Hi Can you please help me with the following questions: 1. Ch-10 Section 1.2 what do you mean by-‘financial promotions contain excessive small print which consumers dislike- what do you mean by financial promotions? 2. Ch-11 · Difference between RCR(Peak1) and RCM(Peak 2)? · Difference between ICA(Pillar 2) and RBS (Peak2)? · We use best estimate assumptions generally for RBS, EEV and SII. (RBS calculates asset shares, EEV calculates PVIF and SII calculates best estimate of liabilities). I am just confused why its not possible to calculate AS, PVIF etc using any one of the 3 measures? · What is the reason behind calculation of WPICC(peak 1 for realistic firms) and RCR(peak 1 for regulatory firms) differently, when both of these fulfil similar purpose – i.e. calculating additional capital requirements? · Why high lapse assumption may be prudent in early term and low rate is likely to be prudent at later durations? · Page 21- para 1 in bold- this is caused by ‘non linearity’ and ‘non separability’ of individual risks, the latter referring to the ways in which risk drivers interact with each other. I don’t understand this? 3. Ch-12 Section 2. How counterparty risk exposure is increased by long positions in futures and options and decreased by short position?
Hi Hope the following comments help. I'd think of financial promotions as marketing communications. COBS defines financial promotions here: http://fshandbook.info/FS/glossary-html/handbook/Glossary/F?definition=G421 They're both assessments of risk capital. The RCR has just market stresses. The RCM has market, credit and persistency stresses. (The Peak 1 / Peak 2 differences affect which type of firm has to calculate each of them and in respect of which types of fund.) ICA (Pillar 2) is done by all firms for all types of business. It is confidential for the PRA. RBS (Pillar 1, Peak 2) is done just by realistic-basis firms and just for with-profits funds. It is not confidential. Don't forget that only do RBS in respect of WP funds. EV and Solvency reporting used to be more different than they are now. Potentially, with a market-consistent EV and market-consistent approach for Solvency II the distinction between them will disappear/get very small. The WPICC is applying the result of the Peak 2 RBS for with-profits funds. The RCR calculates additional capital required for defined stresses. There's considered to be no need for realistic basis firms to do these stresses, perhaps because they've been required to do the RCM (with more stresses) in Peak 2. High lapses may be prudent early on if initial expenses haven't been recouped. Linearity means that the amount of capital required under a risk stress has a linear relationship with the size of the stress. Many risks are non-linear. For example, if an equity market fall of 25% results in a capital requirement of £25m, it's possible that a 50% fall in the equity market results in a capital requirement greater than £50m, for example because guarantees might bite with the larger fall. I assume this is about increasing (ie with a long position, being in the position to buy) or decreasing holdings in the bonds/shares of particular companies, and so increasing/decreasing the insurer's counterparty risk exposure to these companies. Best wishes Lynn
Hi Lynn, Thank you for your explanation. I have one further question. The meaning of "non-linearity" is understood, while how it explains that "diversified summation of several stand-alone events using a correlation matrix" may produce a higher capital requirement than "a combination of a certain subset of events happening at the same time"? I feel that "non-separability" is easier to understand for the effect above, since it just means two events happen together, the combined impact is worse than if they had happened separately. However, the explanation for "non-linearity" seems still for single event itself. How it works when events combine? Thank you. Regards, Han
Hi Han, Technical papers on the subject seem to use the expression non-linearity in a couple of different ways. In addition to that mentioned above, I think one of the issues with using correlation matrices is that it assume a simple linear correlation between risks, whereas, in practice the correlation may be more complicated. Eg two risks may have little correlation for much of the time but high correlation when certain extreme events occur. Optional further reading: https://eiopa.europa.eu/CEIOPS-Archive/Documents/Advices/CEIOPS-L2-Advice-Correlation-Parameters.pdf. https://www.actuaries.org.uk/system/files/documents/pdf/workshop-b1-baumgartner-and-simler.pdf Anyone, please feel free to correct the above if you know more .
