1. Components of AM Best financial strength rating
    • Balance sheet strength
    • Operating performance
    • Business profile
  2. Stress tests in BCAR
    • above normal CAT
    • decline in equity market
    • increase in interest rate
  3. AM Best BCAR calculation
    • net required capital:
      • RBC approach incl investment risk, credit risk, UW risk
      • adj for covariance, reflecting interdependence of components
    • BCAR = adj'd suplus / net required capital
  4. BCAR vs. MCT
    MCT: sig capital required to support future premium risk; BCAR: BS must support risks of current and next year's business
  5. BCAR risk categories
    • investment risk:
      • risk from decrease of investments value
      • main categories: fixed-income, equities, interest rate
      • capital charges applied to asset classes based on default risk, illiquidity and MV decline in fixed-income and equities
    • credit risk
      • risk of unable to collect receivables or recoverables from reinsurers, agents, p.h.'s
      • capital charges applied to receivable balances to reflect TP default risk
    • UW risk / insurance risk:
      • required capital is related to MOB, size of surplus, stability of loss dev't, profitability, loss reserve adequacy, length of claim payout
      • high due to high UW leverage, reserve deficiencies, unstable or unprofitable business
      • main cateogies = reserves, WP, asbestos/pollution exposures, CAT risks
      • capital charges applied to loss & LAE reserves and NWP
  6. Scenarios that would lead to an increase in capital charges for investment risk
    • Market volatility -> decrease MV of investment portfolio
    • Increase in interest rate -> decrease MV of fixed-income
    • Concentration of asset classes prone to default
    • Recession that affect value of equities
    • Default risk from bond issuers suddenly increases
  7. BCAT risks captial charges - Considerations on credit risk and UW risk
    • Credit risk may be modified for:
      • collaterial offsets for reinsurance balances
      • quality of reinsurers
      • dependence on reinsuance program
    • UW risk: loss reserve adj'd for
      • estimated reserve deficiency
      • payout pattern
      • discount rate
      • Growth
  8. Square root rule - Purpose, issues
    purpose: adjust for the diversification between risk categories (not likely to develop simultaneously). issues:
    • UW risk accentuated disproportionately
    • other risks diminished in their relative contribution
  9. BCAR vs. DCAT
    • Similarity: test multiple events
    • Difference:
      • different severity threshold/confidence level;
      • BCAR tests second event
Card Set
Understanding BCAR