Adjusted Equity
When do we use "adjusted equity"? It seems the exam is now (since 2015) using the terms Equity interchangeably with "Adjusted Equity" (MSA). Should I just get used to stating there are no capital requirements for catastrophe or reinsurance so assume adjusted equity = equity (as per below).
eg. Fall 2017 Q25. Asks for ROE and doesn't discuss or mention adjusted equity
In Spring 2015 Q26 there's a statement:
Since we have liquid assets, we need total assets to calculate non‐liquid assets. Can get this from Equity and Liability totals. Because there is no capital required for catastrophes and reinsurance ceded to unregistered reinsurers then Adjusted Equity = Equity.
Comments
Maybe it's late and my brain isn't working properly? But I don't know why they mentioned adjusted equity at all.
The ROE formula according to MSA is slightly different from the ROE formula according to the annual statement instructions. They indicated that you should use the MSA version by saying ROE was calculated using year-end equity. (The annual statement version uses an average of beginning and ending equity.) But neither use adjusted equity. It's indeed true that in this problem we have adjusted equity = equity, as you noted, but it seems irrelevant. I can't see how the solution would be any different even it it weren't.
I would answer your question by saying that equity and adjusted equity are different of course, and I suppose that could come up on the exam, but for these types of MSA questions, I think you can assume you're just dealing with plain old equity, 2015-Spring Q26 nothwithstanding. I expect most people just went ahead and solved it as intended without giving adjusted equity any thought.
It's entirely possible I've missed something. Please let me know if you think I have.
What is the formula for adjusted equity? Can you please direct me to the relevant sections in the reading?
Stat Surplus, Adjusted Equity, Collectively referred to as 'Equity': (page 2 or 10) MSA Ratios
Statutory Surplus = assets - liabilities - reserves required
Adjusted Equity
P&C-1: Adjusted Equity (OSFI) = total equity - cap.req for cat and re.ins
P&C-2: Adjusted Equity (MSA) = Head Office Account
Awesome reply as always, thank you