Solvency Regulation: Risk-Based Capital Standards
Understand risk-based capital regulatory frameworks for insurance solvency on Exam MAS-II.
Risk-Based Capital (RBC) Frameworks
RBC requirements ensure insurers hold sufficient capital relative to their risk profile. The NAIC RBC formula for property-casualty insurers includes charges for: R0 (asset risk from affiliates), R1 (fixed income asset risk), R2 (equity asset risk), R3 (credit risk), R4 (reserve risk), and R5 (premium/growth risk). The charges are combined using a square root formula that provides diversification credit: RBC = R0 + sqrt(R1^2 + R2^2 + R3^2 + R4^2 + R5^2). Regulatory action levels trigger at 200% (company action), 150% (regulatory action), 100% (authorized control), and 70% (mandatory control) of the authorized control level.
International Standards
Solvency II (European framework) uses a three-pillar approach: quantitative requirements (Pillar 1), governance and risk management (Pillar 2), and disclosure (Pillar 3). The Solvency Capital Requirement (SCR) targets a 99.5% VaR over one year, computed using a standard formula or an approved internal model. The Minimum Capital Requirement (MCR) is a lower threshold triggering automatic intervention. Own Risk and Solvency Assessment (ORSA) requires insurers to assess their own risk profile. Exam MAS-II tests RBC calculation, regulatory frameworks, and the relationship between economic and regulatory capital.