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CH24 - page 19

K

kiki

Very Active Member
Hi,

any one help me to understand the following context please ?
"One approach is to consider the marginal capital impact of adding or removing a particular programme. For this approach, one would carry out two capital model runs, one with and one without the programme being considered, and compare the two capital outputs. This is one of the simpler potential approaches, but may risk overstating the capital significance of an individual programme if it tests against a portfolio that is generally well balanced other than the line of business being tested. "

my question is why deriving the capital impact of removing / adding an individual programme will lead to overstating the capital significance for well balanced portfolio?

thank you very much for your time
 
Hi,

In this paragraph, and the paragraph above, the notes talk about how reinsurance programmes affect the risk for individual lines of business. If there is a single reinsurance programme being introduced on a line of business, where the rest of the portfolio is well balanced, then the reduction in capital requirements may be very significant. Hence the term 'overstating the capital significance of an individual programme'.

I hope that helps

Aman
ActEd Tutor
 
thank you Aman, not sure i follow, why introducing a single RI programme to a specific line of business for well balanced portfolio will lead o significant impact on capital requirement ? i would think the other way as one of benefit of using RI , for unbalanced portfolio, eg expose to cat events , using Reinsurance may have a lot more impact on the capital. is that something i missed ?
 
Hi,

Your example here is a good one. You have one line of business which is capital intensive, and the rest of the classes are well balanced. Introduction of RI for the cat exposure would mean a significant reduction in capital.

The notes mention that the 'rest of the portfolio' is well balanced, not the whole portfolio before the use of any RI.

Aman
ActEd Tutor
 
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