R3 Calculation Question

I noticed that in the some of the R3 calculation questions on BattleActs there is a charge for recoverables from parents/affiliates/subsidiaries. I thought this was a low risk recoverable that was excluded from the recoverable risk charge?

Comments

  • According to the text, there is a non-zero risk factor for "recoverables from parents/affiliates/subsidiaries" of 0.05. It's moderate relative to the other R3 items where the risk charges vary from a low of 0.01 (investment income due and accrued) to a high of 0.1 (reinsurance recoverable).

    So the item "recoverables from parents/affiliates/subsidiaries" is definitely part of R3. Maybe I misunderstood your question?

  • I was referencing another study manual (Casual Fellow) here.

    Casual Fellow states: Reinsurance recoverables considered low risk are excluded from this [reinsurance recoverable] charge. These include:
    -Recoverables from an insurer's cession to U.S. parents, subsidiaries, and affiliates
    -Recoverables from state-mandated involuntary pools and associations (ex. MCCA)
    -Recoverables from federal insurance programs (ex. NFIP)

    Perhaps that just means that these recoverables have risk charges less than the 0.1 of the other recoverables, which i took to mean that they had 0 charge.

    Thanks for clearing that up!

  • edited November 2020

    Ok, @shuang01, I see the issue now. In your first post, you asked about:

    • recoverables from parents/affiliates/subsidiaries

    In your second post, you wrote something slightly different:

    • Recoverables from an insurer's cession to U.S. parents, subsidiaries, and affiliates

    These are not the same. The first point above is a recoverable but not a reinsurance recoverable. The 3 bullet points included in your second post do indeed refer to reinsurance recoverables that are not subject to the RBC charge.

    In the exam problem 2014.Spring Q20 (and elsewhere in the wiki) the reinsurance data that's provided is labelled as:

    • non-affiliate and alien affiliate reinsurance recoverables subject to RBC

    So this would have already excluded the 3 amounts you wrote in your second post and you would not have had to know these exclusions to do the problem.

    Generally, I would expect exam problems to provide the reinsurance recoverables that are subject to RBC. Otherwise, they would have to provide Schedule F, Part 3, Column (15) and you would have to know which reinsurance recoverables to include and which to exclude but I think it's very unlikely. The RBC calculation is already so detailed and R3 only accounts for about 1% of the total RBC charge anyway. That's the reason I did not include that discussion in the wiki. (There is a brief mention of this in the source text in the R3 section of chapter 19 if you'd like to look.)

  • What is the RBC factor for Amounts on Credit Risk on Collateralized Recoverables and Uncollateralized Recoverables? Are they both 0.1 even though collateralized is theoretically less risky?

  • The text answers this question, starting on p271, third paragraph from the bottom. Schedule F columns 35 and 36 are the charges differentiated for collateralization.

  • edited April 2023

    are you referring to: "From its inception, the RBC formula applied a simple 10% loading to all eligible reinsurance recoverables."
    so the RBC factor is a .1 for both R3 & R4 calculations
    if we are given the RBC charge for reins recoverables then we take that full amount and either split 50/50 between R3 & R4 or it's 100% to R3

  • RBC charge for reinsurance recoverable is no longer a uniform 10% The change is explained in the last three paragraphs of p.271.

  • ok I see what you are saying, but the text is very hard to follow for the calculation of the reinsurance recoverable charge. I believe I have a formula but would love to know if you agree:

    RBC charge for Reinsurance Recoverable = (Credit Risk on Collateralized Recoverable) + (Credit Risk on Uncollateralized Recoverable)

    Credit Risk on Collateralized Recoverable = (collateralized charge factor) * (Total Collateral)

    Total Collateral = multiple Beneficiary trusts + Letters of Credit + Single beneficiary & other allowed collateral

    Credit Risk on Uncollateralized Recoverable= (uncollateralized charge factor) * (Stressed Net Recoverable net of Total Collateral)

    Stressed Net Recoverable Net of Total Collateral = (Stressed Net Recoverable) - (Total Collateral)

    Stressed Net Recoverable = { 120% * [ (Total Reinsurance Recoverable including commission contingents) – (Provision for Reinsurance) ] } - (Reinsurance payable & Funds Held)

  • I also feel like you should remove the .1 that is in the wiki article next to reinsurance recoverable since that is not actually the charge anymore.

  • Yes, your formulas above are correct.

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