O
olivia_vryenhoek
Member
My answer is quite different to the memo so I'd like to know if my answer is suitable or not.
Question:
A medium-sized general insurance company writes only personal motor business. The company is developing a model that can be used to test the impact on profitability and solvency of changing its reinsurance cover. The existing reinsurance programme has for the last 5 years consisted of quota share reinsurance and individual excess of loss reinsurance.
Describe how the model would be constructed.
MY ANSWER:
- A profit test model can be used for the purpose of this modelling exercise
- Project cashflows:
o Premiums from policyholders
o Premiums paid to reinsurer
o Expenses
o Benefits paid to policyholders (split the portion paid by general insurer and reinsurer)
o Investment income
- Model points can be determine for homogenous groups or it can be done on a policy by policy basis if there aren’t too many
- Allow for supervisory reserves and required capital to be included in the model
- Allow for lapses in the model
- Allow for options and guarantees in the model
- Determine an appropriate discount rate to discount the projected cashflows
o This discount rate should reflect the required return and the riskiness of the cashflows
- Choose between a stochastic or deterministic model
o It might be appropriate to model certain variables stochastically e.g. if there are options and guarantees or economic factors such as market movements
o The reinsurance cover could be modelled deterministically or stochastically- depending on how many scenarios they would like to tests and how accurate the results should be
o If they only want to test a few scenarios then deterministic could be appropriate
o Claim frequency and amount distributions should be modelled separately so that the trends can be allowed for appropriately in either
- Choose the appropriate projection period
o The longer the period, the more accurate the model will be but it will take longer to run
- Choose an appropriate method of to measure profitability e.g. DPP, NPV, IRR
- Set a target profit criteria
- Determine a target probability of insolvency
- Run the model several times, each time changing the reinsurance cover until the target profit criteria is reached and the target probability of insolvency is reached
- If model points were used then scale the points up by the amount of business in force
- Perform sensitivity tests and scenario analysis to ensure the results are appropriate for the purpose
Question:
A medium-sized general insurance company writes only personal motor business. The company is developing a model that can be used to test the impact on profitability and solvency of changing its reinsurance cover. The existing reinsurance programme has for the last 5 years consisted of quota share reinsurance and individual excess of loss reinsurance.
Describe how the model would be constructed.
MY ANSWER:
- A profit test model can be used for the purpose of this modelling exercise
- Project cashflows:
o Premiums from policyholders
o Premiums paid to reinsurer
o Expenses
o Benefits paid to policyholders (split the portion paid by general insurer and reinsurer)
o Investment income
- Model points can be determine for homogenous groups or it can be done on a policy by policy basis if there aren’t too many
- Allow for supervisory reserves and required capital to be included in the model
- Allow for lapses in the model
- Allow for options and guarantees in the model
- Determine an appropriate discount rate to discount the projected cashflows
o This discount rate should reflect the required return and the riskiness of the cashflows
- Choose between a stochastic or deterministic model
o It might be appropriate to model certain variables stochastically e.g. if there are options and guarantees or economic factors such as market movements
o The reinsurance cover could be modelled deterministically or stochastically- depending on how many scenarios they would like to tests and how accurate the results should be
o If they only want to test a few scenarios then deterministic could be appropriate
o Claim frequency and amount distributions should be modelled separately so that the trends can be allowed for appropriately in either
- Choose the appropriate projection period
o The longer the period, the more accurate the model will be but it will take longer to run
- Choose an appropriate method of to measure profitability e.g. DPP, NPV, IRR
- Set a target profit criteria
- Determine a target probability of insolvency
- Run the model several times, each time changing the reinsurance cover until the target profit criteria is reached and the target probability of insolvency is reached
- If model points were used then scale the points up by the amount of business in force
- Perform sensitivity tests and scenario analysis to ensure the results are appropriate for the purpose