Regulatory Capital and Internal Capital Targets [you can thank me later]…
This is not tested, but does a better job putting ORSA [Target], MCT [Supervisory & Minimum] in perspective and provides nice clear definitions of each.
Insurance risk is the risk arising from the potential for claims or payouts to be made to policyholders or beneficiaries.
Market risk arises from potential changes in rates or prices in various markets such as for interest rates, foreign exchange rates, equities, real estate, and other market risk exposures.
Credit risk is the risk of loss arising from a counterparty’s potential inability or unwillingness to fully meet its contractual obligations due to an insurer.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
Consequently, an explicit credit for diversification is permitted between the sum of credit and market risk [and credit risk] requirements, and the insurance risk requirement
adequacy and appropriateness of capital resources used to meet capital requirements, having regard to their ability to meet P&C insurers’ obligations to policyholders and creditors and to absorb losses in periods of stress.
- + Unpaid.Discounted x PF
- + Unearned.Discounted x PF
- + Earthquake Risk (un-insured earthquake)
- + Reinsruance Margin
Earthquake Risk Exposure (E.Risk)
- PML500 = (PML500.West1.5 + PML500.East1.5)1/1.5
- PML420 = MAX(PML420.West + PML500.East)
- PML420 = PML250 x 32% + PML500 x 68%.
- Option: PTIV – Deductible
Financial Resources (Fin.Res)
- + 10% of Capital (Equity)
- + Earthquake Reinsurance
- + Earthquake Premium Reserve (EPR: generally 0)
- + Capital Financing (generally 0)
Earthquake Reserve Component
Risk – Resources:
- ERC = E.Risk – Fin.Res (> 0)
- ER = (EPR + Max(E.Risk – Fin.Res, 0)) * 125%
- Again EPR is generally = 0.
Premium & Claims (X)
- Unearned Premiums Ceded + Outstanding Losses recoverable
Acceptable Collateral (A.Coll)
- + Non-owned deposits
- + Letters of Credit (capped @ 30% of [X])
- – [X]
- – Reinsurance Receivable
Margin Required (must be >0)
- (15% x [X]) – A.Coll
- Note: A.Coll must be > 0
Interest Rate Risk (non risky)
- Margin = Sum of all… [Dollar Value] x [Duration] x [∆y]
- = | Margin.Assets – Margin.Liab | + Margin.Derivatives
Equity Risk (risky)
30% x …
- Common Shared
- Joint Ventures (< 10% owned)
- Futures, Forwards, Swaps
Real estate (less risky)
- 20% x [Rented]
- 10% x [Owner occupied]
Other Exposures & Foreign Exchange
Will typically given by CAS. Students should be aware of adjustments for re-insurance.
- 30% x [I + A]
- I = Insurance Risk
- A = Asset Risk = Credit Risk + Market Risk
If below cap:
8.5% x [I + A] + P
- Premium Margin (P) = 2.5% DWP + 1.75% AWP + 2.5% x CWP + 2.5% ∆P + 0.75% IGP
- ∆P = Gross WP > 20%
- IGP = Max(P.aig, P.cig) = Inter group pooling
- Gross = Assumed (A) + Ceded (C)
- D = Direct , WP = Written Premium
- Memorizing percentages optional (but recommended)
Just memorize it already. Deduct the following from Capital Required to adjust for risk diversification:
A + I – SQRT(A2 + I2 + 2RAI)
Gross Capital Available is defined as Equity less deductions for category B (40%) & category C (7%) surplus.
Total Capital Available is Gross Capital Available less deductions for non-qualifying equity (such as goodwill).