Bright Line Indicator Test

The Bright Line Indicator Test is discussed in COPLFR.SAO as part of the SAO but it requires knowledge from the RBC chapter in Odomirok, Alice's 1st Day. That section will only take a few minutes to read so you should do that before proceeding.

Question: what is the bright line indicator test

IF

[1] the AA does not address material adverse deviation

[2] 10% x (net L & LAE)   >   TAC – CAL

THEN

financial analyst should pursue comments from the AA

Example:

Suppose the AA did not address material adverse deviation and that:

net L & LAE = 500

TAC = 600

ACL = 280

Then:

10% x (net L & LAE) = 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:

E

E (2016.Fall #20)