2014F Q13 C

wilsonchan18

Hi,

I can understand that the Auto Residual Class Participation Ratio set up reasons:
1. Everyone share losses as it serve social purpose
2. Those writing the high risks one should not be penalized.

But here the examiner report saying that Option A is more equitable only if Overland Flood is Mandatory, But Option B is more equitable if the Flood coverage is voluntary. Here, I am bit of confused.

Can anyone help to explain?

Thanks and Warm Regards,
Wilson

Staff-T1

I'm looking at the exam and am unsure where it mentions option A is mandatory? This question is not about equity for the insured

wilsonchan18

I think they mention it in the General Commentary by analyzing the equity from Overland Flood using Voluntary basis or Take-All-Comer basis:

Staff-T1

Okay, I see what you mean;

• Option A is more equitable if Overland Flood is mandatory because everyone has to provide flood insurance, so we shouldn't penalize insurers who have more exposure to flood because their hands are tied even if they wanted to reduce their exposure.
• Option B is more equitable if Overland Flood is voluntary because as an insurer, if you voluntarily take on more flood exposure, you should consequently expect to share more of the losses from the pool vs someone who actively chooses to avoid flood exposure.

wilsonchan18

I love your saying that their hands are tied.
Perfectly make sense, thanks!

exam6passer

I am still confused how does option B penalties for writing flood coverage?

if you write more flood coverage, you can choose to share with to the pool. The more you share, if the better you are beating the other insurer, the insurer will earn money. is it the case?

Staff-T1

Sorry, I don't really understand what you are trying to say in your last sentence. Could you rephrase?