BCAR.Cdn Flashcards
What is the purpose of A.M. Best’s financial strength ratings
To provide an opinion on the financial strength of an insurer (and it’s ability to meet ongoing obligations to policyholders)
What is the BCAR formula?
BCAR = (AC-NRC)/AC x 100
How is AC (Available Capital) calculated in the BCAR formula
- Start with balance sheet reported capital (surplus)
- Make appropriate adjustments
Identify adjustments to balance sheet capital to obtain BCAR Available Capital
EDO: lura-sd-fig
Equity Adjustments:
- Loss reserves
- Unearned premiums
- Reinsurance
- Assets
Debt adjustments:
- Surplus notes
- Debt service requirements
Other adjustments:
- Future operating costs
- Intangibles
- Goodwill
Why don’t we use unadjusted reported capital as the value for AC (Available Capital)
Incorporating these adjustments provides for a more economic and consistent view of capital available
Identify the risk categories in the BCAR model
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 risks:
- (B7) Business Risk
What is the purpose of the covariance adjustment in the NRC formula?
- Reflects the assumed statistical independence of 7 of the 8 risk components (B1-B6 and B8) and shows it’s mostly unlikely that all risks will reach their maximum values at the same time
Why is B7, Business risk, excluded from the covariance adjustment?
A.M. Best expects an insurer to maintain capital for business risks without the benefit of diversification
In the BCAR model, what is “gross required capital”
Gross required capital = direct SUM of required capital for B1 to B8
(represents total required capital if all risks developed simultaneously)
What is the formula for NRC
NRC = (B7) + SQRT [ (B1)^2 + (B2)^2 + (B3)^2 + (0.5 x (B4))^2 + (0.5 x (B4) + (B5))^2 + (B6)^2 + (B8)^2 ]
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 “capital factors” for reserve risk are derived
Derivation of reserve capital factors is:
- Based on industry factors
- Then adjusted for company’s volatility in case loss development
Identify considerations other than BCAR score that impacts Best’s balance sheet strength assessment
Q^2-SALAMI
- ## Q^2: Quality of Capital, Quality of Reinsurance
- Stress testing (how well does the company perform under stress)
- Adequacy of reserves
- Liquidity of capital
- Actions of affiliates (affiliates could drag you down or pull you up)
- Matching of assets & liabilities (this is desirable for paying your bills on time)
- 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 (mainly based on the BCAR scores, but subject also to Q^2-SALAMI)
- Operating performance
- Business profile
-
- Entreprise risk management
- Comprehensive adjustment
- Rating lift and/or drag
Identify company characteristics that may tend to lower a company’s BCAR score (5)
- Aggressive investment portfolio (increases NRC for investment risk categories B1, B2, B3)
- Loans to high-risk entities or reinsurance with low-rated reinsurers (increases NRC for credit risk category B4)
- Reserve deficiency (increases NRC for reserve risk category B5)
- Excessive growth or high U/W leverage (increases NRC for premium risk category B6)
- Concentration of property risks in certain CAT prone area (increases NRC for catastrophe risk category B8)
