Insurance Risk - LIC component
Under Insurance risk, should the capital required for LIC not be made of two components:
1) LIC (money required to make claims incurred payments)
2) Risk associated with miscalculation of LIC estimate
The formula however says "Capital required for LIC = risk factor x LIC.." (which I understand to be component 2)
So what about the actual capital required for LIC (component 1)?
Am I understanding this incorrectly?
Comments
In the MCT you are creating a buffer for the misestimation of LIC by applying a risk factor on your LIC. You don't need capital for your current estimate of the LIC since that is on your balance sheet already. In other words, you have already reserved for your LIC, you just need capital for amounts > than your current LIC estimate.