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Sept 2018 Q1

A

Aditi

Keen member
I fail to understand the link between Question 1 part (i) and part (vi) specially for equity values.

In part (i), we state the SCR will increase due to equity values being down. This is because the asset backing equity will decrease and thus decrease in unit values. As the unit value decreases, the value of charges will decrease and thus increase in BEL. This causes increase in SCR.

However in part (vi), increase in equity will lead to increase in value of assets and so the value of charges will increase and thus decrease in BEL. As value of assets increase, and BEL decreases, shouldn't the SCR decrease? But the examiner's report state SCR will increase and BEL will decrease.
 
The two question parts are asking different things.

Part (i) is about the stresses that are applied to calculate the SCR. We are asked to explain why 'equities down' generates a positive SCR (of 1,500 on a standalone basis). This is because there will be (a) a fall in value of any surplus assets invested in equities and (b) an increase in the NUR part of the BEL (due to lower charges and also (if relevant) a higher cost of guarantees). [The fall in the value of equities backing unit funds and the fall in the value of the unit reserve part of the BEL will offset each other in the SCR calculation so don't contribute.]

Part (vi) is about what would happen to the SCR (and other parts of the balance sheet) if an event actually happened to the company. In other words, how would the SCR immediately after the event has happened compare with the SCR immediately before the event has happened. Equity values up -> holding a higher absolute amount of equity investment -> greater absolute exposure to equity risk -> higher SCR equity risk component -> SCR up. In other words, if the company holds a higher absolute amount of equities, the equity risk SCR calculation performed above would result in a figure that is higher than 1,500. (Which makes sense, because the more equities that are held, the greater would be the adverse impact of an equity market fall.)
 
I still don't understand this, very confusing! On one hand the increase in equity is considered bad and on the other good. How does it matter whether we look at stress impacts or the impact when the change has already happened? Aren't we always comparing with the base BEL which has no increase in equity? So in relative terms, the base remains the same.. Please help me understand this, with an example :)
 
Lindsay Smitherman said:
The two question parts are asking different things.

Part (i) is about the stresses that are applied to calculate the SCR. We are asked to explain why 'equities down' generates a positive SCR (of 1,500 on a standalone basis). This is because there will be (a) a fall in value of any surplus assets invested in equities and (b) an increase in the NUR part of the BEL (due to lower charges and also (if relevant) a higher cost of guarantees). [The fall in the value of equities backing unit funds and the fall in the value of the unit reserve part of the BEL will offset each other in the SCR calculation so don't contribute.]
Click to expand...

So here, the free assets are going down and NUR BEL is going up, and we are saying the SCR impact will be favourable. From a logical point of view, this is an unfav situation which should actually lead higher capital because I have less free assets now. That's why I am finding it hard to understand.
 
Arush said:
So here, the free assets are going down and NUR BEL is going up, and we are saying the SCR impact will be favourable. From a logical point of view, this is an unfav situation which should actually lead higher capital because I have less free assets now. That's why I am finding it hard to understand.
Click to expand...

Precisely, it's saying that there is a high SCR which is unfavourable. Positive SCR = unfavourable
 
Oh ok! Positive SCR is unfavourable, that helps a lot :)

so would it be right to say in both parts, being discussed above, the impact on scr is unfavourable?
 
Arush said:
Oh ok! Positive SCR is unfavourable, that helps a lot :)

so would it be right to say in both parts, being discussed above, the impact on scr is unfavourable?
Click to expand...
If it leads to an increase in SCR, then yes that is unfavourable in respect of capital requirements.
 
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