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
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”
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…….
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. The principle underlying the RBC system is to assign a capital requirement to each of the main "risks" faced by insurance companies A cumulative capital requirement is then calculated by combining the capital requirements assigned to each risk. Risk-Based Capital is used to set capital requirements considering the size and degree of risk taken by the insurer
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
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
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
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%
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
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
NAIC Has developed a Model in early 90s to identify a Risk Associated with Business and provide a Capital towards each identified risk. 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
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: 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 under- estimating 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.
Covariance Adjustment (Square Root Rule) Total Risk Based Capital = R0 + Square Root(R1 2 +R2 2 +R3 2 +R4 2 +R5 2 ) Five elements: Fixed income (R1), equity(R2), credit(R3), reserve(R4), premium(R5). Insurance Affiliates (R0).
RatioAction LevelAction To be Taken More than 100%-- Between 75% and 100% 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
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),
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.
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