Ensuring Capital Adequacy for Captives

Transcription

1 Ensuring Capital Adequacy for Captives Scot Sterenberg, Dawne Davenport & Rodney George March 11, :45pm

2 Capital Adequacy for Captives Why Is This Important? General Considerations Understanding Key Areas Of Risk Capital Adequacy Metrics Capital Adequacy Benchmarks Case Study Questions?

3 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

4 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

5 Capital Adequacy Audience Regulators Policyholder Liquidation Management Owner Going concern Insureds/Investors Rating agency

6 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

7 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

8 Primary Causes of P/C Impairments Impairment of an Affiliate, 4% Catastrophe Losses, 7% Miscellaneous, 10% Deficient Loss Reserves, 37% Reinsurance Failure, 4% Significant Change, 5% Overstated Assets, 8% Source: AM Best Alleged Fraud, 9% Rapid Growth, 17%

9 Composition of Gross Required Capital Credit, 7% Investments, 29% Loss & LAE Reserves, 33% Source: AM Best Premiums Written, 31%

10 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

11 Capital Adequacy Benchmarks Overview Accounting Ratios Regulatory Minimums Risk-Based Capital Ratios Probabilistic

12 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

13 Capital Adequacy Benchmarks NWP:PHS By Industry

14 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

15 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

16 Capital Adequacy Benchmarks P/C Industry Results Action level Table 1 Industry Results By Action Level, No Action 2,566 2,571 2,545 2,538 2,532 Company Action Level Regulatory Action Level Authorized Control Level Mandatory Control Level Total Percentage at 'No Action' Level 96.8% 97.4% 97.7% 97.6% 97.4%

17 Capital Adequacy Benchmarks Probabilistic Probability of ruin VAR - value at risk TVAR - tail VAR EPD - expected policyholder deficit

18 Case Study The Everett Clinic (The Parent) Sentinel Assurance Risk Retention Group (The Captive)

19 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

20 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

21 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

22 Questions?

23 Speakers Scot Sterenberg Office Head Marsh Management Services Hawaii Phone Dawne Davenport, ACAS, MAAA Actuarial Consultant Phone Rodney George Controller Operations/Subsidiaries Sentinel Assurance Risk Retention Group Phone , ext. 2077