April 2013 Q1 (v)

[entact]

I'm studying this question and I can't figure out where some of the figures in the Examiner's solution are coming from, particularly

In the first paragraph the figure 521.8 - I don't see this in the table in the question

In paragraph 3 under Diversification "Much higher diversification than between CAT amd prem/res from standard formula calculated above which is c20%" How was it determined that the diversification benefit is higher than the standard and where is the c20% coming from?

Thank you

 

[MorningtonCrescent]

In the first paragraph the figure 521.8 - I don't see this in the table in the question

This has got to be an error in the examiners' report. Part (iii) calculates the standard formula total SCR as 563.7. I've checked ASET and they use the correct figure.

In paragraph 3 under Diversification "Much higher diversification than between CAT amd prem/res from standard formula calculated above which is c20%" How was it determined that the diversification benefit is higher than the standard and where is the c20% coming from?

Looking at the standard formula first:

Undiversified insurance risk is 199.4+384.5=583.9.
Diversfied insurance risk is 475.3 (from part (iii). The difference is 108.6, or 18.6% of the total.​

Comparing to the internal model:

Undiversified insurance risk is 74.5+59.5+389.9=523.9.
Diversification benefit for insurance risk is 158.7, or 30.3% of the total.​

Mind you this might be expected (to an extent) because the internal model diversification will also include an extra element of diversification between premium risk and reserve risk that wasn't allowed for in the QIS5 correlation assumptions.