- Is operational risk considered non-financial risk? I remember in another practice problem, only Market & Credit risks were taken out to reach non-financial risk.
- for the discount rate, 3.6% is used because we are using bottom-up method for the liquid contracts? If so, we are using the rate corresponding to illiquid contracts because we are given LIC?
- Operational risk is non-financial risk. However, the risk adjustment only considers non-financial risks directly related to the contract, which is why it is removed here.
- Yup. LIC is illiquid and LRC is liquid. You can’t do a top-down approach with the information given.
Thanks! That makes sense.
Another question for the total capital required. In the answer, the “Total capital required” is min cap required * 1.5. Shouldn’t we call this quantity “Target capital required”? Then Total capital required would be Target capital required + D.
You can’t call it that because target capital required is a different concept and is the insurer’s own capital target which is higher than 150% and is usually determined using ORSA. I am not sure what you are referring to with ‘D’ here though
This is a screenshot from OSFI.MCT-IFRS wiki page where it stated capReq is also called the Target Capital Required. And then the later chapters were about how to calculate the components of the target capital required..
Also D stands for diversification credit
Okay yeah that is my bad - I did not check the wiki and was just going off my own internal company terminology which is different than the official MCT guidelines. It gets messy when I sometimes mix up what we call things at work with the exams 