Reserve Risk vs Reserve Adequacy
One of the risks not covered by RBC is reserve adequacy. R4 covers reserve risk, which is defined in the text as "the risk that the company's recorded loss and LAE reserves will develop adversely, under the assumption that the current reserve balance is adequate". I'm trying to understand what encompasses the "reserve adequacy" that is not covered by RBC-does this mean that RBC does not cover the risk of the reserve balance set by the company being inadequate, without factoring in adverse development?
Comments
Yes. Risk-Based Capital is a probabilistic, forward-looking provision, for the risks in the future. By contrast, reserves deficiency, as defined by Schedule P, is a result of historical positions held. Deficient reserves mean surplus is understated, today. Regulator can come in and require the company to increase its surplus, without having to use RBC.