Age Exp. of Life

OD or TP Single or Separate Events

 Valuation affects incidence and not quantum  Solvency : Internal, Regulatory  Selection of Products and Re insurance  Pension Products, Reverse Mortgage  Price war,Persistency  GPM is step towards RBC, assumptions can be standardise. E.g. Nepal valuation rate no more than 6%  Long term investment vehicles

 Solvency has always been an Major Area of Concern, and Financial Institutions always had different Method to Check on Solvency  The Solvency Margin is the amount of capital an insurance undertaking is obliged to hold against unforeseen events  Authorities prescribed various Method for Solvency over a time Periods.

 International Association of Insurance Supervisors defines Solvency as “ An insurer may be deemed to be solvent if it is able to fulfill its contractual obligations under all reasonable forseeable circumstances”

 Insurance Risk. (Mortality, Expense, Lapse…)  Credit Risk (Re-insurance, Third Party Outsourcing...)  Asset Risk (Fall in Value, Concentration, liquidity…)  Regulatory Risk (Taxation, Change in Reserving …)  New Business Risk (Capital Cost, Sell ….)  Subsidiaries Risk (Action from Other Group Company)  Market Risk (Competition, Change of Market Habit..)  Many More…….

 Risk-Based Capital is a method developed by the NAIC to measure the minimum amount of capital that an insurance company needs to support its overall business operations.  The principle underlying the RBC system is to assign a capital requirement to each of the main "risks" faced by insurance companies  A cumulative capital requirement is then calculated by combining the capital requirements assigned to each risk.  Risk-Based Capital is used to set capital requirements considering the size and degree of risk taken by the insurer

 Estimate the Quantum of Additional Risk, and provide as % of the Reserves in total  For Life Business it is X% of Gross Reserves plus Y% of Sum at Risk  For Non Life Business it s Certain % of Premium or % Claims  IBNR/ER

 Requires robustness of insure to meet liabilities  Identify all risks  Use valuation methodology which covers all these identified risks  Use best estimate of cost meeting liabilities

 Liabilities are divided in three groups  High Volatile (Hull, Product liability etc.)  Medium Volatile (Motor, Cargo etc.  Low Volatile (Fire, Personal Accident etc)  Charges added according to risk profile

 Assets have different level of admissibility based on their Security  Defines limit to avoid concentration  Defines  Fix interest bond offered by Govt. 100%  Non listed Share 20% to 30%

 Liability = (Claim + Premium) Liabilities  Charge for all identified risk to be added  Excess Growth in business to be justified  Best Estimates Plus Risk Margins to be considered  UPR = URR + AURR

 IBNR/ER to be calculated and Certified by Actuary  Selection of Method is left to Actuary, who will select appropriate method depending on Data Availability, Nature of Business and other related issues  Detailed certificate along with classwise reserve figures required  AURR (URR-UPR) required for each class of business separately  PAD (Provision for Adverse Deviation)  Actuary has to See Composition of Assets, their risk factors, time to maturity etc.  ALM is Required for the purpose

 NAIC Has developed a Model in early 90s to identify a Risk Associated with Business and provide a Capital towards each identified risk.  USA (General Insurance P&C) has more of a long tailed business, Liability Business forms a Larger portfolio in Business mix unlike Srilankan Market where majority of business is short term

 Bonds (R1)  Other Investment/ Equity (R2)  Claims/Credit(R3)  Reserves (R4)  Premium (R5)  Insurance Affiliates/Subsidiaries (R0)

 As the current measurement stands there are four major categories of risk that must be measured to arrive at an overall risk-based capital amount. These categories are:  Asset Risk - a measure of an asset's default of principal or interest or fluctuation in market value as a result of changes in the market, Assets are further divided in Bonds and Equities  Credit Risk - a measure of the default risk on amounts that are due from policyholders, re-insurers or creditors.  Underwriting Risk - a measure of the risk that arises from under- estimating the liabilities from business already written or inadequately pricing current or prospective business. This looks in to inadequate Premiums and Reserving  Off-Balance Sheet Risk - a measure of risk due to excessive rates of growth, contingent liabilities or other items not reflected on the balance sheet.

 Covariance Adjustment (Square Root Rule)  Total Risk Based Capital = R0 + Square Root(R1 2 +R2 2 +R3 2 +R4 2 +R5 2 )  Five elements: Fixed income (R1), equity(R2), credit(R3), reserve(R4), premium(R5). Insurance Affiliates (R0).

RatioAction LevelAction To be Taken More than 100%-- Between 75% and 100% Company Action Level Company Must Present a Plan for Capital Endowment Between 50% and 75% Regulatory Action Level Company Must Comply with Corrective Measures Prescribed by Authority Between 35% and 50% Authorized Action Level Supervisory Authority may take Control of the Company Less than 35% Mandatory Action Level Regulator Must Place Company under Control

 Some of the Risks Such as Liquidity Risk, Fraud Risk, Operational Risk, Legal Risk are not considered in Formula.  Some factors like Management Strength is also not considered.  Some company with Low RBC Ratio may be able keep their commitment to customer (False Negative),

 Areas like Assets, Re insurance Risk, Cat identifying different risk essential  Any adoption of the model should be with proper adjustments to suit the business environment locally.  More Emphasis should have been made towards adequate reserving.

 Key Areas – Valuations and Provisions, Identifying Different Reserving Requirements, Pricing, U/W, Claim Settlement  Areas of Concern – Persistency Rates, Competition resulting into Price war  Who Can Help : Experienced Professionals, Guidance Notes, Regulators