Odomirok 14-F Credit Risk Charge
Do you think it is likely that there will be a question requiring us to calculate credit risk charge? I couldn't find it discussed here or in the RBC wiki. What about using column 5 special codes? Thanks!
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Do you think it is likely that there will be a question requiring us to calculate credit risk charge? I couldn't find it discussed here or in the RBC wiki. What about using column 5 special codes? Thanks!
Comments
Credit Risk Charge
My opinion is that asking you to calculate the credit risk charge as it appears in Schedule F, Part 3, columns 21-36 is not a likely question.
The reason is that if you look at the BattleTable for Odomirok.14-F, you'll see that the most commonly asked question, by far, is to calculate the reinsurance provision. There have also been a few short-answer questions related to the reinsurance provision, as well as a few questions on using Schedule F for solvency testing. Based on this pattern, the most effective use of your time would be on those topics.
Note also that there are 6 syllabus readings on reinsurance so it's already a heavily tested topic. If they ask a question on the credit risk charge, it means they have to eliminate a question on some other important topic. It isn't that the credit risk charge is a hard calculation but it would require you to memorize a lot of "little" formulas in the prior columns. There are far more important concepts related to reinsurance that make for better exam questions.
Of course, I can't be 100% certain but if I were taking the exam, I would feel very confident if I knew how to calculate the reinsurance provision as well as some of the other concepts surrounding Schedule F. (Part 3 of Schedule F has 78 columns and it just doesn't strike as reasonable to expect you to be able to reproduce the whole thing.)
What I always like to say however is that if you feel uncomfortable skipping the credit risk charge, or anything else, you have a good foundation from the wiki to use the source text to read up on that topic. I did a quick review of chapter 14 in Odomirok and there is a fairly brief discussion on the credit risk charge but there isn't an actual example, unlike for the calculation of the reinsurance provision. That's another signal that the reinsurance provision calculation is a more important topic.
Special Codes
These special codes would be important if you were actually completing Schedule F, Part 3, but I think it's too detailed for the exam. When I read the source text, I always try to think of how the material could be turned into an exam question. An example of a question on special codes might be:
The answer would be:
Then a follow-up question might be:
The answer would be:
I could have put all of that in the wiki, but I worried that it may distract people's attention from what we know is typically tested. I think the chances of this being tested are very low. Again, I could be wrong, but since there is so darn much to study for Exam 6, I think your time is better spent on syllabus topics that have a proven track record of appearing on the exam. That goes for this chapter in Odomirok as well as all the other syllabus readings.
Actually, now that I've written out this answer for you, you have me thinking it might be worth briefly mentioning special codes in the wiki. I still think it's an unlikely question but if you read it once, you've got it. Thx. :-) (I will probably just add a few BattleCards to BattleQuiz 1 for Odomirok.14-F.)
Thanks for the response! I'll probably think of these as things to come back to if I have time.
That's a wise strategy. Cover the high-value targets first, then come back later for the other stuff!
Slightly unrelated, but I'm having trouble figuring out exactly what the syllabus changes are between last sitting and this sitting for Schedule F. Is there somewhere where that is outlined?
Apologies, I normally include that information in the "Study Tips" section of articles that have changed. I have now added that for Odomirok, Chapter 14. Here's the link:
Would you be able to elaborate any more on special code 4 and what we would need to do with it? It says it is "exempt from the statutory provision for unauthorized reinsurance" and so does this mean we would only exclude this IBNR if we were calculating the provision for reinsurance for an unauthorized insurer?
Later on in the source (page 126) says that we have to reduce the total recoverables by this amount when calculating the credit risk charge for RBV, but I am a bit confused here since this charge is not specific to unauthorized reinsurers. Thanks for any insights.
The pre-1984 IBNR is not excluded from provision for reinsurance for unauthorized. Rather, the line is marked with code 4 in Part 3, and the relevant amounts provided in Part 2, Question 17 of the General Interrogatories, to allow users to assess its materiality for themselves.
It's ok to reduce the total recoverable by pre-1984 IBNR, because credit risk charge is for authorized and unauthorized reinsurers alike.
Your statement above makes it sound like the special code is more for informational purposes, so just to clarify, we should reduce recoverables by special code 4 IBNR when calculating credit RBC, but should not need to do anything with it when calculating provision for reinsurance?
There are tables in the Odomirok text (pages 133 and 135) that seem to reduce the net recoverables by special code 4, when calculating the provision for reinsurance, but what really confuses me is that this is done in both the authorizied and unauthortized calculations. Why is special code 4 specifically called "Incurred but not Reported Losses on Contracts in Force Prior to July 1, 1984 that are Exempt from the Statutory Provision for Unauthorized Reinsurance" when it looks like it is reflected in both authorized and unauthorized calculations???
I was going off of this paragraph on Odomirok p123:
"IBNR losses on contracts in force prior to July 1, 1984 and not subsequently renewed are exempt from the statutory provision for unauthorized reinsurance. These contracts are identified by a 4 in this column with details of amounts provided in Part 2, Question 17, of the General Interrogatories to enable the reader to assess significance."
I failed to notice that later staring at p133, there are schematics for provision for authorized and unauthorized reinsurance (Tables 26 and 27), both of which point to recoverables being reduced by the Code 4 IBNR.
To be safe, you should assume that Table 27 governs.
As for the same note being in Table 26 (authorized) as well, I discussed this with Graham, and we believe this is a text error. In the event this gets asked, it may be a good idea to write down a short explanation of this contradiction in the text.