Latest RBC: What risks are still not included?

Now that the latest RBC includes operational risks, CAT risks, and interest rate risks, what risks are still excluded (if any)? Does "reserve adequacy risk" count (considering R4 represents the risk of adverse development)?

Comments

  • Climate change risk comes to mind. I don't think this would be an exam question.

  • Thanks! I also saw an answer in BattleCard stating that the operational risk doesn't include reputational risks arising from strategic decisions.

    I guess technically RBC can't possibly cover all kinds of risks for an insurance company. However, after the update, RBC now, as a regulatory tool, considers all risks that are also considered by other tools (e.g. Solvency II). Is my understanding correct?

  • Solvency II is supposed to be more comprehensive than RBC, e.g. it has interest rate risk which the RBC does not. Also, I understand that risk components of Solvency II can be tailored to ORSA of the company, where company-specific risks are identified, so it's more flexible than RBC.

  • This makes sense! Although I thought interest rate risk is included by RBC in R1?

  • edited February 2023

    Hello,
    I believe the response given by Staff-AC here is incorrect as what vespery says is true. The wiki article says R1 includes interest rate risk. Also I need some clarification on if RBC considers the adequacy of reserves or not since it was not answered above from the original question. I have seen a few situations when IRIS and RBC is being compared, where the answer "RBC does not consider the adequacy of reserves while
    the IRIS structure does focus on that risk." I think the IRIS ratios do because 11 and 12 check how reserves have changed in past years. If there is adverse development then that may mean the insurers reserves may not be adequate. I cannot really see if this is true for RBC or not. I know R4 is reserve risk but does it consider reserve adequacy?. You can see this listed as a difference in part c of Fall 2017 Q18. So as of 2017 this apparently was true but has this changed? If not then can you explain why RBC does not consider the adequacy of reserves? Hopefully this answer can clarify these statements for others as well as it seems to be a point of confusion. Also since R1 does include interest rate risk I think the link provided to solvency 2 needs to be updated to reflect this. Perhaps a different example of how solvency 2 is more comprehensive since interest rate risk would not be accurate anymore.

  • edited February 2023

    I found my answer when going through the material again. RBC does not account for reserve adequacy risk. Most of that long post can be ignored.

  • Ok, great. And we're looking into the other part of your question about interest rate risk.

  • The following section in the Solvency II wiki article has been updated. See footnote 1 below the table in this section:

    Thanks for pointing this out and following up.

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