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What are the shareholder requirements from required capital?

Discussion in 'SA2' started by curiousactuary, Jul 11, 2020.

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  1. curiousactuary

    curiousactuary Member

    Chapter 14 (Capital management) says "Required capital represents the level of assets required in excess of liabilities so that
    policyholder claims (or shareholder requirements) can be met with a high degree of
    certainty".

    What shareholder requirements are there which fall under "required capital"?

    Are these dividends expected for any shares held or is this anything else?
     
    curiousactuary, Jul 11, 2020
    #1
  2. KaustavSen

    KaustavSen Member

    I think “shareholder requirements” might also relate to any internal solvency target that may have been set by the Board. For example, the Solvency Coverage Ratio = Own Funds / SCR, should be greater than 120%.

    Though, dividend payment capacity as you mention seems like a more plausible explanation of “shareholder requirement”.
     
    KaustavSen, Jul 12, 2020
    #2
  3. Em Francis

    Em Francis ActEd Tutor Staff Member

    I think you could include both definitions. As investors of the capital, the shareholders are going to require a certain return for investing in the company. Whether this be via a solvency ratio - a higher ratio means that the company is able to invest and earn the required return, or a dividend ratio - which is a measure of how much they are directly getting back from their investment.
     
    Em Francis, Jul 14, 2020
    #3
  4. curiousactuary

    curiousactuary Member

    Thanks for your replies.

    Just to clarify:

    1. My understanding is that required capital (under solvency II) equals the SCR and MCR. I also thought that all of the SCR and MCR related to policyholder requirements. Is this correct?

    2. My understanding is that available capital equals any assets over and above the required capital (i.e. over and beyond the SCR and MCR and over the technical provisions for that matter). Is this correct?

    3. In relation to my quote in my original post - do the shareholder requirements fall under "required capital" or "available capital"? If required capital, could you explain which part of the required capital (SCR on MCR) the shareholder requirements fall under? Is it somehow related to the Risk Margin and Cost of capital?
     
    curiousactuary, Jul 15, 2020
    #4
  5. Em Francis

    Em Francis ActEd Tutor Staff Member

    Yes, required capital under SII Pillar one is the SCR (where MCR is a subset of SCR). These are there to ensure the policyholder's requirements (ie the technical provisions) are met under extreme adverse circumstances. Under Pillar two, these may be different to the SCR as it may look at a different time horizon and/or VaR so as to meet its own risks and solvency assessment requirements.
    No, available capital under SII is own funds and includes required capital (SCR) + free capital. This means it is available but not all of it is available immediately.
    The objective of Solvency II is to protect the policyholder. SCR is not the shareholders' requirement. Such a requirement would include meeting its required return on capital, for example.
    I think you are getting mixed up with SII and embedded value. The latter is all about trying to come up with a value for shareholders. Whereas the former, is trying to determine whether a company has enough capital to cover all its risks and therefore to meet policyholders' obligations under extreme circumstances.
    Hope this helps.

    Thanks
    Em
     
    Em Francis, Jul 15, 2020
    #5

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