Prem Liab in calculating margin for interest rate risk
I understand that Prem Liab consists of 3 components: (a) PV of loss&expense (b) PfADs (c) future rein cost+maintenance expense+contigent commission.
In calculating Capital Required for Insurance Risk, we use max(30%NWP,PremLiab), where PremLiab=(a)+(c), excluding (b).
How about in calculating Capital Required for interest rate risk, when abs(AssetMDshock-UCAEMDshock-PremLiabMDshock), shall we use PremLiab=(a)+(b) or PremLiab=(a)+(b)+(c)? I vaguely remember one of the past exams use PremLiab=(a)+(b) for interest rate risk, but in 2018S#14, it use PremLiab=(a)+(b)+(c).
Can you clarify this?
Comments
For CapReq(interest rate) you would normally use (a)+(b)+(c), unless there was no reinsurance, or the question didn't provide any information on maintenance expenses or contingent commissions.
If you come across the problem you mentioned where you think they didn't incorporate item (c), let me know and I'll take a look. Offhand, I can't recall a problem where that happened, but you could very well be right.
Probably the reason one of the past exam use PremLiab=(a)+(b) for interest rate risk is that component (c) are not interest rate sensitive. I will come back when I come across that problem again.
That's a good point. If you really want to calculate delta-P properly you would consider each component separately. If a component like maintenance expenses is not interest-rate sensitive, then the delta is 0 under an interest rate shock.
In the 2018 problem, they don't do this however. When they calculate delta-P, they just multiply the interest rate shock by the total premium liabilities (a)+(b)+(c). They assume the shock applies to all components of P equally.