Capital margin vs PfAD

Tony88passTony88pass
in OSFI.MCT

I wonder if there is any double counting between these two? If the answer is NO, then when the risk events associated with both happen at the same time, taking unpaid claims as an example, the liability would be equal to APV(NU) + PV(NU)*Capital Margin?

Comments

  • grahamgraham

    Let's step back and look at what each of these calculations is doing:

    • The analysis of unpaid claims is a very detailed reckoning of liabilities and includes discounting and PfADs. The result appears on the liability side of the balance sheet and is the "official" value for unpaid claims liabilities.
    • The MCT calculation of margin required for unpaid claims is much more of a rough approximation (it's only part of the total MCT calculation) and does not appear on the balance sheet. The MCT calcs are on page 30.62 of the annual statement and are intended for regulatory purposes.

    So even though these calculations look like they're doing a similar thing, they are independent of each other. (I don't think your liability formula would be correct. It looks like you're tying to somehow combine these 2 calculations when they should be kept separate. A particular risk event would be reflected in both calculations but it wouldn't make sense to add them together.)

  • Tony88passTony88pass

    Thanks for the explanation Graham! Can I say the capital margin is designated to cover more extreme risk events, like when the actual loss is greater than APV(NU), the capital could be used to pay off the excess of APV(NU).

  • grahamgraham

    I think that would depend on the %-margins that are used in the MCT calculation. I'm not sure how those margins are selected. It could be that they are chosen to correspond to more extreme events but the readings don't really discuss any of those details. For that reason, I probably would not say that as part of an answer to exam question. (But if you have found something buried somewhere in the readings that I missed, please let me know!)

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