Capital Framework for Property Liability Insurers

By Zia Rehman

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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


Rehman, Zia, "Capital Framework for Property Liability Insurers," Variance 10:2, 2016, pp. 258-278.

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Mission Statement

Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.