RBC vs rating Agency
A common criticism I have seen of RBC against a rating agency raring is that RBC does not account for differences in the inherent risks in lines of business. Wouldn't the step of calculating the RBC% for each line of business in R4 and R5 at least partially account for these differnces? For a long tailed line like GL the LDFs for the R4 charge would be higher then the LDFs of a property line of business. Since we also adjust for the company'd experience via a weighted average, isn't this also taking into account the difference between the particular company's book of business and the industry's "book"? Would it be more accurate to say that rating agencies just do a better job of accounting for differences in line of business and mix of business?
Comments
The initial RBC charge rates are provided by the NAIC per line. (Then, the are adjusted by the LDF ratios.) NAIC must be using the industry-wide volatility of a line of business in deriving its charge rate. Presumably, rating agencies go one step further by incorporating the company's volatility in a line to derive their charge.