2014 F 18
part b: is the question about how to reduce R4 charge? It looks like all listed methods are kind of manipulative. Why does changing from non tabular discount to tabular can increase surplus? I remember under SAP, discount is not allowed excepted for certain lines.
I am also confused about the adding loss sensitive reinsurance and the reinsurance offset. Is this related to the loss sensitive discount? how does this counted as a reserving practice?
part c: one of the answer mentions that RBC ignore the interest rate risk, but R1 charge does consider the change of interest risk. Is this contradictory? Thanks.
Comments
Part (b)
Yes, this was about R4. It's slightly confusing when you first read the question because you just finished calculating R5 in part (a) so you would think they're going to ask about R5 again in part (b). Also, the examiner's comments stated this was a difficult question that candidates struggled with.
Recall:
where TAC = Total Adjusted Capital used in the numerator of the RBC ratio and PHS is Policyholder's surplus. So if you can switch some of the indemnity reserves from non-tabular to tabular, this will cause TAC to increase because only the tabular discounts on medical reserves are subtracted from PHS. The examiner's report solution didn't mention the difference between medical and indemnity reserves but I think that's what they meant.
For the answer about loss-sensitive reinsurance, take a look at the calculation of the loss-sensitive discount in my solution to an R4 problem here:
Equation 2 is:
Here, LSD is loss-sensitive discount so if we can increase LSD, we will decrease RBC. If you look at the other formulas in the solution, you'll see that increasing the % of assumed loss sensitive reserves on retro-rated reinsurance plans will increase A% and this will cause LSD to increase. This can be considered a reserving practice because there is less risk of adverse development for loss-sensitive contracts hence reserves can be lower. Here is the relevant paragraph from the Schedule P chapter of Odomirok, page 192:
Part (c)
This was a change in the most recent version of Odomirok. Previously, interest rate risk was not considered in the property and casualty RBC formula, but now it is. I will make a note of this in the wiki.
Thank you! Your explanation is crystal clear.
When computing the RBC, I multiplied all "company current NWP" and all "NWP RBC after discount" by 1000 since it says ($000) but this led me to a final R5 that was 1000x larger than it should've been, compared to the other RBC charges. Is RBC always calculated in thousands? Meaning, why doesn't the exmaple state that the risk charges are also ($000)
I think there is an error in the question in stating that NWP RBC after discount is in 000's - they are not. Then, all charges are at the same, dollar level, and it works out.
Hello, I read Graham's comment above but I also see in the examiners report that the answer "use tabular discounts to increase surplus" was accepted and in the battle quiz for this question (quiz 6) it uses this for one of the answers. I feel like this is a little misleading because yes Surplus would increase, but we subtract discounts from the surplus in the calculation of TAC and so simply using tabular discounting would not increase TAC unless it is specifically indemnity tabular discounts.
Also, I have a question on how this connects to the Solvency 2 section. In the Solvency 2 wiki it states in the table for Solvency 2 VS RBC that RBC does not discount reserves. Is this saying that the reserves used in the calculation of R4 charge are not discounted? I am just confused because Fall 2014 Q18 seems to be saying we do discount reserves.
My thought is that the reserves in the R4 are the nominal value of reserves; however, if we account for discounting in the calculation of Total adjusted capital, doesn't RBC still use discounting?
RBC does not discount reserves in the sense of SAP reserves not being discounted, but if you remember, that is an ambiguous point on the syllabus. Recall Graham's answer to you on that topic:
https://battleacts6us.ca/vanillaforum6us/discussion/605/statutory-loss-reserves-are-booked-at-their-nominal-undiscounted-value#latest
Hi is entering into intercompany pooling a legit answer for b? thank you in advance.
It would be a correct answer. You would have to specify that the reporting member of the pool is benefiting from the pooling, rather than getting penalized.
Companies use pooling as they would other reinsurance to gain surplus benefits. Odomirok says:
". . . As with reinsurance, companies use intercompany pooling for surplus relief. Under
intercompany reinsurance, an individual company provides the relief. Under intercompany pooling, the members of the pool utilize the capital and surplus of all the companies, rather than each individual company."
But Odomirok also says in regard to RBC:
". . .One initiative currently undertaken by the NAIC is the development of a Group Capital Calculation that will provide regulators with another regulatory tool to understand the level of risk across an entire insurance group, i.e., aggregating across all of its operations, to complement the RBC requirements that are applicable at the legal entity level."
It sounds to me like this initiative would involve reflecting correlations among the risks of group companies, which may involve using pre-pooling data of each company.