A from Un-ded
The formula from the wiki is A = A* + A1 + A2 + A3 + A4 + A5 + A6 - A7
This is combining both PAA and GMM methods.
But in the source text it states:
For P&C insurers using the PAA to measure a group of reinsurance contracts held, the premiums associated with unexpired coverage on reinsurance contracts held is determined as:
Asset for remaining coverage on reinsurance contracts held + unamortized reinsurance commissionFootnote43 + premiums to be paid to the assuming insurer
For P&C insurers using the GMM to measure a group of reinsurance contracts held, the premiums associated with the unexpired coverage on reinsurance contracts held is determined as:
If the contractual service margin (CSM) of a group of reinsurance contracts held represents a net cost of purchasing reinsuranceFootnote44:
Expected cash inflow from reinsurer + risk adjustment (RA) + CSM + unamortized reinsurance commission
If the CSM of a group of reinsurance contracts held represents a net gain of purchasing reinsurance:
Expected cash inflow from reinsurer + risk adjustment (RA) - CSM + unamortized reinsurance commission
So For PAA its A = A* + A1 + A2
And for GMM its A = A3 + A4 + A5 (positive or negative depending on CSM) + A6.
So I see why you combined the two together. But I don't see a deduction for A7 in the source text.
Could you please clarify?
Comments
Also a follow up question, if the calculation only indicated GMM, do we still need to add A*? Or would it just be A3 + A4 + A5 + A6 - A7 (still pending where the A7 came from).
A* in the example contains both the PAA and GMM ARC which means you need to remove the GMM ARC (A7) as that is not required to calculate the capital required. If the insurer only uses the GMM, just use A3 + A4 + A5 + A6
I see that make sense. Thanks for the clarification
I guess there are 3 cases here:
Case 1: insurer uses both PAA and GMM (wiki example)
wiki formula=A=A*+A1+A2+A3+A4+A5+A6-A7
Since using both, why remove the GMM ARC (aka the term -A7)?
Case 2: insurer uses only GMM (example above)
A=A3+A4+A5+A6
This makes sense.
Case 3: insurer uses only PAA
In this case, is A=A*+A1+A2-A7?
Case 1: You are not supposed to use the GMM ARC in any calculation, but rather the components that feed into the FCF calculation. A* contains the GMM ARC which is why you need to back it out.
Case 3: No need to subtract A7 here. There is no GMM estimate in A*
Case 3:
oh! so because if we assume the company uses only PAA for all its contracts (no GMM at all),
then A*=ARC for PAA only (and A7=0)
correct?
Case 1:
A* = PAA ARC + GMM ARC
PAA ARC is part of component A (as in PAA component A=PAA ARC+A1+A2)
but GMM ARC is not used anywhere here (as in GMM component A=A3+A4+A5+A6)
so PAA&GMM component A=(A*-A7+A1+A2)+A3+A4+A5+A6.
correct?
Yup you are right for both cases
thanks!