Capital Framework for Property Liability Insurers
By Zia Rehman
Experience shows that U.S. risk-based capital measures do not always signal financial troubles until it is too late. Here we present an alternative, reasonable capital adequacy model that can be easily implemented using data commonly available to company actuaries. The model addresses the three most significant risks common to property and casualty companies—namely, pricing, interest rate, and reserving risk. Both row and column effects are incorporated into the model. Rating agencies, company management, U.S. regulators, and European Solvency II regulators all represent parties who should find this model useful. We suggest revision of charges pertaining to these risks in the risk-based capital formula. The framework also provides loss reserve uncertainty and margins under IASB accounting standards and net capital estimation, which is useful when considering reinsurance program consequences. European Solvency II regulations require a one-year forward distribution of ultimate losses, which is easily obtained. The model is applicable to all lines where triangulation of data is feasible, including health and group life insurance.
Keywords: Economic capital, risk capital, risk-based capital (RBC), VaR, CVaR, capital allocation
CitationRehman, Zia, "Capital Framework for Property Liability Insurers," Variance 10:2, 2016, pp. 258-278.
- Actuarial Applications and Methodologies > Capital Management > Capital Allocation
- Actuarial Applications and Methodologies > Regulation and Law > Risk-Based Capital
- Financial and Statistical Methods > Risk Measures > Tail-Value-at-Risk (TVAR)
- Financial and Statistical Methods > Risk Measures > Value-at-Risk (VAR)