Last Updated 11/11/2021 Show Issue: Regulators are charged with ensuring that insurance companies can fulfill their financial obligations to policyholders. One way they do this is by imposing a risk-based capital (RBC) requirement. The RBC requirement is a statutory minimum level of capital that is based on two factors: 1) an insurance company’s size; and 2) the inherent riskiness of its financial assets and operations. That is, the company must hold capital in proportion to its risk. RBC is intended to be a regulatory standard and not necessarily the full amount of capital that an insurer would need to hold to meet its objectives. The purpose of RBC requirements is to identify weakly capitalized companies, which facilitates regulatory actions to ensure policyholders will receive the benefits promised without relying on a guaranty association or taxpayer funds. In essence, the RBC formula calculations are critical thresholds that enable timely regulatory intervention. RBC requirements are not designed to be used as a stand-alone tool in determining financial solvency. Rather, RBC is one of the tools that gives regulators legal authority to take control of an insurance company. Background: Regulators use RBC requirements to determine the minimum amount of capital required for an insurer to support its operations and write coverage. The RBC standard for life and property/casualty (P/C) companies is based on the Risk-Based Capital (RBC) For Insurers Model Act (#312), which the NAIC adopted in 2012. Likewise, the RBC standard for health insurers is the Risk-Based Capital (RBC) for Health Organizations Model Act (#315), which the NAIC adopted in 2015. The model laws outline methods for measuring this minimum amount of capital. Before the RBC standard was established, regulators generally used fixed capital standards as a primary tool for monitoring the financial solvency of insurance companies. Under fixed capital standards, every insurance company was required to hold the same minimum amount of capital, regardless of its financial condition, size, and risk profile. Fixed minimum capital requirements were largely based on value judgements of the drafters of the statutes, and they varied widely among the states. A large number of insurer insolvencies in the 1980s was the driving force for the NAIC’s RBC standard. A 1992 report by the U.S. General Accounting Office (GAO) details 176 life and health insurer insolvencies from 1975–1990; 80% of these insolvencies occurred after 1982. The multitude of insolvencies made clear the inherent problems with fixed capital standards. One problem was that fixed capital standards did not address the variation in fundamental risks across sectors and companies. Another problem was that they did not address the differences in the size of insurers in determining the appropriate minimum amount of capital. In the early 1990s, the NAIC established a working group to look at the feasibility of developing a statutory RBC requirement for insurers. In 1992, the NAIC adopted a life RBC formula, which was implemented in 1993. There are now separate RBC models for each of the primary insurance lines of business: 1) life; 2) P/C; and 3) health. Differences in RBC across lines of business reflect differences in the economic environments facing these companies. Although the components in the RBC calculation differ across lines of business, the formulation is roughly the same. The generic RBC formula works by:
RBC requirements in life insurance are based on four categories of risk:
There is also a risk category to account for the default of affiliates and off-balance-sheet items such as derivatives. The RBC calculation considers similar risks for health insurers and P/C insurers. However, interest rate risk does not enter the calculation for these lines of insurance business. Under the RBC system, regulators have the legal authority to take preventive and corrective measures. These measures vary depending on the capital deficiency indicated by the RBC result. Capital sufficiency is the ratio of total adjusted capital to RBC. There are four levels of regulatory intervention.[3] If the ratio is at or above 200%, no regulatory intervention is needed. Below that ratio, interventions range from submission of action plans to a regulatory takeover of the management of the company. If the ratio is below 70%, a regulator is obligated to take over management of the company. These preventive and corrective measures are designed to provide for early regulatory intervention to correct problems before insolvencies become inevitable, thereby minimizing the number and adverse impact of insolvencies. Status: The RBC system is consistently updated to meet the changing regulatory environment. The Capital Adequacy (E) Task Force and its working groups and subgroups manage the RBC calculations. These groups include the:
RBC formulas are reviewed annually. Adopted Modifications to Risk-Based Capital Formulas since 2019 and the Task Force’s working agenda for 2021 are publicly available on the NAIC website. More details on current-year revisions for RBC reporting can be found in the following newsletters, which were published in July 2021:
The Capital Adequacy (E) Task Force’s 2022 proposed charges include several efforts. First, the RBC working groups would evaluate potential refinements to the RBC formulas implemented in 2021. Second, they would consider improvements to RBC blanks. This includes additional reporting formats within existing RBC blanks. Third, they would monitor accounting and reporting changes resulting from the revised Accounting Practices and Procedures Manual (AP&P Manual). The working groups are also charged with reviewing the effectiveness of RBC policies and procedures, as well as comparability between RBC formulas. [1] See Tom Herzog, “The Simple Algebra of the Square Root Formula Behind RBC and Solvency II,” CIPR Newsletter, Volume 1, October, 2011. Solvency II is the European risk aggregation method (or RBC equivalent). [2] These risks include disintermediation and spread compression. Disintermediation typically is associated with rising interest rates and involves the surrender of insurance products with fixed payouts (such as fixed annuities) in favor of higher-yielding assets. Spread compression is associated with lower interest rates. For products with fixed payouts, the insurer could find itself earning lower returns on its assets with no commensurate fall in interest rates on liabilities with fixed payouts. [3] See Martin Eling and Ines Holzmüller, 2008, “An Overview and Comparison of Risk-Based Capital Standards,” Journal of Insurance Regulation, 26(4), 31–60. Which insurance company department accepts the insurance risk?Which insurance company department accepts the insurance risk? * The underwriting Department is responsible for evaluating the acceptability of a risk and, once accepted, determines the actual rate to be charged.
Who evaluates the risk in insurance?Insurers will evaluate historical loss for perils, examine the risk profile of the potential policyholder, and estimate the likelihood of the policyholder to experience risk and to what level. Based on this profile, the insurer will establish a monthly premium.
Who will evaluate risks and determining rates and coverage for a policy?Definition: Risk assessment, also called underwriting, is the methodology used by insurers for evaluating and assessing the risks associated with an insurance policy. The same helps in calculation of the correct premium for an insured.
Which department or division of an insurance company is responsible for the selection?Underwriting Department - Responsible for the selection of risks (persons or property) to insure and rating that determines policy premiums.
|
What department of an insurance company determines which risks are acceptable to the insurer and at what price?
zusammenhängende Posts
Urheberrechte © © 2024 defrojeostern Inc.
