Risk-Based Capital (RBC) Underwriting Risk Factor Safety Levels

The underwriting elements in the NAIC Property Casualty RBC Formula (RBC Formula) are not selected to achieve a particular total safety level. We examine the historical variability in underwriting experience and measure the achieved safety level in terms of a Value at Risk (VaR). As explained in this paper, we consider a Policyholder View for measuring safety level as opposed to a Company View. We demonstrate that the line of business (LOB) risk factors for premium and reserves, while calibrated to an 87.5th percentile safety margin with a Company View, produce a safety margin higher than 87.5% on a Policyholder View.

We show that the underwriting risk charge resulting from the combined effects of individual line of business premium and reserve risk charges, the diversification credits, and the dependency between premium and reserve risk in the 2010 RBC Formula produces a 91% safety level.

This analysis does not evaluate the effect on the safety level of other elements of the RBC Formula, i.e., the R0, R1, R2, R3 risks including R3-Reinsurance Credit Risk, the own company adjustment factors, loss sensitive contract discounts, the growth risk charge or the choice of 5% interest rate assumption in the investment income offset. The paper identifies potential biases in observed safety level due to the use of immature data in the analysis.

This is one of several papers being issued by the Risk-Based Capital (RBC) Dependencies and Calibration.

Keywords: Risk-Based Capital, Capital Requirements, Analyzing/Quantifying Risks, Assess/Prioritize Risks, Integrate Risks