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CASUALTY LOSS RESERVE SEMINAR

CASUALTY LOSS RESERVE SEMINAR. 1998 Meeting. CAPITAL MODELS AND THEIR RELATIONSHIP WITH LOSS RESERVING. Matthew C. Mosher Managing Actuary September 28, 1998. Background Areas of Capital Charges Areas Impacted by Reserves Examples of Various Impacts. DISCUSSION OUTLINE.

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CASUALTY LOSS RESERVE SEMINAR

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  1. CASUALTY LOSS RESERVE SEMINAR 1998 Meeting CAPITAL MODELS AND THEIR RELATIONSHIP WITH LOSS RESERVING Matthew C. Mosher Managing Actuary September 28, 1998

  2. Background • Areas of Capital Charges • Areas Impacted by Reserves • Examples of Various Impacts DISCUSSION OUTLINE

  3. OVERVIEW OF COMPONENTS B1 - Fixed Income B2 - Equity Securities B3 - Interest Rate Capital B4 - Credit Capital B5 - Reserve Capital B6 - NPW Capital B7 - Business Risk Capital

  4. CALCULATION OF NET REQUIRED CAPITAL (NRC) • NRC= B12+B22+B32+(.5xB4)2+(.5xB4+B5)2+B62 + B7 • Similar to RBC Covariance Calculation

  5. CAPITAL ADEQUACY WITHIN BEST'S RATING ANALYSIS • Company BCAR Score = Company Baseline Score Composite Baseline Score • Company Baseline Score = APHS / NRC • APHS = Adjusted Policyholder Surplus • NRC = Net Required Capital

  6. AREAS IMPACTED BY RESERVES • Reserve Charge (B5) • Surplus Adjustment • Credit Charge (B4) • Premium harge (B6)

  7. Carried Reserves • Adjusted for Adequacy • Adjusted to Present Value • Industry Capital Factors based on Risk • Adjusted for Company Size • Adjusted for Company Reserve Stability • Growth Charge RESERVE RISK CHARGE

  8. RESERVE RISK CHARGE CALCULATION • Adjusted ReservesCapital Factor • 1) Reserves 1,955,804 1) Industry Baseline Factor 0.46 • 2) Size Adjustment 0.76 • 2) Deficiency 0.94 3) Company Stability 0.71 • 3) Discount 0.90 • 4) Adjustment 0.84 4) Company Capital Factor 0.25 • 5) Adj Res 1,647,024 • Reserve Risk Charge 404,307 • Growth Charge x 1.00 • Reserve Risk Charge 404,307

  9. NET WRITTEN PREMIUM CHARGE • Industry Capital Factors based on Risk • Adjusted for Company Size • Adjusted for Company’s Premium Adequacy • Growth Charge

  10. Net Written Premium 639,747 • 1) Industry Baseline Factor 0.36 • 2) Size Adjustment 0.82 • 3) Company Premium Adequacy Factor 0.98 • 4) Company Capital Factor 0.29 • Premium Risk Charge 186,151 • Growth Charge 1.00 • Premium Risk Charge 186,151 NET WRITTEN PREMIUM CHARGE CALCULATION

  11. B1 = 21,703 B2 = 65,218 B3 = 16,969 B4 = 56,184 B5 = 404,307 B6 = 186,151 B7 = 647 Gross = 751,180 Net = 477,536 APHS = 800,000 Company Baseline 167.5 = 800,000 477,536 Company BCAR 105.1 = 167.5 159.4 SAMPLE CALCULATION

  12. ADJUSTED RESERVE RISK CHARGE • Adjusted ReservesCapital Factor • 1) Reserves 1,955,804 1) Industry Baseline Factor 0.46 • 2) Size Adjustment 0.76 • 2) Deficiency 1.00 3) Company Stability 0.71 • 3) Discount 0.90 • 4) Adjustment 0.90 4) Company Capital Factor 0.25 • 5) Adj Res 1,760,224 • Reserve Risk Charge 440,056 • Growth Charge x 1.00 • Reserve Risk Charge 440,056

  13. Baseline B1 = 21,703 B2 = 65,218 B3 = 16,969 B4 = 56,184 B5 = 404,307 B6 = 186,151 B7 = 647 Gross = 751,180 Net = 477,536 APHS = 800,000 Adjusted B1 = 21,703 B2 = 65,218 B3 = 16,969 B4 = 56,184 B5 = 440,056 B6 = 186,151 B7 = 647 Gross = 786,928 Net = 510,173 APHS = 686,800 ADJUSTED FOR RESERVE ADEQUACY

  14. Company Baseline 167.5 = 800,000 477,536 Company BCAR 105.1 = 167.5 159.4 Company Adjusted 134.6 = 686,800 510,173 Company BCAR 84.4 = 134.6 159.4 ADJUSTED FOR RESERVE ADEQUACY

  15. Net Written Premium 639,747 • 1) Industry Baseline Factor 0.36 • 2) Size Adjustment 0.82 • 3) Company Premium Adequacy Factor0.89 • 4) Company Capital Factor 0.26 • Premium Risk Charge 166,334 Growth Charge 1.00 • Premium Risk Charge 166,334 ADJUSTED NET WRITTEN PREMIUM CHARGE

  16. Baseline B1 = 21,703 B2 = 65,218 B3 = 16,969 B4 = 56,184 B5 = 404,307 B6 = 186,151 B7 = 647 Gross = 751,180 Net = 477,536 APHS = 800,000 Adjusted B1 = 21,703 B2 = 65,218 B3 = 16,969 B4 = 56,184 B5 = 404,307 B6 = 166,334 B7 = 647 Gross = 731,362 Net = 470,155 APHS = 800,000 ADJUSTED FOR PREMIUM CHARGE

  17. Company Baseline 167.5 = 800,000 477,536 Company BCAR 105.1 = 167.5 159.4 Company Adjusted 170.2 = 800,000 470,155 Company BCAR 106.7 = 170.2 159.4 ADJUSTED FOR PREMIUM CHARGE

  18. Baseline B1 = 21,703 B2 = 65,218 B3 = 16,969 B4 = 56,184 B5 = 404,307 B6 = 186,151 B7 = 647 Gross = 751,180 Net = 477,536 APHS = 800,000 Adjusted B1 = 21,703 B2 = 215,218 B3 = 16,969 B4 = 56,184 B5 = 404,307 B6 = 186,151 B7 = 647 Gross = 901,362 Net = 519,769 APHS = 800,000 ADJUSTED FOR EQUITY CHARGE

  19. Company Baseline 167.5 = 800,000 477,536 Company BCAR 105.1 = 167.5 159.4 Company Adjusted 153.9 = 800,000 519,769 Company BCAR 96.6 = 153.9 159.4 ADJUSTED FOR EQUITY CHARGE

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