Capital and Surplus

YouAreGiven

Hi Graham & Team,

Page 10 of the source text refers to the MCT text, and specifically mentions that "[...]. It also
specifies the maximum retention that can be supported within the insurer’s capital and surplus."

I can't find a section of the MCT text where a level of retention relative to the Capital and Surplus is described.

What exactly do they mean by this comment? and is this possibly some fuel for a Bloom's Taxonomy bomb?

graham

It's funny you should mention that because I had the same issue with the earthquake reading. You're right that on page 10 of the earthquake reading, under the subheading "Capital and Surplus", they refer you back to the MCT reading for more information on "maximum retention". But if you search for "maximum retention" within the MCT text, you don't find anything.

I think it's all just a confusing way of saying that to keep the MCT ratio above 150%, there must a limit of the amount of risk the insurer can retain relative to their capital. In other words, the MCT guidelines specify the maximum risk retention relative to capital and surplus. Here's the way I thought through it:

• First, recall the formula for the MCT ratio: CapAv / minCapReq
• Let's say an insurer is aiming for the minimum acceptable MCT ratio of 150%.
• If the insurer retains too much risk, and their MCT ratio falls below 150%, that means their minCapReq is too high relative to their CapAv (Capital Available.) In other words they exceeded their maximum retention.
• The insurer can then correct for this by reducing the amount of risk they retain. This would lower minCapReq and therefore raise the MCT ratio, hopefully enough to push it over 150%.

So, that's my take. I suppose you can never rule out a Bloom's bomb however. :-)

YouAreGiven

Glad I asked the question then. This perspective is a perfect way to handle a Bloom's bomb .

Thanks a lot for such a thorough and detailed answer!