Difference between revisions of "Bright Line Indicator Test"
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− | The '''Bright Line Indicator Test''' is | + | The '''Bright Line Indicator Test''' is mentioned in ''[[COPLFR.SAO#Step_6-B:_RMAD_.28Relevant_Comments.29 | COPLFR.SAO - Step 6B]]'' as part of the SAO but it requires knowledge of ''[[Odomirok.19-RBC]]'', specifically ''[[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Alice's 1st Day]]''. That section will only take a few minutes to read so you should do that before proceeding. |
− | :{| class='wikitable' | + | '''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 | ||
+ | |||
+ | {| class='wikitable' | ||
|- | |- | ||
− | || '''Question''': what is the | + | || '''Question''': what is the <u>Bright Line Indicator Test</u> |
|} | |} | ||
:: IF | :: IF | ||
::: <span style="color: red;'>'''[1]'''</span> the AA <u>does not</u> address material adverse deviation | ::: <span style="color: red;'>'''[1]'''</span> the AA <u>does not</u> address material adverse deviation | ||
− | ::: <span style="color: red;'>'''[2]'''</span> 10% x (net L & LAE) > TAC – CAL | + | ::: <span style="color: red;'>'''[2]'''</span> 10% x (net L & LAE reserves) > TAC – CAL |
:: THEN | :: THEN | ||
− | ::: financial analyst should pursue comments from the AA | + | ::: the financial analyst should pursue comments from the AA |
'''Example''': | '''Example''': | ||
Line 16: | Line 22: | ||
: Suppose the AA did not address material adverse deviation and that: | : Suppose the AA did not address material adverse deviation and that: | ||
− | :: '''net L & LAE''' = 500 | + | :: '''net L & LAE reserves''' = 500 <span style="color: green;">← ''from Liabilities, Surplus and Other Funds, '''(Line 1) + (Line 3)'''''</span> |
− | :: '''TAC''' = 600 | + | :: '''TAC''' = 600 <span style="color: green;">← ''from Five-Year Historical Data, '''Line 28'''''</span> |
− | :: '''ACL''' = 280 | + | :: '''ACL''' = 280 <span style="color: green;">← ''from Five-Year Historical Data, '''Line 29'''''</span> |
: Then: | : Then: | ||
− | :: 10% x (net L & LAE) = 10% x 500 = '''50 > 40''' = (600 – 560) = (TAC – CAL) = (TAC – 2 x ACL) | + | :: 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. | + | : Therefore, the financial analyst <u>should</u> pursue comments from the AA regarding material adverse deviation. |
'''Here are 2 old exam problems regarding the Bright Line Indicator Test''': | '''Here are 2 old exam problems regarding the Bright Line Indicator Test''': |
Latest revision as of 20:08, 1 July 2023
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: