Modeled Spring 2017 #19
For the modeled version of this (#29 in the Full BattleQuiz), if the actional level was Company Action Level & the COR was > 120%, would the high range of the PH Surplus be the amount that gives an RBC ratio of 300%? Or would you still calculate PH Surplus corresponding to a RBC Ratio of 200%?
Basically, would the results of the trend test also be taken into account? I generated quite a few of these problems and none of them had these conditions so I was unable to check myself.
Comments
You can't use the trend test in the set-up of this problem. For the trend test, you have to start with an RBC ratio. If that ratio is in 200-300%, but COR > 120%, then company is considered at Company Action Level. Whereas here, you're asked to calculate the surplus range for a given action level, so you have to use the generic range for that action level.
That seems odd, so there is no point for the COR given here then? It seems since we know the COR is > 120% and we know the action level is CAL then surplus could range from anywhere that corresponds to an RBC ratio of 150% to 300%.
Given that the COR is > 120%, is it wrong to say a surplus corresponding to an RBC ratio of 270% would cause the company to be subject to Company Action Level requirements? I understand the real world practicallity of only using trend test AFTER knowing the RBC ratio, but I don't see why that the 200-300% range would be excluded here if we know COR > 120% and action level was CAL.
Rethinking it, I think you're right. If the COR were greater than 120%, then the RBC ratio range corresponding to CAL would be 150-300%.
I don't think this particular problem contemplates that case: I don't ever get anything other than COR = 100% in the simulations.
Why in this question do we consider "federal income tax recoverable" a credit risk but e.g. treasury bonds an asset risk?
After reading some more, I'll have a crack myself: because the fixed assets risk covers default AND interest rate risk. Federal income tax recoverable and treasury bonds both have a risk of default if the US goes bust. But the treasury bonds have an additional risk from interest rates changing.
Is this it?
That is a valid point. I also think that liquidity plays a part. "Income tax recoverable" is asset line 18.1 on the BS. But it is not an asset you can buy and sell in the market, like bonds. Being that way, you count on its repayment to you, which makes it a credit risk.
Thank you, that's a much more memorable way of thinking about it
Sure, good luck.