Risk-Based Capital – Calibration of Investment Income Offset

Abstract: In this paper we describe a method of calibrating the Investment Income Offset element of the RBC Formula. Our key calibration decisions are the following: 1. We select the Present Value Approach rather than the Nominal Value Approach2. We convert the current combination of interest rate safety margins and UW risk safety targets to an equivalent UW risk safety target with no interest rate safety margin. In our calibration, for simplicity, we apply a single interest rate approach to all LOBs. In an actual calibration interest rates might vary by LOB, for example, longer duration interest rates for LOBs with longer payment patterns. This is one of several papers being issued by the Risk-Based Capital (RBC) Dependencies and Calibration Working Party.

Keywords: Risk-Based Capital, Capital Requirements, Analyzing/Quantifying Risk