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in BUS 4027W - Actuarial Risk Management by (1.1k points)


I just wanted to clarify how regulatory capital requirements are calculated. From my understanding, your total assets should be:

$$Total \space Assets = Provisions \space + \space Available \space capital = (Best \space Estimate \space + Margins) + (Capital \space required + Free \space Assets )$$

Is the minimum capital requirement (MCR) just margins + capital required? And Solvency capital required simply margin + capital required, but the capital required is slightly larger. 

I've also noticed that when they talk about regulatory capital, there is some inconsistency. Sometimes they refer to it as MCR + Free Assets, but other times they refer to it as: Equity + retained profit+ preference shares + subordinated debt. 

I am just confused with all these terms

1 Answer

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by (220 points)

Solvency Capital Required (SCR) is the amount of capital needed (in excess of provisions). This is a calculated amount based on the factors described in the chapter. If a company does not have enough capital to meet the SCR, the regulator will intervene but it can still continue to trade. However, if the capital dips below the Minimum Capital Requirement (MCR), which is smaller than the SCR, then the company will be forced to shut down. So you can almost see it as a ladder of intervention.

Regulatory capital is based on requirements set out by the regulator (as opposed to economic capital, for example, which is an internal assessment of capital requirements).