Hi, The solution mentions about assessment of diversification bet classes.I thought that this applied to capital modelling only.Do insurers make allowance for diversification when calculating reserves using stochastic modelling or is the sol poorly worded? Also, the capital requirements referred to further down in same sol, is it excess of assets over liabilities or overall capital requirements? Thanks for helping me out..
When ever you aggregate risks you need to think about correlations and diversifications. For example what about div/correl's between years etc. In the question it is talking about what if any credit should or could be allowed between classes. I.e. the 75th percentile of reserves of class A + the 75th percentile of reserves of class B is not likely to be equal to the 75th percentile of class (A+B). It just depends on the method used. Do we work out the reserves and margins class by class, or in total and how do we aggregate them and do we give any diversification credit.
I understand the corr/div between claims. It is just that I would have never thought of this point in the exam and it does make sense to me now. Thanks again.
I'm wondering whether there is anyone taking into account the correlations between the LOBs in practice and how you did with them. Using the advanced Copula theory?
