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Capital Models and Their Relationship With Loss Reserving

Capital Models and Their Relationship With Loss Reserving. Joanne Balling, ACAS Director. Standard & Poor’s Capital Adequacy Ratio. Asset-Related Risk Charges (C-1). Credit-Related Risk Charges (C-2). -. -. Total Adjusted Capital. Underwriting Risk (C-3). Reserve Risk (C-4 ).

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Capital Models and Their Relationship With Loss Reserving

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  1. Capital Models and Their Relationship With Loss Reserving Joanne Balling, ACAS Director

  2. Standard & Poor’s Capital Adequacy Ratio Asset-RelatedRisk Charges (C-1) Credit-Related Risk Charges(C-2) - - Total AdjustedCapital UnderwritingRisk(C-3) ReserveRisk(C-4) Other BusinessRisk (C-5) + +

  3. Total Adjusted Capital Statutory Surplus +/- Loss Reserve Deficiency + Time Value Of Money +/- Other Total Adjusted Capital

  4. Total Adjusted Capital ABC Insurance Group Capital Adequacy Model 1996 • Surplus As Regards Policyholders 1,636.5 • Adjustment For Redundancy / Deficiency Of (214.4)Reserves • Discount For Time Value Of Money32.8 • Analyst’s Adjustments (e.g. Surplus Notes) 0.0 Standard & Poor’s Total Adjusted Capital 1,454.9

  5. Total Adjusted Capital ABC Insurance Group Capital Adequacy Model 1996 • Surplus As Regards Policyholders 1,636.5 • Adjustment For Redundancy / Deficiency Of (100.4)Reserves • Discount For Time Value Of Money25.8 • Analyst’s Adjustments (e.g. Surplus Notes) 0.0 Standard & Poor’s Total Adjusted Capital 1,561.9

  6. Asset Risk (C-1) ABC Insurance Group Capital Adequacy Model Required Capital For: Unaffiliated Bonds 64.2 Affiliated Bonds 4.9 Mortgage-Backed Securities 12.7 Interest Rate Risk Unaffiliated Preferred Stock 9.2 Unaffiliated Common Stock 112.8 Affiliated Preferred & Common Stock 92.4 Mortgage Loans 3.0 Real Estate Holdings 4.7 Collateral Loans 0.0 Schedule BA 4.0 Other Invested Assets 4.4 Off-Balance Sheet Items 1.2 Concentration Risk 0.0 Additional Capital Needs For Asset 0.0Risks Not Already Captured Required Capital For Asset Risk 313.4Adjusted By Size Factor

  7. Credit Risk Factors Credit Risk Factors Reinsurance Recoverables RatingAAAAAABBBBB BCCCU, N.R. S, R Factor0.0050.0120.0190.0470.096 0.2380.4970.2500.500

  8. Credit Risk (C-2) ABC Insurance Group Capital Adequacy Model Credit Risk For: Reinsurance Recoverables46.7 Other Non-Invested Assets 10.9 Additional Capital Needs For Credit Risks 2.0 Not Already Captured Total Required Capital For Credit Risk 59.6

  9. Credit Risk (C-2) ABC Insurance Group Capital Adequacy Model Credit Risk For: Reinsurance Recoverables40.7 Other Non-Invested Assets 10.9 Additional Capital Needs For Credit Risks 2.0 Not Already Captured Total Required Capital For Credit Risk 53.6

  10. Underwriting Risk (C-3) ABC Insurance Group Capital Adequacy Model Premium Risk For: Homeowners / Farm Owners / Personal Auto 76.8 Auto Liability 5.0 Combined 2 Year Lines / International 115.6 Commercial Auto Liability 19.7 Commercial Liability 69.1 Commercial Multiple Peril 23.1 Workers’ Compensation 78.4 Reinsurance 0.7 Analyst’s Adjustment For Premium Risks 0.0Not Already Captured Total Required Capital For Underwriting Risk 388.4

  11. Reserve Risk (C-4) ABC Insurance Group Capital Adequacy Model Reserve Risk For: Homeowners / Farm Owners / Personal Auto 62.1 Auto Liability 4.0 Combined 2 Year Lines / International 33.5 Commercial Auto Liability 22.6 Commercial Liability 100.8 Commercial Multiple Peril 35.5 Workers’ Compensation 75.6 Reinsurance 0.9 Analyst’s Adjustment For Reserve Risks 0.0Not Already Captured Total Required Capital For Reserve Risk 335.0

  12. Reserve Risk (C-4) ABC Insurance Group Capital Adequacy Model Reserve Risk For: Homeowners / Farm Owners / Personal Auto 62.1 Auto Liability 4.0 Combined 2 Year Lines / International 33.5 Commercial Auto Liability 22.6 Commercial Liability 80.8 Commercial Multiple Peril 35.5 Workers’ Compensation 70.6 Reinsurance 0.9 Analyst’s Adjustment For Reserve Risks 0.0Not Already Captured Total Required Capital For Reserve Risk 310.0

  13. Other Risk (C-5) ABC Insurance Group Capital Adequacy Model Business Risk & Other LOBs 47.5 Not Already Captured

  14. ABC Insurance Group Capital Adequacy Ratio Risk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit Risk 1,081.9 = 1,454.9 – 313.4 – 59.6 Required Capital = Underwriting Risk + Reserve Risk + Other Risks 770.9 = 388.4 + 335.0 + 47.5 Capital Adequacy Ratio =Risk Adjusted Capital ÷ Required Capital 140% = 1,081.9 ÷ 770.9 Implied Capital Adequacy: “A”

  15. ABC Insurance Group Capital Adequacy Ratio Risk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit Risk 1,194.9 = 1,561.9– 313.4 –53.6 Required Capital = Underwriting Risk + Reserve Risk + Other Risks 745.9 = 388.4 + 310.0 + 47.5 Capital Adequacy Ratio =Risk Adjusted Capital ÷ Required Capital 160% = 1,194.9 ÷ 745.9 Implied Capital Adequacy: “AA”

  16. COMPARISON OF RESULTS

  17. Impact On Ratings • Model Is One Of Many Factors Assessed In Arriving At Opinion Of Capital • Capital Is One Of Many Factors Assessed In Arriving At Financial Strength Rating • Other Key Areas- Management & Corporate Strategy- Business Profile- Operating Performance- Financial Flexibility

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