Hi, Can you please help understand what the impact of the unit pricing error will be on the magnitude of SCR? Also under which module of Basic SCR will it be classified under? Is this understanding of unit pricing error correct- In case the unit pricing error is not very high, then the company can decide to inform the policyholder and not make any changes in SCR. In case the unit pricing error leads to an increase in the liabilities then the SCR will also increase. Also, the solution mentions that the There are fewer term in force meaning the mortality stress will be lower but interest rates are lower, so the discount rate may be lower which may offset the longevity/mortality reductions Why will this point be considered in case of undiversified SCR? Thanks
Your questions here suggest that you are confused between two distinct things: an event happening to a company (after which it has to recalculate its SCR and the SCR may have changed) and the stresses that are applied in order to determine the SCR. It is vital to appreciate the distinction. A unit pricing error would be an operational risk event (as indicated in the chapter on Risk management and controls) - but this isn't what the question is asking about. The company has made a unit pricing error, then the question part (iii) is asking what might happen to the SCR as a result of that. So we need to think about the impact on the company of making such an error. Perhaps expenses have increased due to needing to rectify the error? But if these are just considered to be one-off expenses, this would have no impact looking forwards - and so the SCR would not change. I'm not sure that I understand your points about deciding to inform the policyholder and 'not to make any changes in SCR': insurers don't decide whether or not to change the SCR, it would simply change or not depending on what had happened and whether that would have any impact on any of the SCR risk stresses.
Because we are only considering the mortality stress in isolation. The fact that there are fewer policies in-force and interest rates have fallen are the events that have happened. If the insurer recalculated its SCR mortality stress following these events, the former would mean that the SCR mortality risk component is likely to have fallen; the latter could mean that the value of the SCR risk component has increased to some extent - so there will be some degree of offset.
Thank you Lindsay for the replies, I have understood the previous question properly, with the second one- wouldn't this offset be a part of diversified SCR as we are assuming an offset of two stress events? Whereas we were asked about only undiversified SCR Thanks
No - there are not two stress events being determined for the SCR calculation in this example. As I said before, you are confusing two distinct things: (a) the events that have actually happened to the company and (b) the stresses being assessed in order to determine the SCR. In what we are talking about here, there are two of (a), ie actual events that have happened: (1) fewer policies in-force due to higher mortality and (2) reduction in interest rates. But we are only looking at one of (b): only the mortality stress component of the SCR (ie what would now happen to the balance sheet, if future mortality rates were materially adverse). Hence we are looking at an undiversified SCR component.
