Fall 2019 Q20 - c)

oxalisoxalis
edited September 2021 in OSFI.MCT

Hi Graham,

I have 2 questions relating this problem.

First, to pick an adverse scenario, I would say 90th, 93th, ad 96th percentiles are all plausible scenarios to choose from? since 90th-95th percentile are going concern scenarios and 95th-99th are solvency scenarios? the exam report only provided answers with 96th percentile, so I would like to confirm the other 2 options are ok too.

Second, why is the self retained cat loss calculated as 605k-400k-150k with multiple reinsurers? I don't understand the reinsurance mechanisme when there're multiple arrangements with reinsurers. I would first calculate the amount covered by reinsurer A, 605k-150k = 455k, then this 455k goes on to be assessed with reinsurer B, given the 200k retention, the covered loss is 255k, so in total the insurer retained 200k and reinsurer A+B covered 150k+255k=405k, can you please explain?

Thanks!

Comments

  • grahamgraham

    No, you must pick the 96th percentile for that question. It isn't as clearly stated in this new FCT reading as it was in the old DCAT reading, but a plausible adverse scenario is one that falls between the 95th and 99th percentile. It's adverse if it is above the 95th percentile and it's plausible if it's below the 99th percentile.

    Reinsurance calculation: The 2 reinsurance treaties with reinsurer A and reinsurer B are designed to cover distinct layers of loss:

    • reinsurer A covers losses from 50K to 200K. (That's what 150 xs 50 means. It covers 150K of losses in excess of 50K so it covers from 50K to 50K+150K = 200K.

    Reinsurance coverage from A will be exhausted when losses hit 200K, which they do because the loss at the 96th percentile is 605K. So:

    • reinsurer B covers losses from 200K to 600K (by the same reasoning as above.)

    Here, coverage from reinsurer B is also exhausted because losses exceeded 600K, so the primary insurer is responsible for the extra 5K plus the initial 50K, which totals 55K. But the quick way to get this is to start with 605K, then subtract the coverage from B or 400K, then subtract the coverage from A which is 150K, and the final result is:

    • 605 - 400 - 150 = 55
  • oxalisoxalis
    edited September 2021

    Thank you for your explanation on the reinsurance!

    for my first question though, based on the answer provided, does it mean these 2 battle cards are not accurate?

    FCT battlecard 15 Define the term going-concern scenario
    an adverse scenario that is more likely and/or less severe than a solvency scenario (could include risks not considered in solvency scenarios)

    FCT battlecard 35 How many adverse scenarios should an FCT report include?
    • at least 3, including 1 going-concern scenario and 2 solvency scenarios
    • they should also be chosen from multiple risk categories

    can you please confirm if the going-concern scenarios should be considered as adverse scenarios?

  • grahamgraham
    edited September 2021

    The definitions provided are from the source text but they require some interpretation in a practical situation.

    A solvency scenario is suggested to fall between the 95th and 99th percentile in the loss distribution. A going-concern scenario is suggested fall between the 90th and 95th percentile making it less of a potential problem for the insurer than a solvency scenario.

    A going-concern scenario in the 90th percentile is still "adverse" because it represents a loss to the insurer but a "plausible adverse scenario" or "solvency scenario" in the context of FCT means even more adverse (above the 95th percentile.)

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