RBC (Non Life)

1. 10-Dec-12 Akshay Pandit RBC (Non Life)

2. Mortality

3. Identification of Claim Single or Separate Events OD or TP

4. Some Thoughts • 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

5. Solvency • 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.

6. Solvency as defined by iais • 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”

7. Risk Faced By Insurer • 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…….

8. What is RBC • 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

9. What Are we doing Currently • 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

10. solvency regim • 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

11. 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

12. Assets • 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%

13. Valuation of liabilities • 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

14. IBSL Guidelines • 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

15. RBC Model Developed by NAIC (USA) • 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

16. Risk Factors, Major Categories • Bonds (R1) • Other Investment/ Equity (R2) • Claims/Credit(R3) • Reserves (R4) • Premium (R5) • Insurance Affiliates/Subsidiaries (R0)

17. NAIC Approach for RBC • 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.

18. RBC Formula-NAIC • Covariance Adjustment (Square Root Rule) • Total Risk Based Capital • = R0 + Square Root(R12+R22+R32+R42+R52) • Five elements: Fixed income (R1), equity(R2), credit(R3), reserve(R4), premium(R5). Insurance Affiliates (R0).

19. Control Level

20. Short falls • 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),

21. Lessons • 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.

22. Summing up • 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

23. THANK YOU