Actuarial Notes

CAS Exam 8 Fall 2014, Question 23

Study guide: Exam 9

While negotiating the terms of a quota share treaty, a reinsurer is considering an agreement with a sliding scale commission and an agreement with a loss corridor.

The terms of the sliding scale commission are as follows:

Term Value
Provisional Commission 20% at a 65% loss ratio
Sliding 1:1 to a minimum 10% at a 75% loss ratio
Sliding 0.5:1 to a maximum 30% at a 45% loss ratio

The terms of the loss corridor are as follows:

Term Value
Commission 15%
Loss Corridor 60% of 75% to 85% loss ratio

The expected loss ratio is 73%

Part a (0.5 points)

Assume that the ceding company is interested in optimizing the amount and the timing of cash flows. Identify and briefly describe one advantage of the sliding scale commission option when compared to the loss corridor option.

Part b (1 point)

The insurer and reinsurer agree that the performance of the underlying business is highly volatile. Describe two ways the insurer can stabilize its results for its sliding scale commission structure over time.

Part c (0.5 points)

Explain whether the smoothing mechanisms in part b. above should be used in the determination of an aggregate loss distribution model.

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