New Question - RBC and SAO (may not be simple enough?)

marquatymarquaty
edited September 2022 in SAO Question Bank

Your coworker asks you to identify if they should pursue comments about material adverse development on a company. They don't have the full statement, but they do know the following:

  • The ratio of Company Action Level Capital to Net Loss Reserve = 35%
  • The RBC Ratio is 250%

Which of the following is correct?
[a] - Yes; pursue comments regarding MAD. The RBC Ratio is below 300% so commentary is suggested.
[b] - Yes; pursue comments regarding MAD if the Appointed Actuary didn't already address it.
[c] - No; do not pursue comments; the RBC Ratio is above 200% so no company action is required.
[d] - No; do not pursue comments; the ratio of Company Action Level Capital to Net Loss Reserves < 50% so no statements regarding MAD are necessary.
[e] - Not enough information.

[answer b is correct; use the Bright Line Indicator Test]
Name: TJ

Comments

  • marquatymarquaty
    edited September 2022

    SOLUTION 1: Use the Bright Line Indicator Test

    https://battleacts6us.ca/wiki6us/Bright_Line_Indicator_Test

    • 10% [Net Loss Reserves] > TAC - CAL
    • 10% [Net Loss Reserves] > [RBC Ratio * ACL] - 2*ACL
    • 10% [Net Loss Reserves] > ACL * [RBC Ratio - 2]
    • 10% > (ACL / Net Loss Reserves) * [RBC Ratio -2]
    • 20% > (CAL / Net Loss Reserves) * [RBC Ratio -2]
    • 20% > (35%) * (250% - 2)
    • 20% > 17.5%
  • grahamgraham
    edited September 2022

    SOLUTION 2: Apply the Bright Line Indicator Test

    • We're given CAL / NLR = 35% therefore CAL = 0.35 x NLR

    We're also given RBC = 250% so:

    • RBC = TAC / ACL = 2.5

    Rearranging this gives:

    • TAC = 2.5 x ACL = 2.5 x (CAL/2) = 1.25 x CAL

    For the Bright Line Indicator test we need the quantity (TAC - CAL) so moving one of the CAL's to the other side gives:

    • TAC - CAL = 0.25 x CAL

    Now we can substitute 0.35 x NLR for CAL on the right side:

    • TAC - CAL = 0.25 x (0.35 x NLR) = 0.0875 x NLR

    Condition [2] for the Bright Line Indicator Test requires:

    • 10% x NLR > TAC - CAL

    And this is indeed satisfied because:

    • 0.10 x NLR > 0.0875 x NLR = TAC - CAL

    So based on the Bright Line Indicator Test, comments on MAD should be pursued.

  • mec06emec06e

    I went about this a bit differently:

    given:
    Company Action Level Capital / Net Loss Reserve = .35
    re-written:
    2(Authorized Control Level Capital)/Net Loss Reserve = .35
    so:
    Net Loss Reserve = 5.7143    (Authorized Control Level Capital)

    given:
    RBC ratio = 250%
    re-written:
    Total Adjusted Capital / Authorized Control Level Capital = 2.5
    so:
    Total Adjusted Capital = 2.5*(Authorized Control Level Capital)

    Brightline indicator:
    if 300% > RBC ratio > 200% &
    if 10%(Net Loss Reserve) > (Total Adjusted Capital) - 2(Authorized Control Level Capital)
    then seek comments from AA
    calc
    .1(Net Loss Reserve) = .57(Authorized Control Level Capital)
    (Total Adjusted Capital) - 2    (Authorized Control Level Capital) = 2.5(Authorized Control Level Capital) - 2(Authorized Control Level Capital) = .5(Authorized Control Level Capital)
    .57(Authorized Control Level Capital) > .5    (Authorized Control Level Capital)
    so seek comments from AA

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