CAS Exam 9 Spring 2015, Question 27
Study guide: Exam 9
A property catastrophe insurer writes one portfolio with exposures in State X, and another portfolio with exposures in State Y, and is considering using the Shapley method to calculate the renewal risk loads for the portfolios.
The following information is given:
- 99th percentile loss modeled for State X Earthquake is $300 million.
- 99th percentile loss modeled for State Y Earthquake is $100 million.
- The variance for X is $50 million.
- The variance for Y is $25 million.
Part a (0.5 points)
Explain whether the Shapley method provides equitable risk loads for the two states.
Part b (0.5 points)
Based on the information given above, propose an alternate risk load method that accounts for the deficiency in the Shapley method.
Part c (2 points)
Calculate the risk loads for State X and State Y using the method proposed in b. above. Assume the covariance between State X and State Y is $15 million and the appropriate risk load multiplier is 0.00025.
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