Spring 2019 Q18-c)

oxalisoxalis
edited April 2022 in OSFI.Eqk

Hi,

question c): explain how personal property earthquake exposures impact the surplus used in AM Best's BCAR score

Can you please help me understand the link between the earthquake exposure and the AM Best BCAR natural cat test please?

I see this question in a couple in past exams, but I don't quite understand the underlying relationship between these 2 pieces.

Thanks a lot!

Comments

  • Staff-T1Staff-T1

    Basically these 2 papers cover similar concepts with respect to the management of catastrophic (EQ) risk. Good EQ risk management practice in the OSFI paper can be applicable to the AM Best rating. You could also answer this question using bullet points from the strong cat risk management and still get full marks

  • oxalisoxalis

    Hi,

    Can you please help me understand the sample answer for this question please, we're talking about earthquake exposure related to the calculation of the BCAR score. BCAR score is calculated as (AC-NCR)/AC at diff level of VaR, the surplus is the AC element here? so if earthquake reserve decreases, then the surplus decreases? (why is it by pml100 though?) and this is also the first step used in the natural cat test in BCAR cat test..

    Thank you

  • AnLaPeAnLaPe

    I wondered the same... Looking at the sample answers, it feels like they wanted us to answer with the impact on the natural cat test. Which I guess is technically correct, the natural cat test will impact the final score, so it does "impact the surplus used in AM Best's BCAR score". They were just being extremely vague about it...

  • AnLaPeAnLaPe

    Should also note that the section on available capital (p. 32+) is not even on the syllabus, and the syllabus for the 2019S exam used a different version of the paper.

    It is possible that the wording in the question is based on how it was worded in the previous paper, which could explain why it seems unclear based on the current version.

  • Staff-T1Staff-T1

    Whoops I saw this as question d)
    Tbh reading the paper again I kind of feel it's fair game. It's a 0.5 mark question so basically they are just testing if you know that if EQ reserves increases, then required capital increases just like in the MCT ~ But the natural cat test interpretation does lead to the same conclusion by reducing capital available

  • wilsonchan18wilsonchan18

    Maybe this is because they are asking for the Stress BCAR Score under EQ for the 2nd EQ Event? The one mentioning 40% Unpaid Increase?

  • Staff-T1Staff-T1

    I don't think so. The part you are referring to (page 33) is no longer on the syllabus ~

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