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) = 600 (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	300	60%
cash	50	10%
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 600.

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) ]

where 0.225 is the RBC factor and

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

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

CV(subs) = [ 600 x 80% x 20% ] + [ 600 x 80% x 60% ] = 384

Then the final answer is:

R₁ charge for holding company = 0.225 x [ 600 – 384 ] = 48.6

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