sohpmalvin

04-26-2011, 10:02 PM

Hi all,

I have a few questions that need your input. Assuming that a company needs to comply to Solvency II requirements and has MCEV reporting on regular basis:

Q1. Adjusted Net Worth = MV(Asset supporting surplus) - Required Capital - Free Capital. Is the required capital the SCR? Or is it capital requirement for other basis?

Q2A. Is Time Value of Options and Guarantees equivalent to the value of the embedded options in the business?

Q2B. For products with optionality, deterministic projection only shows the intrinsic value of the embedded options in the best estimate scenario. The intrinsic value is captured in the PV(Future Profits). On the other hand, if stochastic runs are performed to value the Time Value of Options and Guarantees, is this a double count for the value of the embedded options?

Q2C. In principle, is TVOG the same as cost of non-hedgable risks? In my understanding, the difference is that TVOG can be hedged/replicated using assets in market whereas non-hedgable risks cannot be hedged/replicated using assets in market.

Q3. How is the cost of capital considered in MCEV reporting? In my understanding, cost of capital is somehow equivalent to Frictional Cost + Risk Margin, since frictional cost measures the deadweight costs and the Risk Margin represents the cost of holding SCR.

I appreciate your thoughts or discussions on these. Knowing that my questions alone might be conceptually flawed, please correct me if you identify it.

Thanks!

I have a few questions that need your input. Assuming that a company needs to comply to Solvency II requirements and has MCEV reporting on regular basis:

Q1. Adjusted Net Worth = MV(Asset supporting surplus) - Required Capital - Free Capital. Is the required capital the SCR? Or is it capital requirement for other basis?

Q2A. Is Time Value of Options and Guarantees equivalent to the value of the embedded options in the business?

Q2B. For products with optionality, deterministic projection only shows the intrinsic value of the embedded options in the best estimate scenario. The intrinsic value is captured in the PV(Future Profits). On the other hand, if stochastic runs are performed to value the Time Value of Options and Guarantees, is this a double count for the value of the embedded options?

Q2C. In principle, is TVOG the same as cost of non-hedgable risks? In my understanding, the difference is that TVOG can be hedged/replicated using assets in market whereas non-hedgable risks cannot be hedged/replicated using assets in market.

Q3. How is the cost of capital considered in MCEV reporting? In my understanding, cost of capital is somehow equivalent to Frictional Cost + Risk Margin, since frictional cost measures the deadweight costs and the Risk Margin represents the cost of holding SCR.

I appreciate your thoughts or discussions on these. Knowing that my questions alone might be conceptually flawed, please correct me if you identify it.

Thanks!