Page 109 - Risk Management in current scenario

moving to the second phase of RBC, which they call, RBC2 such as in
Singapore and Philippines.

India, on the other hand, is currently following the traditional approach
of allocating the solvency capital which is based on the formula approach.
However, the regulator has taken some steps in this direction such as
bringing risk management, the disclosure of financials on their website,
Corporate Governance etc which is part of RBC regime.

What is Risk Based Capital?
Risk based capital is calculated based on how much risk is taken by the
insurance companies as opposed to using a standard formula. The Higher
risk would require higher capital requirement and vice versa. One of the
benefits of using risk based capital is as risks are correlated; the benefit
of risk correlation is passed to the insurance companies. Further, as the
risk capital is based on how much risk an insurance company takes, so
better risk management also optimizes the capital.

The risks used in a life insurance company to quantify the risk capital
broadly fall into insurance risk, financial risks, operational risk, credit risk
etc. The components of insurance and financial risks are:
X Insurance Risk
O Mortality risk
O Lapse Risk

O Expense Risk
X Financial Risk
O Interest rate risk
O Equity Risk
O Foreign exchange risk o Spread risks

Risk Capital Calculation methodology is based on Statistical distribution
uses the measure of Value at Risk (VaR) defined as the maximum loss

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