Casualty Actuarial Society

1
Capital Models and Their Relationship With Loss
Reserving
Joanne Balling, ACAS Director
2
Standard Poors Capital Adequacy Ratio
Credit-Related Risk Charges(C-2)

• Asset-RelatedRisk Charges
• (C-1)

-
-
Total AdjustedCapital

UnderwritingRisk(C-3)
ReserveRisk(C-4)
Other BusinessRisk (C-5)


3
Total Adjusted Capital
Statutory Surplus
/-
Loss Reserve Deficiency

Time Value Of Money
/-
Other
Total Adjusted Capital
4
Total Adjusted Capital
ABC Insurance Group Capital Adequacy Model
1996

• Surplus As Regards Policyholders 1,636.5
• Adjustment For Redundancy / Deficiency
  Of (214.4)Reserves
• Discount For Time Value Of Money 32.8
• Analysts Adjustments (e.g. Surplus Notes) 0.0

Standard Poors Total Adjusted Capital
1,454.9
5
Total Adjusted Capital
ABC Insurance Group Capital Adequacy Model
1996

• Surplus As Regards Policyholders 1,636.5
• Adjustment For Redundancy / Deficiency
  Of (100.4)Reserves
• Discount For Time Value Of Money 25.8
• Analysts Adjustments (e.g. Surplus Notes) 0.0

Standard Poors Total Adjusted Capital
1,561.9
6
Asset Risk (C-1)
ABC Insurance Group Capital Adequacy Model

• Required Capital For
• Unaffiliated Bonds 64.2
• Affiliated Bonds 4.9
• Mortgage-Backed Securities 12.7 Interest Rate
  Risk
• Unaffiliated Preferred Stock 9.2
• Unaffiliated Common Stock 112.8
• Affiliated Preferred Common Stock 92.4
• Mortgage Loans 3.0

Real Estate Holdings 4.7 Collateral
Loans 0.0 Schedule BA 4.0 Other Invested
Assets 4.4 Off-Balance Sheet Items 1.2 Concentrati
on Risk 0.0 Additional Capital Needs For Asset
0.0Risks Not Already Captured
Required Capital For Asset Risk 313.4Adjusted
By Size Factor
7
Credit Risk Factors
Credit Risk Factors
Reinsurance Recoverables
RatingAAAAAABBBBB BCCCU, N.R. S, R
Factor0.0050.0120.0190.0470.096
0.2380.4970.2500.500
8
Credit Risk (C-2)
ABC Insurance Group Capital Adequacy Model

• Credit Risk For
• Reinsurance Recoverables 46.7
• Other Non-Invested Assets 10.9
• Additional Capital Needs For Credit Risks 2.0
  Not Already Captured

Total Required Capital For Credit Risk 59.6
9
Credit Risk (C-2)
ABC Insurance Group Capital Adequacy Model

• Credit Risk For
• Reinsurance Recoverables 40.7
• Other Non-Invested Assets 10.9
• Additional Capital Needs For Credit Risks 2.0
  Not Already Captured

Total Required Capital For Credit Risk 53.6
10
Underwriting Risk (C-3)
ABC Insurance Group Capital Adequacy Model

• Premium Risk For
• Homeowners / Farm Owners / Personal Auto 76.8
• Auto Liability 5.0
• Combined 2 Year Lines / International 115.6
• Commercial Auto Liability 19.7
• Commercial Liability 69.1
• Commercial Multiple Peril 23.1
• Workers Compensation 78.4
• Reinsurance 0.7
• Analysts Adjustment For Premium Risks 0.0Not
  Already Captured

Total Required Capital For Underwriting Risk
388.4
11
Reserve Risk (C-4)
ABC Insurance Group Capital Adequacy Model

• Reserve Risk For
• Homeowners / Farm Owners / Personal Auto 62.1
• Auto Liability 4.0
• Combined 2 Year Lines / International 33.5
• Commercial Auto Liability 22.6
• Commercial Liability 100.8
• Commercial Multiple Peril 35.5
• Workers Compensation 75.6
• Reinsurance 0.9
• Analysts Adjustment For Reserve Risks 0.0Not
  Already Captured

Total Required Capital For Reserve Risk 335.0
12
Reserve Risk (C-4)
ABC Insurance Group Capital Adequacy Model

• Reserve Risk For
• Homeowners / Farm Owners / Personal Auto 62.1
• Auto Liability 4.0
• Combined 2 Year Lines / International 33.5
• Commercial Auto Liability 22.6
• Commercial Liability 80.8
• Commercial Multiple Peril 35.5
• Workers Compensation 70.6
• Reinsurance 0.9
• Analysts Adjustment For Reserve Risks 0.0Not
  Already Captured

Total Required Capital For Reserve Risk 310.0
13
Other Risk (C-5)
ABC Insurance Group Capital Adequacy Model
Business Risk Other LOBs
47.5 Not Already Captured
14
ABC Insurance Group
Capital Adequacy Ratio
Risk Adjusted Capital Total Adjusted Capital
Asset Risk Credit Risk 1,081.9 1,454.9
313.4 59.6
Required Capital Underwriting Risk Reserve
Risk Other Risks 770.9 388.4 335.0 47.5
Capital Adequacy Ratio Risk Adjusted Capital
Required Capital 140 1,081.9 770.9
Implied Capital Adequacy A
15
ABC Insurance Group
Capital Adequacy Ratio
Risk Adjusted Capital Total Adjusted Capital
Asset Risk Credit Risk 1,194.9 1,561.9
313.4 53.6
Required Capital Underwriting Risk Reserve
Risk Other Risks 745.9 388.4 310.0 47.5
Capital Adequacy Ratio Risk Adjusted Capital
Required Capital 160 1,194.9 745.9
Implied Capital Adequacy AA
16
COMPARISON OF RESULTS
17
Impact On Ratings

• Model Is One Of Many Factors Assessed In Arriving
  At Opinion Of Capital
• Capital Is One Of Many Factors Assessed In
  Arriving At Financial Strength Rating
• Other Key Areas- Management Corporate
  Strategy- Business Profile- Operating
  Performance- Financial Flexibility