CAS Exam 9 Spring 2018, Question 14
Study guide: Exam 9
An insurer is planning to write a line of business. It plans on releasing capital as the losses are paid at the end of each year, according to the following schedule:
| Year | % Paid |
|---|---|
| 1 | 20% |
| 2 | 50% |
| 3 | 30% |
Given the following:
- Premiums are $25 million.
- Expense ratio is 15%.
- Expected Losses are $21 million.
- Initial Capital is $6.5 million.
- Investment yield is 4%.
- Single-year target RAROC is 16%.
Part a (1 point)
Calculate the multi-year adjusted target RAROC.
Part b (1 point)
Using a risk-adjusted return approach, determine if the insurer should write the line of business.
Part c (0.5 points)
Briefly describe two approaches for handling different exposure horizons in risk capital models.
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