CAS Exam 9 Spring 2018, Question 13
Study guide: Exam 9
An insurer has the following risk elements and correlations:
| Risk Element | Amount (in millions) | Capital Ratio |
|---|---|---|
| Stocks | $200 | 0.20 |
| Bonds | $1,000 | 0.05 |
| Total Assets | $1,200 |
| Risk Element | Amount (in millions) | Capital Ratio |
|---|---|---|
| Loss Reserves | $800 | 0.35 |
| Unearned Premium Reserves | $100 | 0.20 |
| Total Liabilities | $900 |
| Correlated Risk Elements | Correlation Coefficient |
|---|---|
| Stocks - Bonds | 0.2 |
| Bonds - Loss Reserves | 0.4 |
Assume no other correlations exist.
Part a (0.75 points)
Calculate the diversified risk-based capital held by the insurer.
Part b (0.5 points)
Briefly describe an advantage and a disadvantage of the Expected Policyholder Deficit in allocating capital.
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