1. (10 points) Traditionally insurance companies buy reinsurance protection to cover only the underwriting losses and at the same time take certain financial hedge positions to prevent any major investment losses. The following graph (the shaded area) is an example showing that a reinsurance contract will be activated when underwriting loss ratio (Lu) is greater than 90% of earned premium, and the hedging position will have positive payoff when investment loss (Li) is greater than 30% of earned premium. Assume an insurance company is looking for an integrated risk management (IRM) solution with a single trigger to protect its downside risk of its operating results, regardless whether such losses are from underwriting or investment. Specifically, this insurance company would like to protect against situations where Lu + Li > 105%. Assume the insurance company's net earned premium is $10 million, and the IRM aggregated coverage limit is 2 million. Answer the following three questions. I gain Underwriting Loss Ratio Lu 0 Investment return (90%!30%) loss Li a) Draw the trigger line of the integrated risk management program corresponding to this insurer's objective in the following graph. (In Word, click "insert"->"Shape" -> line to draw a line) (3 points). b) If the insurance company's underwriting loss ratio is 90% and its investment income is $200,000, how much would it receive from the single trigger IRM program, if any? Show your calculation (3 points) c) Now assume the underwriting loss ratio is 80%, and investment loss ratio is 30%. how much would it receive from the single trigger IRM program, if any? Show your calculation (2 points) d) Now assume the underwriting loss ratio is 95%, and its investment loss is $400,000. how much would it receive from the single trigger IRM program, if any? Show your calculation (2 points) 1. (10 points) Traditionally insurance companies buy reinsurance protection to cover only the underwriting losses and at the same time take certain financial hedge positions to prevent any major investment losses. The following graph (the shaded area) is an example showing that a reinsurance contract will be activated when underwriting loss ratio (Lu) is greater than 90% of earned premium, and the hedging position will have positive payoff when investment loss (Li) is greater than 30% of earned premium. Assume an insurance company is looking for an integrated risk management (IRM) solution with a single trigger to protect its downside risk of its operating results, regardless whether such losses are from underwriting or investment. Specifically, this insurance company would like to protect against situations where Lu + Li > 105%. Assume the insurance company's net earned premium is $10 million, and the IRM aggregated coverage limit is 2 million. Answer the following three questions. I gain Underwriting Loss Ratio Lu 0 Investment return (90%!30%) loss Li a) Draw the trigger line of the integrated risk management program corresponding to this insurer's objective in the following graph. (In Word, click "insert"->"Shape" -> line to draw a line) (3 points). b) If the insurance company's underwriting loss ratio is 90% and its investment income is $200,000, how much would it receive from the single trigger IRM program, if any? Show your calculation (3 points) c) Now assume the underwriting loss ratio is 80%, and investment loss ratio is 30%. how much would it receive from the single trigger IRM program, if any? Show your calculation (2 points) d) Now assume the underwriting loss ratio is 95%, and its investment loss is $400,000. how much would it receive from the single trigger IRM program, if any? Show your calculation (2 points)