RBC Flashcards
RBC Ratio
RBC Ratio = TAC / ACL (sounds like tackle)
TAC = Total Adjusted Capital
ACL = Authorized Control Level Capital
ACL = 50% * RBC Capital Required
RBC Action Levels
Action Level | Range | Insurance Dept Action | Company Action
Company Action Level | 150-200%
* None (initially)
* Submit action plan within 45 days to meet RBC standards
Regulatory Action Level | 100-150%
* Commissioner has right to issue an order specifying correction action (not mandatory)
* Submit action plan within 45 days to meet RBC standards
Authorized Action Level | 70-100%
* Commissioner authorized to take control of company (not mandatory)
* None (initially)
Mandatory Action Level | <= 70%
* Commissioner must rehabilitate or liquidate (mandatory)
* None (initially)
Company Action Plan for meeting RBC standards
- Explain how to raise needed capital
- Explain how to reduce operations to save money
- Explain how to reduce risks to lower RBC charges
Bright Line Indicator Test
If:
1. the AA does NOT address material adverse deviation
2. 10% x (Net L&LAE reserves) > TAC - CAL
Then:
The financial analyst should pursue comments from the AA
Risks not covered by RBC
BM-AIRS
* Business plans & strategy
* Management
* Ability to access capital
* Internal controls
* Reserve adequacy
* Systems
RBC Trend Test
If a company’s RBC Ratio is in the 200-300% range and also has a COR > 120% THEN they are subject to the CAL Action
COR is sum of (LED, excl. investment income):
* Loss & LAE Ratio: (CY net incurred loss & LAE) / NEP
* Expense Ratio: [(Other UW expenses) + (aggregate write-ins for underwriting deductions)] / NWP
* Dividend Ratio: (policyholder dividends) / NEP
RBC Risk Categories
FEC RON’S CAT
FEC = Fixed income, Equity, Credit (R1, R2, R3)
R = Reserve risk (R4)
O = Operational risk
N = NWP (R5)
S = Subsidiary/Misc (R0)
Cat = Catastrophe (Rcat)
RBC Capital Required Formula
RBC = R0 + SQRT(R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + Rcat^2) + Operational risk
Operational risk is simply 3% on top
Operational Risk
L-PIPE - It was Alice with the lead pipe in the break room
L - Legal risk
P - Personnel risk (in case you hired a dumb-ass intern)
I - Inadequacy or failure of internal systems
P - Procedural risk (and/or risk of failure of internal controls)
E - External risk (due to external events)
Does NOT include reputation risk
Operational risk charge is reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership (but not to produce a charge that is less than zero).
Covariance Adjustment
The part of the RBC formula with the square root
Risks R1 through Rcat are assumed to be independent
RO is not independent of the other risks
RBC Ranking of Risk Charges
R2 Equity
R4 Reserves
R5 NWP
Rcat
R3 Credit
R1 Fixed Income
Total Adjusted Capital
TAC = PHS - (Non-tabular discount) - (Tabular discounts on medical reserves)
R0
Subsidiary Insurance Companies and Miscellaneous Other Amounts
* Common stocks in the subsidiary
* Preferred stocks in the subsidiary
* Investments in alien insurance company affiliates
* Off-balance sheet or other items
Subsidiary and affiliated insurance companies are only considered within R0 if they are US domiciled entities subject to RBC, or if they are alien insurers (foreign to US)
R0 Common Stock Valuation
Using equity method = min[affiliate RBC * (ownership% of common stock), value of common stock as recorded by reporting entity]
Using market method = min[affiliate RBC * (ownership% of common stock), (statutory surplus of affiliate) * (ownership% of common stock)]
R0 Preferred Stock
= min[(affiliate RBC - total value of common stock) * (ownership% of preferred stock), value of preferred stock as recorded by reporting entity]
Charge can’t be less than 0.
Excess RBC = affiliate RBC - total value of common stock
R0 Alien Insurance Affiliate
= 0.5 * (carrying value of company’s interest in affiliate)