I have come across the following terms in the SA2 core reading: - Net Asset Value - Free Asset - Regulatory/Realistic surplus - Working capital - Own funds Can anyone help explain the differences among the terms above? Many thanks
Yes, there are many different terms used for surplus in SA2. The difference is largely due to the different ways that liabilities can be calculated. I'll take each defintion in turn below (but in a slightly different order to the one you used). Regulatory surplus - this is the Pillar 1 Peak 1 surplus. It is calculated as admissible assets (subject to admissibility limits) less (mathematical reserves, LTICR, and RCR or WPICC). Realistic surplus - this is the Pillar 1 Peak 2 surplus. It is calculated as realistic assets (subject to admissibility rules) less (realistic liabilities and RCM). Working capital - this refers to Pillar 1 Peak 2 as well. It is the sum, of the realistic surpluys and RCM. Own funds - this is the Solvency II surplus. It is calculated as the assets less (technical provisions and subordinated liabilities). Free assets - this is a much broader term than those above, so there is no single definition. The glossary says that it is assets less liabilities (which may or may not include the CRR). Net asset value - this is an even broader term as it can be applied to any business (and not just insurance companies). Again, it is the assets less liabilities. A number of different definitions for assets and liabilities can be used depending on the purpose.. Best wishes Mark
Thanks, Mark! Your reply helps a lot in clarifying some of the key concepts that appear frequently in the Core reading and past papers.
A further question: In the core reading, it is mentioned that WPICC is calculated by comparing Peak 1 free assets - RCM and Peak 2 free assets - LTICR. Does "Peak 1 free assets" here mean Admissible assets - Reserves, and "Peak 2 free assets" mean Assets - realistic liabilities? Thanks again!
You've got your peaks the wrong way round. The WPICC is calculated by comparing Peak 2 free assets - RCM and Peak 1 free assets - LTICR. But yes, the Peak 1 free assets here means Admissible assets - Reserves, and Peak 2 free assets means Assets - realistic liabilities. Best wishes Mark