CAS Exam 8 Fall 2016, Question 19
Study guide: Exam 9
In order for an insurance company to increase its return on capital, two reinsurance options are being considered:
I. $5 million excess of $5 million per risk:
- ALAE pro-rata
- Rate = 18% of premium
II. 20% Quota Share:
- Ceding commission of 30%
- Maximum ceded loss ratio of 150%
The insurance company must hold capital to support a 1-in-100 year Probable Maximum Loss. Additionally, the following information regarding the insurance company's performance last year is given:
- Premium: $50,000,000
- Expenses: $15,000,000
- Total Loss & ALAE: $30,000,000
- Return on Capital: 5%
Claims greater than $5,000,000:
| Claim | Loss | ALAE |
|---|---|---|
| Claim 1 | $7,500,000 | $1,500,000 |
| Claim 2 | $10,000,000 | $500,000 |
The Aggregate Exceedance Probability curve for the insurance company is shown below:
Determine the impact each reinsurance option would have had on last year's return on capital. Ignore investment income and taxes.
Part a (3 points)
Answer this question and see the worked solution