solvency questions

[Gousgounis]

Hi,

I have some solvency related questions

1) In Q&A Bank Question 2.12 there is the case of the MCR being proportional to the square root of the premium income. In the answer it says that this is consistent with statistical theory… How is this derived?

2) Is the MCR calculated using accounting years? Isn’t this a limitation?

3) What is the impact of the CER on the solvency margin? Isn’t it treated as an extra liability therefore reducing solvency? For the ECR calculation it can be treated as capital: does this mean that we ignore this extra liability and has no impact on solvency?

Many thanks

Kostas

 

[Ian Senator]

1) The statistical derivation goes back to distribution theory. Whenever we're finding tails of distributions, you remember that we have something like 1.96 times the square root of the number of claims? Well, if you take premiums to be a proxy to claims, then you have your answer. If you're really interested in the detail, try this: http://www.casact.org/library/astin/vol5no2/169.pdf

2) Yes, the MCR looks retrospectively at accounting years (either UY or AY). This is a limitation, but only one of many! No wonder Solvency II will be welcomed with open arms.

3) For the purposes of calculating capital resources the equalisation provision is treated as a technical provision and therefore does reduce the amount by which capital resources exceed the capital resources requirement.

However, the equalisation provision is deducted from the calculation of the ECR, therefore when calculating the excess of capital resources over the ECR the equalisation provision has no net impact as it is a deduction from both capital resources and the ECR.

 

[Gousgounis]

Thanks for the reply.

For (2), does that mean that for calculating the claims amount, we should be using "claims paid + increase in claims outstanding"?

 

[Ian Senator]

No, for calculating the claims amount, you're using claims paid plus outstanding claims (averaged over the relevant number of years).