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Assignment X3, Q3.2, part (ii)

O

obri600

Member
Hi

Does anybody understand the calculation of the capital call amount for this question? Why is it equal to maximum loss amount less premium (£95,000) rather than capital required (£2,500)?

Thanks
 
hello again

Think of the capital call amount as the extent to which your premiums are likely to be inadeqaute to cover claims - this shortfall should it occur has to be covered by a transfer from free reserves to claim reserves and eventual payment as claims. This shortfall is naturally the difference between the maximum possible loss (sum insured) and the premium (which ignoring expenses, profit & other loadings is calibrated to meet the expected (or mean) loss.

hope this helps
 
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