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Module 30 - Capital Management

V

Viki2010

Member
The summary sheet for the module classifies the capital as:
- working
- development
- risk (economic)

I am slightly confused here when referencing against SA2 classification. We had working and required capital. I have never heard of development capital and was unable to find more information on this in the module itself.

Can you please clarify what the summary sheet is meant to cover under the "development capital"?

Thanks!
 
Hi

There is a brief mention of development capital in Module 13 (and an even briefer reminder in the summary to Module 30)

A business holds capital to:
‒ manage its cashflow (working capital)
‒ facilitate growth / new ventures (development capital)
‒ to cover unexpected losses arising from exposure to risk (risk capital).
 
Thank you Simon. Is this classification in sweeting, lam or ioa notes as well?
 
Hi, further question on module 30. Solution 30.13 mentions some practical problems as a limitation of calculating the Economic Cost of Ruin. What are the problems that are meant to apply here?
 
Hello, I thought the practical problem refers to the difficulty of calculating the expected loss to key stakeholders such as policyholders, depositors and also bondholders (where the insurer or bank raised capital through issuing debt).

In a situation of ruin, policyholders could be paid a value ($X) based on asset share or GPV reserve. And the policyholder can use this money ($X) to buy another insurance policy from another insurer to get the insurance coverage that was loss. So the expected loss to the policyholder is the difference between the total premium of the new policy ($Y) and the payout ($X) from the insurer in ruin. This should be the true expected loss from the PH perspective.

However, when the company is calculating Economic cost of ruin, it will be hard to assess how much will be the total premium of the new policy ($Y). Also, the assumption of the PH being able to find a right product to cover the remaining policy term may not be valid.

This is what I thought can be the practical problems. Please correct me if I am wrong.
 
Let's take your example. How do you determine what X should be? How do you calculate the asset share? What will be the cost Y of a comparable insurance policy? So, you are correct that theoretically we are saying "what is the real loss that a PH would suffer" (ie cost of reinstating them back to their original state) - but calculating it in practice is far from simple.
 
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