CAS Exam 9 Spring 2015, Question 10
Study guide: Exam 9
Given the following information for a monoline Workers' Compensation insurance company as of 12/31/2014:
| Accident Year | Written Premium | Indemnity Reserve | Medical Reserve | Total Reserve |
|---|---|---|---|---|
| 2013 | 10,000,000 | 3,450,000 | 50,000 | 3,500,000 |
| 2014 | 9,500,000 | 3,900,000 | 100,000 | 4,000,000 |
In order to fund these liabilities, the following investments are available:
| Investment Vehicle | Expected Investment Income |
|---|---|
| Long-term bonds | 5% |
| Short-term commercial paper | 2% |
The insurer currently invests all of its reserves in short-term commercial paper. The insurer anticipates that their reserves will be paid over the next ten years. There are no transaction costs.
Part a (1.25 points)
Fully assess the insurer's strategy to invest solely in short-term commercial paper, including a recommendation for an alternative strategy, if appropriate.
Part b (1 point)
On 1/1/2015, the insurer increases the reserves by $10 million as shown below:
| Indemnity Reserve | Medical Reserve | Total Reserve |
|---|---|---|
| $1 million | $9 million | $10 million |
These reserves are also expected to be paid out over ten years.
Describe how the insurer's investment strategy should change as a result of this reserve increase.
No current syllabus covers this question; it is kept for the record.
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