Compare how regulators keep watch over insurer solvency, from risk-based capital and financial examinations to receivership and the NAIC's IRIS and ORSA tests.

An insurer's capital slips below a computed floor. Does the regulator send a letter, order a plan, or seize the company outright? The answer depends on exactly which threshold the capital crossed.

RBC sizes required capital to the insurer's actual risk profile, not a flat minimum. A P&C insurer's charges combine affiliate risk (R0), fixed income (R1), equity (R2), credit (R3), reserving (R4), premium risk (R5), and catastrophe risk (Rcat). Rcat joined the formula in 2017; it holds modeled hurricane and earthquake losses at the worst year in 100, net of reinsurance.

$$\text{RBC}_{\text{cov}} = R_0 + \sqrt{R_1^{2} + R_2^{2} + R_3^{2} + R_4^{2} + R_5^{2} + R_{\text{cat}}^{2}}$$

One step remains after the radical. A basic operational risk charge, 3% of the covariance result, is added on. The sum is Total RBC After Covariance including basic operational risk.

The Authorized Control Level (ACL) RBC equals 50% of that operational-risk-inclusive total. Compare it to Total Adjusted Capital (TAC): policyholders' surplus reduced by non-tabular discount and by tabular discount on medical reserves.

Common mistakes

• Dividing TAC by total RBC. The denominator is ACL RBC, which is 50% of total RBC. Using total RBC doubles the denominator, halves the computed ratio, and misreads the tier as more severe.
• Adding the R components straight. R1 through R5 and Rcat combine under the square-root rule; only R0 sits outside the radical, and the operational risk charge is added after the covariance step.
• Halving before the operational risk add-on. ACL RBC is 50% of the total including basic operational risk, not 50% of the bare covariance result.

Bottom line

• The RBC ratio is Total Adjusted Capital divided by Authorized Control Level RBC.
• Company Action Level: ratio below 200%, and the insurer files a corrective plan within 45 days.
• The trend test also pulls in ratios between 200% and 300% when the combined ratio tops 120%.
• Regulatory Action Level: below 150%, where the insurer files a plan and the regulator may issue a corrective order without being required to.

Exam shortcut

Compute the RBC ratio, then walk the bands top-down: 200, 150, 100, 70. The first threshold the ratio drops under names the action level. Between 200% and 300%, check the trend test: a combined ratio above 120% means Company Action anyway. For RBC math, square R1 through R5 and Rcat, sum, take the root, then add R0. Add the 3% operational risk charge.

The full lesson (about 1,462 words, 10 min read) adds 2 worked examples, all 7 common mistakes, a self-check, free in the app.

Learning objectives

• A3

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