Question

# <p>1.The claim cost of an insurance company follows a normal distribution with an expected value of $500

million and a standard deviation of $100 million. Based on the above, work on the following questions. A) In the graph, indicate the probability of insolvency of the insurer when it has an asset of $750 million. Please clearly label the axes. B) Show the probability of insolvency of the insurer after the insurer raises $100 million of new capital. C) Compute the probabilities of insolvency for the insurer when its total assets are respectively $750 and $850 million. D) What is the firm's value at risk at the 1% level? 2. Based on the distribution in Problem 2 (the firm's total asset is $750 million), show in the graph how the probability of insolvency changes when the insurer cedes a proportion of its liabilities to a reinsurer and simultaneously reinsurers a similar amount of business from another insurer with a similar, but uncorrelated book of business. Also explain your results in words.</p>

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