R3 Asset risk Credit considers the credit risk associated with receivables on

R3 asset risk credit considers the credit risk

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R3 Asset risk - Credit : considers the credit risk associated with receivables on the balance sheet as well as risk associated with reinsurance recoverables . R4 Underwriting risk - Reserves: concerned with past business . Risk that the company’s recorded loss and loss adjustment expense (LAE) reserves will develop adversely , under the assumption that the current reserve balance is adequate. R5 Underwriting risk - Net written premium: considers the risk that one year’s worth of the company’s future business will be unprofitable. This calculation uses the current year’s net written premium as a proxy for the next year’s net written premium. It can’t use the next year’s NWP b/c it’s an unknown quantity. Odomirok - ch19 (pg 149-201) – Risk Based Capital Question: Explain the covariance adjustment Answer: The square root calculation within the RBC formula is commonly referred to as the “covariance adjustment.” Rather than summing up the individual risk charges (R1 through R5), it is assumed that the individual risk charge categories are independent of one another. That is, the formula reflects diversification among these risk categories, thereby assuming that the aggregate risk is less than the sum of risk of the independent components. This is considered to be a reasonable assumption. For example, the risk of default on an insurance company’s invested assets (e.g., bonds, stocks) is independent of the performance of its loss reserves. Taking the square root of the sum of the squares for R1 through R5 increases the dependency of the larger risks in the calculation and decreases the significance of the smaller risk categories in the overall aggregate RBC requirement. R0 is kept outside of the covariance adjustment because the risk for investments in insurance company subsidiaries is believed to be directly correlated with the combination of the risks specific to the reporting entity (i.e., the other risk charges R1 through R5). Therefore, the risk for investments in insurance company subsidiaries is additive to the aggregate of the investment and underwriting risks of the reporting entity for which RBC is being calculated. Stated differently, RBC should not depend on organizational structure of the insurance company; investments in insurance subsidiaries that are subject to RBC do not provide diversification benefit. ?????????????????? Odomirok - ch19 (pg 149-201) – Risk Based Capital Question: How much does R1, Asset Risk, Fixed Income contribute to the overall RBC charge (industry-wide) and why? Answer: It contributes close to 0% because prop/cas insurers tend to invest in relatively safe, high credit quality bonds.
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Page 3 of 11 CAS, C2: Using RBC formulas and IRIS ratios, evaluate an insurer’s financial health. Odomirok - ch19 (pg 149-201) – Risk Based Capital Question: How much does R3, Asset Risk, Credit contribute to the overall RBC charge (industry-wide) and why?
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