Hello, How the cost of required capital is allowed in pricing assumption and where does it allow? Does that mean insurer funds risk margin under SII, which cover prudence for non-hedgable risks and cost of holding SCR for these risks, partially from policyholder premiums(say the latter part) and former part(prudence for non-hedgable risks) from shareholder capital? Thanks
There are many different methods by which companies can allow for the 'cost of capital' in pricing calculations. Bear in mind that we are talking about pricing here, so it is about what extra 'cost of capital' is included as a profit test cashflow (as a negative) when setting premium rates or charges. For example, the profit test may allow for a negative cashflow of x% (cost of capital parameter, set by the company) of the capital requirements (eg SCR only, or RM+SCR) at each projected time period within the profit test. As stated in the CR, the projected future capital requirements are likely to be approximated in order to simplify the calculations.
