Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CAS6U > 6 - Odomirok.19 - RBC > Flashcards

6 - Odomirok.19 - RBC Flashcards

1
Q

RBC Ratio

A

TAC / ACL
sounds like tackle
TAC = Total Adjusted Capital
ACL = Authorized Control Level capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What could be included in a company’s action plan for meeting RBC standards?

A

*Explain how to raise needed capital
*Explain how to reduce operations to save money
*Explain how to reduce risks to lower RBC charges

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

When is the Trend Test required?

A

If a company’s RBC ratio is in the 200-300% range and also has a COR > 120% THEN they are subject to the CAL action from the action table.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Components of COR used in Trend Test

A

Loss & LAE Ratio = (CY net incurred loss & LAE) / NAP
Expense Ratio = [(other U/W expenses) + (aggregate write-ins for underwriting deductions)] / NWP
Dividend Ratio = policyholder dividends / NEP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Memory trick for remembering risk components of RBC calc

A

FEC RONS Cat
FEC = Fixed income, equity, and credit = R1 - R3
R = Reserve Risk = R4
O = Operational Risk
N = NWP = R5
S = Subsidiary/Misc = R0
Cat = Catastrophe = Rcat

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

RBC Capital Required after covariance & before operational risk

A

R0 + sqrt(R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + Rcat^2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including:

A

L-PIPE
*Legal risk
–
*Personnel risk (in case you hired a dumb-ass intern)
*Inadequacy or failure of internal systems
*Procedural risk (and/or risk of failure of internal controls)
*External risk (due to external events)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

RBC Capital Required after covariance & after operational risk

A

R0 + sqrt(R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + Rcat^2) + (operational risk)

The part of the formula with the square root is called the covariance adjustment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

The operational risk is then easy to calculate because the basic charge is:

A

3% of the pre-operational risk RBC total

The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the reason for the covariance adjustment?

A

The reason is that risks R1 through R5 and Rcat are assumed to be independent. It’s unlikely that all these risks would reach their maximum value at the same time. The covariance adjustment reduces the required capital to reflect this assumption of independence. For example, the level of equity risk (performance of stocks) is likely not related to reserve risk. A company would be unlikely to experience both very bad investment returns and very bad underwriting results at the exact same time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Why is R0 excluded from the covariance adjustment?

A

R0 is not independent of the other risks. In other words, R0 is correlated with the other risks. It represents the charge for a subsidiary company and investment in an subsidiary does not provide a diversification benefit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

RBC denominator:

A

ACL capital = 50% x (RBC Capital Required)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Risk Magnitude Ranking

A

R2 Equity
R4 Reserves
R5 NWP
RCat
R3 Credit
R1 Fixed Income

2 Early
4 Reading about
5 New
CATegory
3 Cyclones just
1 F’ing Island away

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

CAT risk in RBC includes:

A

earthquake and hurricane

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

RBC Capital Required

A

1.03 * [R0 + sqrt(R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + Rcat^2)]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Formula for Total Adjusted Capital (TAC)

A

TAC = PHS - (non-tabular discount) - (tabular discounts on medical reserves)

Keep in mind that tabular discounts can be for medical or indemnity, and the indemnity portion is not subtracted.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Describe the purpose of RBC from the perspective of the regulator

A
  • The purpose of RBC is to help regulators identify insurers that are in financial trouble and
    that need regulatory attention/early warning sign
  • Therefore, the RBC requirements attempt to individualize minimum capital requirements for
    each insurer.
  • RBC allows or mandates a regulator to take action when a company reaches a certain RBC
    action level.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Are subsidiary and affiliated insurance companies considered within R0?

A

Subsidiary and affiliated insurance companies are only considered within R0 if they are U.S. domiciled entities subject to RBC, or if they are alien insurers (foreign to the U.S.).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Formula for R0 (common stocks) using equity method

A

= min[ affiliate RBC x (ownership% of common stock) , value of common stock as recorded by reporting entity ]

20
Q

Formula for R0 (common stocks) using market method

A

= min[ affiliate RBC x (ownership% of common stock) , (statutory surplus of affiliate) x (ownership% of common stock) ]

21
Q

Formula for R0 (preferred stocks)

A

= min[ (affiliate RBC - total value of common stock) x (ownership% of preferred stock) , value of preferred stock as recorded by reporting entity ]
*Must be >=0

The quantity (affiliate RBC - total value of common stock) is referred to a the subsidiary’s excess RBC.

22
Q

Formula for R0 (alien insurance affiliate)

A

= 0.5 x (carrying value of company’s interest in affiliate)

23
Q

Formula for R0 (off-balance/sheet items)

A

= 1.0% x (value of each off-balance sheet item)

24
Q

R0 Off-balance Sheet items

A

DANCE
D-> DTA (Deferred Tax Assets)
A-> guarantee for Affiliates
N-> Non-controlled assets
C-> Contingent liabilities
E-> collateral for sEcurities lEnding programs

25
Q

The R1 RBC charge covers interest rate risk and default risk for fixed income investments in the following 5 categories:

A

*Bonds
*Off-balance sheet collateral and Schedule DL, Part 1, Assets
*Other long term assets (includes mortgage loans, low income housing tax credits, working capital finance investments)
*Miscellaneous assets (includes cash, cash equivalents, other short-term investments, nonadmitted collateral loans)
*Replication (synthetic asset) transactions and mandatorily convertible securities

26
Q

Basic R1 Charge Formula

A

= Σ [(asset values subject to basic charge) * RBC factor]

27
Q

Bond Size Charge (BSC) for R1 formula

A

= BSF x (total R1 charges for bonds subject to BSF)

28
Q

Asset Concentration Charge (ACC) for R1 formula

A

= Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]

29
Q

Only the following bond classes are subject to BSF

A

class 01 → 06 unaffiliated bonds
(exclude US gov bonds)

BSF decreases as bond count increases

30
Q

Only the following bond classes are subject to BSF

A

Class 1-6 unaffiliated bonds
EXCLUDE US government bonds

31
Q

BSF decreases as bond count ______

A

increases

32
Q

Which fixed income investments are subject to the ACC (asset concentration charge)?

A

*unaffiliated bonds in classes 02 through 05
*collateral loans
*mortgage loans

33
Q

Which equity investments are subject to the ACC (asset concentration charge)?

A

*unaffiliated preferred stocks and hybrid securities in classes 02 through 05
*unaffiliated common stock
*investment in real estate
*encumbrances on invested real estate
*schedule BA assets (excluding collateral loans)
*receivable for securities
*aggregate write-ins for invested assets
*derivatives

34
Q

Steps for how to calculate ACC:

A

*step 1: gather all fixed income investments and equity investments that are subject to the ACC (see above lists)
*step 2: sort the list from highest to lowest
*step 3: truncate this list and keep only the top 10 rows of this table
Then these last 2 steps are done separately for R1 & R2:
*step 4: sum the TOP 10 results in each separate category (classes 02 through 05 are treated separately at this step)
*step 5: multiply each sum from step 4 by the appropriate RBC factor

35
Q

What is an ACF or Asset Concentration Factor?

A

ACF = weighted average of RBC factors for assets subject to the concentration charge

ACC = ACF x (total value of assets subject to the concentration charge)

36
Q

R2 (equity risk) includes the charge for risk associated with equity investments in the following categories:

A

1 - Affiliated investments
2 - Unaffiliated stocks ← major contributor to R2 charge
3 - Real estate
4 - Schedule BA assets ← major contributor to R2 charge
5 - Miscellaneous assets, including receivables for securities, aggregate write-ins for invested assets and derivatives
6 - Replication (synthetic asset) transactions and mandatory convertible securities

37
Q

Formula for R2 (equity risk)

A

R2 = basic charge + ACC

38
Q

basic charge formula for R2

A

= Σ [ (asset values subject to basic charge) x (RBC factor) ]

39
Q

ACC formula for R2

A

= Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]

40
Q

In general, which assets are not subject to the ACC (Asset Concentration Factor)?

A

*assets deemed to be of low risk (like class 01 unaffiliated bonds or preferred stock)
*assets that have already received the maximum charge of 0.3000 (like class 06 unaffiliated bonds)

41
Q

R3 Trick: The RBC charge for reinsurance recoverable is split 50/50 between R3 and R4
Use this split only if:

A

Use this split only if:
unpaid loss & LAE component of R4 > (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)

42
Q

Underwriting risk has 2 categories:

A

*reserve risk (this is the R4 charge)
*NWP risk (this is the R5 charge)

43
Q

There are 4 components to the R5 charge:

A

*99% of the R5 charge: written premium RBC
*1% of the R5 charge: excessive premium growth RBC
*1% of the R5 charge: health premium RBC
*0% of the R5 charge: health stabilization RBC

44
Q

There is only 1 financial statement amount that’s subject to the R5 charge:

A

Net written premium. (Note however that the basic R5 charge is calculated separately for each line of business.)

45
Q

What discounts might be applied to the basic R5 RBC charge?

A

1) LSD - Loss sensitive discount (it is subtracted from the basic charge)
2) PCF - Premium concentration factor (it is multiplied by the ‘after-LSD’ RBC charge)

46
Q

Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including:

A

*inadequacy or failure of internal systems
*personnel
*procedures or controls
*external events
*legal risk

CAS6U (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions