The core reading mentions that a simplified method of approximating RM can be via risk drivers where linear relationship exists. This is the only example of simplification/ approximation. The exam solution to April 2015 paper Q1 vi mentions that RM = % * BEL. Can this officially be used in future exams, even though it is not part of the core reading? Is that really what companies consider or do in practice???
Hi The Risk Margin calculation involves projecting forward the future capital that the company is required to hold at the end of each projection period during the run-off of the existing business and then multiplying by a cost of capital rate (i.e. 6%). The projected capital is a subset of the SCR consisting of those risk that cannot be hedged. Due to the complexity involved in modeling changing SCRs, proxy drivers are determined which have a relationship with the future SCR. In practice, the SCR is split down into business types, where each business type has a proxy driver. So yes, the core reading uses sum at risk as an example of a driver but it could easily be BEL, no of pols, sum assured etc. If the driver didn't have a simple linear relationship with the SCR then something like marginal contribution tables could be used to convert the proxy driver to future SCR which is then multiplied by the CoC rate (6%) and then discounted to get your Risk Margin. Thanks Em
Hi They are a way of recognising the contribution of each risk to the overall SCR. Please note this is not in the CR and would not be assumed knowledge in the exam. Thanks Em
