Spring 2019 Q18 b.)

bkmlocksbkmlocks
in OSFI.MCT

This question asks about the impact on the MCT components of a decrease in the earthquake reserve.

From the solution, it is clear that the question is talking about the Margin on Earthquake reserve that you calculate as part of the insurance risk.

However, I initially interpreted this earthquake reserve to be part of the reserve component (Category A Capital) from the Capital available calculation and hence said that the Capital Available would decrease. Can someone please explain why this would be wrong ?

Thank you.

Comments

  • grahamgraham

    You are right that this is confusing and it is not explained in the examiner's report or in the MCT reading.

    As you said, Capital Available includes something called earthquake reserves but Capital Required also includes this same item. So, which is it - capital available or capital required? This is not explained anywhere. Except for the 2015.Spring exam, you are always given Capital Available, so my advice when you see "earthquake reserves" is to assume they are referring to Capital Required, in particular the insurance risk component of MCT.

    You probably already know this but if you look at the practice template for earthquake reserves, which is BattleCard 9, in Quiz 3 of the OSFI.MCT reading, what you are calculating is specifically called earthquake reserves.

  • bkmlocksbkmlocks

    Thanks a lot Graham :)

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