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
Hi - I think you are referring to Practice Question 29.9? As the marking schedule is provided in the course notes, you will be able to assess your score against that. At a high level, I would encourage you to make sure that you are focussing your answers closely to the specifics of what is being asked. This question is asking about testing the impact on profitability and solvency of a change in reinsurance cover, so the answer should focus on projecting future reinsurance premiums and recoveries (and how this would be done - so focusing on how future claims would be projected), then assessing measures of profitability and solvency under different possible reinsurance strategies. You will see that the solution in the course notes does have this focus, whereas your answer above includes quite a few more general points that would be less likely to gain credit, particularly since the mark allocation is not particularly high.
