Materiality Standard - RBC action level approach
Assuming current RBC > 300% and COR is unknown, when calculating "the amount of adverse deviation that would cause Risk-Based Capital (RBC) to fall to the next action level" do you calculate the adverse deviation amount pertaining to a 200% RBC or a 300% RBC? Or are both acceptable?
Technically a company could fall into CAL range if their RBC drops below 300% by the Trend Test. Which RBC level is typically used in this instance to calculate the materiality standard?
Comments
I don't think there's a specific answer here. I don't think you'd be given a situation like this on the exam where information is lacking but if you were, you could split the problem into different cases and calculate the materiality standard based on each case. Once you had done that, you could evaluate which standard seems the most appropriate just as you do normally when you calculate various options.
Or you could make an assumption regarding which case you're in and just proceed from there. On the exam, the key is to let the grader know you understand the situation because they then seem to allow greater leeway in what's considered an acceptable answer.
This was actually the situation on 2016.Spring.24, part a.
I had selected the deviation that would get to the 300% level and put some comments in my exam that although we wouldn't necessarily have a company action level, we would be subject to the trend test and the additional rigor may concern management and/or regulators.
The examiner's report went to CAL, and didn't discuss much about a 200% to 300% range. But in the justification for selecting RBC, they say "if a company might get to the next action level, then the company will be at CAL, causing it to take action and submit a plan to the regulators". Which to me seems like a 200% to 300% ratio + trend test requirement would be a fair justification because the company "might get to the next action level".
I forgot about that exam problem. I think any reasonable grader would give you credit for your alternate solution. There isn't a single correct answer for materiality standard and the grader is looking to see if you understand the concepts and have provided a reasonable and justified answer, which you did.
Sometimes acceptable answers are not listed in the examiners' reports, especially for somewhat open-ended questions like this one. They list the standard answers but still give credit for other less common but still reasonable answers.