Various Questions

[Blits]

Chapter 38 - Surplus and surplus management - Question 38.4
I don't understand the solution provided?

1. How can the provisions be negative, would this mean there was a positive inflow on the provider's income statement?

• 
  Why should the provisions reflect the future profits expected, which should offset the initial costs involved....So the effect on surplus is positive provided the business is written on profitable terms.

Chapter 47 - Capital Management 2 - Question 47.10
I do not fully grasp the explanation given in the full reading. Why will the confidence limit for TailVar be smaller Please can you elaborate further

Revision Suggestions
I have gone through the material as well as the Q&A bank. Does anyone have any suggestions as to the best techniques to revise all the material and to be best prepared for the exam?

 

[Mark Willder]

Chapter 38 - Surplus and surplus management - Question 38.4
I don't understand the solution provided?
How can the provisions be negative, would this mean there was a positive inflow on the provider's income statement?
Why should the provisions reflect the future profits expected, which should offset the initial costs involved....So the effect on surplus is positive provided the business is written on profitable terms.

This question refers to a reserve calculated on a realistic basis.

The reserve will be the expected present value of the claims plus expenses less the premiums.

The contract will have been priced to make a profit, so at outset (before the first premium is paid) the expected present value of the premiums will exceed the benefits and expenses, so that the reserve will be negative.

So we have

Reserve just before premium = - EPV of future profits

Reserve just after premium = - EPV of future profits + P - initial expenses

Surplus at time zero = Premium - expenses - increase in Reserves
= P - IE - ( - EPV of future profits + P - initial expenses)
= EPV of future profits

Chapter 47 - Capital Management 2 - Question 47.10
I do not fully grasp the explanation given in the full reading. Why will the confidence limit for TailVar be smaller Please can you elaborate further

A 99.5% VaR gives the smallest loss that will occur in the bottom 0.5% of the probability distribution, say 100.

However some of the possible losses will be much bigger than this.

A 99.5% TailVaR gives the average loss that will occur in the bottom 0.5% of the probability distribution, say 120.

As the average loss is bigger than the smallest loss the TailVaR measure results in the company holding more capital.

The question wants us to calculate the same amount of capital under both measures.

If we use a lower confidence level for the TailVaR (eg 99%) we will now be looking at the average losses in the bottom 1% of the probability distribution. Some of these losses will be bigger than 100 and some smaller. If we choose the correct probability level we could end up with an average of 100 as required.

Revision Suggestions
I have gone through the material as well as the Q&A bank. Does anyone have any suggestions as to the best techniques to revise all the material and to be best prepared for the exam?

The CA1 exam is all about the application of the Core Reading to new (and often unusual) situations. So, the most important thing is to do lots of exam questions under exam conditions.

Best wishes

Mark