Updating Reserving and Premium RBC ChargesUpdating Reserving and Premium RBC Charges

Tony Phillips, FCAS, MAAA

Vice President

Accident Fund Insurance Company of America

AAA Updated Research on the NAIC

Risk Based Capital (RBC) Formula

Disclaimer

• These results are based on research conducted by a subgroup of the American Academy P/C RBC Committee

• Views expressed today are based on the research, but do not necessarily reflect the views of the Academy, CAS, Accident Fund, or the NAIC who of course makes all decisions about changes to the RBC formula

• Examples used are illustrative, and not a reference to any specific company

Mission of the AAA RBC Committee

• Reserving and Premium RBC factors have not changed in over 10+ years

• Without “reinventing the wheel” reproduce these factors with updated industry information– Limited documentation

– Had to put the pieces of the puzzle together

• Present results to NAIC– Explain shortcomings in the methodology

– Explain the impact of the “underwriting” cycle on the data

History

• From available records, it appears that the RBC charges were last updated in 1993 with the short tail lines updated in 1999

• Methodology used to update the charges derived mainly from– Feldblum’s paper on RBC (NAIC Property/Casualty Insurance Company

Risk-Based Capital Requirements)

– NY Insurance Department

– NAIC

– Still, no one complete documentation exists that takes one from start to finish (data to actual factor selections)

Status of project• Collected data from the NAIC (1992 Annual Statement Data)

– For the reserving charges 10 AY’s and prior years

– For the premium charges only 10 AY’s

• Massaged the data– Some companies reported paid losses but no incurred losses, or had

missing data

• Using the methodology in Feldblum’s paper calculated the premium and reserving RBC charges (as well as the Investment Income Offset)– Applied various filtering criteria

– Simple average used

• Results were then put through a “Reallocation” method that was used last time– Not in Feldblum’s paper

Current Factors (At this point no judgement used)Summary of RBC Charges

NOT FINAL SELCTIONSNew Values Old Values

Line Line LetterReserve

RBCReserve

IIOPremium

RBCPremium

IIO

Reserving RBC charge

Reserving IIO

Premium RBC Charge

Premium IIO

Impact from

Reserving

Impact from

Premium Combined

Impact

(1) H/F A 0.228 0.943 1.007 0.927 0.275 0.928 0.917 0.942 -13.6% 53.3% 32.1%(2) PPA B 0.232 0.926 1.021 0.898 0.254 0.921 1.046 0.924 -9.4% -21.3% -16.8%(3) CA C 0.245 0.914 1.026 0.869 0.287 0.905 1.013 0.9 -16.7% -11.5% -14.3%(4) WC D 0.335 0.824 1.043 0.814 0.273 0.872 1.008 0.836 -9.1% 5.6% -5.1%(5) CMP E 0.392 0.870 0.909 0.871 0.374 0.88 0.917 0.884 1.2% -24.8% -5.0%(6) MM Occurrence F1 0.610 0.842 2.079 0.753 0.709 0.788 1.761 0.719 2.6% 56.2% 16.3%(7) MM CM F2 0.506 0.889 1.325 0.826 0.346 0.829 1.072 0.8 192.2% 189.9% 191.6%(8) SL G 0.356 0.892 0.925 0.877 0.244 0.887 0.917 0.913 102.5% -24.8% 34.6%(9) OL H 0.598 0.868 1.025 0.819 0.520 0.832 1.082 0.808 46.4% -24.8% 33.7%(11) Spec Prop I 0.245 0.954 1.027 0.881 0.160 0.956 1.014 0.949 72.6% -24.8% -16.5%(12) Auto Phys DamageJ 0.231 0.955 0.863 0.950 0.160 0.97 0.853 0.968 40.5% -7.0% -6.8%(10) Fidelity & Surety K 0.317 0.929 0.858 0.912 0.269 0.942 0.875 0.913 14.3% -24.8% -3.5%(13) Other L 0.325 0.830 0.911 0.938 0.160 0.954 0.867 0.952 -6.2% 31.5% 26.3%(15) International M 0.431 0.876 1.433 0.866 0.327 0.864 1.169 0.879 73.6% 72.4% 73.0%(16) Rein Property & FinancialN&P 0.424 0.879 1.601 0.850 0.313 0.864 1.224 0.879 87.8% 83.0% 85.0%(17) Reinsurance LiabO 1.008 0.840 1.449 0.762 0.838 0.733 1.379 0.762 97.8% 16.9% 85.1%(18) Products LiabilityR 0.589 0.844 1.107 0.840 0.532 0.832 1.095 0.808 24.1% 29.5% 24.4%(14) Fin & Mort S 0.214 0.942 1.637 0.913 0.160 0.942 1.400 0.913 54.6% 39.7% 41.3%

Notes: Total Industry 33.4% 0.0% 19.4%1. New Values are based on a "Reallocation" process2. Impacts are ESTIMATED using total LLAE Reserves and Premium from the 2002 AS

Next Steps

• Review the factors and if warranted recommend changes– Do these factors make sense?

– Are the last 10 years indicative of future events?

– Do these factors truly measure the volatility in a line?

– More in-depth review of the data to see if any anomalies are driving some factors

– Understand the “NAIC” political environment• Working with an NAIC subgroup to understand their concerns

Closing Remarks

• The current methodology is simple to understand, but (in our opinion)….– Does it really address risk?

• Simple average vs. 75% confidence level

– Enhanced “Risk Theory” exists today then in the early 1990’s• Could it help in making the final selections?

– This AAA RBC Subgroup believes there are better approaches that should be explored

• Overhaul?

• Adjustments to key assumptions

– Judgement still has an impact on the final results