Chapter 8:

Ashley is an actuary who is employed by the Nebraska Department of Insurance. Her duties include monitoring the financial position of insurance companies doing business in Nebraska. Based on an analysis of annual financial statements that insurers are required to submit, she discovered that Mutual Life Insurance has a risk-based capital ratio of 75 percent. Based on the information, answer the following questions:

a.) What is the purpose of requiring insurers to meet risk-based capital requirements?

b.) What regulatory action, if any, should the Nebraska Department of Insurance take with respect to Mutual Life Insurance?

c.) Would your answer to part (b) change if the risk-based capital ratio for Mutual Life Insurance fell to 30 percent? Explain your answer.

d.) Mutual Life Insurance has 25 percent of its assets invested in common stocks. Assume the stocks are solid, and the proceeds are invested in U.S. government bonds. What effect, if any, will this investment change have on the risk-based capital ratio of Mutual Life Insurance? Explain your answer.