C - AM Best Understanding BCAR Flashcards

1
Q

AM BEST UNDERSTANDING BCAR

What does BCAR calculates?

A

BCAR = SURPLUS / NET CAPITAL REQUIRED (for investment, credit, and uw risks) compared to economic capital

It is one component to evaluate BALANCE SHEET STRENGTH, which, along with OPERATING PERFORMANCE and BUSINESS PROFILE, is used to calculate Best’s FSR (financial strength rating)

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

AM BEST UNDERSTANDING BCAR

Purpose of Best’s FINANCIAL STRENGTH RATING (FSR)

3 components of the Best’s FSR

A

–purpose–
to give an opinion on :
1) financial strength
2) ability to meet obligations to policyholders

1) Balance Sheet Strength
2) Operating Performance
3) Business profile

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

AM BEST UNDERSTANDING BCAR

Define
balance sheet strength

3 kinds of LEVERAGE to assess balance sheet strength

A

measure the exposure of surplus to its operating and financial practices

--UW Leverage--
from 
types of business written
quality of reinsurance 
adequacy of loss reserves

–Financial Leverage–
from debt instruments

--Asset Leverage--
from
investments
interest rate risk
credit risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

AM BEST UNDERSTANDING BCAR

3 stress tests within BCAR

A

1) above-normal catastrophes
2) a decline in stock markets
3) a rise in interest rates

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

AM BEST UNDERSTANDING BCAR

3 risks categories used in the calculation of AM Best’s net required capital

A

1) UW RISK- 2/3 of required capital
from premium written, loss reserves and reinsurance

2) INVESTMENT RISKS
from
fixed-income securities, equities, interest rates

3) CREDIT RISK
3rd party default risk

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

AM BEST UNDERSTANDING BCAR

How statistical independence of the individual components of BCAR are reflected in the formula

A

Individual components are subject to the “square root rule” covariance calculation to account for statistical independence

this covariance adjustment says it is unlikely all the individual risk components will develop at the same time, so it reduces overall required capital between 35% to 45%.

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

AM BEST UNDERSTANDING BCAR

Contrast BCAR vs MCT

A

in BCAR, a important proportion of capital is required to support FUTURE PREMIUM RISK, reflecting AM BEST view that balance sheet strength must support the current and future risks.

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

AM BEST UNDERSTANDING BCAR

2 categories encompassed by UW risk and

how much capital is required for UW risk

A

1) loss and loss adjustment expense reserves
2) net premium written

UW risk account for 2/3 of gross required capital

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

AM BEST UNDERSTANDING BCAR

how long term duration contracts affect risk and how to capture the difference

A

they create larger unearned premium reserves, which leads to a larger pricing risk

to capture this increased risk, unearned premium for long duration contracts will be included on the loss reserve page instead of the pricing risk page in an effort to reflect diversification from business being written in the future versus business written in the past.

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

AM BEST UNDERSTANDING BCAR

On what AM BEST stresses BCAR?

A

incorporate natural and/or man-made events such as terrorism to monitor how sensitive balance sheet strength is to a second CAT event

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

AM BEST UNDERSTANDING BCAR

Purpose of SQUARE ROOT RULE

Shortcoming of square root rule

how it can be counterbalanced

A

Adjusting for fact that individual risk components are not likely to develop simultaneously.

More capital-sensitive UW risk are accentuated and less capital-sensitive are diminished, relative to net required capital

By using other distinct capital measures

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

AM BEST UNDERSTANDING BCAR

Example of market issues that could be considered in capital

A

Rate changes
Stage of UW cycle
Change of reinsurance
Dependence on reinsurance

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

AM BEST UNDERSTANDING BCAR

Limitation of BCAR

A

Not the sole basis to evaluate financial strength

Must also consider operating performance and business profile

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