Authorized Control Level: An Overview
The authorized control level (ACL) is a crucial concept in the risk-based capital (RBC) framework for insurance companies. It represents the fourth and final action level within the RBC system, indicating a significant level of financial concern for an insurer.
Definition
The authorized control level is defined as the point at which an insurance company’s surplus falls below 100 percent of its RBC amount (33-2-1906(1)). The RBC amount is a measure of the minimum capital level that an insurer needs to maintain based on various risk categories, including asset risk, credit risk, underwriting risk, and off-balance sheet risk (https://www.tdi.texas.gov/rules/2007/0118-059.html).
Regulatory Intervention
When an insurance company’s surplus falls below the authorized control level, the relevant insurance commissioner has the authority to take significant regulatory action. This may include placing the insurer under regulatory control (33-2-1906(2)(b)). Regulatory control gives the commissioner broad powers to intervene in the insurer’s operations and take steps to protect policyholders and creditors.
Capital Requirements
The RBC model calculates the authorized control level based on the insurer’s surplus to RBC ratio. The surplus is the difference between the insurer’s assets and liabilities. The RBC amount is determined by aggregating the capital requirements for each of the four risk categories mentioned above.
Importance for Captive Insurers
While not all captives domiciled in the United States are subject to RBC, it is still beneficial for captive insurers to understand the concept of RBC and be aware of their own indicated RBC number (https://www.captive.com/articles/what-is-risk-based-capital-a-primer-for-captives). This knowledge can be useful in discussions with brokers, reinsurers, and regulators.
Conclusion
The authorized control level is a critical threshold in the RBC framework, indicating a level of financial concern that may trigger regulatory intervention. Captive insurers should be aware of the importance of RBC and monitor their own indicated RBC numbers to ensure financial stability and avoid regulatory scrutiny.
References
FAQs
What is the authorized control level?
The authorized control level (ACL) is the fourth and final action level in the risk-based capital (RBC) framework for insurance companies. It occurs when an insurance company’s surplus falls below 100 percent of its RBC amount.
What is the RBC amount?
The RBC amount is a measure of the minimum capital level that an insurer needs to maintain based on various risk categories, including asset risk, credit risk, underwriting risk, and off-balance sheet risk.
What happens if an insurance company’s surplus falls below the authorized control level?
If an insurance company’s surplus falls below the authorized control level, the relevant insurance commissioner has the authority to take significant regulatory action, including placing the insurer under regulatory control.
What is regulatory control?
Regulatory control gives the insurance commissioner broad powers to intervene in the insurer’s operations and take steps to protect policyholders and creditors.
Why is the authorized control level important for captive insurers?
While not all captives domiciled in the United States are subject to RBC, it is still beneficial for captive insurers to understand the concept of RBC and be aware of their own indicated RBC number. This knowledge can be useful in discussions with brokers, reinsurers, and regulators.
What can captive insurers do to avoid reaching the authorized control level?
Captive insurers should monitor their own indicated RBC numbers and take steps to maintain a healthy surplus. This may include adjusting their investment strategies, underwriting criteria, or reinsurance arrangements.
What are the potential consequences of reaching the authorized control level?
If an insurance company reaches the authorized control level, it may be subject to regulatory intervention, including being placed under regulatory control. This can have significant implications for the insurer’s operations and financial stability.
How can captive insurers prepare for the authorized control level?
Captive insurers should develop a plan to address the possibility of reaching the authorized control level. This plan should include strategies for maintaining a healthy surplus, communicating with regulators, and responding to regulatory intervention.