Bright Line Indicator Test

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

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:

E (2019.Spring #19)

E (2016.Fall #20)