2019 Spring 18 (b) & (c) ER/PML impact on Surplus/CapitalAvailable

Pass6Pass

For (b), I understand ER decrease may not necessarily impact Capital Available in MCT because released ER could flow to retained earning.

But for (c), surplus covers almost the same as "Available capital" in BCAR, and Available capital in BCAR also covers almost the same items as "Capital Available" in MCT. (both include common shares, contributed surplus, retained earning, reserve, AOCI and other adjustments). so why the answer to (b) is "no changes to capital available", while the answer to (c) is " surplus decrease"?

My second question is:
why PML increase can cause surplus decrease? I make up two contradict explanations:
(c.1) PML up >> ER up >> u/w income down >> net income down >> equity(surplus) down;
(c.2) PML up >> ER up >>retained earning down >> surplus is unchanged, as in (b).

Can you help me sort out the relations among "PML/ER" to "Surplus/CapitalAvailable in MCT/AvailableCapital in BCAR"?

graham

Question 1:

• The wording of the question was a bit unclear, but what they were really testing was whether you knew the steps in BCAR's natural catastrophe stress test. This is discussed in the BCAR.Cat wiki article here:
• https://battleactsmain.ca/wiki6c/BCAR.Cat#Natural_Catastrophe_Stress_Test
• The first step is to reduce the reported surplus by the PML (Probable Maximum Loss) of the exposure for a 1-in-100 year event, and apparently that's all you had to say for 0.5 points.

Question 2:

• Does the above answer to your first question answer your second question? If not, let me know. I don't think you were intended to use the same type of reasoning as in part (b) for MCT. I think part (c) was meant to be an easy question on the natural catastrophe stress test.

Pass6Pass

Thank you for the explanation.