MCT.CapAv: Deduction for Unregistered ReIns

Comments

• graham

  June 2021

  That isn't quite how I think about this deduction. Here are a few things that might help clarify what's going on:

  • First, if D<0, then the deduction is set equal to 0. The insurer's capital available cannot increase if D<0. (In other words, the insurer cannot benefit.)

  Let's create a simple example.

  • Suppose the gross capital available is $500.
  • Suppose the 1st bracket equals $100. (This represents the amount the insurer is expecting to receive from the reinsurer.)
  • Suppose the 2nd bracket is $0.

  Since this is an unregistered reinsurer, the default risk is greater and the MCT rules then say that none of this $100 can be included in capital available so:

  • D = $100
  • adjusted capital available = $500 - $100 = $400

  But now let's suppose this unregistered reinsurer has submitted a Letter of Credit for $25. That means the 2nd bracket is $25. This reduces the risk of default and the MCT rules then say the deduction to capital available can be reduced by this amount. This is the same thing as saying the insurer can include this extra $25 in capital available:

  • D = $100 - $25 = $75
  • adjusted capital available = $500 - $75 = $425.

  The general concept is this:

  • The insurer cannot include receivables/recoverables from an unregistered reinsurer in capital available unless these receivables/recoverables are offset by some combination of payables, NODs, and LOCs.

  I'm not sure if that answers your question. Let me know if you'd like to discuss further.
• Tony88pass

  June 2021

  Thanks Graham, I like your examples they make a lot of senses.

  So the $100 is always included in the $500 in the first place (which category does it go into?), but then the company may need to decide how much to exclude depends on the amount of collateral they can receive from the UnregRein, Am I correct?

  Also you mention in the beginning that D<0 will not increase insurer's capital available, is that because the point of CapAv is always reflect the possible lowest amount?

  Thanks
• graham

  June 2021

  Regarding where the $100 goes within the total capital available of $500:

  • The source text isn't too clear on this and doesn't provide an example but the items in the 1st bracket represent assets on the balance sheet. (See page 20.10 of the sample quarterly statement, lines 30, 31, 37.) Any profit/loss associated with these reinsured policies would count as U/W income and any leftover profit (after dividends to stockholders) would be part of retained earnings or R/E.
  • Retained earnings can then be used for whatever purposes the company wants. They could invest it and these investments could fall into any of categories A, B, C depending on whether certain criteria are satisfied. The source text has a long list of criteria that must be satisfied for an investment to be considered category A (or B or C) but that looks far too detailed for the exam. (See chapter 2 in the source text.)

  Regarding when D<0:

  • The calculation of capital available is intended to be conservative or low. That way, the regulator can be more confident that the company really does have enough capital.
  • But the reason for not allowing D to increase capital available when D<0 is more because it just wouldn't make sense. If someone owes you $100 but they gave you a letter of credit of $105, you would still only get at most $100 from them. You cannot add the extra $5 to your capital available because it isn't yours to begin with.