RBC

Question 1

RBC formula - Risk parameter development for H(2)

Answer 1

-To develop risk parameters for underwriting risk, the work group developed a stochastic ‘ruin theory’ model
-This model was used to determine the level of capital needed to give a 95% probability that an insurance company would not become insolvent over the next 5-yr time horizon.
-The key factors that impacted risk for a given scenario included:
–risk of catastrophic claims and other statistical fluctuations in claim levels
–risk of misestimation trends and pricing erros
–length of time needed to recognize a pricing error, implement an adjustment, and have the adjustment become effective

Question 2

Health RBC components

Answer 2

H(0) = asset risk - affiliates -> risk that stock of affiliated company loses value
H(1) = asset risk - other -> risk that stock of other assets lose value or default
H(2) = underwriting risk -> risk of higher claims or inadequate premium
H(3) = credit risk -> risk that amounts owed are not recovered
H(4) = business risk -> administrative expense risk, excessive growth risk, and general business risks not included elsewhere

Question 3

H(4)

Answer 3

administrative expense risk
-subject to misestimation but degree should be less than claims misestimation -> factors less than those applied to claims
-applies to the annual administrative expenses (~4-7%)

ASC/ASO business risk
-risk of misestimating the amount that it charges the customer for administrative services
-2% applies to annual admin expenses

Guaranty fund assessment risk
-reflect risk that future assessments will be higher than expected
-0.5% factor applied to premiums that are subject to guaranty fund assessments

excessive growth risk
-if an insurer’s underwriting RBC increases from one year to the next by more than the ‘safe harbor’ level = current year UW revenue/prior year UW revenue + 10%
-50% of growth in UW RBC beyond this amount

Question 4

RBC - possible actions <200%

Answer 4

-run-off mode, where no business is sold until the capital position returns to adequate levels
-liquidation of the company
-liquidation of a portion of the company to improve capital position
-use of guaranty funds

-regulator establish a rehabilitation action plan for the company. Company should be required to perform more regular reporting to the regulator. If threshold does not improve, regulator should draw up plans for additional measures (e.g. liquidation)

Question 5

Managed care adj factor categories

Answer 5

Category 0
-Default category
-includes: FFS, discounted FFS, UCR, Relative value scale, stop-loss, capitation with retro payments for previous years

Category 1
-payments based on contractual arrangements, such as: provider fee schedules, per diems or case rates, non-adjustable professional case and global rates
-contractual arrangements protect insurer regarding the level of allowed charges

Category 2
-payments that would qualify under 0 or 1 but also have a withhold or bonus arrangement

Category 3
-capitation arrangements that are fixed for a period of at least 12 months

Category 4
-staff model HMO
‘-highest discount factor to reflect the most alignment between the provider and risk-taking party

Question 6

Differences in insurance risk factors between the Life and Health RBC formulas

Answer 6

General:
-Life: there are more asset class risks
-Health’s biggest component is underwriting risk; life’s biggest component is interest rate and credit risks. This is because the nature of health is much more short term while life is long-term, so they face different risks
-Life insurance risk formula includes a catastrophic risk component
-Health formula doesn’t include reserves for the most part and assumes they are estimated properly
-Life formula groups together some of the risks in the covariance portion of the formula (squares the sum of them)
-Insurance risk is much bigger for health than life and includes management risk adjustment since risk can be reduced