Transcript RBC (Non Life)

Age
Exp. of Life
20
56.92
40
38.03
50
28.96
60
20.81
70
13.37
80
8.03
85
6.16
OD or TP
Single or Separate Events
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Valuation affects incidence and not quantum
Solvency : Internal, Regulatory
Selection of Products and Re insurance
Pension Products, Reverse Mortgage
Price war ,Persistency
GPM is step towards RBC, assumptions can
be standardise. E.g. Nepal valuation rate no
more than 6%
Long term investment vehicles
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Solvency has always been an Major Area of
Concern, and Financial Institutions always
had different Method to Check on Solvency
The Solvency Margin is the amount of
capital an insurance undertaking is obliged to
hold against unforeseen events
Authorities prescribed various Method for
Solvency over a time Periods.
International Association of Insurance Supervisors
defines Solvency as
“ An insurer may be deemed to be solvent if it is able to
fulfill its contractual obligations under all reasonable
forseeable circumstances”
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Insurance Risk. (Mortality, Expense, Lapse…)
Credit Risk (Re-insurance, Third Party Outsourcing...)
Asset Risk (Fall in Value, Concentration, liquidity…)
Regulatory Risk (Taxation, Change in Reserving …)
New Business Risk (Capital Cost, Sell ….)
Subsidiaries Risk (Action from Other Group Company)
Market Risk (Competition, Change of Market Habit..)
Many More…….
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Risk-Based Capital is a method developed by the NAIC to
measure the minimum amount of capital that an insurance
company needs to support its overall business operations.
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The principle underlying the RBC system is to assign a capital
requirement to each of the main "risks" faced by insurance
companies
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A cumulative capital requirement is then calculated by combining
the capital requirements assigned to each risk.
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Risk-Based Capital is used to set capital requirements
considering the size and degree of risk taken by the insurer
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Estimate the Quantum of Additional Risk , and provide
as % of the Reserves in total
For Life Business it is X% of Gross Reserves plus Y%
of Sum at Risk
For Non Life Business it s Certain % of Premium or %
Claims
IBNR/ER
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Requires robustness of insure to meet liabilities
Identify all risks
Use valuation methodology which covers all
these identified risks
Use best estimate of cost meeting liabilities
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Liabilities are divided in three groups
 High Volatile (Hull, Product liability etc.)
 Medium Volatile (Motor, Cargo etc.
 Low Volatile (Fire, Personal Accident etc)
Charges added according to risk profile
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Assets have different level of admissibility based
on their Security
Defines limit to avoid concentration
Defines
 Fix interest bond offered by Govt. 100%
 Non listed Share 20% to 30%
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Liability = (Claim + Premium) Liabilities
Charge for all identified risk to be added
Excess Growth in business to be justified
Best Estimates Plus Risk Margins to be
considered
UPR = URR + AURR
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IBNR/ER to be calculated and Certified by Actuary
Selection of Method is left to Actuary, who will select appropriate method
depending on Data Availability, Nature of Business and other related
issues
Detailed certificate along with classwise reserve figures required
AURR (URR-UPR) required for each class of business separately
PAD (Provision for Adverse Deviation)
Actuary has to See Composition of Assets, their risk factors , time to
maturity etc.
ALM is Required for the purpose
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NAIC Has developed a Model in early 90s to identify a Risk
Associated with Business and provide a Capital towards each
identified risk.
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USA (General Insurance P&C) has more of a long tailed business ,
Liability Business forms a Larger portfolio in Business mix unlike
Srilankan Market where majority of business is short term
Bonds (R1)
Other Investment/ Equity (R2)
Claims/Credit(R3)
Reserves (R4)
Premium (R5)
Insurance Affiliates/Subsidiaries (R0)
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As the current measurement stands there are four major categories of risk
that must be measured to arrive at an overall risk-based capital amount.
These categories are:
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Asset Risk - a measure of an asset's default of principal or interest
or fluctuation in market value as a result of changes in the market,
Assets are further divided in Bonds and Equities
Credit Risk - a measure of the default risk on amounts that are due
from policyholders, re-insurers or creditors.
Underwriting Risk - a measure of the risk that arises from underestimating the liabilities from business already written or
inadequately pricing current or prospective business. This looks in
to inadequate Premiums and Reserving
Off-Balance Sheet Risk - a measure of risk due to excessive rates of
growth, contingent liabilities or other items not reflected on the
balance sheet.
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 Covariance Adjustment (Square Root Rule)
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Total Risk Based Capital
= R0 + Square Root(R12+R22+R32+R42+R52)
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Five elements: Fixed income (R1), equity(R2),
credit(R3), reserve(R4), premium(R5). Insurance
Affiliates (R0).
Ratio
More than 100%
Between 75% and
100%
Action Level
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Action To be Taken
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Company Action
Level
Company Must Present a Plan for
Capital Endowment
Between 50% and
75%
Regulatory Action
Level
Company Must Comply with
Corrective Measures Prescribed by
Authority
Between 35% and
50%
Authorized Action
Level
Supervisory Authority may take
Control of the Company
Less than 35%
Mandatory Action
Level
Regulator Must Place Company
under Control
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Some of the Risks Such as Liquidity Risk, Fraud
Risk, Operational Risk, Legal Risk are not
considered in Formula.
Some factors like Management Strength is also
not considered.
Some company with Low RBC Ratio may be able
keep their commitment to customer (False
Negative),
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Areas like Assets, Re insurance Risk, Cat identifying
different risk essential
Any adoption of the model should be with proper
adjustments to suit the business environment locally.
More Emphasis should have been made towards
adequate reserving.
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Key Areas – Valuations and Provisions, Identifying
Different Reserving Requirements, Pricing, U/W,
Claim Settlement
Areas of Concern – Persistency Rates, Competition
resulting into Price war
Who Can Help : Experienced Professionals ,
Guidance Notes, Regulators