Cost of Capital Required.. Query

[lenny]

Hi,

In September 2015 paper, Q1 subsection ix) the question was asking about the issues to consider, whether to issue a product from the banking industry or the insurance industry..."

One of the answers states that" A key consideration will be the cost of capital required to be held by the regulator.."

1. Does the "cost of capital required" mean the risk margin determined under Solvency II?

Risk Margin under Chapter 6 states that it is determined by projecting forward the future capital that the company is required to hold at the end of each projection period and then multiplying it by a cost of capital rate. The product of the cost of capital rate and the capital requirement at each future projection period is discounted by the risk free discount rate, to give the overall risk margin.

2. Is "cost of capital required" the same as the "amount capital requirements"? If not, shouldn't the amount of capital requirements be considered instead as it represents the initial amounts that needs to be set aside?


Thanks in advance.​

 

[Colin McKee]

Hi, This questions was quite a difficult one, particularly for those not familiar with Solvency II and the way it affects different companies, and indeed the way it affects different divisions within a company. My feeling is that in this case, the examiner meant the amount of capital required. The more capital required, the less likely the company will be to release the product from that division. I think the term 'cost' has been used because the company will consider the capital it has to hold to satisfy the regulator a cost.​