CAS Exam 7 Spring 2017, Question 8

Study guide: Exam 7

Given the following information:

Two valuation classes, home and auto, are in runoff.
Outstanding claims liabilities: $45 million for home and $5 million for auto.
Internal systemic risk was analyzed using the following balanced scorecard assessment:

Potential Risk Indicators (Worst = 1, Best = 5)	Home Score	Auto Score
a. Best predictors are stable over time or change due to process changes	5	2
b. Knowledge of past processes affecting predictors	2	2
c. Number of independent models used	3	5
d. Extent, timeliness, consistency and reliability of information from business	1	3
e. Best predictors have been identified, whether or not they are used	4	1
f. Range of results produced by models	3	5

Score from Balanced Scorecard Assessment	Home Coefficient of Variation	Auto Coefficient of Variation
1.0 to 2.0	8.5%	6.5%
2.0 to 3.0	7.0%	5.0%
3.0 to 4.0	6.0%	4.0%
4.0 to 5.0	5.5%	3.5%

Internal systemic risk has a correlation coefficient of 0.40 between valuation classes.
Total independent risk coefficient of variation is 4.0%
Total external systemic risk coefficient of variation is 8.0%
The underlying distribution of insurance liabilities is Normal.
The 80th percentile of the Standard Normal distribution is 0.842

Part a (0.5 points)

Describe a scenario that could justify a score of 1 for the following potential risk indicator:

Extent, timeliness, consistency and reliability of information from business

Assign each potential risk indicator to the appropriate risk component.

Calculate the home and auto weighted average balanced scorecard assessment scores, using the potential risk indicator assignments from part b. above.

Calculate the total internal systemic risk coefficient of variation.

Calculate the risk margin in dollars for a required probability of adequacy of 80%.