Q16 - CoC RA Calculation & Opearting Expense

XiaoZhang25XiaoZhang25
edited September 14 in Practice Exam - 2025-Fall

Hello guys,

I am wondering what is the reasoning behind calculating the RA in 0.5 year interaval in the answer key. Also, correct me if I am wrong, but I understand the logic behind having the same amount of capital required in year 0.5 and 1 is because the capital is only released towards the end of the year ?

My second question is for the opearting expense: In the question, it says the operating expenses are incurred towards the end of the month. However, in the table where the answer key is breaking down and cashflows month by month, this quantity is multiplied directly by 2% from the discounted premium (this quantity is assumed to incurr at the start), which I think might be a mistake as this way we discounted one less period.

Thanks in advance.

Comments

  • Staff-T1Staff-T1

    You can either choose to discount capital at the half-year or year-end interval. Although I think it would make sense to specify a capital release pattern (i.e. as premium is earned). That would be a correct assumption, although looking back I think it would be better to be clearer in the question with regards to how capital should be released in the RA because I think it is a little ambiguous as it stands.

    Yup you are right regarding the operational expenses. That is a mistake that will need to get fixed.

  • Staff-T1Staff-T1

    I have made the changes to the Practice Exam - You can redownload it and let me know if you have any other questions

  • CanAct06CanAct06

    1) for illiquidity premium, why are you taking average of year 3 & 4.

    2) How are you exactly coming up with this pattern? You use Cap Req for first 2 periods and then 60% of it in the last period? I don't understand your selection, in terms of timing and 60% application. I kind of understand that

    3) Why are you including the Acq Cost in the GMM LRC? It says fully paid at inception... so shouldn't that be gone? It is no longer a "Future CF"??

    4) PAA LRC - this makes a bit more sense here - but you had a completely different explanation for 29c in IFRS practice problems.

    what would PAA LRC be if 'it was in advance' like 29c? I don't understand how FCF would be used, because that is a GMM thing.

  • Staff-T1Staff-T1

    1) Because the duration of the reference portfolio is 3.5 years
    2) I've rechanged the pattern to be based on earned premium. You should redownload the latest files
    3) You are right. I should not be including that. I have made the adjustments
    4) Sorry, I am not really sure what you mean here

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