Evolution of RBC System in the USA. Lou Felice. Presentation Agenda. Overview of Current RBC System Milestones and Developments Since the Launch of the RBC System Key Areas and Challenges of Current Reforms Differences between RBC and Solvency II in Terms of Capital Requirements
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Overview of Current RBC System
Milestones and Developments Since the Launch of the RBC System
Key Areas and Challenges of Current Reforms
Differences between RBC and Solvency II in Terms of Capital Requirements
RBC in Context of Group-wide Supervision
RBC Is Part of Regulatory Safety Net
Generic Component Information
Asset Risk – Investments
Asset Risk – Receivables (Credit Risk)
Asset Risk – Other
Reserve Risk = Obligations from Past Business Are Understated (Underestimated Reserves)
Premium Sufficiency Risk = Premiums Are Inadequate to Cover Claims and Expenses for Policies Written (Under-Priced)
Other Types of Risk (Varies by Formula)
Detail in the Formulas was Developed to Focus on the Areas of Most Material Risk for Each Formula
Life – Asset Risks
P&C – Underwriting Risks (Pricing and Reserving)
Life RBC Components:
Property/Casualty RBC Components:
Health RBC Components:
Covariance Calculation (Continued):
Total Adjusted Capital (TAC):
Total Adjusted Capital (Continued):
Authorized Control Level RBC (ACL RBC)
= 50% of Calculation after Covariance
= 200% of ACL RBC
= 150% of ACL RBC
= 70% of ACL RBC
Comparison of Total Adjusted Capital (TAC) to Action Levels:
Section 3 - Company Action Level Event:
Commissioner Response to RBC Plan (60 Days):
Section 4 - Regulatory Action Level Event:
Section 5 - Authorized Control Level Event:
Section 6 - Mandatory Control Level Event:
Section 7 – Hearings (Insurer’s Right to Challenge)
Incorporating Catastrophe Risk Charge
Considering Calibration of Formulas
Assessing Asset Risk Charges
Assessing Underwriting charges (P&C)
How to Incorporate Operational Risk
Role of Scenario Testing (Stress Testing)
Capital Requirement Calculation Differences (cont.)
Capital Requirement Calculation Differences (cont.)
Use of Internal Models
Use of the Capital Requirement
Use of the Capital Requirement in the U.S.
Own Risk & Solvency Assessment (ORSA)
ASSAL – November 2012
Claims, losses, and loss/claim adjustment expenses shall be recognized as expense when a covered or insured event occurs.
A covered or insured event:
SSAP 55: “Management’s Best Estimate”
"Management's best estimate" is the value of the ultimate settlement amount, undiscounted except for some small amounts of fixed and reasonably determinable claim values that can be discounted. It can be viewed that margin exists equal to the difference in the best estimate reserve and a discounted reserve, but there is not to be conservatism in the estimate. Financial reporting in Schedule P via loss development triangles provides a means to test for implicit margins/conservatism in a company's reserves, showing development in accident year incurred values.
Generally, the amount necessary to settle unpaid claims…
Loss Development = Change in Loss Over Time
Are They Adequate or Inadequate?
Same as…Are They Redundant or Deficient?
Salvage: Car value when it’s totaled.
Subrogation: Paid claim but reimbursed by at-fault person.
(Issue Paper No. 65)
Example: Workers compensation
established only AFTER a
catastrophe has occurred
In the Statement of Actuarial Opinion, the Appointed Actuary must address the risk of material adverse deviation. This gives the regulators better knowledge of the possibility for unfavorable reserve development impacting the solvency of a company. What does (or could) impact the management best estimate is the actuary's best estimate and/or range of estimates in the Actuarial Opinion Summary. Significant difference between the actuary's and the management's estimates leads to regulator/management discussion, so management is often significantly influenced by the actuary's best estimate.
Why is it needed?
Quantification of benefits, guarantees, and funding at a level of conservatism for unfavorable events that have a reasonable probability of occurring.
Quantification of significant tail risk.
Assumptions, risk analysis, financial models, and management techniques consistent with company’s overall risk assessment process.
Provide margins for uncertainty such that the greater the uncertainty the larger the margin.
Prescribed formulaic component may be included.
* Exemption criteria apply depending on product. Product may be exempted from SR or both DR & SR.
A non-PBR prospective calculation
Intended to be a floor for the PBR reserve
May ultimately be the basis for the tax reserve
NPR is developed for Term
NPR revisions for Universal Life with secondary guarantees currently in discussion.
NPR is not developed yet for other products and would default to current reserve requirements until developed.
ACLI will work to develop NPR for other products.
Products can be excluded from stochastic reserves if:
The SVL provides an option the Commissioner may consider during legislative adoption to exempt specified products of a domestic company that does business only in that state from the requirements of the Valuation Manual.
Any products exempted will apply current reserve requirements in addition to any requirements established by the commissioner by regulation.