Report 2: 2011 Research – Short-Term Project Report: A Report of the CAS Underwriting Risk Working Party

At the request of the American Academy of Actuaries, the CAS formed the Risk-Based Capital (RBC) Underwriting Risk Working Party (URWP) to research the current RBC formula for measuring underwriting risk and the procedures for calibrating the formula’s parameters (the Current Calibration Method). The research unveiled various accuracy and consistency issues with the Current Calibration Method. Some alternatives are investigated and areas of further research are suggested, including volume of data, data filtering, curve fitting, the investment income offsets (IIO) discount rate, time horizon, and the relative impact of premium and reserve charges by line. This paper presents results of the URWP’s short-term charge.

Keywords: risk-based capital; RBC; underwriting risk, reserve risk; premium risk; risk horizon