RBC Flashcards
What is the formula for the RBC ratio
RBC ratio = TAC / ACL
where
TAC = Total Adjusted Capital
ACL = Authorized Control Level Capital
what company actions are required for an RBC ratio in the 100-200% range
- must submit action plan within 45 days to meet RBC standards
- must explain how to do 1 or more of these:
- increase capital
- reduce operations
- reduce risk
- send to commissioner of domiciliary state
what company actions are required for an RBC ratio in the 0-100% range
- no company action is initially required
- in this range, regulators have authority
what is the regulator action for an RBC ratio in the 70-100% range
- the regulator/commissioner is authorized to take control of the company (not mandatory)
what is the regulator action for an RBC ratio in the 0-70% range
- the regulator/commissioner must rehabilitate or liquidate company (mandatory)
identify regulatory consequences if an insurer’s RBC ratio falls from 85% to 50%
action falls from ACL to MCL
(Authorized Control Level to Mandatory Control Level)
- regulator must take control of the insurer
- regulator must rehabilitate or liquidate insurer
what minimum RBC ratio guarantees no required action regardless of anything else
300%
what is the ‘trend test’ regarding RBC ratios
If
- a company’s RBC ratio is in the 200-300% range
- and COR > 120%
then they are subject to the CAL action from the action table
what is the formula for the ‘Combined Operating Ratio’ or COR
COR = L + E + D where L = company Loss & LAE ratio E = company expense ratio D = policyholder dividend ratio
how many components of risk are there in the RBC framework
8 (R0 thru R5, Rcat, operational risk)
what are the 3 categories of ‘asset risk’ in the RBC framework
Fixed income risk (R1), Equity risk R2, Credit risk R3
what are the 2 categories of ‘U/W risk’ in the RBC framework
reserve risk R4, NWP risk R5 (where NWP = Net Written Premium)
what is the formula for the RBC capital required
RBC capital required = R0 + [ R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + Rcat^2]½ + (operational risk)
what is the covariance adjustment in the RBC formula
it is the part of the RBC formula with the square root
what is the reason for the covariance adjustment
- recognizes that R1 - R5 and Rcat are independent risks
- it is unlikely they would reach their maximum at the same time
- this covariance adjustment recognizes this by reducing the total RBC capital required
why is R0 excluded from the covariance adjustment
- R0 is not independent of the other 5 risks (it is correlated with them)
- investment in an affiliate does not provide a diversification benefit