CAS Exam 7 Spring 2018, Question 20
Study guide: Exam 9
An insurance company does not have a reinsurance program in place. Based on the latest Enterprise Risk Management review, management wants to reduce its insurance hazard risk by purchasing reinsurance and is reviewing two reinsurance programs.
An actuary estimates the following information based on the modeled probability distribution of the underwriting results:
| Current | Option 1 | Option 2 | |
|---|---|---|---|
| Direct Premium ($000) | 1,000 | 1,000 | 1,000 |
| Direct Loss ($000) | 600 | 600 | 600 |
| Net Expenses ($000) | 200 | 200 | 200 |
| Expected Ceded Premium ($000) | 0 | 220 | 330 |
| Expected Net Combined Ratio | 80.0% | 83.0% | 86.0% |
| 1-in-100 TV@R Net Loss ($000) | 2,000 | 1,500 | 1,100 |
- The company uses 1-in-100 TV@R to set its required capital.
Calculate the insurance company's marginal ROEs for reinsurance Option 1 and Option 2.
Part a (1.5 points)
Answer this question and see the worked solution