CAS Exam 8 Fall 2018, Question 16
Study guide: Exam 9
A reinsurance company is evaluating whether or not to write a $50 million excess of $50 million catastrophe reinsurance contract with a primary insurer. The reinsurer is currently holding $850 million of capital and is required to hold enough capital to survive a 1-in-250 event. Without the new contract, the reinsurance company has a 1-in-250 probable maximum loss (PML) of $825 million which is solely driven by the hurricane peril.
Given the following:
- The primary insurer's PMLs are driven by the hurricane and earthquake perils only.
- The primary insurer's aggregate annual PMLs by return period are as follows:
| Return Period (years) | PML ($000,000) |
|---|---|
| 1000 | 125 |
| 500 | 105 |
| 200 | 95 |
| 100 | 70 |
| 50 | 50 |
| 25 | 30 |
| 20 | 25 |
| 10 | 20 |
| 5 | 15 |
- The largest hurricane event in the primary insurer's event catalog is $45,000,000.
Part a (1 point)
Calculate the ceded, and net, 1-in-250 PMLs for this contract for the primary insurer.
Part b (0.75 points)
Evaluate whether the reinsurer should participate in this treaty.
Answer this question and see the worked solution
Concepts tested
- Probable Maximum Loss
- Catastrophe Risk
- Excess of Loss
- Catastrophe Modelling
- Catastrophe Exposure Management