Exam 9 Practice Question 10
Study guide: Exam 9
An insurer measures three risks separately, each as the capital it would need on its own: market risk 60, non-life underwriting risk 80 and counterparty default risk 30. It aggregates them with the correlation matrix that the EU Solvency II Directive (2009/138/EC, Annex IV) prescribes for these modules:
| Market | Default | Non-life | |
|---|---|---|---|
| Market | 1 | 0.25 | 0.25 |
| Default | 0.25 | 1 | 0.5 |
| Non-life | 0.25 | 0.5 | 1 |
The aggregate is the square root of the sum, over every combination of risks i and j, of \text{Corr}_{i,j} \times C_i \times C_j.
Calculate the aggregate capital for the three risks.
- A) 104.40
- B) 117.26
- C) 124.10
- D) 128.84
- E) 170.00
Answer this question and see the worked solution