capital models and their relationship with loss reserving joanne balling, acas director
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Capital Models and Their Relationship Capital Models and Their Relationship With Loss ReservingWith Loss Reserving
Joanne Balling, ACASJoanne Balling, ACASDirectorDirector
Standard & Poor’s Capital Adequacy RatioStandard & Poor’s Capital Adequacy Ratio
UnderwritingUnderwritingRiskRisk(C-3)(C-3)
ReserveReserveRiskRisk(C-4(C-4))
Other BusinessOther BusinessRiskRisk(C-5)(C-5)
Asset-RelatedAsset-RelatedRisk ChargesRisk Charges
(C-1)(C-1)Total AdjustedTotal Adjusted
CapitalCapital
Credit-Credit-Related Risk Related Risk
ChargesCharges(C-2)(C-2)
- -
Total Adjusted CapitalTotal Adjusted Capital
Total Adjusted CapitalTotal Adjusted Capital
Statutory SurplusStatutory Surplus
Loss Reserve DeficiencyLoss Reserve Deficiency+/-Time Value Of Time Value Of
MoneyMoney+
OtherOther+/-
Total Adjusted CapitalTotal Adjusted Capital
Surplus As Regards PolicyholdersSurplus As Regards Policyholders
1,636.51,636.5
Adjustment For Redundancy / Deficiency OfAdjustment For Redundancy / Deficiency Of
(214.4)(214.4)
ReservesReserves
Discount For Time Value Of MoneyDiscount For Time Value Of Money
32.832.8
Analyst’s Adjustments Analyst’s Adjustments (e.g. Surplus Notes)(e.g. Surplus Notes)
0.00.0
19961996
Standard & Poor’s Total Adjusted CapitalStandard & Poor’s Total Adjusted Capital 1,454.91,454.9
ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Total Adjusted CapitalTotal Adjusted Capital
Surplus As Regards PolicyholdersSurplus As Regards Policyholders
1,636.51,636.5
Adjustment For Redundancy / Deficiency OfAdjustment For Redundancy / Deficiency Of
(100.4)(100.4)
ReservesReserves
Discount For Time Value Of MoneyDiscount For Time Value Of Money
25.825.8
Analyst’s Adjustments Analyst’s Adjustments (e.g. Surplus Notes)(e.g. Surplus Notes)
0.00.0
19961996
Standard & Poor’s Total Adjusted CapitalStandard & Poor’s Total Adjusted Capital 1,561.91,561.9
ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Asset Risk (C-1)Asset Risk (C-1)ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Required Capital For:Required Capital For:
Unaffiliated BondsUnaffiliated Bonds 64.264.2
Affiliated BondsAffiliated Bonds 4.94.9
Mortgage-Backed Securities Mortgage-Backed Securities 12.712.7Interest Rate RiskInterest Rate Risk
Unaffiliated Preferred StockUnaffiliated Preferred Stock 9.29.2
Unaffiliated Common StockUnaffiliated Common Stock 112.8112.8
Affiliated Preferred & Common StockAffiliated Preferred & Common Stock 92.492.4
Mortgage LoansMortgage Loans 3.03.0
Real Estate HoldingsReal Estate Holdings4.74.7
Collateral LoansCollateral Loans0.00.0
Schedule BASchedule BA4.04.0
Other Invested AssetsOther Invested Assets4.44.4
Off-Balance Sheet ItemsOff-Balance Sheet Items1.21.2
Concentration RiskConcentration Risk0.00.0
Additional Capital Needs For Asset Additional Capital Needs For Asset 0.00.0
Risks Not Already CapturedRisks Not Already Captured
Required Capital For Asset Risk 313.4Required Capital For Asset Risk 313.4Adjusted By Size FactorAdjusted By Size Factor
Credit Risk FactorsCredit Risk FactorsReinsurance RecoverablesReinsurance Recoverables
RatingRating
AAAAAA
AAAA
AA
BBBBBB
BB BB
BB
CCCCCC
U, N.R. U, N.R.
S, RS, R
FactorFactor
0.0050.005
0.0120.012
0.0190.019
0.0470.047
0.096 0.096
0.2380.238
0.4970.497
0.2500.250
0.5000.500
Credit Risk FactorsCredit Risk Factors
Credit Risk (C-2)Credit Risk (C-2)ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Total Required Capital For Credit Risk 59.6Total Required Capital For Credit Risk 59.6
Credit Risk For:Credit Risk For:
Reinsurance RecoverablesReinsurance Recoverables 46.746.7
Other Non-Invested AssetsOther Non-Invested Assets 10.910.9
Additional Capital Needs For Credit RisksAdditional Capital Needs For Credit Risks 2.0 2.0 Not Already CapturedNot Already Captured
Credit Risk (C-2)Credit Risk (C-2)ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Total Required Capital For Credit Risk 53.6Total Required Capital For Credit Risk 53.6
Credit Risk For:Credit Risk For:
Reinsurance RecoverablesReinsurance Recoverables 40.740.7
Other Non-Invested AssetsOther Non-Invested Assets 10.910.9
Additional Capital Needs For Credit RisksAdditional Capital Needs For Credit Risks 2.0 2.0 Not Already CapturedNot Already Captured
Underwriting Risk (C-3)Underwriting Risk (C-3)ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Premium Risk For:Premium Risk For:
Homeowners / Farm Owners / Personal AutoHomeowners / Farm Owners / Personal Auto 76.876.8
Auto LiabilityAuto Liability 5.05.0
Combined 2 Year Lines / InternationalCombined 2 Year Lines / International 115.6115.6
Commercial Auto LiabilityCommercial Auto Liability 19.719.7
Commercial LiabilityCommercial Liability 69.169.1
Commercial Multiple PerilCommercial Multiple Peril 23.123.1
Workers’ CompensationWorkers’ Compensation 78.478.4
ReinsuranceReinsurance 0.70.7
Analyst’s Adjustment For Premium RisksAnalyst’s Adjustment For Premium Risks 0.00.0Not Already CapturedNot Already Captured
Total Required Capital For Underwriting Risk 388.4Total Required Capital For Underwriting Risk 388.4
Reserve Risk (C-4)Reserve Risk (C-4)ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Reserve Risk For:Reserve Risk For:
Homeowners / Farm Owners / Personal Auto Homeowners / Farm Owners / Personal Auto 62.162.1
Auto LiabilityAuto Liability 4.04.0
Combined 2 Year Lines / InternationalCombined 2 Year Lines / International 33.533.5
Commercial Auto LiabilityCommercial Auto Liability 22.622.6
Commercial LiabilityCommercial Liability 100.8100.8
Commercial Multiple PerilCommercial Multiple Peril 35.535.5
Workers’ CompensationWorkers’ Compensation 75.675.6
ReinsuranceReinsurance 0.90.9
Analyst’s Adjustment For Reserve RisksAnalyst’s Adjustment For Reserve Risks 0.00.0Not Already CapturedNot Already Captured
Total Required Capital For Reserve Risk 335.0Total Required Capital For Reserve Risk 335.0
Reserve Risk (C-4)Reserve Risk (C-4)ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Reserve Risk For:Reserve Risk For:
Homeowners / Farm Owners / Personal Auto Homeowners / Farm Owners / Personal Auto 62.162.1
Auto LiabilityAuto Liability 4.04.0
Combined 2 Year Lines / InternationalCombined 2 Year Lines / International 33.533.5
Commercial Auto LiabilityCommercial Auto Liability 22.622.6
Commercial LiabilityCommercial Liability 80.880.8
Commercial Multiple PerilCommercial Multiple Peril 35.535.5
Workers’ CompensationWorkers’ Compensation 70.670.6
ReinsuranceReinsurance 0.90.9
Analyst’s Adjustment For Reserve RisksAnalyst’s Adjustment For Reserve Risks 0.00.0Not Already CapturedNot Already Captured
Total Required Capital For Reserve Risk 310.0Total Required Capital For Reserve Risk 310.0
Other Risk (C-5)Other Risk (C-5)ABC Insurance Group Capital Adequacy ModelABC Insurance Group Capital Adequacy Model
Business Risk & Other LOBs 47.5 Business Risk & Other LOBs 47.5 Not Already CapturedNot Already CapturedBusiness Risk & Other LOBs 47.5 Business Risk & Other LOBs 47.5 Not Already CapturedNot Already Captured
ABC Insurance GroupABC Insurance GroupCapital Adequacy RatioCapital Adequacy Ratio
Capital Adequacy Ratio =Capital Adequacy Ratio = Risk Adjusted Capital ÷ Required CapitalRisk Adjusted Capital ÷ Required Capital140%140% = 1,081.9 ÷ 770.9 = 1,081.9 ÷ 770.9
Required Capital = Underwriting Risk + Reserve Risk + Other RisksRequired Capital = Underwriting Risk + Reserve Risk + Other Risks770.9 = 388.4 + 335.0 + 47.5770.9 = 388.4 + 335.0 + 47.5
Risk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit RiskRisk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit Risk1,081.9 = 1,454.9 – 313.4 – 59.61,081.9 = 1,454.9 – 313.4 – 59.6
Implied Capital Adequacy: “A”Implied Capital Adequacy: “A”
ABC Insurance GroupABC Insurance GroupCapital Adequacy RatioCapital Adequacy Ratio
Capital Adequacy Ratio =Capital Adequacy Ratio = Risk Adjusted Capital ÷ Required CapitalRisk Adjusted Capital ÷ Required Capital160%160% = 1,194.9 ÷ 745.9 = 1,194.9 ÷ 745.9
Required Capital = Underwriting Risk + Reserve Risk + Other RisksRequired Capital = Underwriting Risk + Reserve Risk + Other Risks745.9745.9 = 388.4 + = 388.4 + 310.0310.0 + 47.5 + 47.5
Risk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit RiskRisk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit Risk1,194.9 1,194.9 = = 1,561.91,561.9 – 313.4 –– 313.4 – 53.653.6
Implied Capital Adequacy: “AA”Implied Capital Adequacy: “AA”
COMPARISON OF RESULTSCOMPARISON OF RESULTS
AMOUNT OF DEFICIENCY (in millions)
$214.4 $100.4 NONETotal AdjustedCapital
1,454.9 1,561.9 1,654.5
Risk AdjustedCapital
1,081.9 1,194.9 1,294.2
Required Capital 770.9 745.9 677.3
Capital AdequacyRatio
140% 160% 191%
Impact On RatingsImpact On Ratings
Model Is One Of Many Factors Assessed Model Is One Of Many Factors Assessed
In Arriving At Opinion Of CapitalIn Arriving At Opinion Of Capital
Capital Is One Of Many Factors Assessed Capital Is One Of Many Factors Assessed
In Arriving At Financial Strength RatingIn Arriving At Financial Strength Rating
Other Key AreasOther Key Areas
- Management & Corporate Strategy- Management & Corporate Strategy
- Business Profile- Business Profile
- Operating Performance- Operating Performance
- Financial Flexibility- Financial Flexibility