AM Best Draft

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  1. Balance sheet strenght
    • in determining a company’s ability to meet its current and ongoing obligations to policyholders, the most important area to evaluate is balance sheet strength
    • it is the foundation for policyholder security
    • performance determines how it will be enhanced, maintained or eroded over time
    • it measures the exposure of a company’s surplus to its operating and financial practices
  2. Underwriting leverage
    • generated from the current premium writings, reinsurance recoverables and loss reserves
    • therefore consider
    •    type of business written
    •    quality and appropriateness of reinsurance program
    •    adequacy of loss reserves
  3. Financial leverage
    • created through debt-like instruments (incl. financial reinsurance)
    • review in conjunction with a company’s underwriting leverage
    • asset leverage measures exposure of surplus to investment, interest rate and credit risks
  4. Overview of BCAR approach
    • adapted specifically to Canadian P&C-1 and P&C-2
    • capital formula takes a risk-based capital approach
    • net required capital supports investment, credit and UW risk
    • formula contains adjustment for covariance
  5. BCAR vs MCT
    • a significant portion of capital is required to support future premium risk
    • this reflects A.M. Best’s view that balance sheet strength must support the risks associated with a company’s current book of business as well as those it plans to insure
  6. Investment risk
    • includes fixed-income securities, equities, interest rate
    • capital charges are applied to different asset classes based on risk of default, illiquidity and market-value declines
    • higher capital charges are ascribed to affiliated investment holdings, real estate, below-investment-grade bond and nonaffiliated, privately traded common and preferred shares because of illiquid nature and/or volatility of the reported value
  7. Credit risk
    • ascribed to recoverables from all registered and unregistered reinsurers, including affiliates
    • required capital may be modified after considering:
    •    any collateral offsets for reinsurance balances
    •    quality of the reinsurers
    •    company’s dependence on its reinsurance program
    • also include charges for premium receivables (agents, brokers, policyholders, instalment)
    • also include funds held by residual market entities (FA / PRR) and other misc receivables
  8. Underwriting risk
    • largest risk category and typically accounts for 2/3 of gross required capital
    • encompasses both loss and loss adjustment expense reserves and NWP
  9. Total capital required
    • investment, credit and underwriting risk generate > 99% of gross required capital
    • latest component reflects off-balance-sheet items
    • gross amount reflects capital required if all risks were to develop at the same time
    • square root rule covariance accounts for statistical independence and reduces by 35-45%
  10. Additional stress testing
    • test for second catastrophic event
    • incorporate natural catastrophes and/or man-made events (e.g. terrorism)
Card Set:
AM Best Draft
2014-04-13 14:09:48
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