Risk Management
Task Force

Risk Based Capital Covariance Subgroup



Credit Risk Management | Economic Capital Calculation and Allocation
Enterprise Risk Management | Equity Modeling | Extreme Value Models
Health Risk Management | Policyholder Behavior in the Tail
Pricing for Risk | Risk Based Capital Covariance | Risk Management Metrics

RBC Covariance
James Reiskytl, Leader


  • to research covariance and correlation of insurance and non-insurance risks and the impact on life insurance company surplus levels
  • to document the implications of these risk impacts on internal company surplus

Initial Product and Process

  1. This research is limited to insurance risks. The techniques used; however, to establish the covariance factors may be extendable to other non-insurance risks.
  2. Covariance factors are needed for many possible risk combinations
    1. For example, one may wish to establish an asset default risk factor at a 99% level. Covariance factors are needed to determine the appropriate probability level for each asset default risk factor (e.g. bonds class 1, bonds class 2, … mortgages, etc.).
    2. Covariance of risks among various lines of insurance (e.g. life, health and possibly property/casualty).
    3. Covariance factors are also needed, for example, for the C-1, C-2, C-3 and C-4 factors as defined for life RBC.
    4. Sector-based approach, as opposed to a particular rating-based (i.e. NAIC) approach. One common definition of the term "sector" is, for example, an industry classification code.
  3. One of the first steps for the subgroup will be to establish which combinations of individual risks are regarded as being of interest and/or importance to the practicing actuaries.
  4. These individual results will be used to improve understanding covariance among aggregate factors, such as the life RBC, C factors and/or property/casualty R factors.
  5. These covariance factors are a challenge to develop since the results desired in part are for the interaction of events that have never occurred, nor may never do so.
  6. The subgroup will consider how to establish covariance factors based on assumptions that are dynamic and appropriately reflect increasing or decreasing risks as one moves out in the tail of likely events.

Documents & Links

Recent Meeting Minutes:
RBCC Minutes – January 8, 2003

Links to RBC related sites:
(coming soon)

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