Clarification of Capital Required for Unpaid Claims
Hello, Just want to clarify on the following:
When calculating the capital required for unpaid claims, do we always ONLY need to consider the margin on the unpaid claims and not the unpaid claims as well ?
For context, I am referring to this question, https://battleactsmain.ca/CP_MCT_04b_InsRsk_unpd_clms.php?myID=54005612&priorDate=&record=&score=&WET=200.000000&fadeFactor=0.0001
Why do we not include the unpaid claims as well ?
Thank you.
Comments
Hi,
I see what you mean. Why are we only including the margin as part of the required capital instead of the margin + the acutal unpaid amounts?
The answer is that the unpaid claims are already booked as a liability on the balance sheet. You can see this in the sample quarterly return on Exhibit 20.20 about half-way down the page:
In other words, the actual unpaid claims amount has already been accounted for and set aside. The purpose of MCT is to see how much extra capital you need as a margin for safety. For example, a risky line of business might need an extra 20% of the unpaid claims liability to be set aside just in case. A less risky line of business might only need 5% extra set aside. Then the MCT ratio compares how much capital you have to how much you need as a safety margin. (And neither the capital available nor the capital required would include the original unpaid claims.)
Thank you for the detailed clarification Graham !