GI've brief analysis about this questions

1.Company B is a large general insurance company writing property insurance in

and around the hurricane-prone East coast of the USA for the past 5 years. While it

has so far relied on traditional reinsurance providers for its reinsurance programs,

Company B's management is keen on exploring alternative options, such as the

insurance-linked securities (ILS).

Company B's management have hired an independent consultancy to provide a

subject-matter expert report around the possibility of using ILS focussing on

catastrophe bonds, a very popular form of ILS.

(i) Describe catastrophe bonds, commenting on how they work in practice. [4]

(ii) Discuss the advantages and disadvantages associated with the use of

catastrophe bonds. [4]

Company B provided the independent consultancy with 5 years of historical claims

data and also asked them to set up a stochastic claims reserve model to come up with

future projections for the catastrophe losses to be able to price the catastrophe bond

accurately.

(iii) Discuss the factors that need to be considered while setting up this model. [6]

[Total 14] SP7 A2020-7

9 Company C has written construction (engineering) insurance business for the past

8 years, starting in 2012. While historically the loss ratio experience in this business

has been favourable, Company C has experienced higher loss ratios in the more recent

accident years.

Since Company C does not have an in-house actuary, the Chief Financial Officer

(CFO) of Company C has hired a consulting actuary to try to explain the reasons

behind the increasing trend in accident year loss ratios. The CFO has provided the

following premiums and incurred claims information as at 31 December 2019:

Accident year

Underwriting

year

Gross written

premium 2012 2013 2014 2015 2016 2017 2018 2019

Cumulative claims incurred

2012 400,000 13,000 39,000 78,000 182,000 260,000 264,000 264,000 264,000

2013 500,000 15,750 47,250 94,500 220,500 315,000 320,000 320,000

2014 400,000 12,800 38,400 76,800 179,200 256,000 256,000

2015 300,000 9,300 27,900 55,800 130,200 186,000

2016 200,000 6,300 18,900 37,800 88,200

2017 200,000 6,000 18,000 36,000

2018 150,000 4,800 9,600

2019 150,000 4,950

Total claims incurred 13,000 54,750 138,050 324,200 591,500 838,900 1,030,800 1,164,750

Claims incurred by

accident year 13,000 41,750 83,300 186,150 267,300 247,400 191,900 133,950

The CFO has further advised that the finance team has been earning premiums

assuming the risk is spread evenly over the period of cover and all projects were

written on 1 January of the respective underwriting year.

The Chief Underwriting Officer (CUO) has explained that all projects written to date

are 5-year projects.

(i) Calculate the loss ratios for the 2012-2019 accident years, stating any

assumptions made. [7]

The CUO has also stated that there has been no change to the underlying portfolio or

to the loss trends in the market.

(ii) Verify whether the CUO's statement around loss trends holds true for

Company C using the data provided. [6]

(iii) Discuss why the accident year loss ratios may be trending upwards. [3]

(iv) Explain alternative premium earning assumptions Company C might consider.

[4]

(v) State the accounting principle that the CFO may be concerned about when

considering such changes.