surlus vs own funds

Discussion in 'SA2' started by dimitris13, Sep 17, 2019.

  1. dimitris13

    dimitris13 Member

    i was reading a past paper and it was saying (among others) that subject to an equity fall surlpus (invested in equities) will fall and so own funds.
    what it the difference between those two? in the core reading i have found that assets-tps = of or nav (in some other page) . surplus i am guessing that is sth larger including of but i am a bit confused about it.

    thanks
     
  2. Em Francis

    Em Francis ActEd Tutor Staff Member

    Hi Dimitris

    The CMP notes (Chapter 11, page 2) show this clearly in a graph. When referring to the SII regulatory balance sheet:
    Own funds = Assets - technical provisions
    Surplus = Excess of own funds above SCR.

    Does this help?
    Thanks
    Em
     
    dimitris13 likes this.
  3. dimitris13

    dimitris13 Member

    only scr or mcr too? i dont understand the graph very well (my bad)

    thanks
     
  4. Em Francis

    Em Francis ActEd Tutor Staff Member

    The MCR is essentially a subset of the SCR.
    If a firm's SCR was 100,000 then the MCR would be between 25,000 and 45,000, let's say 35,000.
    Once the firm breaches 100,000 then it will need to come up with a recovery plan. If the solvency capital fell below 35,000, then it could no longer trade.
    So, using a simple numerical example to answer your original question, if:
    Assets = 1,000,000
    Liabilities = 600,000
    Then own funds = 400,000
    and free surplus = 300,000.
     
  5. dimitris13

    dimitris13 Member

    thanks for this.
    when we say that mcr bites means that it hits the 25% and 45%of scr?
     
  6. Em Francis

    Em Francis ActEd Tutor Staff Member

    Hi Dimitris

    It means that the firm's solvency capital has breached the MCR. So in the above example, the solvency capital falls below 35,000.
    The 25% of SCR, 45% of SCR are lower and upper caps for the MCR. The MCR is calculated by using a simple factor-based linear formula which is targeted at an 85% VaR but with the constraints that it is between 25% and 45% of the SCR.
    In my example, I took 35% of SCR.

    Does this makes sense?
    Thanks
    Em
     
  7. Nitisha

    Nitisha Member

    Might be a very stupid question to ask at this point time but how do we get the free surplus of 300,000 here.
     
  8. Em Francis

    Em Francis ActEd Tutor Staff Member

    Own funds of 400,000 minus the SCR of 100,000
     
  9. Nitisha

    Nitisha Member

    Oops, completely overlooked the SCR amount stated above.
    Many thanks for a quick reply.
     

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