SoA5, Group23, RBC

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SoA5
Group Life, Chapter 23, pages 497 to 498
JAM5, N-65

What is the context of Risk Based Capital? I know that C1 is asset default risk, C2 is mortality/morbidity risk, C3 is interest rate risk, and C4 is general management risk. Is RBC a regulatory issue and not a statutory issue?

Are Interest Maintenance Reserve (IMR) and Asset Valuation Reserve (AVR) the statutory counterpart of the RBC C3 risk and C1 risk, respectively?

[Actuarybert]

RBC is basically just a minimum surplus requirement. Insurance regulators calculate an RBC ratio, which is equal to (Total adjusted capital & surplus) / (RBC requirement). If the ratio falls below a certain level, then the regulator can take control of the company. Also, rating agencies often use the RBC ratio as a measure of the company's financial strength.

AVR and IMR are liabilities that appear on the balance sheet. The Asset Valuation Reserve is intended to provide a cushion against bond defaults and market value fluctuations (e.g. for common stock). The interest maintenance reserve is intended to spread out capital gains and losses resulting from changes in the level of interest rates.

Example: Let's say that you buy a bond for $1000. One year later, interest rates drop, and the bond is now worth $1050. You decide to sell the bond and realize a capital gain of $50. Rather than recognizing the full $50 as income immediately, the $50 would go into your interest maintenance reserve, and it would be amortized (i.e. released into income) over the bond's remaining term to maturity.

The main difference between RBC and AVR/IMR is that RBC is a surplus requirement, whereas the AVR and IMR are liabilities that appear on the balance sheet.

Hope this helps.