Earthquake Premium Reserve
Why is EPR deducted from capital available? The text states: "In the case where EPR is not used as part of financial resources to cover the earthquake risk exposure, ... , the EPR can be deducted from capital available instead of being added to total capital requirements."
Why would we deduct it from capital available? Whether we add it to the denominator or deduct it from the numerator, we are still decreasing MCT. Why would the company be punished for holding this voluntary reserve?
Comments
Additionally, as a financial resource in OSFI.Eqk, EPR is mentioned as one of the possible resources for supporting the PML. Did they mean ER instead of EPR? Why would only the voluntary Earthquake Premium Reserve be a FinRes, and not the ERC as well?
I believe it is mainly used to give flexibility to the insurer - You can choose the option which gives you the highest MCT ratio.
No, the MCT refers to the EPR as a financial resource.
I think it's because by definition, the ERC is an additional component used to cover an insurer’s earthquake exposures which are not covered by financial resources
Thanks for the help. Wouldn't that be incentive to hold no EPR then, since EPR will only decrease the MCT?
Well not if you voluntarily intend to write EQ insurance
It's a trade-off - You're reducing your MCT but you are gaining revenue
Hi,
Just want to build on that to see if I understand it correctly.
If EPR is used as part of financial resources then:
The EPR is deducted from ERC,
where ERC = Ctrywide PML500 - EPR - cap & surp - Rein Cov -cap mkt fin),
but then added back in formula margin(Eq) = (EPR + ERC)*1.25.
What is the point of adding and subtracting EPR in margin(Eq) calculation, it seems like it doesn't play any role there?
Thank you!
I wondered the same thing when I first read the MCT reading. It doesn't seem to make any difference to the final value for ER (Earthquake Reserve) but if the questions asks only for ERC then you would have to remember to subtract EPR.