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6 > Odomirok 19 > Flashcards

Odomirok 19 Flashcards

1
Q

By when must the RBC report be led

A

3/1

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2
Q

Which insurers are exempt from the RBC procedure

A
  • Title insurance companies
  • Monoline financial guaranty insurance companies
  • Monoline mortgage guaranty insurance companies
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3
Q

List some risks that are excluded from the RBC formula

A

Business plans & strategy/ Management/ Internal Controls/ Systems / Reserve adequacy/ Ability to access capital

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4
Q

Reason asset risk charge in the P&C industry is a lot smaller portion of the total risk charge compared to the portion in the life industry.

A

P&C companies typically invest in short-term, relatively liquid investments because of the relatively short duration of the liabilities.

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5
Q

Covariance adjustment (square root rule) formula

A

RBC = R0 + (R1^2 + R2^2 + R3^2 + R4^2 + R5^2)^0.5

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6
Q

Reason the square root is used to derive RBC need

A

Reflects diversification among the risks: RBC makes the assumption that they are independent.

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7
Q

Why is R0 excluded from the covariance adjustment:

A

Risk from the insurance subsidiaries is not assumed to be independent. Instead, it is assumed to be directly correlated with the aggregate risks of the insurer.

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8
Q

List some investments that generate a R0 charge

A
  • Investments (stock, preferred stock & bonds) in an insurance subsidiary
  • Investments in alien insurance company affliates
  • Off-balance sheet items
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9
Q

2 accounting methods used to record common stock investments in subsidiaries

A
  • Market valuation approach: based on the market value, adjusted for the ownership percentage
  • Equity method: based on the statutory equity, adjusted for any unamortized goodwill, and adjusted for the ownership percentage.
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10
Q

Formula for RBC charge if the market valuation approach is used

A

Min (Affliate RBC, Statutory surplus) * ownership %

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11
Q

Formula for RBC charge if the equity approach is used

A

R0 = min (Affliate RBC * ownership %, Book/Adjusted Carrying Value of stock)

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12
Q

R0 charge for Preferred Stock investments in Insurance Subsidiaries

A

RBC = min (Pro rata share of excess RBC, Book/ adjusted carrying value of preferred stock)
* Where the pro rata share is the share of the total outstanding preferred stock that is owned by the insurer.
* Excess RBC is the total RBC after the covariance adjustment in excess of the value of the stocks

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13
Q

RBC charge for a directly owned alien insurance affliate

A

RBC charge = Book/ adjusted carrying value * 0.5

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14
Q

RBC charge for an indirectly owned alien insurance affliate

A

RBC charge = Carrying value * 0.5

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15
Q

3 categories of off-balance sheet items included in the R0 charge

A
  1. Non-controlled assets
  2. Contingent liabilities
  3. Guarantees for the benefit of affliates
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16
Q

RBC factor applied to off-balance sheet items

A

1% (except to the securities lending programs, which receive
0.2%).

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17
Q

RBC Charge for Holding Company

A

0.225 * (Holding company value - carrying value of the indirectly owned insurance companies)

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18
Q

RBC charge for bond investments in a parent company

A

RBC Charge = 0.225 * carrying value of bonds

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19
Q

RBC Charge for bond investment in insurance subsidiary not subject to
RBC

A

Charge = 0.225 * book/ adjusted carrying value of bonds

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20
Q

RBC charge for Investment Affliates:

A

Same as if the insurer owned the investments directly.

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21
Q

RBC charge for bond investment in other non-insurance subsidiaries

A

RBC Charge = 0.225 * book/ adjusted carrying value of bonds

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22
Q

Unaffliated bonds RBC factors

A

Class 1 - Highest credit quality - US gov guaranteed by US gov: 0.000
Class 1 - US gov not guaranteed by US gov: 0.003
Class 1 - All other (government): 0.003
Class 2 - High credit quality: 0.010
Class 3 - Med credit quality: 0.020
Class 4 - Low credit quality: 0.045
Class 5 - Lowest credit quality: 0.100
Class 6 - In or near default: 0.300

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23
Q

Bond types included in the bond size factor adjustment

A
  • Unaffliated bonds in classes 2 - 6
  • Non US government bonds in class 1
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24
Q

Procedure to determine bond size adjustment factor:

A
  • For the first 50 issuers, the weight is 250%.
  • For the next 50 issuers, the weight is 130%.
  • For issuers between 101 & 400, the weight is 100%.
  • For the issuers above 400, the weight is 90%.
  1. Factor = Weighted Issuers / Issuers - 1
  2. If the portfolio has more than 1,300 bonds, the adjustment is 0.
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25
Q

RBC charge for Mortgage loans

A

RBC Charge = 0.05 * book/ adjusted carrying value of loans

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26
Q

RBC charge for Miscellaneous Assets

A

RBC Charge = Factor * book/ adjusted carrying value of assets
* Where, the factor is:
-Cash, net cash equivalents, other short-term investments: 0.003
-Admitted collateral loans: 0.05

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27
Q

Describe Replication (Synthetic Asset) transactions

A

Derivative transactions that are made in combination with other investments in order to replicate the investment characteristics of a certain type of investment.

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28
Q

RBC charge for Replication (Synthetic) Assets

A

RBC Charge = Factor of the equivalent investment * Annual Statement value

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29
Q

Describe Mandatory Convertible Securities

A

Securities which are mandatorily convertible at specified prices

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30
Q

RBC charge for Mandatory Convertible Securities

A

max(0, charge for converted security charge for original security)

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31
Q

How is the charge from replication transactions & mandatorily convertible securities allocated

A

Distributed to both R1 and R2 (50% each)

32
Q

RBC Charge for Unaffliated Common Stock

A

0.15 * book/ adjusted carrying value of stock

33
Q

RBC Charge for non-government money market funds

A

0.003 * value

34
Q

Preferred Stock RBC factors

A

Class 1 - Highest credit quality: 0.003
Class 2 - High credit quality: 0.010
Class 3 - Med credit quality: 0.020
Class 4 - Low credit quality: 0.045
Class 5 - Lowest credit quality: 0.100
Class 6 - In or near default: 0.300

35
Q

Real Estate RBC factor

A

0.1

36
Q

Other long-term invested assets other than collateral loans RBC factor

A

0.2

37
Q

Receivables for securities RBC factor

A

0.05

38
Q

Aggregate write-ins for invested assets RBC factor

A

0.05

39
Q

Derivatives RBC factor

A

0.05

40
Q

2 aspects of credit risk that are included in the RBC charge

A
  1. The counterparty will default (on at least part of the debt)
  2. The risk associated with estimating the amounts due
41
Q

3 sources of R3 charge

A
  1. Non-invested assets
  2. Reinsurance recoverable
  3. Health credit risk
42
Q

List some examples of non-invested asset that receive a R3 charge

A
  • Investment income due & accrued
  • Amounts receivable relating to uninsured plans
  • Federal income tax recoverable
  • Guaranty funds receivable or on deposit
  • Recoverable from parent, subsidiaries and affliates
  • Aggregate write in for other than invested assets
43
Q

RBC Charge for non-invested assets

A

0.05 * net admitted value
(Except for investment income due & accrued, which uses 0.01)

44
Q

RBC Charge for reinsurance recoverables

A

0.1 * reinsurance recoverable
(Where the recoverables have been reduced by the provision for reinsurance)

45
Q

List the exceptions to the RBC Charge for reinsurance recoverables

A
  • Cessions to US parents, subsidiaries & affliates
  • State-mandated involuntary pools & associations
  • Federal insurance programs
46
Q

Why has the 10% charge for reinsurance recoverables been criticized by insurance carriers

A

It does not dierentiate by the reinsurer strength, or whether the recoverables are collateralized.

47
Q

Why does the 10% charge for reinsurance recoverables remain in force, despite the heavy criticism

A

Due to the need to be conservative when reinsurance is involved:
* Uncollectible balances have historically been responsible for several insurance failures
* Reinsurance has been used to overstate surplus

48
Q

How is the RBC charge for reinsurance recoverables treated in the RBC formula

A

Split equally between R3 & R4, unless the reserve RBC is less than the sum of credit risk RBC for non-invested assets and one half of reinsurance recoverables, in which case the total is allocated to R3.

49
Q

Base loss & LAE reserve RBC charge

A

RBC = [(Company RBC % + 1) * Adjustment for investment income - 1] * (Net loss & LAE reserve + Other discounts not in reserves)
* Where the net loss & LAE reserves are taken from Schedule P, Part 1 (and are gross of non-tabular discounts, but net of tabular).

50
Q

Purpose of the Company RBC %

A

Provide a surplus cushion against adverse development.

51
Q

How is the Company RBC % derived

A

Taking the straight average of:
* Industry reserve RBC %
* Industry reserve RBC % adjusted for company experience

52
Q

How is the Industry RBC % derived

A

Calculating the ratio of net incurred loss & DCC development during the year (from Schedule P, Part 2) to the net loss & DCC reserves from the prior year. Uses industry data

53
Q

Formula for the company development factor by line

A

Company development factor =
(Sum of incurred loss & DCC from 9 prior AY s evaluated as of the current year) / (Sum of initial valuations of the same AY s)
* Where the losses are pulled from Schedule P, Part 2 (Col 10 & the values along the diagonal). The factor is capped at 400%.

54
Q

Formula for Adjustment for Company Experience

A

Company Avg Development / Industry Avg Development

55
Q

In what situations should the insurer not make the company adjustment for the RBC charge:

A
  • Either the initial or current loss values are negative for any year
  • Current value is 0 for any year
  • Sum of initial values is 0 across all years
56
Q

Loss sensitive discount factor:

A

30% for direct business, and 15% for assumed.

57
Q

Why does assumed business have a lower Loss sensitive discount factor

A

The benefit is often partially offset by the fact that the commissions are loss sensitive as well.

58
Q

Equation for Loss concentration factor

A

0.3 * (Net loss & LAE reserves in largest line) / (Net loss & LAE for all lines) + 0.7

59
Q

List 2 reasons that the reserves are subject to a lot more uncertainty if the insurer is growing rapidly

A
  1. The insurer won’t have as much insight into the new business
  2. The estimate of unpaid claims is more difficult for a growing company relative to one in a steady state: the average writings of the insurer are going to be skewed towards the end of a policy year. It is difficult to adjust the analysis for this shift, and also quite likely that insurers will neglect to make an adjustment
60
Q

Threshold for an insurer to be defined as having excessive growth

A

3yr average growth rate in GWP (capped at 40%) exceeding 10%

61
Q

Average growth rate factor formula

A

Min (Max [Avg growth over 3yrs, 0.1], 0.4) - 0.1

62
Q

Excessive premium growth charge formula for reserves

A

Charge = Average growth rate factor * 0.45 * net losses & LAE reserves

63
Q

What does WP RBC reflect

A

Risk that future business may be unprofitable

64
Q

Base NWP RBC formula

A

RBC = Current yr NWP * (Company RBC loss ratio * Adjustment for investment income + Underwriting expense ratio - 1)

65
Q

How is the company average loss & LAE ratio calculated

A

Straight average of net loss & LAE ratios from Schedule P, Part 1, Col 31; over 10 accident years. Ratios for each accident year are capped at 300% before averaging.
Adjustment for Company Experience = Company Avg Loss & LAE Ratio / Industry Avg Loss & LAE Ratio

66
Q

Source of underwriting expense ratio in NWP RBC calculation

A

Company’s actual ratio of other underwriting expenses incurred in the current year to the total net written premium in the current year (capped at 400%).

67
Q

Premium concentration factor formula

A

0.3 * (NWP in largest line) / (NWP for all lines) + 0.7

68
Q

Excessive premium growth charge formula for NWP

A

Charge = Average growth rate factor * 0.225 * NWP

69
Q

Formula for Total adjusted capital

A

= Surplus - Non-tabular discount (from Schedule P, Part 1) - Tabular discount on medical reserves

70
Q

Formula for RBC ratio

A

RBC ratio = Total adjusted capital / ACL
* Where the ACL = RBC after covariance * 50%

71
Q

4 levels of actions permitted/ required based on RBC ratio, as well as the respective ratio:

A
  1. Company action level (150%-200%)
  2. Regulatory action level (100%-150%)
  3. Authorized control level (70%-100%)
  4. Mandatory control level (<70%)
72
Q

Action required by DOI & Insurer for Company Action Level (150%-200%)

A
  • DOI: None
  • Insurer: submit action plan to commissioner of domiciliary state explaining how it will obtain needed capital or reduce it risks
73
Q

Action required by DOI & Insurer for Regulatory Action Level (100%-150%)

A
  • DOI: right to take corrective action
  • Insurer: submit action plan to commissioner of domiciliary state explaining how it will obtain needed capital or reduce it risks
74
Q

Action required by DOI & Insurer for Authorized Control Level (70%-100%)

A
  • DOI: commissioner is authorized to take control of the insurer
  • Insurer: None initially
75
Q

Action required by DOI & Insurer for Mandatory Control Level (<70%)

A
  • DOI: commissioner of domiciliary state must rehabilitate or liquidate the insurer
  • Insurer: None initially
76
Q

Criteria for the insurer to undergo a trend test

A
  • RBC ratio between 200 & 300%
  • Combined ratio >120%
77
Q

Purpose of the trend test

A

Early warning of companies that may incur RBC ratios below 200%. All companies that meet these criteria need to comply with the requirements of the company action level.

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