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Exam 6 > BCAR.Cdn > Flashcards

BCAR.Cdn Flashcards

1
Q

what is the purpose of A.M. Best’s financial strength ratings?

A

to provide an opinion on the financial strength of an insurer and its ability to meet ongoing obligations to policyholders

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2
Q

what is the BCAR formula?

A

BCAR = (AC - NRC) / AC *100
calculated at 4 different VaR levels
NRC = capital needed for financial/economic/market risk
AC = capital available for financial/economic/market risk

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3
Q

how is AC calculated in the BCAR formula?

A
  • start with balance sheet reported capital (surplus)
  • make appropriate adjustments
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4
Q

identify adjustments to balance sheet capital to obtain BCAR available capital?

A

EDO: lura-sd-fig
Equity adj:
- loss reserves
- unearned prems
- reinsurance
- assets
Debt adj:
- surplus notes
- debt service requirements
Other adj:
- future operating costs
- intangibles
- goodwill

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5
Q

why don’t we use unadjusted reported capital as the value for AC?

A

incorporating these adjustments provides for a more economic and consistent view of capital available

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6
Q

identify the risk categories in the BCAR model

A

NRC supports 3 risk categories
fake raspberry cat
FEIC RPB CAR
asset risk:
1. Fixed income securities
2. Equity securities
3. Interest rate risk
4. Credit risk
UW risk:
5. reserve risk
6. premium risk
8. CAT risk
other risk:
7. Business risk

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7
Q

what is the purpose of covariance adjustment in the NRC formula?

A

reflects the assumed statistical independence of 7/8 risk components (it is unlikely for independent risk components to develop simultaneously)

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8
Q

why is business risk excluded from the covariance adjustment?

A

AM Best expects an insurer to maintain capital for business risks without the benefit of diversification

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9
Q

in the BCAR model, what is gross required capital?

A

amount of capital needed to support all risks if they develop simultaneously
= sum of B1 to B8

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10
Q

what is the key idea in calculating the required capital for each risk category?

A

multiply the liability from each risk category by a specific capital factor
capital factor is based on industry risk factors and adjusted for company’s volatility in case loss development

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11
Q

describe how BCAR capital factors for reserve risk are derived

A

derivation of reserve capital factors is:
- based on industry risk factors
- then adjusted for company’s volatility in case of loss development

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12
Q

how are BCAR reported reserves
adjusted?

A

adjusted to an economic basis through 2 modification factors:
- reserve deficiency factor
- discount factor

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13
Q

what is the BCAR diversification credit, and how is it calculated?

A

it reflects the reduction in overall reserve risk within a well diversified portfolio, calcualted using a correlation matrix.

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14
Q

identify considerations other than BCAR score that impact Best’s balance sheet strength assessment (other factors)

A

Q^2 - SALAMI ( BCAR WANTS TO CONSIDER SALAMI)
- Quality of capital & reins
- Stress testing
- Adequacy of reserves
- Liquidity of capital
- Actions of affiliates
- Matching of assets & Liabs
- Internal capital models

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15
Q

identify the 6 steps in Best’s rating process

A

BOB- ECL (BEST BELONGS TO BOB, ECL)
- Bs strength
- Operating performance
- Business profile
- ERM
- Comprehensive adjustment
- Lift and or drag

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16
Q

identify company characteristics that may tend to lower a company’s BCAR score

A
  • aggressive investment portfolio (increase NRC for investment risk categories B123)
  • loans to high risk entities or reinsurance with low-rated reinsurers (increase NRC for credit risk B4)
  • reserve deficiency (increase NRC for reserve risk B5)
  • excess growth or high UW leverage (increase NRC for premium risk B6)
17
Q

why does Best calculate NRC and BCAR at more than 1 level of VaR?

A
  • to gain more insight into the company’s bs strength
  • to assess its ability to withstand tail events
18
Q

what is Best’s sensitivity calculation for?

A

to quantify the extent of the impact of stress scenario could have on capital position after such an event occurs

19
Q

why does Best use a sensitivity analysis to supplement its BCAR calculation?

A

to assess
- capital required to support future business
- impact of a pro-forma transaction (acquisition of a subsidiary)
- projected year end capital position

pro-forma: method of calculating financial results using certain projections or presumptions

20
Q

identify an aspect of the BCAR model that may make it more robust 健全 than MCT

A

BCAR permits qualitative adjustments to final assessment for economic conditions:
- interest rate changes
- stage of UW cycle
- changes in reinsurance arrangements

21
Q

describe 3 similarities between BCAR and MCT

A
  • purpose: assess financial strength and ability to meet policyholder obligations
  • key idea: apply capital factors to liabilities in various risk categories
  • cov adj: to account for the statistical independence between risk categories
22
Q

describe 3 diffs between BCAR and MCT

A
  • formula is diff
    • BCAR max = 100%, no min
    • MCT min = 0, no max
  • robustness is diff: Best is more robust because final assessment includes qualitative economic conditions (like stage of UW cycle)
  • time horizon is diff:
    • BCAR capital must support current and future premium risk
    • MCT focuses more on current year’s risk
23
Q

what is VaR used for in BCAR model?

A

to measure the amount of risk within an organization over a selected time horizon

24
Q

what are VaR applied to?

A

to the risks that are the most material to an insurer

25
Q

what are the three pieces of information that are required to evaluate the item at risk?

A
  • time horizon
  • confidence level
  • probability distribution of possible outcomes
26
Q

what is the drawback to using VaR?

A

VaR only looks at a single value of the probability distribution and provides no information about the other potential values that are beyond that single value

27
Q

how does Best address the issue with VaR?

A

by calculating required capital at different confidence levels using VaR metric

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