Bright Line Indicator Test
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The Bright Line Indicator Test is mentioned in COPLFR.SAO - Step 6B as part of the SAO but it requires knowledge of Odomirok.19-RBC, specifically Alice's 1st Day. That section will only take a few minutes to read so you should do that before proceeding.
Note:
- TAC = Total Adjusted Capital (this is an RBC concept and refers to the balance sheet capital available to a company)
- ACL = regulatory capital level corresponding to Authorized Control Level
- CAL = regulatory capital level corresponding to Company Action Level = 2 x ACL
Question: what is the Bright Line Indicator Test |
- IF
- [1] the AA does not address material adverse deviation
- [2] 10% x (net L & LAE reserves) > TAC – CAL
- THEN
- the financial analyst should pursue comments from the AA
- IF
Example:
- Suppose the AA did not address material adverse deviation and that:
- net L & LAE reserves = 500 ← from Liabilities, Surplus and Other Funds, (Line 1) + (Line 3)
- TAC = 600 ← from Five-Year Historical Data, Line 28
- ACL = 280 ← from Five-Year Historical Data, Line 29
- Then:
- 10% x (net L & LAE reserves) = 10% x 500 = 50 > 40 = (600 – 560) = (TAC – CAL) = (TAC – 2 x ACL)
- Therefore, the financial analyst should pursue comments from the AA regarding material adverse deviation.
Here are 2 old exam problems regarding the Bright Line Indicator Test: