Question
The claim cost of an insurance company follows a normal distribution with an expected value of $500 million and a standard deviation of $100 million.
The claim cost of an insurance company follows a normal distribution with an expected value of $500 million and a standard deviation of $100 million. Based on the above, work on the following questions. What is the firms value at risk at the 1% level? Based on the distribution (the firms total asset is $750 million), show in the graph how the probability of insolvency changes when the insurer cedes a proportion of its liabilities to a reinsurer and simultaneously reinsurers a similar amount of business from another insurer with a similar, but uncorrelated book of business. Also explain your results in words.
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