MCT Capital Required: Insurance Risk (Unregistered Reinsurance)
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
Hi Tony,
Before addressing your question, one thing to notice is that "D", which is:
will either reduce capital available (if D>0), or reduce capital required (if D<0).
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:
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
Please see edited answer above your last post.
Thanks Graham, it makes lots of senses now!