Skip to content

IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

Bharat General Insurance's actuarial team finds that its solvency position is comfortable today, but a stress test combining a sharp equity fall, a rise in claim frequency and a downgrade of its bond portfolio shows the solvency ratio dropping close to the regulatory minimum. The CRO wants to use this result properly. Which action best reflects sound ERM practice?

The result should go to the board along with possible management actions such as reinsurance, changing the asset mix or contingency capital plans. Stress tests exist to expose vulnerabilities, so dismissing, softening or siloing them would defeat their purpose.

  1. ADisregard the result, since the combined scenario is unlikely to occur in practice
  2. BReport only the current solvency ratio to the board, since stress results are hypothetical
  3. CPresent the result to the board and consider management actions such as reinsurance, changing asset mix or raising capital contingency plansCorrect
  4. DAsk the team to rerun the test with milder assumptions until the ratio looks adequate
  5. Delegate the result to the investment team alone, as the fall in equities is the main driver

Explanation

Stress and scenario testing exists to reveal vulnerabilities so the board can plan responses, such as reinsurance, de-risking assets or contingent capital. Dismissing, softening or siloing the result defeats its purpose and the claim and credit risks are not only investment matters.

Did you get it right without looking?

One question tells you little. A timed set on Issues and challenges in each main practice area shows your real accuracy, how long you take and where you lose marks.

Practise Issues and challenges in each main practice areaFree diagnostic mock

More Issues and challenges in each main practice area questions