R3 reinsurance recoverable charge
I have a question about the R3 reinsurance recoverable charge. Battleacts says,
Use this split only if:
unpaid loss & LAE component of R4 > (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)
When I look at Odomirok Pg 259 it states,
The RBC charge for reinsurance recoverable is split 50%/50% between R3 and R4 if the reserve
RBC (see discussion below) exceeds the sum of the credit risk RBC for non-invested assets
and reinsurance recoverables. Otherwise, the total amount of the reinsurance recoverable RBC
charge is included in R3.
Am I wrong or in the book are they checking to see if the loss & ALAE component of R4 > (RBC charge for non-invested assets) +(RBC charge for reinsurance recoverables)? Where did the 1/2 (RBC charge for reinsurance recoverables) in your notes come from? Should it be 1/2 of the RBC charge for reinsurance recoverables or the full RBC charge for reinsurance recoverables? Any help understanding this would be appreciated. Thanks.
Comments
The formula is correct. Here is the extract from Odomirok, page 272:
The RBC charge for reinsurance recoverable is split 50%/50% between R3 and R4 in
circumstances where the reserve RBC charge (see discussion below) exceeds the sum of the credit risk RBC charge for non-invested assets plus one-half of the RBC charge for
reinsurance recoverables. Otherwise, the full amount of the reinsurance recoverable RBC
charge is included in R3. The concept of moving half of the reinsurance recoverable RBC
amount to R4 is to recognize there is some dependency between deterioration in reserves and an increase in exposure to reinsurance credit risk. The limitation on splitting the charge based on the size of the reserve RBC charge is put in place so the insurance company cannot diversify away a portion of its credit risk in situations where the company has limited net reserves.