RBC for Holding Companies

This is an example of how to calculate the R₁ and R₂ holding company charges when the insurer owns shares in a holding company. Note: The calculation is essentially the same for R₁ and R₂. The only difference is that you use only fixed income assets for R₁ and only equity assets for R₂.

Given:

Here we calculate the R₁ charge for holding companies because the table below only provides information about fixed income assets.

• market(HC) = 750 (market value of holding company HC)

• ownership % = 80% (insurer has 80% ownership in the holding company)

• table showing the fixed income assets for the holding company HC:

type of asset	book value of asset (fixed income)	distribution
subsidiary 1	100	20%
subsidiary 2	275	55%
cash	75	15%
other assets	50	10%
TOTAL	500	100%

* Note that the TOTAL book value of 500 doesn't have to equal the total market value of 750.

Solution:

We just need a couple of simple formulas. Let CV(subs) = carrying value of subsidiaries

R1 charge for holding company   =   0.225   x   [ market(HC)   –   CV(subs) ]   x   ( ownership % )

where 0.225 is the RBC factor and

CV(subs)   =   Σi [ (market(HC) x (distribution)i ]

First calculate CV(subs) by summing across the 2 given subsidiaries:

CV(subs) = [ 750 x 20% ] + [ 750 x 55% ] = 562.5

Then the final answer is:

R₁ charge for holding company = 0.225 x [ 750 – 562.5 ] x 80% = 33.75

(if the calculated value is negative then the RBC charge is 0)

Bonus Fact:

• The RBC charge related to the carrying value of the subs is already included in the R₀ charge.
• That's why we apply the 0.225 factor to the difference between the holding company value and the carrying value (and not to the full value of the holding company.) This is to avoid double-charging the subs.

(awesome shout-out to PA!)