Upload
others
View
9
Download
0
Embed Size (px)
Citation preview
Ensuring Capital Adequacy for Captives
Scot Sterenberg, Dawne Davenport & Rodney George
March 11, 2014 3:45pm
Capital Adequacy for Captives
• Why Is This Important?
• General Considerations
• Understanding Key Areas Of Risk
• Capital Adequacy Metrics
• Capital Adequacy Benchmarks
• Case Study
• Questions?
Why is this important?
“Expect the best, plan for the worst” unknown
• Adequacy of capital most important measure of an insurance company
• Insurance is promise to pay
• Ability to pay matters
• Proper exercise of fiduciary responsibilities of directors & officers
• Cost of capital
General Consideration to Ensuring Capital Adequacy
• Consider multiple views and perspectives
• Seek independent advice
• Appropriately document
• Robust infrastructure sufficiently flexible to accommodate changing tests
• Regularly maintain and update and assess independently
Capital Adequacy Audience
– Regulators
• Policyholder
• Liquidation
– Management
• Owner
• Going concern
– Insureds/Investors
– Rating agency
Understanding Key Areas of Risk Four Primary Areas of Risk
Reserve Risk
Underwriting Risk
Asset Risk
General Operational Risk
Other Areas of Risk
Reinsurance Risk
Management Risk
External Risks
Understanding Key Areas of Risk
• Subjective
• Varies by entity
– “Comprehensive stress testing programs should consider the institution’s most material and significant risks”-OSFI
• Varies by insurance type (life, health, PC)
• Consistent across frameworks
– Terminology and categorization differ
Primary Causes of P/C Impairments
Deficient Loss
Reserves, 37%
Rapid Growth, 17%
Alleged Fraud, 9%
Overstated Assets,
8%
Significant Change,
5%
Reinsurance
Failure, 4%
Catastrophe
Losses, 7%
Impairment of an
Affiliate, 4%
Miscellaneous,
10%
Source: AM Best
Composition of Gross Required Capital
Loss & LAE
Reserves,
33%
Premiums
Written, 31%
Investments,
29%
Credit, 7%
Source: AM Best
Capital Adequacy Metrics
• Impact of stress test needs to be measurable
• Satisfy obligations?
– Yes/No
– X% probability
– By margin of Y%
• Meet minimum capital requirements?
– Regulatory
– Rating agencies
– Economic
Capital Adequacy Benchmarks Overview
• Accounting Ratios
• Regulatory Minimums
• Risk-Based Capital Ratios
• Probabilistic
Capital Adequacy Benchmarks Accounting Ratios
• Premium to Surplus
– P:S = NWP / PHS
– Casualty industry rule of thumb~2:1
– Not to exceed 3 or 4:1
• Reserves to Surplus
– R:S = (UPR + Loss & LAE Reserves) / PHS
– Not to exceed 4:1
Capital Adequacy Benchmarks NWP:PHS By Industry
Capital Adequacy Benchmarks Risk-Based Capital Ratios
• “RBC represents an amount of capital based on an assessment of risks that a company should hold to protect customers against adverse developments”-NAIC
• NAIC-RBC
• AM Best-BCAR
• Fitch-PrismScore
• Moody’s-MRAC
• S&P-CAR
Capital Adequacy Benchmarks NAIC-RBC
Action Levels
– RBC ratio Action
– ≥200% No Action
– 150%200% Company Action Level
– 100%150% Regulatory Action Level
– 70%100% Authorized Control Level
– <70% Mandatory Control Level
Capital Adequacy Benchmarks
P/C Industry Results – Action level
Table 1 Industry Results By Action Level, 2008–2012
2008
2009
2010
2011
2012
No Action 2,566 2,571 2,545 2,538 2,532 Company Action Level 29 19 13 14 16 Regulatory Action Level 16 10 17 13 14 Authorized Control Level 10 10 5 9 8 Mandatory Control Level 29 29 26 26 31 Total 2650 2639 2606 2600 2601
Percentage at 'No Action' Level
96.8%
97.4%
97.7%
97.6%
97.4%
Capital Adequacy Benchmarks Probabilistic
• Probability of ruin
• VAR - value at risk
• TVAR - tail VAR
• EPD - expected policyholder deficit
Case Study
• The Everett Clinic (The Parent)
• Sentinel Assurance Risk Retention Group (The Captive)
Why we measured capital adequacy….
• Comply with minimum state requirements
• Understanding what is excess capital/surplus
• Knowing and recognizing your risk tolerance
• Preparing for the worst – every risk instrument/ profile is capable of bearing loss
• Gearing up for change in risk profile, if necessary
• Better and more timely management decisions
How we went about doing the study….
• Engaging the board at an early stage
• Understanding the reasons for doing it
• Engaging your Captive Manager and Actuary
• Looking at various adverse scenarios
• Creating a policy for Board to adopt
Our experience after adopting policy…..
• Had worst loss experience in history!
• Management able to better react and make sound decisions (underwriting and investment)
• Using it as a tool to continue monitoring
Questions?
Speakers Scot Sterenberg Office Head Marsh Management Services Hawaii [email protected] Phone 808-585-3591 Dawne Davenport, ACAS, MAAA Actuarial Consultant [email protected] Phone 312-627-6924 Rodney George Controller – Operations/Subsidiaries Sentinel Assurance Risk Retention Group [email protected] Phone 425-339-5465, ext. 2077