CAS Exam 9 Spring 2019, Question 12
Study guide: Exam 9
A company is considering offering cyber risk insurance in addition to its single current line. The company will offer cyber risk insurance only if the return on the new line is greater than or equal to the target RAROC of the company.
Given the following table of 1,000 simulations of the aggregate loss distribution:
| Sorted scenario | Current Line Loss ($million) | Cyber Risk Loss ($million) | Aggregate Loss ($million) |
|---|---|---|---|
| 1 | 900 | 50 | 950 |
| 2 | 940 | 4 | 944 |
| 3 | 400 | 444 | 844 |
| 4 | 450 | 10 | 460 |
| 5 | 300 | 2 | 302 |
| 6 | 250 | 40 | 290 |
| 7 | 220 | 55 | 275 |
| ... | ... | ... | ... |
| Cyber Risk | |
|---|---|
| Premium | $25 million |
| Expense | $1.25 million |
| Investment Return | 4% |
| Discounted Losses at end of the year | $18 million |
| Undiscounted Losses | $22 million |
- Target RAROC over one period is 8%
- Risk capital is calculated using 99.6% CTE and allocated using 99.6% Co-CTE
- Ignore other risks for the company
- Premium is received and expenses are paid at the beginning of the year
Part a (1 point)
Calculate the cyber risk RAROC.
Part b (0.5 points)
Calculate the additional risk margin required for the company to offer cyber risk insurance.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution