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Old 06-29-2018, 10:54 AM
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Default RBC Score

I asked this in the exam 6 thread but I think it'd be more appropriate here.

I'm currently working on creating an RBC model and I was just wondering which component (R0 - R5), tend to be the biggest contributor to lowering the RBC score? I mean, which component could easily lead to the lower RBC?

Is it R5 (underwriting risk - premium) since companies can write more business easily than, let's say, have more unaffiliated bonds or stocks?



Thanks in advance.
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Old 06-29-2018, 11:12 AM
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Caveat - I'm a Life&Health guy..

Insurance/underwriting risk is inherently riskier than investing in bonds/stocks. I wouldn't necessarily call underwriting risk 'the component that leads to lower RBC'. Underwriting risk is typically the largest contributor to the required RBC amount in Life&Health and Heath companies. It may or may not lower the actual RBC level depending on the profitability of the business.
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Old 06-29-2018, 11:17 AM
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Quote:
Originally Posted by sixt8 berd View Post
Caveat - I'm a Life&Health guy..

Insurance/underwriting risk is inherently riskier than investing in bonds/stocks. I wouldn't necessarily call underwriting risk 'the component that leads to lower RBC'. Underwriting risk is typically the largest contributor to the required RBC amount in Life&Health and Heath companies. It may or may not lower the actual RBC level depending on the profitability of the business.

My question is a bit unclear. Each year when RBC is calculated, what can change more easily relative to other types of risks?

I assume the amount of investments in bonds and equities don't change as much (unless you acquire a business and their investments with it). However, insurers could write a lot of business in a given year if they truly wanted to right?

Also like you said, underwriting risks are probably charged more with higher factors...


Let's say the capital goes up only marginally but there is this other component that went up higher proportionally and leads to a lower RBC score from prior year. If you had to guess based on likelihood, what could this component be?
...or is there no way of guessing since it's really hard to gauge without additional information?

The reason why I'm asking this is, there is a model created by another department in my company and that model is disagreeing with my model and I really think that other model is just silly.
Their model pretty much says NWP increases by 45% and with only 6% increase in TAC, their RBC projection is even higher than prior YE RBC.

I just don't see that happening. The only way this were to happen is if the scores from the other components went down dramatically to a point, it wouldn't make sense in a normal company's balance sheet.
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Old 06-29-2018, 12:11 PM
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Quote:
Originally Posted by ronaldy27 View Post
I asked this in the exam 6 thread but I think it'd be more appropriate here.

I'm currently working on creating an RBC model and I was just wondering which component (R0 - R5), tend to be the biggest contributor to lowering the RBC score? I mean, which component could easily lead to the lower RBC?

Is it R5 (underwriting risk - premium) since companies can write more business easily than, let's say, have more unaffiliated bonds or stocks?



Thanks in advance.
It depends on the company. You may have been told this before.

Quote:
or is there no way of guessing since it's really hard to gauge without additional information?
Yeah, this.
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Old 06-29-2018, 01:29 PM
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Originally Posted by ronaldy27 View Post
Let's say the capital goes up only marginally but there is this other component that went up higher proportionally and leads to a lower RBC score from prior year. If you had to guess based on likelihood, what could this component be?
What do you mean by "lower RBC score"? Are you thinking of ACL, an absolute number, or are you thinking of the ratio of surplus to ACL?

The latter can drop if the surplus drops even if the ACL stays the same.


Quote:
and that model is disagreeing with my model and I really think that other model is just silly.
Their model pretty much says NWP increases by 45% and with only 6% increase in capital, their RBC projection is even higher than prior YE RBC.

I just don't see that happening. The only way this were to happen is if the scores from the other components went down dramatically to a point, it wouldn't make sense in a normal company's balance sheet.
Surplus strain; a 45% increase in NWP could kill your surplus.

(A friend once asked me to go to ACL-fest in Austin. I thought it would be an insolvency party.)
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Old 06-29-2018, 01:36 PM
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I meant "lower RBC score" due to higher ACL and moderate increase in surplus, and I'm asking what could be likely culprit of the much higher ACL?
Let's say no acquisition made.
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Old 06-29-2018, 01:41 PM
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Now you say "surplus" before you said "capital"? Do you understand the difference?
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Old 06-29-2018, 01:44 PM
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Capital plus surplus used to calculate TAC.
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Old 06-29-2018, 01:49 PM
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This is pretty new to me and I'm still learning. Maybe I have 1 month of RBC experience. Feel free to correct me.
I'm asking here because some of this stuff doesn't make sense to me.
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Old 06-29-2018, 01:59 PM
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Don't tell us the factors, but maybe you could list the kind of items in your financial statements that you use to calculate the ACL? Also, do you know what items are in the other employee's model?


Quote:
Originally Posted by ronaldy27 View Post
Let's say no acquisition made.
I'm not sure what you meant by that.
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This. And everything else JMO wrote.
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Depends upon the employer and the situation.
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I feel like ERM is 90% buzzwords, and that the underlying agenda is to make sure at least one of your Corporate Officers is not dumb.
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