Satisfactory condition: Min MCT >100% or surplus >0?

passexam6cpassexam6c
in CIA.DCAT

The exam questions seem to use these terms interchangeably to mean the same thing: surplus/equity/capital available.
And many exam solutions state that satisfactory condition needs adverse scenarios to have surplus > 0 or Min. MCT >100%, so which one is it?
My understanding is that: if Min MCT > 100%, this implies that capital available must be greater than capital required. however surplus > 0 means capital available just has to be positive, now I'm confused....although I think in practice capital available has to be higher than capital required. However if a question asking about this comes up, should I check to see if capital available is higher than capital required (MCT >100%) or can I just simply check Asset > Liability to conclude if the company is in satisfactory condition or not.

Thanks for looking into my question.

Comments

  • passexam6cpassexam6c

    For example: 2015 Fall 20d) solution says:
    The financial condition of the insurer is satisfactory since throughout the forecast period,
    under the base scenario and all plausible scenarios, the statement value of the insurer’s assets is greater than the statement value of its liabilities (or at a minimum, to maintain an MCT ratio of 100%), and under the base scenario, the insurer meetsthe supervisory target capital requirement of 150%.
    Also 2014 Spring 28 b.

  • grahamgraham

    You should ignore the 2014.Spring problem. It's all messed up. I will insert a note about that in the wiki. (One reason is that they assume the capital required is the same for all scenarios.)

    You're right that there is inconsistency in how all these terms are applied in different problems.

    For 2015.Fall Q20, they're using assets as a proxy for capital available, and liabilities as a proxy for minimum capital required. That's how they equate MCT >100% with assets > liabilities. You can then conclude the company is in good financial condition because:

    • MCT = 187% > 150% for the base scenario (you're given this value)
    • Then you calculate MCT for a plausible adverse scenario and your answer depends on which adverse scenario you choose. The solution does it 2 ways and gets answers of 144% and 109%, both of which are greater than 100%. Using proxies as stated above, you can then conclude that assets are greater than liabilities and the company is in good financial condition.

    A possible problem with this reasoning, however, is that in the very next problem on that exam, 2015.Fall Q21, they use equity as a proxy for capital available, which is definitely different from using assets as a proxy (since equity = assets - liabilities)

    My advice is keep in mind both of these interpretations and use whichever seems to best suit the given situation. For a problem where you have to calculate the MCT ratio, this shouldn't come up, but if it's more of a conceptual problem, you have to go with the flow based on the information you're given. These 2 problems from 2015.Fall Q20 & Q21 are good examples.

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