CAS Exam 9 Spring 2015, Question 26
Study guide: Exam 9
A reinsurer is pricing a high excess layer with the following attributes:
- The mean loss,
\mu_L, for the treaty is $0. - The target investment return is 12%.
- The cost per dollar of investment protected for a put option is 2%.
- The risk-free rate is 3%.
- The mean of the investment return is 10%.
- The safety level is equal to the limit of the treaty.
Part a (1.5 points)
Calculate the Rate On Line (ROL) the reinsurer would charge.
Part b (0.75 points)
State whether the swap technique or put option technique usually produces a smaller Rate On Line. Describe why.
Part c (0.25 points)
State an underwriter's justification for a minimum rate on line.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution