2019 Fall #18
I haven't seen this question posted anywhere, please redirect me if this has already been commented on.
In part (b) of this question, why does the solution not include operational risk? In my solution, I assumed that we were supposed to divide out the 1.03 operational charge when trying to calculate what the new R2 should be.
Also, why are we assuming that the converted bonds would have a 0 RBC charge for R1? Is this standard? I saw in the solution it was an ERROR to assume they were being attributed a .003.
Thank you!
Comments
This problem was written prior to the introduction of operational risk charge.
They are converted to government bonds, which get zero risk charge.
Also in part b) it seems like they are assuming the Asset Concentration (ACC) term is 0 for R2 (and R1). How do we know this? Is it the bullent point that "Of the insurer's top10 largest equity investments, none are in class 06"?.. if so I'm not sure how to interpret that statement to mean that ACC=0.
The R1 and R2 that enter into the RBC formula include ACC.
That statement is there to assure that the conversion is not to affect R1.
For the steps to compute the ACC: gather, sort, truncate, sum, and multiply. I don't understand what the "sort" is based on. I see in the sample problem for R1 they are already sorted but I see bonds of "$0" value sorted to rank 3 and then "$10,700" sorted to rank 4. So, if they aren't sorted based on dollar amount then what is the sort based on?
Thanks.
I don't know to which sample problem you refer.
Bonds and stocks are pooled and sorted by value. Top 10 are subject to ACC. From within the top 10, the bonds will go into the R1 ACC and stocks into the R2 ACC.
To check, would the answer to part (b) with operational risk be $3,798,291.90?
Correct.