A Few ST3 Questions

Discussion in 'ST3' started by Jimbay, Apr 4, 2009.

  1. Jimbay

    Jimbay Member

    Hi,

    I've been working through the revision books and flash cards and had a few questions:

    1. Chapter 5 - Will a broker ever get as many underwriters as possible to sign up for a particular risk under the London Market slip system so that under the co-insurance principle the risk for the policyholder is spread across as many parties as possible (ie. if one defaults then the policyholder will still get most of his claim) or will they get 100% or just over to avoid the effort and likely costs of going round the whole market?

    2. Flash Card 2 under Chapter 20 says that for long tailed classes of business likely assets are Fixed Interest Securities, I thought these were non-inflation/index linked. This would surely mean that the nature of the assets and the liabilities would be mismatched. Why not use long-term index linked securities such as bonds?

    3. Data - can somebody explain to me what a check digit is? Is this for example a 4 digit code on a policy reference that is the same on a claim reference from this policy if a claim arises so that it can be matched back to the policy? Or have I completely misunderstood the concept?

    4. Finally, the formula used in Revision book 8 that came from nowhere (Return on Capital*U=theta*E(s)), I understand the individual elements of this formula and that the return on capital and theta are both the extra we want to earn over and above initial capital and expected cost of claims respectively but why do they need to be equal? Am I missing something really obvious here?

    Thanks a million.
    J
     
  2. moomanoid

    moomanoid Member

    I'll try and help for 3 and 4.

    3) check digits take many forms, the common example is just to make sure that a number has been typed in correctly.

    For example, if you have a 10 digit policy number which you are told over the phone by a claimant it wud be very easy to make a mistake typing it in. In reality, the first 9 digits make up the policy number and the last digit is a check digit.

    The clever bit is that there will be an agreed formula which is applied to to the (actual) policy number (the first 9 digits) and the answer will be the check digit.

    e.g. multiply the 'odd' digits (1st , 3rd etc..) together and add the even digits together. Then take the last digit of the result (i.e. mod 10). If that matches the check digit then there prob hasn't been an input error.

    e,g, p/n 5234 wud give a check digit of 1 (5*3 + 2+4) so the full p/n wud be 52341. If someone phoned up with a p/n of 53241 then the computer would flag an error because this wouldnt match the check digit.

    oops, i've forgotton what q4 was. gonna have to do another reply
     
  3. moomanoid

    moomanoid Member

    i think q4 is easier to think about with a qualitative approach.

    profit = E(s)*theta

    calculates our expected profit in monetary terms.

    For a theoretical insurance company we cud also calculate profit as...

    profit = Return on capital * capital (i.e. U* RoC)


    Hence we can just equate the formulae.
     

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