R3 reinsurance recoverable charge
I have a question about the R3 reinsurance recoverable charge. Battleacts says,
Use this split only if:
unpaid loss & LAE component of R4 > (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)
When I look at Odomirok Pg 259 it states,
The RBC charge for reinsurance recoverable is split 50%/50% between R3 and R4 if the reserve
RBC (see discussion below) exceeds the sum of the credit risk RBC for non-invested assets
and reinsurance recoverables. Otherwise, the total amount of the reinsurance recoverable RBC
charge is included in R3.
Am I wrong or in the book are they checking to see if the loss & ALAE component of R4 > (RBC charge for non-invested assets) +(RBC charge for reinsurance recoverables)? Where did the 1/2 (RBC charge for reinsurance recoverables) in your notes come from? Should it be 1/2 of the RBC charge for reinsurance recoverables or the full RBC charge for reinsurance recoverables? Any help understanding this would be appreciated. Thanks.
Comments
The formula is correct. Here is the extract from Odomirok, page 272:
The RBC charge for reinsurance recoverable is split 50%/50% between R3 and R4 in
circumstances where the reserve RBC charge (see discussion below) exceeds the sum of the credit risk RBC charge for non-invested assets plus one-half of the RBC charge for
reinsurance recoverables. Otherwise, the full amount of the reinsurance recoverable RBC
charge is included in R3. The concept of moving half of the reinsurance recoverable RBC
amount to R4 is to recognize there is some dependency between deterioration in reserves and an increase in exposure to reinsurance credit risk. The limitation on splitting the charge based on the size of the reserve RBC charge is put in place so the insurance company cannot diversify away a portion of its credit risk in situations where the company has limited net reserves.
Following up on this- can you elaborate further on the "unpaid LALAE portion of R4"? I am having trouble finding further information on that. Is there a non-"unpaid LALAE" portion of R4? I guess a more concise way to frame my question is: Is the total R4 amount equal to the unpaid LALAE portion of R4?
You start out calculating R4 based on the reserves. You then add to it half of the reinsurance recoverable charge, under the condition described above, to arrive at the final R4.
"unpaid LALAE portion of R4" is a term used to signify the portion of R4 before the adding of reinsurance recoverable charge. It is not for certain that half of reinsurance recoverable charge will be added to it. You use the unpaid LALAE portion of R4 in the specified condition to determine whether or not you will add it.
Ah ok- so "unpaid LALAE portion of R4" = (LOB Z R4 after discount)LCF +Growth and then we potentially add on (0.5 Reins Recoverable Charge). Got it, thank you for the quick response!
Sure, good luck.
Hello, in 2016 spring 26 b it seems like they are indeed using "R4 > (RBC charge for non-invested assets) +(RBC charge for reinsurance recoverables)" vs "R4 > (RBC charge for non-invested assets) +(1/2)*(RBC charge for reinsurance recoverables)". Should we assume that is just an error? or did the formula change since then?
The examiner answer does use the "half". I read this:
Total R4 charge = $75,000 + ($4,300 / 2) = $77,150
Sorry, I mean for the test of whether to split the reins recov between R3 and R4. $75000>$5635.
The examiner's answer is outdated. Here is the relevant passage from Odomirok since 2021:
". . .The RBC charge for reinsurance recoverable is split 50%/50% between R3 and R4 in
circumstances where the reserve RBC charge (see discussion below) exceeds the sum of the credit risk RBC charge for non-invested assets plus one-half of the RBC charge for
reinsurance recoverables. Otherwise, the full amount of the reinsurance recoverable RBC
charge is included in R3. . . ."