BCAR 2018 Flashcards
What is the purpose of A.M. Best’s financial strength ratings?
To provide an opinion on the financial strength of the insurer (and its ability to meet ongoing obligations to policyholders).
What is the BCAR formula?
BCAR = (AC - NRC) / AC x 100
where
AC = Available Capital
NRC = Net Capital Required
Note that these are calculated at 4 different VaR levels (95th, 99th, 99.5th and 99.6th percentiles).
How is Available Capital (AC) calculated in the BCAR formula?
- Start with the B/S Reported Capital (surplus)
- then, make appropriate adjustments
Identify the adjustments to B/S capital to obtain the BCAR AC (Available Capital).
EDO - > lura, sd, fig
Equity Adjustments: - loss reserves - unearned premium - reinsurance - assets Debt Adjustments: - surplus notes - Debt servicing costs Other Adjustments - future operating costs - intangibles - goodwill
Why isn’t the unadjusted reported capital used as the AC (Available Capital) value in the BCAR calculation?
Because, incorporating these adjustments provides for a more economic and consistent view of capital available.
Identify the risk categories for BCAR. (8)
Asset Risk: - B1: Fixed income securities - B2: Equity securities - B3: Interest rate risk - B4: Credit risk U/W Risk: - B5: Reserve risk - B6: Premium risk - B8: Catastrophe risk Other Risk: - B7: Business risk
What is the purpose of the covariance adjustment in the NRC formula?
- Reflects the statistical independence of 7 of the 8 risks components (B1-B6, B8).
- this independence reduces Gross Required Capital (GRC) because it’s unlikely that these 7 components will be near maximum levels simultaneously
Why is B7 (Business Risk) not included in the covariance adjustment?
A.M. Best expects an insurer to maintain capital for business risk without the benefit of diversification.
In the BCAR model, what is Gross Required Capital (GRC)?
The sum of the required capital for all 8 risk components (B1 - B8).
Represents the total capital required if all risks developed simultaneously.
What is the key idea in calculating the required capital for each risk category?
Multiply the liability from each risk category by a specific capital factor (similar to MCT).
Briefly describe how BCAR’s capital factors are derived.
- based on industry risk factors
- then, adjusted for the company volatility in case loss development
Identify considerations other than BCAR score that impact Best’s balance sheet strength assessment. (8)
Q^2, SALAMI
- Quality of Capital
- Quality of Reinsurance
- Stress Testing
- Adequacy of Reserves
- Liquidity of Capital
- Actions of Affiliates (could be positive or negative)
- Matching of Assets and Liabilities
- Internal Capital Models (does the company have a good procedure for assessing its own capital needs?)
Identify the 6 steps in A.M. Best’s rating process (leading to the final issuer credit rating).
BOB-ECL
- Balance Sheet Strength (based on BCAR score, but affected by Q^2, SALAMI)
- Operating performance
- Business profile
- Enterprise risk management
- Comprehensive adjustment
- Lift and/or Drag
Identify characteristics that may tend to lower a company’s BCAR score.
- aggressive investment portfolio (increases NRC for investment risk categories (B1 - B3))
- loans to poor creditors or reinsurance with low rated reinsurers (increases NRC for credit risk category B4)
- reserve deficiency (increases NRC for reserve risk category B5)
- Rapid growth or high UW leverage (increases NRC for premium risk category B6)
- concentration of properties in an area prone to floods or EQs (increases NRC for catastrophe risk category B8)
Why does A.M. Best calculate NRC and BCAR at more than one level of VaR?
- to gain more insight into the company balance sheet strength
- to assess its ability to withstand tail events
