Reinsurance Recoverable Split

In the wiki article it is stated that if

R4 > (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables) (text is wrong. see errata. thx TD. very observant.)

but then in 2016 Spring question 26, the solution uses the comparison used in the text (full RBC charge for reinsurance recoverable rather than half). I understand the errata corrects this but just wanted to make sure... Would the CAS accept both methods? Is it expected to go through the errata? Thanks.

Comments

  • The short answer is that it's better to use what you know is correct. In other words, use the corrected version from the errata. You'll always be on firm footing if you do that. Then if there's an issue with the grading, your appeal is more likely to be successful. (I do think it's a bit much to make the errata part of the syllabus however. If I were the creating the exam, I would try to avoid material that appears in the errata.)

    It's unfortunate that the CAS never (or extremely rarely) corrects errors in the examiner's report even though that's the single most important resource for studying. The syllabus explicitly states you are responsible for the errata but it appears the examiners did not read the errata themselves. This particular correction was made in 2014, so it should have been known for the 2016 exam.

  • I was having trouble making sense of the inequality, and it helped to re-read the R4 discussion from the source. Specifically this statement was key:

    The reserve RBC limitation is put in place so the insurance company cannot diversify away a portion of its credit risk in the situation where the company has limited net reserves.

    The wiki mentions that this would be a freak occurrence, but of course CAS exam problems can be contrived and unrealistic. So I'll be looking for "limited net reserves" (a fronting carrier for Workers Comp, perhaps?) as a warning sign that this obscure point matters.

  • Thx. I threw it in as a parenthetical statement. I could maybe see an exam question that asked you to explain the reason for the 100% allocation versus the 50/50 allocation, for 0.25 pts. I think if you're honing in on details like that then you know the RBC chapter very well.

  • in the inequality
    R4 > charge for non invested asset in R3 + 0.5* charge for reinsurance recoverable
    R4 is before adding the half reinsurance recoverable or after?

  • Sorry, I wasn't careful when I wrote that inequality. It's actually just the unpaid loss & LAE component of R4 that should be used to test this inequality. (That portion is usally almost the whole R4 charge anyway however, and the inequality for the 50/50 split is almost always true.)

    I clarified that in the wiki. Thanks for asking about it.

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