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)
R0 Off-balance sheet items
= 1.0% * (value of each off-balance sheet item)
Off-balance sheet items
DANCE
1.0% charge
DANCE
D - DTA
A - guarantee for Affiliates
N - Non-controlled assets
C - Contingent liabilities
E - collateral for sEcurities lEnding programs (0.2%)
R1 RBC Charge
Covers interest rate risk and default risk
* Bonds
* Off-balance sheet collateral and Schedule DL, Part 1, Assets
* Other long-term assets
* Miscellaneous assets
* Replication (synthetic asset) transactions and mandatorily convertible securities
R1 Formula
R1 = Basic charge + BSC + ACC
BSC = Bond size charge
ACC = Asset concentration charge
R1 RBC Factors
Class 1 - US govt guaranteed by US govt = 0.000
US govt not guaranteed by US govt = 0.003
All Other Class 1 = 0.003
Class 2 = 0.010
Class 3 = 0.020
Class 4 = 0.045
Class 5 = 0.100
Class 6 = 0.300
Mortgage loans = 0.05
Cash, net cash equivalents, other short-term investments = 0.003
Admitted collateral loans = 0.05
Bond Size Charge
1st calculate Bond Size Factor:
1st 50 issuers = 2.5
next 50 issuers = 1.3
next 300 issuers = 1.0
above 400 issuers = 0.9
Only Class 01 to 06 unaffiliated bonds (exclude US govt bonds)
1300 issuers is the breakeven
Fixed Income - Asset Concentration Charge
Subject to ACC:
* Unaffiliated bonds in classes 02 through 05
* Collateral loans
* Mortgage loans
Doubles RBC charge for 10 largest issuers
Equity - Asset Concentration Charge
Subject to ACC:
* Unaffiliated preferred stocks and hybrid securities in classes 02 through 05
* Unaffiliated common stock
* Investment in real estate
* Encumbrances on invested real estate
* Schedule BA assets (excluding collateral loans)
* Receivable for securities
* Aggregate write-ins for invested assets
* Derivatives
Doubles RBC charge for 10 largest issuers
R2 RBC Charge
Covers:
* Affiliated investments
* Unaffiliated stocks
* Real estate
* Schedule BA assets
* Miscellaneous assets, including receivables for securities, aggregate write-ins for invested assets and derivatives
* Replication (synthetic asset) transactions and mandatory convertible securities
R2 Formula
R2 = Basic charge + ACC
R2 RBC Charge for Holding Companies
= 0.225 * [market(HC) - CV(subs)] * (ownership %)
CV(subs) = Sum(market(HC) * distribution)
Difference between holding company value and carrying value because carrying value already captured in R0
R2 RBC Factors
Unaffiliated Common Stocks = 0.15
Class 1 Preferred Stock = 0.003
Class 2 Preferred Stock = 0.010
Class 3 Preferred Stock = 0.020
Class 4 Preferred Stock = 0.045
Class 5 Preferred Stock = 0.100
Class 6 Preferred Stock = 0.300
Real Estate = 0.1
Other long-term invested assets other than collateral loans = 0.2
Receivables for securities = 0.025
Aggregate write-ins for invested assets = 0.05
R3 RBC Factors
Non-invested assets = 0.05
Investment income due & accrued = 0.01
Reinsurance recoverables = charge based on credit rating of reinsurer
Reinsurer Designation, Collateralized Recoverables Charge, Uncollateralized Recoverables Charge
Secure 1, 3.6%, 3.6%
Secure 2, 4.1%, 4.1%
Secure 3, 4.8%, 4.8%
Secure 4, 5.0%, 5.3%
Secure 5, 5.0%, 7.1%
Vulnerable 6 or Unrated Unauthorized Reinsurers, 5.0%, 14.0%
Unrated Authorized Reinsurers, 5.0%, 10.0%
Collateralized: Credit Risk = Charge Factor * Total Collateral
Uncollateralized: Credit Risk = Charge Factor * Stressed Net Recoverable Net of Collateral Offsets
When to split RBC for reinsurance recoverable
Split 50/50 between R3 and R4 only if:
Unpaid loss & LAE component of R4 > (RBC charge for non-invested assets) + 0.5 * (RBC charge for reinsurance recoverables)
R4 RBC Factor
(Reserves) * [(C x A) + A - 1]
C: Company RBC% - derived from Industry RBC%
A: adjustment for investment income
R4 LSD
Loss-Sensitive Discount
Subtracted from basic charge
30% x % Direct loss-sensitive + 15% x Assumed loss-sensitive
R4 LCF
Loss Concentration Factor
Multiplicative factor
= 0.3 * Max Reserve + 0.7
R5 RBC Factor
(NWP) * [(C x A) + U - 1]
R5 LSD
Loss-Sensitive Discount
Subtracted from basic charge
30% x % Direct loss-sensitive + 15% x Assumed loss-sensitive
R5 PCF
Premium Concentration Factor
Multiplicative factor
= 0.3 * Max WP + 0.7
R4 Excessive Growth Charge
Excess growth x 0.450 x Net loss & LAE reserves
R5 Excessive Growth Charge
Excess growth x 0.225 x NWP
Excessive Growth Charge Formula
= (Average growth over last 3 years) - 10%
(Average growth over last 3 years) is capped at 40% each year
Set to 0 if growth is less than 10%
Should use GWP
R5 Company L&LAE 10-yr avg
Cap L&LAE for each year at 300%
10 year straight avg
Catastrophe Risk RBC
Net catastrophe risk factor = 1.00 (apply to net 1-in-100 year event)
Contingent credit risk = 0.048 (apply to ceded 1-in-100 year event to account for credit risk related to reinsurance recoverables)
Rcat = SQRT[(Total earthquake risk)^2 + (Total hurricane risk)^2)]
Losses ceded to US affiliates and mandatory pools are NOT subject to 0.048 credit risk charge
