2019 Spring Q18 - Capital and Surplus - Include EPR?

chrisboersmachrisboersma
in OSFI.MCT

Just reviewing the Spring 2019 exam and noticed that capital and surplus did not include "EPR"

Doesn't line 45 include "EPR"?

More specifically: Earthquake Reserves = "Reserve Complement" Line 90 and "Premium Reserves" Line 91 on page 92.40

Note the MCT guide incorrectly refers to this "Complement" as a "Component"

Comments

  • grahamgraham

    There are a few things here that puzzle me actually. The FIRST is that in the solution (and according to the formulas in the MCT paper) the value of EPR seems totally irrelevant to the final calculation of ER (Earthquake Reserves.)

    • EPR is subtracted from the reserving PML to get ERC (because it's part of financial resources)
    • Then in the next step, EPR is added back into ERC before multiplying by 1.25 to get the final value for ER (Earthquake Reserve.)

    So EPR totally cancels out of the calculations. But then there is a strange comment about EPR regarding a deduction from "capital available". Section 2.3.1, bullet point 3 says:

    • The earthquake premium reserve (EPR) not used as part of financial resources to cover
      earthquake risk exposure (reference section 4.5) is a deduction from capital available

    This seems to say that some (or all) of EPR can be deducted from "capital available." But it isn't clear what portion is to be deducted. (This deduction also shows up on page 30.62, Line 11 of the quarterly return.)

    Since the solution to the exam problem doesn't use EPR as part of "capital & surplus", this seems to imply that the full EPR of 10,000 indeed has been deducted from "capital available." But that then means EPR is not used as part of the financial resources to cover earthquake exposure. But the solution definitely does consider EPR to be part of the financial resources for earthquake exposure.

    The short answer is that I don't know the answer to your question. Sorry.

    The SECOND thing that puzzles me about the examiner's report solution is that they used the full 10% of "capital & surplus", without explanation, as part of the financial resources for earthquake. But the reading states:

    • Insurers can count up to a maximum of 10% of capital and surplus as part of their financial resources to cover their earthquake risk exposure. This maximum limit is subject to supervisory discretion and can be lowered to an amount less than 10% of capital and surplus.

    In other words, it could be 0% and you could eliminate this term from financial resources entirely. The solution doesn't seem to allow for this option however.

    This question wasn't too badly done by candidates overall (60% average) because I suspect many people got partial credit for (a) even if they missed the calculation about 10% of "capital & surplus" and the EPR business. Then parts b,c,d weren't too hard.

    In the end, I think this may be just another case where the examiner's report isn't completely correct.

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