CAS Exam 9 Spring 2013, Question 14
Study guide: Exam 9
A company currently writes coverage for Line A, and is considering expanding into Line B. For both lines, all losses will be paid at time 1. The table below shows the probability distribution of nominal loss amounts.
| Probability | Loss for Line A | Total Loss for Line A and B |
|---|---|---|
| 0.4 | $0 | $0 |
| 0.3 | $6,000 | $11,000 |
| 0.1 | $8,000 | $12,000 |
| 0.1 | $0 | $12,000 |
| 0.1 | $14,000 | $23,000 |
You are also given the following information about the company:
- All assets are invested in risk-free securities.
- The risk-free interest rate is 2.04%.
- Both lines are priced at an expected loss ratio of 100%.
- The company pays no expenses.
- To support Line A on a stand-alone basis, the company requires $5,800 of risk capital at time 0.
- The company uses a fixed expected policyholder deficit (EPD) ratio to determine its required risk capital.
Calculate the amount of additional capital the company would require at time 0 to support its expansion into Line B.
Part a (2.5 points)
No current syllabus covers this question; it is kept for the record.
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