i was reading a past paper and it was saying (among others) that subject to an equity fall surlpus (invested in equities) will fall and so own funds. what it the difference between those two? in the core reading i have found that assets-tps = of or nav (in some other page) . surplus i am guessing that is sth larger including of but i am a bit confused about it. thanks
Hi Dimitris The CMP notes (Chapter 11, page 2) show this clearly in a graph. When referring to the SII regulatory balance sheet: Own funds = Assets - technical provisions Surplus = Excess of own funds above SCR. Does this help? Thanks Em
The MCR is essentially a subset of the SCR. If a firm's SCR was 100,000 then the MCR would be between 25,000 and 45,000, let's say 35,000. Once the firm breaches 100,000 then it will need to come up with a recovery plan. If the solvency capital fell below 35,000, then it could no longer trade. So, using a simple numerical example to answer your original question, if: Assets = 1,000,000 Liabilities = 600,000 Then own funds = 400,000 and free surplus = 300,000.
Hi Dimitris It means that the firm's solvency capital has breached the MCR. So in the above example, the solvency capital falls below 35,000. The 25% of SCR, 45% of SCR are lower and upper caps for the MCR. The MCR is calculated by using a simple factor-based linear formula which is targeted at an 85% VaR but with the constraints that it is between 25% and 45% of the SCR. In my example, I took 35% of SCR. Does this makes sense? Thanks Em
Might be a very stupid question to ask at this point time but how do we get the free surplus of 300,000 here.