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Capital modelling

A

Adithyan

Member
The resultant insurance
capital (based on undiscounted reserves) could therefore be too high and the free
capital too low. When the excess reserves are released, the profits declared will
be greater (at this point) than if discounted reserves had been held. As discussed
in Section 2.2, we should deduct any such baseline profit from the capital
requirement as a separate item.

I want to know if insurance capital and reserve or technical provisions are the same.

If my reserves are high will my capital be high?
 
Technical provisions are defined in the glossary.
Reserves may be the same but it depends on the basis and method of calculation etc.
Capital in the context of capital modelling normally refers to the excess held over and above the technical provisions.

Depending on how your capital requirement has been calculated it may or may not be high if the reserves are high.
 
Then could you please explain the sentences in bold in my first post? Because there it sounds like higher reserves need higher capital.
 
I think we're only confusing the issue by worrying about the definitions here.
The paragraph is saying that if we use undiscounted technical reserves, then the capital needed to back them will be higher. This means that the free reserves will be lower (assuming total reserves are unchanged). Then, over time, the extra capital we held as a result of not discounting will be released, making profits look better.
For all intents and purposes, we can use capital and reserves interchangeably in this paragraph (the idea is that capital is the asset that is being held in order to meet the reserves). But as Darren says, the meaning of reserves and capital can vary depending on what it is you're referring to, and the context. In the exam, as long as you explain what it is you're referring to, you should be ok.
Hope that clears it up!
 
Hi all. I follow the above conversation and understand how profit over the years will be higher when holding undiscounted reserves.

The last line in the 1st message above says 'we should deduct any such baseline profit from the capital requirement as a separate item'.

What does this exactly mean? The capital we hold at time 0 should be reduced by the amount of excess profit we would've observed over the years?

Thanks in advance.
 
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