AM Best BCAR

Card Set Information

Author:
ED_6C3
ID:
267001
Filename:
AM Best BCAR
Updated:
2014-03-18 20:46:15
Tags:
6C
Folders:
Rating Agencies
Description:
6C
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  1. BCAR formula
    Adjusted Surplus / Net Required Capital
  2. Components of Adjusted Surplus
    • Reported Surplus
    • Equity Adjustments: UEP, Assets, Loss Reserves, Reinsurance
    • Debt Adjustments: Surplus Notes, Debt Service Requirements
    • Other Adjustments: Potential Cat Losses, Future Operating Losses
  3. Components of Net Required Capital
    • (B1) Fixed-Income Securities (investment risk)
    • (B2) Equity Securities (investment risk)
    • (B3) Interest Rate (investment risk)
    • (B4) Credit (credit risk)
    • (B5) L&LAE-Expense Reserves (UW risk)
    • (B6) Net Written Premium (UW risk)
    • (B7) Off Balance Sheet (business risk)
  4. Covariance adjustment formula
    NRC = √(B12 + B22 + B32 + (0.5*B4)2 + [(0.5*B4) + B5]2 + B62) + B7
  5. Adjustment to model in response to market issues
    • rate changes
    • stage of underwriting cycle
    • changing reinsurance products
    • dependence on reinsurance
  6. Advantages of EPD (target = 1%)
    • allows risk charges to be calibrated to a specific level of insolvency risk
    • produces a consistent assessment of insolvency risk throughout capitalization model
    • takes into consideration the expected cost (severity) of insolvency, not just probability
  7. Elements influencing investment risk (B1/B2)
    • nonaffiliated bonds
    • common / preferred stocks (preferred = bond if willing and able to hold long term)
    • real estate and other investment such as cash, inter company loans
    • investment in P&C insurers, life/health insurers, special purpose subsidiaries, affiliates
    • derivative assets, securities lending reinvested collateral
  8. Elements influencing interest rate risk (B3)
    • level of exposure to short-term cash needs
    • PML for cat used to calculate maximum exposure to interest rate risk
    • adjust fixed-income securities to market each year; only incremental risk is considered
  9. Elements influencing credit risk (B4)
    • affiliated vs nonaffiliated reinsurance
    • reinsurance dependence, including credit enhancements (letter of credit, funds in trust)
    • pools and associations
    • agents’ balances and other receivables
  10. Elements influencing underwriting risk (B5/B6)
    • variance in loss development (within accident years and between companies)
    • reinsurance products (quota share, loss ratio caps, corridors, sub-limits, sliding scale)
    • growth charge (based on highest of 1 year growth and 3 years growth)
    • diversification credit

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