CAS Exam 7 Spring 2015, Question 26
Study guide: Exam 9
A primary insurance company is evaluating two reinsurance options. The company estimated the following information from its modeled probability distribution of underwriting results.
| Gross | Option 1 | Option 2 | |
|---|---|---|---|
| Probability of Distress | 3.00% | 0.70% | 0.65% |
| 1-in-250 VaR Loss ($000,000) | 530 | 130 | 130 |
| 1-in-100 TVaR Loss ($000,000) | 570 | 220 | 210 |
| Expected Net Underwriting Profit ($000,000) | 70 | 37 | 30 |
| Item | Value |
|---|---|
| Cost of Risk Capital | 10% |
| Required Risk Capital | 1-in-100 TVaR |
Part a (1.5 points)
For each of the three risk measures provided, perform an efficient frontier analysis to determine whether either of the reinsurance options under consideration is superior to the other.
Part b (1 point)
Using the cost of allocated risk capital method, determine which reinsurance option is preferable for the insurance company.
Answer this question and see the worked solution