available capital vs required capital

Hello

During SA2 April 2019 attempt, it was written in the question that capital margin is difference between required capital and available capital. There were follow up question parts under the same on movement of capital margin.

I believe that available capital should be greater than required capital, but due to the way it was framed in the question, I used capital margin as required capital less available capital instead of available capital less required capital.

Could you please express your views on the same as which should be the correct statement.

Thanks in advance
Yogesh

 

I interpreted it as available less required capital because the question mentioned it was a SII company, but the question was really not worded well

 

Neither was question 2, which I thought was significantly more difficult than the first! I also interpreted capital margin as available less required capital given that the company was operating under SII.

 

Yogesh,

If it brings you comfort expressing capital margin as required capital less available capital shouldn’t change the interpretation of your results (ie a negative result is a healthy outcome for a firm) and you (still) would’ve been able to generate the relevant marks .

In this sense, there isn’t a ‘correct statement’.

 

I interpreted available capital as own funds or assets (excess of assets over liabilities) available to cover the required capital. Therefore, Capital margin = Available capital - Required Capital.
This seemed to be the most practical definition to me for the purpose of this question.

 

Thanks for confirmation.

But there was a follow up question asking that:
The company has planned to hold low capital margin in future. Why would company prefer holding lower capital margin?

So does my answer using capital margin equal to RC - AC still holds here?
What do you think?

 

Please find the screen shot from the question below:


So does my answer using capital margin equal to RC - AC still holds here?
What do you think?

 

Yogesh,

The follow up questions are qualitative in nature (ie there are unlikely to be marks in this part of the marking schedule for your capital margin equation).

Provided you wrote your points the ‘right way round’, eg in (v) why running with a low buffer above the RC could be risky then you should be fine.

 

Yogesh, how do you have a screenshot of the question?

 

the exam paper is available on website....

 

Actually I have assumed that capital margin is equal to required capital minus available capital in the above part of the question. So here I explained the risks of having required capital a little above than available capital.

So does it make sense?

 

Marks will be awarded based on the marking schedules.

The SA may give some marks for reasonable points not on the marking scheme. But in the spirit of helpfulness and honesty, I suspect a number of your comments are unlikely to be on the marking scheme. For eg, it isn’t immediately obvious to me why a firm would knowingly wish to hold insufficient assets to meet its SCR. I suspect an actuary who made such an argument in practice would come under a lot of professional scrutiny.

 

how did u find the exam under the new syllabus? was it materially different than previous exams ?

D