OBSERVATION OF RISK-BASED CAPITAL
FOR DEVELOPMENT OF
SOLVENCY MARGIN OF THAILAND
Tommy Pichet, B.Eng (Hons), FSA, FSAT, MScFE (Distinction)
The Society of Actuaries of Thailand
36/1 Rama 4 Road, Bangkok 10120, Thailand
Proceedings of the East Asia Actuarial Conference
October 9-12, 2007 at Tokyo, Japan
Abstract. Solvency margin of Thailand has been using maximum of 2 percent of statutory reserve or 50 million baht (whichever is higher) as a required capital in order to absorb unexpected large loss for the sake of solvency in Life insurance industry while modified net level premium has been adopted to establish statutory reserve. Investment securities and market environment tend to be more complicated, simple and traditional monitoring may not be able to guarantee solvency of Life Insurance Company in future. As such, Thai regulator recently has planned to develop new solvency margin for Thailand by using risk-based capital concept to implement in Life insurance Company, which is operating in Thailand.
As a part of The Society of Actuaries of Thailand, this paper tends to assist Thai regulators to observe risk-based capital model as well as its history and development in Life insurance industry. Risk-based capital models developed from various countries during past several years are also observed as a stable benchmark. With author opinion to provide advantage and disadvantage from each model, it also recommends what can be holistically achieved and positioning for upcoming development of new risk-based capital of Thailand so as to encourage well risk management practice while having effective model but not too complicated to implement by Life insurance industry in Thailand.
Key-words: capital, solvency, risk-based capital, solvency margin, risk factor, asset risk, insurance risk, interest rate risk, business risk, exchange rate risk, cash flow projection, risk free rate, economic capital, value at risk, solvency margin of Thailand, Standard & Poor’s capital adequacy model, risk-based capital framework in Singapore CONTENT
What is Capital?
Definition and Objective of capital
What is Risk-Based Capital?
History and development on RBC
Simple factor with fixed percentage to all products
Factor derivation style
More risk-based model
Most advanced risk-based model
“Risk Based Capital”: A focus on Standard & Poor’s requirement (2005 version)
Asset risk, Liability Risk, Cash flow mismatch risk, and business risk Risk-Based Capital Framework in Indonesia
More on foreign exchange risk, reinsurance risk, reinvestment risk
Surplus and admitted asset
Comparison of risk-based capital (as of 2004)
US, Canada, Taiwan, Singapore, Indonesia, China
Tabulated table for comparison
New Risk-Based Capital Framework in Singapore
More on cash flow projection and fair value concept
Economic Capital (EC)
Components of Economic Capital
Simple illustration in how to calculate Value at Risk
What else can be done, if not RBC?
Minimum working capital
Dynamic solvency testing
Cash flow testing – NY 7 (interest rate scenarios)
What can be holistically achieved and positioning for Thailand?
Observation of each model
Rudimentary establishments for Thai industry
What is Capital?
Capital is the surplus from the balance sheet. It is the excess of the asset less liability. In short, Asset less Liability equal to Capital. Capital in fact is injected from shareholder or investor or entrepreneur since inception of the company.
As a matter of fact, the advantage of the form of corporation is that if Liability is more than Asset, the Capital would be depleted to zero, not negative. This means that the obligation from liability will not be able to be paid in the end.
Figure 1: simple balance sheet to show asset, liability, and capital
Objective of Capital
With respect to “The professional Risk Mangers’...
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