CAS Exam 9 Spring 2014, Question 12
Study guide: Exam 9
A company's capital allocation will be based on a simulation of 1,000 underwriting outcomes for the three lines of business that the company writes.
The company will use proportional allocation based on one of the following two risk measures:
- 99.5% conditional tail expectation (CTE).
- 99.5% value at risk (VaR).
The 10 worst loss scenarios for each line, sorted independently, are in the table below.
| Rank | Line A Loss | Line B Loss | Line C Loss | Total Loss |
|---|---|---|---|---|
| 1 | 1,000 | 10,000 | 1,500 | 11,500 |
| 2 | 985 | 9,000 | 1,000 | 9,000 |
| 3 | 980 | 8,800 | 975 | 9,500 |
| 4 | 925 | 7,900 | 950 | 8,700 |
| 5 | 850 | 4,000 | 940 | 7,000 |
| 6 | 650 | 2,000 | 750 | 2,400 |
| 7 | 500 | 1,000 | 675 | 1,190 |
| 8 | 495 | 950 | 600 | 1,185 |
| 9 | 490 | 900 | 500 | 1,165 |
| 10 | 485 | 800 | 450 | 1,150 |
Part a (1.25 points)
Calculate the allocation percentages for each line using both risk measures.
Part b (1 point)
The company is primarily concerned with holding enough capital to cover the magnitude of a shortfall event. Contrast how well each of the allocation bases will address the company's primary concern.
Part c (0.5 points)
Describe the impact to the amount of capital allocated to line B if the company were to use a CTE co-measures approach at the 99.5% level.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution