Fall 2019, Q17
I'm confused on the wording for part a. Method 1 for ERX is based on the model without phase-in but this is also called the countrywide PML 500 requirement. The question says that we are phasing in CW PML500 requirement. Wouldnt that mean we should be using method 1? Looks like the solution is using method 2.
Comments
When they state that PML500 is being phased in, it means you can't use PML500 directly. You have to calculate PML420 and then take a weighted average of PML420 and PML500. The weight given to PML500 increases from the year 2014 to the year 2022, at which point PML500 is completely phased in. The formulas for all of this are included in the web-based problem referenced below. (Method 2 is the correct approach here.)
This shows how to do the earthquake reserves problem. There is also an important note in a tan box just above the BattleQuiz link about interpolating to find PML420. Here's a direct link to that section of the OSFI.MCT article:
This problem also had another wrinkle in that you had to know how to calculate the total value of financial resources. That's discussed in the OSFI Earthquake article. Here's a direct link to the relevant section of that article:
Thank you!