RBC2 Flashcards
R4 risk and generated from
risk that reserves will develop adversely assuming current values are adequate
- reserve risk charge is calc separately by line using Sched P data for last 10 yrs
- generated from risk associated with reins recoverable, unpaid loss&LAE, excessive prem growth, accident & health claim reserves
Reinsurance RBC for R4
other half of RBC generated in R3 that may need to be allocated to R4
Reserve RBC designed to measure and general calc
designed to measure susceptibility to adverse development
- applying factor (company RBC %) to net loss & LAE reserves gross of non-tabular discount and generated separately for each line from Sched P
- gross of non-tabular discount bc different companies have different methods to determine discount so to ensure consistent treatment
- base RBC is first calc then 2 adjustments made to reflect loss sensitive contracts and loss concentration
Base loss&LAE reserve RBC by line
RBC=[(company RBC%+1)*adj for investment income -1]*(net reserves+other discounts not in reserves)
Company RBC %
provide surplus cushion against adverse development
Comp RBC % = average(industry reserve RBC % and industry adj for company experience)
Industry adj = company avg devel:industry avg devel * industry loss RBC
-adj for company experience is based on company development factor by line = sum of incd from 9 prior AYs eval as of curr yr / sum of initial valuations of same AYs (diagonal values)
*so excludes prior row and newest AY
industry reserve RBC %
based on historical reserve development patterns and is provided by NAIC = net incd loss&DCC development during year/net loss&DCC reserves from prior yr
-been based on worst case approach but revised since often was quite different to expectations; 87.5 percentile was used instead with floor set to produce min charge of 5% and factors capped to 15%
Adj for investment income for R4
provided by NAIC and is based on 5% interest rate and payment patterns using IRS discount method
-discount factor for WC is adj to reflect portion of reserves that already received tabular discount
Adj for loss-sensitive business for R4
business exposes the insurer to less risk than traditional policies so less surplus protection required
RBC = base reserve RBC – loss sensitive discount
Loss sensitive discount = loss sensitive discount factor*% loss sensitive direct loss and expense reserves*base reserve RBC
-factor is 30% for direct and 15% assumed
*retro rated policies are loss sensitive
Adj for loss concentration for R4
reflects level of diversification across lines and is applied to aggregate RBC reserve charge
LCF = 0.3*net reserves in line with highest reserves/total net reserves + 0.7
-LCF reflects adverse devel is not only caused by random fluctuations so devel across lines may not be totally independent
Final net reserve RBC
Final net reserve RBC = total reserve RBC after discount for all lines * 1000 * LCF
Excessive Prem Growth for R4
reserves are subject to lot more uncertainty if insurer is growing rapidly – won’t have as much insight into NB relative to current book, estimate of unpaid claims is more difficult for growing co relative to one in SS bc avg writings are going to be skewed towards end of policy yr
-insurer with excessive growth = 3yr avg growth rate in GWP exceeding 10%
Excessive prem growth charge
Avg growth rate factor = min (max[avg growth, 0.1],0.4)-0.1
Excessive prem growth charge = avg growth rate factor * 0.45 * net reserves
Health RBC for R4
applies to firms that > 5% of total prem in any of last 3yrs
R5 covers
-covers charge for risk associated with net WP, excessive prem growth, health prem, health stabilization
WP RBC
risk that future business may be unprofitable and will require resources from surplus to cover these future losses, based on current year prem with 2 adj to reflect loss sensitive contracts and prem concentration
RBC = curr yr NWP*(comp RBC LR*adj for investment income + comp UW expense ratio-1)
Comp RBC LR = average(industry LR ratio provided by NAIC, industry RBC LC adj for company experience)
Adj for company experience = company avg LR/industry avg LR
-avg is based on 10 AYs and ratios are capped at 300% for each yr
adj for investment income for R5
calc using same assumptions as reserve RBC factor with exception that yrs included at diff bc WP that is being discounted; provided by NAIC
UW expense ratio
company’s actual ratio of other UW expenses incd in the curr yr to total net WP in curr year, capped @ 400%
Company Expense Ratio (All Lines Combined)**
adj for loss-sensitive business & adj for prem concentration
incd in the curr yr to total net WP in curr year, capped @ 400%
- adj for loss-sensitive business: based on portion of WP in loss sensitive contracts in each line
- adj for prem concentration: factor = 0.3*(NWP in largest line/NWP for all lines) + 0.7
- total WP RBC for all lines are calc then adj by prem conc factor
30% for direct and 15% assumed like reserves
Excessive Prem Growth for R5
similar to reserve risk but applied to NWP instead of reserves and factor is 0.225 and 0.45; factor is based on LR of companies with excessive growth relative to industry adj for discount factor of 90%
state’s statutes do impose min capital requirements on insurers but
usually relatively low and don’t account for unique char and risks of insurer
RBC helpful bc reflects
info specific to insurer in its min capital requirements; RBC requirement is not target-level surplus but a min level so can be used to help id insurers in financial trouble
RBC formula produces RBC $ level required which needs to be compared to insurer’s total adj capital
Total adjusted capital = surplus – nontabular discount – tabular discount on medical reserves
RBC ratio = total adj capital/ACL where ACL=RBC after cov *50%
-ACL is authorized control level which is point at which insurance commissioner is authorized to take control over insurer
2 RBC metrics are published in AS
total adj capital and ACL
- depending on ratio, certain actions permitted/required
- 150-200% company action level, 100-150% regulatory, 70-100% authorized, <70% mandatory
company action based on ratio
- company & regulatory action=company submits action plan to commissioner explaining how it will obtain needed capital or reduce risk
- authorized & mandatory= none initially by company
DOI/commissioner action based on ratio
- company = no action required by DOI
- regulatory=right to take corrective action by DOI
- authorized=commissioner authorized to take control
- mandatory=commissioner must rehabilitate or liquidate insurer
Trend Test
looks for companies that satisfy RBC btw 200% & 300% and combined ratio > 120%
- CR=LR + dividend ratio + expense ratio
- designed to be early warning of companies that may incur RBC ratios <200%
if you fail trend test, have to comply with the company action level of RBC model act
Future RBC
NAIC is currently reviewing solvency reg in US and going forward RBC process will be complemented by add assessments that are part of ORSA
why RBC is not fail-safe test of financial impairment
RBC is somewhat arbitrary and was intended to be measure of min capital requirements, does not factor in all risks like CAT and interest rate risk, RBC does not distinguish reinsurers by relative collectability and may not detect sign reinsurer credit risk, does not include risk that reserves are currently adeq which historically sign risk
Hurricane Reinsurance problem with hypothetical hurricane loss
need to calc new NWP = NWP-reins prem
updated reserves = net reserves + retained loss
updated PHS = PHS - rein prem - retained loss
updated reins recoverable
lower R1 due to the use of bonds to pay for reins prem
calc updated R3, R4, R5
why there is an “adjustment for investment income”
In both cases, the RBC formulas are using undiscounted values from the AS. This adds extra margin for adverse conditions, which is reflected in the RBC requirement in order to avoid being too conservative.
Identify the RBC charge for investments in insurance affiliates for a parent insurance company that has an alien insurance subsidiary and explain the reasoning behind the prescribed formula
The insurance charge = 50% of the carrying value of the alien insurance company. This was determined reasonable because the charge for domestic companies is roughly 50% of their carrying value.
Explain the reasoning behind the difference between the charges for domestic and alien subsidiaries
Alien insurance companies are not subject to the same regulatory requests as are domestic. They don’t calculate an RBC charge and determining one would be difficult.
items in R0
Off balance sheet risks
contingent liabilities
subsidiaries and affiliates
items in R1
bonds
cash
items in R2
stock
real estate
items in R3
reinsurance recoverables (50%)
recoverables from parent, sub, or affiliates
non-invested assets
investment income due and accrued
fed income tax recoverable
aggregate write-ins for other than investment assets
