CAS Exam 9 Spring 2019, Question 13
Study guide: Exam 9
An insurer has catastrophe exposure to three independent perils: water, wind, and earthquake.
| Event | Probability | Water loss ($millions) | Wind loss ($millions) | Earthquake loss ($millions) | Total loss ($millions) |
|---|---|---|---|---|---|
| 1 | 0.565 | 0 | 0 | 0 | 0 |
| 2 | 0.242 | 3 | 0 | 0 | 3 |
| 3 | 0.100 | 0 | 7 | 0 | 7 |
| 4 | 0.043 | 3 | 7 | 0 | 10 |
| 5 | 0.030 | 0 | 0 | 30 | 30 |
| 6 | 0.013 | 3 | 0 | 30 | 33 |
| 7 | 0.005 | 0 | 7 | 30 | 37 |
| 8 | 0.002 | 3 | 7 | 30 | 40 |
| Total | 1.000 |
The assigned capital ($millions) by event for 3 layers is provided:
| Event | $3 million excess $0 layer | $4 million excess $3 million layer | $3 million excess $7 million layer | Total |
|---|---|---|---|---|
| 5 | 0.207 | 0.622 | 0.968 | 1.797 |
| 6 | 0.090 | 0.269 | 0.419 | 0.778 |
| 7 | 0.034 | 0.104 | 0.161 | 0.299 |
| 8 | 0.014 | 0.041 | 0.065 | 0.120 |
Using the Capital Allocation by Percentile Layer methodology with a 98.0% VaR capital requirement, determine how much capital should be allocated to the earthquake peril.
Part a (2 points)
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution