CAS Exam 9 Spring 2016, Question 20
Study guide: Exam 9
An insurance company writes one line of business with the following probability distribution of incurred losses:
| Incurred Loss | Probability |
|---|---|
| $10,000 | 0.50 |
| $20,000 | 0.30 |
| $30,000 | 0.20 |
The company wants to reduce their capital requirement by writing two independent lines of business with the same loss distribution above and participating in a 50% quota share reinsurance agreement.
- The company targets an EPD (expected policyholder deficit) ratio of 5%.
- Assume assets are invested at a risk-free rate of 0%.
Calculate the reduction in capital required by adding the second line of business and entering into the quota share reinsurance agreement.
Part a (2.5 points)
No current syllabus covers this question; it is kept for the record.
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