All financial institutions are faced with a basic business question: What is the best use of available funds? Historically, within the insurance industry, this issue of capital allocation has been addressed using some very basic projections of future balance sheets and profit-and-loss statements, with capital projections based on regulatory capital...
Under the New Basel Accord bank capital adequacy rules (Pillar 1) are substantially revised but the introduction of two new "Pillars" is, perhaps, of even greater significance. This paper focuses on Pillar 2 which expands the range of instruments available to the regulator when intervening with banks that are capital...
A very simple method is shown for the estimation of the catastrophe loss exceedance curve of a sub-portfolio, when the information available is limited to a total portfolio catastrophe loss exceedance curve, and just enough information about the sub-portfolio to make reasonable selection for two parameters; relative frequency and relative...
Variable annuities have become one of the top success stories for the life insurance industry in the last decade. However, the evolution of guarantees like guaranteed minimum death benefits GMDBs and guaranteed living benefits GLBs, in many cases dependent for their financial viability on sophisticated hedging programs, have caused concern...
Due to risk based capital requirements, financial institutions need to budget their risk-taking to assure their financial survival. This is necessary because the economic capital of the institutions which has to back risky positions is widely assumed to be a short resource. Therefore, financial institutes are advised to pursue a...
This article shows that risk-based deposit insurance premiums generate smaller procyclical effects than do risk-based capital requirements. Thus, Basel II's procyclical impact can be reduced by integrating risk-based deposit insurance. If deposit insurance is structured as a moving average of contracts, its procyclical effects can be decreased further. The results...
The paper reveals a proposed framework, based on emerging international standards and good practices in developed countries, which is risk-focused. It reflects the relevant risks that the insurance companies face. The minimum capital prescribed under the framework, which includes a consistent approach to the valuation of assets and liabilities, will...
OCC, Board of Governors of the Federal Reserve System Board, FDIC, and OTS collectively, are proposing to amend their risk-based capital standards by removing a sunset provision in order to permit sponsoring banks, bank holding companies, and thrifts to continue to exclude from their risk-weighted asset base those assets in...
The articles discusses that federal bank and thrift regulatory agencies have requested public comment on an interim final rule and a notice of proposed rulemaking NPR to amend their risk-based capital standards. For the treatment of assets in asset-backed commercial paper ABCP programs consolidated under the recently issued Financial...
This advance notice of proposed rulemaking ANPR describes significant elements of the Advanced Internal Ratings-Based approach for credit risk and the Advanced Measurement Approaches for operational risk (together, the advanced approaches). The ANPR specifies criteria that would be used to determine banking organizations that would be required to use the...
The Board is being asked to approve for publication in the Federal Register the attached interagency ANPR seeking comment on pertinent aspects of the proposed New Capital Accord being developed by the Basel Committee on Banking Supervision Basel Committee. The ANPR explains how the U.S. banking and thrift agencies Agencies...
This document describes supervisory expectations for banking organizations institutions adopting the advanced internal ratings-based approach IRB for the determination of minimum regulatory risk-based capital requirements. The focus of this guidance is corporate credit portfolios. Retail, commercial real estate, securitizations, and other portfolios will be the focus of later guidance. This...
From the executive summary: ‘Of all the changes in capital regulation being considered on banking supervision, the most fundamental shift from current practice is that the risk-based capital requirements for the largest banks would no longer be based on a few pre-set ratios dictated by regulators. Instead, the banks would...
This report on health insurance (2002-2003) expects further modest improvement in capital adequacy driven by several factors. These include: positive operating results, which improve retained earnings; industry consolidation, which should concentrate a greater proportion of the business with better capitalized companies; and further implementation of risk-based capital requirements, which should...
Capital adequacy is one of the critical factors that the FDIC is required to analyze when taking action on various types of applications and when conducting supervisory activities related to the safety and soundness of individual banks and the banking system. In view of this, the FDIC's Board of Directors...
This paper examines the two-way linkages between credit risk measurement and the macroeconomy. It first discusses the issue of whether credit risk is low or high in economic booms. It then reviews how macroeconomic considerations are incorporated into credit risk models and the risk measurement approach. It also suggests that...
The concept of risk-based capital requirements enjoys widespread support. Effective implementation, however, requires that risk be measured accurately both across borrowers and across time. This paper uses the ratings assigned to examine how measured credit risk for these banks has changed since the financial crisis in the mid-1990s. It then...
This report estimates that the U.S. life insurance industry's NAIC risk-based capital RBC ratio improved from 277% of company action level at year-end 2000 to 366% at year-end 2001 on a dollar-weighted basis. The report believes that this significant increase was caused by two changes enacted during 2001 by the...
This rating outlook for the U.S. health insurance and managed care sector (2001/2002) is Stable. The outlook is based on the expectation that the financial profile of the industry will continue to improve in 2002. In addition, the report projects further improvement in capital adequacy driven by industry consolidation, which...
OCC, Governors of the Federal Reserve System Board, FDIC, and OTS are changing their regulatory capital standards to address the treatment of recourse obligations, residual interests and direct credit substitutes that expose banks, bank holding companies, and thrifts (collectively, banking organizations) primarily to credit risk. The final rule treats recourse...
