5a. What is economic capital for an insurer with assets of $800 million and liab

Question

5a. What is economic capital for an insurer with assets of $800 million and liabilities of $650 million? Show computation for full

    credit

5b. Suppose Tom and Kathy each are exposed to the possibility of an accident in the coming year. In particular, we assume that each

    person has a 20% chance of an accident that will cause a loss of $3000 and 80% chance of no accident. Because both Tom

    and Kathy each have a 20% chance of having an accident that causes $3000 in losses, the expected costs and standard deviation

    for each person without pooling arrangements would be?

    Compute expected accident costs to each person by pooling.

Explanation / Answer

We are allowed to do 1 question at a time. Post again for second question.

In finance, mainly for financial services firms,economic capital is the amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as a going concern, such as market risk, credit risk, legal risk, and operational risk.

5 a) 800 – 650 = $150 million.

Remember to use market value when calculating assets and liabilities for insurer.

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