R1- holding company

emelndalgicemelndalgic
in Odomirok.19-RBC

Hi,

I have trouble following what is meant by the bolded. What does "holding company value" and "carrying value" refer to below?

Thanks

"Basic R1 RBC charge
This part of the calculation is very simple. You just multiply the amount held in each fixed investment category by the RBC factor. (An exception to this formula is for holding companies. In that case, multiply the RBC factor of 0.225 by the holding company value in excess of the carrying value for indirectly owned insurance affiliates calculated in R0.)"

Comments

  • grahamgraham

    Good question. I added an example to the wiki. Here's the direct link:

    You can also get there from this subsection of the main RBC article:

    I didn't originally provide an example because I don't think it will be asked on the exam. I could be wrong of course, but there are already so many other more important topics in the RBC chapter. It isn't too hard though. If you read it over once or twice, you should understand it. There is also another example in the source text in the subsection on R2.

  • emelndalgicemelndalgic

    Thanks, that makes sense now

  • emelndalgicemelndalgic

    Actually should the market(HC) also be multiplied by ownership percentage? Otherwise at 0% ownership the charge is largest

  • grahamgraham
    edited September 2019

    Yes, I believe you're right. I changed the example to incorporate the ownership percentage into the market value of the holding company. (The source text isn't very clear about this because in their example, the ownership percentage is 100%.)

  • peteabbatepeteabbate

    One thing in the source text that isn't mentioned in the Wiki is the rationale for this formula. It's actually straightforward from what I can tell - The carrying value of the holding company is part of the R0 charge, so RBC incorporates the value in excess of that as an R1/R2 risk.

    I know you aren't trying to recreate the entire source material, but for me that information was the critical piece to making the formula stick in my memory.

  • grahamgraham

    I was going to add a brief note to the wiki on that but when I went to double-check in Odomirok, I couldn't immediately find the reference. What page in chapter 19 are you referencing?

  • peteabbatepeteabbate

    It's within the Holding Company example on pg 253. This chapter is definitely a sprawling mess!

    Recall that the book/adjusted carrying value is used in computing the R0 charge. The carrying value of an indirectly owned insurance subsidiary will depend on the carrying value of the holding company and percentage of the holding company carrying value that the subsidiary represents. Let’s continue our example to illustrate.

  • grahamgraham

    Got it, thx! I've added a note to the end of the holding company example here:

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