Report 7: Risk-Based Capital (RBC) Reserve Risk Charges – Improvements to Current Calibration Method

The purpose of this paper is to describe the results of research on methods to improve the Current Calibration Method (CCM) for reserve risk charges for use in the NAIC RBC Formula. The paper shows how it is possible to construct risk charges that might be both more reflective of underlying risk and more stable over time than the CCM.

This paper shows the extent to which calibration of reserve risk charges is affected by issues identified, but not measured, in prior research – reserve size by line of business (LOB-size), pooling, and movement over time.

The paper also identifies and measures the extent to which risk charges are affected by (a) the “minor line” effect, which appears to distort risk charges for specialty lines of business (LOBs), and (b) the effect of data maturity.

This is one of several papers being issued by the Risk-based Capital (RBC) Dependencies and Calibration Working Party. The approach to calibrating reserve risk charges described in this paper is analogous to the calibration approach for premium risk described in DCWP Report 6.

Keywords: Risk-Based Capital, Capital Requirements, underwriting risk, reserve risk, premium risk, Analyzing/Quantifying Risks, Assess/Prioritizing Risks, Integrating Risks.