Difference between revisions of "RBC for Holding Companies"

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This is an example of how to calculate the R<sub>1</sub> and R<sub>2</sub> holding company charges when the insurer owns shares in a holding company.  '''Note''': The R<sub>1</sub> for holding companies seems to have been removed in the current version of Odomirok but the holding company charge for R<sub>2</sub> remains.
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This is an example of how to calculate the R<sub>2</sub> holding company charges when the insurer owns shares in a holding company.  '''Note''': The R<sub>1</sub> charge for holding companies seems to have been removed in the current version of Odomirok but the holding company charge for R<sub>2</sub> remains.
  
 
'''Given''':
 
'''Given''':
 
Here we calculate the R<sub>2</sub> charge for holding companies because the table below only provides information about equity assets.
 
  
 
* market(HC) = 750 ''(market value of holding company HC)''
 
* market(HC) = 750 ''(market value of holding company HC)''
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* ownership % = 80% ''(insurer has 80% ownership in the holding company)
 
* ownership % = 80% ''(insurer has 80% ownership in the holding company)
  
* table showing the fixed income assets for the holding company HC:
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* table showing the equity assets for the holding company HC:
  
 
::{| class='wikitable' style='text-align: center;'
 
::{| class='wikitable' style='text-align: center;'
 
|-
 
|-
! type of asset !! book value of asset <br> (fixed income) !! distribution
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! type of asset !! book value of asset <br> (equity assets) !! distribution
 
|-
 
|-
 
| style='text-align: left;' | subsidiary 1  || 100  || 20%     
 
| style='text-align: left;' | subsidiary 1  || 100  || 20%     
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:{| class='wikitable'
 
:{| class='wikitable'
 
|-
 
|-
| '''R<sub>1</sub> charge for holding company''' &nbsp; = &nbsp; 0.225 &nbsp; x &nbsp; [ market(HC) &nbsp; &ndash; &nbsp; CV(subs) ] &nbsp; x &nbsp; ( ownership % )
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| '''R<sub>2</sub> charge for holding company''' &nbsp; = &nbsp; 0.225 &nbsp; x &nbsp; [ market(HC) &nbsp; &ndash; &nbsp; CV(subs) ] &nbsp; x &nbsp; ( ownership % )
 
|}
 
|}
  
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Then the final answer is:
 
Then the final answer is:
  
: '''R<sub>1</sub> charge for holding company''' = 0.225 x [ 750 &ndash; 562.5 ] x 80% = <u>33.75</u>
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: '''R<sub>2</sub> charge for holding company''' = 0.225 x [ 750 &ndash; 562.5 ] x 80% = <u>33.75</u>
  
 
''(if the calculated value is negative then the RBC charge is 0)
 
''(if the calculated value is negative then the RBC charge is 0)

Latest revision as of 17:54, 8 February 2021

This is an example of how to calculate the R2 holding company charges when the insurer owns shares in a holding company. Note: The R1 charge for holding companies seems to have been removed in the current version of Odomirok but the holding company charge for R2 remains.

Given:

  • market(HC) = 750 (market value of holding company HC)
  • ownership % = 80% (insurer has 80% ownership in the holding company)
  • table showing the equity assets for the holding company HC:
type of asset book value of asset
(equity assets)
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

R2 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:

R2 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!)