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 its ability to meet ongoing obligations to policyholders
what is the BCAR formula?
BCAR = (AC - NRC) / AC *100
calculated at 4 different VaR levels
NRC = capital needed for financial/economic/market risk
AC = capital available for financial/economic/market risk
how is AC calculated in the BCAR formula?
- start with balance sheet reported capital (surplus)
- make appropriate adjustments
identify adjustments to balance sheet capital to obtain BCAR available capital?
EDO: lura-sd-fig
Equity adj:
- loss reserves
- unearned prems
- reinsurance
- assets
Debt adj:
- surplus notes
- debt service requirements
Other adj:
- future operating costs
- intangibles
- goodwill
why don’t we use unadjusted reported capital as the value for AC?
incorporating these adjustments provides for a more economic and consistent view of capital available
identify the risk categories in the BCAR model
NRC supports 3 risk categories
fake raspberry cat
FEIC RPB CAR
asset risk:
1. Fixed income securities
2. Equity securities
3. Interest rate risk
4. Credit risk
UW risk:
5. reserve risk
6. premium risk
8. CAT risk
other risk:
7. Business risk
what is the purpose of covariance adjustment in the NRC formula?
reflects the assumed statistical independence of 7/8 risk components (it is unlikely for independent risk components to develop simultaneously)
why is business risk excluded from the covariance adjustment?
AM Best expects an insurer to maintain capital for business risks without the benefit of diversification
in the BCAR model, what is gross required capital?
amount of capital needed to support all risks if they develop simultaneously
= sum of B1 to B8
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
capital factor is based on industry risk factors and adjusted for company’s volatility in case loss development
describe how BCAR capital factors for reserve risk are derived
derivation of reserve capital factors is:
- based on industry risk factors
- then adjusted for company’s volatility in case of loss development
how are BCAR reported reserves
adjusted?
adjusted to an economic basis through 2 modification factors:
- reserve deficiency factor
- discount factor
what is the BCAR diversification credit, and how is it calculated?
it reflects the reduction in overall reserve risk within a well diversified portfolio, calcualted using a correlation matrix.
identify considerations other than BCAR score that impact Best’s balance sheet strength assessment (other factors)
Q^2 - SALAMI ( BCAR WANTS TO CONSIDER SALAMI)
- Quality of capital & reins
- Stress testing
- Adequacy of reserves
- Liquidity of capital
- Actions of affiliates
- Matching of assets & Liabs
- Internal capital models
identify the 6 steps in Best’s rating process
BOB- ECL (BEST BELONGS TO BOB, ECL)
- Bs strength
- Operating performance
- Business profile
- ERM
- Comprehensive adjustment
- Lift and or drag
identify company characteristics that may tend to lower a company’s BCAR score
- aggressive investment portfolio (increase NRC for investment risk categories B123)
- loans to high risk entities or reinsurance with low-rated reinsurers (increase NRC for credit risk B4)
- reserve deficiency (increase NRC for reserve risk B5)
- excess growth or high UW leverage (increase NRC for premium risk B6)
why does Best calculate NRC and BCAR at more than 1 level of VaR?
- to gain more insight into the company’s bs strength
- to assess its ability to withstand tail events
what is Best’s sensitivity calculation for?
to quantify the extent of the impact of stress scenario could have on capital position after such an event occurs
why does Best use a sensitivity analysis to supplement its BCAR calculation?
to assess
- capital required to support future business
- impact of a pro-forma transaction (acquisition of a subsidiary)
- projected year end capital position
pro-forma: method of calculating financial results using certain projections or presumptions
identify an aspect of the BCAR model that may make it more robust 健全 than MCT
BCAR permits qualitative adjustments to final assessment for economic conditions:
- interest rate changes
- stage of UW cycle
- changes in reinsurance arrangements
describe 3 similarities between BCAR and MCT
- purpose: assess financial strength and ability to meet policyholder obligations
- key idea: apply capital factors to liabilities in various risk categories
- cov adj: to account for the statistical independence between risk categories
describe 3 diffs between BCAR and MCT
- formula is diff
- BCAR max = 100%, no min
- MCT min = 0, no max
- robustness is diff: Best is more robust because final assessment includes qualitative economic conditions (like stage of UW cycle)
- time horizon is diff:
- BCAR capital must support current and future premium risk
- MCT focuses more on current year’s risk
what is VaR used for in BCAR model?
to measure the amount of risk within an organization over a selected time horizon
what are VaR applied to?
to the risks that are the most material to an insurer
what are the three pieces of information that are required to evaluate the item at risk?
- time horizon
- confidence level
- probability distribution of possible outcomes
what is the drawback to using VaR?
VaR only looks at a single value of the probability distribution and provides no information about the other potential values that are beyond that single value
how does Best address the issue with VaR?
by calculating required capital at different confidence levels using VaR metric
