SP7 - General Insurance Reserving and Capital Modelling Principles - Curriculum 2019 Specimen Examination

Sep 27, 2026

Uploaded by Cipher

Curriculum 2019 specimen examination paper for Subject SP7, General Insurance Reserving and Capital Modelling Principles, with a three-hour-and-fifteen-minutes duration and candidate instructions on completing nine questions. The questions cover annual accounting cashflows, drivers of reinsurance purchase, data needs for internal capital models, sensitivity testing and uncertainty in reserve risk, and reinsurance design for agriculture. Additional sections address captive insurers, reserve uncertainty definitions, diagnostics for reserving investigations, and analysis using claims ratio triangles.

LanguageEnglish

CategoryExam

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

Instructions to the candidate

Questions

Question 1 - Income and outgo items

Question 2 - Factors influencing reinsurance purchase

Question 3 - Data for internal capital model risk types

Question 4 - Sensitivity testing and validation

Question 5 - Agriculture reinsurance perils and earned premium

Question 6 - Captive insurer and reinsurance company arrangement

Question 7 - Advantages and disadvantages discussion

Question 8 - Parameter and model uncertainty in reserving

Question 9 - ALAE and reserving diagnostics

INSTITUTE AND FACULTY OF ACTUARIES Curriculum 2019 SPECIMEN EXAMINATION Subject SP7 – General Insurance Reserving and Capital Modelling Principles Time allowed: Three hours and fifteen minutes INSTRUCTIONS TO THE CANDIDATE 1. Enter all the candidate and examination details as requested on the front ofyour answer booklet. 2. You must not start writing your answers in the booklet until instructed to do so by the supervisor. 3. Mark allocations are shown in brackets. 4. Attempt all 9 questions, beginning your answer to each question on a new page. 5. Candidates should show calculations where this is appropriate. Graph paper isNOT required for this paper. ATTHE END OF THE EXAMINATION Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this question paper. In addition to this paper you should have available the 2002 edition of the Formulae and Tables and your own electronic calculator from the approved list. 1 List the key items of income and outgo in the annual accounting model for insurance contracts. [3] 2 List factors influencing the purchase of reinsurance by an insurance company. [8] 3 List four items of data per risk type that may be used in an internal capital model for modelling: (a) underwriting risk. (b) market risk. (c) counterparty default risk. (d) liquidity risk. [8] 4 (i) State the purpose of sensitivity testing in internal model validation [1] An insurance company uses a stochastic model to estimate its reserve risk capital. Lognormal distributions are used to model volatility of individual classes and a correlation matrix is used to aggregate distributions. A sensitivity test is performed in which the means and standard deviations ofthe lognormal distributions are increased by 5% for all classes. An actuary working for the company suggests that the modelled reserve risk should increase by 5% . The testis run and shows a 4% increase. (ii) Suggest three possible reasons why the test may not match expectations. [3] A second sensitivity test is performed in which a 20% multiplicative increase is applied to the gross volatility parameter for the three lines of business with the largest gross reserves. (iii) Suggest four factors that influence the expected impact of this test. [4][Total 8] 5 A reinsurer is planning to start writing reinsurance that provides protection for the direct writers’ global agriculture insurance portfolios. The agriculture insurance provides cover for both crops and livestock. Cover for farm buildings is excluded. (i) List perils from which purchasers ofthis reinsurance may be seeking protection. [3] (ii) Suggest, with reasons, factors the reinsurer should take into account when determining an earned premium profile for this class of business. [6] [Total 9] 6 (i) Define the terms: (a) captive insurer (b) free reserves [3] (ii) List four potential reasons why a company might set up a captive insurer. [2] A large multinational insurer is considering changing its reinsurance arrangements by setting up a new reinsurance company to which it will cede a significant proportion of its business under a long-term agreement. The insurer will retain a 30% interest in the new reinsurance company which will be capitalised by a private issue of shares in the newly established reinsurer. The company will be established in a country which has very favourable corporate and regulatory requirements for this type of venture, requiring free reserves of just $1 to be held. The company will voluntarily hold additional capital calculated using a prudent risk based measure. The assets of the company will be managed by a third party investment manager engaged to maximise investment returns with no restrictions on asset type or investment strategy. (iii) Discuss the advantages and disadvantages ofthis arrangement for the: (a) cedant. (b) new company. (c) investors in the new company. (d) country of

FAQs

What are the key instructions candidates must follow during the exam?

Enter candidate and examination details as requested, wait for supervisor instructions before writing, attempt all nine questions starting each on a new page, show appropriate calculations, and hand in both the answer booklet and the question paper at the end.

How is sensitivity testing described in the internal model validation question?

A stochastic reserve risk capital model is used, with lognormal distributions and an aggregation correlation matrix. The example increases means and standard deviations by 5% and reports the observed change, then performs a second test with a 20% multiplicative increase to gross volatility for selected lines of business.

What uncertainty topics are assessed in the reserving uncertainty questions?

The paper defines parameter and model uncertainty, asks for sources of each, and requests discussion of another key uncertainty area. It also requires methods to quantify reserve uncertainty for given lines of business and justification of those choices.

Sep 27, 2026

Uploaded by Cipher