RBC Flashcards
RBC Ratio
Total Adjusted Capital / Authorized Control Level
Company Action Level
150% < RBC < 200%
Company must submit action plan within 45 days
Regulatory Action Level
100% < RBC < 150%
Commissioner has the right to issue an order specifying corrective action
Company must submit action plan within 45 days
Authorized Control Level
70% < RBC < 100%
Commissioner authorized to take control of company (not mandatory)
No company action initially
Mandatory Control Level
RBC <= 70%
Commissioner must rehabilitate or liquidate
Action plan
how to raise the needed capital, reduce operations to save money, or reduce risks to lower RBC charges
What is NOT covered by RBC test
business plans & strategy
management
internal controls
systems
reserve adequacy
access to capital
Total Adjusted Capital
Surplus - (non-tabular discount) - (tabular discount on medical reserves)
Trend Test
If 200% < RBC < 300% you need to check:
COR = L&LAE/NEP + Exp/NWP + PHDiv/NEP
If COR > 120% then company still subject to CAL
Authorized Control Level
0.5 * (RBC Required Capital)
Req Cap = [R0 + sqrt(R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + Rcat^2)] + operational risk
Operational Risk
Basic charge is 3% may be adjusted down by sum of offset amounts reported by directed owned life ins. co. subsidiaries that prepare and file the Life RBC calc, adjusted for the percentage of ownership in the subsidiary
Types of risk included/excluded from operational
Includes:
Legal
Personnel
Inadequacy or failure of internal systems
Procedural
External
Excludes reputational risk from strategic decisions
R0
Subsidiary Insurance Companies & Misc other amounts
Common stocks in subsidiaries
Preferred stocks in subsidiaries
Investments in alien insurance co affiliates
Off-balance-sheet items or other items
R0 common stocks
Depends on accounting method:
common stocks (equity) = min[affilitateRBC*own%, value of common stock as recorded by reporting entity]
common stocks (market) = min[affilitateRBC * own%, affiliate surplus* own%]
R0 preferred stocks
preferred stocks = min[(affiliate RBC - total value common)*own%pref, value of pref stock as recorded by reporting entity]
R0 alien insurance affiliate
alien insurance affiliate = 0.5*carrying value of company’s interest in affiliate
R0 off-balance-sheet items
1.0% * value of each item
Non-controlled assets
Guarantees for the benefit of affiliates
Contingent liabilities
Deferred Tax Assets
R1
Fixed Income Risk - default risk/risk of change in interest rates
R1 = basic charge + BSC + ACC
basic charge = sum(asset values) * RBC factor
BSC = (bond size factor) * (total R1 charges for bonds)
ACC = sum(asset values for top 10 issuers) * RBC factor
R1 RBC basic charge items & factors
Fixed Income Assets:
cash & equivalents - 0.003
mortgage bonds - 0.05
gov’t bonds - 0.0
Class 02 unaffil bonds - 0.01
Other long-term assets, off-balance-sheet collateral and Sch DL Part1 Assets
R1 Bond Size Charge (BSC)
Applies to non-gov’t bonds classes 01-06. Exclude gov’t bonds.
(sumproduct(# issuers, weight) / total # issuers) -1
first 50 issuers - weight 2.5
next 50 - weight 1.3
next 300 - weight 1.0
> 400 - weight 0.9
Break-even point for BSC
1300; any company with more than 1300 bonds receives a discount to RBC charge
Asset Concentration Charge (ACC)
Step 1: gather all fixed income & equity investments subject to ACC
Step 2: sort by issuer from highest to lowest
Step 3: truncate, keeping only top 10
- Split out R1 and R2 items and do for each:
Step 4: Sum all; for R1, separate bonds into each class
Step 5: Multiply each sum by the appropriate RBC factor
R1 ACC RBC Factors
(NOTE: same dist for pref stock classes & RBC factors)
class 02 bonds - 0.01
class 03 bonds - 0.02
class 04 bonds - 0.045
class 05 bonds - 0.010
collateral loans - 0.05
mortgage bonds - 0.05
working capital finance investments (NAIC 02)
low income housing tax credits
Assets NOT considered in ACC calc:
class 01 bonds - 0.003 (low risk)
class 06 bonds - 0.3 (already been charged enough)
R2
Equity Risk - changes in market value of equities
R2 = basic charge + ACC
Affiliated investments
Unaffiliated stocks
Real estate
Schedule BA assets
Misc assets, including receivables for securities, aggregate write-ins for invested assets and derivatives
Replication (synthetic asset) transactions and mandatory convertible securities
R2 charge for holding companies
0.225 * [market value of holding co - CV(subs)] * own%
CV(subs) = carrying value of subsidiaries = sum(market value * distribution)
or = 0.225* market value * (1 - total asset distribution % in subsidiaries) * %own
Market value rarely equals book value
R3
Credit Risk - default risk for receivables, reinsurance recoverables
Non-invested assets
Half of Reinsurance Recoverables charge
Health Credit Risk - accounts for 0% of P&C insurer risk
R3 RBC Factors
Non-invested assets: all 0.05 except one:
*Inv Inc due & accrued - 0.01
Amts receivable related to insurance plans - 0.05
Fed income tax recoverable - 0.05
Guarantee funds receivable or on deposit - 0.05
Recoverable (parent/sub/affiliate) - 0.05
Aggregate write-ins for other inv assets - 0.05
Reins recoverables - 0.10
Reinsurance Recoverable Charge
Split evenly between R3 and R4 when:
unpaid loss & LAE component of R4 > (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)
which is almost always
comes from SchF.3 columns 35 and 36:
(35) Credit risk on collateral recoverables
(36) Credit risk on uncollateralized recoverables
R4 general
Reserve Risk - adverse development
Half of reinsurance recoverables
Unpaid loss & lae reserve
Excessive premium growth RBC charge
Health stabilization RBC charge
R4 formula
([[(C+1) x A] -1](net L&LAE reserves) - LSD)LCF + 0.5*(Reinsurance Recoverables) + excess growth charge
C = 50% of Industry RBC + 50% of Industry RBC * (company L+LAE LDF)/(industry L+LAE LDF)
example does this by LOB
A = Adjustment for Investment Income, provided by NAIC
Loss-Sensitive Discount = 30% of %Direct Loss Sensitive + 15% of %Assumed Loss Sensitive
again split out by LOB
Loss Concentration Factor = look at reserve distribution by line (% of total reserves) then 0.3*max concentration + 0.7
Excess Growth Charge = 0.45 * (excess growth) * (net L&LAE reserves)
The LDFs are calculated as the (current reserve for 9 prior AYs)/(initial reserves for those AYs), capped at 400%
A is an adjustment for investment income and A<1.
R5
NWP Risk - premiums from future business won’t cover future losses
[[(C * A) + U - 1] * NWP - LSD] * PCF + growth charge
U = company underwriting expense ratio (done by LOB)
Excess Growth Charge = 0.225 * (excess growth) * NWP
Excess Growth (R4 and R5)
R4: 0.450 * (excess growth) * (net L&LAE reserves)
R5: 0.225 * (excess growth) * NWP
excess growth = average growth over last 3 years - 10%
capped at 40% each year
use GWP for premium growth
Necessary because quick expansion is harder to underwrite and price properly; excessive growth has also historically been associated with insolvency
Rcat
Catastrophe Risk - hurricanes and earthquakes
sqrt[ (total EQ)^2 + (total hurricane)^2 ]
net 1-in-100 year events - factor 1.0
ceded 1-in-100 year events - factor 0.048
Weaknesses of RBC system
doesn’t measure all relevant risks - strategic, reputational, model, regulatory
method is formula-based and relies on industry averages which may not be appropriate for every company
Similarities between RBC and IRIS
Quantitative measures of financial health
Excessive growth penalties
use Financial statement data
Numeric thresholds
Differences between RBC and IRIS
RBC calculates minimum capital required, IRIS doesn’t
RBC has regulatory authority to intervene if ratio too low
IRIS considers adequacy of reserves, RBC does not
