2019 Spring Q18 B

wilsonchan18wilsonchan18
in OSFI.Eqk

Hi,

The examiner report say that the Financial Resources will stay the same unless the EQ Reserve Reduction is caused by EPR.

But taking one step backward, the MCT paper say the FR include CAT Reserve (incl. EQ and Nuclear), and that should involve both the EQR (EQR=1.25*(EPR+EQC) and EPR, right? Or should this FR be only involved with EPR Reserve only?

I found the above Impact to FR a bit confused. Can anyone please share and explain?

Thanks and Warm Regards,
Wilson

Comments

  • Staff-T1Staff-T1

    On page 39, Financial resources only include the EPR.

    I think the question is talking about EQ reserves = (EPR + ERC)*1.25, but examiner report is referring to capital available not financial resources

  • AnLaPeAnLaPe

    I had some trouble with this question as well and found these old posts with good discussion:

    Basically, the reduction in reserve will flow to equity to keep Assets = Liabilities + Equity in balance, so overall, available capital stays constant.

    This being said, I'm not sure what the comment about the EPR is implying... It might have to do with the fact that EPR would generally be reduced to establish an unpaid claims provision following an earthquake, so if the EPR is reduced, it might be indicative that an earthquake occurred, which would reduce available capital.

    Or maybe it has to do with this comment from the source text:

    Any reduction in the EPR should be brought back into unappropriated surplus immediately

    I don't know what the implications of this are... Is unappropriated surplus part of available capital?

  • Staff-T1Staff-T1
    edited May 2022

    Unappropriated surplus is surplus that has no designated business use (or not set aside to be reinvested in the company). What that sentence is saying is that when EPR decreases, unappropriated surplus should increase. It's not mentioned explicitly in the text but I don't see why unappropriated surplus would not be included in capital available.

    However, I see that as just shuffling assets and liabilities around as you mentioned above so it shouldn't reduce capital available. It's also not necessarily true that an EQ has occurred if the EPR decreases since you can decrease your EPR by shifting your exposure distribution away form EQ prone areas.

    I think it is more to do with this statement related to deductions to capital available:
    The earthquake premium reserve (EPR) not used as part of financial resources to cover
    earthquake risk exposure (reference section 4.5)

    Capital available could increase when the EPR decreases in this case

  • AnLaPeAnLaPe

    Thanks, that makes perfect sense :smile:

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