Solvency Margin :
The insurer makes assumptions into future for parameters such as mortality, morbidity, expenses, interest etc. Sub regulation (b) of Regulation 5 of IRDA Regulations (Assets, Liabilities and Solvency Margin of Insurers) 2000; specifies that the best estimate assumption shall be adjusted by an appropriate Margin for Adverse Deviation (MAD) which is dependent upon the degree confidence.
The purpose of MAD is to build a buffer for mis-estimations of the best estimate or adverse fluctuations. But it does not cover for volatility and catastrophe risks for which a separate excess asset known as Solvency Margin should be provided by the insurer.
Risk Based Capital :
Risks based capital includes asset default risk, mortality morbidity risk, volatility risk, catastrophe risk, margin risk and fund risk. Hach Company needs to develop implement and maintain appropriate and effective procedures to manage its capital position, i.e., ongoing minimum capital requirements, and future capital requirements.
The capital management planning identifies the quantity, quality and sources of additional capital required, availability of any external sources, estimating the financial impact of raising additional capital, and taking into account the plans and requirements of various business units of the company.
Risk Based Capital is an amount of capital based on an assessment of risk that a company should hold to protect policy holders against adverse developments. Risk based capital involves identifying the key risks and quantifying them.
1. Insurance Risk
2. Market Risk
3. Credit Risk
4. Liquidity Risk
5. Operational Risk
These risks are analysed with special references.
It is underwriting risk associated with the uncertainty of business written in the future
It is the risk associated with movements in interest rates, foreign exchange rates or asset prices lead to an adverse movement in asset values
If another party fails to perform them in time i.e. If the party fails to pay the credit. So, allowance should be made for the financial effect of non-payment of reinsurance and of the nonpayment of premium debtors.
It is the risk that a firm has insufficient financial resources to meet its obligation as they fall due or can only secure the resources at excessive cost.
It in the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and system or from external events.