MCT Capital Required: Insurance Risk (Unregistered Reinsurance)

Tony88passTony88pass
in OSFI.MCT

Hi Graham,

I have a question on this formula:

CapReq(UnregRe)
= (UEP + O/S) x 15% – max(0, -D) (if < 0 then set to 0)

If D<0 and -D>(UEP+O/S)*15%, it means the collateral is greater than the reinsurer's exposure so insurer doesn't need capital required, it's in line with the formula above and makes sense to me (If the Unreg Reinsurer defaults, the insurer will even benefit from it by keeping the collateral)

If D>0, then it means even without considering the margin the collateral is short to cover the reinsuer's exposure, after including the margin, the collateral will be short by [(UEP+O/S)*15%+D], so to my understanding this should be the capital required, overall the above formula should be (UEP+O/S)*15%+D in my opinion

Can you let me know your thought?

Thanks,
Tony

Comments

  • grahamgraham
    edited June 2021

    Hi Tony,

    Before addressing your question, one thing to notice is that "D", which is:

    • D = (UEP + O/S recoverable + Reinsurance Receivable)
    •        - (Reinsurance Payable + NOD + LOC)

    will either reduce capital available (if D>0), or reduce capital required (if D<0).

    • when D>0, that means collateral is not sufficient to cover reinsurer recoverables/receivables and capital available must be reduced. (No adjustment is made to capital required.)
    • when D<0, collateral is sufficient so the required margin of (UEP + O/S) x 15% can be reduced by the magnitude of D to a minimum of 0. (No adjustment is made to capital available.)

    So even if D=0 and the collateral perfectly covers the exposure, you still require a margin of (UEP + O/S) x 15% for unregistered reinsurance. To reduce this margin, the collateral must exceed the exposure. This corresponds to D<0.

    Take a look at this exam problem for an example of this calculation:

    Back to your question:

    • Part of what you stated is correct but I don't think the formula you gave is correct when D>0. When D>0 the term max(0, -D) = 0 so D plays no role in adjusting the capital required for unregistered reinsurance.
    • Maybe you just got D and -D mixed up because the formula you gave: (UEP+O/S)*15%+D is correct for when D<0. (And with the condition that this value for margin required for unregistered reinsurance cannot be less than 0.)
  • Tony88passTony88pass
    edited June 2021

    Hi Graham,

    Based on the formula:

    CapReq(UnregRe)
    = (UEP + O/S) x 15% – max(0, -D) (if < 0 then set to 0)

    Isn't that the capreq can't exceed (UEP+O/S)*15%? So it's a topline instead of a baseline?

    I read the relevant section in the paper, it calls (UEP+O/S)15% margin required, from a MfAD stand point, does the regulator think the A/R could potentially go up so requires you to add buffer of that amount? Otherwise if D=0, the collateral is enough to cover the A/R, why still need the additional "(UEP+O/S)15%"? This part makes me confused

  • grahamgraham

    Please see edited answer above your last post.

  • Tony88passTony88pass

    Thanks Graham, it makes lots of senses now!

Sign In or Register to comment.