BCAR.Cdn

A.M. Best's financial strength rating is an opinion of an insurer's ability to meet ongoing policyholder obligations. The components of this rating are BOB (Balance sheet strength, Operating performance, Business profile). The BCAR ratio (Best's Capital Adequacy Ratio) is an important part of evaluating balance sheet strength.   Forum

READ ME (Jan 31, 2018): The syllabus reference is A.M. Best Company, Inc., A.M. Best Methodology, “Understanding BCAR For Canadian Property/Casualty Insurers,” June 24, 2016. It appears that the syllabus, and the links here, refer to the (correct) non-updated versions of the A. M. Best readings, but as of least Jan 31, 2018, the Complete PDF of all Online Text References [PDF] has links that take you to the new (2017) version. Do NOT use the new version. (The CAS has verified that the Spring 2019 exam is based on the 2016 version of the reading. They are very different.)

READ ME (June 25, 2018): The syllabus still refers to the 2016 version, and the Complete PDF of all Online Text References [PDF] still has a link to the 2017 version. I have to assume that the syllabus is the authoritative source. That means that the 2016 version is the one you should study, unless the CAS makes a late revision.

Pop Quiz

Do you remember the 4 broad areas of risk from OSFI.MCT? Do you remember the definitions of each?

BattleTable

Based on past exams, here is what you need to know (in rough order of importance):

• BCAR risk categories: ICU
• BCAR components: BOB
• BCAR investment risk: FEI
• BCAR square-root rule

reference	part (a)	part (b)	part (c)
E (2018.Fall #21)	A.M. Best vs MCT: - future premium risk	low BCAR value: - company characterisitics	A.M. Best vs MCT: - covariance adjustment
E (2017.Spring #23)	BCAR investment risk: FEI	BCAR risk categories: ICU	BCAR square-root rule
E (2016.Fall #21)	BCAR risk categories: ICU
E (2016.Fall #24)		BCAR risk categories: ICU
E (2015.Fall #24)	BCAR components: BOB	BCAR risk categories: ICU

Note: I didn't like this paper. I found it très confusing. You could maybe read the first page, but I wouldn't recommend much more than that: easy link to current (2016) source reading

In Plain English!

BattleHack #1

If you only have 5 minutes to spend studying this paper, here is what you should learn:

Question: what is the purpose of A.M. Best's financial strength ratings

• to provide an opinion on the financial strength of an insurer (and it's ability to meet ongoing obligations to policyholders)

Question: what are the BCAR risk categories [Hint: ICU]

Investment risk

Credit risk

Underwriting risk (largest component of BCAR risk - accounts for 2⁄3 of required capital)

Alice the actuary has no problem remembering this (unfortunately). Last winter, she was snowboarding at Whistler in BC and attempted a backside 1260.

• See backside 1260 for how she meant to do it.
• See Alice fails... for what really happened. (She didn't know I was taking a video!)

Anyway, she took a risk, and ended up being airlifted to ICU (Intensive Care Unit) at the hospital. That's how she remembers the connection between BCAR risk & ICU.

• Note that you usually have to provide a brief description of these risk categories, but you can probably do that from general knowledge.
• A small point of confusion, however, is that in the IMCO (In My Crummy Opinion) memory trick in OSFI.MCT, "I" stands for insurance risk but here it stands for investment risk. You just have to remember that.

BattleHack #2

If you have 10 minutes to spend on this paper, here are a few more things to learn:

Question: what are the components of A.M. Best's financial strength ratings [Hint: BOB]

Balance sheet strength

Operating performance

Business profile

Question: what are the components of investment risk, according to A.M. Best [Hint: FEI]

Fixed income securities (insurance companies invest mainly in fixed income securities)

Equity securities

Interest rates

Note: Here is "I" stands for Interest rates. (Sorry, I know that's a bit confusing because previously, the "I" stood for both Insurance risk & Investment risk)

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BattleHack #3

If you have 20 minutes for this paper, here is something that I think would be a great exam question, but is has never been asked:

Question: how is the Canadian version of BCAR different from the American version

• the Canadian interest rate risk component (part of BCAR investment risk FEI) considers...

...market-value decline of an insurer's fixed-income portfolio due to rising interest rates

• the Canadian U/W risk component (part of BCAR risk categories ICU) makes adjustments for...

...reported surplus (Ex: eliminates intangible assets)

The title of this paper is: Understanding BCAR for Canadian P&C Insurers. The obvious question, before I even read the paper, is: how is the Canadian version different? I really can't understand why this hasn't been asked. Neither can Alice. (Please send her a 'Get Well Soon' card.)

Comparison of BCAR to MCT

Recall that from OSFI.MCT:

MCT ratio = CapAv / minCapReq

• it's based on an analysis of the risk factors: IMCO

A.M. Best calculates something similar, where NRC is Net Required Capital:

BCAR = (adjusted surplus) / (NRC after covariance adjustment)

• it's based on the BCAR risk categories: ICU
• note that the covariance adjustment corresponds loosely to the diversification credit in OSFI.MCT
• the numerator in both BCAR & MCT represents capital available
• the denominator in each represents minimum capital required

This brings us back to a prior exam question (2017.Spring #23c)

Question what is the purpose of the square-root rule (covariance adjustment) in the BCAR calculation

• provides a credit for diversification between risks (just like the diversification credit in the MCT formula: not all risks will suffer MAX loss at the same time)

My 2 cents: I think (2017.Spring #23c) was a terrible question. There was once a paper on the syllabus on how to calculate BCAR, but it has been removed. If the CAS wants you to understand details of the BCAR formula, why did they remove that paper? If you knew how to do the calculation, this question on the square-root rule would have been easy.

One final point... (There are probably many different answers, but BCAR is not a major topic.)

Question what is 1 conceptual difference between BCAR & MCT regarding the time horizon

• BCAR: capital must support current & future premium risk
• MCT: focuses more on current year's risk

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Miscellaneous

Here are some final miscellaneous facts from the Canadian BCAR paper. As of Spring.2018 none of these has been asked even though 3 of them are from the first page of the paper. (If the CAS is looking for new questions, this may be something they'll pick out.)

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BattleCodes

Memorize: (All BattleCards, of course, but here's a summary of the memory tricks.)

More important:

ICU: risk categories that BCAR NCR (Net Required Capital) supports

• Investment risk, Credit risk, U/W risk

BOB: components of A.M. Best's financial strength rating

• B/S strength, Operating performance, Business profile

FEI: components of investment risk

• Fixed income securities, Equity securities, Interest rate

Less important:

UFA: types of leverage important to B/S strength

• U/W leverage, Financial leverage, Asset leverage

ICI: things that asset leverage measures

• exposure of an company's surplus to: Investment risk, Credit risk, Interest rate risk

Conceptual:

• The title of this paper is: "Understanding BCAR for Canadian P&C InsRs". I keep thinking it would be a great exam question to ask what's different about the Canadian version. A couple of answers to that are:
  • For InvRsk: The Cdn interest rate component considers market-value decline in InsR's fixed-income portfolio due to rising interest rates
  • For U/W Rsk: Cdn BCAR makes adjustments for reported surplus (Ex: eliminate intangible assets)

• I think it's interesting to see how the MCT ratio compares to BCAR.

Calculational:

• Nothing to calculate since the paper on calculating BCAR was removed from the syllabus.

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  Forum

POP QUIZ ANSWERS

IMCO are the 4 broad areas of risk from OSFI.MCT. (IMCO = In My Crummy Opinion)

Insurance Risk

• risk of loss FROM the potential for claims (from policyholders & beneficiaries)

Market Risk

• risk of loss FROM changes in prices in various markets

Credit Risk

• risk of loss FROM counterparty's potential (inability OR unwillingness) to fully meet contractual obligations due to the insurer

Operational Risk

• risk of loss FROM inadequate or failed (internal processes, people, systems) OR FROM (external events)