RBC Flashcards
(39 cards)
Risk based capital system (RBC)
tool to help provide early warning of potential impending insurer insolvency
RBC formula
calc min level of capital that insurer should hold based on risks to which it is exposed; output feeds RBC ratio = actual capital/required capital
RBC model act for insurers
provides state regulator authority to take action if RBC ratio falls below threshold level
RBC formula applies specific factors to
certain risks to which insurer is exposed and P&C consists or asset risk, UW risk, and covariance adj
Asset Risk
-Risk that assets lose value
R0 Subsidiary insurers: default risk from investments in these companies
-off-balance sheet risk
R1 Fixed income: impact of changing interest rates on valuation and default risk
R2 Equity: change in valuation
R3 Credit
- risk that counterparties such as reinsurers will not pay as expected
- asset charge is smaller portion of total risk charge compared to portion for life industry because P&C invest in short-term, relatively liquid investments
UW Risk
-risk that prem will be insufficient to cover loss and expense and that reserves may develop adversely
R4 Reserve risk: risk that reserves will develop adversely assuming current values are adequate
R5 Net WP risk: risk that following year’s business will be unprofitable
-predominant portion of RBC charge
Covariance Adjustment
-name of formula used to calc RBC need; aggregates each or risk components
RBC = R0+( R1^2+ R2^2+ R3^2+ R4^2+ R5^2)^0.5
-reflects diversification among risks; assumption that they are independent except R0 because assumed directly correlated with aggregate risks of insurer
Excluded risks
business plan & strategy, management, internal controls, systems, reserve adequacy, ability to access capital bc too difficult to quantify
carrying value
value @ which item is recorded on BS
R0 charge depends on
asset class, type of subsidiary, and whether subsidiary is subject to RBC
R0 covers risk from
investments in insurance sub, investments in alien ins company affiliates, off-balance sheet items
-only includes charges for investments in subsidiaries that are subject to RBC requirements
R0 Common stock investment
charge depends on accting method used to record investment in subsidiary
-market value approach = based on market value adj for ownership %
RBC=min(aff RBC, statutory surplus)*ownership%
-equity method = investment based on statutory equity adj for unamortized goodwill and adj for ownership -> carrying value is initially the cost and then adj based on income
RBC=min(aff RBC ownership%, book/adj carrying value of stock)
R0 Preferred stock investment
charge only generated if there is excess RBC RBC (total affiliate RBC after cov adj in excess value of stocks)
RBC = min(pro rata share of excess RBC, book/adj carrying value of preferred stock)
R0 Bond investment
charge only generated if there is excess RBC (in excess of total value of stocks & preferred stocks)
RBC = min(pro rata share of excess RBC, book/adj carrying value of bonds)
R0 Investments in alien insurance affiliates
not subject to RBC requirements
- for directly owned: RBC= book/adj carrying value*0.5
- for indirectly owned: RBC= carrying value*0.5
R0 Off-balance sheet & other
not included in financials but still are assets/potential liab so expose insurer to risk
- Non-controlled assets, contingent liab, guarantees for benefit of affiliates
- 1% charge factor applied to these items
- 0.2% for securities lending programs that conform to certain rules that lower risk
R1 reflects & general approach
reflects interest rate & default risk from fixed income instruments
-factors provided by NAIC are applied to book/adj carrying value of assets with 2 adj to reflect amount of diversification: bond size factor and asset concentration factor
bond charge = factor of asset * book/adj carrying value
R1 = bond charge + bond size charge + asset concentration charge
things that are subject to 0.225 in R0
Holding company: RBC = 0.225*(holding co value – carrying value of indirectly owned ins companies)
Upstream affiliate: RBC = 0.225*carrying value of bonds
Ins subsidiaries not subject to RBC: RBC = 0.225*book/adj carrying value of bonds
Other non-ins subsidiaries: RBC = 0.225*book/adj carrying value of bonds
Investment affiliate
entity that exists only to invest funds of parent, RBC same if insurer owned investments directly
R1 Unaffiliated bonds & bond size factor
RBC = RBC charge*book/adj carrying value of bonds
- RBC charge based on cash flow modeling that used historical default statistics for each class of bond
- bond size factor is also applied: reflects amount of diversification; measured based on # of issuers of bonds
Factor = weighted issuers/issuers -1
- 1st 50 issuers = 250%, next 50 130%, next 300 100%, rest 90%
- if over 1300 issuers, adj = 0
bond size charge = factor*bond charge
R1 Mortgage loans
RBC = 0.05*book/adj carrying value of loans
R1 Misc Assets
RBC = factor*book/adj carrying value of assets (excess of amounts considered elsewhere in RBC fomula)
-0.003 for cash & short term and 0.05 for admitted collateral loans
US gov guaranteed bonds have factor
0
Replication transactions
- RSATs are derivative transactions that are made in combo with other investments in order to replicate investment char of certain investment
- derivatives used to hedge/mitigate risk, generate income, and replicate asset that cannot be purchased bc unavail or too $$
RBC = factor of equiv investment*AS value (schedule DB)
-charge is reduced for amnt of charge already been applied to the cash instrument to avoid double counting
