April 2013 Q1 part (iv) and part (v)

[lwang]

Hi All,

I have some questions regarding the April 2013 Q1 part (iv) and part (v):
(iv)
Large Company Issues (page 6)
The examiner report wrote: “The large London Market insurer will have a much more diversified book of business than that which underlies the standard formula calculation and hence the level of diversification is unlikely to be as high as required by the company.”
I am not sure how to interpret the 2nd half of this sentence. Does it mean that the SF imposes 25% correlation between Premium/Reserve and Cat, but the company in fact deserves a lower correlation such as 10% because it has more diversified business than assumed by the SF?

Market Risk Issues (page 7)
Does it make sense to charge a higher market risk charge for heavy CAT exposure? I thought the insurance company will invest in more liquid and safer assets for short tail business in order to match the liability outgo?

(v)
Overall 1yr vs Ultimate (page 8)
The examiner report wrote: “Not likely to be the case for binders though, suggesting CAT is light for these risks.”
I don’t see where this coming from. I understand the 1 yr factor will be lower for binders as it has longer risk exposure. However, where does the question indicate that CAT is light for the binder business?

Diversification (page 8)
I don’t understand the explanation – the examiner wrote “Increase in diversification is likely to be because CAT is even more dominant in the 1 year picture.” And 3 sentences later, it said “Dominance of CAT risk should mean this is not a key driver though, so other reasons for difference.”

Attritional Losses (page 10)
The examiner report wrote: “… In combination with low CAT 1 yr to ultimate may mean this is a complementary binder book…”
That’s not true as the CAT 1 yr recognition factor is high. It also commented in this way in the Overall 1yr vs Ultimate section on Page 8.
Reserve Risk (page 11)
What does “limited line size” mean here? Is it referring to the Surplus reinsurance?

Thank you!

 

[avnish]

(iv)
Large Company Issues (page 6)
The examiner report wrote: “The large London Market insurer will have a much more diversified book of business than that which underlies the standard formula calculation and hence the level of diversification is unlikely to be as high as required by the company.”
I am not sure how to interpret the 2nd half of this sentence. Does it mean that the SF imposes 25% correlation between Premium/Reserve and Cat, but the company in fact deserves a lower correlation such as 10% because it has more diversified business than assumed by the SF?

For the above, I think all they saying is that an internal model would better reflect the diversified book of business.

(v)
Reserve Risk (page 11)
What does “limited line size” mean here? Is it referring to the Surplus reinsurance?

I guess they mean that insurance co. is expected to take only a small proportion of the risk in their role as a follow underwriter.

No clue for the others!

 

[MorningtonCrescent]

Market Risk Issues (page 7)
Does it make sense to charge a higher market risk charge for heavy CAT exposure? I thought the insurance company will invest in more liquid and safer assets for short tail business in order to match the liability outgo?

True. But still, I guess even safer assets would suffer from a cat? Eg credit downgrades of corporate bonds, increased spreads, generally lower liquidity in the market.

(v)
Overall 1yr vs Ultimate (page 8)
The examiner report wrote: “Not likely to be the case for binders though, suggesting CAT is light for these risks.”
I don’t see where this coming from. I understand the 1 yr factor will be lower for binders as it has longer risk exposure. However, where does the question indicate that CAT is light for the binder business?

For the total catastrophe risk, the one year figure is very close to the ultimate figure (96%).

Such a high year 1 recognition and first year earning might be relatively appropriate for catastrophes from policies written on the open market but we would expect a bigger difference for the binder business eg due to higher data delays . This suggests that the business written via delegated authorities is not very exposed to catastrophes.

Diversification (page 8)
I don’t understand the explanation – the examiner wrote “Increase in diversification is likely to be because CAT is even more dominant in the 1 year picture.” And 3 sentences later, it said “Dominance of CAT risk should mean this is not a key driver though, so other reasons for difference.”

See my previous post https://www.acted.co.uk/forums/index.php?threads/april-2013-q1-v.10685/

Attritional Losses (page 10)
The examiner report wrote: “… In combination with low CAT 1 yr to ultimate may mean this is a complementary binder book…”
That’s not true as the CAT 1 yr recognition factor is high. It also commented in this way in the Overall 1yr vs Ultimate section on Page 8.

Yeah, I was thrown by this too. As above though, I don't think the examiners' report is completely clear, or even right. I've checked my old ASET and they say something different:

The one year modelled figure is only 45% of the ultimate. This could be due to the longer-tail casualty policies being classed as mostly attritional, or maybe the business written through binders is mostly attritional.

So the short answer is, I bet you'd score pretty well for any reasonable conclusions drawn from the data!