BCAR.CND

Question 1

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

Answer 1

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

Question 2

what is the BCAR formula

Answer 2

BCAR = (AC - NRC) / AC x 100
(calculated at 4 different VaR levels)

Question 3

identify adjustments to balance sheet capital to obtain BCAR Available Capital

Answer 3

EDO: lura-sd-fig
+ Equity adjustments:
- loss reserves
- unearned premiums
- reinsurance
- assets
+ Debt adjustments:
- surplus notes
- debt service requirements
(-) Other adjustments:
- future operating costs
- intangibles
- goodwill

Question 4

identify the risk categories in the BCAR model
(1-8) FEIC-RP-BC

Answer 4

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

Question 5

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

Answer 5

• 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)

Question 6

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

Answer 6

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

Question 7

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

Answer 7

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)

Question 8

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

Answer 8

BOB-ECL
Balance sheet strength (based mainly on the BCAR scores, but subject also subject to Cured Salami.)
Operating performance
Business profile
–
Enterprise risk management
Comprehensive adjustment
Lift and/or drag

Question 9

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

Answer 9

• 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)

Question 10

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

Answer 10

• to gain more insight into the company’s balance sheet strength
• to assess its ability to withstand tail events