BCAR.Cdn Flashcards
What is the purpose of A.M. Best’s financial strength ratings?
to provide an opinion on the financial strength of an insurer
(and it’s ability to meet ongoing obligations to policyholders)
What is the BCAR formula
BCAR = (AC - NRC) / AC x 100
(calculated at 4 different VaR levels)
How is AC (Available Capital) calculated in the BCAR formula?
- start with balance sheet reported capital (surplus)
- make appropriate adjustments
Identify 9 adjustments to balance sheet capital to obtain BCAR Available Capital.
(Hint: EDO: lura-sd-fig)
Equity adjustments:
- loss reserves
- unearned premiums
- reinsurance
- assets
Debt adjustments:
- surplus notes
- debt service requirements
** O**ther adjustments:
- future operating costs
- intangibles
- goodwill
Why don’t we use unadjusted reported capital as the value for AC (Available Capital)?
incorporating these adjustments provides for a more economic and consistent view of capital available
Identify the risk categories in the BCAR model (8 within 3 categories)
Asset risks; UW risks and Other risk
asset risk:
(B1) Fixed income securities
(B2) Equity securities
(B3) Interest rate risk
(B4) Credit risk
U/W/ risk:
(B5) reserve risk
(B6) premium risk
(B8) Catastrophe risk
other risks:
(B7) Business risk
What is the purpose of the covariance adjustment in the NRC formula?
reflects the assumed statistical independence of 7 of the 8 risk components: (B1)-(B6) and (B8)
** c-a-d** it’s unlikely that these 7 components will be near their maximum levels simultaneously)
Why is (B7), Business risk, excluded from the covariance adjustment?
A.M. Best expects an insurer to maintain capital for business risks without the benefit of diversification
Briefly explain how the strength assessment table work.
Strongest: BCAR@99.6% between 25 and 100
Very Strong: BCAR@99.6% between 10 and 25
Strong: BCAR@99.6% smaller than 10, but BCAR@99.5% positive
Adequate: BCAR@99.5% negative, but BCAR@99% positive
Weak: BCAR@99% negative, but BCAR@95% positive
Very weak: BCAR@95% negative
NRC formula
NRC= B7+SQRT [ B1^2 +B2^2 +B3^2+(0.5B4)^2 + (0.5 x B4 + B5)^2 +B6^2 + B8^2 ]
What is the key idea in calculating the required capital for each risk category?
multiply the liability from each risk category by a specific capital factor (similar to MCT)
Briefly describe how BCAR ‘capital factors’ are derived
derivation of capital factors is:
- based on industry risk factors
- then adjusted for company’s volatility in case loss development
Identify 8 considerations other than BCAR score that impact Best’s balance sheet strength assessment
Hint: Q2 - SALAMI
Q2 → Quality of capital, Quality of reinsurance
–
Stress testing
Adequacy of reserves
Liquidity of capital
Actions of affiliates
Matching assets & liabilities
Internal capital models
Identify the 6 steps in A.M. Best’s rating process (leading to the final issuer credit rating)
Hint: BOB-ECL
BOB-ECL
Balance sheet strength
Operating performance
Business profile
–
Enterprise risk management
Comprehensive adjustment
Lift and/or drag
Identify 5 company characteristics that may tend to lower a company’s BCAR score
- aggressive investment portfolio (increases NRC for investment risk categories B1, B2, B3)
- loans to poor creditors or reinsurance with low-rated reinsurers (increases NRC for credit risk category B4)
- reserve deficiency (increases NRC for reserve risk category B5)
- excessive growth or high U/W leverage (increases NRC for premium risk category B6)
- concentration of property risks in Florida (increases NRC for catastrophe risk category B8)
