Hi Lindsay
Thanks a lot for helping me understand the RM. I have found my understanding about Risk Margin under SII, lets denote it as RM(SII), has been quite different. And i just this last round of discussions around it. Below is the plot:
1.As you mentioned, RM(SII) is the prudence for non-hedgable risk calculated as frictional cost of holding SCR capital for these risk using 'Cost of Capital' approach. that means: RM(SII) =Prudendnce for non-hedgable risk(NHR) = frictional cost ot SCR.
My understanding was, RM(SII) is Prudence for NHR + Cost ot holding SCR for NHR risks.
Basis for my such understanding is based on the content of two pages of Chapter 19, as given below:
page 18, section MCEV, content under 'Component of an MCEV' :
These are
1.free surplus(princ 4)
2.required capital(SCR?, if based on SII, as per prinp 5)
2(a) minus "Frictional cost of required capital"
3. ViF:
3(a) PVFP
3(b) minus Time value of option and guarantee
3(c) minus cost of residual non-hedgeable risks-RM(EEV), when using MCEV.
You must see 2(a) and 3(c) are separate things.
Page 20, EV reporting under SII:
Points written as
(i) if there is no PVIF(assuming item 3(c) above is taken as 2(b) and release of RM(SII) is clubbed with release of SCR)
(ii) company considering RM(SII) to be appropriate measure of cost of residual NHR, RM(EEV), and lock in cost of holding regulatory capital(SCR)
The EV equals to SII own funds.
Hope you can see the reason of my confusion. Can you help me on this?
Last edited by a moderator: Feb 26, 2018