A question about reduction/deductible in Capital required due to unregistered reinsurance

yunal911111yunal911111
in OSFI.MCT

Hi there,

  • For capital required for unregistered reinsurance, capital required of insurance risk decreases if -D>0
  • But in the text page 35, there is another term will decrease the capital required which is the "Reduction in Capital required due to reinsurance ceded to unregistered reinsurance"

Can you tell me what's the difference between these two and do we always have to calculate the second one above in the exam.

A follow up question is 2015 Spring #23 d) asked us to calculate the reduction in Capital required due to reinsurance ceded to unregistered reinsurance, the answer is 0.625. (
https://www.battleactsmain.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(23).pdf)

However, the 0.625 reduction is not included in the e) MCT calculation. Can you please why? I understand 0.625 is a very small number which wont impact the final number, but I just want to find out the reason behind or to confirm whether it is another typo we often find in exam 6 (again!!)

Thank you!

Comments

  • grahamgraham

    About 2015.Spring Q23d:

    • This material was removed from the syllabus in 2017
    • See footnote 2 in the BattleTable for OSFI.MCT
    • Just so you know, the reason they didn't include in the 0.625 in the MCT calculation in part (e) is that "Capital required for reinsurance ceded to unregistered reinsurer" was already 0, as calculated in part (b). Normally, the 0.625 should be subtracted, but capital required cannot be less than 0. (So it wasn't a mistake in the examiner's report, but since there are indeed many other mistakes, you just never know!)

    For your first question, I'm not too sure where on page 35 you found that sentence. On p35, they talk about a reduction in capital required due to excess collateral. It isn't totally clear but I believe that is no longer on the syllabus because it really is part of section 6 on credit risk, most of which has been removed from the syllabus (even though some of this material on collateral is discussed in section 4.)

  • yunal911111yunal911111

    :) Make sense, thanks Graham!

  • chrisboersmachrisboersma

    To be clear 4.3.3.3 included and includes:

    Step 1: Computation of excess collateral (reference P&C unregistered reinsurance exhibit of the P&C Returns)
    Step 2: Reduction in capital required for excess collateral (The capital requirements for acceptable collateral, less the excess, are reported as part of capital required for credit risk)

    I believe the way 2015Q23D is written it would still qualify under the post-2017 syllabus (has CAS said otherwise?)

    Since the value of "Credit Risk" is given as 6,000 we do not need to worry about this additional deduction in relation to the credit risk component - as we have the correct final amount after this reduction as a given. However, you may still be asked to calculate "Step 2: Reduction in capital required for excess collateral" as defined in 4.3.3.3.

    In relation to all the pieces of re-insurance you should know - put this table together showing what happens to all the variables are you increase collateral:
    https://www.battleactsmain.ca/vanillaforum/discussion/comment/523/#Comment_523
    - You should understand Capital Available deductions, Cap Required and Excess Capital

    There's basically three scenarios:
    1. too much collateral (excess collateral) - we adjust the credit risk component
    2. just enough collateral (we are charged 15% (20% after 2020)) of premium/claims
    3. not enough collateral (we are charged penalty for shortfall + 15%/20% from 2)

    There's also the possibility you have more than just enough (but less than too much). In this case you just use the extra collateral to reduce the 15/20% re-insurance charge (until you reach $0 or scenario 1 - too much collateral)

  • bkmlocksbkmlocks

    To add on the post above from @yunal911111 , if we are asked to calculate the capital required for unregistered reinsurance, do we also need to look at the excess collateral component discussed on pg 35 ?

    For instance, in this question : https://battleactsmain.ca/CP_MCT_04d_InsRsk_unreg_re.php?myID=54005616&priorDate=&record=&score=&WET=244.948974&fadeFactor=0.0001, if we had excess collateral, would we be required to credit the capital required ?

    Thank you :)

  • grahamgraham

    The syllabus is confusing on this point and I can't say for certain whether you need to be able to do this calculation for the exam. If you were doing it for work, then definitely yes.

    The confusion is because this calculation relates to credit risk, but most of the material on credit risk was removed from the syllabus. But the example for excess collateral in the paper is included in the section on insurance risk on page 35 (specifically the subsection on unregistered reinsurance.)

    Because I wasn't sure, I left the practice template for this in the BattleCards in Quiz 5 of the MCT article. (That's the credit risk section.) You can see there how this calculation is done. But again, my reading of the syllabus is that you don't have to know how to do it. I know however that some exam-takers feel more comfortable studying it anyway just in case.

    Sorry I can't provide a more definitive answer.

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