Interest Rate Risk and Capital Requirements for Property/Casualty Insurance Companies

The advent of risk-based capital requirements and the potential expansion of the role of the Appointed Actuary demand expertise in evaluating the financial stability of insurance enterprises. Because of the growth of property/casualty loss reserves and the wide fluctuations in interest rates during the past two decades, asset-liability management is of increasing importance for casualty actuaries. The American Academy of Actuaries task force on risk-based capital has provided the NAIC with a proposed "interest rate risk charge" for its risk-based capital formula. This paper review the theoretical development of an interest rate risk charge as wells as its practical application for setting capital requirements.