Brainscape's Knowledge GenomeTM

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


See full index

Exam 6c 2025 > BCAR.cdn,CAT&OSFI.EQ > Flashcards

BCAR.cdn,CAT&OSFI.EQ Flashcards

1
Q

Question: what is the purpose of A.M. Best’s financial strength ratings

A

to provide an opinion on the financial strength of an insurer (and it’s ability to meet ongoing obligations to policyholders)

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

BCAR formula

A

BCAR = (AC - NRC) / AC x 100
calculated at 4 different VaR levels: 95%, 99%, 99.5%, 99.6% (99.6% cutoff point 10, 25, 100)
6 level assessment: vw, w, a, s, vs, S

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

how is AC (Available Capital) calculated in the BCAR formula

A

balance sheet reported capital (surplus) adj for EDO: lura-sd-fig&offp

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

adjustments to balance sheet capital to obtain BCAR Available Capital

A

EDO: lura-sd-fig offp
Equity adjustments:
- loss reserves
- unearned premiums
- reinsurance
- assets
Debt adjustments:
- surplus notes
- debt service requirements
Other adjustments:
- future operating costs
- intangibles
- goodwill
OFFP
- off balance sheet loss
- fixed income equity
- future div
- protected cell surplus

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

why don’t we use unadjusted reported capital as the value for AC (Available Capital)

A

incorporating these adjustments provides for a more economic and consistent view of capital available

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

identify the risk categories in the BCAR model (cap required) (8)

A

FEI-C-PRCat-B
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

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

what is the purpose of the covariance adjustment in the NRC formula

A
  • reflects the assumed statistical independence of 7 of the 8 risk components: (B1)-(B6) and (B8)
    (reduces GRC because it’s unlikely that these 7 components will be near their maximum levels simultaneously)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

why is (B7), Business risk, excluded from the covariance adjustment

A

A.M. Best expects an insurer to maintain capital for business risks without the benefit of diversification

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

in the BCAR model, what is ‘gross required captial’

A

gross required capital = direct SUM of required capital for (B1) through (B8)
(represents total required capital if all risks developed simultaneously)

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

what is the key idea in calculating the required capital for each risk category

A

multiply the liability from each risk category by a specific capital factor (similar to MCT)

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

briefly describe how BCAR ‘capital factors’ for reserve risk are derived

A
  • based on industry risk factors
  • then adjusted for company’s volatility in case loss development
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

identify considerations other than BCAR score that impact Best’s balance sheet strength assessment

A

Q2 - SALAMI
* Q2 → Quality of capital, Quality of reinsurance
–
* Stress testing (how well does the company perform under stress)
* Adequacy of reserves
* Liquidity of capital
* Actions of affiliates (affiliates could drag you down or pull you up)
* Matching of assets & liabilities (this is desirable for paying your bills on time)
* Internal capital models (does the company have a good procedure for assessing its own capital needs)

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

identify the 6 steps in A.M. Best’s rating process (leading to the final issuer credit rating)

A

BOB-ECL-R
[1] Balance sheet strength (based mainly on the BCAR scores, but subject also subject to Cured Salami.)
[2] Operating performance
[3] Business profile
[4] Enterprise risk management
[5] Comprehensive adjustment
[6] Lift and/or drag

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

identify company characteristics that may tend to lower a company’s BCAR score

A
  • aggressive investment portfolio (increases NRC for investment risk categories B1, B2, B3)
  • loans to high-risk entities 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)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

why does A.M. Best calculate NRC and BCAR at more than 1 level of VaR

A
  • to gain more insight into the company’s balance sheet strength
  • to assess its ability to withstand tail events
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

why does A.M. Best use a sensitivity analysis to supplement its BCAR calculation

A
  • assess capital required to support future business
  • assess impact of a pro-forma transaction (acquisition of a subsidiary)
  • assess projected year-end capital position
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

identify an aspect of the BCAR model that may make it more robust than MCT

A

BCAR model permits qualitative adjustments to final assessment for economic conditions:
- interest rate changes
- stage of U/W cycle
- changes in reinsurance arrangements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

describe 3 similarities between the BCAR model and MCT

A
  • purpose (assess financial strength and ability to meet policyholder obligations)
  • key idea (apply capital factors to liabilities in various risk categories)
  • covariance adjustment (to account for the statistical independence between risk categories)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

describe 3 differences between BCAR model and MCT

A

[1] formula is different and:
→ BCARmax = 100%, no minimum
→ MCTmin = 0%, no maximum
[2] robustness is different:
→ A.M. Best more robust because final assessment includes qualitative economic conditions
(like stage of U/W cycle)
[3] time horizon is different:
→ BCAR capital must support current & future premium risk
→ MCT focuses more on current year’s risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

identify drivers for recent increase in frequency/severity of cats

A

FREQUENCY: climate change
SEVERITY: increase in population density & complexity of supply chains

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

identify Best’s expectations for insurers accepting cat risks (2)

A

insurers must demonstrate ability to:
- MANAGE cat risk
- ABSORB potential losses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

what is a standard BCAR score

A

a measure of an insurer’s financial strength (includes a component for catastrophes)
an insurer is then assigned 1 of 6 ratings based on it’s standard score (strongest, very strong, strong, adequate, weak, very weak)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

what is a stressed BCAR score

A
  • a score that reflects the ability of an insurer to continue operating even after a catastrophe
  • based on natural catastrophe stress test
    → the standard BCAR score already has a catastrophe component so the stressed score measures the impact of a second catastrophe
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Describe the purpose of A.M. Best’s natural catastrophe stress testing.

A
  • A.M. Best stress a company’s BCAR score for a second Catastrophic event
  • The purpose is test how sensitive a company’s balance sheet strength is to a second catastrophic event
  • Determine the impact on surplus of multiple catastrophic events
25
Q

identify considerations in adjusting an insurer’s rating based on it’s stressed BCAR score

A

fin-his-fre-man
financial flexibility:
- tolerance is HIGHER if the company is willing & able to replace capital after an event
historical volatility
- tolerance is LOWER if the company has as history of volatile operating performance
frequency of severe exposures
- tolerance is LOWER if the company has multiple exposures to severe events in a single season
risk management
- tolerance is HIGHER if the company has good/experienced risk management

26
Q

describe the elements of strong cat risk management (4)

A

MADM
1)catastrophe modeling: parameter selection is critical & use more than 1 model
2)data quality:
accurate property location & coding (type of buildling)
accurate property value & insurance-to-value
conduct site reviews (so that information is up-to-date)
safeguards to prevent manipulation by insured
3)aggregate loss exposure: use aggregate losses as a secondary test of model
4)monitoring (MML): Measure, Monitor, Limit exposure on a continuous basis

27
Q

what is the purpose of the A.M. Best natural catastrophe stress test

A

test financial condition of insurer after 2 major catastrophe events

28
Q

describe the steps in the natural catastrophe stress test

A

[1] surplus
- reduce reported surplus by PML (net post-tax 1-in-100 year event)
[2] reinsurance
- increase reinsurance recoverables by at least 40% of ceded PML
[3] reserves
- increase reserves by 40% of net PML
[4] optional
- adjust PMLs used in cat risk portion of standard BCAR score due to changes in reinsurance structure after 1st cat event

29
Q

how do earthquakes impact BCAR surplus

A

reduce reported surplus by PML (net post-tax 1-in-100 year event)

30
Q

what is a broad 3-point plan for managing earthquake exposure

A

Measure / Monitor / Limit earthquake exposure

31
Q

define PML (Probable Maximum Loss)

A

$-value of loss a major earthquake is unlikely to exceed ($-loss expected only once-per-X years)

32
Q

describe the 5 key principles for managing earthquake exposure.

A
  • Risk Management
  • Data Management (ACC I LV)
  • Models (AML)
  • PML (Probable Maximum Loss) (dumb)
  • Financial Resources & Contingency Plan
33
Q

describe the key principle of Risk Management for earthquake exposure

A

[1] earthquake exposure risk management policies are overseen by Senior Management
[2] Have sound Eq risk management program, subject to oversight by the board

34
Q

describe the key principle of Data Management for earthquake exposure

A
  • data required is MORE than for traditional ratemaking
  • must address data INTEGRITY, VERIFICATION, LIMITATIONS
  • ACC I LV: data Accuracy, Consistency, Completeness, Integrity, Limitation, Verification
35
Q

describe the key principle of Modeling for earthquake exposure

A

understand (assumptions, methods, limitations) of earthquake models (AML)

36
Q

describe the key principle of PML (Probable Maximum Loss) for earthquake exposure

A

PML = Total Expected Ultimate Cost
- includes considerations for data quality, non-modeled exposure, model uncertainty, multi-region exposure. (dumb)

37
Q

describe the key principle of Financial Resources & Contingency Plan for earthquake exposure

A

Financial Resources: quantification of how financial resources cover PML
Contingency Plan: how to continue efficient business operations after disaster

38
Q

items that should be documented for earthquake risk management

A
  • risk appetite and risk tolerance of insurer
  • data management framework
  • model assumptions, methods, limitations
  • calculation of PMLs
  • nature & adequacy of financial resources
  • contingency plans supporting the risk
  • how concentration of exposures is measured & monitored
39
Q

what are the best practices for earthquake modelling

A

DAQKD-UP
[1] Docs:
→ document use of model within risk management program (Ex: for measuring & monitoring of exposure)
[2] Alternatives:
→ explain why a particular model is used versus alternatives
[3] Qualified:
→ need qualified staff to run in-house models regularly
[4] Knowledge:
→ must have knowledge of assumptions, methods, limitations of earthquake model
[5] Data:
→ should provide evidence to show that granularity & quality of data is appropriate
[6] Uncertainty:
→ must understand the impact of uncertainty on capital adequacy & reinsurance requirements
[7] PMLs:
→ if PML(model 1) ≠ PML(model 2) then must explain differences & any subsequent model adjustments

40
Q

identify uses of earthquake models aside from PML calculation (2)

A
  • make U/W decisions
  • monitor exposure-accumulations
41
Q

what are sound practices for earthquake model VERSION

A
  • use more than 1 model
  • ensure timely updates of material changes to model (within 1 year of change)
  • understand assumptions, methods, limitations of vendor software for PML calculation
  • if in-house PML model is used, should compare result to alternate models
42
Q

what are sound practices for earthquake model VALIDATION

A
  • compare modelled losses with actual losses
  • compare tail losses with market price for reinsurance
  • use global data to supplement limited Canadian earthquake data
43
Q

how might management adjust for low data quality in earthquake PML estimate

A

may add a margin of safety to the PML estimate (not an excuse to ignore data quality)

44
Q

identify non-modeled exposures when calculating PML (4)

A
  • exposure growth between (date of data) & (relevant exposure period)
  • consider adequacy of ITV (Insurance-to-Value)
  • consider GRC (Guaranteed Replacement Cost)
    (may be inadequate due to inflation)
  • increased seismicity after large event
45
Q

identify 2 examples of model uncertainty (2)

A
  • uncertainty associated with conversion from (location-specific ground motion) to (actual damage levels)
  • model assumptions are being continuously updated & refined
46
Q

how might management adjust for model uncertainty in earthquake PML estimate

A

may add a margin of safety to the PML estimate

47
Q

Regarding multi-region exposures, identify disadvantages of using the maximum of (BC, QC) exposures (2)

A
  • understates risk for insurers with exposure in both regions
  • ignores earthquake elsewhere, which could be material
48
Q

how should PMLs be reported for Canadian versus foreign insurers with exposure outside Canada

A

BoD, senior management would report PMLs to OSFI as follows:
- Canadian insurers report PMLs based on worldwide exposure
- foreign insurers report PMLs based on Canada-wide exposure

49
Q

identify financial resources for covering PML for earthquake exposure

A
  • capital & surplus (max 10% of capital & surplus)
  • reinsurance (most insurers use cat reinsurance)
  • earthquake reserves (calculated as part of MCT)
  • capital market financing (OSFI prior approval)
50
Q

identify a restrictive condition on earthquake exposure financial resources for: reinsurance coverage

A

when including non-cat reinsurance must consider ‘per event’ limits and other events that may exhaust coverage

51
Q

identify a restrictive condition on earthquake exposure financial resources for: capital market financing

A

OSFI prior approval is required before recognition as a financial resource (under MCT guidelines)

52
Q

identify a restrictive condition on earthquake exposure financial resources for: capital & surplus

A

limited to a maximum of 10% of capital & surplus

53
Q

identify a restrictive condition on earthquake exposure financial resources for: EPR

A

must not exceed countrywide PML500

54
Q

what are OSFI’s earthquake exposure reporting requirements

A
  • file Earthquake Exposure Data form annually
  • if no material exposure then submit letter stating so
55
Q

what are OSFI’s earthquake exposure supervisory requirements

A

if an insurer has material earthquake exposure:
* insurer must submit earthquake risk management policies
* must submit FCT report that includes earthquake exposure scenario (or provide reason for not including)

56
Q

what are OSFI’s supervisory options when an insurer’s earthquake exposure risk management principles are not being followed

A

OSFI may adjust capital or asset requirements or TSR (Target Solvency Ratio)

57
Q

what are the duties of senior management regarding earthquake exposure risk management (3)

A
  • implement risk management plan & internal controls
  • discretion to increase PML from model (due to low data quality OR model uncertainty)
  • a senior manager reports to all senior management about compliance and the PML
58
Q

what is included in a senior officer’s regular reports to senior management regarding earthquake exposure (2)

A
  • state compliance with risk management policies (except where noted)
  • explain calculation of PML with details of supporting financial resources
59
Q

what are the duties of the Board of Directors regarding earthquake exposure risk management (2)

A

oversight of risk management plan & ensuring adequacy of internal controls

Exam 6c 2025 (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions