Capital requirements and risk-based capital

Document description

The paper looks at the problems of assessing the capital requirements of a non-life insurer from a regulator's viewpoint in the context of the United Kingdom. It considers how capital requirements might vary according to the different risks to which an insurer is subject and how this Risk-Based Capital (RBC) might be measured in practice. Chapter A sets the scene by discussing insurer solvency and how to measure and compare the financial strength of insurance companies. Chapter B looks at the considerations that an insurance regulator is faced with, including objectives, possible actions, desirable features of a solvency test, the stringency of solvency tests, and how public the results of such testing should be. A few brief remarks are made on the special features of Lloyd's that complicate the regulator's task. Chapter C discusses various types of risk that an insurance business is subject to. it considers how these various risks interact and how an insurer can mitigate the effect of these risks in combination. There is a section on the miscellaneous factors that, while potentially significant, are difficult to measure in order to incorporate them into a mathematical formula. Chapter D describes the US Risk-Based Capital system, including the formula itself with examples to illustrate its operation. Some results of testing are given, and a series of our comments and criticisms are included. Chapter E closes the paper by outlining how a Risk-Based Capital formula could be constructed for the UK, but the difficulty of preparing a formula is acknowledged.