I actually meant to include a comment about that in the wiki, but I will link to this post from the wiki instead. I left it out in the interests of time because the calculation has no material effect on the capital required. Also, most of the information on credit risk was removed from the syllabus (chapter 6). I'm not sure why this particular calculation on credit risk is in chapter 4 on insurance risk. The presentation of this topic in the source text is all a bit muddled.
I actually do have a web-based problem for that that just needs to be updated. I will do that in the near future. Having said that however, here is my reasoning for thinking it's a low-probability exam question.
Let me explain:
The purpose of the calculation is to determine whether capital required for collateral (held by the primary insurer for amounts due from the reinsurer) can be reduced. In other words, does the primary insurer hold excess collateral?
In the text example, step 1 on page 41 shows the primary insurer holds $1,200 in collateral, of which $340 is excess collateral.
In step 2 of the example on page 42, the calculation shows that because of this excess of $340, the total capital required can be reduced by $1.89. This is only 0.16% of the total, which is almost certainly not material.
There were so many other more important calculations that in the interests of time, I decided to leave this out. Now, this calculation was actually asked in part (d) of Q23 from 2015-Spring:
But that was the first sitting where the (then) brand new MCT method was on the syllabus and I think the examiner's simply asked it because it was one of the few calculation examples in the MCT reading. I suspect they realized however that it was not a material calculation and it was NEVER ASKED AGAIN. In that 2015 problem, the result was this:
total collateral = $12,000
reduction in capital required due to excess collateral = $0.625 or 62.5 cents
So the reduction amounts to 0.005%. It was a lot of work to find out that the capital required can be reduced by such a tiny amount.
Comments
I actually meant to include a comment about that in the wiki, but I will link to this post from the wiki instead. I left it out in the interests of time because the calculation has no material effect on the capital required. Also, most of the information on credit risk was removed from the syllabus (chapter 6). I'm not sure why this particular calculation on credit risk is in chapter 4 on insurance risk. The presentation of this topic in the source text is all a bit muddled.
I actually do have a web-based problem for that that just needs to be updated. I will do that in the near future. Having said that however, here is my reasoning for thinking it's a low-probability exam question.
Let me explain:
There were so many other more important calculations that in the interests of time, I decided to leave this out. Now, this calculation was actually asked in part (d) of Q23 from 2015-Spring:
But that was the first sitting where the (then) brand new MCT method was on the syllabus and I think the examiner's simply asked it because it was one of the few calculation examples in the MCT reading. I suspect they realized however that it was not a material calculation and it was NEVER ASKED AGAIN. In that 2015 problem, the result was this:
So the reduction amounts to 0.005%. It was a lot of work to find out that the capital required can be reduced by such a tiny amount.