Risk Based Capital (RBC) Flashcards
RBC Ratio
RBC = TAC / ACL
- Total Adjusted Capital / Authorized Control Level Capital
- TAC = Policyholder Surplus – Non-tabular discount – Tab discounts on medical reserves
- ACL = 50% * RBC Capital Required
- RBC Capital Required = R0 + sqrt(R12 + R22 + R32 + R42 + R52 + Rcat2) + R(operational)
- R(operational) = 3% of pre-operational RBC capital required - offsets
RBC Ratio Action Levels
With ranges
CRAM
- Company Action Level (150-200%) / Trend Test
- Regulatory Action Level (100-150%)
- Authorized Control Level (70-100%)
- Mandatory Control level (<70%)
Company Action Level (150%-200%)
Actions by insurance and/or company
- Insurance dept: None
- Company: Submit Action plan within 45 days to meet RBC standards
Regulatory Action Level (100%-150%)
Actions by insurance and/or company
- The regulator has the authority to take corrective actions such as restricting new business
- Company: Submit Action plan within 45 days to meet RBC standards
Authorized Control Level (70%-100%)
Actions by insurance and/or company
- Regulator is authorized to take control of the insurer
Mandatory Control level (<70%)
Actions by insurance and/or company
- Regulator must take over the company and prepare to rehabilitate or liquidate
Trend Test (Company Action Level)
Formula
- Company’s RBC ratio 200-300% and also Combined Operating Ratio (COR) > 120% THEN they are subject to CAL
- COR = Loss & LAE R + ExpenseR + DividendR > 120%
- Loss & LAE = CY net incurred loss & LAE / NEP
- (other U/W expenses + aggregate write-ins for U/W deductions) / NWP
- Policy holder dividends / NEP
Company’s Action Plan for Meeting RBC Standards
Explain how to:
- raise needed capital
- reduce operation to save money
- reduce risks to lower RBC charges
RBC Risk Components and Descriptions
Asset risks:
- Fixed income risk (R1)
- considers changes in interest rates and potential default of fixed income investments.
- Equity Risk (R2)
- considers changes in asset valuations for non-fixed income investments (stocks, real estate)
- Credit Risk (R3)
- credit risk associated with receivables on the balance sheet as well as risk associated with reinsurance recoverables.
U/W risks:
- Reserve Risk (R4)
- risk that the company’s recorded loss and LAE reserves will develop adversely
- NWP Risk (R5)
- (risk that the company’s future business will be unprofitable) or (risk that the premiums will not be able to cover losses)
Other risks:
- Subsidiary Insurance Companies and Misc Other Amounts (R0)
- considers default risk associated with investments in affiliated insurance companies.
- Catastrophe Risk (Rcat)
- Operational Risk (L-PIPE)
- Personnel
- Inadequacy or failure of internal systems
- Procedures or controls
- External events
Reason for Covariance Adjustment
- R1 – R5 are assumed to be independent
- Adjustment reduces the required capital to reflect assumption of independence
- R0 excluded from adjustment because it is correlated with other risk
Total Adjusted Capital (TAC)
Formula
= Policyholder Surplus – Non-tabular discount – Tab discounts on medical reserves
- No tabular no medical
Bright Line Indicator Test
If, then
- If: (The appointed actuary does not address MAD) AND (10% * net L+LAE reserves > TAC – CAL = TAC – 2 * ACL
- Then: the financial analyst should pursue comments from the appointed actuary
Fixed Income Risk (R1), Equity Risk (R2)
General formula
R1 = basic charge + bond size charge (BSC) + asset concentration charge (ACC)
R2 = basic charge + asset concentration charge (ACC)
R1/R2 Basic Charge
Formula, assets
R1 basic charge = sum(asset values subject to basic charge * RBC factor)
- fixed income assets:
- bonds
- cash/cash equals
- mortgage/collateral loan
- off balance collateral
R2 basic charge = sum(asset values subject to basic charge * RBC factor)
- non-fixed income assets:
- affiliated investments
- unaffiliated stocks
- real estate
- schedule BA assets
R1 Bond Size Charge (BSC) / Bond Size Factor (BSF)
Formula, assets, chart
BSC = BSF * sum(assets subject to BSF * RBC factor)
BSF = weighted # of bond issuers / total # of bond issuers
(# of bond issuers) * (weight) = weighted # of bond issuers
- (first 50) * (2.5)
- (second 50) * (1.3)
- (next 300) * (1)
- (remaining) * (0.9)
Assets subject to bond size factor:
- Class 01-06 unaffiliated bonds
- NOT US government bonds
R1/R2 Asset Concentration Charge (ACC)
Formula and assets
sum(asset values subject to TOP 10 issuers * RBC factor)
- bonds (class 02-05)
- collateral loans
- mortgage loans
- working capital finance investments – NAIC 02
- low income housing tax credits
sum(asset values subject to TOP 10 issuers * RBC factor)
- unaffiliated preferred (class 02-05) and common stock
- real estate
- schedule BA
- receivable for securities
- aggregate write-ins for invested assets
- derivatives
Credit Risk (R3)
General Formula
R3 = basic charge - ½ * (RBC charge for reinsurance recoverables)
Second part subject to criteria
R3 Basic Charge
Formula, assets
sum(asset values subject to basic charge * RBC factor)
AIRFARe
- Amount receivable (uninsured plans)
- Investment income (due/accured) (RBC factor = 0.01)
- Recoverable (parent/subsidiary/affiliates)
- guaranty Funds receivable (on deposit)
- Aggregate write-ins for NON-invested assets
- Reinsurance recoverables (RBC factor = 0.1)
- E for Exam 6!
R3/R4 Split
criteria
R4 (unpaid loss & LAE) > (RBC charge for non-invested assets) + ½ * (RBC charge for reinsurance recoverables)
Reserve Risk (R4), NWP Risk (R5)
General formula
R4 = (Base RBC - LSD) * LCF + (excessive growth charge) + ½ * (RBC charge for reinsurance recoverables)
R5 = (Base RBC - LSD) * PCF + (excessive growth charge)
LSD = Loss sensitive discount, L/PCF = Loss/premium concentration factor
R4/R5 Base RBC
General formula
R4 Base RBC = (Reserves) * [(company L+LAE RBC%) * (adjustment for investment income) + (adjustment for investment income) - 1]
R5 Base RBC = (NWP) * [(company L+LAE RBC%) * (adjustment for investment income) + (U/W expense ratio) - 1]
R4 Base RBC = [[(C+1) * A] - 1 ] * (reserves)
R4/R5 Company L+LAE RBC%
Formula
Average of:
- industry L+LAE ratio
- industry L+LAE ratio * (company average L+LAE ratio) / (industry average L+LAE ratio)
- (company average L+LAE ratio) = straight average over last 10 years capped at 300% each year
R4/R5 Loss Sensitive Discount (LSD)
Formula
LSD = Base RBC * (0.3 * % direct loss sensitive + 0.15 * % assumed loss sensitive)
R4/R5 Loss/Premium Concentration Factor (LCF, PCF)
Formula
R4 LCF = 0.7 + 0.3 * (max reserve by line) / (total reserve)
R5 PCF = 0.7 + 0.3 * (max NWP by line) / (total NWP)
R4/R5 Excessive Growth Charge
Formula, bounds
R4 = 0.45 * (excess growth) * (reserves)
R5 = 0.225 * (excess growth) * (NWP)
excess growth = (average growth over last 3 years) - 10%
- max growth per year 40%
- excess growth minimum 0
- USE GROSS WP TO CALCULATE GROWTH
Catastrophe Risk (Rcat)
Formulas
Rcat = sqrt[(total EQ risk)^2 + (total hurricane risk)^2]
- total risk = (net 1-in-100 yr loss) + 0.048 * (ceded 1-in-100 yr loss)
