1998 Casualty Loss Reserve Seminar
September 28-29, 1998
Philadelphia, PA
Session: Capital Models and their Relationship with Loss Reserving
Presentation: Loss Reserves and the NAIC (P&C) RBC Formula
Presenter: Ralph Blanchard
Travelers Property Casualty Corporation

0
Loss Reserves and NAIC P&C RBC
Biography
Ralph S. Blanchard, III, FCAS, MAAA
Ralph is a Second Vice President & Actuary for Travelers Property Casualty (a member of Travelers Group), in their Corporate Finance - Accounting Policy department.
Ralph is a member of the American Academy of Actuaries and a fellow of the Casualty
Actuarial Society. He is currently the chair of the American Academy of Actuaries -
Property & Casualty Risk Based Capital Task Force, as well as a member of the following American Academy of Actuaries committees; Joint Risk Based Capital Task
Force, Environmental Liabilities Work Group, Casualty Practice Council. He is also a past member of the Academy’s Committee on Property Liability Financial Reporting.
Ralph started his career at Aetna is 1978, after graduating from Dartmouth College (B.A. in Math) and was part of Aetna’s Property / Casualty division when it was sold to
Travelers Group in 1996.

1
Loss Reserves and NAIC P&C RBC
Overview
Caveat - NAIC RBC purpose is MINIMUM CAPITAL,
NOT PRUDENT CAPITAL
Not meant to be accurate, but adequate
One tool of many
Basic RBC Structure
Covariance Importance
What Drives RBC
Loss Reserve Impacts
Issues

2
Loss Reserves and NAIC P&C RBC
Basic RBC Structure
RBC for a risk = Exposure times Risk Factor
e.g. (c. stock) 100 x 15%
Risks Considered
R1 - Fixed Income Asset Risk (e.g. Bonds)
R2 - Equity Asset Risk (excl. ins. affil.)
R3 - 1/2 of Credit Risk (incl. reins. collectibility)
R4 - 1/2 of Credit Risk, plus Loss Reserve Risk
R5 - Premium Risk
R0 - Equity Risk for Insurance Affiliates , plus Off Balance Sheet Risk
Required Capital (ACL Level)
R
0
+ R
1
2
+ R
2
2
+ R
3
2
+ R
4
2
+ R
5
2
2

3
Loss Reserves and NAIC P&C RBC
The Importance of Covariance
Two risk example
R
A
R
B
R
A
+R
B
10 1
10 5
( R
A
2
+ R
B
11 vs. 10.05
15 vs. 11.18
2
)
1/2
10 10 20 vs. 14.14
Effects:
Biggest risks dominate the result
Smaller (relative) risks become insignificant

4
R5
22%
What Drives RBC (i.e. biggest items entering covariance)
R0
15%
R1
2%
R2
21%
R0
27%
R1
3%
R2
4%
R3
3%
R3
4%
R4
48%
R4
36%
R5
15%
Note: Industry amounts for R2 dominated by a handful of companies.
R5
51%
R0
0%
R1
4%
R2
0%
R3
1%
R4
44%
R1
R2
R3
R4
R5
R0
R0
0%
R1
10%
R2
0%
R3
0%
R4
23%
R5
67%

5
Loss Reserves and NAIC P&C RBC
Loss Reserve Impacts
R3
R4
1/2 reinsurance credit risk
(10% of ceded balances)
R5
1/2 reinsurance credit risk
(10% of ceded balances)
Held Schedule P Reserve times Risk Factor (by line)
(11% to 35%)
Company experience adjustment - adjusts reserve risk factor
Based on historic company vs. industry INCURRED developmment
Loss Concentration factor - credit for line diversification
Equals 0.7 + 0.3 x Biggest Line / Total Reserves
Growth risk charge - based on GROUP's 3 yr avg wp growth
Equals (Growth - 10%) x .45 x Total Sched. P Reserves
" Growth" capped at 40%, no charge if under 10%
Company experience adjustment - adjusts premium risk factor
Based on historic company vs. industry 10 yr avg. loss ratio

6
Loss Reserves and NAIC P&C RBC
Loss Reserve Risk Factors
Line
Homeowners/Farmowners
Net risk charge *
Personal Auto Liability
Commercial Auto Liability
Workers Compensation
Commercial Multi-Peril
18.3%
15.5
16.5
11.0
20.9
Med. Malp. - Occur.
Med. Malp. - Claims Made
35.2
11.8
Biggest
Special Liability 10.3 Smallest
Other Liability
Fidelity / Surety
Two Year Lines
26.5
19.5
11.5
International
Reinsurance A & C
Reinsurance B
14.7
11.5
34.9
27.5 Products Liability
*charges are before company experience adjustments

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Loss Reserves and NAIC P&C RBC
Company Experience Adjustment - R4
Strategy Impact on factor applied to reserves
Absolute change Relative change
Reserves always 10% "high"
Increase reserves by 10%
-0.5% to -1.5% -3.5% to -7%
+0.1% to +1.5% +0.7% to +4.5%
Increase reserves by 10% of NEP +0.1% to +0.5% +1% to +2%
Note: Example of company experience adjustment calculation can be found at the back of the handouts.

8
Loss Reserves and NAIC P&C RBC
Issues
Spread / allocation to line
Factors vary from 11% to 35%
Loss concentration factor
Company experience adjustments
Other
Allocation to AY
"All prior" AY not used in company experience adjustment calcs
Current AY not used in R4 company experience adjustment
Reliance on "reasonable" reserve
No adjustment for "inestimables"
No adjustment for where in a reasonable range (other than co. exper. adj.)
(high, low, even below)
Double whammy
Increase reserves
Required capital up (R3, R4, R5)
Held capital down
Non-tabular discount
Reversed by RBC
Retroactive Reinsurance (ceding co. impacts)
Does not reduce required capital
May increase held capital