CAS Exam 7 Spring 2017, Question 22
Study guide: Exam 9
A start-up insurance company writes exclusively private passenger auto insurance, offering both liability and physical damage coverages. Based on the latest Enterprise Risk Management (ERM) review, management is confident in its capital utilization and plans to grow.
To attract and retain customers, the insurer is considering expanding into one of the following three lines of business:
- Renters
- Homeowners
- Livery conveyance (commercial coverage for insureds that use their personal vehicle and drive part-time for ridesharing companies such as Uber, Lyft, etc.)
Part a (0.25 points)
Explain why parameter risk is a key source of uncertainty in enterprise risk modeling.
Part b (1.5 points)
Identify and briefly describe an aspect of parameter risk introduced by incorporating each of the three lines of business into the insurer's existing ERM model. Use a different type of parameter risk for each line of business.
Part c (0.5 points)
Explain why parameter risk may be more significant for large insurers than small insurers.
Part d (0.25 points)
Briefly describe how parameter risk can be reduced.
Answer this question and see the worked solution