1. (a) Western Insurance Company has assets at fair market value of $100 million. The present value of Westerns liabilities is $85 million. The market value margin is $5 million. What is Westerns MVS? (b) Using probability models, Western Insurance determines that its value at risk (VaR) is $8 million. Western may be expected to incur $8 million or greater loss of capital at a .5% probability over the next one-year period. What is Westerns economic capital? (c) Does Western have excess capital or a deficiency in capital?

2. What constitutes an insurers most significant credit risk?

3. What is the purpose of the National Association of Insurance Commissioners (NAIC) risk-based capital (RBC) system?

4. The composition of Western Insurance Companys capital is as follows: 10% market value of debt 30% market value of common stock 60% reserves The after-tax cost of debt is 3%, the cost of common stock is 4% and the cost of reserves is 5%. Calculate the weighted Average cost of Capital (WACC)