Odomirok 19 Flashcards
Which insurers are exempt from the RBC procedure:
- Title insurance companies
- Monoline financial guaranty insurance companies
- Monoline mortgage guaranty insurance companies
By when must the RBC report be filed:
3/1
List some risks that are excluded from the RBC formula:
Business plans & strategy/ Management/ Internal Controls/ Systems / Reserve adequacy/ Ability to access capital
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.
P&C companies typically invest in short-term, relatively liquid investments because of the relatively short duration of the liabilities.
Covariance adjustment (square root rule) formula:
RBC = R0 + (R1^2 + R2^2 + R3^2 + R4^2 + R5^2 )^0.5
Reason the square root is used to derive RBC need:
Reflects diversification among the risks: RBC makes the assumption that they are independent.
Why is R0 excluded from the covariance adjustment:
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.
List some investments that generate a R0 charge:
- Investments (stock, preferred stock & bonds) in an insurance subsidiary
- Investments in alien insurance company affiliates
- Off-balance sheet items
2 accounting methods used to record common stock investments in subsidiaries:
- 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.
Formula for RBC charge if the market valuation approach is used:
Min (Affiliate RBC, Statutory surplus) × ownership %
Formula for RBC charge if the equity approach is used:
R0 = min (Affiliate RBC × ownership %, Book/Adjusted Carrying Value of stock)
R0 charge for Preferred Stock investments in Insurance Subsidiaries:
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
RBC charge for a directly owned alien insurance affiliate:
RBC charge = Book/ adjusted carrying value × 0.5
RBC charge for an indirectly owned alien insurance affiliate:
RBC charge = Carrying value × 0.5
3 categories of off-balance sheet items included in the R0 charge:
- Non-controlled assets
- Contingent liabilities
- Guarantees for the benefit of affiliates
RBC factor applied to off-balance sheet items:
1% (except to the securities lending programs, which receive 0.2%).
RBC Charge for Holding Company
0.225 × (Holding company value - carrying value of the indirectly owned insurance companies)
RBC charge for bond investments in a parent company:
RBC Charge = 0.225 × carrying value of bonds
RBC Charge for bond investment in insurance subsidiary not subject to RBC
Charge = 0.225 × book/ adjusted carrying value of bonds
RBC charge for Investment Affiliates:
Same as if the insurer owned the investments directly.
RBC charge for bond investment in other non-insurance subsidiaries:
RBC Charge = 0.225 × book/ adjusted carrying value of bonds
Unaffiliated bonds RBC factors:
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]
Bond types included in the bond size factor adjustment:
Unaffiliated bonds in classes 2 - 6
Non US government bonds in class 1
Procedure to determine bond size adjustment factor:
- 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.
RBC charge for Mortgage loans:
RBC Charge = 0.05 × book/ adjusted carrying value of loans
RBC charge for Miscellaneous Assets:
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
Describe Replication (Synthetic Asset) transactions:
Derivative transactions that are made in combination with other investments in order to replicate the investment characteristics of a certain type of investment.
RBC charge for Replication (Synthetic) Assets:
RBC Charge = Factor of the equivalent investment × Annual Statement value
Describe Mandatory Convertible Securities:
Securities which are mandatorily convertible at specified prices
RBC charge for Mandatory Convertible Securities:
RBC Charge = Factor of asset pre-conversion × Annual Statement value