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Exam 6 > Part 13 (Odomirok 19) (****) > Flashcards

Part 13 (Odomirok 19) (****) Flashcards

*** Everything

1
Q

What is RBC

A

Risk Based Capital is a tool to help provide an early warning of a potential impending insurer insolvency.

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2
Q

The 2 main components of RBC

A

RBC Formula
- Calculates minimum level of capital that the insurer should hold based on the risks it is exposed to
- Can derive RBC ratio from this: The ratio of the actual to required Capital

RBC Model Act for Insurers
- Provides the state regulator the authority to take action if the RBC ratio falls below a threshold level

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3
Q

RBC Ratio

A

The ratio of the actual to required Capital. Calculated from the RBC Formula.

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4
Q

Risk Categories considered in the RBC Formula

A

R0: Subsidiary Insurance Companies and Misc. Other Amts.
R1: Asset Risk - Fixed Income
R2: Asset Risk - Equity
R3: Asset Risk - Credit
R4: Underwriting Risk - Reserves
R5: Underwriting Risk - NPW
Rcat: Catastrophe Risk
- : Operational risk

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5
Q

Carrying Value Definition

A

The Value at which the item is recorded on the balance sheet

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6
Q

What risk does R0 cover

A
  • Investments in an insurance subsidiary
    • Common Stock
    • Preferred Stock
  • Investments in alien insurance company affiliates
  • Off-balance sheet items

Only includes charges for investments in subsidiaries that are subject to RBC requirements

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7
Q

If only charges for investments in subsidiaries that are subject to RBC requirements are included in R0, where are the charges generated for subsidiaries that are exempt from RBC included?

A

R2

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8
Q

(Skip) Definitions:
Control
Parent
Subsidiary
Affiliate

A

Control: Power to direct, via ownership of voting securities/common management/ contract. Control exits if the entity owns at least 10% of the voting interests (include all affiliates)

Parent: Entity that directly/indirectly controls the reporting entity

Subsidiary: The controlled entity

Affiliate: An entity that is within the same holding company system, or controls/is controlled by the reporting entity.

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9
Q

What RBC risk is a common stock investment in

A

R0

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10
Q

RBC charge for the common stock investments
(Accounting Method: Market valuation approach)

A

RBC charge = Min( Affiliate RBC, Statutory Surplus ) * Ownership %

  • If RBC of the affiliate * % ownership > book(carrying) value
    • RBC Charge = Excess of the book(carrying) value over the R0 calculated above
  • Otherwise = Max ( 22.5% * Excess of book value over the pro rata SAP surplus, Excess of RBC * % ownership over the R0 calculated above)
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11
Q

RBC charge for the common stock investments
(Accounting Method: Equity Method)

A

RBC charge = Min( Affiliate RBC * Ownership %, Book/Adjusted Carrying value of Stock)

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12
Q

What RBC risk is a preferred stock investment in

A

R0

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13
Q

RBC charge for the preferred stock investments

A

RBC = Min( Pro rata share of excess RBC, book/ adjusted carrying value of preferred stock)

Pro Rata Share: share of the total outstanding preferred stock that is owned by the insurer.

  • Only generate if there is excess RBC (the total affiliate RBC after the covariance adjustment in excess of the total value of the common stock)
  • If excess RBC is less than or equal to 0, the RBC charge for the preferred stock is 0.
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14
Q

Where are Investments in Alien Insurance Affiliates noted as a risk

A

R2 since alien insurers are incorporated outside of the U.S and therefore not subject to RBC requirements

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15
Q

(Directly Owned) Affiliate Investment in Alien Insurance Affiliates RBC Charge

A

RBC Charge = Book/adjusted carrying value of investment * 0.5

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16
Q

(Indirectly Owned) Affiliate Investment in Alien Insurance Affiliates RBC chage

A

RBC Charge = Book/adjusted carrying value of investment * 0.5

But adjusted to reflect the insurer’s ownership of the holding company

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17
Q

Where are Risks from Off-balance Sheet & other Items shown

A

R0

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18
Q

What are the 4 categories of Off-balance sheet items that are included in the R0 charge

A
  • Non-Controlled Assets
  • Contingent Liabilities
  • Guarantees for the benefit of affiliates
  • Deferred tax assets
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19
Q

Examples of Non-Controlled Asset

A
  • Collateral loaned to others from securities lending programs
  • Assets that are reported on the company’s balance sheet, but for which it does not have exclusive control
  • Assets sold that are subject to put option
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20
Q

Examples of Contingent Liabilites

A

Amounts for which the insurer may be liable, but for which the amount is uncertain, and are not entered in the balance sheet.

example is if insurer purchases an annuity from a life insurer to satisfy obligations under a structured settlement, it will still be held responsible if the life insurer is unable to pay.

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21
Q

Examples of Guarantees for the benefit of affiliates

A

A guarantee to pay an outstanding load of an affiliate

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22
Q

Deferred Tax asset, where to find

A

DTA is taken from the Notes to the Financial Statements

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23
Q

What RBC charge factor is applied to Off-balance sheet risks

A

1%

  • If securities lending programs meet certain risk mitigating rules: 0.2%
  • For DTA if insurer either filed its own separate Federal tax return, or was included in a consolidated Federal tax return of a parent which is an insurance company: 0.5%
24
Q

What does R1 cover generally

A

RBC charge for asset risk associated with Fixed income investments

25
Q

What Risks does the R1 charge reflect

A
  • Bonds
  • Off-balance sheet collateral
  • Other long term assets (mortgage loans, low income housing tax credits, working capital finance investments)
  • Miscellaneous Assets (Cash, cash equivalents, other short term investments, collateral loans)
  • Replication (synthetic asset) transactions and mandatory convertible securities
26
Q

What are the two adjustments (additional charges) made to reflect the amount of diversification in R1

A
  • Bond Size Factors
  • Asset Concentration Factors
27
Q

Bonds RBC Charge formula

A

RBC Factor = Factor * book/adjusted carrying value of bonds

28
Q

NAIC Bond Class Factors

A

Class 1 - Highest Credit quality - U.S Govt. Guaranteed by U.S Govt

  • 0.0

U.S Govt not guaranteed by U.S govt.

  • 0.003

All other Class 1

  • 0.003

Class 2 - High Credit Quality

  • 0.01

Class 3 - Med credit quality

  • 0.02

Class 4 - Low credit quality

  • 0.045

Class 5 - Lowest credit quality

  • 0.1

Class 6 - In or near default

  • 0.3
29
Q

Class 1 - Highest Credit quality - U.S Govt. Guaranteed by U.S Govt
(Bond Factor for RBC Charge)

30
Q

U.S Govt not guaranteed by U.S govt.
(Bond Factor for RBC Charge)

31
Q

All other Class 1
(Bond Factor for RBC Charge)

32
Q

Class 2 - High Credit Quality
(Bond Factor for RBC Charge)

33
Q

Class 3 - Med credit quality
(Bond Factor for RBC Charge)

34
Q

Class 4 - Low credit quality
(Bond Factor for RBC Charge)

35
Q

Class 5 - Lowest credit quality
(Bond Factor for RBC Charge)

36
Q

Class 6 - In or near default
(Bond Factor for RBC Charge)

37
Q

What type of bonds are included in the bond size adjustment calculation?

A
  • Unaffiliated Bonds in classes 2-6
  • Non U.S government bonds in Class 1
38
Q

Weights for bond size adjustment charge

A
  • First 50 issuers, 250%
  • Next 50 issuers, 130%
  • Issuers between 101 & 400, 100%
  • Above 400, 90%

Factor = Weighted Issuers / Issuers -1

39
Q

Factor for bond size adjustment charge

A

Factor = Weighted Issuers / Issuers -1

40
Q

How many issuers would be needed to generate a bond size adjustment charge of 0?

A

1,300 issuers. Any more will make the factor become a credit

41
Q

What are the 3 ways collateral can be recorded for the Off-balance sheet collateral & Schedule DL and which generate an R1 charge?

A
  • Investment schedules that correspond to the collateral
  • Schedule DL, Part 1
  • Off-Balance sheet

Only the last 2 generate R1 charge

42
Q

Other Long Term Assets: Mortgage Loans
RBC charge for which R

A

RBC Charge = 0.05 * book/ adjusted carrying value of loans
R1

43
Q

Other Long Term Assets: Working Capital Finance Investments
RBC Charge for which R

A

RBC Charge = Factor * value of Working capital finance investments
R1
Factor
- Assets with rating NAIC Designation 1: 0.0038
- Assets with rating NAIC Designation 1: 0.0125

44
Q

What are the 5 categories of LIHTC

A
  • Federal guaranteed
  • Federal Non-guaranteed
  • State guaranteed
  • State non-guaranteed
  • All other
45
Q

LIHTC (Low income housing Tax Credit)
RBC charge, for which R?

A

RBC R1 Charge = Factor * book/adjusted carrying value

46
Q

Federal Guaranteed factor for RBC charge
What qualifies

A

.0014

LIHTC needs to have a guarantee from one of NAIC’s acceptable organizations

47
Q

Federal Non guaranteed factor for RBC charge
What qualifies

A

0.026

  • leverage ratio under 50% and
  • Tax guaranteed from a general partner/ managing member that requires this party to reimburse investors for any shortfalls in tax credits due to compliance errors
48
Q

State guaranteed factor for RBC charge
What qualifies

A

0.0014

meet federal requirements for guaranteed or non-guaranteed LIHTC investments

49
Q

State non-guaranteed factor for RBC charge
What qualifies

A

0.026

meet federal requirements for guaranteed or non-guaranteed LIHTC investments

50
Q

All other factor for RBC charge
What qualifies

A

0.15

All other LIHTC investments

51
Q

Miscellaneous Assets RBC charge

A

RBC Charge = Factor * book/ adjusted carrying value of assets

Note: The book/ adjusted carrying value of assets must be in excess of amounts considered elsewhere in the RBC formula

52
Q

Miscellaneous Assets factor for RBC charge

A

Cash, net cash equivalents, other short-term investments: 0.003
- Recognizes the risk of insolvency at bank where cash is held

Admitted collateral loans: 0.05

53
Q

Replication (Synthetic Asset) Transactions (RSATs) definition

A

transactions consisting of derivatives and cash instruments (usually a bond) that are made in combination with other investments to replicate the investment characteristics of a certain type of investment

54
Q

RBC charge for RSATs and what R risk is attributed to

A

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

  • Annual Statement value is taken from schedule DB
  • Reduce for the amount that has already been applied to the cash instrument.
  • Charge generated is distributed evenly to both R1 and R2, based on assumption that half of securities are debt and half are equity
55
Q

Mandatorily Convertible Securities definition

A

Securities (usually bonds) which automatically convert to common stock on or before a contractual conversion date

56
Q

Mandatorily Convertible Securities RBC charge
What R risk

A

R1
RBC Charge = max( 0, charge for converted security - charge for original security)

  • Distributed evenly to both R1 and R2 based on assumption that half of securities are debt and half are equity

Exam 6 (31 decks)

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