2018S Q13b

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in OSFI.MCT

Hello Graham,

For part ii of this question, I'm having a hard time wrapping my head around the wording in the sample answer key so I was hoping you could help me out.
The sample in the answer key has "It depends on whether the cap is reached (30% of net WP in the last 12m). If the cap is already reached, then no change. "
However, there's no cap in the margin for prem liability, as it is the MAX of net prem liabilities (minus PfAD) and 30% of net WP in the past 12 month, times the risk factor. Should the answer be worded as "It depends on if the floor is reached. If the floor is reached, then the margin for premium liabilities increases as well"?

Thanks.

Comments

  • chrisboersmachrisboersma

    It appears as though you are correct.... Strange no one caught this sooner.

    If you're already above 30% of NWP - then change in yield -- > change in margin
    if you're below 30% of NWP (floor) then change in yield -- > no change in margin (unless you exceed floor).

  • grahamgraham

    Hmm...I believe you guys are correct. If we let NPR = Net Premium liabilities, then the simplest way I could think of expressing the answer is:

    • if under the new (lower) yield NPR > 30% x NWP ==> margin goes up
    • if under the new (lower) yield NPR ≤ 30% x NWP ==> no change in margin

    (It doesn't matter whether NPR was greater than or less than 30% x NWP prior to the change in yield. All that matters is whether the change pushes NPR above 30% x NWP.)

    I'll link to this post from the wiki.

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