B1. Odomirok 19 Flashcards Preview

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Flashcards in B1. Odomirok 19 Deck (71):

By when must the RBC report be filed



Which insurers are exempt from the RBC procedure

• Title insurance companies

• Monoline financial guaranty insurance companies

• Monoline mortgage guaranty insurance companies


Reason asset risk charge in the P and C industry is a lot smaller portion of the total risk charge compared to the portion in the life industry.

P and C companies typically invest in short-term, relatively liquid investments because of the relatively short duration of the liabilities.


List some risks that are excluded from the RBC formula

Those associated with the business plans and strategy/ Management/ Internal Controls/ Systems / Reserve adequacy/ Ability to access capital


Reason the square root is used to derive RBC need

Reflects diversification among the risks: RBC makes the assumption that they are independent.


Covariance adjustment (square root rule) formula

RBC = R0 + (R1^2+R2^2+R3^2+R4^2+R5^2)^.5


List some investments that generate a R0 charge

• Investments (stock, preferred stock & bonds) in an insurance subsidiary

• Investments in alien insurance company affiliates

• Off-balance sheet items


Why is R0 excluded from the covariance adjustment?

Risk from the insurance subsidiaries is not assumed to be independent. Instead, it is assumed to be directly correlated with the aggregate risks of the insurer.


Formula for R0 if the market valuation approach is used

Min (RBC, Statutory surplus) × ownership %


2 accounting methods used to record investments in subsidiaries

• Market valuation approach: based on the market value, adjusted for the ownership percentage

• Equity method: based on the statutory equity, adjusted for any unamortized goodwill, and adjusted for the ownership percentage.


R0 charge for Preferred Stock investments in Insurance Subsidiaries

RBC = min (Pro rata share of excess RBC, Book/ adjusted carrying value of preferred stock)

Where the pro rata share is the share of the total outstanding preferred stock that is owned by the insurer. Excess RBC is the total RBC after the covariance adjustment in excess of the value of the stocks


Formula for R0 if the equity approach is used

R0 = min (RBC × ownership %, Book/Adjusted Carrying Value of stock)


RBC charge for an indirectly owned alien insurance affiliate

RBC charge = Carrying value × 0.5


RBC charge for a directly owned alien insurance affiliate

RBC charge = Book/ adjusted carrying value × 0.5


RBC factor applied to off-balance sheet items

1% (except to the securities lending programs, which receive 0.2%).


3 categories of off-balance sheet items included in the R0 charge

1. Non-controlled assets

2. Contingent liabilities

3. Guarantees for the benefit of affiliates


RBC charge for bond investments in a parent company

RBC Charge = 0.225 × carrying value of bonds


RBC Charge for Holding Company

0.225 × (Holding company value - carrying value of the indirectly owned insurance companies)


RBC charge for Investment Affiliates

Same as if the insurer owned the investments directly


RBC Charge for bond investment in insurance subsidiary not subject to RBC

Charge = 0.225 × book/ adjusted carrying value of bonds


Unaffiliated bonds RBC factors

Class 1 - Highest credit quality - US gov guaranteed by US gov=0.000

Class 1 -US gov not guaranteed by US gov=0.003

Class 1 -All other (government)=0.003

Class 2 - High credit quality=0.010

Class 3 - Med credit quality=0.020

Class 4 - Low credit quality=0.045

Class 5 - Lowest credit quality=0.100

Class 6 - In or near default=0.300


RBC charge for bond investment in other non-insurance subsidiaries

RBC Charge = 0.225 × book/ adjusted carrying value of bonds


Procedure to determine bond size adjustment factor

• For the first 50 issuers, the weight is 250%.

• For the next 50 issuers, the weight is 130%.

• For issuers between 101  and 400, the weight is 100%.

• For the issuers above 400, the weight is 90%.

Factor = Weighted Issuers / Issuers 1 If the portfolio has more than 1,300 bonds, the adjustment is 0.


Bond types included in the bond size factor adjustment

Unaffiliated bonds in classes 2 -6

Non US government bonds in class 1


RBC charge for Miscellaneous Assets

RBC Charge = Factor × book/ adjusted carrying value of assets Where, the factor is:

• Cash, net cash equivalents, other short-term investments: 0.003

• Admitted collateral loans: 0.05


RBC charge for Mortgage loans

RBC Charge = 0.05 × book/ adjusted carrying value of loans


RBC charge for Replication (Synthetic) Assets

RBC Charge = Factor of the equivalent investment × Annual Statement value


Describe Replication (Synthetic Asset) transactions

Derivative transactions that are made in combination with other investments in order to replicate the investment characteristics of a certain type of investment


RBC charge for Mandatory Convertible Securities

RBC Charge = Factor of asset pre-conversion × Annual Statement value


Describe Mandatory Convertible Securities:

Securities which are mandatorily convertible at specified prices


RBC Charge for Unaffiliated Common Stock:

0.15 × book/ adjusted carrying value of stock


How is the charge from replication transactions and mandatorily convertible securities allocated

Distributed to both R1 and R2 (50% each)


Preferred Stock RBC factors

Class 1 - Highest credit quality=0.003

Class 2 - High credit quality=0.010

Class 3 - Med credit quality=0.020

Class 4 - Low credit quality=0.045

Class 5 - Lowest credit quality=0.100

Class 6 - In or near default=0.300


RBC Charge for non-government money market funds

0.003 × value


Other long-term invested assets other than collateral loans RBC factor



Real Estate RBC factor



Receivables for securities RBC factor



Aggregate write-ins for invested assets RBC factor



Derivatives RBC factor



2 aspects of credit risk that are included in the RBC charge

1. The counterparty will default (on at least part of the debt)

2. The risk associated with estimating the amounts due


List some examples of non-invested asset that receive a R3 charge:

• Investment income due and accrued

• Amounts receivable relating to uninsured plans

• Federal income tax recoverable

• Guaranty funds receivable or on deposit

• Recoverable from parent, subsidiaries and affiliates

• Aggregate write in for other than invested assets


3 sources of R3 charge

1. Non-invested assets

2. Reinsurance recoverable

3. Health credit risk


RBC Charge for reinsurance recoverables

0.1 × reinsurance recoverable (Where the recoverables have been reduced by the provision for reinsurance)


RBC Charge for non-invested assets

0.05 × net admitted value (Except for investment income due and accrued, which uses 0.01)


Why has the 10% charge for reinsurance recoverables been criticized by insurance carriers

It does not differentiate by the reinsurer strength, or whether the recoverables are collateralized.


List the exceptions to the RBC Charge for reinsurance recoverables

• Cessions to US parents, subsidiaries and affiliates

• State-mandated involuntary pools and associations

• Federal insurance programs


How is the RBC charge for reinsurance recoverables treated in the RBC formula

Split equally between R3 and R4, unless the reserve RBC is less than the sum of credit risk RBC for non-invested assets and reinsurance recoverables, in which case the total is allocated to R3.


Why does the 10% charge for reinsurance recoverables remain in force, despite the heavy criticism

Due to the need to be conservative when reinsurance is involved:

• Uncollectible balances have historically been responsible for several insurance failures

• Reinsurance has been used to overstate surplus


Purpose of the Company RBC %

Provide a surplus cushion against adverse development.


How is the Industry RBC % derived

Calculating the ratio of net incurred loss and DCC development during the year (from Schedule P, Part 2) to the net loss and DCC reserves from the prior year. Uses industry data


How is the Company RBC % derived

Taking the straight average of:

• Industry reserve RBC %

• Industry reserve RBC % adjusted for company experience


Formula for Adjustment for Company Experience

Company Avg Development / Industry Avg Development


Formula for the company development factor by line

Company development factor = (Sum of incurred loss and; DCC from 9 prior AY s evaluated as of the current year)/ (Sum of initial valuations of the same AY s) Where the losses are pulled from Schedule P, Part 2 (Col 10 and the values along the diagonal). The factor is capped at 400%.


Loss sensitive discount factor

30% for direct business, and 15% for assumed


Equation for Loss concentration factor

0.3 × (Net loss and; LAE reserves in largest line) / (Net loss and LAE for all lines) + 0.7


In what situations should the insurer not make the company adjustment

• Either the initial or current loss values are negative for any year

• Current value is 0 for any year

• Sum of initial values is 0 across all years


Why does assumed business have a lower Loss sensitive discount factor

The benefit is often partially offset by the fact that the commissions are loss sensitive as well.


Threshold for an insurer to be defined as having excessive growth

3yr average growth rate in GWP (capped at 40%) exceeding 10%


List 2 reasons that the reserves are subject to a lot more uncertainty if the insurer is growing rapidly:

1. The insurer wont have as much insight into the new business

2. The estimate of unpaid claims is more difficult for a growing company relative to one in a steady state: the average writings of the insurer are going to be skewed towards the end of a policy year. It is difficult to adjust the analysis for this shift, and also quite likely that insurers will neglect to make an adjustment


Excessive premium growth charge formula for reserves

Charge = Average growth rate factor × 0.45 × net losses and LAE reserves


Average growth rate factor formula

Min (Max [Avg growth over 3yrs, 0.1], 0.4)* 0.1


Base NWP RBC formula

RBC = Current yr NWP × (Company RBC loss ratio × Adjustment for investment income + Underwriting expense ratio 1)


What does WP RBC reflect

Risk that future business may be unprofitable


Source of underwriting expense ratio in NWP RBC calculation

Companys actual ratio of other underwriting expenses incurred in the current year to the total net written premium in the current year (capped at 400%).


Excessive premium growth charge formula for NWP

Charge = Average growth rate factor × 0.225 × net losses and LAE reserves


Premium concentration factor formula

0.3 × (NWP in largest line) / (NWP for all lines) + 0.7


Formula for RBC ratio

RBC ratio = Total adjusted capital / ACL Where the ACL = RBC after covariance × 50%


Formula for Total adjusted capital

= Surplus - Non-tabular discount (from Schedule P, Part 1) - Tabular discount on medical reserves


Criteria for the insurer to undergo a trend test

• RBC ratio between 200 and 300%

• Combined ratio >120%


Actions permitted/ required, based on the RBC ratio


Purpose of the trend test

Early warning of companies that may incur RBC ratios below 200%. All companies that meet these criteria need to comply with the requirements of the company action level.