Premium Growth for Operational Risk - Battle Quiz 6 - Calculation

UnknownUnknown
in OSFI.MCT

The premium growth formula provided does not reconcile with the example on pg. 76. The one in the examiner's report for Fall 2017 20. c) however is more in-line with the paper (as expected).

Please correct the battle quiz algorithm/solution to accept the formula found within the paper.

Comments

  • grahamgraham

    The MCT paper doesn't specifically provide a formula so I invented my own. My formula is algebraically equivalent to what they did in the text and gives the same answer as can be seen as follows:

    • Growth from 150 to 225 is 50%
    • Therefore growth above the 20% threshold is 30%
    • DWP + AWP = 225

    Then according to my formula, the growth charge

    = (risk factor) x (excess growth) x (DWP+AWP) / (1+growth)
= 2.5% x 30% x 225 / (1.5)
= 1.125

    which rounds to 1.13 and agrees with the answer in p76.

    The term (DWP+AWP)/(1+growth) is just the premium from the prior year, which in this case is given. That means you can rewrite the formula like this if you want:

    (risk factor) x (excess growth) x (prior year's DWP + AWP)

    To create a formula that exactly matches the example in the text, you could write:

    (risk factor) x [(current premium) - (prior premium) x 1.20]

    However you do it, the risk factor has to be multiplied by the dollar amount of the premium growth that's in excess of 20%. I will add a link to this post in the wiki.

  • UnknownUnknown

    Thank you. I had mistakenly used the premium amount before growth when trying to reconcile the two methods.

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