CAS Exam 9 Spring 2017, Question 18
Study guide: Exam 9
The tables below display simulated values of risk sources (reserve risk and underwriting risk) in descending order for a company under two risk measures, Value at Risk (VaR) and Co-Conditional Tail Expectation (Co-CTE).
| VaR Sorted Scenarios | Reserve Risk ($) |
|---|---|
| 1,000 | 1,000 |
| 999 | 1,000 |
| 998 | 900 |
| 997 | 900 |
| 996 | 875 |
| 995 | 850 |
| : | |
| 1 | -400 |
| VaR Sorted Scenarios | Line A UW Risk ($) |
|---|---|
| 1,000 | 1,600 |
| 999 | 1,600 |
| 998 | 1,550 |
| 997 | 1,550 |
| 996 | 1,525 |
| 995 | 1,500 |
| : | |
| 1 | -1,600 |
| VaR Sorted Scenarios | Line B UW Risk ($) |
|---|---|
| 1,000 | 1,300 |
| 999 | 1,200 |
| 998 | 1,100 |
| 997 | 1,050 |
| 996 | 1,000 |
| 995 | 900 |
| : | |
| 1 | -500 |
Co-CTE (99.5%) Calculations ($):
| Sorted Scenarios | Reserve | Line A UW | Line B UW | Total |
|---|---|---|---|---|
| 1,000 | 800 | 1,600 | 600 | 3,000 |
| 999 | 700 | 1,500 | 700 | 2,900 |
| 998 | 500 | 1,300 | 900 | 2,700 |
| 997 | 100 | 1,400 | 1,100 | 2,600 |
| 996 | 300 | 1,300 | 900 | 2,500 |
| 995 | -100 | 1,200 | 1,300 | 2,400 |
| : | ||||
| 1 | -200 | -1,600 | 300 | -1,500 |
- The Co-CTE table is ordered by the total column.
- Ignore other risks for the company.
- The market value of the firm's equity is $2,900.
Part a (0.25 points)
Briefly discuss the meaning of the term "risk capital."
Part b (2.25 points)
Determine which of the following results in a larger allocation of capital to Line B:
- i. Allocating the market value of equity using the Proportional Allocation based on 99.5% VaR Method, or
- ii. Allocating the risk capital using the Co-Measures Approach based on 99.5% Co-CTE.
Part c (0.5 points)
Explain one implication of allocating more capital to a line of business.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution