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RBC AND DST

General Descriptions

By

Masdar

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Rational for RBC Formula

Risk Based Capital provides a means of setting capital standards that recognizes a life insurance’s size and risk profile*

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Four categories of risks

• C-1 Asset Risk*

This is the risk of loss from bonds, mortgages, stocks, real estate, and the investments through either default on payment of interest and or principal or through loss of market value.

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Four categories of risks (cont)

• C-2 Insurance Risk*

This is the risk that premiums will be unable to cover unfavorable changes in mortality, morbidity, health care inflation, and expenses

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Four categories of risks (cont)

• C-3 Interest Risk*

This is the risk of unexpected cash outflows or inflows during periods of rising or falling interest rates

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Four categories of risks (cont)

• C-4 Business Risk*

The risks that are not completely covered by the C-1 through C-3 categories. Examples; frauds, law suits and contingent liabilities.

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Indonesian RBC Model

Legal basis; Article 11 of Government Regulation Number 63 year 1999:

(1) An insurance company or reinsurance company shall maintain its solvency margin at any time.

(2) Solvency margin is the exes of total admitted assets over liabilities.

(3) The different between total admitted asset and total liabilities as stated in para (2) shall carry sufficient funds at least to cover loss risks arising out of possible deviation in managing assets and liabilities.

(4) Further provisions are stipulated by virtue of Ministerial Decree

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Indonesian RBC Model

Risk components;

Ri-1 Asset defaults (C-1)Ri-2 Asset and Liability cash flow mismatch (C-1, C-2)Ri-3 Currency mismatch (C-1)Ri-4 Claim experiences worse than

expected (C-2)Ri-5 Insufficient premium (C-2, C-3)Ri-6 Reinsurance default (C-2) ?

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Calculation of RBC Components

Ri-1 = Risk factor x admitted assetsRi-2 = Risk factor x technical reserveRi-3 = Risk factor x shortfall of assets and liabltiesRi-4 = Risk factor x (NAR, SI, Net Annual Premium, or

Premium Reserve)Ri-5 = Risk factor x premium reserve Ri-6 = Risk factor x technical reserve of reinsurance

Minimum Solvency Margin Requirement (MSMR) = sum (Ri-1; Ri-6)

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Calculation of RBC Components

Minimum Solvency Margin Requirement

(MSMR) = sum (Ri-1; Ri-6)

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Solvency Requirement

– Total Admitted Assets = xxxx …… ……....(1)– Total Liabilities = xxxx……………...(2)

- Solvency margin = (1) – (2)…………..(3)- MSMR = sum (Ri-1;Ri-6)….(4)- RBC ratio: (3)/(4) >= 120%

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Analysis of RBC ComponentsBased on Annual Report

as of 31 Dec 2004

– Average AA : 724.046– Average L : 615.061- Solvency margin : 108.985- MSMR : 56.175- RBC Ratio : 194,01%

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Analysis of RBC ComponentsBased on Annual Report

as of 31 Dec 2004

– Ri-1 : 16.224– Ri-2 : 22.005– Ri-3 : 4.294– Ri-4 : 9.996– Ri-5 : 51

MSMR = SUM (RI-1;RI-5) : 56.175

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Analysis of RBC ComponentsBased on Annual Report

as of 31 Dec 2004

28,9%

39,2%

7,6%

17,8%

6,4%

0,1%0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

40,0%

45,0%

R1 R2 R3 R4 R5 R6

R

%

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Financial Condition Report

A Life insurance company’s Actuary shall submit the projection of financial condition of the life insurance company for a period of at least five year to the Minister of Finance no later than April 30 of the following year.

Format and organization of the report shall be determined by the DGFI Decree.

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References: 1) * RBC in the Life Insurance Industry, LOMA Division Research 1994

2) Indonesian Insurance Regulation