CAS Exam 9 Spring 2018, Question 20
Study guide: Exam 9
A company writes in two distribution channels, A and B. At the start of a new year, the company decides to allocate a risk load to each renewing distribution channel using the covariance share method and the table of events below. The calculated risk load for channel A is $2.024 million. The calculated risk load for channel B is $1.070 million.
| Event | Probability | Channel A Loss (million) | Channel B Loss (million) | Covariance Share A | Covariance Share B |
|---|---|---|---|---|---|
| 1 | 0.005 | 24 | 8 | 1.43 | 0.48 |
| 2 | 0.010 | 20 | 10 | 2.64 | 1.32 |
| 3 | 0.010 | 15 | 15 | 2.23 | 2.23 |
| 4 | 0.015 | 15 | 7 | 2.12 | 0.99 |
| 5 | 0.020 | 12 | 7 | 2.08 | 1.21 |
| 6 | 0.025 | 8 | 9 | 1.65 | 1.86 |
| Total | 12.15 | 8.09 | |||
| Variance | 16.76 | 7.19 |
Part a (0.5 points)
Determine the risk load multiplier used to calculate the risk loads.
Part b (1.25 points)
The company purchases a reinsurance contract that caps losses in distribution channel A at $15 million. Assuming the company maintains the same risk load multiplier, calculate the change in the overall risk load.
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