2015 Fall #20 - Adjustment to the capital available

yunal911111yunal911111
in OSFI.MCT

Hi, I understand that in this PAS, capital requirement will increase if unpaid claim increase by 8%. But can you please explain why do we also adjust the capital available?

Thanks!

Comments

  • grahamgraham

    First note that in this problem, equity is used as a proxy for capital available. Now recall the fundamental accounting equation:

    • assets = liabilities + equity

    This equation is always true so it must be true for both the base and the adverse scenario:

    • IF unpaid claims increase THEN liabilities increase since unpaid claims are on the liability side of the balance sheet
    • IF liabilities increase THEN either equity decreases or assets increase or a combination of equity decrease & asset increase (so that the fundamental accounting equation remains true)

    The solution assumes that assets don't change. That means equity must decrease by the same amount that the liabilities increased. The solution then just uses equity as a proxy for capital available.

  • yunal911111yunal911111

    Make sense! Thank you!

  • jjj820jjj820

    Hi, is this (PAS) still on syllabus? Thank you Graham!

  • grahamgraham

    I have communicated with the CAS about this but their answers have not been clear.

    The concept of Plausible Adverse Scenario (PAS) is discussed in detail in the CIA.DCAT reading and that reading has been removed from the syllabus. That makes me think PAS will not be tested but the term PAS is also used in OSFI.Stress and CIA.CSOP.

    I think they probably intend not to test this topic for 2020 Fall, but I can't say with 100% certainty. (I'm about 80% sure.)

    The exam question referenced above requires quite detailed knowledge of the CIA.DCAT reading so that type of problem should really not appear on the 2020 Fall exam.

  • jjj820jjj820

    Thank you Graham !

  • vspezialevspeziale

    Hello, can you confirm where I can find more information on how to adjust the unpaid claims capital required for this question? If capital required is comprised of SUM(IMCO) - DC, would it be incorrect to look at this as an LIC item?

  • Staff-T1Staff-T1
    Yes, this would be an LIC item. It's more of logic and understanding how an increase in claims liability would affect your capital required. It is usually just a straight up scaling of the capital required. I don't think there is any specific section that would show you how to do it. On a side note, I think this question is actually still relevant. It is basically an FCT and MCT hybrid question
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