Tidbits I picked up at the Casualty Actuarial Society’s Casualty Loss Reserving Seminar:
- The NAIC update of its solvency standards is unlikely to have the sophisticated modeling possibilities that Solvency II has in Europe. (Recall S-II creates a model to set capital, then basically suggests that insurers that could do a better job should submit a model.) NAIC seems much more inclined to tweak its current model, risk-based capital. Two key concerns: the cost of reviewing hundreds of models would be prohibitive and small insurers might be put at a disadvantage.
The main RBC tweak would a charge for cat exposure, using cat models. This has been kicking around for a couple of years. Reinsurers don’t like it, as they don’t want to be responsible for the quality of data provided them by cedents. These are early days, of course, and this could all change.
- The New York Insurance Exchange seems to be on hold. I wrote about it here. Basically, NY Gov. Paterson is the force behind the idea, and he leaves office after the November elections. Next steps will await the new governor.
- Discounting of U.S. reserves seems almost certain with the overhaul of U.S. accounting standards. Right now, the IASB contemplates a discount with a margin for risk and a residual margin (the contract’s expected profit). The risk and residual margins will run off as the insurance contract ages. FASB, the U.S. accounting board, is nodding in the same direction, though the risk and residual margins are combined into a single composite margin.
But either standard would use discounting. And statutory accounting principles may well follow suit. That would have a knock-on effect on RBC, since one of RBC’s capital charges is on reserves. And if reserves are discounted, the capital charge would be artificially low.
Of course, as one speaker pointed out, RBC and statutory accounting are a bit duplicative. Statutory accounting disallows certain non-liquid assets in calculating surplus – as a precaution. RBC models the capital needed given the companies risk profile – as a precaution.