CAS Exam 9 Spring 2016, Question 29
Study guide: Exam 9
A property reinsurer currently writes the following two renewal accounts with modeled losses as shown below:
| Event | Event Probability | Losses for Account X (in $000's) | Losses for Account Y (in $000's) | Losses for Account X + Y (in $000's) |
|---|---|---|---|---|
| 1 | 0.5% | $100 | $85 | $185 |
| 2 | 1.0% | $75 | $60 | $135 |
| 3 | 2.5% | $35 | $25 | $60 |
| 4 | 5.0% | $20 | $15 | $35 |
| Coefficient of Variation | 3.97 | 4.11 | 4.03 |
- The target return on marginal surplus is 12.5%.
- Using the marginal surplus method, the reinsurer calculated the sum of the risk loads for account X and Y to be $4,071.
Part a (2 points)
Determine the probability that the actual result will require more surplus than what was allocated.
Part b (0.5 points)
Identify an alternative approach to using the marginal surplus method for calculating risk loads and briefly describe an advantage to that approach.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution