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Exam 6 > Odomirok 19 > Flashcards

Odomirok 19 Flashcards

1
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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2
Q

By when must the RBC report be filed?

A

3/1

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3
Q

List some risks that are excluded from the RBC formula

A

Those associated with the business plans & strategy/management/internal control/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 + R3^3 + R4^2 + R5^2) ^ .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 affiliates -Off-balance sheet items

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9
Q

2 accounting methods used to record 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 R0 if the market approach is used

A

Min(RBC, statutory surplus) x ownership %

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11
Q

Formula for R0 if the equity approach is used

A

R0 = min( RBC x 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 affiliate:

A

RBC charge = Book/ adjusted carrying value × 0.5

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14
Q

RBC charge for an indirectly owned alien insurance affiliate:

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 affiliates
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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 Affiliates:

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

Unaffiliated bonds RBC factors:

A

NAIC bond class Factor Class 1 - Highest credit quality - US gov guaranteed by US gov 0.000 US gov not guaranteed by US gov 0.003 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

Unaffiliated 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%. Factor = Weighted Issuers / Issuers 1 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

RBC Charge = Factor of asset pre-conversion × Annual Statement value

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 Unaffiliated 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

NAIC preferred stock class Factor 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 affiliates • 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 & affiliates • 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 differentiate 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 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:

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 wont 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

Companys 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 × net losses & LAE reserves

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

Actions permitted/ required, based on the RBC ratio:

A
72
Q

Criteria for the insurer to undergo a trend test:

A
  • RBC ratio between 200 & 300%
  • Combined ratio >120%
73
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.

Exam 6 (46 decks)

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