National Association of Insurance Commissioners ...Based on the Working Group’s review of existing...

© 2019 National Association of Insurance Commissioners

CAPITAL ADEQUACY (E) TASK FORCE Capital Adequacy (E) Task Force April 7, 2019, Minutes Capital Adequacy (E) Task Force Feb. 19, 2019, Minutes (Attachment One) Capital Adequacy (E) Task Force Working Agenda (Attachment One-A) Referral from the Statutory Accounting (E) Working Group Regarding (Attachment One-B) Capital Adequacy (E) Task Force Jan. 31, 2019, Minutes (Attachment Two) RBC Preamble (Attachment Three) Health Risk-Based Capital (E) Working Group April 7, 2019, Minutes (Attachment Four) Health Risk-Based Capital (E) Working Group March 6, 2019, Evote Minutes (Attachment Four-A) Health Risk-Based Capital (E) Working Group Feb. 1, 2019, Conference Call Minutes (Attachment Four-B) Operational Risk Analysis – Health RBC Growth Risk Referral (Attachment Four-B1) ACLI Comment Letter Regarding Proposal 2018-14-CA Stop Loss Interrogatories and Instructions (Attachment

Four-B2) Comment Letter from Self-Insurance Institute of America, Inc. Regarding Proposal 2018-14-CA Stop Loss

Interrogatories and Instructions (Attachment Four-B3) Health Risk-Based Capital (E) Working Group Dec. 3, 2018, Conference Call Minutes (Attachment Four-C) Operational Risk Analysis – Health RBC Growth Risk Existing vs. Current Informational Growth Risk and

Further Options for Consideration (Attachment Four-C1) Proposal 2019-04-H (Attachment Four-D) 2019 Health RBC Working Agenda (Attachment Four-E) Life Risk-Based Capital (E) Working Group April 7, 2019, Minutes (Attachment Five) Life Risk-Based Capital (E) Working Group Feb. 22, 2019, Conference Call Minutes (Attachment Five-A) Comment Letter from American Council of Life Insurers (ACLI) Regarding the Tax Guidance Document

(Attachment Five-A1) Comment Letter from American Academy of Actuaries Regarding the Tax Guidance Document (Attachment

Five-A2) Tax Guidance Document Dated Jan. 25, 2019(Attachment Five-A3) Life Risk-Based Capital (E) Working Group Dec. 19, 2018, Conference Call Minutes (Attachment Five-B) Tax Guidance Document Dated Dec. 18, 2018(Attachment Five-B1) Life Risk-Based Capital (E) Working Group Dec. 13, 2018, Conference Call Minutes (Attachment Five-C) Modification Summary from Great American Regarding the C-3 Treatment of Fixed-indexed Annuities in the

Life RBC Formula (Attachment Five-C1) Update from the Academy Longevity Risk Task Force (Attachment Five-D) Longevity Risk (A/E) Subgroup March 4 and Feb. 19, 2019, Conference Call Minutes (Attachment Five-E) American Academy of Actuaries Longevity Risk Task Force Report (Attachment Five-E1) RBC Instructions for Interest Rate Risk and Market Risk (Attachment Five-F) Update from the Academy C2 Work Group (Attachment Five-G) Operational Risk-Based Capital (E) Subgroup March 27, 2019, Conference Call Minutes (Attachment Six) Operational Risk-Based Capital (E) Subgroup Feb. 26, 2019, Conference Call Minutes (Attachment Six-A) Operational Risk-Based Capital (E) Subgroup Jan. 24, 2019, Conference Call Minutes (Attachment Six-A1) Operational Risk-Based Capital (E) Subgroup Dec. 20, 2019, Conference Call Minutes (Attachment Six-A2) Proposal 2019-01-O Referral for Further Work on Health Growth Operational Risk (Attachment Six-A4) Memorandum Regarding Improving Regulator Knowledge and Assessment of Operational Risk (Attachment Six-B) Memorandum Regarding Potential Further Work on Health Growth Operational Risk (Attachment Six-C) Property and Casualty Risk-Based Capital (E) Working Group April 7, 2019, Minutes (Attachment Seven) Property and Casualty Risk-Based Capital (E) Working Group and Catastrophe Risk (E) Subgroup Feb. 20, 2019,

Joint Conference Call Minutes (Attachment Seven-A) Catastrophe Risk (E) Subgroup April 5, 2019, Minutes (Attachment Seven-B) Proposal 2019-06-CA (Attachment Eight) Proposal 2018-14-CA (Attachment Nine) Proposal 2018-12-H (Attachment Ten) Proposal 2018-16-P (Attachment Eleven) Proposal 2018-20-P (Attachment Twelve) Proposal 2019-02-P (Attachment Thirteen)

Draft Pending Adoption

© 2019 National Association of Insurance Commissioners 1

Draft: 4/11/19

Capital Adequacy (E) Task Force Orlando, Florida

April 7, 2019

The Capital Adequacy (E) Task Force met in Orlando, FL, April 7, 2019. The following Task Force members participated: David Altmaier, Chair (FL); Todd E. Kiser, Vice Chair, represented by Jake Garn (UT); Lori K. Wing-Heier represented by David Phifer (AK); Jim L. Ridling represented by Richard Ford (AL); Ricardo Lara represented by Rachel Hemphill (CA); Andrew N. Mais represented by Wanchin Chou (CT); Stephen C. Taylor represented by Philip Barlow (DC); Trinidad Navarro represented by Dave Lonchar (DE); Doug Ommen represented by Mike Yanacheak (IA); Robert H. Muriel represented by Kevin Fry (IL); Vicki Schmidt represented by Richard Ramos (KS); Steve Kelley represented by John Robinson (MN); Chlora Lindley-Myers represented by John Rehagen (MO); Mike Causey represented by Jackie Obusek (NC); Marlene Caride represented by John Sirovetz (NJ); John G. Franchini (NM); Jillian Froment represented by Dale Bruggeman and Tom Botsko (OH); Glen Mulready represented by Eli Snowbarger (OK); Elizabeth Kelleher Dwyer represented by Matt Gendron (RI); Kent Sullivan represented by Mike Boerner (TX); Mike Kreidler represented by Patrick McNaughton (WA); and Mark Afable represented by Randy Milquet (WI). Also participating was: Stephen Wiest (NY).

1. Adopted its Feb. 19 and Jan. 31 Minutes The Task Force met Feb. 19 and took the following action: 1) adopted its 2018 Fall National Meeting minutes; 2) adopted its 2019 working agenda; and 3) exposed proposal 2019-06-CA for 30-day public comment period ending March 22. The Task Force also conducted an e-vote that concluded Jan. 31 to adopt the 2018 U.S. and non-U.S. catastrophe risk event lists. Mr. Yanacheak made a motion, seconded by Mr. Boerner, to adopt the Task Force’s Feb. 19 (Attachment One) and Jan. 31 (Attachment Two) minutes. The motion passed unanimously. 2. Exposed the RBC Preamble Commissioner Altmaier said the purpose of the risk- based capital (RBC) preamble is to provide some history and background on the RBC as a reference when reviewing the numerous referrals and proposal that pass to the Task Force and its working groups. Mr. Barlow noted that RBC is more than a factor-driven formula, and the mission of the Task Force may need to be revised. He also asked about its purpose, because the preamble states that permitted practices are not allowed in RBC, but he is aware that a state may have allowed permitted practices, so this preamble may not provide anymore guidance than what is already noted in the instructions. Commissioner Altmaier said some referrals the Task Force has received in the past were found to contain changes that should not be addressed in the RBC formula, and this preamble can provide a clear understanding of the purpose of RBC and the goals of the formula as guidance for referrals. Commissioner Altmaier suggested exposing the RBC preamble for a 30-day public comment period ending May 7 (Attachment Three). 3. Adopted its Working Group Reports Mr. McNaughton made a motion, seconded by Mr. Botsko, to adopt the reports of the Health Risk-Based Capital (E) Working Group (Attachment Four); Life Risk-Based Capital (E) Working Group (Attachment Five); Operational Risk (E) Subgroup (Attachment Six); and Property and Casualty Risk-Based Capital (E) Working Group (Attachment Seven). The motion passed unanimously. Mr. Chou said the arbitrary 3% operational risk charge may need to be reviewed. He added that international operational risk charges range from 6% to 10%, and further analysis may be necessary. Commissioner Altmaier indicated that, going forward, each working group will need to include operational risk in its analysis for future changes in economic conditions and make necessary adjustments, if appropriate, as with other aspects of RBC.



Commissioner Altmaier thanked Mr. Wiest for stepping in as chair of the Operational Risk (E) Subgroup. He expressed his appreciation to Superintendent Franchini for allowing Alan Seeley (NM), who passed away in April 2018, to chair the Subgroup for the time that he did. He said the operational risk charge is a great legacy to have in the state-based regulatory system. 4. Adopted Proposal 2019-06-CA Commissioner Altmaier said the purpose of proposal 2019-06-CA (RBC Procedures) is to stress that proposals regarding the RBC formula should be sent to the Task Force, and referrals sent to the Task Force may require an impact analysis before the working groups and Task Force can consider its relevance for changing the current RBC formula. The proposal was exposed for a public comment period ending March 22. Brian Bayerle (American Council of Life Insurers—ACLI) said “may” should be changed to “will” to be consistent with the remaining procedures document. Commissioner Altmaier agreed and suggested that NAIC staff make that editorial change. Mr. Rehagen made a motion, seconded by Mr. Ford, to adopt the RBC procedures with the editorial change (Attachment Eight). The motion passed unanimously. 5. Adopted Proposal 2018-14-CA Mr. McNaughton said the purpose of proposal 2018-14-CA (Stop Loss Interrogatories and Instructions) is to break Table 2 in the Stop Loss Interrogatories table into two separate tables. The proposal was originally exposed by the Task Force at the 2018 Fall National Meeting, comments were received and sent to the Health Risk-Based Capital (E) Working Group to review, and the proposal was revised based on those comments and re-exposed by the Task Force until Feb. 19, 2019. No comments were received during the second exposure. Mr. McNaughton made a motion, seconded by Mr. Boerner, to adopt proposal 2018-14-CA (Attachment Nine). The motion passed unanimously. 6. Adopted Proposal 2018-12-H Mr. McNaughton said the Health Risk-Based Capital (E) Working Group adopted proposal 2018-12-H (Asset Concentration) on July 12, 2018, for 2019 reporting. The purpose of this proposal is to correct the bond and preferred stock descriptions on the Asset Concentration page in the health RBC formula. The term “unaffiliated” has been included in the bond line description since the inception of the formula and the preferred stock line descriptions should have the term “unaffiliated” added to the blanks page for consistency with the instructions. Mr. McNaughton made a motion, seconded by Mr. Botsko to adopt proposal 2018-12-H (Attachment Ten). The motion passed unanimously. 7. Received the Credit Risk Memorandum Mr. McNaughton said the Health Risk-Based Capital (E) Working Group received a request from the Task Force on Sept. 21, 2018, to evaluate the recommendation from the Financial Condition (E) Committee regarding the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” (Covered Agreement) on the health RBC formula. Based on the Working Group’s review of existing credit risk health insurers are exposed to under the current formula, the Task Force does not believe the risk is material enough to modify the health RBC formula at this time. The Working Group’s basis for this is that only 12 out of 990 health companies reported unauthorized reinsurance on line 20 of the Liabilities page for year-end 2017, with the largest unauthorized reinsurance amount reported accounting for only 1.97 % of that health entities capital and surplus. The current health RBC formula applies a risk charge to the entire (authorized and unauthorized) recoverable balance for paid and unpaid claims, unearned premiums, and other reserve credits (Schedule S, Part 2 and Schedule S, Part 3, Section 2). There is no reduction in the risk charge to account for reinsurance recoverable balances from unauthorized reinsurance, which are currently treated as a liability (and a reduction in total adjusted capital) based on current annual financial statement reporting. Commissioner Altmaier thanked the Working Group for its thorough review of the Covered Agreement and its potential impact on the health RBC formula.



8. Exposed Proposal 2018-17-CA Mr. McNaughton said the purpose of proposal 2018-17-CA (Capitation Tables) is to make the capitation tables currently included in each line of businesses forecasting file to be captured electronically by the NAIC. Capturing these tables electronically will allow for greater transparency and the addition of crosschecks. Mr. McNaughton suggested exposing the proposal for a 30-day public comment period ending May 7 for year-end 2020 reporting. The Task Force concurred. 9. Adopted Proposal 2018-16-P Mr. Botsko said the Health Risk-Based Capital (E) Working Group received a comment letter from Nationwide during the public comment period on proposal 2018-16-P (2019 Underwriting Risk Line 4 Factors). Nationwide is requesting the Working Group to consider: 1) asking the American Academy of Actuaries (Academy) to evaluate whether to introduce additional granularity within the various lines of business and the related underwriting line 4 factors; 2) exposing comments for any follow-up recommendations from the Academy to the Working Group; 3) continuing to evaluate the aggregate impact that all changes have on the RBC formula; and 4) whether there should be an alternative treatment or exemption for insurers that are deemed to be in “run-off.” Mr. Botsko said the Working Group will work closely with the Academy to develop the underwriting risk factors in the future. He also agreed with the Nationwide comment that the issue for the run-off insurers should be handled by the Restructuring Mechanisms (E) Subgroup. However, the intent of the Working Group is to move forward with the proposed changes at this meeting. Mr. Botsko made a motion, seconded by Mr. Gendron, to adopt proposal 2018-16-P (Attachment Eleven). The motion passed unanimously. 10. Adopted Proposal 2018-20-P Mr. Botsko said proposal 2018-20-P (Asset Concentration PS and Hybrid Labels) provides some minor edits to the line descriptions on the PR011 Asset Concentration page. He stated that no comments were received during the exposure period. Mr. Botsko made a motion, seconded by Mr. Rehagen, to adopt proposal 2018-20-P (Attachment Twelve). The motion passed unanimously. 11. Adopted Proposal 2019-02-P Mr. Botsko said the purpose of proposal 2019-02-P (Modify RBC Average Growth Calculation) is to address the inconsistencies between the current instructions and formula for computation of the selected average growth rate. During the last conference call, the Working Group agreed to modify the instructions to match the current formula. Mr. Botsko stated that no comments were received during the exposure period. Mr. Botsko made a motion, seconded by Mr. Chou, to adopt proposal 2019-02-P (Attachment Thirteen). The motion passed unanimously 12. Received a Status Update on the Affiliate Investment Ad Hoc Group Mr. Botsko said the Affiliate Investment Ad Hoc Group has met several times this year to complete its review of the definitions and instructions for affiliate investments, and it will make a recommendation to the Blanks (E) Working Group for annual financial statement reporting. The ad hoc group will move forward with the reporting of investment affiliates in the RBC formulas and make any necessary recommendations for adjustments based on changes to the categories and definitions. 13. Discussed the Comprehensive Fund Referral Commissioner Altmaier suggested that NAIC staff conduct an analysis to determine how prevalent the various funds are throughout the RBC formulas and report to the Task Force. Mr. Barlow suggested going back three years to see if there is growth in reporting those investments.



Chris Anderson (Anderson Insights) said while there may be an argument for treating closed-end funds as if they are actual bonds for insurance regulatory purposes, no reasonable argument can be made for bond-like treatment of open-end funds (which include exchange-traded funds [ETFs]). At a minimum, he said their inclusion, without rigorous review, would distort current measures and historical comparisons of RBC and could encourage insurers to invest in assets with unjustifiably low C-1 factors. He agreed that the factor may need to be adjusted, and it should not have the same factors as bonds. Commissioner Altmaier said NAIC staff will circulate Mr. Anderson’s comment letter and reports regarding ETFs after they complete their analysis. 14. Discussed Other Matters Commissioner Altmaier said that based on the Task Force’s activity today, it will not need to meet April 30, but it will meet again June 28 to consider adoption of the 2019 RBC instruction changes. Having no further business, the Capital Adequacy (E) Task Force adjourned. W:\National Meetings\2019\SpringTF\CapAdequacy\04-07_CapitalAdequacyTFmin_final.docx

Attachment One Capital Adequacy (E) Task Force

4/7/19


Draft:2/20/19

Capital Adequacy (E) Task Force Conference Call

February 19, 2019

The Capital Adequacy (E) Task Force met via conference call Feb. 19, 2019. The following Task Force members participated: David Altmaier, Chair (FL); Todd E. Kiser, Vice Chair, represented by Jacob W. Garn (UT); Jim L. Ridling represented by Steven Ostlund (AL); Ricardo Lara represented by Rachel Hemphill (CA); Paul Lombardo by Wanchin Chou (CT); Stephen C. Taylor represented by Philip Barlow (DC); Trinidad Navarro represented by Charles Santana (DE); Doug Ommen represented by Carrie Mears (IA); Kevin Fry (IL); Vicky Schmidt represented by Tish Becker (KS); Steve Kelley represented by John W. Robinson (MN); Chlora Lindley-Myers represented by John Rehagen (MO); Mike Causey represented by Jackie Obusek (NC); Marlene Caride represented by Steve Kerner (NJ); John G. Franchini (NM); Barbara D. Richardson represented by Annette James (NV); Jillian Froment represented by Dale Bruggeman and Thomas Botsko (OH); Glen Mulready represented by Cuc Nguyen (OK); Elizabeth Kelleher Dwyer represented by Jack Broccoli (RI); Kent Sullivan represented by Mike Boerner and Jamie Walker (TX); Mike Kreidler represented by Patrick H. McNaughton (WA); and Mark Afable represented by Randy Milquet (WI).

1. Adopted its 2018 Fall National Meeting Minutes Mr. Kerner made a motion, seconded by Mr. Bruggeman, to adopt the Task Force’s Nov.16, 2018, minutes (see NAIC Proceedings – Fall 2018, Capital Adequacy (E) Task Force). The motion passed unanimously. 2. Adopted its Working Agenda Commissioner Altmaier said that its 2019 working agenda was updated to reflect the expected completion date for the various agenda items. Lou Felice (NAIC) said that the Operational Risk (E) Subgroup should complete its tasks by March 31 and then will be disbanded. Mr. Botsko made a motion, seconded by Mr. Boerner, to adopt its 2019 working agenda (Attachment One-A). The motion passed. 3. Received a Referral from the Statutory Accounting Principles (E) Working Group Mr. Bruggeman said that the Statutory Accounting Principles (E) Working Group recently updated Statement of Statutory Accounting Principles (SSAP) No. 30—Unaffiliated Common Stock but did not include foreign mutual funds (Attachment One-B). The Working Group asked the Task Force to review if exchange-traded funds (ETFs) should be captured in the general interrogatory and excluded from the asset concentration factor for risk-based capital (RBC) purposes. 4. Exposed the RBC Procedures Commissioner Altmaier noted that the highlighted text serves as a reminder to the RBC procedures for proposals. Additional instruction was added to address how referrals will be treated if suggested changes to the structure for RBC and an impact analysis may be conducted. Commissioner Altmaier suggested the procedures be exposed for a 30-day public comment period ending March 22. 5. Discussed Other Matters Steve Clayburn (American Council of Life Insurers⸺ACLI) asked if the working agenda for the Investment Risk-Based Capital (E) Working Group included the ongoing work for the C-1 bond factor. Commissioner Altmaier concurred that it did. Having no further business, the Capital Adequacy (E) Task Force adjourned. W:\National Meetings\2019\SpringlTF\CapAdequacy\02-19_CapitalAdequacyTFmin.docx

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iatio

n of

Insu

ranc

e C

omm

issi

oner

s

Cap

ital A

dequ

acy

(E) T

ask

Forc

e


Attachment One-A Capital Adequacy (E) Task Force

4/7/19

Prio

rity

1 –

Hig

h pr

iorit

y C

API

TA

L A

DE

QU

AC

Y (E

) TA

SK F

OR

CE

Prio

rity

2 –

Med

ium

prio

rity

WO

RK

ING

AG

EN

DA

ITE

MS

FOR

CA

LE

ND

AR

YE

AR

201

9Pr

iorit

y 3

– Lo

w p

riorit

y

Exp

ecte

d20

1920

19C

ompl

etio

n#

Ow

ner

Prio

rity

Dat

eW

orki

ng A

gend

a It

emSo

urce

Com

men

ts

Dat

e A

dded

to

Age

nda

Ong

oing

Item

s – P

&C

RB

C13

P&C

RB

C

WG

1A

nnua

lC

ontin

ue th

e ro

utin

e an

nual

upd

ate

of th

e in

dust

ry a

vera

ge d

evel

opm

ent (

rese

rve)

an

d L&

LAE

ratio

s (pr

emiu

m) i

n th

e PR

BC

form

ula.

Thi

s now

incl

udes

gat

herin

g ca

tast

roph

e da

ta a

nd d

evel

opin

g in

dust

ry p

rem

ium

risk

fact

ors o

n ex

-cat

astro

phe

basi

s.14

Cat

Ris

k SG

1A

nnua

lD

evel

op th

e an

nual

list

of c

atas

troph

e ev

ents

to b

e us

ed in

gat

herin

g ac

tual

ca

tast

roph

e lo

sses

for u

se in

dev

elop

ing

prem

ium

risk

fact

ors o

n ex

-cat

astro

phe

basi

s.

Car

ry-O

ver

Item

s Cur

rent

ly b

eing

Add

ress

ed –

P&

C R

BC

Con

tinue

dev

elop

men

t of R

BC

form

ula

revi

sion

s to

incl

ude

a ris

k ch

arge

bas

ed o

n ca

tast

roph

e m

odel

out

put:

Yea

r-end

20

18 2

019

a)Ev

alua

te o

ther

cat

astro

phe

risks

for p

ossi

ble

incl

usio

n in

the

char

ge-d

eter

min

e w

heth

er to

reco

mm

end

deve

lopi

ng c

harg

es fo

r any

add

ition

al p

erils

,an

d w

hich

per

ils o

r per

ils th

ose

shou

ld b

e.Y

ear-e

nd

b ) E

valu

ate

the

AEP

vs O

EP fa

ctor

s.

Car

ry-O

ver

Item

s not

Cur

rent

ly b

eing

add

ress

ed -

P&C

RB

C14

P&C

RB

C

WG

2Y

ear-e

nd

2016

or l

ater

Rev

iew

"mis

sing

risk

s" fo

r P&

C R

BC

from

Jan.

31,

201

1 A

AA

Rep

ort.

Jan.

31,

201

1 A

AA

R

epor

t14

P&C

RB

C

WG

3A

nnua

l Yea

r-en

d 20

19 o

r la

ter J

une

2020

Con

tinue

wor

king

with

the

Aca

dem

y to

revi

ew th

e m

etho

dolo

gy a

nd re

vise

the

unde

rwrit

ing

(pre

miu

m a

nd re

serv

e) c

harg

es in

the

PRB

C fo

rmul

a as

app

ropr

iate

. 20

16-1

4-P

1)C

onsi

der e

xpos

ing

the

Aca

dem

y Pr

opos

al a

t 201

6Fa

ll M

eetin

g.A

dopt

ed 1

0% c

appe

d fa

ctor

s6/

28/1

7 on

Tas

k Fo

rce

conf

eren

ce c

all.

The

PCR

BC

WG

agr

eed

to re

view

th

efa

ctor

sin

2or

3ye

ars.

New

Item

s – P

&C

RB

C15

P&C

RB

C

WG

1Y

ear-e

nd

2019

or l

ater

Eval

uate

the

impa

ct to

RB

C if

sche

dule

BA

inve

stm

ents

are

ass

igne

d a

desi

gnat

ion

and

whe

ther

or n

ot it

is fe

asib

le b

y th

e V

OST

F. C

hang

es to

RB

C w

ill fo

llow

the

Bla

nks W

G c

hang

es to

the

Ann

ual S

tate

men

t rep

ortin

g.

Ref

er fr

om

SAPW

GFo

rwar

ded

a re

com

men

datio

n M

emor

andu

m to

the

CA

DTF

11/7

/201

7

16P&

C R

BC

W

G1

Yea

r-end

20

19 o

r lat

erR

eins

tate

the

P/C

RB

C D

rafti

ng G

roup

to w

ork

join

tly w

ith th

e H

ealth

RB

C

Dra

fting

Gro

up to

revi

ew th

e bo

nd fa

ctor

sR

e-ap

poin

ted

the

Dra

fting

G

roup

on

10/3

0/17

PC

RB

C

conf

eren

ce c

all

1/17

/201

8

15P&

C R

BC

W

G1

Yea

r-end

20

19 o

r lat

erEv

alua

te a

) the

cur

rent

gro

wth

risk

met

hodo

logy

whe

ther

it is

ade

quat

ely

refle

cts

both

ope

ratio

nal r

isk

and

unde

rwrit

ing

risk;

b) t

he p

rem

ium

and

rese

rve

base

d gr

owth

risk

fact

ors e

ither

as a

stan

d-al

one

task

or i

n co

njun

ctio

n w

ith th

e on

goin

g un

derw

ritin

g ris

k fa

ctor

revi

ew w

ith c

onsi

dera

tion

of th

e op

erat

iona

l ris

k co

mpo

nent

of

exc

essi

ve g

row

th; c

) whe

ther

the

appl

icat

ion

of th

e gr

owth

fact

ors t

o N

ET p

roxi

es

adeq

uate

ly a

ccou

nts f

or g

row

th ri

sk th

at is

ced

ed to

rein

user

s tha

t do

not t

rigge

r gr

owth

risk

inth

eiro

wn

right

.

Ref

er fr

om

Ope

ratio

nal R

isk

Subg

roup

1)Se

nt a

refe

rral t

o th

e A

cade

my

on 6

/14/

18co

nfer

ence

cal

l.

1/25

/201

8

16P&

C R

BC

W

G1

Yea

r-end

20

19 o

r lat

erEv

alua

te th

e im

pact

to R

BC

on

a) P

re-T

ax v

s. A

fter T

ax; b

) Tax

refo

rm o

n To

tal

Adj

uste

d C

apita

l1/

25/2

018

13C

at R

isk

SG1

2©

201

8 N

atio

nal A

ssoc

iatio

n of

Insu

ranc

e C

omm

issi

oner

s

Cap

ital A

dequ

acy

(E) T

ask

Forc

e



4/7/19

Prio

rity

1 –

Hig

h pr

iorit

y C

API

TA

L A

DE

QU

AC

Y (E

) TA

SK F

OR

CE

Prio

rity

2 –

Med

ium

prio

rity

WO

RK

ING

AG

EN

DA

ITE

MS

FOR

CA

LE

ND

AR

YE

AR

201

9Pr

iorit

y 3

– Lo

w p

riorit

y

Exp

ecte

d20

1920

19C

ompl

etio

n#

Ow

ner

Prio

rity

Dat

eW

orki

ng A

gend

a It

emSo

urce

Com

men

ts

Dat

e A

dded

to

Age

nda

17P&

C R

BC

W

G1

2020

Sum

mer

M

eetin

gC

ontin

ue d

evel

opm

ent o

f RB

C fo

rmul

a re

visi

ons b

ased

on

the

Cov

ered

Agr

eem

ent:

'a) c

onsi

der e

limin

atin

g th

e di

ffere

nt tr

eatm

ent o

f unc

olla

tera

lized

rein

sura

nce

reco

vera

ble

from

aut

horiz

ed v

ersu

s una

utho

rized

, unr

ated

rein

sure

rs;

'b) c

onsi

der w

heth

er th

e fa

ctor

for u

ncol

late

raliz

ed, u

nrat

ed re

insu

rers

shou

ld b

e ad

just

ed

8/4/

2018

Ong

oing

Item

s – H

ealth

RB

C18

Hea

lth R

BC

W

G3

Yea

r-end

20

21 R

BC

or la

ter

Eval

uate

the

impa

ct o

f Fed

eral

Hea

lth C

are

Law

on

the

Hea

lth R

BC

For

mul

as4/

13/2

010

CA

TF

Cal

lA

dopt

ed 2

014-

01H

Ado

pted

201

4-02

HA

dopt

ed 2

014-

05H

Ado

pted

201

4-06

HA

dopt

ed 2

014-

24H

Ado

pted

201

4-25

HA

dopt

ed 2

016-

01-H

Ado

pted

201

7-09

-CA

Ado

pted

201

7-10

-HT

he W

orki

ng G

roup

will

co

ntin

ually

eva

laut

e an

y ch

ange

s to

the

heal

th

form

ula

as a

rsu

lt of

on

goin

g fe

dera

l dis

csus

sion

s an

d le

gisl

atio

n.

19H

ealth

RB

C

WG

3Y

ear-e

nd

2021

RB

C o

r la

ter

Dis

cuss

and

mon

itor t

he d

evel

opm

ent o

f fed

eral

leve

l pro

gram

s and

act

ions

and

the

potie

ntia

l im

pact

of t

hese

cha

nges

to th

e H

RB

C fo

rmul

a:

-Dev

elop

men

t of t

he st

ate

rein

sura

nce

prog

ram

s;-A

ssoc

iatio

n H

ealth

Pla

ns;

-Cro

ss-b

orde

r sal

es

HR

BC

WG

Dis

cuss

and

mon

itor t

he

deve

lopm

ent

of fe

dera

l lev

el

prog

ram

s and

the

pote

ntia

l im

pact

on

the

HR

BC

form

ula.

1/11

/201

8

22H

ealth

R

BC

WG

120

19 2

018

RB

C o

r la

ter

Mak

e te

chni

cal c

orre

ctio

ns to

Hea

lth R

BC

inst

ruct

ions

, bla

nk a

nd /o

r m

etho

ds

to p

rovi

de fo

r co

nsis

tent

trea

tmen

t am

ong

the

vari

ous c

ompo

nent

s of t

he R

BC

ca

lcul

atio

ns.

Ado

pted

201

5-06

-HA

dopt

ed 2

015-

14-H

Ado

pted

201

6-04

-HA

dopt

ed 2

015-

14-H

Thi

s age

nda

item

is

addr

esse

d un

der

the

Wor

kin g

Gro

up's

cha

rges

. C

arry

-Ove

r It

ems C

urre

ntly

bei

ng A

ddre

ssed

– H

ealth

RB

C20

Hea

lth R

BC

W

G1

Year

-End

20

19 R

BC o

r La

ter

Con

side

r cha

nges

for s

top-

loss

insu

ranc

e or

rein

sura

nce.

AA

A R

epor

t at

Dec

. 200

6 M

eetin

g(B

ased

on

Aca

dem

y re

port

expe

cted

to b

e re

ceiv

ed a

t YE-

2016

)20

16-1

7-C

A21

Hea

lth R

BC

W

G2

Yea

r-end

20

21 R

BC

or

late

r

Rev

iew

the

indi

vidu

al fa

ctor

s for

eac

h he

alth

car

e re

ceiv

able

s lin

e w

ithin

the

Cre

dit

Ris

k H

3 co

mpo

nent

of t

he R

BC

form

ula.

HR

BC

WG

Ado

pted

201

6-06

-H

3©

201

8 N

atio

nal A

ssoc

iatio

n of

Insu

ranc

e C

omm

issi

oner

s

Cap

ital A

dequ

acy

(E) T

ask

Forc

e



4/7/19

Prio

rity

1 –

Hig

h pr

iorit

y C

API

TA

L A

DE

QU

AC

Y (E

) TA

SK F

OR

CE

Prio

rity

2 –

Med

ium

prio

rity

WO

RK

ING

AG

EN

DA

ITE

MS

FOR

CA

LE

ND

AR

YE

AR

201

9Pr

iorit

y 3

– Lo

w p

riorit

y

Exp

ecte

d20

1920

19C

ompl

etio

n#

Ow

ner

Prio

rity

Dat

eW

orki

ng A

gend

a It

emSo

urce

Com

men

ts

Dat

e A

dded

to

Age

nda

22H

ealth

RB

C

WG

1Y

ear-e

nd

2020

or l

ater

Esta

blis

h an

Ad

Hoc

Gro

up to

revi

ew th

e H

ealth

Tes

t and

ann

ual s

tate

men

t cha

nges

fo

r rep

ortin

g he

alth

bus

ines

s in

the

Life

and

P/C

Bla

nks

HR

BC

WG

Eval

uate

the

appl

icab

ility

of

the

curre

nt H

ealth

Tes

t in

the

Ann

ual S

tate

men

t ins

truct

ions

in

toda

y's h

ealth

insu

ranc

e m

arke

t. D

iscu

ss w

ays t

o ga

ther

add

ition

al in

form

atio

n fo

r hea

lth b

usin

ess r

epor

ted

in

othe

r bla

nks.

8/4/

2018

23H

ealth

RB

C

WG

2Y

ear-e

nd

2020

RB

C o

r la

ter

Rev

iew

refe

rral l

ette

r fro

m C

apita

l Ade

quac

y (E

) Tas

k Fo

rce

rega

rdin

g G

uara

nty

Fund

s, Lo

ng-T

erm

Car

e an

d H

MO

'sC

AD

TFR

evie

w if

cha

nges

are

re

quire

d to

the

Hea

lth R

BC

Fo

rmul

a

9/21

/201

8

24H

ealth

RB

C

WG

1Y

ear-e

nd

2020

RB

C o

r la

ter

Rev

iew

refe

rral l

ette

r fro

m C

apita

l Ade

quac

y (E

) Tas

k Fo

rce

rega

rdin

g re

insu

ranc

e an

d co

vere

d ag

reem

ent

CA

DTF

Rev

iew

if c

hang

es a

re

requ

ired

to th

e H

ealth

RB

C

Form

ula

9/21

/201

8

25H

ealth

RB

C

WG

2Y

ear-e

nd

2020

RB

C o

r la

ter

Rev

iew

Lon

g-Te

rm C

are

and

Long

-Ter

m D

isab

ility

and

the

RB

C im

plic

atio

ns u

nder

th

e H

2 co

mpo

nent

HR

BC

WG

Rev

iew

if c

hang

es a

re

requ

ired

to th

e H

ealth

RB

C

Form

ula

9/21

/201

8

New

Item

s – H

ealth

RB

C26

Hea

lth

RB

C W

G1

Yea

r-en

d 20

20 R

BC

or

late

r

Rev

iew

the

Man

aged

Car

e C

redi

t cal

cula

tion

in th

e H

ealth

RB

C fo

rmul

a -

spec

ifica

lly C

ateg

ory

2a a

nd 2

b.H

RB

CW

GR

evie

w th

e M

anag

ed C

are

Cat

egor

y an

d th

e cr

edit

calc

ulat

ed, m

ore

spec

ifica

lly

the

cred

it ca

lcul

ated

whe

n m

ovin

g fr

om C

ateg

ory

0 &

1

to 2

a an

d 2b

.

12/3

/201

8

Ong

oing

Item

s – T

ask

Forc

e27

CA

TF1

2018

Affil

iate

d In

vest

men

t Sud

sidi

arie

s R

efer

ral

Ad H

oc g

roup

form

ed S

ept.

2016

Ad

Hoc

Gro

upA

d H

oc g

roup

will

pro

vide

pe

riodi

c up

date

s on

thei

r pr

ogre

ss.

Car

ry-O

ver

Item

s not

Cur

rent

ly b

eing

Add

ress

ed –

Tas

k Fo

rce

28C

ATF

220

19R

ecei

vabl

e fo

r Sec

uriti

es fa

ctor

Con

side

r eva

luat

ing

the

fact

or

ever

y 3

year

s. (2

018,

202

1, 2

024

etc.

)C

ATF

3N

AIC

Des

igna

tion

for S

ched

ule

D, P

art 2

Sec

tion

2 - C

omm

on S

tock

sR

efer

ral f

rom

SA

PWG

CA

TF3

Com

preh

ensi

ve F

und

Rev

iew

for i

nves

tmen

ts re

porte

d on

Sch

edul

e D

Pt 2

Sn2

Ref

erra

l fro

m

VO

STF

New

Item

s – T

ask

Forc

e

Car

ry-O

ver

Item

s Cur

rent

ly b

eing

Add

ress

ed –

Tas

k Fo

rce

4©

201

8 N

atio

nal A

ssoc

iatio

n of

Insu

ranc

e C

omm

issi

oner

s

Cap

ital A

dequ

acy

(E) T

ask

Forc

e



4/7/19

Prio

rity

1 –

Hig

h pr

iorit

y C

API

TA

L A

DE

QU

AC

Y (E

) TA

SK F

OR

CE

Prio

rity

2 –

Med

ium

prio

rity

WO

RK

ING

AG

EN

DA

ITE

MS

FOR

CA

LE

ND

AR

YE

AR

201

9Pr

iorit

y 3

– Lo

w p

riorit

y

Exp

ecte

d20

1920

19C

ompl

etio

n#

Ow

ner

Prio

rity

Dat

eW

orki

ng A

gend

a It

emSo

urce

Com

men

ts

Dat

e A

dded

to

Age

nda

29C

ATF

120

18 o

r La

ter

XX

X/A

XX

X C

aptiv

e R

eins

uran

ce R

BC

Sho

rtfal

lR

efer

ral f

rom

R

eins

uran

ce T

ask

Forc

e /R

ITF

Ref

erre

d to

Life

RB

C W

G fo

r co

nsid

erat

ion

and

com

men

t11

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017

30C

ATF

220

19 o

r La

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To: Commissioner Altmaier, Chair of the Capital Adequacy (E) Task Force Kevin Fry, Chair of the Valuation of Securities (E) Task Force

From Dale Bruggeman, Chair of the Statutory Accounting Principles (E) Working Group

Date: November 27, 2018

Re: Foreign Mutual Funds

During the Fall National Meeting, the Statutory Accounting Principles (E) Working Group exposed agenda item2018-34 proposing to explicitly include registered foreign mutual funds in scope of SSAP No. 30R—Unaffiliated Common Stock. (The revisions explicitly exclude other foreign funds from the scope of the SSAP.) This agenda item was developed pursuant to an industry request in response to substantive revisions to SSAP No. 30R. Although industry supported adopting the substantive revisions, it was identified that foreign mutual funds have previously been captured in scope of SSAP No. 30 (under the generic scope reference of “mutual funds”). Theindustry comments identified that the substantive revisions to include SEC-registered open-end funds (mutual funds), closed-end funds and unit-investment trusts in scope of SSAP No. 30R, perhaps inadvertently excluded foreign mutual funds. Consistent with industry’s request, the substantive revisions to SSAP No. 30R were adopted during the Fall National Meeting (under agenda item 2017-32), and the Working Group exposed proposed revisions to consider foreign mutual funds in scope.

Although there is a general assessment that foreign mutual funds should be treated similarly to foreign common stock, (which are in scope of SSAP No. 30R), the Statutory Accounting Principles (E) Working Group directed referrals to the Valuation of Securities (E) Task Force and the Capital Adequacy (E) Task Force to inquire on the exposure and solicit input. Specifically, comments were requested on the following questions:

1) Should only certain jurisdictions be permitted to have their registered mutual funds included as commonstock? (For example, UK, Hong Kong, Canadian, etc.)

2) Should Canadian registered mutual funds continue to be considered “domestic securities” in accordancewith the current annual statement instructions? (Under current annual statement instructions, Canadiansecurities are considered domestic securities.) Would the classification of Canadian mutual funds as“domestic” securities result with an inappropriate assessment that they represent U.S. SEC registeredfunds? If reported as domestic securities, should a new code or other reporting mechanism be establishedto identify Canadian mutual funds on Schedule D-2-2?

3) Should all foreign mutual funds be captured in the Supplemental Investment Risk Interrogatory as foreigninvestments? For example, question 4.01 of the Interrogatory asks whether foreign investments are lessthan 2.5% of total admitted assets. If an entity has more than 2.5% in foreign investments, then additionalinformation on the foreign securities is required. The ultimate question is whether an investment in aregistered foreign mutual fund should be captured in determining whether the foreign thresholdpercentage is met. If included in the total, then the issue is whether the subsequent foreign investmentIntegratory questions should be answered in accordance with the country that registered the fund, withouta look-through to the underlying origin of the investments held in the foreign mutual fund. (Thesubsequent questions ask for the foreign investment exposure by the NAIC sovereign designation.) Therisk is that allocating a foreign mutual fund to the registration country may not provide accurateinformation on the actual exposure of the investments within the fund, particularly if the registeredforeign fund is made up of investments from other countries.


Attachment One-B Capital Adequacy (E) Task Force

4/7/19

For example, SEC-registered mutual funds could be “global funds,” meaning they investprimarily in foreign companies with investments also in U.S. companies, or “international funds,”meaning that they invest in companies outside of the United States. Other SEC-Registered fundsinclude “regional or country funds,” which invest primarily in a particular region or country, or“international index funds,” which seek to track the results of a particular foreign market orinternational index.

4) Should there be clarification that only U.S. SEC registered mutual funds are permitted to be identified as“diversified” and excluded from the Asset Concentration Factor section of the risk-based capital filing, orshould all funds that are diversified in accordance with the SEC Investment Company Act of 1940 beexcluded from this factor?

The current interrogatory asks whether there are diversified mutual funds reported on ScheduleD-2-2 (diversified according to the SEC Investment Company Act of 1940, Section 5(b)(1)).Technically, this current question does not restrict the reporting to SEC registered mutual funds.As such, it is uncertain whether foreign mutual funds that meet the diversification requirements ofthe 1940 Act are permitted to be reported in this Interrogatory.

It has been communicated that certain Exchange Traded Funds (ETFs), although not registered asmutual funds, are diversified in accordance with the Investment Company Act of 1940, Section5(b)(1). The question is whether these funds should be captured in the general interrogatory forexclusion from the asset concentration factor for RBC purposes. (If these funds should becaptured in the GI, then a subsequent revisions will likely be proposed to clarify what is permittedto be reported.)

Thank you for your attention to this referral. If possible, a response would be preferred by Feb 15, 2019 to correspond with the Statutory Accounting Principles (E) Working Group exposure deadline. Consideration of comments received is planned to occur during the 2019 Spring National Meeting.

Please contact NAIC staff of the Statutory Accounting Principles (E) Working Group with any questions.

Cc: Charles A. Therriault, Robert Carcano, Jane Barr, Julie Gann, Robin Marcotte, Jake Stultz and Fatima Sediqzad

Attachment: Agenda Item 2018-34

G:\FRS\DATA\Stat Acctg\1. Statutory\E. Referrals\2018\SAPWG to VOSTFCATF - Foreign Mutual Funds.docx


Attachment One-B Capital Adequacy (E) Task Force

4/7/19

Attachment Two Capital Adequacy (E) Task Force

4/7/19


Draft: 2/5/19

Capital Adequacy (E) Task Force E-Vote

January 31, 2019 The Capital Adequacy (E) Task Force conducted an e-vote that concluded on Jan. 31, 2019. The following Task Force members participated: Todd E. Kiser vice-chair represented by Jake Garn (UT); Jim L.Ridling represented by Dan Davis (AL); Ricardo Lara represented by Rachel Hemphill (CA); Paul Lombardo represented by Wanchin Chou (CT); Kevin Fry represented by Judy Mottar (IL); Vicki Schmidt represented by Tish Becker (KS); Steven Kelley represented by Frederick Andersen (MN); Chlora Lindley-Myers (MO); Barbara D. Richardson represented by Joel Bengo (NV); John G. Franchini represented by Mark Jordan (NM); Glen Mulready represented by Andrew Schallhorn (OK); Kent Sullivan represented by Mike Boerner (TX); and Mark Afable represented by Randy Milquet. 1. Adopted the Updated 2018 U.S. and Non-U.S. Catastrophe Risk Event Lists The Task Force conducted an e-vote that concluded Jan. 31 to consider adoption of the updated 2018 U.S. and non-U.S. catastrophe risk event lists. Mr. Garn made a motion, seconded by Ms. Lindley-Myers, to adopt the lists. The motion passed. Having no further business, the Capital Adequacy (E) Task Force adjourned. W:\National Meetings\2019\Spring\TF\CapAdequacy\ Evote CADTF 01-31-doc

Attachment Three Capital Adequacy (E) Task Force

4/7/19

P–1 © 2019 National Association of Insurance Commissioners 1

Risk-Based Capital Preamble

History of Risk-Based Capital by the NAIC

A. Background

1. The NAIC, through its committees and working groups, facilitated many projects of importance to the insurance regulators, industry and users of statutory financial information in the early 1990s. That was evidenced by the original mission statement and charges given to the NAIC Capital Adequacy (E) Task Force of the Financial Condition (E) Committee.

2. The mission of the Capital Adequacy (E) Task Force was to determine the minimum amount of capital an insurer should be required to hold to avoid triggering regulatory action. The risk-based capital formula consists of a series of risk factors that are applied to selected assets, liabilities or other specific company financial data to establish the minimum capital needed to bear the risk arising from that item.

3. To carry out the mission, the Capital Adequacy (E) Task Force was charged with carrying out the following initiatives:

• Evaluate emerging "risk" issues for referral to the risk-based capital (RBC) working groups/subgroups for certain issues involving more than one RBC formula. Monitor emerging and existing risks relative to their consistent or divergent treatment in the three RBC formulas.

• Review and evaluate company submissions for the schedule and corresponding adjustment to total adjusted capital (TAC).

• Monitor changes in accounting and reporting requirements resulting from the adoption and continuing maintenance of the revised Accounting Practices and Procedures Manual (AP&P Manual) to ensure that model laws, publications, formulas, analysis tools, etc., supported by the Task Force continue to meet regulatory objectives

4. The Risk-based Capital forecasting and instructions were developed and are now maintained in accordance with the mission of the Capital Adequacy (E) Task Force as a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile.

B. Purpose of Risk-Based Capital

5. The purpose of risk-based capital is to determine the minimum capital (RBC levels) an insurer needs to operate its business and insurers should seek to maintain capital above the RBC levels.

6. RBC Instructions, RBC reports and adjusted report(s) are intended solely for use by the commissioner/state in monitoring the solvency of insurers and the need for possible corrective action with respect to insurers and are considered confidential. All domestic insurers are required to file an RBC report unless exempt by the Commissioner. There are no permitted practices for RBC and all insurers are required to abide by the RBC instructions.


4/7/19 Preamble


7. Comparison of an insurer’s TAC to any RBC level is a regulatory tool which may indicate the need for possible corrective action with respect to the insurer and is not intended as a means to rank insurers generally. Therefore, except as otherwise required under the provisions of Risk-Based Capital (RBC) for Insurers Model Act (#312) or Risk-Based Capital (RBC) for Health Organizations Model Act (#315) (Model Laws), the making, publishing, disseminating, circulation or placing before the public, or causing, directly or indirectly to be made, published, disseminated, circulated or place before the public, in a newspaper, magazine or other publication, or in a form of a notice, or in any other way, an advertisement, announcement or statement containing an assertion, representation or statement with regard to the RBC levels of any insurer or of any component derived in the calculation by any insurer in prohibited

C. History of Risk-Based Capital

8. From the inception of insurance regulation in the middle 1800s, the limitation of insurance company insolvency risk has been a major goal of the regulatory process. The requirement of adequate capital has been a major tool in limiting insolvency costs throughout the history of insurance regulation. Initially, the states enacted statutes requiring a specified minimum amount of capital and surplus for an insurance company to enter the business or to remain in business.

9. In 1992, the NAIC adopted the life risk-based capital formula with an implementation date of year-end 1993. The formula was developed for specific regulatory needs. Four major categories were identified for the life formula: Asset Risk, Insurance Risk, Interest Rate Risk and All other Business Risk. The property and casualty and health formulas were implemented in 1994 and 1998, respectively. The focus of these formulas is Asset Risk, Underwriting Risk, Credit Risk and Business Risk (Health)..

10. The total risk-based capital needed by an insurer to avoid being taken into conservatorship is the Authorized Control Level Risk-Based Capital, which is 50 percent of the sum of the risk-based capital for the categories, adjusted for covariance. The covariance adjustment is meant to take into account that problems in all risk categories are not likely to occur at the same time.

B. Objectives of Risk-Based Capital Reports

11. The primary responsibility of each state insurance department is to regulate insurance companies in accordance with state laws with an emphasis on solvency for the protection of policyholders. The ultimate objective of solvency regulation is to ensure that policyholder, contract holder and other legal obligations are met when they come due and that companies maintain capital and surplus at all times and in such forms as required by statute to provide an adequate margin of safety.

C. Critical Concepts of Risk-Based Capital

12. Fixed minimum capital requirements have been largely based on the judgement of the drafters of statutes and varied widely amount the states. Those fixed minimum capital and surplus requirement have served to protect the public reasonably well for over a century. Beginning in the 1960’s rapidly rising inflation brought rapidly rising interest rates.

13. Over the years, various financial models have been developed to try to measure the “right” amount of capital that an insurance company should hold. Risk-based capital seeks to modify the risk profile of all insurance companies to the point where they all have an equal probability of insolvency.


4/7/19 Preamble


14. Because the NAIC formula develops a minimum level of capitalization rather than a target level, it is impractical to use the RBC formula to compare the minimum RBC level developed by one insurance company to the minimum level developed by another. Comparisons of amounts that exceed the minimum standards do not provide a definitive assessment of their relative financial strength. For this reason, the Model Law prohibits insurance companies, their agents and others involved in the business of insurance using the company’s RBC results to compare competitors.

15. The principal focus of solvency measurement is determination of financial condition through analysis of the financial statements and risk-based capital. However, protection of the policyholders can only be maintained through continued monitoring of the financial condition of the insurance enterprise. Operating performance is another indicator of an enterprise’s ability to maintain itself as a going concern.

16. The Capital Adequacy Task Force and its RBC Working Groups are charged with evaluating refinements to the existing NAIC risk-based capital formula and considering improvements and revisions to the various RBC blanks to 1) conform the RBC blanks to changes made in other areas of the NAIC to promote uniformity (when it is determined to be necessary); and 2) oversee the development of additional reporting formats within the existing RBC blanks as needs are identified

17. The Capital Adequacy (E) Task Force and its RBC Working groups will monitor and evaluate changes to the Annual Statement Blanks and Purposes and Procedure Manual of the NAIC Investment Analysis Office to determine if assets or specifically investments evaluated by the Security Valuation Office are relevant to the Risk-Based Capital formula in determining the minimum capital and surplus for all insurance companies or whether reporting available to the regulator as a more appropriate means to addressing the risk. The Task Force will consider different methods of determining whether a particular risk should be added as a new risk to be studied and selected for a change to the applicable RBC formula, but due consideration will be given to the materiality of the risk to the industry as well as the very specific purpose of the RBC formulas to develop regulatory minimum capital levels.

Draft Pending Adoption Attachment Four

Capital Adequacy (E) Task Force 4/7/19


Draft: 4/8/19 Health Risk-Based Capital (E) Working Group

Orlando, Florida April 7, 2019

The Health Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met in Orlando, FL, April 7, 2019. The following Working Group members participated: Patrick McNaughton, Chair (WA); Steven Ostlund (AL); Rolf Kaumann (CO); Wanchin Chou (CT); Carolyn Morgan, Ray Spudeck and Virginia Christy (FL); Tish Becker (KS); Stephen Wiest (NY); Kimberly Rankin (PA); and Mike Boerner (TX). Also participating was: Rhonda Ahrens (NE). 1. Adopted its March 6, 2019, Feb. 1, 2019, and Dec. 3, 2018, Minutes The Working Group met March 6, 2019, Feb. 1, 2019, and Dec. 3, 2018. During these meetings, the Working Group took the following action: 1) discussed the rounding functions in the capitation tables; 2) referred proposal 2018-17-CA and proposal 2018-14-CA to the Capital Adequacy (E) Task Force for exposure; 3) discussed the health care receivable factors; 4) discussed the managed care credit calculation; 5) received an update from the Operational Risk (E) Subgroup on the excessive growth charge in the health risk-based capital (RBC) formula; 6) received an update on the Annual Statement Health Test Ad Hoc Group; 7) exposed and voted to refer the credit risk/reinsurance memorandum to the Capital Adequacy (E) Task Force; and 8) adopted its 2019 working agenda. Mr. Ostlund made a motion, seconded by Mr. Chou, to adopt the Working Group’s March 6, 2019 (Attachment Four-A), Feb. 1, 2019 (Attachment Four-B) and Dec. 3, 2018 (Attachment Four-C) minutes. The motion passed. 2. Received Excessive Growth Charge Memo from the Operational Risk (E) Subgroup Mr. McNaughton said the Working Group received the excessive growth charge referral letter from the Operational Risk (E) Subgroup. In the letter, the Subgroup noted that it believes there may be an opportunity for the Working Group to evaluate and improve the growth risk charge in the health RBC formula. The Subgroup recommended that the Working Group develop an ad hoc group of regulators and interested parties to review the existing growth risk methodology, as well as potential enhancements including the following items: 1) determine if, given the current array of company types that now file health RBC, the variables used in the application of the 10% threshold should be reversed (i.e., the charge is assessed if risk revenue is increasing faster than RBC); 2) determine if a 10% threshold is still reasonable; 3) determine if the normal growth risk calculation (existing or as adjusted) should apply to startup companies and, if not, what adjustments should be applied to the calculation for startups; and 4) determine if the health RBC growth risk methodology (existing or as adjusted) should be adopted into the life RBC formula for companies that write a material amount (e.g., > X%) of their premiums in health business, where such business would be subject to the growth risk calculation in the health RBC formula. Hearing no objections, the Working Group received the referral letter and agreed to form an ad hoc group to review the excessive growth charge. 3. Exposed Proposal 2019-04-H Mr. McNaughton said the Working Group has been working with the Academy for several years to evaluate and revise the health care receivable factors. In 2013, Exhibit 3A was added to the health annual financial statement to provide the data needed for a follow-up study on the accruals made for health care receivables. Prior to 2013, the annual financial statement did not provide sufficient granular data for all types of health care receivables. Based on the data collected in the annual financial statement, the Academy submitted a report to the Working Group for year-end 2016 reporting that suggested changes to the factors for the credit risk portion of the RBC formula for some health care receivables. The factors were developed from the 2014 annual financial statement data. The Academy found during its review of the data in Exhibit 3A that more than 90% of companies reported pharmaceutical rebates collected in 2014 on amounts accrued as of Dec. 31, 2013, exceeded or equaled the admitted portion of pharmaceutical rebates receivable accrued as of Dec. 31, 2013, and the pharmaceutical rebates receivable factor remained unchanged. However, the five other types of health care receivables—i.e., claim overpayment receivables, loan and advances to providers, capitation arrangement receivables, risk-sharing receivables and other health care receivables—reported in Exhibit 3A showed that only 66% of companies reported collections

Draft Pending Adoption Attachment Four



in 2014 on amounts accrued as of Dec. 31, 2013, that exceeded or equaled the admitted portion of these receivables, with 7% reporting no collections and 27% reporting amounts collected in 2014 on amounts accrued as of Dec. 31, 2013, less than those accruals. Based on this analysis, the Academy recommended increasing the factor significantly to almost 57%, to provide the 90% confidence that the collected amounts would exceed the sum of the admitted portion of the accrual plus the addition to the credit risk calculation from the 5% factor. Due to the significant increase in the factor based on the reported data, the Working Group agreed to a lower factor of 19% and asked the Academy to continue its review of the factors. Mr. McNaughton said that as the Academy has continued to review the 2015 and later health care receivable data for the five other types of health care receivables, recoveries have not shown substantive improvement. One likely reason is that companies have not made diligent efforts to track the recoveries that are being made. For example, amounts recovered for claim overpayments receivable may be accomplished by means of offsets against other claims paid to the same providers, so separate tracking through the claim payment system may not be automated. Mr. McNaughton said proposal 2019-04-H is designed to change the credit risk portion of the RBC formula to apply an additional charge when the reported recovery against the prior year accrual was zero or low and seeks to avoid charging substantial amounts for those companies that are reporting recoveries in line with prior accruals. The hope is that the changes to the formula (which adds to RBC when recoveries are not reported) will prompt companies to improve their reporting of recoveries on the accrued health care receivables. The recommendation is for this proposal to be implemented with 2020 reporting on an informational-only basis for two years; after this two-year period, the change would be implemented with the charge to RBC. Hearing no objections, the Working Group exposed proposal 2019-04-H for a 30-day public comment period ending May 7 (Attachment Four-D). 4. Adopted Updates to its 2019 Working Agenda Mr. McNaughton said the health RBC working agenda was revised to remove item 24 regarding reinsurance and the covered agreement and added the referral letter from the Operational Risk (E) Subgroup for the excessive growth charge. Mr. Ostlund made a motion, seconded by Mr. Wiest, to adopt the updates to the 2019 health RBC working agenda (Attachment Four-E). The motion passed. 5. Received an Update on the Annual Statement Health Test Ad Hoc Group Mr. McNaughton said the Annual Statement Health Test Ad Hoc group met March 15 and continues to move forward in a deliberative and thoughtful manner. He said the group discussed moving forward with a two-phase approach: 1) revise the current health test language; and 2) consider the addition of supplemental health schedules in the life and property/casualty annual financial statement blanks. The group plans meet May 3 to continue its discussions. 6. Discussed Other Matters Mr. McNaughton said the Working Group lost a member of the group at the beginning of the year and asked if any states were interested in joining the Working Group. Ms. Ahrens said Nebraska would like to join the Working Group. Having no further business, the Health Risk-Based Capital (E) Working Group adjourned. W:\National Meetings\2019\Spring\TF\Capadequacy\Healthrbc\04_07_19_HRBC Minutes.Docx

Attachment Four-A Capital Adequacy (E) Task Force

4/7/19


Draft: 3/11/19

Health Risk-Based Capital (E) Working Group E-Vote

March 6, 2019 The Health Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force conducted an e-vote that concluded March 6, 2019. The following Working Group members participated: Patrick McNaughton, Chair (WA); Steven Ostlund (AL); Rolf Kaumann (CO); Wanchin Chou (CT); Carolyn Morgan (FL); Tish Becker (KS); Kristi Bohn (MN); Annette James (NV); Stephen Wiest (NY); Kimberly Rankin (PA); and Mike Boerner (TX). 1. Referred the Credit Risk/Reinsurance Memorandum to the Capital Adequacy (E) Task Force The Working Group conducted an e-vote that concluded March 6 to consider referring the credit risk/reinsurance memorandum to the Capital Adequacy (E) Task Force. Mr. Ostlund made a motion, seconded by Mr. Wiest, to refer the memorandum to the Task Force. The motion passed. Having no further business, the Health Risk-Based Capital (E) Working Group adjourned. W:\National Meetings\2019\Spring\TF\CapAdequacy\HealthRBC\Proceedings\Att2A_E-Vote HRBC 3-6-19.docx

Attachment Four-B Capital Adequacy (E) Task Force

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Draft: 3/19/19

Health Risk-Based Capital (E) Working Group Conference Call February 1, 2019

The Health Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met via conference call Feb. 1, 2019. The following Working Group members participated: Patrick McNaughton, Chair, and Steve Drutz (WA); Steve Ostlund (AL); Rolf Kaumann (CO); Wanchin Chou (CT); Kyle Collins (FL); Tish Becker (KS); Kristi Bohn and Charles Roadfeldt (MN); Annette James (NV); Stephen Wiest (NY); and Mike Boerner (TX). 1. Received an Update from the Operational Risk (E) Subgroup on the Excessive Growth Charge in the Health RBC Formula Mr. Wiest said the Operational Risk (E) Subgroup will disband by March 31, as it has completed its charge for developing the basic operational risk charge. He said the Subgroup will not be able to make a final recommendation for a methodology for replacing the current excessive growth charge in the health risk-based capital (RBC) formula. He said the Subgroup will spend the bulk of its remaining time making a recommendation to collect information about the approaches used by state insurers to assess operational risk internally. However, the Subgroup wants to provide useful information to transition the excessive growth charge back to the Working Group. Mr. Wiest said the Subgroup has considered various ways to move the excessive growth risk charge. The Subgroup has proposed to remove the informational only growth risk page from the health RBC formula, and it does not recommend the addition of a replacement page. He said a referral letter will be sent to the Working Group to review the existing excessive growth charge in the health RBC formula. Lou Felice (NAIC) summarized the draft health growth risk referral letter (Attachment Four-B1). He said the market conditions that existed when the health RBC formula was developed in the mid-to-late 1990s were different than the market conditions today. He said some reasons to consider a change in the excessive growth charge are because when the charge was originally developed, it was only for health maintenance organizations (HMOs) and Blue Cross and Blue Shield plans. Since then, the health reporting blank has been implemented and has different types of arrangements. Mr. Felice said it is still worth considering that a charge should be applied to startup companies as a result of rapid growth. The Working Group will continue to monitor and accept the excessive growth charge referral once it is received and will consider forming an ad hoc group to consider the changes. 2. Referred Proposal 2018-14-CA to the Capital Adequacy (E) Task Force for Re-Exposure Jan Graeber (American Council of Life Insurers—ACLI) provided a summary of the ACLI’s comment letter (Attachment Four-B2). She said the ACLI’s concerns revolved around three main issues: 1) stop-loss carriers’ inability to access and report data based on total lives covered; 2) clarification and revisions to the data collected and the type of stop-loss business reported in Table 2a and Table 2b; and 3) clarification to the instructions for determining the “Average Specific Attachment Point” and the “Average Aggregate Attachment (%).” A second comment letter from the Self-Insurance Institute of America, Inc. was also received by the Working Group (Attachment Four-B3). Mr. McNaughton said, based on the comments received, several changes were incorporated into the proposal: 1) deleting the Average Aggregate Attachment (%) column in Table 2a; 2) deleting the Average Specific Attachment Point ($) column in Table 2b; 3) adding a footnote for the number of covered lives reported; 4) clarifying the instructions; and 5) adding examples. Mr. McNaughton said the footnote was added to address concerns that stop-loss carriers do not collect data on the total number of lives covered and the suggestion to base this amount on the number of employees covered. However, throughout the annual financial statement (Accident & Health Policy Experience Exhibit, Column 6, Section C, Line 2) and the RBC formula references to the lives covered are not limited to just employees. The annual instructions allow for those carriers that do not have the exact number of covered lives administratively available to them to be approximated. For consistency in reporting,


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the number of covered lives will be based on the total, rather than the number, of employees. An instruction and footnote were added to reflect how they are to be calculated if estimated amounts are used. Crystal Brown (NAIC) said NAIC staff will work to clarify the instructions to reflect whether the weighted average should be on the number of covered lives or expected claims. Ms. Graeber asked whether the change is to be applied to direct business and not assumed. Ms. Brown said the purpose of this proposal is to split the current Table 2 into two separate tables and not to change the current reporting. She said the question of direct versus assumed may need to be addressed separately, as it was not discussed in this proposal. She said the current instructions state to report on a gross basis. Bill Weller (America’s Health Insurance Plans—AHIP) suggested adding an example for an Insured 4 that has a specific attachment point but no aggregate, so it would be included in Table 2a and excluded from Table 2b because there is no aggregate. James Braue (UnitedHealthcare Group) asked for clarification on what is to be estimated in the footnote. Mr. Roadfeldt said, in many groups, regulators look at the number of covered employees and apply a factor to come up with the number of covered lives. Mr. Weller suggested changing the second question to read, “If the answer is ‘yes,’ provide an explanation for the assumptions used in how the estimation was calculated.” The Working Group agreed to refer the proposal, with the modifications suggested in the comment letters and discussed during the conference call, to the Capital Adequacy (E) Task Force to consider re-exposing it for a public comment period ending Feb. 19. 3. Exposed the Credit Risk/Reinsurance Memorandum Mr. McNaughton said the Capital Adequacy (E) Task Force received a referral from the Financial Condition (E) Committee to evaluate the recommendation regarding the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” (Bilateral Agreement) on the health RBC formula, and the Task Force requested that the Working Group review the impact. Mr. McNaughton said, based on a review of the current credit risk charge in the health RBC formula, it is the Working Group’s belief that the risk is not material enough to modify the health RBC formula at this time. He provided a summary of the review performed. Twelve companies (out of 990) reported unauthorized reinsurance on line 20 of the Liabilities page for year-end 2017. Of those 12 companies, the company reporting the largest amount of unauthorized reinsurance accounted for only 1.97% of the company’s capital and surplus amount. Mr. McNaughton said the health RBC formula currently applies a risk charge to the entire (authorized and unauthorized) recoverable balance for paid and unpaid claims, unearned premiums and other reserve credits (Schedule S, Part 2 and Schedule S, Part 3, Section 2). There is no reduction in the risk charge in the current health RBC formula to account for reinsurance recoverable balances from unauthorized reinsurance, which are currently treated as a liability (and a reduction in total adjusted capital (TAC)) based on current annual financial statement reporting. Lastly, annual financial statement reporting changes to Schedule S being considered by the Blanks (E) Working Group will address the TAC adjustment in the health RBC formula. Mr. Weller said AHIP supports the conclusion of the Working Group. The Working Group agreed to expose the memorandum for a public comment period ending Feb. 19. 4. Adopted its Working Agenda Ms. Brown summarized the changes to the 2019 health RBC working agenda, which included: 1) moving the expected completion date of item 21 to 2021 or later, considering federal discussions and legislation; 2) moving the expected completion date of item 22 to 2021 or later, as these items are also related to federal and state discussions and legislation; 3) deleting the technical corrections item, as this is addressed under the Working Group’s charges; 4) moving the priority of item 23 to a 1; 5) moving the expected completion date of item 24 to 2021 or later, as the Working Group continues to work with the American


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Academy of Actuaries (Academy) and potentially draft a proposal for these receivables; 6) moving the priority of item 27 to a 1 based on the memorandum that was discussed under Item 3 of the agenda; 7) moving the priority of item 28 to a 2; and 8) adding new agenda item 29 to look at the calculation of the managed care credit for Category 2a and Category 2b. Mr. Ostlund made a motion, seconded by Mr. Kaumann, to adopt the 2019 health RBC working agenda. The motion passed. Mr. McNaughton invited other interested regulators to join the Working Group as members. Having no further business, the Health Risk-Based Capital (E) Working Group adjourned. W:\National Meetings\2019\Spring\TF\Capadequacy\Healthrbc\Proceedings\Att2B_2_1_19_HRBC Minutes.Docx

Attachment Four-B1 Capital Adequacy (E) Task Force

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Operational Risk Analysis – Health RBC Growth Risk Outline for a Referral to the Health Risk Based Capital (E) Working Group

Referral for Further Work on Health Growth Operational Risk

The operational Risk (E) Subgroup believes that there is an opportunity to improve the assessment of growth risk in the Health Risk-based Capital (HRBC) formula. While alternatives to the existing growth risk methodology that have been tested by the Subgroup have not proved to be better indicators of risk, there are reasons to consider whether the existing methodology is working as intended. The Health RBC (E) Working Group is best positioned to continue the review. The Operational Risk (E) Subgroup recommends that the review focus on the existing growth risk by forming an ad hoc subgroup of regulators and interested parties familiar with the HRBC formula similar to what was utilized to review the existing growth risk methodology and factors in the Property RBC formula. This document should be used as a starting point for that review. That ad hoc group would provide suggestions for potential enhancements to the existing growth charge to the HRBCWG. The review could include: Given the current array of company types that now file Health RBC, should the variables used in the

application of the 10% threshold be reversed (i.e., the charge is assessed if risk revenue is increasing faster than RBC)?

Determine if a 10% threshold is still reasonable. Should the normal growth risk calculation (existing or as adjusted) apply to start-up companies? If not,

what adjustments should be applied to the calculation for start-ups? Should the Health RBC growth risk methodology (existing or as adjusted) be adopted into the Life RBC

formula for companies that write a material amount (e.g. > X%) of their premiums in health business, where such business would be subject to the growth risk calculation in the Health RBC formula?

Background

How the Existing Growth Risk Charge Works:

Growth in Underwriting Risk RBC year over year is measured against growth in underwriting risk revenue year over year. Thus, the formula recognized that as risk was added, revenue should respond accordingly.

If growth Underwriting Risk RBC exceeds growth in underwriting risk revenue by greater than 10%, growth risk is triggered.

A factor of 50% is applied to the excess of growth in Underwriting Risk RBC above the 10% threshold.


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Considerations in Developing the Existing Methodology:

The risk of growth, while included in H-4, is most related to increased pricing risk caused by growth rather than increased operational risk that may be caused by rapid growth.

The methodology is better designed to capture change in product mix or introductions of new managed care products with differing levels of managed care features.

At the time that the HRBC formula was being developed, there were significant issues around transfer of risk to providers which were driving a change from capitated arrangements and HMO products to greater use of contractual fee-for-service and withholds / incentives in provider agreements and PPO and POS products.

The developers of the HRBC formula considered the potential for premium rate impact related to increasing competition from national carriers into local markets, and consolidation in the market.

Reasons to Consider a Change to the Existing Methodology:

The original Health Organizations RBC (HORBC) formula applied primarily to HMOs and Not-for-profit health plans (e.g., hospital and medical indemnity plans). In the early 2000s, with the adoption of Statutory Accounting Principles and the Health financial reporting blank (and the addition of a health test to that reporting blank), insurers became subject to the renamed Heath RBC (HRBC) formula.

Relatively few entities triggered the current growth risk charge, even during recent periods of rapid growth caused by the ACA.

The application of growth risk to new entities is unclear. A number of entities that were new to the market and which grew rapidly in 2014 and 2015 ultimately failed regardless of original projections. If sufficient capital was in put in place during the licensing process based on reasonably accurate projections, then there should be little impact from growth risk. If not, perhaps growth risk should be recognized as an early warning indicator. The growth should smooth out over time and the charge removed.

For various reasons, neither the informational approach nor other alternatives explored thus far by the Operational Risk (E) Subgroup have indicated a significantly improved ability to identify companies that are not sufficiently capitalized to absorb the impact of rapid growth.

Companies that file the Life RBC formula, but write the same type of health business written by companies that are required to file the Health RBC formula are not currently subject to a growth risk capital requirement.


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December 17, 2018

Commissioner David Altmaier Chair, Group Capital Calculation (E) Working Group National Association of Insurance Commissioners (NAIC) Via email to: [email protected]

RE: Proposal 2018-14 CA Stop Loss Interrogatories and Instructions

Dear Commissioner Altmaier:

As a national trade association representing companies involved in the self-insurance marketplace, including third-party administrators (TPAs), stop-loss insurance carriers, brokers and attorneys, the Self-Insurance Institute of America (SIIA) appreciates the committee’s work related to the reporting of stop-loss insurance contracts, as outlined in CA-2018-14 Stop-Loss Interrogatories and Instructions. Our members are proud to represent and assist tens of thousands of self-insured employees and their dependents in both the public and private sector.

We appreciate the committee’s work on this proposal and have some suggestions for improving the language related to reporting of stop-loss insurance contracts. Our primary concern with the proposal is that it would require stop-loss carriers to report information they do not have.

These comments refer to page 26 of the draft:

“The number of covered lives in a group (group size) should be based on the size of the group as of December 31 of the calendar year. The number of covered lives counted should include all enrolled members (that is, employees plus dependents).”

The stop-loss carrier calculates premium on the number of covered employees. Rarely, if ever, does the carrier know the actual number of covered lives and would not know the health plan enrollment members “as of December 31st of the calendar year.”

As you know, TPA’s manage health plan benefits and retain plan enrollment and eligibility information. Generally, TPAs do not share this information in real-time with the stop-loss carrier. There is a very good rationale for this business practice: the only time stop-loss carriers need to know whether an enrollee is both eligible for and covered by a health plan is when that enrollee incurs health care costs that, upon being paid by the plan sponsor, are eligible for stop-loss reimbursement. Most health plans only submit a few claims for reimbursement in a calendar year.

As a result, we respectfully suggest that the first columns in all tables 2(a) and (b) in CA-2018-14 be revised to request:

“covered employees in the group” (versus “covered lives in group.”)


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Additionally, we have a final comment for page 26:

Average Aggregate Attachment Percentage – Is based on expected claims. Subgroups of groups that have separate stop loss contracts should be aggregated in terms of determining the group size. The average should be weighted by the number of covered lives in the respective group size bracket, excluding the count of covered lives within the denominator where specific/aggregate coverage was not provided.

For the reporting the aggregate attachment point, we understand this to mean that the NAIC is requesting weighted aggregate corridors, such as 120 and 125 percent.

In closing, we expect carriers will report more specific contracts than aggregate. Larger employers tend to have stable claims and opt to not purchase aggregate stop-loss. Thus, the aggregate calculations will be based on a smaller universe than the total number of contracts- and the averages will reflect the smaller employers in the cohort.

Thank you for your consideration of these comments. If you have questions or would like to discuss further, please call me at (202) 595-0641.

Sincerely,

Adam Brackemyre Vice President of State Government Relations


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Attachment Four-C Capital Adequacy (E) Task Force

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Draft: 12/12/19

Health Risk-Based Capital (E) Working Group Conference Call

December 3, 2018 The Health Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met via conference call Dec. 3, 2018. The following Working Group members participated: Patrick McNaughton, Chair, and Steve Drutz (WA); Richard Hinkel, Vice Chair (WI); Steve Ostlund (AL); Rolf Kaumann (CO); Wanchin Chou (CT); Carolyn Morgan and Kyle Collins (FL); Tish Becker (KS); Kristi Bohn and Charles Roadfeldt (MN); Annette James (NV); Stephen Wiest (NY); and Mike Boerner (TX). 1. Discussed Rounding Functions in Capitation Tables and Referred Proposal 2018-17-CA to the Capital Adequacy (E)

Task Force

Mr. McNaughton said that there is not a rounding function included in capitation tables of the health risk-based capital (RBC) formula. He said that it is recommended that the rounding function be added in the formula as this will result in a more accurate calculation and will be consistent with the life and property/casualty (P/C) formulas. Mr. McNaughton said that proposal 2018-17-CA would allow the current capitation tables, used to calculate the capitation charge in the RBC forecasting spreadsheet, to be captured as electronic-only tables. He said that this change would allow for more transparency and the addition of crosschecks. Hearing no objections, the Working Group agreed to add the rounding function to the capitation tables within the health RBC formula and to refer proposal 2018-17-CA to the Capital Adequacy (E) Task Force for exposure, with comments to come back to the Working Group. 2. Discussed the Health Care Receivables Factors Mr. McNaughton said that American Academy of Actuaries (Academy) submitted a recommendation several years ago to the Working Group to increase the health care receivables factors from 5% to 57%. Due to the large increase in the recommended factor, the Working Group agreed to update the factor at a lower charge than the Academy recommended. However, the Academy was asked to continue to review the factors. The Academy has continued to review factors but found that there are concerns with the data quality of the amounts reported in Exhibit 3, Exhibit 3A and U&I Part 2B. The Academy provided this summary of the data concerns that it has encountered: “For the company data for 2015-2017, Exhibits 3 and 3A balance to each other 99% of the time. However, the situation is much different in the balancing of U&I Part 2B and Exhibit 3A. If you exclude the companies where 2B and 3A are both zero (about 37% of the companies), for the remaining companies the current year receivable in Exhibit 2B and 3A balance less than 10% of the time. However, the Blank instructions indicate that Exhibit 2B and Exhibit 3 and 3A should both be on insured business only excluding Loans and Advances.” Mr. McNaughton stated that due to these discrepancies, the data is lacking in providing meaningful analysis. He said one option that the Working Group could consider would be to draft a proposal to add an adjustment to the health care receivable portion of the health formula based on the company’s past experience. If the base value (current year) is reported correctly, then the formula would work as it currently does. However, if the amount is set too high for the prior year or the company did not account for the receivables correctly, the charge would be increased by a large portion of the excess. Kevin Russell (Academy) said that the current health RBC formula uses a similar approach in the long-term care (LTC) calculation, where not all companies have the same factor, but the experience of company compared to its prior accrual drives the factor in the next year. He said moving forward with the development of a proposal would serve two purposes: 1) not to penalize those companies that are doing a good job of estimating their receivables and reporting the recoveries; and 2) to encourage companies in reporting their accrual and reporting the recoveries in their accrual. Jim Braue (UnitedHealthcare) asked if it has been identified as to where the inconsistencies lie within the data. Crystal Brown (NAIC) said that the discrepancies within the data appear to be between Exhibit 3A and U&I Part 2B, with U&I Part 2B as having the inconsistent data. The Working Group directed NAIC staff to proceed with drafting a proposal for year-end 2020.

Attachment Four-C Capital Adequacy (E) Task Force

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3. Discussed MCC Calculation Mr. McNaughton said that a question was brought forward regarding the calculation of the managed care credit (MCC) as a result of the execution of a risk-sharing contract with providers, which shifts paid claims from “Category 1 – Payments Made According to Contractual Arrangements” to “Category 2 – Payments Made Subject to Withholds or Bonuses That Are Otherwise Managed Care Category 1.” When modeling the change, it was found that there was little benefit in shifting from Category 1 to Category 2b. This resulted in a broader question: What was the original intent of the formula? Was it that the formula would yield the same MCC (e.g., a 15% result) under Category 1 and Category 2B, even though the underlying arrangements are subject to different MCCs on their own? Or should a company get an additional credit under Category 2b compared to a 15% result under Category 1? Mr. McNaughton said that it is unclear how many companies are affected by the MCC, how broad of a scope this may be and the materiality impact to the formula. The Working Group asked NAIC staff to pull the data and do some initial analysis to get a better understanding of the impact to industry. The Working Group will continue to discuss this further during its next conference call. 4. Received an Update from the Operational Risk (E) Subgroup on the Excessive Growth Charge in the Health RBC Formula Mr. Wiest said that the Operational Risk (E) Subgroup will disband by March 31, 2019 and has completed its charge for developing the basic operational risk charge. He said that the Subgroup will not be able to make a final recommendation for a methodology for replacing the current excessive growth charge in the health RBC formula. He summarized the Operational Risk Analysis – Health RBC Growth Risk Existing vs. Current Informational Growth Risk and Further Options for Consideration document (Attachment Four-C1). Mr. Wiest said that the Subgroup will spend the bulk of its remaining time on making a recommendation to collect information about the approaches used by insurers to assess operational risk internally. However, the Subgroup wants to provide useful information to transition the excessive growth charge back to the Working Group. Lou Felice (NAIC) said that the existing excessive growth charge measures the difference between underwriting risk RBC and underwriting risk revenue. He said that at the time of the development, there were changes in product mix largely away from capitated or risk sharing arrangements to preferred provider organization (PPO) products and fee for service-type arrangements. However, in today’s market, the current excessive growth charge is capturing a smaller number of companies, even during the rapid growth of the federal Affordable Care Act (ACA), because the arrangements are moving up the MCC scale rather than down the MCC scale. He said that the informational methodology currently in the formula would not likely be recommended due to the inability to determine if it captured more companies through the charge or because of price/premium increases during that time period. The Working Group will continue to monitor and work with the Subgroup as it transitions the excessive growth charge work to the Working Group in 2019. 5. Received an Update on the Health Annual Statement Health Test Ad Hoc Group Mr. McNaughton said that the ad hoc group met Nov. 20 to continue the discussion of the best approach to move forward with updating the health annual statement test. He said that the group discussed two possible approaches: 1) look at modifying the health test language; and 2) consider adding supplemental schedules to the life and P/C annual statement filings to more appropriately gather the relevant health data needed to provide more meaningful analysis. Mr. McNaughton said that the group directed NAIC staff to review the 2017 data and provide aggregate results to the group, as well as individual company results to state insurance regulators. The group and NAIC staff were asked to provide their thoughts on which schedules in the health blank would be beneficial as supplemental schedules. The group plans to meet next on Dec. 18 to continue its discussions. Having no further business, the Health Risk-Based Capital (E) Working Group adjourned. W:\National Meetings\2019\Spring\TF\Capadequacy\Healthrbc\Proceedings\Att2C_12_3_18_HRBC Minutes.Docx

Operational Risk Analysis – Health RBC Growth Risk Existing vs. Current Informational Growth Risk and Further Options for Consideration

How the Existing Growth Risk Charge Works: Growth in Underwriting Risk RBC year over year is measured against growth in underwriting risk

revenue year over year. If growth Underwriting Risk RBC exceeds growth in underwriting risk revenue by greater than

10%, growth risk is triggered A factor of 50% is applied to the excess of growth in Underwriting Risk RBC above the 10%

threshold.

Considerations in developing the Existing Methodology The risk of growth while included in H-4 is most related to increased pricing risk caused by

growth rather than increased op risk that is caused by growth. The methodology is better designed to capture change in product mix or introductions of new

products with a lower level of managed care features At the time that the HRBC formula was being developed, there were significant issues around

transfer of risk to providers which were driving a change from capitated arrangements and HMOproducts to greater use of contractual fee-for service and withholds / incentives in provideragreements and PPO and POS products. Such agreements are subject to a lower level of controlover variances in underwriting results. Thus the formula recognized that as risk was added,revenue should respond accordingly.

The developers of the HRBC considered the potential for premium rate impact related toincreasing competition from national carriers into local markets, and consolidation in.

Reasons to consider a Change to the Existing Methodology The mix of managed care arrangements is shifting, perhaps more toward capitated risk sharing

arrangements rather than away from such arrangements Relatively few entities triggered the current growth risk charge even during recent periods of

rapid growth caused by ACA The application of growth risk to new entities is unclear. A number of entities that were new to

the market and which grew rapidly in 2014 and 2015 ultimately failed. There may be a better way to measure increased operational risk than via use of premium

exposures alone

Original Work Conducted by the Operational Risk (E) Subgroup Using 5 years of RBC data (2011 – 2015), the RBC impact of the existing growth risk charged to the informational methodology. In order to isolate the impact of the informational charge, the existing charge was removed from the data for each year and data for the proposed method, using the informational factors was substituted and included within H-4. The informational factor is 2.0% of net premium revenue in excess of a growth threshold of 25% year over year. The following was observed:


Attachment Four-C1 Capital Adequacy (E) Task Force

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There were some advantages of the proposed informational method:

• The RBC ratios for Companies triggering the informational growth risk charge are generallylower than for the companies triggering the existing method.

• The lowest average RBC ratios for companies triggering the informational method (2015)followed the highest average RBC ratios (2014). This may be indicative of a negative trend inRBC as a result of rapid growth in 2014 and 2015.

• The proportion of companies that trigger growth risk and are at an action level in the first yearand over time is similar, but again the numbers are larger for the proposed method

There were some drawbacks to the proposed informational method:

• The amount of premiums in excess of the growth risk threshold for the proposed method hasgrown remarkably in 2014 and 2015. The impact of significant premium rate increases orchanges in product mix cannot be filtered out of potentially large growth risk capital resultscompared to the existing method.

• More than 25% of all Companies trigger the proposed growth risk in 2014 and 2015 years.Again, the impact of rate increases during this period is not filtered.

• The proposed method produces a higher percentage of growth risk to total RBC for all RBC filers;this is especially pronounced in 2014 and 2015.

There were circumstances where the proposed method had no advantage over the existing method:

• The proportion of non-growth risk triggering companies that get to action level in current yearand eventually is similar between the existing and proposed method and is a much lower ratethan for companies that trigger growth risk.

• The median loss ratios for companies triggering growth risk under each method appearcomparable.

Initial conclusions: Growth in the Health industry appeared to have accelerated in 2014 and to a slightly lesser extent in 2015, likely due to the commencement of enrollment in State and Federal exchanges and some new participants in the market.

Although the informational method may be equivalent or a slightly better predictor of risk, the large increase in the number of companies that trigger the informational charge must be considered since many more companies may not have increased risk. This is partially due to the observed growth can be attributed to premium rate increases rather than membership increases. In such cases the increases in premium rates may be a positive solvency factor.

The far larger number of companies triggering growth at a 25% threshold should be taken into account in considering how effective the informational method is relative to the existing method.



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Potential Revisions to current Informational Growth Risk Approach In order to filter out the impact of large rate increases which continued in 2016 and 2017, two alternate methodologies may be tested for calendar years 2016 and 2017. The first option applies the current factor of 2% of premium revenue in excess of 25% of the prior year premium revenue but applies the result only to those insurers where membership has grown more than premium growth rate minus 10% (e.g. premium growth = 25% and membership growth > or = 15%) The second option applies an escalating add-on factor (e.g. 1%, 1.5% and 2% of RBC after covariance) to those insurers that experienced membership growth of 20%- 50%; 51% and 100%; and >100% respectively.

Potential Advantages / drawbacks of alternate methods:

Option 1 Advantages: • A better indicator of growth as this option should trigger companies with large growth in

membership while factoring out premium increased to a certain degree.• Arguably more geared toward additional op risk from as oppose to underwriting risk

Option 1 Drawbacks: • It does not account well for changes in product mix or introduction of a new product or

products which may be more indicative of operational risk• Applies a charge to net premiums which may indicate some level of false precision

Option 2 Advantages: • Consistent with basic operational risk methodology• Relies on growth in membership alone• Can be applied to start up insurers, but…

Option 2 Drawbacks: • May be duplicative of capital for start-up insurers• Not risk sensitive within growth ranges

Potential ways forward

1. Recommend further testing and evaluation of one or both of the alternative informationalmethodologies.

2. Provide suggestions for potential enhancements to the existing growth to the HRBC WG whichcould include: Review of the how the 10 % threshold criteria are applied Addressing start-up companies Addressing additional op risk from growth vs. additional underwriting risk from growth



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Capital Adequacy (E) Task ForceRBC Proposal Form

[ ] Capital Adequacy (E) Task Force [ x ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] SMI RBC (E) Subgroup [ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup

DATE: 3-6-19

CONTACT PERSON: Crystal Brown

TELEPHONE: 816-783-8146

EMAIL ADDRESS: [email protected]

ON BEHALF OF: Health RBC (E) Working Group

NAME: Patrick McNaughton

TITLE: Chief Financial Examiner/Chair

AFFILIATION: WA Office of Insurance Commissioner

ADDRESS: PO Box 40255

Olympia, WA 98504-0255

FOR NAIC USE ONLY

Agenda Item # 2019-04-H Year 2020

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO

[ ] REFERRED TO OTHER NAIC GROUP

[ ] EXPOSED _______________

[ ] OTHER (SPECIFY)

IDENTIFICATION OF SOURCE AND FORM(S)/INSTRUCTIONS TO BE CHANGED

[ x ] Health RBC Blanks [ ] Property/Casualty RBC Blanks [ ] Life RBC Instructions[ ] Fraternal RBC Blanks [ x ] Health RBC Instructions [ ] Property/Casualty RBC Instructions[ ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER ______________

DESCRIPTION OF CHANGE(S)Add a break out for health care receivables accrued vs. recovered from the CY and PY.

REASON OR JUSTIFICATION FOR CHANGE **The purpose of the proposal is to apply an additional charge for receivable amounts that were accrued in the PY but not recovered in the CY.

Additional Staff Comments:The proposal is being exposed would be on an informational only basis for 2020 & 2021 reporting with full implementation to the formula in 2022. The factors and instructions will be discussed in more detail on future calls and will exposed around the Summer National Meeting.

The proposed calculations include the current 5% and 19% factors for the health care receivables, additional consideration to change the factors will be addressed by the Working Group after 2020 data has been received.

___________________________________________________________________________________________________ ** This section must be completed on all forms. Revised 11-2013

Attachment Four-D Capital Adequacy (E) Task Force

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Page

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20A

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4/7/19


CA

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rmat

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ontr

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evel

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Den

otes

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s tha

t mus

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ually

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ftwar

e.


4/7/19


Example 1:

Claim overpayment receivable as of 12/31/2020 with substantial recoveries (but still a little less than the accrual)

a. Claim overpayment receivable as of 12/31/2020 of $1,000,000b. Claim overpayment receivable as of 12/31/2019 of $900,000c. Claim overpayment recoveries of $800,000 reported achieved in 2020 against accruals at

12/31/2019d. Current formula amount: $1,000,000 x 0.19 = $190,000e. Informational formula amount =

= $1,000,000 x 0.19 + (1 – 0.19) x max(0, $900,000 – (1 + 0.19) x $800,000) = $190,000 + 0.81 x max(0, $900,000 - $952,000) = $190,000 + 0.81 x max(0, -$52,000) = $190,000

Example 2:

Claim overpayment receivable as of 12/31/2020, but with no recoveries:

a. Claim overpayment receivable as of 12/31/2020 of $1,000,000b. Claim overpayment receivable as of 12/31/2019 of $900,000c. Claim overpayment recoveries of $0 reported achieved in 2020 against accruals at 12/31/2019d. Current formula amount: $1,000,000 x 0.19 = $190,000e. Informational formula amount =

= $1,000,000 x 0.19 + (1 – 0.19) x max(0, $900,000 – (1 + 0.19) x $0) = $190,000 + 0.81 x max (0, $900,000) = $190,000 + 0.81 x $900,000 = $190,000 + $729,000 = $919,000

Example 3:

Claim overpayment receivable as of 12/31/2020, but with recoveries of half the amount of the accrual:

a. Claim overpayment receivable as of 12/31/2020 of $1,000,000b. Claim overpayment receivable as of 12/31/2019 of $900,000c. Claim overpayment recoveries of $450,000 reported achieved in 2020 against accruals at

12/31/2019d. Current formula amount: $1,000,000 x 0.19 = $190,000e. Informational formula amount =

= $1,000,000 x 0.19 + (1 – 0.19) x max(0, $900,000 – (1 + 0.19) x $450,000) = $190,000 + 0.81 x max(0, $900,000 - $535,500) = $190,000 + 0.81 x $364,500 = $190,000 + $295,245 = $485,245


4/7/19


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Attachment Four-E Capital Adequacy (E) Task Force

4/7/19


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Attachment Four-E Capital Adequacy (E) Task Force

4/7/19


Draft Pending Adoption Attachment Five



Draft: 4/18/19

Life Risk-Based Capital (E) Working Group Orlando, Florida

April 7, 2019 The Life Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met in Orlando, FL, April 7, 2019. The following Working Group members participated: Philip Barlow, Chair (DC); Steven Ostlund and Richard Ford (AL); Perry Kupferman and Rachel Hemphill (CA); Wanchin Chou (CT); Virginia Christy, Carolyn Morgan and Ray Spudeck (FL); Judy Mottar (IL); John Robinson (MN); Debbie Doggett (MO); Rhonda Ahrens (NE); John Sirovetz (NJ); Marshal Bozzo and Stephen Wiest (NY); Andy Schallhorn (OK); and Mike Boerner (TX). Also participating was: Peter Weber (OH). 1. Adopted its Feb. 22, 2019; Dec. 19, 2018; and Dec. 13, 2018, Minutes Mr. Ostlund made a motion, seconded by Mr. Chou, to adopt the Working Group’s Feb. 22, 2019 (Attachment Five-A); Dec. 19, 2018 (Attachment Five-B); and Dec. 13, 2018 (Attachment Five-C) minutes. The motion passed unanimously. 2. Heard an Update from the Academy Longevity Risk Task Force Ms. Ahrens said the Longevity Risk (A/E) Subgroup heard a presentation from the American Academy of Actuaries (Academy) Longevity Risk Task Force on an approach for adding a longevity risk charge to the life risk-based capital (RBC) formula during its March 5 and Feb. 19 conference calls. She said the proposed approach was exposed for public comment along with a list of questions the Subgroup would like to contemplate. Paul Navratil (Academy) provided the Working Group with a summary presentation of that proposed approach (Attachment Five-D), highlighting the key points also included in the presentations to the Subgroup. He discussed the Academy’s objective and philosophy, the overall approach. He provided a summary of the field study results, along with impacts for sample companies with concentrated, balanced and low longevity risk exposures. He said the Academy did not get enough responses from companies with longevity reinsurance, but it believes it is important to keep this product in scope. He said the Academy’s next steps include completing the recommendation on covariance between longevity risk and mortality risk. Ms. Ahrens said the factors being considered would be applied to all in-force business. She noted the Academy’s premise of the reserves being adequate and said a concern of some Subgroup members is scenarios where the reserve valuation may not be as adequate as desired. She said she believes the Subgroup should focus on the factors going forward, as opposed to any inadequacies in reserves due to the lack of a factor addressing longevity risk in the current formula. Mr. Barlow asked about the timing of the Subgroup’s recommendation for a longevity risk factor for the products in scope and any potential covariance adjustment. Ms. Ahrens said the Subgroup wants the factors to be applicable for year-end 2020, so there should be time to get a final covariance recommendation; however, she said she is not sure the Subgroup will be comfortable with a covariance adjustment. While she believes it is valuable to consider, and the Subgroup would likely submit recommendations with or without a covariance adjustment, she said this would be introducing a product-specific covariance item. Mr. Barlow said he believes identifying where there are covariances and reflecting this in the formula is a good idea, but he suggested that covariance is something the Working Group needs to look at in general. 3. Adopted the Longevity Risk (A/E) Subgroup’s March 5, 2019; and Feb. 19, 2019, Minutes Ms. Ahrens made a motion, seconded by Mr. Ostlund, to adopt the Longevity Risk (A/E) Subgroup’s March 5 and Feb. 19 minutes (Attachment Five-E). The motion passed unanimously.




4. Received an Update from the Variable Annuities Capital and Reserve (E/A) Subgroup

Mr. Weber said the NAIC created the Variable Annuities Issues (E) Working Group and engaged Oliver Wyman to study the writers of variable annuities’ use of captives, with a possible outcome being revisions to the requirements for variable annuity reserves and minimum capital, known as C-3 Phase II, to discourage or eliminate the use of captive reinsurers. The framework was designed to address many of the reasons companies were using captives. The project started in 2014, included two Quantitative Impact Studies (QIS 1 and QIS 2), and wrapped up with a final recommendation from Oliver Wyman in December 2017. The Variable Annuities Issues (E) Working Group studied that recommendation; made necessary decisions, modifications and referrals to the Life Actuarial (A) Task Force; and arrived at a final version of the Variable Annuities Framework, which was adopted by the Financial Condition (E) Committee in July 2018.

Mr. Weber said the Variable Annuities Capital and Reserve (E/A) Subgroup’s charge is not to assess the appropriateness of, or make any changes to, the framework but only to make changes to VM-21, Requirements for Principle-Based Reserves for Variable Annuities, Actuarial Guideline XLIII—CARVM for Variable Annuities (AG 43), and the C-3 Phase II instructions and to implement it. He said between July 2018 and September 2018, an NAIC drafting group—including state insurance regulators, most members of the Subgroup, NAIC staff, industry participants who were involved in the QIS projects and Oliver Wyman representatives—worked on the initial drafts of the amendments. Since September 2018, the Subgroup met several times via conference call to discuss the revisions. The Subgroup exposed the C-3 Phase II edits, received comments, and discussed and implemented several recommended edits, resulting in the suggested RBC instructions (Attachment Five-F).

Mr. Weber highlighted the fact that the framework includes an early adoption option for 2019. He said the framework was intended to be implemented for year-end 2020, but some companies have expressed interest in implementing early, to be consistent with early adoption of reserve changes. He said the documentation for the confidential reporting associated with C-3 calculations will be covered in VM-31, PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation. He noted that Appendix 2 is new to the instructions; however, it was referenced in the existing instructions as a reference to Appendix 8 of the report “Recommended Approach for Setting Regulatory Risk-Based Capital Requirements for Variable Annuities and Similar Products: Presented by the American Academy of Actuaries’ Life Capital Adequacy Subcommittee to the National Association of Insurance Commissioners’ Capital Adequacy Task Force” (June 2005). He said the Subgroup recommends that the Life Risk-Based Capital (E) Working Group expose the revised instructions for a 30-day public comment period.

5. Exposed Proposed Revisions to the RBC Instructions

The Working Group agreed to expose the proposed revisions to the RBC instructions (Attachment Five-F) for a public comment period ending May 8, so the comments can be discussed during its May 13 conference call.

6. Heard an Update from the Academy C2 Work Group

Chris Trost (Academy) presented an update (Attachment Five-G) on the Academy C2 Work Group. He reminded everyone that the focus of the work group is to review the RBC requirements for life insurance, both individual and group, mortality risk. He said the work group will also work with the Academy Longevity Risk Task Force on any needed covariance adjustment between mortality and longevity risk. He described the work group’s overall approach as identifying the C-2 requirements as the mortality risk in excess of that covered by statutory reserves. This will include mortality risks related to volatility, level, trend and catastrophic risk.

Mr. Trost said the approach includes the use of a Monte Carlo simulation, and the work group expects the results to be expressed in terms of a factor-based approach for RBC. He noted that the appendix included in the presentation contains details with respect to the preliminary distributions and assumptions. He said he believes it would be appropriate for the work group to give a more detailed presentation on what it would like to include in the modeling during an upcoming conference call of the Life Risk-Based Capital (E) Working Group to get additional feedback from state insurance regulators and interested parties.




7. Received an Update on Pending Items to Be Considered by the Working Group Mr. Barlow said the Working Group has been concentrating on work related to the federal Tax Cuts and Jobs Act of 2017 (TCJA) and provided an update on other items the Working Group will be looking at. With respect to the elimination of the fraternal annual financial statement blank and the combined life and fraternal RBC formula, he said blank and instruction changes needed were exposed for comment, and those comments will be discussed during the Working Group’s April 26 conference call. Mr. Barlow said a proposal to update RBC charges for unaffiliated common stock supporting long-horizon contractual commitments, which some members of the Working Group have discussed with the proposal sponsor, is being modified to address feedback received. He said a proposal from industry to address the RBC treatment of fixed-indexed annuities is being incorporated into the work being done by the Academy’s C3 Life and Annuities Work Group. Mr. Barlow reminded the Working Group members that they need to determine if any adjustment is needed due to the changes made to the Life and Health Insurance Guaranty Association Model Act (#520) or if any adjustment is needed to the reinsurance credit risk in light of changes related to collateral and the changes made to the property/casualty (P/C) RBC formula. A referral from the Operational Risk (E) Subgroup has been received, and Mr. Barlow said the Working Group will need to consider whether a growth risk charge is needed in the life RBC formula. With respect to the work that was done for the TCJA, Mr. Barlow said there were some changes that might have been done structurally without the time constraints, and he asked the American Council of Life Insurers (ACLI) for its input, but there may be some follow-up action required. He reminded the Working Group that the work being done by the Investment Risk-Based Capital (E) Working Group is something the Working Group will, eventually, need to consider. Having no further business, the Life Risk-Based Capital (E) Working Group adjourned. W:\National Meetings\2019\Spring\TF\CapAdequacy\LifeRBC\For Proceedings\LifeRBC\Life RBC 2019-4-7.docx

Attachment Five-A Capital Adequacy (E) Task Force

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Draft: 3/29/19

Life Risk-Based Capital (E) Working Group Conference Call

February 22, 2019 The Life Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met via conference call Feb. 22, 2019. The following Working Group members participated: Philip Barlow, Chair (DC); Steve Ostlund (AL); Perry Kupferman (CA); Deborah Batista (CO); Wanchin Chou (CT); Vincent Tsang (IL); William Leung (MO); Rhonda Ahrens (NE); David Wolf (NJ); Bill Carmello (NY); Andrew Schallhorn (OK); and Mike Boerner (TX). 1. Adopted the Tax Guidance Document

Paul Graham (American Council of Life Insurers—ACLI) presented the ACLI’s comment letter (Attachment Five-A1). The Working Group accepted the recommendation in the ACLI’s first comment, but with a suggested wording change to indicate there are offsetting provisions in the Tax Cuts and Jobs Act of 2017 (TCJA). The Working Group accepted the recommendations in the ACLI’s second and third comments, but with a suggested wording change to specifically mention total adjusted capital (TAC) as well as authorized control level (ACL) in discussing the timing of the impacts. The Working Group accepted the recommendation in the ACLI’s fifth comment concerning the change in the amortization of the deferred acquisition costs (DAC) tax, but with suggested wording changes to indicate a period of years as opposed to a specific number and to reflect the fact that this revision will adjust taxable income as opposed to further increasing it. The Working Group accepted the ACLI’s sixth comment, but with an amendment to indicate that the dividends received deduction was modified beginning with 2018. Wayne Stuenkel (American Academy of Actuaries—Academy) presented the Academy’s comment letter (Attachment Five-A2). The Working Group accepted the Academy’s first two recommendations. With respect to the ACLI’s fourth comment concerning the paragraph discussing lower risk-based capital (RBC) ratios resulting from the TCJA changes and making companies appear riskier, Mr. Graham said RBC is one measurement of risk, but there are others that would show companies as less risky as a result of the TCJA changes. He said the intent of the paragraph is to indicate that, when viewed holistically, the lower RBC ratio does not necessarily mean a company is riskier. Mr. Stuenkel said the Academy had robust discussions concerning this paragraph, and there was concern with talking about risk because the impacts are so multifaceted. Mr. Barlow said he does not believe the Working Group will be able to come up with the correct wording in the time required, noting that it may add more confusion. He suggested not including the paragraph in the final tax guidance document. Mr. Ostlund and Mr. Chou agreed. Mr. Graham said he understands the concerns, but he reminded the Working Group that the language was originally designed to respond to early questions about why RBC ratios would go down when taxes go down, which did not seem to make sense. He said the intent was to indicate that, while this one measurement might be showing a higher level of risk, there are other risk measurement tools that would not send that same signal. He said state insurance regulators have spent a lot of time on this issue, and if everyone is comfortable with understanding the dynamics involved, it is probably acceptable to remove it. The Working Group agreed to remove the paragraph. Mr. Leung made a motion, seconded by Mr. Boerner, to adopt the tax guidance document (Attachment Five-A3) as amended during today’s discussion. The motion passed unanimously. 2. Exposed the Combined Life and Fraternal RBC Formula Proposal for Comment The Working Group exposed the proposal to combine the life and fraternal RBC formulas, due to the elimination of the fraternal annual financial statement, for a public comment period ending March 25. Having no further business, the Life Risk-Based Capital (E) Working Group adjourned. W:\National Meetings\2019\Spring\TF\CapAdequacy\LifeRBC\2_22_19 Call

PPaul Graham Senior Vice President, Insurance Regulation & Chief Actuary (202) 624-2164 t (866) 953-4097 [email protected]

February 12, 2019

Philip Barlow, Chair Life Risk-Based Capital Working Group National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, MO 64108

RE: Comments on Exposed Document: Interpretation of 2018 Life Risk-Based Capital Results in Light of the 2017 Tax Cuts and Jobs Act

Dear Philip:

The American Council of Life Insurers (ACLI)1 would like to thank you and the Task Force for the opportunity to comment on the document entitled “Interpretation of 2018 Life Risk-Based Capital Results in Light of the 2017 Tax Cuts and Jobs Act”.

We have provided a mark-up of ACLI’s recommended changes to the document (attached as Appendix A). To make it easier to identify our suggested changes vs. earlier changes made by the Working Group, we have accepted all the previous changes in the document. While ACLI’s suggested changes are limited, we believe that they are important clarifications on the impact of the Tax Cuts and Jobs Act on life insurers. We apologize for not catching these in earlier comment letters. Rationale for the suggested changes are provided in the comment section.

We look forward to discussing our comments on the upcoming teleconference of the Working Group

Sincerely,

Paul S. Graham, III, FSA, MAAA

cc: Dave Fleming, NAIC Staff Members of Life RBC Working Group

1 The American Council of Life Insurers (ACLI) advocates on behalf of 280 member companies dedicated to providing products and services that promote consumers’ financial and retirement security. 90 million American families depend on our members for life insurance, annuities, retirement plans, long-term care insurance, disability income insurance, reinsurance, dental and vision and other supplemental benefits. ACLI represents member companies in state, federal and international forums for public policy that supports the industry marketplace and the families that rely on life insurers’ products for peace of mind. ACLI members represent 95 percent of industry assets in the United States. Learn more at www.acli.com.

Attachment Five-A1 Capital Adequacy (E) Task Force

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2

APPENDIX A

From: Philip Barlow, Chair of the Life Risk-Based Capital (E) Working Group

RE: Interpretation of 2018 Life Risk-Based Capital Results

Date: January 25, 2019

Interpretation of 2018 Life Risk-Based Capital Results in Light of the 2017 Tax Cuts and Jobs Act

Purpose and Intended Audience for this Document This document is intended to assist financial examiners and other state regulators as they review the results of 2018 risk-based capital (RBC) calculations for life insurers2 in light of the 2017 Tax Cuts and Jobs Act (TCJA). It is intended to be a non-technical overview of changes that will affect 2018 RBC filings.

More detailed information about this topic is contained in letters to the Life Risk-Based Capital (E) Working Group (Working Group) from the American Academy of Actuaries’ (Academy) RBC Tax Reform Work Group dated March 16, April 24, and June 4, 2018. Changes to the Life RBC formula due to the TCJA were adopted by the Capital Adequacy (E) Task Force in June 2018. Questions related to this document may be submitted to Dave Fleming (NAIC) at [email protected].

Executive Summary The TCJA is effective for 2018. A widely known provision in the TCJA is a reduction in the corporate tax rate from 35 percent to 21 percent, which applies to life insurers as well as other corporate entities. There are also several items in the TCJA that specifically affect life insurers On the other hand, the TCJA included numerous provisions generally increasing taxes for corporations, including life insurance companies, plus several provisions specifically directed at increasing life insurance company taxes, including changes in tax reserves, deferred acquisition cost (DAC) tax, and the dividends received deduction.

Starting in early 2018, the Working Group examined Life RBC to see what changes should be made because of the TCJA. With assistance from the Academy and others, the Working Group worked through the formula and proposed a number of changes to Life RBC. Those changes were adopted by both the Working Group and its parent committee, the Capital Adequacy (E) Task Force, during June 2018. The changes to Life RBC will be effective for the 2018 filing year (that is, RBC reports that will be filed in the first quarter of 2019).

The impact of the TCJA on life insurers' Total Adjusted Capital (TAC) was partially reflected in 2017 annual statements and RBC reports and will continue to affect TAC in 2018 and future years. Also, the

2 Life insurers are referenced throughout this document. While fraternal benefit societies are not subject to federal income tax, the fraternal RBC formula parallels the life formula by including explicit tax factors. Some of the items discussed in this document will not be applicable to fraternals, however, the changes in ACL resulting from lower tax factors will.

Commented [A1]: This language doesn’t indicate direction and could even be read to suggest further benefits to life companies beyond the corporate tax rate cut. Also, no mention is made of other corporate tax changes that affect life insurers. While the changes are detailed below, ACLI thinks that the Executive Summary should include the fact that the ”several items” are actually designed to largely offset the rate cut for life insurers.


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Authorized Control Level (ACL), which is a calculated result of the Life RBC formula, will be impacted by the changes to Life RBC that were made by the Working Group.

Due to changes to Life RBC to reflect the TCJA, the Working Group expects that the Dec. 31, 2018, ACL for most life insurers will be higher than it would have been under the 2017 Life RBC formula. The higher ACL will increase the “Trigger Points for Level of Regulatory Action” (as defined in the instructions for the Life RBC calculation.) As a consequence, this is expected to decrease the amount of TAC in excess of ACL for Dec. 31, 2018, filings compared to what such amount would have been under the previous tax law, even though the Dec. 31, 2018, TAC for some life insurers may increase due to the TCJA. An insurer’s mix of assets and liabilities, business profile, and tax attributes will determine the impact of the TCJA on the Life RBC calculation for that company.

According to information summarized by the NAIC, the Working Group expects that an immaterial number of life insurers, if any, will breach an RBC threshold (Company Action Level (CAL), ACL, etc.) due to the increase in ACL. However, the Working Group expects that there is a potential for more life insurers to trigger the Life RBC Trend Test for Dec. 31, 2018, due to the TCJA-related changes to the Life RBC formula. Later in this document, suggestions are offered as to how regulators might analyze any breaches of an RBC threshold or triggering of the Trend Test in 2018.

While the law and the instructions define the Life RBC calculation as TAC minus ACL, it is common to divide TAC by ACL (or by CAL) to derive an “RBC Ratio”. An increase in ACL will tend to decrease a life insurers’ RBC Ratio. The Working Group expects that the 2018 RBC Ratio for most life insurers will be lower than it would have been under the 2017 Life RBC formula. The percentage point reduction in RBC Ratio will tend to be larger for companies with higher RBC Ratios.

This document examines the changes to ACL, TAC, and RBC results due to the TCJA, including:

Why does a reduction in tax rates cause an increase in ACL?What are the changes in ACL that will be effective for the 2018 filing year?How will TAC be affected by the TCJA?How should effects of the TCJA be factored into the interpretation of RBC results?How will elements of the TCJA affect the components of the Life RBC calculation in the future?

Why does a reduction in tax rates cause an increase in ACL? It may seem counterintuitive that a lower tax rate causes ACL to be higher. However, an example can illustrate why this is the case:

Life RBC factors are developed to cover risks that could materialize in “stressed” conditions. Forexample, an economic downturn might cause an increase in defaults on bonds, or a pandemiccould cause death claims to increase. RBC is intended to calculate the minimum capital that alife insurer should hold to provide for such “stress” events, recognizing that statutory policyreserves cover “moderately adverse” risk conditions.As an illustration, assume that a pandemic would increase a life insurer’s death benefits by $1million, net of policy reserves and reinsurance. The death benefit increase would reduce the insurer’s taxable income by $1 million.


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Assuming the increased death benefit results in a federal income tax benefit, the insurer’s tax billunder the previous tax law would have been reduced by $350,000 (35 percent of $1 million).Therefore, the net loss to the insurer would be $650,000; that is, $1 million of death benefitsoffset by a $350,000 reduction in taxes. TAC would decrease by $650,000.Due to the TCJA, the same “stress” event under the new tax law, the insurer’s tax bill would bereduced by only $210,000 (21 percent of $1 million), leaving the net loss (and TAC impact) tothe insurer at $790,000. It is this impact that requires a higher RBC requirement to cover the risk.In other words, under this example ACL would need to increase by 21.5 percent to coverthe new after-tax impact to TAC of the stress event; that is, [($790,000 divided by $650,000)minus one].This phenomenon is what leads to the increase in Life RBC factors for 2018.

There are hundreds of factors in the Life RBC formula. The adopted changes to Life RBC increased some of the factors, net of tax, by 21.5 percent. However, for technical reasons, some RBC factors were decreased as a result of the TCJA, while others remained unchanged. The net result is that the majority of post-tax RBC factors increased by less than 21.5 percent. Therefore, ACL for life insurers is expected to generally be increased as a result of the TCJA, but by less than 21.5 percent. The actual increase in ACL is company-specific, depending on each company’s mix of assets, liabilities, risk factors, and tax strategies. Some sampling has shown that increases are generally between 5 and 15 percent, but individual company increases may be outside the range.

What are the changes in ACL that will be effective for the 2018 filing year? There are numerous changes to Life RBC factors due to the TCJA. A high-level summary of the changes to the RBC factors follows. Life RBC factors not mentioned below were unaffected by the TCJA.

Most of the factors in LR030 (Calculation of Tax Effect for Life RBC) for the 2017 RBC filingyear were 0.35. Those factors are changed to 0.21 for the 2018 Life RBC filing year. Certain ofthe tax factors for bonds, preferred stocks, and similar instruments for the 2017 RBC filing yearwere 0.2625 (that is, 75 percent of 0.35), and those factors are changed to 0.1575 (that is, 75percent of 0.21).C1 pre-tax RBC factors for bonds, preferred stocks, and similar instruments, and C2 RBC factorsfor individual and group life, were reduced by 3 percent, reflecting a higher post-tax discountrate.C2 RBC factors for health insurance, the C3 “base” factors, and the C4-0 factor were adjusteddownward so that the net post-tax RBC factor is unchanged.

A complete set of updated factors has been prepared by NAIC staff, and can be referenced using the above hyperlink.

How will TAC be changed by the TCJA? If the change in the corporate tax rate from 35 percent to 21 percent were the only tax law change affecting life insurers, TAC would be higher in the future than under the prior tax law for companies with taxable income, because income tax expense would be reduced.

This increase to TAC from a lower tax rate is offset by a number of factors. The extent to which there is an offset is company-specific, as each life insurer’s tax situation is different. The offset is also time-


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specific, as the offset factors could be larger than the benefit of a lower tax rate for Life RBC filings in 2018 and immediately following years, with the size of the offset reducing as time goes on. The offset factors are as follows:

Some life insurers have a net deferred tax asset (DTA) on their balance sheets. Accounting rulesrequire that the DTA be recalculated using the lower tax rates. We understand that most lifeinsurers that have a DTA reported this reduction to DTA, which reduced TAC, in their 2017annual statements. The elimination of net operating loss carrybacks also had a significant impact(reduction) on the calculation of the DTA in many life insurers’ 2017 annual statements.The TCJA changed the tax deduction for non-variable product reserves to the greater of the cashsurrender value or 92.81 percent of the statutory reserve (with certain prescribed adjustmentssuch as eliminating deficiency reserves and asset adequacy reserves). For variable contracts, the 92.81% factor is applied only to the excess of statutory reserves over the greater of the separateaccount reserve or total cash surrender value. For most products, this is expected to reduce thedeductible tax reserve, which increases taxable income and tax expense for a growing company,and therefore reduces TAC. Additionally, the TCJA requires that the difference between “oldbasis” and “new basis” tax reserves as of Dec. 31, 2017, be amortized into taxable income overeight years, further increasing taxable income and tax expense and further reducing TAC.Companies had to establish a deferred tax liability for this 8-year spread in 2017, which may nothave been offset in full by a corresponding DTA.The TCJA increased the capitalization rate and lengthened the amortization period for the DACtax. These changes will accelerate taxable income and tax expense, and therefore reduce TAC.A portion of the higher current income tax expense resulting from the new tax reserve and DACcalculations generally will be offset in part by additional admitted DTAs, which will increasestatutory surplus and TAC.The TCJA modified the dividends received deduction (DRD), which will increase taxableincome and tax for some life insurers and decrease taxable income and tax for others. The DRDallows a life insurer that receives a dividend from another company to deduct a portion of thatdividend from taxable income.

The reduction in tax rates would be expected, by itself, to result in higher TAC for many life insurers. However, this reduction in tax rates will be offset, by some degree that will vary by company, by the changes discussed above, which broadened the life insurance company tax base. While the full initial impact of the tax law changes began in 2017 with changes in DTAs and the full impact will flow in over time, changes to ACL RBC are fully effective for 2018. Consequently, the anticipated impact of these changes for most life insurers will be a reduction in the amount of TAC in excess of ACL for life insurers for 2018 and immediately following years.

How should the effects of the TCJA be factored into the interpretation of RBC results? The Life RBC Trend Test (LR035) will be affected by the TCJA. The Trend Test calculates a margin, which is the excess of TAC over ACL, for each of the current year, the prior year, and the third prior year. To the extent that the current year margin is lower than the prior year or third prior year margin, regulatory action may be indicated.

Commented [A2]: These two sentences are redundant with sentences preceding the bullets.

Commented [A3]: Edit. After reflecting upon our earlier comments, we suggest that the word “initial” is better than “full” for the first part of this sentence. Much of the impact did not occur until 2018 and later years. However, making that change requires adding the term “the full impact” later in the sentence.


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For the 2018 Trend Test, the margin for 2018 is compared to the margins for 2017 and 2015. As noted above, a company’s ACL is expected to be increased for 2018 compared to prior years, and TAC may be reduced. The changes to ACL and TAC due to the TCJA may cause some companies to trigger the Trend Test for 2018, solely because of the TCJA.

Also, as noted above, the amount of TAC in excess of ACL is expected to decrease for Dec. 31, 2018, RBC filings compared to what such amount would have been under the previous tax law, even though the Dec. 31, 2018, TAC for some life insurers may increase due to the TCJA. The decrease may be large enough to push a life insurer below an Action Level.

Further, a life insurer may experience a significant decrease in RBC Ratio as calculated from its 2018 RBC filing compared to the RBC Ratio in 2017. While the life insurer could remain well-capitalized in 2018, the absolute change in the RBC Ratio from 2017 to 2018 could raise concern with regulators.

If regulators find that a life insurer or fraternal has triggered an Action Level event for 2018, either directly or due to the Trend Test, or has a significant decline in RBC Ratio from 2017 to 2018, they should consider having additional discussions with the company and request additional calculations. It is likely that the life insurer or fraternal would have done some analysis of their results, and that analysis could be shared with regulators. For a life insurer or fraternal with a CAL event for 2018 due to the Trend Test, the one-time TCJA changes to the RBC formula would impact that result and regulators may consider whether the Trend Test is correctly identifying a life insurer or fraternal that is trending toward CAL.

It should be noted that a lower RBC Ratio resulting from these changes does not necessarily mean that a life insurer is “riskier” than before tax reform. It simply means that stress events will take more capital than under the prior tax law. RBC is a point-in-time calculation that does not consider the possibility of future increased after-tax earnings that might partially offset the impact of those future stress events.

It should be noted that a lower RBC Ratio resulting from these changes does not necessarily mean that a life insurer, viewed holistically, is “riskier” than before tax reform. On the one hand, the lower RBC Ratio means that the insurer has less excess capital over the RBC trigger points for regulatory action. On the other hand, the RBC Ratio is a point-in-time calculation does not consider the possibility of future increased after-tax earnings that might partially offset the impact of those future stress events.

How will the elements of the TCJA affect the components of the Life RBC calculation in the future? As described above, some of the elements of the TCJA were effective for Dec. 31, 2017, annual statements, some are fully effective for the Dec. 31, 2018, annual statements and RBC filings, and others are partially effective for 2018 filings and will become fully effective over time.

Authorized Control Level—The changes to ACL are fully effective for the Dec. 31, 2018, RBCfiling.

Total Adjusted Capital—There are a number of tax-related items that affect TAC, with timingthat varies by item. Items that increase taxable income generally increase tax expense andtherefore reduce TAC, while those that decrease taxable income generally reduce tax expense and therefore increase TAC.

Commented [A4]: ACLI understands that there are concerns with this language. While this concept is important, we would not object to changing the language to that provided by the AAA as indicated below.


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6© 2019 National Association of Insurance Commissioners 6

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o DTA—As noted above, we understand that most life insurers have already recalculatedtheir DTA using the new lower tax rate and elimination of net operating loss carrybackson their 2017 annual statement. For insurers with a net DTA, this recalculation reducedTAC in 2017.

o Tax Rate—The 21 percent tax rate, which is a reduction from the previous 35 percent rate,is effective for the 2018 tax year. For life insurers with taxable income, this will reducetax expenses in 2018 and future years and therefore increase TAC.

o Tax Reserves—As noted above, tax reserves are generally reduced under the TCJA. Forlife insurers with increasing reserves (that is, generally companies that are growing), thatwill reduce the tax deduction for reserves for 2018 and future years, and thereforeincrease taxable income. Also, the difference between “old method” and “new method”tax reserves as of Dec. 31, 2017, will be amortized over eight years from 2018 to 2025,which will increase taxable income in the future.

o DAC Tax—As noted above, DAC tax capitalization is increased starting in 2018. Forexample, the factor for individual life insurance premiums increases from 7.70 percent to9.20 percent, which will increase taxable income. Also, the amortization period isincreased from 10 years to 15 years, which will further increase taxable income for 2018–2032a period of years.

o Dividends Received Deduction—The deduction is reduced effective in 2018. For some companies, this change increases taxable income.The deduction was modified effective in2018. For most companies this change is expected to increase taxable income; for some, taxable income may be decreased.

o New Timing Differences - A portion of higher current income tax expense resulting fromthe new Tax Reserve and DAC calculations generally will be offset in part by additionaladmitted DTAs, which will increase statutory surplus and TAC.

o RBC Ratios – The expected impact of TCJA on RBC ratios will vary widely by company,given the varied impacts on the TAC and ACL described above.

Commented [A5]: This is not quite right. For $15 of DAC capitalized in 2018, the effect of the amortization change will be to increase taxable income by $.50/year for 10 years and then decrease it by $1/year for 5 years. Also, amortization of the higher capitalized DAC will eventually lower taxable income compared to amortization of the lower capitalized DAC.

Commented [A6]: The DRD was changed in 2018, but the deduction was reduced for separate account dividends and increased for general account dividends.


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1850 M Street NW Suite 300 Washington, DC 20036 Telephone 202 223 8196 Facsimile 202 872 1948 www.actuary.org

February 19, 2019

Mr. Philip Barlow Chair, Life Risk-Based Capital (E) Working Group National Association of Insurance Commissioners (NAIC)

Dear Philip,

The RBC Tax Reform Work Group (TRWG) of the American Academy of Actuaries’ (Academy)1 Life Practice Council is pleased to submit comments on the document “LRBCWG Guidance on RBC Results 2018,” which was exposed for comment by your working group on Jan. 25, 2019.

We have comments on two pages of the exposed document:

Page 3 - The second bullet of the section, “What are the changes in ACL that will be effective for the 2018 filing year?” currently says “C1 pre-tax RBC factors for bonds, preferred stocks, and similar instruments, and C2 RBC factors for individual and group life, were reduced by 3 percent, reflecting a higher post-tax discount rate.” We believe that some readers of the document might not be aware that the calculation of these C1 and C2 RBC factors involve assumptions of future losses. Therefore, we suggest additional clarifying language to the end of the sentence, so it would read “…discount rate, because these RBC factors are calculated assuming future losses.”

Also, the third bullet of the same section refers to changes to the C4 factor. That reference should be changed to read “… and the C4-a factors were adjusted…”

Page 5: The last paragraph of the section, “How should the effects of the TCJA be factored into the interpretation of RBC results?” currently says:

1 The American Academy of Actuaries is a 19,500-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.


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1850 M Street NW Suite 300 Washington, DC 20036 Telephone 202 223 8196 Facsimile 202 872 1948 www.actuary.org

“It should be noted that a lower RBC Ratio resulting from these changes does not necessarily mean that a life insurer is ‘riskier’ than before tax reform. It simply means that stress events will take more capital than under the prior tax law. RBC is a point-in-time calculation that does not consider the possibility of future increased after-tax earnings that might partially offset the impact of those future stress events.”

Possible alternate wording for this paragraph is as follows:

“RBC is a point-in-time calculation, and a decrease in the Dec. 31, 2018, RBC Ratio due to tax reform implies that the life insurer is more susceptible to stress events as of that date. Note that the underlying non-tax-related risks to which a life insurer is exposed did not change as a result of tax reform.”

Please let us know if you have any questions about these recommendations. We stand ready to assist your working group as you move forward. If you have any questions, please contact Ian Trepanier ([email protected]), life policy analyst at the Academy.

Sincerely,

Wayne E. Stuenkel, MAAA, FSA, CERA Chairperson, RBC Tax Reform Work Group American Academy of Actuaries


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To: Financial Examiners and Other State Regulators



Date: December 19, 2018January 25, 2019


Purpose and Intended Audience for this Document This document is intended to assist financial examiners and other state regulators as they review the results of 2018 risk-based capital (RBC) calculations for life insurers1 in light of the 2017 Tax Cuts and Jobs Act (TCJA). It is intended to be a non-technical overview of changes that will affect 2018 RBC filings.

More detailed information about this topic is contained in letters to the Life Risk-Based Capital (E) Working Group (Working Group) from the American Academy of Actuaries’ (Academy) RBC Tax Reform Work Group dated March 16, April 24, and June 4, 2018. Changes to the Life RBC formula due to the TCJA were adopted by the Capital Adequacy (E) Task Force in June 2018. Questions related to this document may be submitted to Dave Fleming (NAIC) at [email protected].

Executive Summary The TCJA is effective for 2018. A widely known provision in the TCJA is a reduction in the corporate tax rate from 35 percent to 21 percent, which applies to life insurers as well as other corporate entities. There are also several items in the TCJA that specifically affect life insurers, including changes in tax reserves, deferred acquisition cost (DAC) tax, and the dividends received deduction.

Starting in early 2018, the Working Group examined Life RBC to see what changes should be made because of the TCJA. With assistance from the Academy and others, the Working Group worked through the formula and proposed a number of changes to Life RBC. Those changes were adopted by both the Working Group and its parent committee, the Capital Adequacy (E) Task Force, during June 2018. The changes to Life RBC will be effective for the 2018 filing year (that is, RBC reports that will be filed in the first quarter of 2019).

1 Life insurers are referenced throughout this document. While fraternal benefit societies are not subject to federal income tax, the fraternal RBC formula parallels the life formula by including explicit tax factors. Some of the items discussed in this document will not be applicable to fraternals, however, the changes in ACL resulting from lower tax factors will.

https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

http://www.actuary.org/files/publications/Academy_Life_RBC_Tax_Reform_WG_Comment_Letter_to_LRBC_031618.pdf

http://www.actuary.org/files/publications/Academy_to_LRBC_update_to_031618_letter_042418.pdf

http://www.actuary.org/files/publications/Academy_RBC_Tax_Reform_WG_additional_comments_to_Life_RBC.pdf

https://www.naic.org/documents/cmte_e_capad_related_2018_13_l.pdf?81

mailto:[email protected]


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The impact of the TCJA on life insurers' Total Adjusted Capital (TAC) was partially reflected in 2017 annual statements and RBC reports and will continue to affect TAC in 2018 and future years. Also, the Authorized Control Level (ACL) RBC (i.e., “required RBC”), which is a calculated result of the Life RBC formula, will be impacted by the changes to Life RBC that were made by the Working Group.

Due to changes to Life RBC to reflect the TCJA, the Working Group expects that the Dec. 31, 2018, ACL RBC for most life insurers will be higher than it would have been under the 2017 Life RBC formula. The higher ACL RBC will increase the “Trigger Points for Level of Regulatory Action” (as defined in the instructions for the Life RBC calculation.) In turnAs a consequence, this is expected to decrease the amount of TAC in excess of ACL RBC for Dec. 31, 2018, filings compared to what such amount would have been under the previous tax law, even though the Dec. 31, 2018, TAC for some life insurers may increase due to the TCJA. An insurer’s mix of assets and liabilities, business profile, and tax attributes will determine the impact of the TCJA on the Life RBC calculation for that company.

According to information summarized by the NAIC, the Working Group expects that an immaterial number of life insurers, if any, will breach an RBC threshold (Company Action Level (CAL), Authorized Control LevelACL, etc.) due to the increase in ACL RBC. However, the Working Group expects that there is a potential for more life insurers to trigger the Life RBC Trend Test for Dec. 31, 2018, due to the TCJA-related changes to the Life RBC formula. Later in this document, suggestions are offered as to how regulators might analyze any breaches of an RBC threshold or triggering of the Trend Test in 2018.

[possible additional paragraph – While the law and the instructions define the Life RBC calculation as (TAC minus ACL RBC), it is common to divide TAC by ACL RBC (or by Company Action LevelCAL RBC) to derive an “RBC Ratio”. An increase in ACL RBC will tend to decrease a life insurers’ RBC Ratio. The LRBCWG Working Group expects that the 2018 RBC Ratio for most life insurers will be lower than it would have been under the 2017 Life RBC formula. The percentage point reduction in RBC Ratio will tend to be larger for companies with higher RBC Ratios.] [FD1]

This document examines the changes to ACL RBC, TAC, and RBC results due to the TCJA, including:

• Why does a reduction in tax rates cause an increase in ACL RBC?• What are the changes in ACL RBC that will be effective for the 2018 filing year?• How will TAC be affected by the TCJA?• How should effects of the TCJA be factored into the interpretation of RBC results?• How will elements of the TCJA affect the components of the Life RBC calculation in the future?

Why does a reduction in tax rates cause an increase in ACL RBC? It may seem counterintuitive that a lower tax rate causes ACL RBC to be higher. However, an example can illustrate why this is the case:

• Life RBC factors are developed to cover risks that could materialize in “stressed” conditions. Forexample, an economic downturn might cause an increase in defaults on bonds, or a pandemiccould cause death claims to increase. ACL RBC is intended to calculate the minimum capital that


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a life insurer should hold to provide for such “stress” events, recognizing that statutory policy reserves cover “moderately adverse” risk conditions.

• As an illustration, assume that a pandemic would increase a life insurer’s death benefits by $1million, net of policy reserves and reinsurance. The death benefit increase would reduce theinsurer’s taxable income by $1 million.

• Assuming the increased death benefit results in a federal income tax benefit, the insurer’s tax billunder the previous tax law would have been reduced by $350,000 (35 percent of $1 million).Therefore, the net loss to the insurer would be $650,000; that is, $1 million of death benefitsoffset by a $350,000 reduction in taxes. TAC would decrease by $650,000.

• Due to the TCJA, the same “stress” event under the new tax law, the insurer’s tax bill would bereduced by only $210,000 (21 percent of $1 million), leaving the net loss (and TAC impact) tothe insurer at $790,000. It is this impact that requires a higher RBC requirement to cover the risk.In other words, under this example ACL RBC would need to increase by 21.5 percent tocover the new after-tax impact to TAC of the stress event; that is, [($790,000 divided by$650,000) minus one].

• This phenomenon is what leads to the increase in Life RBC factors for 2018.

There are hundreds of factors in the Life RBC formula. The adopted changes to Life RBC increased some of the factors, net of tax, by 21.5 percent. However, for technical reasons, some RBC factors were decreased as a result of the TCJA, while others remained unchanged. The net result is that the majority of post-tax RBC factors increased by less than 21.5 percent. Therefore, ACL RBC for life insurers is expected to generally be increased as a result of the TCJA, but by less than 21.5 percent. The actual increase in ACL RBC is company-specific, depending on each company’s mix of assets, liabilities, risk factors, and tax strategies. Some sampling has shown that increases are generally between 5 and 15 percent, but individual company increases may be outside the range. [FD2]

What are the changes in ACL RBC that will be effective for the 2018 filing year? There are numerous changes to Life RBC factors due to the TCJA. A high-level summary of the changes to the RBC factors follows. Life RBC factors not mentioned below were unaffected by the TCJA.

• Most of the factors in LR030 (Calculation of Tax Effect for Life RBC) for the 2017 RBC filingyear were 0.35. Those factors are changed to 0.21 for the 2018 Life RBC filing year. Certain ofthe tax factors for bonds, preferred stocks, and similar instruments for the 2017 RBC filing yearwere 0.2625 (that is, 75 percent of 0.35), and those factors are changed to 0.1575 (that is, 75percent of 0.21).

• C1 pre-tax RBC factors for bonds, preferred stocks, and similar instruments, and C2 RBC factorsfor individual and group life, were reduced by 3 percent, reflecting a higher post-tax discountrate.

• C2 RBC factors for health insurance, the C3 “base” factors, and the C4-0 factor were adjusteddownward so that the net post-tax RBC factor is unchanged.


https://www.naic.org/documents/cmte_e_capad_related_2018_13_l.pdf?81


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How will TAC be changed by the TCJA? If the change in the corporate tax rate from 35 percent to 21 percent were the only tax law change affecting life insurers, TAC would be higher in the future than under the prior tax law for companies with taxable income, because income tax expense would be reduced. This increase to TAC from a lower tax rate is offset by a number of factors. The extent to which there is an offset is company-specific, as each life insurer’s tax situation is different. The offset is also time-specific, as the offset factors could be larger than the benefit of a lower tax rate for Life RBC filings in 2018 and immediately following years, with the size of the offset reducing as time goes on. The offset factors are as follows:

• Some life insurers have a net deferred tax asset (DTA) on their balance sheets. Accounting rules require that the DTA be recalculated using the lower tax rates. We understand that most life insurers that have a DTA reported this reduction to DTA, which reduced TAC, in their 2017 annual statements. The elimination of net operating loss carrybacks also had a significant impact (reduction) on the calculation of the DTA in many life insurers’ 2017 annual statements.

• The TCJA changed the tax deduction for non-variable product reserves to the greater of the cash surrender value or 92.81 percent of the statutory reserve (with certain prescribed adjustments such as eliminating deficiency reserves and asset adequacy reserves). For variable contracts, the 92.81% factor is applied only to the excess of statutory reserves over the greater of the separate account reserve or total cash surrender value. For most products, this is expected to reduce the deductible tax reserve, which increases taxable income and tax expense for a growing company, and therefore reduces TAC. Additionally, the TCJA requires that the difference between “old basis” and “new basis” tax reserves as of Dec. 31, 2017, be amortized into taxable income over eight years, further increasing taxable income and tax expense and further reducing TAC. Companies had to establish a deferred tax liability for this 8-year spread in 2017, which may not have been offset in full by a corresponding DTA.

• The TCJA increased the capitalization rate and lengthened the amortization period for the DAC tax. These changes will accelerate taxable income and tax expense, and therefore reduce TAC.

• A portion of the higher current income tax expense resulting from the new tax reserve and DAC calculations generally will be offset in part by additional admitted DTAs, which will increase statutory surplus and TAC.

• The TCJA modified the dividends received deduction (DRD), which will increase taxable income and tax for some life insurers and decrease taxable income and tax for others. The DRD allows a life insurer that receives a dividend from another company to deduct a portion of that dividend from taxable income.

The reduction in tax rates would be expected, by itself, to result in higher TAC for many life insurers. However, this reduction in tax rates will be offset, by some degree that will vary by company, by the changes discussed above, which broadened the life insurance company tax base. While the full impact of the tax law changes began in 2017 with changes in DTAs and will flow in over time, changes to ACL RBC are fully effective for 2018. Consequently, the anticipated impact of these changes for most life insurers will be a reduction in the amount of TAC in excess of ACL RBC for life insurers for 2018 and immediately following years.


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How should the effects of the TCJA be factored into the interpretation of RBC results? The Life RBC Trend Test (LR035) will be affected by the TCJA. The Trend Test calculates a margin, which is the excess of TAC over ACL RBC, for each of the current year, the prior year, and the third prior year. To the extent that the current year margin is lower than the prior year or third prior year margin, regulatory action may be indicated. For the 2018 Trend Test, the margin for 2018 is compared to the margins for 2017 and 2015. As noted above, a company’s ACL RBC is expected to be increased for 2018 compared to prior years, and TAC may be reduced. The changes to ACL RBC and TAC due to the TCJA may cause some companies to trigger the Trend Test for 2018, solely because of the TCJA. Also, as noted above, the amount of TAC in excess of ACL RBC is expected to decrease for Dec. 31, 2018, RBC filings compared to what such amount would have been under the previous tax law, even though the Dec. 31, 2018, TAC for some life insurers may increase due to the TCJA. The decrease may be large enough to push a life insurer below an Action Level. [possible additional paragraph – Further, a life insurer may experience a significant decrease in RBC Ratio as calculated from its 2018 RBC filing compared to the RBC Ratio in 2017. While the life insurer could remain well-capitalized in 2018, the absolute change in the RBC Ratio from 2017 to 2018 could raise concern with regulators.[FD3] ] If regulators find that a life insurer has triggered the Trend Test, triggers an Action Level for 2018, [possible additional wording – or has a significant decline in RBC Ratio from 2017 to 2018,] they could have [possible alternate wording – should consider having] additional discussions with the company and request additional calculations. It is likely that life insurers themselves would have done some analysis of significant changes in ACL RBC and the excess of TAC over ACL RBC, and that analysis could be shared with regulators. [possible additional sentence - If the only reason that an Action Level is triggered is due to the Trend Test, the regulator should consider the possibility that no regulatory action is needed and that simply monitoring the results of the Trend Test over the next few years is the best course of action.] If regulators find that a life insurer or fraternal has triggered an Action Level event for 2018, either directly or due to the Trend Test, or has a significant decline in RBC Ratio from 2017 to 2018, they should consider having additional discussions with the company and request additional calculations. It is likely that the life insurer or fraternal would have done some analysis of their results, and that analysis could be shared with regulators. For a life insurer or fraternal with a CAL event for 2018 due to the Trend Test, the one-time TCJA changes to the RBC formula would impact that result and regulators may consider whether the Trend Test is correctly identifying a life insurer or fraternal that is trending toward CAL. [possible additional paragraph – It should be noted that a lower RBC Ratio resulting from these changes does not necessarily mean that a life insurer is “riskier” than before tax reform. It simply means that stress events will take more capital than under the prior tax law. RBC is a point-in-time calculation that does not consider the possibility of future increased after-tax earnings that might partially offset the impact of those future stress events.[FD4]]


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Regulators might consider requesting that a written analysis of the impacts be included in the RBC submission.


• Authorized Control Level RBC—The changes to ACL RBC are fully effective for the Dec. 31,2018, RBC filing.

• Total Adjusted Capital—There are a number of tax-related items that affect TAC, with timingthat varies by item. Items that increase taxable income generally increase tax expense andtherefore reduce TAC, while those that decrease taxable income generally reduce tax expenseand therefore increase TAC.


o Tax Rate—The 21 percent tax rate, which is a reduction from the previous 35 percent rate,is effective for the 2018 tax year. For life insurers with taxable income, this will reducetax expenses in 2018 and future years and therefore increase TAC.

o Tax Reserves—As noted above, tax reserves are generally reduced under the TCJA. Forlife insurers with increasing reserves (that is, generally companies that are growing), thatwill reduce the tax deduction for reserves for 2018 and future years, and thereforeincrease taxable income. Also, the difference between “old method” and “new method”tax reserves as of Dec. 31, 2017, will be amortized over eight years from 2018 to 2025,which will increase taxable income in the future.

o DAC Tax—As noted above, DAC tax capitalization is increased starting in 2018. Forexample, the factor for individual life insurance premiums increases from 7.70 percent to9.20 percent, which will increase taxable income. Also, the amortization period isincreased from 10 years to 15 years, which will further increase taxable income for 2018–2032.

o Dividends Received Deduction—The deduction is reduced effective in 2018. For somecompanies, this change increases taxable income.


o [possible additional bullet - RBC Ratios – The expected impact of TCJA on RBC ratioswill vary widely by company, given the varied impacts on the TAC and ACL RBCdescribed above.]

Attachment Five-B Capital Adequacy (E) Task Force

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Draft: 1/17/19


December 19, 2018 The Life Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met via conference call Dec. 19, 2018. The following Working Group members participated: Philip Barlow, Chair (DC); Perry Kupferman (CA); Wanchin Chou (CT); Gilbert Moreau (FL); Vincent Tsang and Bruce Sartain (IL); Rhonda Ahrens (NE); Seong-min Eom (NJ); Andrew Schallhorn (OK); and Mike Boerner (TX). 1. Discussed the Tax Guidance Document

Mr. Barlow said some non-substantive changes and a few additions have been made to the proposed tax guidance document (Attachment Five-B1) based on previous discussions and comment letters received. The first substantive change is to the language on the first page of the document. The American Council of Life Insurers (ACLI) suggests adding language that indicates how the impacts of the federal Tax Cuts and Jobs Act of 2017 (TCJA) were partially reflected in the 2017 annual financial statements and risk-based capital (RBC) reports. The ACLI believes that these impacts will continue to affect total adjusted capital (TAC) and the authorized control level (ACL) will be affected by the changes the Working Group has already adopted. Mr. Barlow said he believes this will be a good addition. Mr. Chou suggested changing the language on the top of Page 2 from “in turn” to “as a consequence.” The next item is a new paragraph on Page 2 that discusses the RBC ratio. Mr. Barlow said he has gone back and forth on whether discussion of the RBC ratio should be included in the document because the ratio is not part of the Risk-Based Capital (RBC) for Insurers Model Act (#312), but it is actively used in many places. He said he currently favors including this paragraph. Paul Graham (ACLI) said the change to the language in the first bullet point on Page 3 of the document adds clarity to the example. He said the original language stated that the ACL RBC would increase by 21.5%, and this is not necessarily true because the example does not cause an increase in RBC. He said what the example shows is that the RBC would need to increase in order to cover the new after-tax impact of the stress event. Wayne Stuenkel (American Academy of Actuaries) said the intent of this section is to discuss only the impact on ACL when tax rates go down. He agreed that there are effects on TAC, and he believes that the revised language provides good clarification. With respect to the next change, which is the inclusion of an indication of the range of impacts, Mr. Barlow said he has gone back and forth on this item, as well. He expressed concern about adding both discussion of RBC ratios and expected impacts due to possible confusion regulators and others may experience because the actual, absolute change in the ACL amount will be different than the change in the RBC ratio. There could also be confusion as to which RBC action level is being used in the ratio if the ACL is not specified. As long as the Working Group members agree these distinctions are clear, Mr. Barlow said he believes the language is acceptable. If the Working Group adopts this change and the previous one, which he believes add clarity, Mr. Chou questioned whether the new paragraph on Page 2 of the document discussing RBC ratios is needed. Mr. Boerner noted that the stated audience for the document includes financial examiners and other state insurance regulators, noting that he believes that it should have some discussion of the impact on the RBC ratio itself because that is what a lot of financial examiners will notice first. He said it is important to make sure that when ACL RBC is used, it is not referring to a percentage because this change will be the opposite of the change in the RBC ratio. Ms. Eom said she believes adding the paragraph will be helpful for the examiners, because it is possible that lower RBC ratios are discussed a lot by insurers in their conversations with regulators. She pointed to the last possible paragraph addition on Page 5 of the document and suggested either excluding the last sentence referencing RBC as a point-in-time calculation or adding some clarity because it may cause confusion for people not familiar with how RBC is calculated. Mr. Barlow said including discussion of the RBC ratio is a difficult area, because there may be more focus on it than the two numbers that are created in Model #312 and identified in the annual financial statement. He said it appears the Working Group is moving toward including this discussion, but it is looking to determine where clarity is needed.

Attachment Five-B Capital Adequacy (E) Task Force

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Mr. Boerner said when he sees RBC he thinks about a ratio, and he asked if it would be helpful to remove RBC from ACL RBC where it is used. Mr. Sartain asked if a definition section might also be helpful. If there is discussion of the RBC ratio, Lou Felice (NAIC) suggested noting that there could be areas other than the change in the tax law that could affect it.

Mr. Graham said an example might be helpful. Mr. Barlow said an example sounds like a good idea, but he expressed concern that it could raise more questions and that it might get to be extensive. With respect to adding definitions, he said the document was originally drafted with an executive summary to provide a brief overview, as well as more detail. He said including definitions there could defeat the purpose of providing something short, and he asked whether any definitions should be added in the executive summary or after it.

Mr. Sartain said the executive summary already includes some definitions citing the reference to ACL RBC, which is then identified as the required RBC. Mr. Boerner suggested removing RBC from references to ACL. Mr. Barlow agreed, noting that it appears there is consensus that inclusion of language about RBC ratios is a good addition, as long as it is clear.

Mr. Barlow said he is opposed to the inclusion of an additional sentence on Page 5 that states the regulator should consider the possibility that no regulatory action is necessary. He said he does not believe the document should tell regulators what action they should take.

Mr. Graham asked if it would make a difference if the sentence included “could” in place of “should.” He said giving the regulators some guidance on what reasonable action in the event of some unusual results could be helpful.

Mr. Barlow said he understands that reasoning, but is still uncomfortable with the language. He suggested working with Mr. Graham to see if they can draft language that is acceptable.

Mr. Barlow said the document has no reference to fraternals, noting that their RBC results will be affected, as well as life companies, even though they do not pay federal income tax. He suggested adding language to address this.

Having no further business, the Life Risk-Based Capital (E) Working Group adjourned.

W:\National Meetings\2019\Spring\TF\CapAdequacy\LifeRBC\12_19_18 Call

To: Financial Examiners and Other State Regulators



Date: December 19, 2018


Purpose and Intended Audience for this DocumentThis document is intended to assist financial examiners and other state regulators as they review the results of 2018 risk-based capital (RBC) calculations for life insurers in light of the 2017 Tax Cuts and Jobs Act (TCJA). It is intended to be a non-technical overview of changes that will affect 2018 RBC filings.

More detailed information about this topic is contained in letters to LRBCWG the Life Risk-Based Capital (E) Working Group (Working Group) from the American Academy’s of Actuaries’ (Academy)RBC Tax Reform Work Group dated March 16, April 24, and June 4, 2018. Changes to the Life RBC formula due to the TCJA were approved adopted by the NAIC Capital Adequacy (E) Task Force in June 2018.

Executive SummaryThe TCJA is effective for 2018. A widely known provision in the TCJA is a reduction in the corporate tax rate from 35 percent to 21 percent, which applies to life insurers as well as other corporate entities. There are also several items in the TCJA that specifically affect life insurers, including changes in tax reserves, deferred acquisition cost (DAC) tax, and the dividends received deduction.

Starting in early 2018, the LRBCWG Working Group examined Life RBC to see what changes should be made because of the TCJA. With assistance from the Academy and others, the LRBCWG Working Group worked through the formula and proposed a number of changes to Life RBC. Those changes were adopted by both LRBCWG the Working Group and its parent committee, the NAIC Capital Adequacy (E) Task Force, during June 2018. The changes to Life RBC will be effective for the 2018 filing year (that is, RBC reports that will be filed in the first quarter of 2019).

The impact of the TCJA on life insurers' Total Adjusted Capital ("TAC") was partially reflected in 2017 annual statements and RBC reports and will continue to affect TAC in 2018 and future years. Also, the Authorized Control Level (ACL) RBC (i.e., “required RBC”), which is a calculated result of the Life RBC formula, will be impacted by the changes to Life RBC that were made by LRBCWGthe Working Group.

Due to changes to Life RBC to reflect the TCJA, the LRBCWG Working Group expects that the Dec. 31, 2018, ACL RBC for most life insurers will be higher than it would have been under the 2017 Life RBC formula. The higher ACL RBC will increase the “Trigger Points for Level of

Commented [FD1]: ACLI 10-23 comment letter

Attachment Five-B1 Capital Adequacy (E) Task Force

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2

Regulatory Action” (as defined in the instructions for the Life RBC calculation.) In turn, this is expected to decrease the amount of TAC in excess of ACL RBC for Dec. 31, 2018, filings compared to what such amount would have been under the previous tax law, even though the Dec. 31, 2018, TAC for some life insurers may increase due to the TCJA. An insurer’s mix of assets and liabilities, business profile, and tax attributes will determine the impact of the TCJA on the Life RBC calculation for that company.

According to information summarized by the NAIC, the LRBCWG Working Group expects that an immaterial number of life insurers, if any, will breach an RBC threshold (Company Action Level, Authorized Control Level, etc.) due to the increase in ACL RBC. However, the LRBCWG Working Group expects that there is a potential for more life insurers to trigger the Life RBC Trend Test for Dec. 31, 2018, due to the TCJA-related changes to the Life RBC formula. Later in this document, suggestions are offered as to how regulators might analyze any breaches of an RBC threshold or triggering of the Trend Test in 2018.

[possible additional paragraph – While the law and the instructions define the Life RBC calculation as (TAC minus ACL RBC), it is common to divide TAC by ACL RBC (or by Company Action Level RBC) to derive an “RBC Ratio”. An increase in ACL RBC will tend to decrease a life insurers’ RBC Ratio. The LRBCWG expects that the 2018 RBC Ratio for most life insurers will be lower than it would have been under the 2017 Life RBC formula. The percentage point reduction in RBC Ratio will tend to be larger for companies with higher RBC Ratios.]

This document examines the changes to ACL RBC, TAC, and RBC results due to the TCJA, including:

Why does a reduction in tax rates cause an increase in ACL RBC?What are the changes in ACL RBC that will be effective for the 2018 filing year?How will TAC be affected by the TCJA?How should effects of the TCJA be factored into the interpretation of RBC results?How will elements of the TCJA affect the components of the Life RBC calculation in the future?

Why does a reduction in tax rates cause an increase in ACL RBC?It may seem counterintuitive that a lower tax rate causes ACL RBC to be higher. However, an example can illustrate why this is the case:

Life RBC factors are developed to cover risks that could materialize in “stressed” conditions. Forexample, an economic downturn might cause an increase in defaults on bonds, or a pandemiccould cause death claims to increase. ACL RBC is intended to calculate the minimum capital thata life insurer should hold to provide for such “stress” events, recognizing that statutory policyreserves cover “moderately adverse” risk conditions.As an illustration, assume that a pandemic would increase a life insurer’s death benefits by $1million, net of policy reserves and reinsurance. The death benefit increase would reduce theinsurer’s taxable income by $1 million.Assuming the increased death benefit results in a federal income tax benefit, the insurer’s tax billunder the previous tax law would have been reduced by $350,000 (35 percent of $1 million).Therefore, the net loss to the insurer would be $650,000; that is, $1 million of death benefitsoffset by a $350,000 reduction in taxes. TAC would decrease by $650,000.

Commented [FD2]: Academy 11/4 and 10/31 WG discussion

Commented [FD3]: ACLI 10/23 comment letter


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3

Due to the TCJA, the same “stress” event under the new tax law, the insurer’s tax bill would be reduced by only $210,000 (21 percent of $1 million), leaving the net loss (and TAC impact) to the insurer at $790,000. It is this impact that requires a higher RBC requirement to cover the risk. In other words, under this example ACL RBC would need to increase by 21.5 percent to cover the new after-tax impact to TAC of the stress event; that is, [($790,000 divided by $650,000) minus one].This phenomenon is what leads to the increase in Life RBC factors for 2018.

There are hundreds of factors in the Life RBC formula. The adopted changes to Life RBC increased some of the factors, net of tax, by 21.5 percent. However, for technical reasons, some RBC factors were decreased as a result of the TCJA, while others remained unchanged. The net result is that the majority of post-tax RBC factors increased by less than 21.5 percent. Therefore, ACL RBC for life insurers is expected to generally be increased as a result of the TCJA, but by less than 21.5 percent. The actual increase in ACL RBC is company-specific, depending on each company’s mix of assets, liabilities, risk factors, and tax strategies. Some sampling has shown that increases are generally between 5 and 15 percent, but individual company increases may be outside the range.

What are the changes in ACL RBC that will be effective for the 2018 filing year?There are numerous changes to Life RBC factors due to the TCJA. A high-level summary of the changes to the RBC factors follows. Life RBC factors not mentioned below were unaffected by the TCJA.

Most of the factors in LR030 (Tax OffsetCalculation of Tax Effect for Life RBC) for the 2017 RBC filing year were 0.35. Those factors are changed to 0.21 for the 2018 Life RBC filing year. Certain of the tax factors for bonds, preferred stocks, and similar instruments for the 2017 RBC filing year were 0.2625 (that is, 75 percent of 0.35), and those factors are changed to 0.1575 (that is, 75 percent of 0.21). C1 pre-tax RBC factors for bonds, preferred stocks, and similar instruments, and C2 RBC factors for individual and group life, were reduced by 3 percent, reflecting a higher post-tax discount rate.C2 RBC factors for health insurance, the C3 “base” factors, and the C4-0 factor were adjusted downward so that the net post-tax RBC factor is unchanged.


How will TAC be changed by the TCJA? If the change in the corporate tax rate from 35 percent to 21 percent were the only tax law change affecting life insurers, TAC would be higher in the future than under the prior tax law for companies with taxable income, because income tax expense would be reduced.

This increase to TAC from a lower tax rate is offset by a number of factors. The extent to which there is an offset is company-specific, as each life insurer’s tax situation is different. The offset is also time-specific, as the offset factors could be larger than the benefit of a lower tax rate for Life RBC filings in 2018 and immediately following years, with the size of the offset reducing as time goes on. The offset factors are as follows:


Commented [FD5]: ACLI 10/23 comment letter and 10/31 WG discussion


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4

Some life insurers have a net deferred tax asset (DTA) on their balance sheets. Accounting rules require that the DTA be recalculated using the lower tax rates. We understand that most life insurers that have a DTA reported this reduction to DTA, which reduced TAC, in their 2017 annual statements. The elimination of net operating loss carrybacks also had a significant impact (reduction) on the calculation of the DTA in many life insurers’ 2017 annual statements.The TCJA changed the tax deduction for non-variable product reserves to the greater of the cash surrender value or 92.81 percent of the statutory reserve (with certain prescribed adjustments such as eliminating deficiency reserves and asset adequacy reserves). For variable contracts, the 92.81% factor is applied only to the excess of statutory reserves over the greater of the separate account reserve or total cash surrender value. For most products, this is expected to reduce the deductible tax reserve, which increases taxable income and tax expense for a growing company, and therefore reduces TAC. Additionally, the TCJA requires that the difference between “old basis” and “new basis” tax reserves as of Dec. 31, 2017, be amortized into taxable income over eight years, further increasing taxable income and tax expense and further reducing TAC. Companies had to establish a deferred tax liability for this 8-year spread in 2017, which may not have been offset in full by a corresponding DTA.The TCJA increased the capitalization rate and lengthened the amortization period for the DAC tax. These changes will accelerate taxable income and tax expense, and therefore reduce TAC.A portion of the higher current income tax expense resulting from the new tax reserve and DAC calculations generally will be offset in part by additional admitted DTAs, which will increase statutory surplus and TAC. The TCJA modified the dividends received deduction (DRD), which will increase taxable income and tax for some life insurers and decrease taxable income and tax for others. The DRD allows a life insurer that receives a dividend from another company to deduct a portion of that dividend from taxable income.

The reduction in tax rates would be expected, by itself, to result in higher TAC for many life insurers. However, this reduction in tax rates will be offset, by some degree that will vary by company, by the changes discussed above, which broadened the life insurance company tax base. While the full impact of the tax law changes began in 2017 with changes in DTAs and will flow in over time, changes to ACL RBC are fully effective for 2018. Consequently, the anticipated impact of these changes for most lifeinsurers will be a reduction in the amount of TAC in excess of ACL RBC for life insurers for 2018 and immediately following years.

How should the effects of the TCJA be factored into the interpretation of RBC results? The Life RBC Trend Test (LR035) will be affected by the TCJA. The Trend Test calculates a margin, which is the excess of TAC over ACL RBC, for each of the current year, the prior year, and the third prior year. To the extent that the current year margin is lower than the prior year or third prior year margin, regulatory action may be indicated.

For the 2018 Trend Test, the margin for 2018 is compared to the margins for 2017 and 2015. As noted above, a company’s ACL RBC is expected to be increased for 2018 compared to prior years, and TACmay be reduced. The changes to ACL RBC and TAC due to the TCJA may cause some companies to trigger the Trend Test for 2018, solely because of the TCJA.








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Also, as noted above, the amount of TAC in excess of ACL RBC is expected to decrease for Dec. 31, 2018, RBC filings compared to what such amount would have been under the previous tax law, even though the Dec. 31, 2018, TAC for some life insurers may increase due to the TCJA. The decrease may be large enough to push a life insurer below an Action Level.

[possible additional paragraph – Further, a life insurer may experience a significant decrease in RBC Ratio as calculated from its 2018 RBC filing compared to the RBC Ratio in 2017. While the life insurer could remain well-capitalized in 2018, the absolute change in the RBC Ratio from 2017 to 2018 could raise concern with regulators.]

If regulators find that a life insurer has triggered the Trend Test, triggers an Action Level for 2018, [possible additional wording – or has a significant decline in RBC Ratio from 2017 to 2018,] they could have [possible alternate wording – should consider having] additional discussions with the company and request additional calculations. It is likely that life insurers themselves would have done some analysis of significant changes in ACL RBC and the excess of TAC over ACL RBC, and that analysis could be shared with regulators. [possible additional sentence - If the only reason that an Action Level is triggered is due to the Trend Test, the regulator should consider the possibility that no regulatory action is needed and that simply monitoring the results of the Trend Test over the next few years is the best course of action.]

[possible additional paragraph – It should be noted that a lower RBC Ratio resulting from these changes does not necessarily mean that a life insurer is “riskier” than before tax reform. It simply means that stress events will take more capital than under the prior tax law. RBC is a point-in-time calculation that does not consider the possibility of future increased after-tax earnings that might partially offset the impact of those future stress events.]

Regulators might consider requesting that a written analysis of the impacts be included in the RBC submission.


Authorized Control Level RBC—The changes to ACL RBC are fully effective for the Dec. 31, 2018, RBC filing.

Total Adjusted Capital—There are a number of tax-related items that affect TAC, with timing that varies by item. Items that increase taxable income generally increase tax expense and therefore reduce TAC, while those that decrease taxable income generally reduce tax expense and therefore increase TAC.


o Tax Rate—The 21 percent tax rate, which is a reduction from the previous 35 percent rate,is effective for the 2018 tax year. For life insurers with taxable income, this will reduce tax expenses in 2018 and future years and therefore increase TAC.







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o Tax Reserves—As noted above, tax reserves are generally reduced under the TCJA. Forlife insurers with increasing reserves (that is, generally companies that are growing), thatwill reduce the tax deduction for reserves for 2018 and future years, and therefore increase taxable income. Also, the difference between “old method” and “new method”tax reserves as of Dec. 31, 2017, will be amortized over eight years from 2018 to 2025,which will increase taxable income in the future.

o DAC Tax—As noted above, DAC tax capitalization is increased starting in 2018. Forexample, the factor for individual life insurance premiums increases from 7.70 percent to 9.20 percent, which will increase taxable income. Also, the amortization period is increased from 10 years to 15 years, which will further increase taxable income for 2018–2032.

o Dividends Received Deduction—The deduction is reduced effective in 2018. For some companies, this change increases taxable income.


o [possible additional bullet - RBC Ratios – The expected impact of TCJA on RBC ratioswill vary widely by company, given the varied impacts on the TAC and ACL RBCdescribed above.]


Commented [FD18]: Academy 11/4 and 10/31 discussion


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Attachment Five-C Capital Adequacy (E) Task Force

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Draft: 2/14/19


December 13, 2018 The Life Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met via conference call Dec. 13, 2018. The following Working Group members participated: Philip Barlow, Chair (DC); Steve Ostlund (AR); Perry Kupferman (CA); Deborah Batista (CO); Wanchin Chou (CT); Vincent Tsang and Bruce Sartain (IL); Derek Wallman (NE); Nakia Reid (NJ); William Carmello (NY); and Mike Boerner (TX). 1. Discussed the Elimination of the Fraternal Annual Statement Blank Mr. Barlow said that after this yearend, the fraternal annual statement blank will no longer exist, and fraternals will use the life blank. He said the fraternal risk-based capital (RBC) calculation will be eliminated, and fraternals will be included in the life RBC formula. While the fraternal RBC formula already largely follows the life formula, he said there will be some minor adjustments made to the life formula to accommodate fraternals using it. Dave Fleming (NAIC) noted that he discussed including fraternals in the life formula with NAIC legal staff, and they concur that it does not affect the Risk-Based Capital (RBC) for Insurers Model Act (#312). He said there are relatively few differences between the formulas, and he does not see any needed changes affecting the structure of the life formula. He said there are three areas that need to be addressed. The first area is the items in the life formula that are not applicable to fraternals. Mr. Fleming said these are mostly related to lines of business and taxes. He said the second area is the annual statement references that are different in the two formulas. He said the items being referenced are the same, but the location within an exhibit, schedule or page may be different in the two current annual statement blanks. He said these will be mostly addressed by the third area which is the changes to the life formula references needed as a result of the changes made to the annual statement blank. He said the two main questions he has are whether the title of the life formula should be changed similar to the change in the annual statement blank and whether instructional language is actually necessary to indicate that items are not applicable to fraternals. Since the changes do not appear to be structural, Mr. Barlow said he believes this means the Working Group has until June to complete this. Mr. Fleming concurred and said it would need to be exposed for comment by the Spring National Meeting. He said he planned to have a final version for the Working Group well before then. He said he will reach out to a few fraternals for input on the proposed changes as well. 2. Discussed a Proposal to Update RBC Charge for Unaffiliated Common Stock Supporting Long-Horizon Contractual

Commitments Mr. Barlow said this is an issue brought to the Working Group by Allstate, and it is looking for a different RBC charge for equities that back structured settlements. He said he has had discussions with Allstate, and they are in the process of revising their proposal. He said there are other insurers that have taken an interest in this issue and are looking to potentially consider other liabilities beyond structured settlements and payout annuities. As part of revising the proposal, he said that potential accounting changes are also being considered. Mr. Tsang said Illinois has received the same type of request from and had several discussions with another Illinois-domiciled company, and Illinois is open to the idea of a lower capital charge for common stock as long as there is a good business reason for it. He said there must be a good balance between liquidity and the common stock with a liquidity buffer of five to seven years before allowing lower charges; although, the exact length of the buffer is up for debate. Mr. Barlow said he would like to see what, if any, accounting changes are needed. With the right framework around it, he said the proposal might be a good modification to the formula, but it will be important to make sure that everything is considered. Mr. Chou noted that the life formula has different treatment for common stock than the other RBC formulas, and he suggested looking at the reason for that. Edward Toy (Risk and Regulatory Consulting) suggested that review of the analysis be done as part of the Investment Risk-Based Capital (E) Working Group’s work on common stock. 3. Discussed the Treatment of Fixed-Indexed Annuities Yan Fridman (Great American) provided a summary of their request to modify the C-3 treatment of fixed-indexed annuities in the life RBC formula (Attachment Five-C1). He said when C-3 Phase I was developed it specifically excluded what, at that time, were called equity-indexed annuities from the scope. He indicated that this could have been due to the product being in its infancy, and there was thought to be a lot of equity risk in them. While this may have made sense at the time, he said 20 years later the major risk in this product is not equity risk but fixed risk. He said the majority of companies are hedging the account value with static options, largely eliminating the equity risk; therefore, the C-3 Phase I scope should include indexed

Attachment Five-C Capital Adequacy (E) Task Force

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annuities without riders that are well-hedged without riders because this would recognize the benefit of well-matched assets and liabilities and result in the product being treated in a manner consistent with other fixed annuities. Mr. Barlow asked for the clarification that this suggestion was being restricted to those fixed-indexed annuities without any living benefits. Mr. Fridman said that is correct because they believe fixed-indexed annuities with living benefit riders have equity risk and do not necessarily fit within the C-3 Phase I framework. Mr. Barlow asked about the market split between those fixed-indexed annuities that have living benefits and those that do not. Mr. Ostlund asked about any work the American Academy of Actuaries (Academy) has done in this area since C-3 Phase I was put in place. Nancy Bennett (Academy) said the Academy’s C3 Life and Annuity Capital Work Group has been looking for a while at the issue of how to treat equity-indexed annuities and C-3 in general including C-3 Phase I for all types of fixed annuities. She said there was agreement among all parties that any work on C-3 related to fixed annuities would be put on hold until the Variable Annuities Issues (E) Working Group and correspondinggroup’s work was done and the new C-3 framework for variable annuities was finalized. Mr. Barlow said he would like to geta sense of how much of an issue this is in RBC, and then the Working Group can determine whether to take any action apartfrom the work that the Academy will be doing once the variable annuities work is complete. Birny Birnbaum (Center forEconomic Justice—CEJ) said they have real concerns with the proposed treatment because a traditional fixed annuity has twokinds of risk: interest rate risk and mortality risk. He said a fixed-indexed annuity adds a hedging risk, and the costs of hedgingare not fixed, varying depending upon economic conditions. Mr. Barlow said this is a good point, and it will be something theWorking Group considers before making any decisions.

Having no further business, the Life Risk-Based Capital (E) Working Group adjourned.

W:\National Meetings\2019\Spring\TF\CapAdequacy\LifeRBC\12_13_18 Call

Great American Tower Mike Prager 301 East Fourth Street EVP & Chief Actuary Cincinnati, OH 45202

GreatAmericanInsuranceGroup.com

July 9, 2018

Philip Barlow, Chair Life Risk-Based Capital Working Group National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, MO 64108

Dear Philip:

Great American is a major writer of Fixed Indexed Annuities (FIA) and we would like to engage with the Life Risk-Based Capital Working Group to address their treatment under C-3 Phase I. When the standard was developed 20 years ago, FIAs were new and not well understood. Most believed they had material equity exposure, and in a broad brush move to publish C-3 Phase I, the entire product line was excluded.

As time passed, it is clear that FIAs without living benefits have a nearly identical risk profile to traditional fixed annuities if they are effectively hedged to eliminate equity risk.

The vast majority of assets are invested similarly to traditional fixed annuities, so the primary risk isinterest rate relatedFixed and indexed annuities are typically together in an ALM programFor Great American, any guarantees on caps and par rates are low and have the same risk as a GMIR

We believe that FIAs with living benefits do contain equity risk if not hedged and these should continue to be excluded from C-3 Phase I, and an appropriate standard should be developed. There is growing concurrence that the presence of living benefits is the determining factor of equity risk. In fact, the final report by the Annuity Reserve Work Group carved out FIAs without living benefits and combined them with traditional fixed annuities for reserving under AG33/35. Those with living benefits were aggregated with variable annuities.

We would appreciate the opportunity to work with the Life Risk-Based Capital Working Group to modify the language under C-3 Phase I to only exclude products with material equity risk, rather than condemning an entire product line regardless of actual product risk profiles.

Sincerely,

______________________________ MMichael Prager, FSA, CERA, MAAA

Executive Vice PresidentChief Actuary and Chief Risk Officer513.412.3816 Ph | 513.412.1204 Fax

cc: Yan Fridman

Attachment Five-C1 Capital Adequacy (E) Task Force

4/7/19


2

Background

Equity Exposure Transferred to Counterparties

Great American statically hedges its FIAs without living benefits, eliminating our equity exposure. We pay a fixed fee, approximately 2.5% of reserves, to counterparties or the CBOE, for which we receive the equity performance of the associated index (almost exclusively the S&P 500) and pass that through to the customer. Counterparties post collateral as protection against their failure to perform.

The remaining 97.5% of assets are invested identically to our traditional fixed annuity portfolio, primarily consisting of fixed income securities. With this asset structure, our primary risk is to interest rate movements, and we include these products in our ALM program and metrics (e.g. duration analysis). This is why FIAs can guarantee a rate of return on the contract (called the GMSV and similar in function to the GMIR on a traditional fixed annuity), whereas variable annuities cannot.

Great American takes little equity risk. We are indifferent to actual equity performance.

To illustrate our hedge effectiveness, we track the correlation of hedge payoffs to policyholder credits, which has been over 99.85% over the past two years.

FIAs without Living Benefits act like Traditional Fixed Annuities

Our profit margin on FIAs is the difference between our investment yield and the fixed fee paid to counterparties. The fixed fee is identical to a credited rate on a traditional annuity.

If interest rates fall and margins are squeezed, we reduce the credited rates on our FIAs, which in turn reduces the fee paid to the counterparties. We dial the fee up and down within our ALM framework, just like the credited rate on a traditional fixed annuity.

For our point-to-point FIAs (which dominate our inforce policies), our guaranteed minimum S&P 500 caps are identical to guaranteed minimum interest rates (GMIRs) on the fixed account. Should interest rates remain low for a prolonged period of time, we would ultimately reduce the cap to match the GMIR. At that point, we


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would not hedge the equity performance, as the customer could, at most, receive the guaranteed fixed interest rate. In that situation, an FIA looks almost exactly like a traditional fixed annuity. And the Fixed Account of an FIA without living benefits always acts like a traditional fixed annuity.

Reserving for FIAs with and without Living Benefits

Fixed annuities are valued under AG33, reflecting interest rate risk as its primary exposure for establishing reserves. The standard for FIAs without Living Benefits is to start with AG33, then add on an equity exposure value from AG35. However, the equity impact from AG35 is offset by the hedge value on the asset side.

It has long been recognized that AG33 does not work for FIAs with living benefits, due to equity risk and policyholder optionality. The Annuity Reserve Work Group of the American Academy of Actuaries has been investigating a new standard for VM-22 over the past few years. Their last report, dated December 2016, indicates that FIAs without living benefits should follow AG33, while FIAs with living benefits should follow an AG43/VM-21 approach. This is consistent with our view that FIAs without living benefits behave like traditional fixed annuities economically, and should be treated as traditional fixed annuities in all aspects, including C-3 Phase I.

Spirit of C-3 Phase I

Prior to C-3 Phase I, C-3 was strictly formulaic. In 1999, the NAIC recognized that asset adequacy analysis and ALM for annuities were commonplace, and should be reflected in C-3 capital requirements. They engaged the American Academy of Actuaries Life RBC Task Force to develop a better approach. The Task Force was charged “to see if a practical method could be found to reflect the degree of asset/liability mismatch risk of a particular company” (Phase I Report of the American Academy of Actuaries' C-3 Subgroup of the Life Risk Based Capital Task Force to the NAIC Risk Based Capital Work Group, October 1999).

Asset/liability mismatch occurs on a portfolio primarily invested in fixed income securities when the asset duration drifts from the liability duration for interest sensitive liabilities. FIAs without living benefits behave like interest sensitive products in all material aspects, and fall within the spirit of C-3 Phase I. The Subgroup determined that equity based products should be excluded, which would cover FIAs with living benefits. We would continue to exclude them from C-3 Phase I. While we receive a C-3 Phase I credit today for our ALM practices, it is solely based on our traditional fixed annuities, despite FIAs being an integral part of ALM.

The spirit of C-3 Phase II along with AG43/VM-21 is to recognize the effects of the hedging program and reward companies with effective ALM. We believe that a similar notion would be in the spirit of C-3 Phase I.

Rating agency models

Great American has been extremely successful in the fixed indexed annuity market, while maintaining strong profitability and a conservative risk profile. Standard & Poor’s and AM Best ratios do not penalize us for selling a fixed indexed annuity vs. a traditional fixed annuity. In fact, Standard & Poor’s has a lower capital requirement for fixed indexed annuities vs. traditional fixed annuities. Yet, the NAIC RBC is punitive for fixed indexed annuities without living benefits, relative to the capital requirements for a traditional fixed annuity.


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Attachment Five-D Capital Adequacy (E) Task Force

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0.9 0.7

0.8 0.3

0.5 0.1

0.9 0.6

0.7 0.4

0.5 0.1



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Attachment Five-E Capital Adequacy (E) Task Force

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Draft: 3/25/19

Longevity Risk (A/E) Subgroup Conference Calls

March 5, 2019, and February 19, 2019

The Longevity Risk (A/E) Subgroup of the Life Actuarial (A) Task Force and the Life Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met via conference call March 5, 2019, and Feb. 19, 2019. The following Subgroup members participated: Rhonda Ahrens, Chair (NE); John Robinson (MN); Seong-min Eom (NJ); Bill Carmello (NY); and Pete Weber (OH).

1. Exposed the Academy’s Longevity Risk Task Force Report

Paul Navratil (American Academy of Actuaries—Academy) presented an update (Attachment Five-E1) on the work of the Academy’s Longevity Risk Task Force. He said the key conclusions are in the preliminary proposal summary. The Academy is recommending that a capital structure with longevity C-2 factors be applied to base statutory reserves. The Academy is also proposing that the updated mortality factors that a separate Academy group is working on be implemented concurrently, along with a covariance adjustment within C-2 to reflect the offsetting nature of mortality and longevity risk. The proposal also includes a working version of a proposed set of factors that vary by the total size of company reserves in scope products as a proxy for the credibility and volatility of company-specific longevity.

Mr. Navratil said the remainder of the report goes through the Academy’s approach and assumptions, as well as the process undertaken to use the field study and other information to calibrate and then arrive at the proposed factors. In covering the objective and philosophy, he highlighted the fact that the Academy focused on life risk-based capital (RBC), with the assumption that the statutory reserves reflect longevity risk through prescribed assumptions and are appropriate and adequate, and then coming up with a proposal only for the capital portion. The proposal was developed in line with the objective of RBC as a regulatory tool to identify weakly capitalized companies. It also balances several competing objectives, among them linkage to the statutory financial statements, reasonability of the charge as a measure of longevity risk at the company level, and simplicity and consistency with the RBC framework.

Mr. Navratil discussed the overall approach, key assumptions, trend stress calibration and starting mortality level stress calibration as outlined in pages 5–9 of the presentation. He said page 10 of the presentation provides the results of the field study, and the appendix goes into more detail on the requests that were asked. He said companies were asked to run the impact of two different level stresses, a 1% and 6% level stress on their reserves, as well as the impact of a stress to trend or mortality improvement. He said the Academy developed its own self-testing model that looked at many variations across ages and products, noting that the results of the field study confirmed a lot of the Academy’s expectations, with one exception being contingent deferred annuities. He said the proposal is not recommending a difference by product, noting that the field study confirmed that the results across ages were fairly consistent, so no age factor is needed. He discussed the after-tax factor, factor scaling and preliminary factor implementation, as outlined in pages 11–13 of the presentation. With respect to the sample company impacts of the introduction of the longevity risk factor on page 14, he highlighted the Academy’s conclusion, which is effective at identifying companies with concentrated exposure to longevity risk but will have an appropriately smaller impact on companies that have a balanced risk exposure.

Mr. Navratil said the Academy does not believe that longevity reinsurance is a prevalent product currently but recommends that it remain in scope. He said there are two important adjustments that are needed in order to capture the longevity risk in a way that is consistent with how it would be captured for single premium annuities. The first is that a capital factor needs to be applied to the present value of annuity payments using statutory assumptions rather than just the statutory reserves. The second is that premium amounts excluded from statutory reserves should be netted against C-2 capital.

Mr. Navratil said the Academy’s Longevity Risk Task Force is working with the Academy’s C2 Work Group to develop a joint proposal on the correlation between mortality and longevity within C-2. He said they have limited the scope to mortality and longevity risk, which they believe is significant, and it needs to be considered concurrently with the implementation of a longevity risk charge. He said this is a key next step along with a more detailed documentation of the work and the recommendation, as well as addressing questions and feedback from state insurance regulators and interested parties.


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Ms. Ahrens noted the covariance assumptions of 0%, 25% and 50% between mortality and longevity in the sample company impacts, and she asked if the two Academy groups have discussed this enough to recommend whether these numbers are reasonable or are for just for demonstration.

Mr. Navratil said there are sensitivities that were used in the initial work that do not represent the recommendation or the range of the recommendation.

Ms. Ahrens said one of the intentions of exploring longevity risk factors for reserves and capital has been a growing exposure to longevity-type products and, given the work that remains to be done on the correlation and other aspects, she asked how soon the Academy’s Longevity Risk Task Force believes it would be prudent to introduce an RBC factor for longevity risk.

Mr. Navratil reiterated the Academy’s recommendation that the longevity risk factor should be implemented concurrently with the work being done on mortality and covariance when that work is completed, and the consideration of items that are not in scope of the recommendation should be left as a possible desired future course of work.

Mr. Robinson noted that the use of an average policy reserve is 50,000 with the understanding that there will be some variance, and he asked how using another amount would impact the resulting factor. Mr. Navratil said the Academy’s Longevity Risk Task Force can show alternative sensitivities. He said this would not change the resulting factors, but it would change the size thresholds to which the factors are applied.

Mr. Carmello said New York is not in favor of a covariance adjustment. While, theoretically, there might be some offset with the right assumptions, he said this is not needed for RBC because the Subgroup is looking for something that represents a reasonable charge for the risk. The way the proposal is structured, he said many of the companies with the large portfolios of life insurance would actually have a reduction in overall RBC, and this is not what New York is looking for. He said the Subgroup should not wait until C-2 is finished for life insurance, because they have waited long enough for a longevity RBC charge to be set.

Mr. Carmello said New York believes use of the 85th percentile is not right for RBC purposes because they have had many companies that had to put up cash-flow testing reserves for payout annuities. He also questioned the use of the number of deaths because that was not used in the 2012 table. He said that was based on income because companies lose money based on the income amount, not on the number of deaths. With the 2012 table, he said they excluded some of the smaller income amount business mainly because there was such a dramatic difference in the number of deaths for the higher income business. He said New York would also like a list of the companies that participated in the study.

Ms. Ahrens said she believes the last two points are for the Academy to respond to, and she asked why the number of deaths was chosen as a proxy for a lower RBC ratio when, intuitively in a recall of some past studies, lower income policies were not as big of a risk component, perhaps because people who have lower payout products were not really using them as insurance. She said a better question to ask the Academy might be what its consideration is of an approach where the size of the contract is more of a factor rather than a proxy for the number of deaths based on 50,000 as the average size. She questioned the use of that amount as a proxy, because it does not seem right over the long term if payments are used to fund lifetime income in retirement or some major event.

Mr. Navratil said the 50,000 amount is within the range of what different blocks of business could be, but this is for the purpose of illustration and is not even necessarily an average. He said the analysis includes a scaling factor to reflect the fact that there is an additional volatility component if there are policies of different sizes.

Ms. Ahrens asked for clarification that the intent of the proposal is to have the RBC factors applied to all in-force business. Mr. Navratil said that is the intent.

With respect to use of the 85th percentile and whether the assumption that reserves are at that level, Ms. Ahrens said she believes any C-2 factor ultimately adopted by the Subgroup should not need updating should a change be made to reserves. Mr. Robinson suggested having some guidance on what possible future changes would require a factor revision.

Ms. Ahrens cited the concern with the wait for a longevity charge in the formula. She said the Subgroup has a proposal in which there are some open questions, specifically about the treatment covariance, and she asked Subgroup members what direction they would like to take.


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Mr. Robinson said the Academy has provided what, in their judgment, works best, and he suggested the Subgroup move forward with it. He asked if covariance is a critical part of the proposal.

Mr. Navratil said, from a practical perspective, it would be possible to implement RBC factors without covariance, but the Academy’s view in capturing a reasonable representation of longevity risk is that covariance is important.

Mr. Weber agreed that exposing the report for public comment would result in more people considering it, and it would generate additional discussion.

Mr. Carmello said he would want an alternative that does not include the covariance as part of the exposure.

Mr. Robinson suggested that the exposure include some questions the Subgroup specifically asks for comment on, which could include covariance.

Ms. Ahrens suggested that Subgroup members work together in the next few days on the questions to be included in the exposure.

The Subgroup agreed to expose the Academy’s report, along with a list of questions on which it would like comment, for a 60-day public comment period once the questions are finalized.

Having no further business, the Longevity Risk (A/E) Subgroup adjourned.

w:\national meetings\2019\Spring\tf\LA\Att Longevity Risk Subgroup 2019-3-5 and 2019-2-19.docx

© 2018 American Academy of Actuaries. All rights reserved.May not be reproduced without express permission.

LONGEVITY RISK TASK FORCEUPDATE (LRTF)

LONGEVITY RISK TASK FORCE

FEBRUARY 19, 2019


2

Discussion Topics

Approach & Key AssumptionsField Study Results & Longevity Factor CalibrationNext Steps


3

Preliminary Proposal Summary

Recommend capital structure with Longevity C 2 Factors applied to baseStatutory Reserves

Factor applied to present value of benefits for Longevity Reinsurance

Propose that updated C 2 mortality factors (e.g., C 2a) and new C 2 longevityfactors (e.g., C 2b) be implemented concurrently along with a covarianceadjustment within C 2.Anticipated factors (working version below) vary with the total size of companyreserves for in scope products, where reserves are a proxy for the credibility andvolatility of company specific longevity

Total Reserves(in scope products)

C 2 LongevityAfter Tax Factor

up to $250M 1.35%next $250M 0.85%next $500M 0.75%over $1B 0.70%


4

Objective & Philosophy

The objective of our work is to develop a proposed method to incorporatelongevity risk into the NAIC’s Life Risk Based Capital formula (LRBC).The scope of our work is LRBC. Statutory reserves reflect longevity risk throughprescribed mortality assumptions and asset adequacy testing requirements.Our proposal was developed in line with the overall objective of LRBC as being atool for regulators to identify potentially weakly capitalized companies.

We took a practical approach in developing an initial longevity risk factor for LRBC which is not intended toprecisely reflect all drivers nor align to an internal view of economic capital for all companies

We balanced several competing objectives in proposing a longevity risk factorwithin LRBC:

Clear linkage of the calculation to statutory financial statements & regulatory ability to auditcalculationAccuracy and reasonability of the charge as a measure of longevity risk at the company levelSimplicity of the calculationConsistency with the existing RBC framework

Attachment Five-E1 Capital Adequacy (E) Task Force

4/7/19



5

Overall Approach

Scope to include longevity risk to payout annuity products and pension risk transfers. Other productssuch as VA, LTC and traditional deferred accumulation annuities are out of scope at this time.(Additional scope detail in Appendix)

Based on discussions with the NAIC Longevity Risk Subgroup, our analysis begins with the premise thatLRBC is intended to cover tail risk in excess of the risk covered by statutory reserves.

Our work assumes statutory reserves adequately fund moderately adverse risk measured at the 85thpercentile and that LRBC covers longevity risk from the 85th percentile to the 95th percentile levelOur work assumes LRBC covers longevity risk over the lifetime of the policy

RBC is intended to cover losses from increased longevity over the policy lifetime, summarized into 2components for analysis:

Mortality Trend Risk – risk that future mortality improvements are greater than anticipatedMortality Level Risk – error in initial mortality assumptions, including credibility of startingmortality rate assumption and volatility of individual company longevity outcomes

Losses due to longevity risk are measured as the impact on reserves from stressed longevityassumptions

Loss amounts are expressed as a capital factor to be applied to the Statutory Reserves


6

Key Assumptions

Statutory reserves are adequate and cover risks at the 85th percentile

Discount rate of 5% (pre tax) is used to calculate the present value loss amount from increasedlongevity. 5% rate was chosen to be consistent with the discount rate applied elsewhere in RBC (C 1Bond Factors). Sensitivity analysis has been provided to illustrate the impact of a 4% discount rate.

Tax rate of 21% used to calculate after tax capital factors from pre tax loss amounts. Tax adjustmentapplied to both the loss amount as well as the discount rate.

Mortality distribution for future insured annuitants can be represented by the distribution of historicalpopulation mortality.

No differences in the volatility and probability distribution shape for insured mortality compared to thegeneral population

Volatility and distribution of possible future improvements is consistent with the volatility of post WWIIhistorical improvements

Mortality improvements are normally distributed; this normal distribution was used to determine the 85thand 95th percentiles

20 years is an appropriate period of time to calibrate an improvement stress that is applied for the entirelifetime of policies

Overlapping 20 year historical periods were assumed independent in developing the distribution of 20 yearmortality improvements


7

Key Assumptions Continued

Independence between Trend Risk and Level Risk, and among Level Risk components(Credibility, Population Volatility and Historical Trend). Each component was separatelyquantified then combined assuming the components were independent.

Old Age Calibration showed similar absolute level of improvement rate volatility as youngerages. Mortality improvement stress was assumed to be a multiplicative factor of the baselinemortality improvement, resulting in a larger multiple (1.40x vs 1.16x) for older ages becausethe baseline mortality improvement is lower.

Policy Size Distribution based on a 2009 2013 Individual Payout Annuity Mortality study bythe SOA was used to adjust the volatility of deaths on a count basis to volatility on a dollarreserve basis.

Average reserve per policy of $50,000 and average block mortality rate of 2% were assumedin scaling factors derived from the number of company experience period deaths to a totalcompany reserve basis. This does not impact the overall quantification of longevity risk on alife count exposure basis, just the approach to scaling the factor from a life count to a statutoryreserves basis.


8

Trend Stress Calibration

Based on 20 Year historical population improvement dataField study calibration originally based on data 1900 – 2013; subsequently adjusted to reflect recentpopulation volatility post WWII 1946 – 2013 (to exclude war impacts and reflect that total populationmortality volatility has declined as population size has increased).

Data fit to a normal distribution to determine stresses for 85th and 95th percentiles (based on regulatorinput and preference for normal distribution considering the limited number of non overlapping 20 yearhistorical periods)

Multiplicative stress applied to valuation mortality improvement scaleGreater stress used for older (>85) ages to reflect similar absolute trend volatility on a smaller average levelof trend

Recommendation reflects 80% of Field Study requested trend stress after adjusting to 1946+ calibration

16% stress to mortality improvement for ages <85 (resulting in a 1.16x multiple to improvement rates)

40% stress to mortality improvement for ages 85+ (resulting in a 1.40x multiple to improvement rates)

Avg AA/G2 85th % 95th %(95th 85th)

/ Avg 85th % 95th %(95th 85th)

/ AvgField StudyStress

Final StressApplied

All ages 35+ 1.17% 1.27% 1.49% 19% 1.31% 1.47% 13%Ages 35 - 84 1.19% 1.41% 1.63% 19% 1.45% 1.60% 13% 20% 16%Ages 85+ 0.59% 1.00% 1.28% 47% 1.09% 1.34% 43% 50% 40%

1900 2013 Calibration 1946 2013 Calibration


4/7/19



9

Starting Mortality Level Stress Calibration

Total Mortality Level Stress varies with the size and credibility of company mortality experienceLarger companies with more insured lives will have less variability in company specific outcomesThere remains fundamental population volatility that does not diversify away with size

Overall mortality level stress varies between 0.7% and 6.0% of initial mortality rates

Mortality level stress was quantified using 3 largely independent components:

1. Credibility Risk – captures credibility and volatility of insurer population specific mortality

2. Volatility of Population Mortality – underlying volatility that is not diversified with larger blocks

3. Trend Adjustment – impact of error in trend applied from experience period to valuation date

# Exp Yrs: 5 5 5# Deaths 500 2,100 100,000A. Credibility 5.8% 2.8% 0.4%B. Pop Volatility 0.5% 0.5% 0.5%C. Trend Shift 0.4% 0.4% 0.4%Total Level Stress 5.8% 2.9% 0.7%


10

Field Study Results (Summary)

AAA Field Study asked participating companies to run the impact of level and trend stresses to actualcompany reserves to confirm the calibration of the longevity risk charge. (Additional detail in Appendix)

Result reflected the combined impact of the requested trend and level stresses, assuming independence

Results confirmed many expectations from our cell testing and resolved some outstanding questions witha combined impact that was comparable across products and ages (detail not included below)

Field study indicated low prevalence of contingent deferred annuities where no benefits are payable ifannuitant does not survive to benefit commencement. Our cell testing indicated greater risk as apercentage of reserves for this structure, and is a potential future enhancement.

Red line shows recommended pre tax LRBC factorsNote: Error bars show result from 25th and 75th percentileresponses

“Cell Model” reflects expected study result derived from asimple reserve cell testing model constructed by the LRTFand shown for comparison. Cell model error bars arebased on sensitivity tests of different assumed agedistributions.

Field study requested mortality level shocks of 1% and 6%to represent companies with high and low credibility ofmortality experience data


11

After Tax Capital Factor

Two adjustments were made to convert from pre tax to after tax factors:

1. Loss amount was multiplied by 0.79 (1 21% tax rate)

2. Discount rate was also multiplied by 0.79 factor (5% pre tax rate adjusted down to 3.95%)

The baseline recommendation reflects a 5% pre tax discount rate to be consistent with thediscount rate applied elsewhere in LRBC (e.g., recommended C 1 Bond factors)

Since the impact of longevity risk is increased in a low interest rate environment, it may beappropriate to consider a lower discount rate (such as 4%) for longevity risk capital. Note: stochasticmodeling of interest rates was considered but not used as the basis for a recommendation due to the modelcomplexity it would have required.

Capital Factor4% Discount Rate

Pre Tax After Tax After TaxHigh Credibility 0.80% 0.71% 0.78%Low Credibility 1.55% 1.37% 1.48%

5% Discount Rate


12

# Exp Yrs: 5 5 5 5# Deaths 475 1,000 10,000 25,000Total Level Stress 6.00% 4.15% 1.43% 1.01%Calibrated Total After Tax Capital 1.37% 1.09% 0.75% 0.71%

Avg Qx 2.0% 2.0% 2.0% 2.0%# Life Exposures 4,750 10,000 100,000 250,000Avg Reserve/policy 50,000$ 50,000$ 50,000$ 50,000$Total Reserve Level ($,M) 238$ 500$ 5,000$ 12,500$

Factor Scaling

Recommend Factor that varies by total Statutory Reserves for in scope productsSize of in scope product reserves used as a proxy for credibility and volatility of company mortalityexperience; a better measure would be total annual deaths, however this is not available instatutory statementsA key assumption in scaling risk based on total annual deaths to a reserve basis is the averagereserve per policy which will vary considerably across blocks of business; $50,000 amount usedbelow is used to illustrate a scaling approach and is not necessarily an averageChart below shows the total capital calibrated from the field study stresses (first and last columns)mapped to corresponding total statutory reserve levels. Additional calibration points were addedbased on the relative total risk calculated from the cell testing model to calibrate at other reservelevels.


4/7/19



13

Preliminary Factor Implementation

Factors to be applied to Statutory Reserves for products in scope to determineC 2b Longevity risk amountFactors and breakpoints were chosen to closely match total risk derived fromthe Field Study calibration

Simple approach with 4 factors shown provides results which closely match calibration fromField Study

Each factor applies at the margin to reserves in excess of the breakpoint, avoidingdiscontinuities in total C 2b for companies with reserves just above vs below a breakpoint

Reserve Level($,M)

Calibrated FieldStudy Results

Marginal C 2bFactor Total C 2b

250 1.35% 1.35% 1.35%500 1.09% 0.85% 1.10%1,000 0.92% 0.75% 0.92%2,500 0.80% 0.70% 0.79%5,000 0.75% 0.70% 0.74%7,500 0.73% 0.70% 0.73%10,000 0.72% 0.70% 0.72%25,000 0.70% 0.70% 0.71%50,000 0.69% 0.70% 0.70%


14

Sample Company Impacts

Introduction of “C 2b” charge is effective in identifying companies with concentrated exposure tolongevity risk, and has appropriately smaller impact on companies with balanced risk exposures.

Illustration shown using distribution of RBC amounts from aggregate 2017 Life RBC (additionalcalculation details provided in Appendix)

Sample impacts shown for companies with Concentrated Longevity exposure (C 2b 3x greater than C2a), Balanced Longevity exposure (C 2b equal to C 2a), and Low Longevity exposure (C 2a 5x greaterthan C 2b)

Sample impacts also shown under a range of covariance assumptions between longevity andmortality

BaselineC2aMortality/Other Insurance Risk 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1C2b Longevity Insurance Risk n/a 75.4 75.4 75.4 25.1 25.1 25.1 5.0 5.0 5.0Longevity Mortality Correlation n/a 0% 25% 50% 0% 25% 50% 0% 25% 50%C 2 Insurance Risk 25.1 79.5 73.3 66.5 35.6 30.8 25.1 25.6 24.4 23.0

Calculated CAL RBC Ratio 517% 393% 407% 423% 496% 506% 517% 516% 518% 521%

Concentrated Longevity Balanced Longevity Low Longevity Exposure


15

Longevity Reinsurance

This is a recurring premium product where a reinsurer is responsible for annuity payments based on actual longevity ofcovered lives in exchange for a premium stream (generally representing expected payments plus a fee)

There were not enough field study responses from companies with Longevity Reinsurance for the LRTF to receive results

Although the product structure may not be common, we recommend it remaining in scope for longevity C 2 since thelongevity risk is the same as a traditional single premium annuity product

There are 2 important adjustments needed to capture the longevity C 2 consistently with single premium annuities:

1. Capital Factor must be applied to the Present Value of annuity benefits under Statutory assumptionsUnder a net premium reserve methodology which reflect future premiums, statutory reserves are much lower than for acomparable SPIA

The statutory reserve for a SPIA equals the full PV of benefits, so this is the comparable basis applicable for this product

2. Premium amounts excluded from Statutory Reserves should be netted against C 2 capitalA net premium reserve methodology typically excludes a portion of future premiums to prevent a negative initial reserve

These excluded premiums are a source of funding for adverse longevity outcomes more severe than provided for in reserves

This allows for consistency with funded products where assets from the initial premium are available to fund capital

It is appropriate for future fees to fund reserves and capital since claims are only due if premiums are paid


16

Covariance

The LRTF together with the Academy C 2 Mortality Working Group plan todevelop an approach to reflect the correlation between mortality and longevityrisk within C 2The LRTF plans to limit the scope of this effort to mortality and longevity risk

The correlation between longevity and mortality is significant and we believe must be consideredconcurrent with the implementation of a longevity risk charge

The covariance proposal will take into consideration the specific risks (i.e.basis/credibility, volatility, trend) considered in both the development of thelongevity risk factors as well as by the Academy C 2 Mortality Working Group


4/7/19



17

LRTF Next Steps

Complete recommendation of covariance between C 2 mortality and C 2longevityComplete more detailed documentation of analysis andrecommendationsAddress questions & feedback from regulators and interested parties


18

Appendix


19

Products in Scope

Scope includes annuity products with life contingent payments where benefits are expected to be distributed in the form of anannuity.

It does not include annuity products for which payments are certain only (non life contingent).It does not include deferred annuities that have an annuitization option, but are not required to annuitize.It does not include variable annuities or contingent deferred annuities which are captured in C3 Phase 2 testing.

Product in scope include:Single Premium Immediate Annuities (SPIAs) and Other Payout Annuities: Annuities issued to individuals (not groups) in which a singlepremium is paid and a benefit payment is paid periodically during the time the person is alive, including deferred annuities that have moved to apayout stage.Structured Settlements: Annuities issued to individuals as part of a legal settlement in which a single premium is paid and benefit payments arepaid periodically during the time the person is alive. Many structured settlement contracts involve substandard mortality.Longevity Reinsurance: A product offered to pension plan sponsors (or direct writers) in which the insurer (or reinsurer) makes payments to thepension plan sponsor (or direct writer) in the event that actual mortality experience of the pensioners is better (i.e. they live longer) than a definedlevel of experience per the contract (or, for a longevity swap, the payments are also made in the opposite direction in the event that actual mortalityexperience of the pensioners is worse, and may be based on a defined index). In exchange for these payments, the insurer or reinsurer may receive aperiodic fee.Group Immediate Annuities: Annuities issued to groups in which a single premium is paid (in cash or in kind assets) and benefit payments arepaid to specified members of the group periodically during the time they are individually alive.

Deferred Payout Annuities (DPAs): Annuities issued to individuals in which premiums or deposits are made over aspecified deferral period. At the end of the deferral period, benefit payments are paid to the individual periodicallyduring the time the person is alive.Group Deferred Payout Annuities: This product is defined as annuities issued to groups in which premiums ordeposits are made over a specified deferral period. At the end of the deferral period, benefit payments are paid tomembers of the group periodically during the time the person is alive.


20

Field Study Overview

Conducted by the Academy Research Task Force (ARTF)

LRTF developed instructions and a template completed by participatingcompanies

Tested the impact to statutory reserves of stresses in base mortality rates andmortality improvement rates for policies inforce on December 31, 2017

Field study template was at a granular level to understand how drivers such asproduct type, valuation discount rate, policy duration, age and gender impactrisk

Results were submitted to ARTF from 17 companies

Company data kept confidential, only aggregated results with average, 25thand 75th percentile responses for each requested cell shared with the LRTF


4/7/19



21

Field Study Details

Run A – 2017 CARVM Valuation Basis (assumed to be 85th percentile)2012 IAM Table (1994 GAR for Group business)Projection Scale G2 (Projection Scale AA for Group business)

Run B/C – 95th Percentile Stress – basis and volatility risk2012 IAM Table (1994 GAR for Group business), all rates adjusted for our definedbasis risk stress event (99% factor for run B high credibility/large block or 94%factor for run C low credibility/small block)Projection Scale G2 (Projection Scale AA for Group business)

Run D – 95th Percentile Stress – trend risk2012 IAM Table (1994 GAR for Group business)Projection Scale G2 (Projection Scale AA for Group business), all improvementfactors adjusted for our defined trend stress event (0.20%/0.50% stress forunder/over age 85)

Capital = [(Run B/C Run A)2 + (Run D – Run A)2]1/2


22

Sample Company Impacts Detail

Illustrated distribution of RBC Risk based on aggregate 2017 Life RBC

Existing Formula: CAL RBC = C0 + [(C1o+C3a) 2 + (C1cs+C3c)2 + (C2) 2 + (C3b) 2 + (C4b)2]1/2 + C4a

Illustrated Formula Update: C2 = [C2a2 + C2b 2 + 2*C2a*C2b*Corra,b]1/2

2017 AggregatedLife RBC($,B)

C 0 Asset Risk Affiliates 21.5 21.5 21.5 21.5 21.5 21.5 21.5 21.5 21.5 21.5C 1cs Asset Risk Common Stock 29.9 29.9 29.9 29.9 29.9 29.9 29.9 29.9 29.9 29.9C 1o Asset Risk All Other 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7C 2a Mortality/Other Insurance Risk 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1C 2b Longevity Insurance Risk 75.4 75.4 75.4 25.1 25.1 25.1 5.0 5.0 5.0Longevity Mortality Correlation 0% 25% 50% 0% 25% 50% 0% 25% 50%C 2 Insurance Risk 25.1 79.5 73.3 66.5 35.6 30.8 25.1 25.6 24.4 23.0C 3a Interest Rate Risk 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3C 3b Health Credit Risk 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1C 3c Market Risk 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3C 4a Business Risk 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7C 4b Business Risk Admin Expenses 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

Calculated CAL RBC 101.8 133.9 129.3 124.4 106.1 104.0 101.8 102.0 101.6 101.1Reported Aggregate CAL RBC 112.7Total Adjusted Capital 526.6 526.6 526.6 526.6 526.6 526.6 526.6 526.6 526.6 526.6Calculated CAL RBC Ratio 517% 393% 407% 423% 496% 506% 517% 516% 518% 521%

Concentrated LongevityExposure Company Example

Balanced Longevity ExposureCompany Example

Low Longevity ExposureCompany Example


Additional Questions, contact:

Questions?

Paul Navratil, MAAA, FSAChairperson, Longevity Risk Task Force(LRTF)[email protected]

Ian TrepanierLife Policy AnalystAmerican Academy of [email protected]


4/7/19


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Cas

h Fl

ow M

odel

edfo

r Int

eres

t Rat

e R

iskT

este

d fo

r Ass

et A

dequ

acy

–Fa

ctor

-Bas

ed R

BC

Line

s (2

) tho

ugh

(16)

incl

ude

the

rese

rves

for c

ontra

cts

that

wer

e m

odel

ed fo

r int

eres

t rat

e ris

k fo

llow

ing

the

guid

ance

ofS

eeA

ppen

dix

1 of

the

inst

ruct

ions

for m

ore

deta

ils.½

of t

his

fact

or b

ased

fact

or-b

ased

amou

nt is

use

d in

the

floor

det

erm

ined

in li

ne (3

4)

The

risk

cate

gorie

s are

:(a

)Lo

w-R

isk

Cate

gory

The

basi

c ris

k-ba

sed

capi

tal d

evel

oped

for a

nnui

ties

and

life

insu

ranc

e in

the

low

-ris

k ca

tego

ry w

as b

ased

on

an a

ssum

ed a

sset

/liab

ility

dur

atio

n m

ism

atch

of 0

.125

(i.e

., a

wel

l-m

atch

ed p

ortfo

lio).

This

dur

atio

nal g

ap w

asco

mbi

ned

with

a p

ossib

le 4

per

cent

one

-yea

r sw

ing

in in

tere

st ra

tes (

the

max

imum

his

toric

al in

tere

st ra

te sw

ing

95 p

erce

ntof

the

time)

to p

rodu

ce a

pre

-tax

fact

or o

f 0.0

0637

7.Fo

r a le

ss w

ell m

atch

edw

ell-m

atch

edpo

rtfol

io,I

n ad

ditio

n to

the

50 p

erce

nt lo

adin

g di

scus

sed

abov

e,th

e ris

k-ba

sed

capi

tal p

re-ta

x fa

ctor

refle

ctin

g th

e 50

per

cent

load

ing

disc

usse

d ab

ove

is 0

.009

115.

Attachment Five-F Capital Adequacy (E) Task Force

4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

28/

17/2

018

(b)

Med

ium

and

Hig

h-R

isk

Cat

egor

yTh

e fa

ctor

s for

the

med

ium

and

hig

h-ris

k ca

tego

ries w

ere

dete

rmin

ed b

y m

easu

ring

the

valu

e of

the

addi

tiona

l ris

k fr

om th

e m

ore

disc

retio

nary

with

draw

al p

rovi

sion

s bas

edon

ass

umpt

ions

of p

olic

yhol

der b

ehav

ior a

nd 1

,000

rand

om in

tere

st ra

te sc

enar

ios.

Supp

lem

enta

ry c

ontra

cts n

ot in

volv

ing

life

cont

inge

ncie

s and

div

iden

d ac

cum

ulat

ions

are

incl

uded

in th

em

ediu

m-r

isk

cate

gory

due

to th

e hi

stor

ical

tend

ency

of t

hese

pol

icyh

olde

rs to

be

rela

tivel

y in

sens

itive

to in

tere

st ra

te c

hang

es.

Add

ition

al C

ompo

nent

for C

alla

ble/

Pre-

Paya

ble

Ass

ets

Iden

tify

the

amou

nt o

f cal

labl

e/pr

e-pa

yabl

e as

sets

(inc

ludi

ng IO

s and

sim

ilar i

nves

tmen

ts) s

uppo

rting

rese

rves

cla

ssifi

ed in

this

sect

ion.

The

C-3

requ

irem

ent a

fter t

axes

is 5

0 pe

rcen

t of

the

exce

ss, i

f any

, of b

ook/

adju

sted

car

ryin

g va

lue

abov

e cu

rren

t cal

l pric

e. T

he c

alcu

latio

n is

don

e on

an

asse

t-by-

asse

t bas

is. N

OTE

: If a

com

pany

is re

quire

d to

cal

cula

te p

art o

f th

e R

BC

bas

ed o

n ca

sh fl

ow te

stin

g fo

r C-3

RB

C, t

he fa

ctor

bas

edfa

ctor

-bas

edre

quire

men

ts fo

r cal

labl

e/pr

e-pa

yabl

e as

sets

use

d in

that

test

ing

is z

ero.

Fact

or-B

ased

RB

C fo

r All

Oth

er R

eser

vesn

ot in

clud

ed in

Res

erve

s tha

t are

Cas

h Fl

ow M

odel

ed fo

r Int

eres

t Rat

e R

isk

This

cap

ture

s all

rese

rves

not

incl

uded

in R

eser

ves o

n C

erta

in A

nnui

ties a

nd S

ingl

e Pr

emiu

m L

ife In

sura

nce

that

wer

e Ca

sh F

low

Tes

ted

or p

rodu

cts i

nclu

ded

unde

r the

“Re

com

men

ded

App

roac

h fo

r Set

ting

Ris

k-B

ased

Cap

ital R

equi

rem

ents

for V

aria

ble

Ann

uitie

s and

Sim

ilar P

rodu

cts.”

The

risk

cate

gorie

s are

:(a

)Lo

w-R

isk

Cate

gory

The

basi

c ris

k-ba

sed

capi

tal d

evel

oped

for a

nnui

ties

and

life

insu

ranc

e in

the

low

-ris

k ca

tego

ry w

asba

sed

on a

n as

sum

ed a

sset

/liab

ility

dur

atio

n m

ism

atch

of 0

.125

(i.e

., a

wel

l-mat

ched

por

tfolio

). Th

is d

urat

iona

l gap

was

com

bine

d w

ith a

pos

sibl

e 4

perc

ent o

ne-y

ear s

win

g in

inte

rest

rate

s (th

e m

axim

um h

isto

rical

inte

rest

rate

swin

g 95

per

cent

of th

e tim

e) to

pro

duce

a p

re-ta

x fa

ctor

of 0

.006

377.

For a

less

wel

l-mat

ched

por

tfolio

, In

addi

tion

to th

e 50

per

cent

load

ing

disc

usse

d ab

ove,

the

risk-

base

d ca

pita

l pre

-tax

fact

or re

flect

ing

the

50 p

erce

nt lo

adin

g di

scus

sed

abov

e is

0.0

0911

5.

(b)

Med

ium

and

Hig

h-R

isk

Cat

egor

yTh

e fa

ctor

s for

the

med

ium

and

hig

h-ris

k ca

tego

ries w

ere

dete

rmin

ed b

y m

easu

ring

the

valu

e of

the

addi

tiona

l ris

k fro

m th

e m

ore

disc

retio

nary

with

draw

al p

rovi

sion

s bas

edon

ass

umpt

ions

of p

olic

yhol

der b

ehav

ior a

nd 1

,000

rand

om in

tere

st ra

te sc

enar

ios.

Supp

lem

enta

ry c

ontra

cts n

ot in

volv

ing

life

cont

inge

ncie

s and

div

iden

d ac

cum

ulat

ions

are

incl

uded

in th

e m

ediu

m-r

isk

cate

gory

due

to th

e hi

stor

ical

tend

ency

of t

hese

pol

icyh

olde

rs to

be

rela

tivel

y in

sens

itive

to in

tere

st ra

te c

hang

es.

Add

ition

al C

ompo

nent

for C

alla

ble/

Pre-

Paya

ble

Ass

ets

Iden

tify

the a

mou

nt o

f cal

labl

e/pr

e-pa

yabl

e ass

ets (

incl

udin

g IO

s and

sim

ilar i

nves

tmen

ts) n

ot re

porte

d el

sew

here

in th

is sc

hedu

le.

This

excl

udes

calla

ble/

pre-

paya

ble a

sset

s sup

porti

ngR

eser

ves o

n C

erta

in A

nnui

ties

and

Sing

le P

rem

ium

Life

Insu

ranc

e th

at w

ere

Cas

h Fl

ow M

odel

edTe

sted

or s

uppo

rting

the

Inte

rest

Rat

e R

isk

Com

pone

nt fo

r pro

duct

s inc

lude

d un

der

the

“Rec

omm

ende

d A

ppro

ach

for S

ettin

g R

isk-

Bas

ed C

apita

l Req

uire

men

ts fo

r Var

iabl

e A

nnui

ties a

nd S

imila

r Pro

duct

s.”

This

incl

udes

cal

labl

e/pr

e-pa

yabl

e as

sets

supp

ortin

g ot

her

rese

rves

and

cap

ital a

nd s

urpl

us. T

he C

-3 re

quire

men

t afte

r tax

es is

50

perc

ent o

f the

exc

ess,

if an

y, o

f boo

k/ad

just

ed c

arry

ing

valu

e ab

ove

curr

ent c

all p

rice.

The

cal

cula

tion

is d

one

on a

n as

set-b

y-as

set b

asis

and

repo

rted

in a

ggre

gate

.

Cas

h Fl

ow T

estin

g fo

r C-3

RB

CA

com

pany

may

be

requ

ired

or c

hoos

e to

per

form

cas

h flo

w te

stin

gto

det

erm

ine

its R

BC

requ

irem

ent.

Bec

ause

of t

he w

ides

prea

d us

e of

incr

easi

ngly

wel

l-dis

cipl

ined

scen

ario

testi

ng

for a

ctua

rial o

pini

ons b

ased

upo

n an

ass

et a

dequ

acy

anal

ysis

invo

lvin

g ca

sh fl

ow te

stin

g, it

was

det

erm

ined

that

a p

ract

ical

met

hod

of m

easu

ring

the

degr

ee o

f ass

et/li

abili

ty m

ism

atch

ex

iste

d. It

invo

lves

furth

er c

ash

flow

test

ing.

See

App

endi

x 1

–C

ash

Flow

Tes

ting

for C

-3 R

BC

for d

etai

ls.

Spec

ific

Instr

uctio

ns fo

r App

licat

ion

ofth

e Fo

rmul

a

Line

s (2)

thro

ugh

(16)

Thes

e lin

es d

eal w

ith C

erta

in A

nnui

ties a

nd S

ingl

e Pr

emiu

m L

ife In

sura

nce

for w

hich

rese

rves

wer

e ca

sh fl

ow te

sted

for a

sset

ade

quac

ymod

eled

for R

BC.

Gua

rant

eed

Inde

xed

sepa

rate

acc

ount

s fol

low

ing

a C

lass

1 in

vest

men

tstra

tegy

are

repo

rted

as lo

w-r

isk

Line

(2).


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

38/

17/2

018

The

fixed

por

tion

of e

quity

-bas

ed v

aria

ble

prod

ucts

and

shou

ld n

ot b

e in

clud

ed. G

uara

ntee

d in

dexe

d se

para

te a

ccou

nts f

ollo

win

g a

Cla

ss I

inve

stm

ent s

trate

gy a

re re

porte

d as

low

-risk

Li

ne 2

and

thos

e fo

llow

ing

a C

lass

II

inve

stm

ent s

trate

gy a

re e

xclu

ded.

See

Pro

pose

d ne

w R

isk-

Bas

ed C

apita

l Met

hod

for

Sepa

rate

Acc

ount

s th

at G

uara

ntee

an

Inde

x, J

une

2003

. C

ompa

ny so

urce

reco

rds e

nter

ed in

Col

umn

(3) o

f Lin

es (1

3), (

15) a

nd (1

6) sh

ould

be

adju

sted

to a

pre

-tax

basi

s.

Line

(17)

Shou

ld e

qual

the

sum

of L

ines

(6) +

(11)

+ (1

4) +

(15)

. Lin

e (1

6) is

not

incl

uded

in th

e Li

ne (1

7) to

tal.

Inst

ead,

it is

incl

uded

in th

e Li

ne (3

2) to

tal.

Line

s (18

) thr

ough

(31)

Thes

e lin

es c

over

:(a

)Th

e re

mai

ning

com

pany

bus

ines

s tha

t was

not

cas

h flo

w te

sted

for a

sset

ade

quac

ymod

eled

for C

-3R

BC

(se

e A

ppen

dix

1 fo

r det

ails

) exc

ludi

ng p

rodu

cts i

nclu

ded

unde

r the

“Rec

omm

ende

d A

ppro

ach

for S

ettin

gCas

h Fl

ow M

odel

ing

forC

-3R

isk-

Bas

ed C

apita

lReq

uire

men

ts fo

r Var

iabl

e A

nnui

ties a

nd S

imila

r Pro

duct

s”an

d(b

)B

usin

ess i

n co

mpa

nies

that

did

not

cas

h flo

w te

st fo

r ass

et a

dequ

acym

odel

for C

-3R

BC.

The

calc

ulat

ion

for r

isk-

base

d ca

pita

l sho

uld

not i

nclu

de u

nitiz

ed se

para

te a

ccou

nts w

ithou

t gua

rant

ees e

ven

thou

gh th

ey m

ay b

e in

clud

ed in

Item

32

of th

e N

otes

to F

inan

cial

Sta

tem

ents

. Se

para

te a

ccou

nts w

ith g

uara

ntee

s sho

uld

be in

clud

ed, e

xcep

t for

thos

e se

para

te a

ccou

nts t

hat g

uara

ntee

an

inde

x an

d fo

llow

a C

lass

II in

vest

men

t stra

tegy

and

cer

tain

oth

er g

uara

ntee

d se

para

te a

ccou

nts

as d

efin

ed b

elow

. Syn

thet

ic G

ICs

net o

f ce

rtain

cre

dits

sho

uld

be in

clud

ed in

this

sec

tion.

The

pro

visio

ns fo

r th

ese

cred

its to

C-3

req

uire

men

ts is

pro

vide

d in

the

Sepa

rate

Acc

ount

s sec

tion

of th

e ris

k-ba

sed

capi

tal i

nstru

ctio

ns. E

xper

ienc

e-ra

ted

pens

ion

cont

ract

s def

ined

bel

ow sh

ould

be

excl

uded

from

“an

nuity

rese

rves

with

fair

valu

e ad

just

men

t”

and

“ann

uity

rese

rves

not

with

draw

able

.” A

ll am

ount

s sho

uld

be re

porte

d ne

t of r

eins

uran

ce, n

et o

f pol

icy

loan

s and

adj

uste

d fo

r ass

umed

and

ced

ed m

odifi

ed c

oins

uran

ce.

Expe

rienc

e-ra

ted

grou

p an

d in

divi

dual

pen

sion

bus

ines

s tha

t mee

ts a

ll of

the

follo

win

g fo

ur c

ondi

tions

is e

xclu

ded

from

C–3

fact

or-b

ased

risk

:(a

)G

ener

al a

ccou

nt fu

nded

;(b

)R

eser

ve in

tere

st ra

te is

car

ried

at n

o gr

eate

r tha

n 4

perc

ent a

nd/o

r fun

d lo

ng-te

rm in

tere

st g

uara

ntee

(in

exce

ss o

f a y

ear)

doe

s not

exc

eed

4 pe

rcen

t;(c

)Ex

perie

nce

ratin

g m

echa

nism

is im

med

iate

par

ticip

atio

n, re

troac

tive

cred

its, o

r oth

er te

chni

que

othe

r tha

n pa

rtici

patin

g di

vide

nds;

and

(d)

Eith

er is

not

subj

ect t

o di

scre

tiona

ry w

ithdr

awal

or i

s sub

ject

to fa

ir va

lue

adju

stm

ent,

but o

nly

if th

e co

ntra

ctua

lly d

efin

ed lu

mp

sum

fair

valu

e ad

just

men

t ref

lect

s por

tfolio

expe

rienc

e as

wel

l as

curr

ent i

nter

est r

ates

and

is e

xpec

ted

to p

ass

both

cre

dit r

isk

and

rate

risk

to th

e po

licyh

olde

r at w

ithdr

awal

. (A

lum

p su

m s

ettle

men

t bas

ed o

nly

onch

ange

s in

prev

ailin

g ra

tes d

oes n

ot m

eet t

his t

est.

Boo

k va

lue

cash

out

opt

ions

mee

t thi

s tes

t as l

ong

as th

e pr

esen

tval

ue o

f pay

men

ts u

sing

U.S

. Tre

asur

y sp

ot ra

tes i

s les

sth

an o

r equ

al to

the

lum

p su

m fa

ir va

lue

on th

e va

luat

ion

date

and

the

polic

yhol

der d

oes n

ot h

ave

an o

ptio

n to

cha

nge

the

paym

ent p

erio

d on

ce p

aym

ents

beg

in.)

For c

ompa

nies

not

exe

mpt

from

cas

h flo

w te

stin

g fo

r C-3

RB

C, s

uch

test

ing

is to

incl

ude

thos

e ex

perie

nce-

rate

d pr

oduc

ts e

xem

pted

from

the

form

ula

fact

ors,

but f

or w

hich

cas

h flo

w

test

ing

is d

one

as a

par

t of t

he a

sset

ade

quac

y te

stin

g.

Non

-inde

xed

sepa

rate

acc

ount

bus

ines

s with

gua

rant

ees t

hat s

atis

fy b

oth

cond

ition

s (b)

and

(d) a

bove

is e

xclu

ded

from

C–3

fact

or-b

ased

risk

.

Gua

rant

eed

inde

xed

sepa

rate

acc

ount

bus

ines

s fol

low

ing

a C

lass

I in

vest

men

t stra

tegy

is re

porte

d on

Lin

e (1

8). N

ote

that

in th

e A

AA

Rep

ort “

Prop

osed

New

Ris

k-B

ased

Cap

ital M

etho

d fo

r Sep

arat

e A

ccou

nts T

hat G

uara

ntee

an

Inde

x”(a

dopt

ed b

y th

e N

AIC

Life

Ris

k-B

ased

Cap

ital W

orki

ng G

roup

in N

ew Y

ork,

NY

, Jun

e 20

03),

ther

e is

a st

ress

test

app

licab

leto

Cla

ss

I inv

estm

ent s

trate

gies

for a

com

pany

that

is n

ot su

bjec

t to

scen

ario

test

ing

requ

irem

ents

.

Com

pany

sour

ce re

cord

s ent

ered

in C

olum

n (3

) of L

ines

(30)

and

(31)

shou

ld b

e ad

just

ed to

a p

re-ta

x ba

sis.

Line

(33)


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

48/

17/2

018

Ente

r in

Col

umn

(3) t

he p

re-ta

x in

tere

st ra

te ri

sk re

sults

of c

ash

flow

test

ing

per t

he A

ppen

dix

1a m

etho

dolo

gy. L

ine

(33)

shou

ld b

e co

mpl

eted

by

all c

ompa

nies

who

do

cash

flow

test

ing

mod

elin

g of

Cer

tain

Ann

uitie

s an

d Si

ngle

Pre

miu

m L

ife In

sura

nce

for a

sset

ade

quac

yC

-3R

BC

(see

App

endi

x 1)

exc

ept t

hose

with

less

than

$10

0 m

illio

n in

adm

itted

ass

ets

at y

ear-

end,

unl

ess t

he a

nsw

er to

Lin

e (1

4) o

r Lin

e (2

2) o

f LR

049

Exem

ptio

n Te

st: C

ash

Flow

Tes

ting

for C

-3 R

BC

is “

Yes

” or

if th

e co

mpa

ny c

hoos

es to

do

C-3

RB

C c

ash

flow

test

ing

on a

co

ntin

uing

bas

is. O

nce

a co

mpa

ny c

hoos

es to

use

the

C-3

RB

C c

ash

flow

test

ing

met

hod

to c

alcu

late

RB

C it

mus

t con

tinue

to d

o so

unl

ess

regu

lato

ry a

ppro

val f

rom

the

dom

icili

ary

juris

dict

ion

is re

ceiv

ed to

go

back

to th

e fa

ctor

-bas

ed m

etho

d.Th

e in

tere

st ra

te ri

sk c

ompo

nent

for V

aria

ble

Ann

uitie

s and

Sim

ilar P

rodu

cts s

houl

d be

ente

red

into

Lin

e (3

5).

Line

(34)

If

Lin

e (3

3) is

equ

al to

zer

o, th

en L

ine

(34)

shou

ld e

qual

Lin

e (3

2). O

ther

wis

e, L

ine

(34)

shou

ld e

qual

Lin

e (3

2) p

lus L

ine

(33)

less

Lin

e (1

6) le

ss L

ine

(17)

subj

ect t

o a

min

imum

of 0

.5

times

Lin

e (3

2).

Line

(35)

Ente

r the

inte

rest

rate

risk

com

pone

nt fr

om th

e C

ash

Flow

Mod

elin

g fo

r C-3

RB

C R

equi

rem

ents

Var

iabl

e A

nnui

ties a

nd S

imila

r Pro

duct

s(se

e Li

ne (3

7).T

he in

tere

st ra

te ri

sk c

ompo

nent

sh

ould

be

ente

red

on a

pre

-tax

basi

susi

ng th

e en

acte

d m

axim

umco

rpor

ate

inco

me

tax

rate

.

Line

(36)

Tota

l int

eres

t rat

e ris

k.Eq

uals

Lin

e (3

4) p

lus L

ine

(35)

.

Line

(37)

Cas

h Fl

ow M

odel

ing

for

C-3

RB

C R

equi

rem

ents

for

Var

iabl

e A

nnui

ties a

nd S

imila

r Pr

oduc

ts:

Inst

ruct

ions

for

2019

:

2019

is a

tran

sitio

n ye

arto

a n

ew m

odel

ing

fram

ewor

k. A

com

pany

mus

t fol

low

one

of t

wo

optio

nsto

dev

elop

the

C-3

RB

C a

mou

nt:

A.

If th

e co

mpa

ny h

as e

lect

ed to

app

ly th

e re

quir

emen

ts o

f VM

-21

from

the

2020

ver

sion

of t

he N

AIC

val

uatio

n m

anua

lto

dete

rmin

e re

serv

es fo

r th

e V

aria

ble

Ann

uitie

sfo

r 12

/31/

19,t

he c

ompa

ny sh

all f

ollo

w th

e in

stru

ctio

ns b

egin

ning

on

page

16la

bele

d “I

nstr

uctio

ns fo

r 20

20an

d L

ater

”fo

r de

term

inin

g th

e C

-3R

BC

req

uire

men

t on

the

Var

iabl

e A

nnui

ties a

nd si

mila

r co

ntra

cts,

but m

ay n

ot a

pply

the

phas

e-in

prov

isio

ns o

f par

agra

ph E

on p

age

18.

Oth

erw

ise,

A.B

.T

he c

ompa

ny sh

all f

ollo

w th

e ni

ne st

epni

ne-s

tep

proc

essb

elow

thro

ugh

page

15.

Ove

rvie

w(2

019)

The

amou

nt re

porte

d on

Lin

e (3

7) is

cal

cula

ted

usin

g a

nine

-ste

p pr

oces

s. A

s in

Ste

p 3

of th

e Si

ngle

Sce

nario

C-3

Mea

sure

men

t Con

side

ratio

ns s

ectio

n of

App

endi

x 1a

–C

ash

Flow

Te

stin

g fo

r C-3

RB

C M

etho

dolo

gy, e

xist

ing

AV

R-r

elat

ed a

sset

s sho

uld

not b

e in

clud

ed in

the

initi

al a

sset

s us

ed in

the

C-3

mod

elin

g un

less

AV

R h

as b

een

excl

uded

from

TA

C d

ue to

its

use

in th

e as

set a

dequ

acy

anal

ysis

supp

ortin

g re

serv

es. A

VR

-rel

ated

ass

ets m

ay b

e in

clud

ed w

ith C

-3 te

stin

g to

the

exte

nt th

at th

e A

VR

has

bee

n us

ed in

the

cash

flow

test

ing

and

is

ther

efor

e ex

clud

ed fr

om T

AC

, and

that

por

tion

of th

e A

VR-

rela

ted

asse

ts re

late

s to

the

busi

ness

bei

ng te

sted

. The

se a

sset

s ar

e av

aila

ble

for f

utur

e cr

edit

loss

dev

iatio

ns o

ver a

nd a

bove

ex

pect

ed c

redi

t los

ses.

Thes

e de

viat

ions

are

cov

ered

by

C-1

risk

cap

ital.

Sim

ilarly

, fut

ure

AV

R co

ntrib

utio

ns s

houl

d no

t be

mod

eled

. H

owev

er, t

he e

xpec

ted

cred

it lo

sses

sho

uld

be in

th

e C

-3 m

odel

ing.

(Dev

iatio

ns fr

om e

xpec

ted

are

cove

red

by b

oth

the

AV

R a

nd C

-1 ri

sk c

apita

l and

shou

ld n

ot b

e m

odel

ed).

IMR

ass

ets s

houl

d be

use

d fo

r C-3

mod

elin

g. If

neg

ativ

e ca

sh fl

ows a

re h

andl

ed b

y se

lling

ass

ets,

then

app

ropr

iate

mod

elin

g of

con

tribu

tions

to a

nd a

mor

tizat

ion

of th

e IM

R n

eed

to

be re

flect

ed in

the

mod

elin

g.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

58/

17/2

018

(1) T

he fi

rst s

tep

is d

eter

min

ed b

y ap

plyi

ng th

e m

etho

dolo

gy d

escr

ibed

in th

e re

port

“Rec

omm

ende

d A

ppro

ach

for S

ettin

g R

isk-

Bas

ed C

apita

l Req

uire

men

ts fo

r Var

iabl

e A

nnui

ties a

ndSi

mila

r Pro

duct

s Pre

sent

ed b

y th

e Am

eric

an A

cade

my

of A

ctua

ries’

Life

Cap

ital A

dequ

acy

Subc

omm

ittee

to th

e Nat

iona

l Ass

ocia

tion

ofIn

sura

nce C

omm

issi

oner

s’ C

apita

l Ade

quac

y Ta

sk F

orce

(Jun

e 20

05)”

to c

alcu

late

the

tota

l ass

et re

quire

men

t. A

lthou

gh A

ppen

dix

2 in

the

Rep

ort n

otes

pat

h de

pend

ent m

odel

s un

der a

diff

eren

t set

of i

nitia

lizat

ion

para

met

ers

mig

ht p

rodu

ce s

cena

rios

that

do

not s

atis

fy a

ll th

e ca

libra

tion

poin

ts s

how

n in

Tab

le 1

, to

be in

com

plia

nce

with

the

requ

irem

ents

in th

is fi

rst s

tep,

the

actu

al s

cena

rios

used

for

dive

rsifi

ed U

.S. e

quity

fund

s m

ust m

eet t

he c

alib

ratio

n cr

iteria

. The

sce

nario

s ne

ed n

ot s

trict

ly s

atis

fy a

llca

libra

tion

poin

ts in

Tab

le 1

of

App

endi

x 2,

but

the

actu

ary

shou

ld b

esa

tisfie

d th

at a

ny d

iffer

ence

s do

not m

ater

ially

redu

ce th

e re

sulti

ng c

apita

l req

uire

men

ts. S

ee th

e Pr

eam

ble

to th

e Ac

coun

ting

Prac

tices

and

Pro

cedu

res M

anua

lfor

an

expl

anat

ion

of

mat

eria

lity.

Incl

ude

the

Tax

Adj

ustm

ent a

s des

crib

ed in

the

repo

rtus

ing

the

enac

ted

max

imum

fede

ral c

orpo

rate

inco

me

tax

rate

. If u

sing

the

Alte

rnat

ive

Met

hod

for

GM

DB

Ris

ks, u

se 1

min

us th

e en

acte

d m

axim

um fe

dera

l cor

pora

te in

com

e ta

x ra

te in

pla

ce o

f the

65%

adj

ustm

ent c

onta

ined

in p

arag

raph

4 (p

age

55) a

nd th

e en

acte

d m

axim

umfe

dera

l cor

pora

te in

com

e tax

rate

in p

lace

of 3

5% In

com

e T

ax R

ate s

how

n in

Tab

le 8

-9 (p

age 7

8).

The

dis

coun

t rat

e in

Tab

le 8

-9 sh

ould

als

o be

adj

uste

d fo

r the

app

ropr

iate

enac

ted

max

imum

fede

ral c

orpo

rate

inco

me

tax

rate

.

(2)T

he se

cond

step

is to

redu

ce th

e am

ount

cal

cula

ted

in (1

) abo

ve b

y th

e in

tere

st ra

te p

ortio

n of

the

risk

(i.e.

,onl

y th

e se

para

te a

ccou

ntm

arke

t ris

k is

incl

uded

in th

is st

ep).

(3)T

he th

ird st

ep is

to c

alcu

late

the

Stan

dard

Sce

nario

Am

ount

.

(4)T

ake

the

grea

ter o

f the

am

ount

s fro

m st

eps (

2) a

nd (3

).

(5)A

pply

the

smoo

thin

g an

d tra

nsiti

on ru

les (

if ap

plic

able

) to

the

amou

nt in

step

(4).

(6)A

dd th

e ge

nera

l acc

ount

inte

rest

rate

por

tion

of th

e ris

k to

the

amou

nt in

step

(5).

(7)S

ubtra

ct th

e re

porte

d st

atut

ory

rese

rves

for t

he b

usin

ess s

ubje

ct to

the

Rep

ort f

rom

the

amou

nt c

alcu

late

d in

step

(6).

Floo

r thi

s am

ount

at $

0.

(8)D

ivid

e th

e re

sult

from

step

(7) b

y (1

-ena

cted

max

imum

fede

ral c

orpo

rate

inco

me

tax

rate

)to

arriv

e at

a p

re-ta

x am

ount

.

(9)S

plit

the

resu

lt fr

om s

tep

(8) i

nto

an in

tere

st ra

te ri

sk p

ortio

n an

d a

mar

ket r

isk

porti

on. N

ote

that

the

inte

rest

rate

por

tion

may

not

equ

al th

e in

tere

st ra

te p

ortio

n of

the

risk

used

inst

eps (

2) a

nd (6

) abo

ve e

ven

afte

r adj

ustin

g th

ese

to a

pre

-tax

basi

s. Th

e in

tere

st ra

te p

ortio

n of

the

risk

shou

ld b

e in

clud

ed in

Lin

e (3

5)an

d th

e m

arke

t ris

k po

rtion

in L

ine

(37)

.

The

lines

on

the

alte

rnat

ive

calc

ulat

ions

pag

e w

ill n

ot b

e re

quire

d fo

r 201

8201

9.

Calc

ulat

ion

of th

e To

tal A

sset

Req

uire

men

t

The

met

hod

of c

alcu

latin

g th

e To

tal A

sset

Req

uire

men

t is e

xpla

ined

in d

etai

l in

the

AA

A’s

June

200

5 re

port,

refe

renc

ed a

bove

.In

sum

mar

y, it

is a

s fol

low

s:

A.

Agg

rega

te th

e re

sults

of

runn

ing

stoc

hast

ic s

cena

rios

usin

g pr

uden

t bes

t est

imat

e as

sum

ptio

ns (

the

mor

e re

liabl

e th

e un

derly

ing

data

is, t

he s

mal

ler

the

need

for

mar

gins

for

cons

erva

tism

) and

cal

ibra

ted

fund

per

form

ance

dis

tribu

tion

func

tions

. If u

tiliz

ing

prep

acka

ged

scen

ario

s as o

utlin

ed in

the

Am

eric

an A

cade

my

of A

ctua

ries’

repo

rt, C

onstr

uctio

nan

d U

se o

f Pre

-Pac

kage

d Sc

enar

ios t

o Su

ppor

t the

Det

erm

inat

ion

of R

egul

ator

y Ri

sk B

ased

Cap

ital R

equi

rem

ents

for V

aria

ble

Annu

ities

and

Sim

ilar P

rodu

cts,

Jan.

13, 2

006,

the

Enha

nced

C-3

Pha

se I

Inte

rest

Rat

e G

ener

ator

shou

ld b

e us

ed in

gen

erat

ing

any

inte

rest

rate

scen

ario

s or r

egen

erat

ing

pre-

pack

aged

fund

scen

ario

s for

fund

s tha

t inc

lude

the

impa

ctof

bon

d yi

elds

. Det

ails

con

cern

ing

the

Enha

nced

C-3

Pha

se I

Int

eres

t Rat

e G

ener

ator

can

be

foun

d on

the

Am

eric

an A

cade

my

of A

ctua

ries

web

page

at t

he f

ollo

win

g ad

dres

sht

tp://

ww

w.a

ctua

ry.o

rg/p

df/li

fe/c

3sup

p_ja

n06.

pdf.

The

Enha

nced

C-3

Pha

se 1

Inte

rest

Rat

e G

ener

ator

with

its

abili

ty to

use

the

yiel

d cu

rve

as o

f the

run

date

and

to re

gene

rate

pre-

pack

aged

fund

retu

rns u

sing

inte

rest

rate

scen

ario

s bas

ed o

n th

e cu

rren

t yie

ld c

urve

repl

aces

the

usag

e of

the

Mar

ch 2

005

pre-

pack

aged

scen

ario

s.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

68/

17/2

018

B.

Cal

cula

te re

quire

d ca

pita

l for

eac

h sc

enar

io b

y ca

lcul

atin

g ac

cum

ulat

ed st

atut

ory

surp

lus,

incl

udin

g th

e ef

fect

of f

eder

al in

com

e ta

xes a

t the

ena

cted

max

imum

fede

ral c

orpo

rate

in

com

e ta

x ra

te, f

or e

ach

cale

ndar

yea

r-en

d an

d its

pre

sent

val

ue. T

he n

egat

ive

of th

e lo

wes

t of t

hese

pre

sent

val

ues

is th

e as

set r

equi

rem

ent f

or th

at s

cena

rio. T

hese

val

ues

are

reco

rded

for e

ach

scen

ario

and

the

scen

ario

s ar

e th

en s

orte

d on

this

mea

sure

. For

this

pur

pose

, sta

tuto

ry s

urpl

us is

mod

eled

as

if th

e st

atut

ory

rese

rve

wer

e eq

ual t

o th

e w

orki

ngre

serv

e.

C.

The

Tota

l Ass

et R

equi

rem

ent i

s set

at th

e 90

Con

ditio

nal T

ail E

xpec

tatio

n by

taki

ng th

e av

erag

e of

the

wor

st 1

0 pe

rcen

t of a

ll th

e sc

enar

ios’

asse

t req

uire

men

ts (c

apita

l plu

s sta

rting

rese

rve)

. Ris

k-ba

sed

capi

tal i

s ca

lcul

ated

as

the

exce

ss o

f th

e To

tal A

sset

Req

uire

men

t abo

ve th

e st

atut

ory

rese

rves

. For

pro

duct

s w

ith n

o gu

aran

teed

livi

ng b

enef

it, o

r ju

st a

guar

ante

ed d

eath

ben

efit,

an

alte

rnat

ive

met

hod

is a

llow

ed, a

s des

crib

ed in

the

AA

A re

port.

D.

Ris

k-ba

sed

capi

tal i

s ca

lcul

ated

as

the

exce

ss o

f the

Tot

al A

sset

Req

uire

men

t abo

ve th

e st

atut

ory

rese

rves

. Exc

ept f

or th

e ef

fect

of t

he S

tand

ard

Scen

ario

and

the

Smoo

thin

g an

dTr

ansi

tion

Rul

es (s

ee b

elow

), th

is R

BC

is to

be

com

bine

d w

ith th

e C

-1cs

com

pone

nt fo

r cov

aria

nce

purp

oses

.

E.A

pro

visi

on fo

r the

inte

rest

rate

risk

of t

he g

uara

ntee

d fix

ed fu

nd o

ptio

n, if

any

, is t

o be

cal

cula

ted

and

com

bine

d w

ith th

e cu

rren

t C-3

com

pone

nt o

f the

form

ula.

F.Th

e w

ay g

roup

ing

(of

fund

s an

d of

con

tract

s), s

ampl

ing,

num

ber

of s

cena

rios,

and

sim

plifi

catio

n m

etho

ds a

re h

andl

ed is

the

resp

onsi

bilit

y of

the

actu

ary.

How

ever

, all

thes

em

etho

ds a

re su

bjec

t to

Act

uaria

l Sta

ndar

ds o

f Pra

ctic

e, su

ppor

ting

docu

men

tatio

n an

d ju

stifi

catio

n.

G.

Cer

tific

atio

n of

the

wor

k do

ne to

set

the

RB

C le

vel w

ill b

e re

quire

d to

be

subm

itted

with

the

RB

C fi

ling.

Ref

er to

App

endi

ces

10 a

nd 1

1 of

the

AA

A L

CA

S C

-3 P

hase

II R

BC

Rep

ort (

June

200

5) fo

r fur

ther

det

ails

of t

he c

ertif

icat

ion

requ

irem

ents

. The

cer

tific

atio

n sh

ould

spec

ify th

at th

e ac

tuar

y is

not

opi

ning

on

the

adeq

uacy

of t

he c

ompa

ny's

surp

lus o

r its

futu

re fi

nanc

ial c

ondi

tion.

The

act

uary

will

als

o no

te a

ny m

ater

ial c

hang

e in

the

mod

el o

r ass

umpt

ions

from

that

use

d pr

evio

usly

and

the

impa

ct o

f suc

h ch

ange

s (e

xclu

ding

ch

ange

s due

to a

cha

nge

in th

ese

NA

IC in

stru

ctio

ns).

Cha

nges

will

requ

ire re

gula

tory

dis

clos

ure

and

may

be

subj

ect t

o re

gula

tory

revi

ew a

nd a

ppro

val.

Add

ition

ally

, if h

edgi

ng is

refle

cted

in th

e st

ocha

stic

mod

elin

g, a

dditi

onal

cer

tific

atio

ns a

re re

quire

d fr

om a

n ac

tuar

y an

d fin

anci

al o

ffic

er o

f the

com

pany

.

The

certi

ficat

ion(

s) sh

ould

be

subm

itted

by

hard

cop

y w

ith a

ny st

ate

requ

iring

an

RB

C h

ard

copy

.

H.

An

actu

aria

l mem

oran

dum

sho

uld

be c

onst

ruct

ed d

ocum

entin

g th

e m

etho

dolo

gy a

nd a

ssum

ptio

ns u

pon

whi

ch th

e re

quire

d ca

pita

l is

dete

rmin

ed. T

he m

emor

andu

m s

houl

d al

soin

clud

e se

nsiti

vity

test

s tha

t the

act

uary

feel

s app

ropr

iate

, giv

en th

e co

mpo

sitio

n of

thei

r blo

ck o

f bus

ines

s (i.e

., id

entif

ying

the

key

assu

mpt

ions

that

, if c

hang

ed, p

rodu

ce th

e la

rges

t ch

ange

s in

the

RB

C a

mou

nt).

This

mem

oran

dum

will

be

conf

iden

tial a

nd a

vaila

ble

to re

gula

tors

upo

n re

ques

t.

App

licat

ion

of th

e Ta

x A

djus

tmen

t

Tax

Adj

ustm

ent:

Und

er th

e U

.S. I

RC

,the

tax

rese

rve

is d

efin

ed. I

t can

nev

er e

xcee

d th

e st

atut

ory

rese

rve

nor

be le

ss th

an th

e ca

sh s

urre

nder

val

ue. I

f ta

x re

serv

es a

ssum

ed in

the

proj

ectio

n ar

e se

t equ

alto

Wor

king

Res

erve

s and

if ta

x re

serv

es a

ctua

lly e

xcee

d W

orki

ng R

eser

ves a

t the

beg

inni

ng o

f the

pro

ject

ion,

a ta

x ad

just

men

tis r

equi

red.

A ta

x ad

just

men

t is n

ot re

quire

d in

the

follo

win

g si

tuat

ions

:Ta

x re

serv

es a

re p

roje

cted

dire

ctly

; tha

t is,

it is

not

ass

umed

that

pro

ject

ed ta

x re

serv

es a

re e

qual

to W

orki

ng R

eser

ves,

whe

ther

thes

e ar

e ca

sh v

alue

s or o

ther

app

roxi

mat

ions

.Ta

x re

serv

es a

t the

beg

inni

ng o

f the

pro

ject

ion

perio

d ar

e eq

ual t

o W

orki

ng R

eser

ves.

Tax

rese

rves

at t

he b

egin

ning

of t

he p

roje

ctio

n pe

riod

are

low

er th

an W

orki

ng R

eser

ves.

This

situa

tion

is o

nly

poss

ible

for c

ontra

cts

with

out c

ash

surr

ende

r val

ues

and

whe

n th

ese

cont

ract

s ar

e si

gnifi

cant

eno

ugh

to d

omin

ate

othe

r con

tract

s w

here

tax

rese

rves

exc

eed

Wor

king

Res

erve

s. In

this

cas

e th

em

odel

ed ta

x re

sults

are

ove

rsta

ted

each

yea

r fo

r res

erve

s in

the

proj

ectio

n, a

s wel

l as t

he p

roje

cted

tax

resu

lts re

vers

ed a

t the

tim

e of

cla

im.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

78/

17/2

018

If a

tax

adju

stm

ent i

s req

uire

d,th

e To

tal A

sset

Req

uire

men

t (TA

R) m

ust b

e in

crea

sed

on a

n ap

prox

imat

e ba

sis t

o co

rrec

t for

the

unde

rsta

tem

ent o

f mod

eled

tax

expe

nse.

The

add

ition

al

taxa

ble

inco

me

at th

e tim

e of

cla

im w

ill b

e re

aliz

ed o

ver t

he p

roje

ctio

n an

d w

ill b

e m

easu

red

appr

oxim

atel

y us

ing

the

dura

tion

to w

orst

, i.e

., th

e du

ratio

n pr

oduc

ing

the

low

est p

rese

ntva

lue

for e

ach

scen

ario

. The

met

hod

of d

evel

opin

g th

e ap

prox

imat

e ta

x ad

just

men

t is d

escr

ibed

bel

ow.

The i

ncre

ase t

o TA

R m

ay b

e app

roxi

mat

ed as

the c

orpo

rate

tax

rate

(i.e

., 35

per

cent

) tim

es f

times

the d

iffer

ence

bet

wee

n ta

xre

serv

es a

nd W

orki

ng R

eser

ves a

t the

star

t of t

he p

roje

ctio

ns.

For t

his

calc

ulat

ion,

f is

cal

cula

ted

as fo

llow

s:Fo

r the

sce

nario

s re

flect

ed in

cal

cula

ting

90 C

TE, t

he lo

wes

t of t

hese

pre

sent

val

ues

of a

ccum

ulat

ed s

tatu

tory

sur

plus

is d

eter

min

ed fo

r ea

ch c

alen

dar y

ear-

end

and

its a

ssoc

iate

d pr

ojec

tion

dura

tion

is ta

bula

ted.

At e

ach

such

dur

atio

n, th

e ra

tio o

f the

num

ber o

f con

tract

s in

forc

e (o

r cov

ered

live

s fo

r gro

up c

ontra

cts)

to

the

num

ber o

f con

tract

s in

forc

e (o

r cov

ered

live

s) a

t the

star

t of t

he m

odel

ing

proj

ectio

n is

cal

cula

ted.

The

ave

rage

ratio

is th

en c

alcu

late

d, o

ver a

ll 90

CTE

scen

ario

s, an

d f i

s one

min

us

this

ave

rage

ratio

. If i

nste

ad, R

BC

is d

eter

min

ed u

nder

the

stan

dard

sce

nario

met

hod

then

f is

bas

ed o

n th

e ra

tio a

t the

wor

st du

ratio

n un

der t

hat s

cena

rio. I

f the

Alte

rnat

ive

Met

hod

is

used

, f is

app

roxi

mat

ed a

s 0.5

.

Cal

cula

tion

of th

e St

anda

rd S

cena

rio A

mou

nt

Stan

dard

Sce

nario

for C

-3 P

hase

II R

isk

Bas

ed C

apita

l (R

BC

) Det

erm

inat

ion

I)O

verv

iew

A)

App

licat

ion

to D

eter

min

e R

BC

.

A S

tand

ard

Scen

ario

Am

ount

shal

l be

dete

rmin

ed fo

r all

of th

e co

ntra

cts u

nder

the

scop

e de

scrib

ed in

the

June

200

5 re

port,

“Re

com

men

ded

App

roac

h fo

r Set

ting

Ris

k-B

ased

Cap

ital R

equi

rem

ents

for V

aria

ble

Ann

uitie

s and

Sim

ilar P

rodu

cts”

. If t

he S

tand

ard

Scen

ario

Am

ount

is g

reat

er th

an th

e To

tal A

sset

Req

uire

men

t les

s any

am

ount

incl

u ded

int h

e TA

R b

ut a

ttrib

utab

le to

and

allo

cate

d to

C-3

(Int

eres

t Rat

e R

isk)

oth

erw

ise

dete

rmin

ed b

ased

on

the

Rep

ort,

then

the

Tota

l Ass

et R

equi

rem

ent b

efor

e ta

x ad

just

men

t use

dto

det

erm

ine

C-3

Pha

se 2

II(M

arke

t Ris

k) R

BC

shal

l be

the

Stan

dard

Sce

nario

Am

ount

.

The

Stan

dard

Sce

nario

Am

ount

shal

l be

the

sum

of t

he fo

llow

ing:

1.Fo

r co

ntra

cts

for

whi

ch R

BC

is b

ased

on

the

Alte

rnat

ive

Met

hodo

logy

app

lied

with

out a

mod

el o

ffic

e us

ing

100

perc

ent o

f th

e M

GD

B m

orta

lity

tabl

e, th

e St

anda

rdSc

enar

io A

mou

nt sh

all b

e th

e su

m o

f the

tota

l ass

et re

quire

men

t bef

ore

tax

adju

stm

ent f

rom

the

Alte

rnat

ive

Met

hodo

logy

app

lied

to su

ch c

ontra

cts.

2.Fo

r con

tract

s w

ithou

t gua

rant

eed

deat

h be

nefit

s fo

r whi

ch R

BC

is b

ased

on

the

Alte

rnat

ive

Met

hodo

logy

app

lied

with

out a

mod

el o

ffice

, the

Sta

ndar

d Sc

enar

io A

mou

ntsh

all b

e th

e su

m o

f the

tota

l ass

et re

quire

men

ts b

efor

e ta

x ad

just

men

t fro

m th

e A

ltern

ativ

e M

etho

dolo

gy a

pplie

d to

such

con

tract

s.

3.Fo

r con

tract

s und

er th

e sc

ope

of th

e R

epor

t oth

er th

an c

ontra

cts f

or w

hich

par

agra

phs 1

and

2 a

pply

, the

Sta

ndar

d Sc

enar

io A

mou

nt is

det

erm

ined

by u

se o

f The

Sta

ndar

dSc

enar

io M

etho

d de

scrib

ed in

Sec

tion

III.

The

Stan

dard

Sce

nario

Met

hod

requ

ires a

sing

le p

roje

ctio

n of

acc

ount

val

ues b

ased

on

spec

ified

retu

rns o

n th

e as

sets

supp

ortin

g th

e ac

coun

t val

ues.

On

the

valu

atio

n da

te a

n in

itial

dro

p is

app

lied

to th

e ac

coun

t val

ues b

ased

on

the

supp

ortin

g as

sets

. Sub

sequ

ently

, acc

ount

val

ues a

re p

roje

cted

at t

h er a

te e

arne

d on

sup

porti

ng a

sset

s le

ss a

mar

gin.

Add

ition

ally

, the

pro

ject

ion

incl

udes

the

cash

flow

s fo

r cer

tain

con

tract

pro

visi

ons,

incl

udin

g an

y gu

aran

teed

livi

ng a

ndde

ath

bene

fits

usin

g th

e as

sum

ptio

ns in

Sec

tion

III.

Thus

Thus

,the

cal

cula

tion

of th

e St

anda

rd S

cena

rio A

mou

nt w

ill re

flect

the

grea

test

pre

sent

val

ue o

f the

acc

umul

ated

proj

ecte

d co

st o

f gua

rant

eed

bene

fits l

ess t

he a

ccum

ulat

ed p

roje

cted

reve

nue

prod

uced

by

the

mar

gins

in a

ccor

danc

e w

ith S

ubse

ctio

n II

I (D

).

B)

The

Stan

dard

Sce

nario

Am

ount

und

er th

e St

anda

rd S

cena

rio M

etho

d.

The

Stan

dard

Sce

nario

Am

ount

for a

ll co

ntra

cts s

ubje

ct to

the

Stan

dard

Sce

nario

Met

hod

is d

eter

min

ed a

s of t

he v

alua

tion

date

unde

r the

Sta

ndar

d Sc

enar

io M

etho

d de

scrib

edin

Sec

tion

III b

ased

on

a ra

te, D

R. D

R is

the

annu

al e

ffec

tive

equi

vale

nt o

f the

10-

year

con

stan

t mat

urity

trea

sury

rate

repo

rted

by th

e Fe

dera

l Res

erve

for t

he m

onth

of v

alua

tion

plus

50

basi

s poi

nts.

How

ever

, DR

shal

l not

be

less

than

3 p

erce

nt o

r mor

e th

an 9

per

cent

. If t

he 1

0-ye

ar c

onst

ant m

atur

ity tr

easu

ry ra

te is

no

long

er a

vaila

ble,

then

a su

bstit

ute

rate

det

erm

ined

by

the

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers s

hall

be u

sed.

The

acc

umul

atio

n ra

te, A

R, i

s the

pro

duct

of D

R a

nd o

ne m

inus

the

tax

rate

def

ined

in

para

grap

h II

I(D

)(10

).


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

88/

17/2

018

No

mod

ifica

tion

is a

llow

ed fr

om th

e re

quire

men

ts in

Sec

tion

III u

nles

s the

Dom

icili

ary

Com

mis

sion

er a

ppro

ves s

uch

mod

ifica

tion

as n

eces

sary

to p

rodu

ce a

reas

onab

le re

sult.

C)

Illus

trativ

e A

pplic

atio

n of

the

Stan

dard

Sce

nario

Met

hod

to a

Pro

ject

ion,

Mod

el O

ffice

and

Con

tract

by

Con

tract

.

To p

rovi

de in

form

atio

n on

the

sign

ifica

nce

of a

ggre

gatio

n, a

det

erm

inat

ion

of th

e St

anda

rd S

cena

rio A

mou

nt b

ased

on

para

grap

hs II

I(B

)(1)

and

III(

B)(

2) is

requ

ired

for e

ach

cont

ract

subj

ect t

o pa

ragr

aph

I(A

)(3)

. The

sum

of a

ll su

ch S

tand

ard

Scen

ario

Am

ount

s is d

escr

ibed

as r

ow B

in T

able

A. I

n ad

ditio

n, if

the

Con

ditio

nal T

ail E

xpec

tatio

n A

mou

ntin

the

Rep

ort i

s det

erm

ined

bas

ed o

n a

proj

ectio

n of

an

info

rce p

rior t

o th

e st

atem

ent d

ate

and/

or b

y th

e us

e of

a m

odel

off

ice,

whi

ch is

a gr

oupi

ng o

f con

tract

s int

o re

pres

enta

tive

cells

, the

n ad

ditio

nal d

eter

min

atio

ns o

f the

Sta

ndar

d Sc

enar

io A

mou

nt sh

all b

e pe

rfor

med

on

the

prio

r inf

orce

and

/or m

odel

offi

ce. T

he c

alcu

latio

ns a

re fo

r illu

stra

tive

purp

oses

to a

ssis

t in

valid

atin

g th

e re

ason

able

ness

of t

he p

roje

ctio

n an

d or

the

mod

el o

ffic

e an

d to

det

erm

ine

the

sign

ifica

nce

of a

ggre

gatio

n.

Tabl

e A

iden

tifie

s th

e St

anda

rd S

cena

rio A

mou

nts

requ

ired

by th

is s

ectio

n. T

he S

tand

ard

Scen

ario

Am

ount

s re

quire

d ar

e ba

sed

on h

ow th

e C

ondi

tiona

l Tai

l Exp

ecta

tion

proj

ectio

n or

Alte

rnat

ive

Met

hodo

logy

is a

pplie

d. F

or c

ompl

eten

ess,

the

tabl

e al

so in

clud

es th

e St

anda

rd S

cena

rio A

mou

nt re

quire

d by

par

agra

ph I(

A)(

3). T

he a

mou

nts i

n Ta

ble

A sh

ould

be

incl

uded

as p

art o

f the

cer

tifyi

ng a

ctua

ry’s

ann

ual s

uppo

rting

mem

oran

dum

spec

ified

in p

arag

raph

(H) o

f the

“Ca

lcul

atio

n of

the

Tota

l Ass

et R

equi

rem

ent”

sect

ion

of th

e R

BC

inst

ruct

ions

.

Stan

dard

Sce

nario

Am

ount

s in

row

s A a

nd B

in T

able

A a

re re

quire

d of

all

com

pani

es su

bjec

t to

para

grap

h I(

A)(

3). N

o ad

ditio

nal S

tand

ard

Scen

ario

Am

ount

s are

requ

ired

if a

com

pany

’s st

ocha

stic

or a

ltern

ativ

e m

etho

dolo

gy re

sult

is c

alcu

late

d on

the

stat

emen

t dat

e us

ing

indi

vidu

al c

ontra

cts (

i.e.,

with

out a

mod

el o

ffic

e).

A c

ompa

ny th

at u

ses a

mod

el o

ffice

as o

f the

stat

emen

t dat

e to

det

erm

ine

its st

ocha

stic

or a

ltern

ativ

e m

etho

dolo

gy re

sult

mus

t pro

vide

the

Stan

dard

Sce

nario

Am

ount

for

the

mod

el o

ffic

e. T

his i

s row

C.

A c

ompa

ny th

at u

ses a

n ag

greg

atio

n by

dur

atio

n of

con

tract

by

cont

ract

pro

ject

ion

of a

prio

r inf

orce

to d

eter

min

e its

stoc

hasti

c or

alte

rnat

ive

met

hodo

logy

with

resu

lt PS

an

d th

en p

roje

cts r

equi

rem

ents

to th

e st

atem

ent d

ate

with

resu

lt S

mus

t pro

vide

the

Stan

dard

Sce

nario

Am

ount

for t

he p

rior i

nfor

ce, r

ow D

.

A c

ompa

ny th

at u

ses

a m

odel

offi

ce o

f a p

rior i

nfor

ce to

det

erm

ine

its s

toch

astic

or a

ltern

ativ

e m

etho

dolo

gy re

quire

men

ts w

ith re

sult

PM a

nd th

en p

roje

cts

requ

irem

ents

to

the

stat

emen

t dat

e w

ith re

sult

S m

ust p

rovi

de th

e St

anda

rd S

cena

rio A

mou

nt fo

r the

mod

el o

ffice

on

the

prio

r inf

orce

dat

e,ro

w E

.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

98/

17/2

018

Tabl

e A

Stan

dard

Sce

nario

Am

ount

sG

uide

line

Var

iatio

ns

Val

idat

ion

Mea

sure

sM

odel

Offi

ce

Proj

ectio

nPr

ojec

tion

of

Prio

r Inf

orce

A.A

ggre

gate

val

uatio

n on

the

stat

emen

tda

te o

n in

forc

e co

ntra

cts r

equi

red

inI(

A)(

3)

Non

eN

one

Non

e

B.S

eria

tim v

alua

tion

on th

e st

atem

ent

date

on

info

rce

cont

ract

sN

one:

Com

pare

to A

Non

eN

one

C.A

ggre

gate

val

uatio

n on

the

stat

emen

tda

te o

n th

e m

odel

off

ice

If n

ot m

ater

ial t

o m

odel

of

fice

valid

atio

nA

/Cco

mpa

re to

1.0

0N

one

D.A

ggre

gate

val

uatio

n on

a p

rior i

nfor

ceda

te o

n pr

ior i

nfor

ce c

ontra

cts

If n

ot m

ater

ial t

o pr

ojec

tion

valid

atio

nN

one

A/D

-S/

PSC

ompa

re to

0

E.A

ggre

gate

val

uatio

n on

a p

rior i

nfor

ceda

te o

f a m

odel

offi

ceIf

not

mat

eria

l to

mod

el

offic

e or

pro

ject

ion

valid

atio

n.

(A/E

–S/

PM)

com

pare

to 0

Mod

ifica

tion

of th

e re

quire

men

ts in

Sec

tion

III w

hen

appl

ied

to a

prio

r inf

orce

or a

mod

el o

ffic

e is

per

mitt

ed if

such

mod

ifica

tion

faci

litat

es v

alid

atin

g th

e pr

ojec

tion

of in

forc

e or

the

mod

el o

ffic

e. A

ll su

ch m

odifi

catio

ns sh

ould

be d

ocum

ente

d. N

o m

odifi

catio

n is

allo

wed

for r

ow B

as o

f the

stat

emen

t dat

e unl

ess t

he D

omic

iliar

y C

omm

issi

oner

appr

oved

su

ch m

odifi

catio

n as

nec

essa

ry to

pro

duce

a re

ason

able

resu

lt un

der t

he c

orre

spon

ding

am

ount

in ro

w A

.

II)B

asic

Adj

uste

d R

eser

ve

For p

urpo

ses

of d

eter

min

ing

the

Stan

dard

Sce

nario

Am

ount

for R

isk-B

ased

Cap

ital,

the

Bas

ic A

djus

ted

Res

erve

for a

con

tract

sha

ll be

the

Wor

king

Res

erve

, as

desc

ribed

in th

eR

epor

t, as

of t

he v

alua

tion

date

.

III)

Stan

dard

Sce

nario

Am

ount

-A

pplic

atio

n of

the

Stan

dard

Sce

nario

Met

hod

A)

Gen

eral

Whe

re n

ot in

cons

iste

nt w

ith th

e gu

idan

ce g

iven

her

e, th

e pr

oces

s an

d m

etho

ds u

sed

to d

eter

min

e re

sults

und

er th

e St

anda

rd S

cena

rio M

etho

d sh

all b

e th

e sa

me

as re

quire

d in

the

calc

ulat

ion

unde

r th

e m

odel

ing

met

hodo

logy

req

uire

d by

the

Rep

ort.

Any

add

ition

al a

ssum

ptio

ns n

eede

d to

app

ly th

e St

anda

rd S

cena

rio M

etho

d to

the

info

rce

shal

lbe

expl

icitl

y do

cum

ente

d.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

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nce

Com

mis

sion

ers

108/

17/2

018

B)

Res

ults

for t

he S

tand

ard

Scen

ario

Met

hod.

The

Stan

dard

Sce

nario

Am

ount

is e

qual

to (1

) + (2

) –(3

) whe

re:

1)Is

the

sum

of t

he B

asic

Adj

uste

d R

eser

ve a

s des

crib

ed in

Sec

tion

II fo

r all

cont

ract

s for

whi

ch th

e St

anda

rd S

cena

rio A

mou

nt is

bei

ng d

eter

min

ed,

2)Is

zer

o or

if g

reat

er th

e ag

greg

ate

grea

test

pre

sent

val

ue fo

r all

cont

ract

s m

easu

red

as o

f the

end

of e

ach

proj

ectio

n ye

ar o

f the

neg

ativ

e of

the

Acc

umul

ated

Net

Rev

enue

desc

ribed

bel

ow u

sing

the

assu

mpt

ions

des

crib

ed in

Sub

sect

ion

III(

D) a

nd a

dis

coun

t rat

e eq

ual t

o th

e A

ccum

ulat

ion

Rat

e, A

R. T

he A

ccum

ulat

ed N

et R

even

ue a

t the

en d

o f a

pro

ject

ion

year

equ

als (

i)+

(ii) -

(iii)

whe

re:

(i)Is

the

Acc

umul

ated

Net

Rev

enue

at t

he e

nd o

f the

prio

r pro

ject

ion

year

acc

umul

ated

at t

he ra

te A

R to

the

end

of th

e cu

rren

t pro

ject

ion

year

. The

Acc

umul

ated

Net

Reve

nue

at th

e be

ginn

ing

of th

e pr

ojec

tion

(i.e.

, tim

e 0)

is z

ero.

(ii)A

re th

e m

argi

ns g

ener

ated

dur

ing

the

proj

ectio

n ye

ar o

n ac

coun

t val

ues a

s de

fined

in p

arag

raph

III(

D)(

1) m

ultip

lied

by o

ne m

inus

the

tax

rate

and

acc

umul

ated

at

rate

AR

to th

e en

d of

cur

rent

pro

ject

ion

year

, and

(iii)

Are

the

cont

ract

ben

efits

pai

d in

exc

ess

of a

ccou

nt v

alue

app

lied

plus

the

Indi

vidu

al re

insu

ranc

e pr

emiu

ms

(ced

ed le

ss a

ssum

ed) l

ess

the

Indi

vidu

al re

insu

ranc

ebe

nefit

s (ce

ded

less

ass

umed

) pay

able

or r

ecei

vabl

e du

ring

the

proj

ectio

n ye

ar m

ultip

lied

by o

ne m

inus

the

tax

rate

and

acc

umul

ated

at r

ate

AR

to th

e en

d of

cur

rent

proj

ectio

n ye

ar. I

ndiv

idua

l rei

nsur

ance

is d

efin

ed in

par

agra

ph II

I(D

)(2)

.

3)Is

the

valu

e of

app

rove

d he

dges

and

Agg

rega

te re

insu

ranc

e as

des

crib

ed in

par

agra

ph II

I(E)(

2). A

ggre

gate

rein

sura

nce

is d

efin

ed in

par

agra

ph II

I(D

)(2).

C)

The

actu

ary

shal

l det

erm

ine

the

proj

ecte

d re

insu

ranc

e pr

emiu

ms

and

bene

fits

refle

ctin

g al

l tre

aty

limita

tions

and

ass

umin

g an

y op

tions

in th

e tre

aty

to th

e ot

her

party

are

exer

cise

d to

dec

reas

e th

e va

lue

of re

insu

ranc

e to

the

repo

rting

com

pany

(e.g

., op

tions

to in

crea

se p

rem

ium

s or t

erm

inat

e co

vera

ge).

The

posi

tive

valu

e of

any

rein

sura

nce

treat

y th

at is

not

gua

rant

eed

to th

e in

sure

r or i

ts su

cces

sor s

hall

be e

xclu

ded

from

the

valu

e of

rein

sura

nce.

The

com

mis

sion

er m

ay re

quire

the

excl

usio

n of

any

por

tion

of th

e va

lue

of

rein

sura

nce

if th

e te

rms o

f the

rein

sura

nce

treat

ies a

re to

o re

stric

tive

(e.g

., tim

e or

am

ount

lim

its o

n be

nefit

s cor

rela

te to

the

Stan

dard

Sce

nario

Met

hod)

.

D)

Ass

umpt

ions

for P

arag

raph

III (

B) (

2) M

argi

ns a

nd A

ccou

nt V

alue

s.

1)M

argi

ns o

n A

ccou

nt V

alue

s. Th

e ba

ses f

or re

turn

ass

umpt

ions

on

asse

ts su

ppor

ting

acco

unt v

alue

s are

show

n in

Tab

le I.

The

Initi

al re

turn

s sha

ll be

app

lied

to th

e ac

coun

tva

lues

ass

igne

d to

eac

h as

set c

lass

on

the

valu

atio

n da

te a

s im

med

iate

dro

ps, r

esul

ting

in th

e A

ccou

nt V

alue

s at t

ime

0. T

he "Y

ear 1

" and

"Yea

r 2+"

retu

rns a

re g

ross

ann

ual

effe

ctiv

e ra

tes o

f ret

urn

and

are

used

(alo

ng w

ith o

ther

dec

rem

ents

and

/or i

ncre

ases

) to

prod

uce

the

Acc

ount

Val

ues a

s of t

heen

d of

eac

h pr

ojec

tion

year

. For

pur

pose

s of

this

sect

ion,

mon

ey m

arke

t fun

ds sh

all b

e co

nsid

ered

par

t of t

he B

ond

clas

s.

The

Fixe

d Fu

nd ra

te is

the

grea

ter o

f the

min

imum

rate

gua

rant

eed

in th

e co

ntra

ct o

r 3.5

per

cent

but

not

gre

ater

than

the

curr

ent r

ates

bei

ng c

redi

ted

to F

ixed

Fun

ds o

n th

eva

luat

ion

date

.

Acc

ount

Val

ues

shal

l be

accu

mul

ated

afte

r th

e in

itial

dro

p us

ing

the

rate

s fr

om T

able

I w

ith a

ppro

pria

te r

educ

tions

app

lied

to th

e su

ppor

ting

asse

ts. T

he a

ppro

pria

tere

duct

ions

for a

ccou

nt v

alue

s su

ppor

ted

by a

sset

s in

the

Equi

ty, B

ond

or B

alan

ce C

lass

es a

re a

ll fu

nd a

nd c

ontra

ct c

harg

es a

ccor

ding

to th

e pr

ovis

ions

of t

he fu

nds

and

cont

ract

s. Th

e ap

prop

riate

redu

ctio

n fo

r Acc

ount

Val

ues s

uppo

rted

by F

ixed

Fun

ds is

zer

o.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

118/

17/2

018

The

mar

gins

on

Acc

ount

Val

ues a

re d

efin

ed a

s fol

low

s:

a)D

urin

g th

e Su

rren

der C

harg

e Pe

riod:

i.0.

10%

of A

ccou

nt V

alue

; plu

s

ii.Th

e m

axim

um o

f:

0.20

% o

f Acc

ount

Val

ue; o

r

Expl

icit

and

optio

nal c

ontra

ct c

harg

es fo

r gua

rant

eed

livin

g an

d de

ath

bene

fits.

b)A

fter t

he S

urre

nder

Cha

rge

Perio

d:

i.Th

e am

ount

det

erm

ined

in (a

) abo

ve; p

lus

ii.Th

e le

sser

of:

0.65

% o

f Acc

ount

Val

ues;

and

50%

of t

he e

xces

s, if

any,

of a

ll co

ntra

ct c

harg

es o

ver (

a) a

bove

.

How

ever

, on

fixed

fund

s afte

r the

surr

ende

r cha

rge

perio

d, a

mar

gin

of u

p to

the

amou

nt in

(a) a

bove

plu

s 0.4

% m

ay b

e us

ed.

Tabl

e I

Initi

alY

ear 1

Yea

r 2+

Equi

ty C

lass

-20%

0%3%

Bon

d C

lass

00

4.85

%B

alan

ced

Cla

ss-1

2%0%

3.74

%Fi

xed

Sepa

rate

Acc

ount

s and

G

ener

al A

ccou

nt

Fixe

d Fu

nd R

ate

Fixe

d Fu

nd R

ate

2)R

eins

uran

ce C

redi

t. In

divi

dual

rein

sura

nce

is d

efin

ed a

s rei

nsur

ance

whe

re th

e to

tal p

rem

ium

s for

and

ben

efits

of t

he re

insu

ranc

e ca

n be

det

erm

ined

by

appl

ying

the

term

sof

the

rein

sura

nce

to e

ach

cont

ract

cov

ered

with

out r

efer

ence

to th

e pr

emiu

ms o

r ben

efits

of a

ny o

ther

con

tract

cov

ered

and

sum

min

g th

e re

sults

ove

r all

cont

ract

s cov

ered

.Re

insu

ranc

e th

at is

not

Indi

vidu

al re

insu

ranc

e is

Agg

rega

te re

insu

ranc

e.

Indi

vidu

al r

eins

uran

ce p

rem

ium

s pr

ojec

ted

to b

e pa

yabl

e on

ced

ed r

isk

and

rece

ivab

le o

n as

sum

ed r

isk

shal

l be

incl

uded

in th

e su

bpar

agra

ph I

II(B

)(2)

(iii).

Sim

ilarly

,In

divi

dual

rei

nsur

ance

ben

efits

pro

ject

ed to

be

rece

ivab

le o

n ce

ded

risk

and

paya

ble

on a

ssum

ed r

isk

shal

l be

incl

uded

in s

ubpa

ragr

aph

III(

B)(2

)(iii)

. No

Agg

rega

tere

insu

ranc

e sh

all b

e in

clud

ed in

subp

arag

raph

III(

B)(

2)(ii

i).


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

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nce

Com

mis

sion

ers

128/

17/2

018

3)La

pses

, Par

tial

With

draw

als,

and

Mon

eyne

ss. P

artia

l w

ithdr

awal

s el

ecte

d as

gua

rant

eed

livin

g be

nefit

s or

req

uire

d co

ntra

ctua

lly (

e.g.

, a c

ontra

ct o

pera

ting

unde

r an

auto

mat

ic w

ithdr

awal

pro

visi

on o

n th

e va

luat

ion

date

) are

to b

e in

clud

ed in

sub

para

grap

h II

I(B

)(2)

(iii).

No

othe

r par

tial w

ithdr

awal

s, in

clud

ing

free

par

tial w

ithdr

awal

s,ar

e to

be

incl

uded

. All

laps

e ra

tes s

hall

be a

pplie

d as

full

cont

ract

surr

ende

rs.

A c

ontra

ct is

in th

e m

oney

(ITM

) if i

t inc

lude

s a

guar

ante

ed li

ving

ben

efit

and

at a

ny ti

me

the

porti

on o

f the

futu

re p

roje

cted

acc

ount

val

ue u

nder

the

Stan

dard

Sce

nario

Met

hod

requ

ired

to o

btai

n th

e be

nefit

wou

ld b

e le

ss th

an th

e va

lue

of th

e gu

aran

teed

ben

efit

at th

e tim

e of

exe

rcis

e or

pay

men

t. If

the

proj

ecte

d ac

coun

t val

ue is

90

perc

ent

of th

e va

lue

of th

e gu

aran

teed

ben

efit

at th

e tim

e of

exe

rcis

e or

pay

men

t, th

e co

ntra

ct is

sai

d to

be

10 p

erce

nt in

the

mon

ey. I

f the

inco

me

from

app

lyin

g th

e pr

ojec

ted

acco

unt v

alue

to g

uara

ntee

d pu

rcha

se ra

tes

exce

eds

the

inco

me

from

app

lyin

g th

e pr

ojec

ted

bene

fit b

ase

to G

MIB

pur

chas

e ra

tes f

or th

e sa

me

type

of a

nnui

ty, t

hen

ther

e is

no

GM

IB c

ost a

nd th

e G

MIB

is n

ot in

the

mon

ey. A

con

tract

not

in th

e m

oney

is o

ut o

f the

mon

ey (O

TM).

If a

con

tract

has

mul

tiple

livi

ng b

enef

it gu

aran

tees

then

the

cont

ract

is IT

M to

the

exte

nt th

at a

ny o

f the

livi

ng b

enef

it gu

aran

tees

are

ITM

. Lap

ses s

hall

be a

t the

ann

ual e

ffec

tive

rate

s giv

en in

Tab

le II

.

Tabl

e II

–La

pse

Ass

umpt

ions

Dur

ing

Surr

ende

r Ch

arge

Per

iod

Afte

r Sur

rend

er C

harg

e Pe

riod

Dea

th B

enef

it O

nly

Con

tract

s5%

10%

All

Gua

rant

eed

Livi

ng

Ben

efits

OTM

5%10

%

ITM

< 10

%10

%IT

M<

20%

20%

ITM

Any

Gua

rant

eed

Acc

ount

B

alan

ce B

enef

its IT

M

0%0%

0%0%

Any

Oth

er G

uara

ntee

d Li

ving

Ben

efits

ITM

3%7%

5%2%

4)A

ccou

nt T

rans

fers

and

Fut

ure

Dep

osits

. No

trans

fers

bet

wee

n fu

nds

shal

l be

assu

med

to d

eter

min

e th

e gr

eate

st p

rese

nt v

alue

am

ount

requ

ired

unde

r par

agra

ph II

I(B

)(2)

un

less

requ

ired

by th

e co

ntra

ct (e

.g.,

trans

fers

from

a d

olla

r cos

t ave

ragi

ng fu

nd o

r con

tract

ual r

ight

s gi

ven

to th

e in

sure

r to

impl

emen

t a c

ontra

ctua

lly s

peci

fied

portf

olio

insu

ranc

e m

anag

emen

t stra

tegy

or

a co

ntra

ct o

pera

ting

unde

r an

aut

omat

ic r

e-ba

lanc

ing

optio

n). W

hen

trans

fers

mus

t be

mod

eled

, to

the

exte

nt n

ot in

cons

iste

nt w

ithco

ntra

ct la

ngua

ge, t

he a

lloca

tion

of tr

ansf

ers t

o fu

nds m

ust b

e in

pro

porti

on to

the

cont

ract

's cu

rren

t allo

catio

n to

fund

s.

Mar

gins

gen

erat

ed d

urin

g a

proj

ectio

n ye

ar o

n fu

nds

supp

ortin

g ac

coun

t val

ues

are

trans

ferr

ed to

the

Acc

umul

atio

n of

Net

Rev

enue

at y

ear-

end

and

are

subs

eque

ntly

accu

mul

ated

at t

he A

ccum

ulat

ion

Rat

e. A

sset

s for

eac

h cl

ass s

uppo

rting

acc

ount

val

ues a

re to

be

redu

ced

in p

ropo

rtion

to th

e am

ount

hel

d in

eac

h as

set c

lass

at t

he ti

me

oftra

nsfe

r of m

argi

ns o

r any

por

tion

of A

ccou

nt V

alue

app

lied

to th

e pa

ymen

t of b

enef

its.

No

futu

re d

epos

its sh

all b

e as

sum

ed u

nles

s req

uire

d by

the

term

s of t

he c

ontra

ct to

pre

vent

con

tract

or g

uara

ntee

d be

nefit

laps

e, in

whi

ch c

ase

they

mus

t be

mod

eled

. Whe

n fu

ture

dep

osits

mus

t be

mod

eled

, to

the

exte

nt n

ot in

cons

iste

nt w

ith c

ontra

ct la

ngua

ge, t

he a

lloca

tion

of th

e de

posi

t to

fund

s mus

t be

in p

ropo

rtion

to th

e co

ntra

ct’s

cur

rent

allo

catio

n to

fund

s.

5)M

orta

lity.

Mor

talit

y at

80

perc

ent o

f the

199

4 M

GD

B ta

bles

thro

ugh

age

95 in

crea

sing

by

1 pe

rcen

t eac

h ye

ar to

100

per

cent

of t

he 1

994

MG

DB

tabl

e at

age

115

shal

l be

assu

med

in th

e pr

ojec

tion

used

to th

e de

term

ine

the

grea

test

pre

sent

val

ue a

mou

nt re

quire

d un

der p

arag

raph

III(

B)(

2).


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

138/

17/2

018

6)Pr

ojec

tion

Freq

uenc

y. T

he p

roje

ctio

n us

ed to

det

erm

ine

the

grea

test

pre

sent

val

ue a

mou

nt re

quire

d un

der p

arag

raph

III(

B)(

2) s

hall

be c

alcu

late

d us

ing

an a

nnua

l or m

ore

freq

uent

tim

e st

ep, s

uch

as q

uarte

rly. F

or ti

me

step

s m

ore

freq

uent

than

ann

ual,

asse

ts s

uppo

rting

Acc

ount

Val

ues

at th

e st

art o

f eac

h pr

ojec

tion

year

may

be

reta

ined

insu

ch fu

nds u

ntil

year

-end

(i.e

., pr

e-ta

x m

argi

n ea

rned

dur

ing

the

year

will

ear

n th

e fu

nd ra

tes i

nste

ad o

f the

Dis

coun

t Rat

e un

til y

ear-

end)

or r

emov

ed a

fter e

ach

time

step

.H

owev

er, t

he s

ame

appr

oach

sha

ll be

app

lied

for a

ll ye

ars.

Subs

eque

nt to

eac

h pr

ojec

tion

year

-end

, Acc

umul

ated

Net

Rev

enue

s fo

r the

yea

r sha

ll ea

rn th

e A

ccum

ulat

ion

Rat

e. S

imila

rly, p

roje

cted

ben

efits

, lap

ses,

elec

tions

and

oth

er c

ontra

ct a

ctiv

ity c

an b

e as

sum

ed to

occ

ur a

nnua

lly o

r at t

heen

d of

eac

h tim

e st

ep, b

ut th

e ap

proa

ch sh

a ll b

eco

nsis

tent

for a

ll ye

ars.

7)Su

rren

der

Char

ge P

erio

d.If

the

sur

rend

er c

harg

e fo

r th

e co

ntra

ct i

s de

term

ined

bas

ed o

n in

divi

dual

con

tribu

tions

or

depo

sits

to t

he c

ontra

cts,

the

surr

ende

r ch

arge

amor

tizat

ion

perio

d m

ay b

e es

timat

ed fo

r pro

ject

ion

purp

oses

.Suc

h es

timat

ed p

erio

d sh

all n

ot b

e le

ss th

an th

e re

mai

ning

dur

atio

n ba

sed

on th

e no

rmal

am

ortiz

atio

n pa

ttern

for t

he re

mai

ning

tota

l con

tract

cha

rge

assu

min

g it

resu

lted

from

a si

ngle

dep

osit,

plu

s one

yea

r.

8)C

ontra

ctH

olde

r El

ectio

n R

ates

. Con

tract

hold

er e

lect

ion

rate

s to

det

erm

ine

amou

nts

in s

ubpa

ragr

aph

III(

B)(2

)(iii

) sha

ll be

15

perc

ent p

er a

nnum

for

any

ele

ctiv

e IT

Mbe

nefit

exc

ept g

uara

ntee

d w

ithdr

awal

ben

efits

, but

onl

y to

the

exte

nt s

uch

elec

tion

does

not

term

inat

e a

mor

e va

luab

le b

enef

it su

bjec

t to

elec

tion.

Gua

rant

eed

Min

imum

Dea

th B

enef

its a

re n

ot b

enef

its su

bjec

t to

elec

tion.

Exc

eptio

n: C

ontra

ctho

lder

ele

ctio

n ra

tes s

hall

be 1

00 p

erce

nt a

t the

last

oppo

rtuni

ty to

ele

ct a

n IT

M b

enef

it, b

ut o

nly

toth

e ex

tent

such

ele

ctio

n do

es n

ot te

rmin

ate

a m

ore

valu

able

ben

efit

subj

ect t

o el

ectio

n. A

ben

efit

is m

ore

valu

able

if it

is m

ore

ITM

in a

bsol

ute

dolla

rs u

sing

the

defin

ition

of IT

M in

par

agra

ph II

I(D

)(3)

.

For g

uara

ntee

d m

inim

um w

ithdr

awal

ben

efits

, a p

artia

l with

draw

al e

qual

to th

e ap

plic

able

per

cent

age

in T

able

III a

pplie

d to

the

cont

ract

’s m

axim

um a

llow

able

par

tial

with

draw

al sh

all b

e as

sum

ed in

subp

arag

raph

III(

B)(

2)(ii

i). H

owev

er, i

f the

con

tract

’s m

inim

um a

llow

able

par

tial w

ithdr

awal

exc

eeds

the

parti

al w

ithdr

awal

from

app

lyin

gth

e ra

te in

Tab

le II

I to

the

cont

ract

’s m

axim

um a

llow

able

par

tial w

ithdr

awal

, the

n th

e co

ntra

ct’s

min

imum

allo

wab

le p

artia

l with

draw

al sh

all b

e as

sum

ed in

subp

arag

raph

II

I(B

)(2)

(iii).

Tabl

e II

I –G

uara

ntee

d W

ithdr

awal

Ass

umpt

ions

Atta

ined

Age

Le

ss th

an 5

0A

ttain

ed A

ge50

to 5

9A

ttain

ed A

ge60

or G

reat

erW

ithdr

awal

s do

not r

educ

e ot

her e

lect

ive

Gua

rant

ees t

hat a

re in

the

mon

ey50

%75

%10

0%

With

draw

als r

educ

e el

ectiv

e G

uara

ntee

s th

at a

re in

the

mon

ey25

%50

%75

%

9)G

MIB

s. Fo

r sub

para

grap

h II

I(B)(

2)(ii

i), G

MIB

cos

t at t

he ti

me

of e

lect

ion

shal

l be

the

exce

ss, i

f pos

itive

, of t

he re

serv

e re

quire

d fo

r the

pro

ject

edan

nuiti

zatio

n str

eam

ove

rth

e av

aila

ble

acco

unt v

alue

. If t

he re

serv

e re

quire

d is

less

than

the

acco

unt v

alue

, the

GM

IB c

ost s

hall

be z

ero.

The

rese

rve

requ

ired

shal

l be

dete

rmin

ed u

sing

the

Ann

uity

2000

Mor

talit

y Ta

ble

and

a va

luat

ion

inte

rest

rate

equ

al to

the

Dis

coun

t Rat

e. If

mor

e th

an o

ne a

nnui

ty o

ptio

n is

ava

ilabl

e,ch

ose

the

optio

n w

ith a

rese

rve

clos

est t

o th

ere

serv

e fo

r a li

fe a

nnui

ty w

ith 1

0 ye

ars o

f cer

tain

pay

men

ts.

10)

Indi

ces.

If a

n in

tere

st in

dex

is r

equi

red

to d

eter

min

e pr

ojec

ted

bene

fits

or r

eins

uran

ce o

blig

atio

ns, t

he in

dex

mus

t ass

ume

inte

rest

rate

s ha

ve n

ot c

hang

ed s

ince

the

last

repo

rted

rate

s bef

ore

the

valu

atio

n da

te. I

f an

equi

ty in

dex

is re

quire

d,th

e in

dex

shal

l be

cons

iste

nt w

ith th

e la

st re

porte

d in

dex

befo

re th

e va

luat

ion

date

, the

initi

al d

rop

ineq

uity

retu

rns a

nd th

e su

bseq

uent

equ

ity re

turn

s in

the

stand

ard

scen

ario

pro

ject

ion

up to

the

time

the

inde

x is

use

d. T

he so

urce

s of i

nfor

mat

ion

and

how

the

info

rmat

ion

isus

ed to

det

erm

ine

inde

xes s

hall

be d

ocum

ente

d an

d, to

the

exte

nt p

ossi

ble,

con

sist

ent f

rom

yea

r to

year

.

11)T

axes

.All

taxe

s sha

ll be

bas

ed o

n th

e en

acte

d m

axim

um fe

dera

l cor

pora

te in

com

e ta

x ra

te.

E)A

ssum

ptio

ns fo

r use

in p

arag

raph

III (

B) (

3).


4/7/19


© 1

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Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

148/

17/2

018

1)Th

e V

alue

of A

ggre

gate

Rei

nsur

ance

. The

val

ue o

f Agg

rega

te re

insu

ranc

e is

the

disc

ount

ed v

alue

, at r

ate

AR

of t

he e

xces

s of:

a) th

e be

nefit

pay

men

ts fr

om th

e re

insu

ranc

e,ov

er b

) the

rein

sura

nce

prem

ium

s, w

here

(a) a

nd (b

) are

det

erm

ined

und

er th

e as

sum

ptio

ns d

escr

ibed

in S

ubse

ctio

n II

I(D

).

2)Th

e V

alue

of A

ppro

ved

Hed

ges.

The

valu

e of

app

rove

d he

dges

shal

l be

calc

ulat

ed se

para

tely

from

the

calc

ulat

ion

in p

arag

raph

III(

B)(

2). T

he v

alue

of a

ppro

ved

hedg

es is

the

diffe

renc

e be

twee

n: a

) the

dis

coun

ted

valu

e at

rate

AR

of t

he a

fter-

tax

cash

flow

s fro

m th

e ap

prov

ed h

edge

s; le

ss b

) the

ir st

atem

ent v

alue

s on

the

valu

atio

n da

te.

To b

e an

app

rove

d he

dge,

a d

eriv

ativ

e or

oth

er in

vest

men

t has

to b

e an

act

ual a

sset

hel

d on

the

valu

atio

n da

te, b

e de

sign

ated

as a

hed

ge fo

r one

or m

ore

cont

ract

s sub

ject

to th

e St

anda

rd S

cena

rio, a

nd b

e pa

rt of

a c

lear

ly d

efin

ed h

edgi

ng s

trate

gy a

s de

scrib

ed in

the

Rep

ort.

If th

e ap

prov

ed h

edge

also

sup

ports

con

tract

s no

t sub

ject

to th

eSt

anda

rd S

cena

rio, t

hen

only

that

por

tion

of th

e he

dge

desi

gnat

ed fo

r con

tract

s sub

ject

to th

e St

anda

rd S

cena

rio sh

all b

e in

clud

ed in

the

valu

e of

app

rove

d he

dges

. App

rove

dh e

dges

mus

t be

held

in a

ccor

danc

e w

ith a

n in

vest

men

t pol

icy

that

has

bee

n im

plem

ente

d fo

r at l

east

six

mon

ths

and

has

been

app

rove

d by

the

Boa

rd o

f Dire

ctor

s or

asu

bcom

mitt

ee o

f Boa

rd m

embe

rs. A

cop

y of

the

inve

stm

ent p

olic

y an

d th

e re

solu

tion

appr

ovin

g th

e po

licy

shal

l be

mai

ntai

ned

with

the

docu

men

tatio

n of

the

Stan

dard

Scen

ario

and

ava

ilabl

e on

requ

est.

App

rove

d he

dges

mus

t be

held

in a

ccor

danc

e w

ith a

writ

ten

inve

stm

ent s

trate

gy d

evel

oped

by

man

agem

ent t

o im

plem

ent t

he B

oard

’sin

vest

men

t pol

icy.

A c

opy

of th

e in

vest

men

t stra

tegy

on

the

valu

atio

n da

te, t

he m

ost r

ecen

t inv

estm

ent s

trate

gypr

esen

ted

to th

e B

oard

if d

iffer

ent a

nd th

e m

ost r

ecen

tw

ritte

n re

port

on th

e ef

fect

iven

ess o

f the

stra

tegy

shal

l be

mai

ntai

ned

with

the

docu

men

tatio

n of

the

Stan

dard

Sce

nario

and

ava

ilabl

e on

requ

est .

The

com

mis

sion

er m

ay re

quire

the

excl

usio

n of

any

por

tion

of th

e va

lue

of a

ppro

ved

hedg

es u

pon

a fin

ding

that

the

com

pany

’s d

ocum

enta

tion,

con

trols

, mea

sure

men

t,ex

ecut

ion

of st

rate

gy o

r his

toric

al re

sults

are

not

ade

quat

e to

supp

ort a

futu

re e

xpec

tatio

n of

risk

redu

ctio

n co

mm

ensu

rate

with

the

valu

e of

app

rove

d he

dges

.

The

item

bei

ng h

edge

d, th

e co

ntra

ct g

uara

ntee

s, an

d th

e ap

prov

ed h

edge

s ar

e as

sum

ed to

be

acco

unte

d fo

r at t

he a

vera

ge p

rese

nt v

alue

of t

he ta

il sc

enar

ios.

The

valu

e of

appr

oved

hed

ges

for

the

stan

dard

sce

nario

is th

e di

ffere

nce

betw

een

an e

stim

ate

of th

is “

tail

valu

e” a

nd th

e “f

air

valu

e” o

f ap

prov

ed h

edge

s. Fo

r th

is v

alua

tion

to b

eco

nsis

tent

with

the

state

men

t val

ue o

f app

rove

d he

dges

, the

stat

emen

t val

ue o

f app

rove

d he

dges

will

nee

d to

be

held

at f

air v

alue

with

the

imm

edia

te re

cogn

ition

of g

ains

and

loss

es. A

ccor

ding

ly, i

t is a

ssum

ed th

at a

ppro

ved

hedg

es a

re n

ot su

bjec

t to

the

IMR

or t

he e

quity

com

pone

nt o

f the

AV

R. A

ppro

ved

hedg

es n

eed

not s

atis

fy S

SAP

No.

86. I

n pa

rticu

lar,

as g

ains

and

loss

es o

f app

rove

d he

dges

are

reco

gniz

ed im

med

iate

ly, a

ppro

ved

hedg

es n

eed

not s

atis

fy th

e re

quire

men

ts fo

r hed

ge a

ccou

ntin

g of

fair

valu

ehe

dges

.

It is

the

com

bina

tion

of h

edge

s and

liab

ilitie

s tha

t det

erm

ine

whi

ch sc

enar

ios a

re th

e ta

il sc

enar

ios.

In p

artic

ular

, sce

nario

s whe

re th

e he

dgin

g is

leas

t effe

ctiv

e ar

e lik

ely

to

be ta

il sc

enar

ios a

nd li

abili

ties t

hat a

re a

left

tail

risk

coul

d in

com

bina

tion

with

hed

ges b

ecom

e a

right

tail

risk.

The

cash

flow

pro

ject

ion

for a

ppro

ved

hedg

es th

at e

xpire

in le

ss th

an o

ne y

ear f

rom

the

valu

atio

n da

te sh

ould

be

base

d on

hol

ding

the

hedg

es to

thei

r exp

iratio

n. F

or h

edge

s w

ith a

n ex

pira

tion

of m

ore

than

one

yea

r, th

e va

lue

of h

edge

s sh

ould

be

base

d on

liqu

idat

ion

of th

e he

dges

one

yea

r fr

om th

e va

luat

ion

date

. Whe

re a

pplic

able

, the

liq

uida

tion

valu

e of

hed

ges s

hall

be c

onsi

sten

t with

Bla

ck-S

chol

es p

ricin

g, a

risk

free

risk-

free

rate

of D

R, a

nnua

l vol

atili

ty im

plic

it as

of t

he v

alua

tion

date

in th

e st

atem

ent

valu

e of t

he h

edge

s und

er B

lack

-Sch

oles

pric

ing

and

a ris

k fr

ee ra

te o

f DR

and

the a

ssum

ed re

turn

s in

the S

tand

ard

Scen

ario

from

the

valu

atio

n da

te to

the d

ate o

f liq

uida

tion.

Ther

e is

no

cred

it in

the

Stan

dard

Sce

nario

for d

ynam

ic h

edgi

ng b

eyon

d th

e cr

edit

that

resu

lts fr

om h

edge

s act

ually

hel

d on

the

valu

atio

n da

te. T

here

is n

o cr

edit

for h

edge

s ac

tual

ly h

eld

on th

e va

luat

ion

date

that

are

not

app

rove

d he

dges

as t

he c

omm

itmen

t to

mai

ntai

n th

e le

vel o

f ris

k re

duct

ion

deriv

ed fr

om su

ch h

edge

s is n

ot a

dequ

ate.

3)R

eten

tion

of C

ompo

nent

s. Fo

r the

Sta

ndar

d Sc

enar

io A

mou

nts o

n th

e st

atem

ent d

ate

the

com

pany

shou

ld h

ave

avai

labl

e to

the

Com

mis

sion

er th

e fo

llow

ing

valu

es:

a)Fo

r run

s A a

nd B

as d

efin

ed in

I(C

) by

cont

ract

and

in a

ggre

gate

the

amou

nts d

eter

min

ed in

III(

B)(

1) a

nd II

I(B

)(2)

.

b)Fo

r run

A th

e ag

greg

ate

amou

nts d

eter

min

ed in

III(

E)(1

) and

III(

E)(2

).

Smoo

thin

g an

d Tr

ansit

ion

Rule

s


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

158/

17/2

018

If a c

ompa

ny is

follo

win

g a

Cle

arly

Def

ined

Hed

ging

Stra

tegy

(See

“Rec

omm

ende

d A

ppro

ach

for S

ettin

g R

isk-

Bas

ed C

apita

l Req

uire

men

ts fo

r Var

iabl

e Ann

uitie

s and

Sim

ilar P

rodu

cts”

pres

ente

d by

the

Am

eric

an A

cade

my

of A

ctua

ries’

Life

Cap

ital A

dequ

acy

Subc

omm

ittee

to th

e N

atio

nal A

ssoc

iatio

n of

Insu

ranc

e C

omm

issi

oner

’s C

apita

l Ade

quac

y Ta

sk F

orce

(Jun

e 20

05) f

or th

e de

finiti

on o

f thi

s ph

rase

) on

som

e or

all

of it

s bu

sine

ss, a

dec

isio

n sh

ould

be

mad

e w

heth

er o

r not

to s

moo

th th

e TA

R. I

n al

l cas

es w

here

‘cas

h va

lue’

is to

be

used

, the

va

lues

use

d m

ust b

e co

mpu

ted

on a

con

sist

ent b

asis

for e

ach

bloc

k of

bus

ines

s at s

ucce

ssiv

e ye

ar-e

nds.

For d

efer

red

annu

ities

with

a c

ash

valu

e op

tion,

dire

ct w

riter

s w

ill u

se th

e ca

sh

valu

e. F

or d

efer

red

annu

ities

with

no

cash

val

ue o

ptio

n, o

r for

rein

sura

nce

assu

med

thro

ugh

a tre

aty

othe

r tha

nco

insu

ranc

e, u

seth

e po

licyh

olde

r acc

ount

val

ue o

f the

und

erly

ing

cont

ract

. Fo

r pay

out a

nnui

ties,

or o

ther

ann

uitie

s w

ith n

o ac

coun

t val

ue o

r ca

sh v

alue

, use

the

amou

nt a

s de

fined

for

varia

ble

payo

ut a

nnui

ties

in th

e de

finiti

on o

f Wor

king

Res

erve

. For

any

bu

sine

ss re

insu

red

unde

r a c

oins

uran

ce a

gree

men

t tha

t com

plie

s with

all

appl

icab

le re

insu

ranc

e re

serv

e cr

edit

“tra

nsfe

r of r

isk”

requ

irem

ents,

the

cedi

ng c

ompa

ny sh

all r

educ

e th

e va

lue

in p

ropo

rtion

to th

e bu

sine

ss c

eded

whi

le th

e as

sum

ing

com

pany

shal

l use

an

amou

nt c

onsi

sten

t with

the

busi

ness

ass

umed

.

A c

ompa

ny w

ho re

porte

d an

am

ount

in L

ine

(37)

last

yea

r may

cho

ose

to sm

ooth

the

Tota

l Ass

et R

equi

rem

ent.

A c

ompa

ny is

requ

ired

to g

et a

ppro

val f

rom

its d

omes

tic re

gula

tor p

rior

to c

hang

ing

its d

ecis

ion

abou

t sm

ooth

ing

from

the

prio

r yea

r.To

impl

emen

t sm

ooth

ing,

use

the

follo

win

g st

eps.

If a

com

pany

doe

s not

qua

lify

to s

moo

th o

r a d

ecis

ion

has

been

mad

e no

t to

smoo

th, g

o to

the

step

“R

educ

tion

for R

epor

ted

Stat

utor

y R

eser

ves.”

Inst

ruct

ions

–20

07 a

nd L

ater

1.D

eter

min

e th

e To

tal A

sset

Req

uire

men

t as t

he g

reat

er o

f tha

t pro

duce

d by

the

“Rec

omm

ende

d A

ppro

ach

for S

ettin

g R

isk-

Bas

ed C

apita

l Req

uire

men

ts fo

r Var

iabl

e A

nnui

ties

and

Sim

ilar

Prod

ucts

”pr

esen

ted

by th

e A

mer

ican

Aca

dem

y of

Act

uarie

s’ L

ife C

apita

l Ade

quac

y Su

bcom

mitt

ee to

the

Nat

iona

l Ass

ocia

tion

of I

nsur

ance

Com

mis

sion

er’s

Cap

ital A

dequ

acy

Task

For

ce (J

une

2005

)or t

he v

alue

pro

duce

d by

the

“Sta

ndar

d Sc

enar

io”

as o

utlin

ed a

bove

.2.

Det

erm

ine

the

aggr

egat

e ca

sh v

alue

for t

he c

ontra

cts c

over

ed b

y th

e St

ocha

stic

mod

elin

g re

quire

men

ts.

3.D

eter

min

e th

e ra

tio o

f TA

R /

CV

for c

urre

nt y

ear.

4.D

eter

min

e th

e To

tal A

sset

Req

uire

men

t as a

ctua

lly re

porte

d fo

r the

prio

r yea

r Lin

e (3

7).

5.D

eter

min

e th

e ag

greg

ate

cash

val

ue fo

r the

sam

e co

ntra

cts f

or th

e pr

ior y

ear-e

nd.

6.D

eter

min

e th

e ra

tio o

f TA

R /

CV

for p

rior y

ear.

7.D

eter

min

e a

ratio

as 0

.4*(

6) p

lus 0

.6*(

3) {

40%

prio

r yea

r rat

io a

nd 6

0% c

urre

nt y

ear r

atio

}.8.

Det

erm

ine

TAR

for c

urre

nt y

ear a

s the

pro

duct

of (

7) a

nd (2

) {ad

just

(2) t

o be

act

ual 1

2/31

cas

h va

lue}

.

Red

uctio

n fo

r Rep

orte

d St

atut

ory

Res

erve

s

The

amou

nt o

f the

TA

R (p

ost-F

eder

al In

com

e Ta

x) d

eter

min

ed u

sing

the

inst

ruct

ions

for t

he a

pplic

able

yea

r is r

educ

ed b

y th

e re

serv

e, n

et o

f rei

nsur

ance

, for

the

busi

ness

subj

ect t

o th

is

inst

ruct

ion

repo

rted

in th

e cu

rren

t sta

tuto

ry a

nnua

l sta

tem

ent.

Allo

catio

n of

Res

ults

to L

ine

(35)

and

Lin

e (3

7)

See

step

(9) l

ocat

ed in

the

over

view

sect

ion

at th

e be

ginn

ing

of th

e in

stru

ctio

ns fo

r thi

s lin

e.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

168/

17/2

018

Line

(37)

Cas

h Fl

ow M

odel

ing

for

the

C-3

RB

C R

equi

rem

ents

for

Var

iabl

e A

nnui

ties a

nd S

imila

r Pr

oduc

ts:

Inst

ruct

ions

for

2020

& L

ater

{Dra

ftin

g N

ote:

in

the

mat

eria

l tha

t fol

low

s, O

liver

Wym

an’s

pro

pose

d in

stru

ctio

ns a

re m

odifi

ed to

pre

sent

a m

ore

unde

rsta

ndab

le r

equi

rem

ent,

but t

he o

nly

chan

ges t

o ac

tual

req

uire

men

ts a

re fo

r: C

. Alte

rnat

ive

Met

hodo

logy

, E. P

hase

-in, F

. Sm

ooth

ing,

and

I. F

orm

at o

f doc

umen

tatio

n. }

Ove

rvie

w

The a

mou

nt re

porte

d on

Lin

e (35

) and

Lin

e (37

) is c

alcu

late

d us

ing

the 7

-ste

p pr

oces

s def

ined

bel

ow.

This

calc

ulat

ion

appl

ies t

o al

l pol

icie

s and

cont

ract

s tha

t hav

e bee

n va

lued

follo

win

g th

e re

quire

men

ts o

f AG

-43

or V

M-2

1. F

or c

ontra

cts

who

se re

serv

e w

asde

term

ined

usi

ng th

e A

ltern

ativ

e M

etho

dolo

gy (V

M-2

1 Se

ctio

n 7)

see

ste

p 3

whi

le a

ll ot

her c

ontra

cts

follo

w

step

s 1 a

nd 2

, the

n al

l con

tract

s fol

low

step

s 4 -

7.

Step

1 C

TE98

: Th

e fir

st st

ep is

to d

eter

min

e C

TE98

by a

pply

ing

the

one

of th

e tw

o m

etho

dolo

gies

des

crib

ed in

Par

agra

ph A

bel

ow.

Step

2 C

-3R

BC

: usi

ng th

e fo

rmul

as in

par

agra

ph B

, det

erm

ine

the

C-3

RB

C a

mou

nt b

ased

on

the

amou

nt c

alcu

late

d in

step

(1).

Floo

r thi

s am

ount

at $

0.

Step

3 D

eter

min

e th

e C

-3R

BC

usi

ng th

e A

ltern

ativ

e M

etho

dolo

gy fo

r any

bus

ines

s sub

ject

to th

at re

quire

men

ts a

s des

crib

ed in

Par

agra

ph C

.

Step

4 A

s de

scrib

ed in

Par

agra

ph D

bel

ow, t

he C

-3R

BC

am

ount

is th

e su

m o

f the

am

ount

s de

term

ined

in s

teps

2 a

nd 3

abo

ve, b

ut n

ot le

ss th

an z

ero.

The

Tot

al A

sset

Req

uire

men

t is

the

Stoc

hast

icR

eser

ve b

ased

on

the

requ

irem

ents

of V

M-2

1 pr

ior t

o th

e ap

plic

atio

n of

any

pha

se-in

, plu

s the

C-3

RB

C a

mou

nt.

Step

5: F

or a

com

pany

that

has

elec

ted

a Pha

se-in

for r

eser

ves f

ollo

win

g V

M-2

1 Se

ctio

n 2.

B.,

the C

-3R

BC

amou

nt is

to b

e pha

sed-

in o

ver t

he sa

me t

ime p

erio

d fo

llow

ing

the r

equi

rem

ents

in

par

agra

ph E

bel

ow.

Step

6 A

pply

the

smoo

thin

g ru

les (

if ap

plic

able

) to

the

C-3

RB

C a

mou

nt in

step

(4) o

r (5)

as a

pplic

able

.

Step

7 D

ivid

e th

e am

ount

from

Ste

p4,

5, o

r 6 (

as a

ppro

pria

te)

by (

1-en

acte

d m

axim

um f

eder

al c

orpo

rate

inco

me

tax

rate

). Sp

lit th

is a

mou

nt in

to a

n in

tere

st r

ate

risk

porti

on a

nd a

m

arke

t ris

k po

rtion

, as d

escr

ibed

in P

arag

raph

G.

The

inte

rest

rate

por

tion

of th

e ris

k sh

ould

be

incl

uded

in L

ine

(35)

and

the

mar

ket r

isk

porti

on in

Lin

e (3

7).

The

C-3

RB

C is

cal

cula

ted

as fo

llow

s:

A.

CTE

(98

)is

calc

ulat

ed a

s fo

llow

s: E

xcep

t for

pol

icie

s an

d co

ntra

cts

subj

ect t

o th

e A

ltern

ativ

e M

etho

dolo

gy (S

ee E

. bel

ow),

app

ly th

e C

TE m

etho

dolo

gy d

escr

ibed

in N

AIC

Val

uatio

n M

anua

l VM

-21

and

calc

ulat

e the

CTE

(98

) as

the

num

eric

al a

vera

ge o

f the

2 p

erce

nt la

rges

t val

ues o

f the

Sce

nario

Res

erve

s, as

def

ined

by S

ectio

n 4

of V

M-2

1. I

n pe

rfor

min

g th

is c

alcu

latio

n, th

e pr

oces

s and

met

hods

use

d to

calc

ulat

e th

e Sc

enar

io R

eser

ves u

se th

e re

quire

men

ts o

f VM

-21

and

shou

ld b

e th

e sa

me

as u

sed

for t

he re

serv

e ca

lcul

atio

ns. T

he e

ffect

of

Fed

eral

Inco

me

Tax

shou

ld b

e ha

ndle

d fo

llow

ing

one

of th

e fo

llow

ing

two

met

hods

1.

If u

sing

the

Mac

ro T

ax A

djus

tmen

t (M

TA):

The

mod

eled

cas

h flo

ws

will

igno

re th

e ef

fect

of F

eder

al In

com

e Ta

x. A

s a

resu

lt, fo

r eac

h in

divi

dual

sce

nario

, the

num

eric

alva

lue

of th

e Sc

enar

io G

reat

est P

rese

nt V

alue

use

d in

this

cal

cula

tion

shou

ld b

e id

entic

al to

that

for t

he s

ame

scen

ario

in th

e A

ggre

gate

Res

erve

cal

cula

tion

unde

r VM

-21.

Fede

ral I

ncom

e Ta

x is

refle

cted

late

r in

the

form

ula

in p

arag

raph

B.1

.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

178/

17/2

018

2.If

usin

g Sp

ecifi

c Ta

x R

ecog

nitio

n (S

TR):

At t

he o

ptio

n of

the

com

pany

, CTE

Afte

r-Ta

x (9

8) (C

TEA

T (9

8)) m

ay b

e ca

lcul

ated

usin

g an

app

roac

h in

whi

ch th

e ef

fect

of

Fede

ral I

ncom

e Ta

x is

refle

cted

in th

e pr

ojec

tion

of A

ccum

ulat

ed D

efic

ienc

ies,

as d

efin

ed in

Sec

tion

4.A

. of V

M-2

1, w

hen

calc

ulat

ing

the

Scen

ario

Res

erve

for e

ach

scen

ario

. To

refle

ct th

e ef

fect

of F

eder

al In

com

e Ta

x, th

e co

mpa

ny sh

ould

find

a re

ason

able

and

con

sist

ent b

asis

for a

ppro

xim

atin

g th

e ev

olut

ion

of ta

x re

serv

es in

the

proj

ectio

n, ta

king

into

acc

ount

rest

rictio

ns a

roun

d th

e si

ze o

f the

tax

rese

rves

(e.g

., th

at ta

x re

serv

e m

ust e

qual

or e

xcee

dth

e ca

sh su

rren

der v

alue

for a

giv

en c

ontra

ct).

The

Acc

umul

ated

Def

icie

ncy

at th

e en

d of

eac

h pr

ojec

tion

year

shou

ld a

lso

be d

isco

unte

d at

a ra

te th

at re

flect

s the

pro

ject

ed a

fter-

tax

disc

ount

rate

sin

that

yea

r. In

add

ition

, the

co

mpa

ny sh

ould

add

the

Tax

Adj

ustm

ent a

s des

crib

ed b

elow

to th

e ca

lcul

ated

CTE

AT

(98)

val

ue.

3.A

com

pany

that

has

ele

cted

to c

alcu

late

CTE

AT

(98)

usi

ng S

TR m

ay n

ot s

witc

h ba

ck to

usi

ng M

TA in

the

proj

ectio

n of

Acc

umul

ated

Def

icie

ncie

s w

ithou

t pro

min

ently

disc

losi

ng th

at c

hang

e in

the

certi

ficat

ion

and

supp

ortin

g m

emor

andu

m.

The

com

pany

shou

ld a

lso

disc

lose

the

met

hodo

logy

ado

pted

, and

the

ratio

nale

for i

tsad

optio

n, in

the

docu

men

tatio

n re

quire

d by

Par

agra

ph J

belo

w.

4.A

pplic

atio

n of

the

Tax

Adj

ustm

ent:

Und

er th

e U

.S. I

RC,

the

tax

rese

rve

is d

efin

ed. I

t can

nev

er e

xcee

d th

e st

atut

ory

rese

rve

nor b

e le

ss th

an th

e ca

sh su

rren

der v

alue

. If a

com

pany

is u

sing

STR

and

if th

e co

mpa

ny’s

act

ual t

ax re

serv

es e

xcee

d th

e pr

ojec

ted

tax

rese

rves

at t

he b

egin

ning

of t

he p

roje

ctio

n, a

tax

adju

stm

ent i

s req

uire

d.

The

CTEA

T (9

8) m

ust b

e in

crea

sed

on a

n ap

prox

imat

e ba

sis

to c

orre

ct fo

r the

und

erst

atem

ent o

f mod

eled

tax

expe

nse.

The

add

ition

al ta

xabl

e in

com

e at

the

time

of c

laim

w

ill b

e re

aliz

ed o

ver t

he p

roje

ctio

n an

d w

ill b

e ap

prox

imat

edus

ing

the

dura

tion

to w

orst

, i.e

., th

e du

ratio

n pr

oduc

ing

the

low

est p

rese

nt v

alue

for e

ach

scen

ario

. The

met

hod

of d

evel

opin

g th

e ap

prox

imat

e ta

x ad

just

men

t is d

escr

ibed

bel

ow.

The

incr

ease

to C

TEA

T (9

8) m

ay b

e ap

prox

imat

ed a

s the

cor

pora

te ta

x ra

te ti

mes

f tim

es th

e di

ffere

nce

betw

een

the

com

pany

’s a

ctua

l tax

rese

rves

and

pro

ject

ed ta

x re

serv

es

at th

e st

art o

f th

e pr

ojec

tions

. For

this

cal

cula

tion,

f is

cal

cula

ted

as f

ollo

ws:

For

the

scen

ario

s re

flect

ed in

cal

cula

ting

CTE

(98

), th

e Sc

enar

io G

reat

est P

rese

nt V

alue

is

dete

rmin

ed a

nd it

s ass

ocia

ted

proj

ectio

n du

ratio

n is

tabu

late

d. A

t eac

h su

ch d

urat

ion,

the

ratio

of t

he n

umbe

r of c

ontra

cts i

nfo

rce

(or c

over

ed li

ves f

or g

roup

con

tract

s) to

the

num

ber o

f con

tract

s in

forc

e (o

r cov

ered

live

s) a

t the

sta

rt of

the

mod

elin

g pr

ojec

tion

is c

alcu

late

d. T

he a

vera

ge ra

tio is

then

cal

cula

ted

over

all

CTE

(98)

sce

nario

s an

d f i

s on

e m

inus

this

ave

rage

ratio

. If t

he A

ltern

ativ

e M

etho

d is

use

d, f

is a

ppro

xim

ated

as 0

.5.

B.

Det

erm

inat

ion

of R

BC

am

ount

usi

ng st

ocha

stic

mod

elin

g:

1.If

usi

ng th

e M

TA:

Cal

cula

te th

e R

BC

Req

uire

men

t by

the

follo

win

g fo

rmul

a in

whi

ch th

e st

atut

ory

rese

rve

is th

e ac

tual

rese

rve

repo

rted

in th

e A

nnua

l Sta

tem

ent.

in th

e se

cond

term

–i.e

., th

e di

ffere

nce

betw

een

stat

utor

y re

serv

es a

nd ta

x re

serv

es m

ultip

lied

by th

e Fe

dera

l Inc

ome

Tax

Rat

e –

may

not

exc

eed

the

porti

on o

f the

com

pany

’s n

on-a

dmitt

ed

defe

rred

tax

asse

ts a

ttrib

utab

le to

the

sam

e po

rtfol

io o

f con

tract

s to

whi

ch V

M-2

1 is

app

lied

in c

alcu

latin

g st

atut

ory

rese

rves

:

25%

×( C

TE ( 9

8)+

Addi

tiona

l Sta

ndar

d Pr

ojec

tion

Amou

ntSt

atut

ory

Rese

rve)

×( 1

Fede

ral I

ncom

e Ta

x Ra

te)

( Sta

tuto

ry R

eser

veTa

x Re

serv

e)×

Fede

ral I

ncom

e Ta

x Ra

te

2.If

the

com

pany

ele

cts t

o us

e th

e ST

R:

the

C-3

RB

C is

det

erm

ined

by

the

follo

win

g fo

rmul

a:

25%

×( C

TEAT

( 98)

+Ad

ditio

nal S

tand

ard

Proj

ectio

n Am

ount

×( 1

Fede

ral I

ncom

e Ta

x Ra

te)

Stat

utor

y Re

serv

e)

The

Add

ition

al S

tand

ard

Proj

ectio

n A

mou

nt is

cal

cula

ted

usin

g th

e m

etho

dolo

gy o

utlin

ed in

Sec

tion

6 of

VM

-21.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

188/

17/2

018

C.

Det

erm

inat

ion

of C

-3R

BC

usi

ng A

ltern

ativ

e M

etho

dolo

gy:

This

cal

cula

tion

appl

ies

to a

ll po

licie

s an

d co

ntra

cts

that

hav

e be

en v

alue

d fo

llow

ing

the

requ

irem

ents

of A

G-4

3 or

VM

-21,

for w

hich

the

rese

rve

was

det

erm

ined

usi

ng th

e A

ltern

ativ

e M

etho

dolo

gy (V

M-2

1 Se

ctio

n 7)

. The

C-3

RB

C a

mou

nt is

det

erm

ined

by

appl

ying

the

met

hodo

logy

as

defin

ed in

A

ppen

dix

2 to

thes

e in

stru

ctio

ns.

D.

The

C-3

RB

C a

mou

ntis

the

sum

of t

he a

mou

nts d

eter

min

ed in

par

agra

phs B

and

Cab

ove,

but

not

less

than

zer

o. T

he T

otal

Ass

et R

equi

rem

enti

s def

ined

as t

he S

toch

astic

Res

erve

dete

rmin

ed a

ccor

ding

toV

M-2

1 Se

ctio

n 4

plus

the

C-3

RB

C a

mou

nt.

All

valu

es a

re p

rior t

o an

y co

nsid

erat

ion

of P

hase

-in a

llow

ance

s for

eith

er re

serv

e or

C-3

RB

C, o

r any

C-3

RB

C sm

ooth

ing

allo

wan

ce. T

he R

BC

val

ues a

re p

ost-t

ax.

E.Ph

ase

in:

A c

ompa

ny th

at h

as e

lect

ed to

pha

se-in

the

effe

ct o

f the

new

rese

rve

requ

irem

ents

follo

win

g V

M-2

1 Se

ctio

n 2.

B. s

hall

phas

e in

the

effe

ct o

n C

-3R

BC

ove

r the

sam

etim

e pe

riod,

usi

ng th

e fo

llow

ing

step

s:-

1. B

egin

with

the C

-3 R

BC

amou

nt fr

om st

ep 7

for D

ec. 3

1, 2

019

LR02

7 Li

ne (3

7) in

stru

ctio

ns fo

r all

busi

ness

with

in th

e sco

pe o

f the

Var

iabl

e Ann

uitie

s mod

elin

g re

quire

men

tsas

of 1

2/31

/19.

A

dd to

this

the

amou

nt o

f C-3

RB

C c

ompu

ted

in th

e sa

me

man

ner a

s the

201

9 va

lue

for a

ny re

insu

ranc

e ce

ded

that

is e

xpec

ted

to b

e re

capt

ured

in 2

020

and

in th

e sc

ope

of th

e V

aria

ble

Ann

uitie

s mod

elin

g re

quire

men

ts. T

his a

mou

nt is

201

9R

BC

-2.

Det

erm

ine

the

C-3

RBC

amou

nt a

s of 1

2/31

/19

usin

g pa

ragr

aphs

A, B

, C, a

nd D

for t

he sa

me

info

rce

busi

ness

as i

n 1.

Lab

eled

as 2

019

RB

C N

ew

-D

eter

min

e th

e ph

ase-

in a

mou

nt (P

IA)a

s the

exc

ess o

f 201

9RB

C N

ew o

ver 2

019R

BC

-Fo

r 12/

31/2

020,

com

pute

the

C-3

RB

C fo

llow

ing

para

grap

hs A

–D

abo

ve, t

hen

subt

ract

PIA

tim

es (2

/3)

-Fo

r 12/

31/2

021,

com

pute

the

C-3

RB

C fo

llow

ing

para

grap

hs A

–D

abo

ve, t

hen

subt

ract

PIA

tim

es (1

/3)

Gui

danc

e N

ote:

For a

com

pany

that

has

ado

pted

a P

hase

-in fo

r res

erve

s lo

nger

than

3 y

ears

, adj

ust t

he a

bove

form

ula

to re

flect

the

actu

al p

erio

d w

ith u

nifo

rm a

mor

tizat

ion

amou

nts

durin

g th

at p

erio

d.

F.Sm

ooth

ing

of C

-3 R

BC

am

ount

A c

ompa

ny s

houl

d de

cide

whe

ther

or n

ot to

sm

ooth

the

C-3

RB

C c

alcu

late

d in

par

agra

phD

or E

abo

ve to

det

erm

ine

the

amou

nt in

Lin

e (3

7).F

or a

ny b

usin

ess r

eins

ured

und

er a

co

insu

ranc

e ag

reem

ent t

hat c

ompl

ies w

ith a

ll ap

plic

able

rein

sura

nce

rese

rve

cred

it “t

rans

fer o

f ris

k” re

quire

men

ts, t

he c

edin

g co

mpa

ny sh

all r

educ

e th

e re

serv

e in

pro

porti

on to

the

busi

ness

ced

ed w

hile

the

assu

min

g co

mpa

ny s

hall

use

a re

serv

e co

nsis

tent

with

the

busi

ness

ass

umed

.

A c

ompa

ny m

ay c

hoos

e to

sm

ooth

the

C-3

RB

Cca

lcul

ated

in p

arag

raph

D o

r E a

bove

. A c

ompa

ny is

requ

ired

to g

et a

ppro

val f

rom

its

dom

estic

regu

lato

r prio

r to

chan

ging

its

deci

sion

abo

ut sm

ooth

ing

from

the

prio

r yea

r. In

add

ition

, a c

ompa

ny th

at h

as e

lect

ed to

smoo

th th

e ris

k-ba

sed

capi

tal i

s req

uire

d to

get

app

rova

l fro

m it

s dom

estic

regu

lato

r prio

r to

smoo

thin

g if

it ha

s exp

erie

nced

a m

ater

ial c

hang

e in

its C

lear

ly D

efin

ed H

edgi

ng S

trate

gy fr

om th

e pr

ior y

ear.

For t

his p

urpo

se, a

com

pany

’s C

lear

ly D

efin

ed H

edgi

ng S

trate

gy

is c

onsi

dere

d to

hav

e ex

perie

nced

a m

ater

ial c

hang

e if

any

of th

e ite

ms o

utlin

ed in

VM

-21

Sect

ions

9in

the

curr

ent y

ear d

iffer

s fro

m th

at in

the

prio

r yea

r.

To im

plem

ent s

moo

thin

g, u

se th

e fo

llow

ing

step

s. If

a co

mpa

ny d

oes n

ot q

ualif

y to

smoo

th o

r a d

ecis

ion

has b

een

mad

e no

t to

smoo

th, g

o to

par

agra

ph G

.

1.D

eter

min

e th

e C

-3 R

BC

amou

nt c

alcu

late

d in

par

agra

phD

or E

abo

ve2.

Det

erm

ine

the

aggr

egat

e re

serv

e fo

r the

con

tract

s cov

ered

by

the

Var

iabl

e A

nnui

ty S

toch

astic

mod

elin

g re

quire

men

ts.

3.D

eter

min

e th

e ra

tio o

f the

C-3

RB

C /

rese

rve

for c

urre

nt y

ear.

4.D

eter

min

e th

e C

-3 R

BC

as a

ctua

lly re

porte

d fo

r the

prio

r yea

r Lin

es (3

5) p

lus (

37)a

nd a

djus

t tha

t am

ount

to a

pos

t-tax

amou

ntby

mul

tiply

ing

by (1

-ena

cted

max

imum

fede

ral

corp

orat

e in

com

e ta

xra

te).

5.D

eter

min

e th

e ag

greg

ate

rese

rve

for t

he c

ontra

cts i

n sc

ope

of th

ese

requ

irem

ents

for t

he p

rior y

ear-e

nd.

6.D

eter

min

e th

e ra

tio o

f the

C-3

RB

C/ r

eser

ve fo

r prio

r yea

r.7.

Det

erm

ine

a ra

tio a

s 0.4

*(6)

plu

s 0.6

*(3)

{40

% p

rior y

ear r

atio

and

60%

cur

rent

yea

r rat

io}.

8.D

eter

min

e th

e ris

k-ba

sed

capi

tal f

or c

urre

nt y

ear a

s the

pro

duct

of (

7) a

nd (2

) {ad

just

(2) t

o be

act

ual 1

2/31

rese

rve}

.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

198/

17/2

018

G.

The

amou

ntde

term

ined

in p

arag

raph

s D.,

E., o

r F. a

bove

for t

he c

ontra

cts s

hall

be d

ivid

ed b

y (1

-ena

cted

max

imum

fede

ral c

orpo

rate

inco

me

tax

rate

) to

arriv

e at

a p

re-ta

xam

ount

.Th

is p

re-ta

x am

ount

shal

l be

split

into

a c

ompo

nent

for i

nter

est r

ate

risk

and

a co

mpo

nent

for m

arke

t ris

k.N

eith

er c

ompo

nent

may

be

less

than

zer

o. T

he p

rovi

sion

for t

he in

tere

st

rate

risk

, if a

ny, i

s to

be re

porte

d in

Lin

e (3

5). T

he m

arke

t ris

k co

mpo

nent

is re

porte

d in

Lin

e(3

7).

The

amou

nt re

porte

d in

Lin

e (3

7)is

to b

e co

mbi

ned

with

the

C-1

csco

mpo

nent

for c

ovar

ianc

e pu

rpos

es.

H.

The

way

gro

upin

g (o

f fun

ds a

nd o

f con

tract

s), s

ampl

ing,

num

ber o

f sce

nario

s, an

d si

mpl

ifica

tion

met

hods

are

han

dled

is th

e re

spon

sibi

lity

of th

e co

mpa

ny. H

owev

er, a

ll th

ese

met

hods

are

sub

ject

to A

ctua

rial S

tand

ards

of P

ract

ice,

sup

porti

ng d

ocum

enta

tion

and

just

ifica

tion,

and

sho

uld

be id

entic

al to

thos

e us

ed in

cal

cula

ting

the

com

pany

’s s

tatu

tory

re

serv

es fo

llow

ing

VM

-21.

I.C

ertif

icat

ion

of th

e w

ork

done

to se

t the

C-3

RB

C a

mou

nt fo

r Var

iabl

e A

nnui

ties a

nd S

imila

r pro

duct

s are

the

sam

e as

are

requ

ired

for r

eser

ves a

s par

t of V

M-3

1. T

hece

rtific

atio

nsh

ould

spec

ify th

at th

e ac

tuar

y is

not o

pini

ng o

n th

e ad

equa

cy o

f the

com

pany

's su

rplu

s or i

ts fu

ture

fina

ncia

l con

ditio

n.

The

certi

ficat

ion(

s) sh

ould

be

subm

itted

by

hard

cop

y w

ith a

ny st

ate

requ

iring

an

RB

C h

ard

copy

.

J.A

n ac

tuar

ial m

emor

andu

m s

houl

d be

con

stru

cted

doc

umen

ting

the

met

hodo

logy

and

ass

umpt

ions

upo

n w

hich

the

requ

ired

capi

tal f

or th

e va

riabl

e an

nuiti

es a

nd s

imila

r pro

duct

sis

det

erm

ined

. The

mem

oran

dum

sho

uld

be d

evel

oped

bas

ed o

n th

e re

quire

men

ts o

f VM

-31.

At t

he c

ompa

ny’s

opt

ion,

the

docu

men

tatio

n of

rese

rves

and

RB

C m

ay b

e m

erge

d in

to a

sing

le A

ctua

rial M

emor

andu

m w

ith a

ny d

iffer

ence

s for

C-3

RB

C d

iscu

ssed

in a

sepa

rate

sect

ion

of th

e M

emor

andu

m.

Thes

e di

ffere

nces

will

typi

cally

incl

ude

the

basi

s for

co

nsid

erin

g fe

dera

linc

ome

tax,

whe

ther

or n

ot sm

ooth

ing

was

app

lied

and

whe

ther

or n

ot a

pha

se in

was

use

d. T

his m

emor

andu

m w

ill b

e co

nfid

entia

l and

ava

ilabl

e to

regu

lato

rs

upon

requ

est.

If th

e co

mpa

ny e

lect

s to

cal

cula

te C

TEA

T (9

8) u

sing

STR

whe

reby

the

effe

ct o

f Fed

eral

Inc

ome

Tax

is r

efle

cted

in th

e pr

ojec

tion

of A

ccum

ulat

ed D

efic

ienc

ies,

the

com

pany

sh

ould

still

dis

clos

e in

the

mem

oran

dum

the

Tota

l Ass

et R

equi

rem

ent a

nd C

-3R

BC

that

wou

ld b

e ob

tain

ed if

the

com

pany

had

ele

cted

to u

se th

e M

TA m

etho

d.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

208/

17/2

018

The

lines

on

the

alte

rnat

ive

calc

ulat

ions

pag

e w

ill n

ot b

e re

quire

d fo

r 201

9or

late

r.

The

tota

l of a

ll an

nual

stat

emen

tres

erve

s rep

rese

ntin

g ex

posu

re to

C–3

risk

on

Line

(36)

shou

ld e

qual

the

follo

win

g:Ex

hibi

t 5, C

olum

n 2,

Lin

e 01

9999

9–

Page

2, C

olum

n 3,

Lin

e 6

+Ex

hibi

t 5, C

olum

n 2,

Lin

e 02

9999

9+

Exhi

bit 5

, Col

umn

2, L

ine

0399

999

+Ex

hibi

t 7, C

olum

n 1,

Lin

e 14

+Se

para

te A

ccou

nts

Page

3, C

olum

n 3,

Lin

e 1

plus

Lin

e 2

afte

r de

duct

ing

(a)

fund

s in

uni

tized

sep

arat

e ac

coun

ts w

ith n

o un

derly

ing

guar

ante

ed m

inim

um r

etur

n an

d no

un

rein

sure

d gu

aran

teed

livi

ng b

enef

its; (

b) n

on-in

dexe

d se

para

te a

ccou

nts t

hat a

re n

ot c

ash

flow

test

ed w

ith g

uara

ntee

s les

s tha

n 4

perc

ent;

(c) n

on-c

ash-

flow

-test

ed e

xper

ienc

e ra

ted

pens

ion

rese

rves

/liab

ilitie

s; a

nd (d

) gua

rant

eed

inde

xed

sepa

rate

acc

ount

s usi

ng a

Cla

ss II

inve

stm

ent s

trate

gy.

–N

on p

olic

yhol

der r

eser

ves r

epor

ted

on E

xhib

it 7

+Ex

hibi

t 5, C

olum

n 2,

Lin

e 07

9999

7+

Sche

dule

S, P

art 1

, Sec

tion

1, C

olum

n 12

–Sc

hedu

le S

, Par

t 3, S

ectio

n 1,

Col

umn

14


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

218/

17/2

018

App

endi

x 1

–C

ash

Flow

Tes

ting

Mod

elin

g fo

r C

-3 R

BC

This

app

endi

x is

app

licab

le fo

r all

com

pani

es w

ho d

o C

ash

Flow

Tes

ting

for C

-3 R

BC

for C

erta

in A

nnui

ties a

nd S

ingl

e Pr

emiu

m L

ife p

rodu

cts.

The

met

hod

of d

evel

opin

g th

e C

-3 c

ompo

nent

for t

hese

con

tract

s is b

uild

ing

on th

e w

ork

of th

e as

set a

dequ

acy

mod

elin

g, b

ut u

sing

inte

rest

scen

ario

s des

igne

d to

hel

p ap

prox

imat

e th

e 95

thpe

rcen

tile

C-3

risk

.

The

C-3

com

pone

nt is

to b

e ca

lcul

ated

as t

he su

m o

f fou

r am

ount

s, bu

t sub

ject

to a

min

imum

. The

cal

cula

tion

is:

(a)

For C

erta

in A

nnui

ties

or S

ingl

e Pr

emiu

m L

ife In

sura

nce

prod

ucts

oth

er th

an e

quity

-inde

xed

prod

ucts

, whe

ther

writ

ten

dire

ctly

or a

ssum

ed th

roug

h re

insu

ranc

e, th

at th

e co

mpa

ny

test

s for

ass

et a

dequ

acy

anal

ysis

usi

ng c

ash

flow

test

ing,

an

actu

ary

shou

ld c

alcu

late

the

C-3

requ

irem

ent b

ased

on

the

sam

e ca

sh fl

ow m

odel

s and

ass

umpt

ions

use

d an

d sa

me

“as-

of”

date

as f

or a

sset

ade

quac

y, b

ut w

ith a

diff

eren

t set

of i

nter

est s

cena

rios a

nd a

diff

eren

t mea

sure

men

t of r

esul

ts. A

wei

ghte

d av

erag

e of

a su

bset

of t

he sc

enar

io-s

peci

fic re

sults

isus

ed to

det

erm

ine

the

C-3

requ

irem

ent.

The

resu

lt is

to b

e di

vide

d by

(1-e

nact

ed m

axim

umfe

dera

l cor

pora

te in

com

e ta

x ra

te)t

o pu

t it o

n a

pre-

tax

basis

for L

R027

Inte

rest

Rat

eR

isk

and

Mar

ket R

isk

Col

umn

(2) L

ine

(33)

.

If th

e “a

s-of

” da

te o

f thi

s te

stin

g is

not

Dec

. 31,

the

ratio

of t

he C

-3 re

quire

men

t to

rese

rves

on

the

“as-

of”

date

is a

pplie

d to

the

year

-end

rese

rves

, sim

ilarly

gro

uped

, to

dete

rmin

eth

e ye

ar-e

nd C

-3 re

quire

men

t for

this

cate

gory

.

(b)

Equi

ty-in

dexe

d pr

oduc

ts a

re to

use

the

exis

ting

C-3

RB

C fa

ctor

s, no

t the

resu

lts o

f cas

h flo

w te

stin

g.

(c)

For a

ll ot

her p

rodu

cts

(eith

er n

on-c

ash-

flow

-test

ed o

r tho

se o

utsi

de th

e pr

oduc

t sco

pe d

efin

ed a

bove

) the

C-3

requ

irem

ents

are

cal

cula

ted

usin

g cu

rren

t exi

stin

g C

-3 R

BC

fact

ors

and

inst

ruct

ions

.

(d)

For c

alla

ble/

pre-

paya

ble

asse

ts (i

nclu

ding

IOs a

nd si

mila

r inv

estm

ents

othe

r tha

n th

ose

used

for t

estin

g in

com

pone

nt a

) abo

ve, t

he a

fter-t

ax C

-3 re

quire

men

t is 5

0.07

6.9

perc

ent o

f th

e ex

cess

, if a

ny, o

f boo

k/ad

just

ed c

arry

ing

valu

e ab

ove

curr

ent c

all p

rice.

The

cal

cula

tion

is to

be

done

on

an a

sset

-by-

asse

t bas

is.

For c

alla

ble/

pre-

paya

ble

asse

ts u

sed

for t

estin

gin

com

pone

nt a

) abo

ve a

s wel

l as t

hose

use

d in

C-3

P2 te

stin

g, th

e C

-3 fa

ctor

requ

irem

ent i

s zer

o.

The

tota

l C-3

com

pone

nt is

the

sum

of (

a), (

b), (

c) a

nd (d

), bu

t not

less

than

hal

f the

C-3

com

pone

nt b

ased

on

curr

ent f

acto

rs a

nd in

stru

ctio

ns.

For

this

C-3

cal

cula

tion,

“C

erta

in A

nnui

ties”

mea

ns p

rodu

cts

with

the

char

acte

ristic

s of

def

erre

d an

d im

med

iate

ann

uitie

s, st

ruct

ured

set

tlem

ents

, gua

rant

eed

sepa

rate

acc

ount

s (e

xclu

ding

gua

rant

eed

inde

xed

sepa

rate

acc

ount

s fol

low

ing

a C

lass

II in

vest

men

t stra

tegy

) and

GIC

s (in

clud

ing

synt

hetic

GIC

s and

fund

ing

agre

emen

ts).

Deb

t inc

urre

d fo

r fun

ding

an

inve

stm

ent a

ccou

nt is

incl

uded

if c

ash

flow

test

ing

of th

e ar

rang

emen

t is

requ

ired

by th

e in

sure

r’s

stat

e of

dom

icile

for a

sset

ade

quac

y an

alys

is. T

he e

quity

-bas

ed p

ortio

ns o

f vV

aria

ble

annu

ity p

rodu

cts a

re n

ot to

be

incl

uded

, but

incl

udin

ggu

aran

teed

fixe

d op

tions

with

in su

ch p

rodu

cts,

area

s the

y ar

e se

para

tely

test

ed u

nder

the

requ

irem

ents

for V

aria

ble

Ann

uitie

s and

Sim

ilar P

rodu

cts.

See

App

endi

x 1b

for f

urth

er d

iscu

ssio

n.

The

com

pany

may

use

eith

er a

sta

ndar

d 50

sce

nario

set

of i

nter

est r

ates

or a

n al

tern

ativ

e, b

ut m

ore

cons

erva

tive,

12

scen

ario

set (

for p

art a

, abo

ve).

It m

ay u

se th

e sm

alle

r set

for

som

e pr

oduc

ts a

nd th

e la

rger

one

for o

ther

s. D

etai

ls o

f the

cas

h flo

w te

stin

g fo

r C-3

RB

C m

etho

dolo

gy a

re c

onta

ined

in A

ppen

dix

1a.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

228/

17/2

018

In o

rder

to a

llow

tim

e fo

r the

add

ition

al w

ork

effo

rt, a

n es

timat

ed v

alue

is p

erm

itted

for t

he y

ear-

end

annu

al s

tate

men

t. Fo

r the

RB

C e

lect

roni

c fil

ing,

the

actu

al re

sults

of t

he c

ash

flow

test

ing

for C

-3 R

BC

will

be

requ

ired.

If th

e ac

tual

RB

C v

alue

exc

eeds

that

est

imat

ed e

arlie

r in

the

blan

ks fi

ling

by m

ore

than

5 p

erce

nt, o

r if t

he a

ctua

l val

ue tr

igge

rs re

gula

tory

ac

tion,

a re

vise

d fil

ing

with

the

NA

IC a

nd th

e st

ate

of d

omic

ile is

requ

ired

by Ju

ne 1

5; o

ther

wis

e, re

-fili

ng is

per

mitt

ed b

ut n

ot re

quire

d.

The

risk-

base

d ca

pita

l sub

mis

sion

is to

be

acco

mpa

nied

by

a st

atem

ent f

rom

the

appo

inte

d ac

tuar

y ce

rtify

ing

that

in h

is o

r her

opi

nion

the

assu

mpt

ions

use

d fo

r the

se c

alcu

latio

ns

are

not u

nrea

sona

ble

for t

he p

rodu

cts,

scen

ario

s an

d pu

rpos

e be

ing

test

ed. T

his

C-3

Ass

umpt

ion

Stat

emen

t is

requ

ired

from

the

appo

inte

d ac

tuar

y ev

en if

the

cash

flow

test

ing

for

C-3

RB

C is

don

e by

a d

iffer

ent a

ctua

ry.

T he

cash

flow

test

ing

used

for t

his p

urpo

se w

ill u

se a

ssum

ptio

ns a

s to

cash

flow

s, as

sets

ass

ocia

ted

with

test

ed li

abili

ties,

futu

re in

vest

men

t stra

tegy

, rat

e sp

read

s, “a

s-of

” da

te a

nd

how

neg

ativ

e ca

sh fl

ow is

refle

cted

con

siste

nt w

ith th

ose

used

for c

ash

flow

test

ing

for a

sset

ade

quac

y pu

rpos

es (e

xcep

t tha

t if n

egat

ive

cash

flow

is m

odel

ed b

y bo

rrow

ing,

the

actu

ary

need

s to

mak

e su

re th

at th

e am

ount

and

cos

t of b

orro

win

g ar

e re

ason

able

for t

hat p

artic

ular

sce

nario

of t

he C

-3 te

stin

g).T

he o

ther

diff

eren

ces

are

the

inte

rest

sce

nario

s as

sum

ptio

ns a

nd h

ow th

e re

sults

are

use

d.

It is

impo

rtant

that

ass

umpt

ions

be

revi

ewed

for r

easo

nabl

enes

s un

der t

he s

ever

e sc

enar

ios

used

for C

-3 R

BC

cas

h flo

w te

stin

g. T

he a

ssum

ptio

ns u

sed

for c

ash

flow

test

ing

may

ne

ed to

be

mod

ified

so a

s to

prod

uce

reas

onab

le re

sults

in se

vere

scen

ario

s.

The

actu

ary

mus

t als

o en

sure

that

the

cash

flow

test

ing

used

for t

he 5

0 or

12

scen

ario

s doe

s not

dou

ble-

coun

t cas

h flo

w o

ffset

s to

the

inte

rest

rate

risk

s. Th

at is

, tha

t the

cal

cula

tions

do

not

redu

ce C

-3 a

nd a

noth

er R

BC

com

pone

nt fo

r the

sam

e m

argi

ns. F

or e

xam

ple,

cer

tain

rese

rve

mar

gins

on

som

e gu

aran

teed

sepa

rate

acc

ount

pro

duct

s ser

ve a

n A

VR

role

and

ar

e cr

edite

d ag

ains

t the

C-1

o re

quire

men

t. To

that

deg

ree,

thes

e m

argi

ns sh

ould

be

rem

oved

from

the

rese

rve

used

for C

-3 R

BC

cas

h flo

w te

stin

g.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

238/

17/2

018

App

endi

x 1a

–C

ash

Flow

Tes

ting

Mod

elin

g fo

r C

-3 R

BC

Met

hodo

logy

Gen

eral

App

roac

h

1.Th

e un

derly

ing

asse

t and

liab

ility

mod

el(s

) are

thos

e us

ed fo

r yea

r-en

d A

sset

Ade

quac

y A

naly

sis c

ash

flow

test

ing,

or a

con

sist

ent m

odel

.

2.R

un th

e sc

enar

ios (

12 o

r 50)

pro

duce

d fr

om th

e in

tere

st-r

ate

scen

ario

gen

erat

or.

3.Th

e st

atut

ory

capi

tal a

nd s

urpl

us p

ositi

on, S

(t), s

houl

d be

cap

ture

d fo

r eve

ry sc

enar

io fo

r eac

h ca

lend

ar y

ear-e

nd o

f the

test

ing

horiz

on. T

he c

apita

l and

surp

lus p

ositi

on is

equ

al to

st

atut

ory

asse

ts le

ss st

atut

ory

liabi

litie

s for

the

portf

olio

.

4.Fo

r eac

h sc

enar

io, t

he C

-3 m

easu

re is

the

mos

t neg

ativ

e of

the

serie

s of p

rese

nt v

alue

s S(t)

*pv(

t), w

here

pv(

t) is

the

accu

mul

ated

dis

coun

t fac

tor f

or t

year

s usi

ng 1

05 p

erce

nt o

f the

af

ter-

tax

one-

year

Tre

asur

y ra

tes f

or th

at sc

enar

io. I

n ot

her w

ords

:

t

tit

pv1

1/(1)(

)

5.R

ank

the

scen

ario

-spe

cific

C-3

mea

sure

s in

des

cend

ing

orde

r, w

ith s

cena

rio n

umbe

r 1’s

mea

sure

bei

ng th

e po

sitiv

e ca

pita

l am

ount

nee

ded

to e

qual

the

very

wor

st pr

esen

t val

ue

mea

sure

.

6.Ta

king

the

wei

ghte

d av

erag

e of

a su

bset

of t

he sc

enar

io sp

ecifi

c C

-3 sc

ores

der

ives

the

final

C-3

afte

r-tax

fact

or.

(a)

For t

he 5

0 sc

enar

io se

t, th

e C

-3 sc

ores

are

mul

tiplie

d by

the

follo

win

g se

ries o

f wei

ghts

:

----

----

----

----

----

----

----

----

----

-W

eigh

ting

Tabl

e --

----

-----

----

----

----

----

----

----

----

--

Scen

ario

Ran

k:

1716

1514

1312

1110

98

76

5W

eigh

t:0.

020.

040.

060.

080.

100.

120.

160.

120.

100.

080.

060.

040.

02

The

sum

of t

hese

pro

duct

s is t

he C

-3 c

harg

e fo

r the

pro

duct

.

(b)F

or th

e 12

scen

ario

set,

the

char

ge is

cal

cula

ted

as th

e av

erag

e of

the

C-3

scor

es ra

nked

2 a

nd 3

, but

can

not b

e le

ss th

an h

alf t

he w

orst

scen

ario

scor

e.

7.If

mul

tiple

ass

et/li

abili

ty p

ortfo

lios

are

test

ed a

nd a

ggre

gate

d, a

n ag

greg

ate

C-3

cha

rge

can

be d

eriv

ed b

y fir

st s

umm

ing

the

S(t)'

s fr

om a

ll th

e po

rtfol

ios

(by

scen

ario

) an

d th

en

follo

win

g St

eps 2

thro

ugh

6 ab

ove.

An

alte

rnat

ive

met

hod

is to

cal

cula

te th

e C

-3 sc

ore

by sc

enar

io fo

r eac

h pr

oduc

t, su

m th

em b

y sc

enar

io, t

hen

orde

r the

m b

y ra

nk a

nd a

pply

the

abov

e w

eigh

ts.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

248/

17/2

018

Sing

le S

cena

rio C

-3 M

easu

rem

ent C

onsi

dera

tions

1.G

ENER

AL

MET

HO

D -

This

app

roac

h in

corp

orat

es in

terim

val

ues,

cons

iste

nt w

ith th

e ap

proa

ch u

sed

for b

ond,

mor

tgag

e an

d m

orta

lity

RB

C fa

ctor

qua

ntifi

catio

n. T

he a

ppro

ach

esta

blis

hes

the

risk

mea

sure

in te

rms

of a

n ab

solu

te le

vel o

f ris

k (e

.g.,

solv

ency

) rat

her t

han

vola

tility

aro

und

an e

xpec

ted

leve

l of r

isk.

It a

lso re

cogn

izes

rese

rve

cons

erva

tism

, to

the

degr

ee th

at su

ch c

onse

rvat

ism

has

n’t b

een

used

els

ewhe

re.

2.IN

ITIA

L A

SSET

S =

RES

ERV

ES -

Con

sist

ent w

ith a

ppoi

nted

act

uary

pra

ctic

e, th

e ca

sh fl

ow m

odel

s are

run

with

initi

al a

sset

s equ

al to

rese

rves

; tha

t is,

no su

rplu

s ass

ets a

re u

sed.

3.A

VR

-Exi

sting

AV

R-r

elat

ed a

sset

s sho

uld

not b

e in

clud

ed in

the

initi

al a

sset

s use

d in

the

C-3

mod

elin

g. T

hese

ass

etsa

re a

vaila

ble

for f

utur

e cr

edit

loss

dev

iatio

ns o

ver a

nd a

bov e

expe

cted

cre

dit l

osse

s. Th

ese

devi

atio

ns a

re c

over

ed b

y C

-1 ri

sk c

apita

l. Si

mila

rly, f

utur

e A

VR

con

tribu

tions

shou

ld n

ot b

e m

odel

ed. H

owev

er, t

he e

xpec

ted

cred

it lo

sses

shou

ld b

ein

the

cash

flow

mod

elin

g. (D

evia

tions

from

exp

ecte

d ar

e co

vere

d by

bot

h th

e A

VR

and

the

C-1

risk

capi

tal.)

4.IM

R -

IMR

ass

ets s

houl

d be

use

d fo

r C-3

mod

elin

g. (A

lso

see

#9 –

Dis

inve

stm

ent S

trate

gy.)

5.IN

TER

IM M

EASU

RE

-Ret

aine

d st

atut

ory

surp

lus (

i.e.,

stat

utor

y as

sets

less

stat

utor

y lia

bilit

ies)

is u

sed

as th

e ye

ar-to

-yea

r int

erim

mea

sure

.

6.TE

STIN

G H

OR

IZO

NS

-Sur

plus

ade

quac

y sh

ould

be

test

ed o

ver a

per

iod

that

ext

ends

to a

poi

nt a

t whi

ch c

ontri

butio

ns to

surp

lus o

n a

clos

ed b

lock

are

imm

ater

ial i

n re

latio

nshi

pto

the

anal

ysis

. If s

ome

prod

ucts

are

bei

ng c

ash

flow

test

ed fo

r Ass

et A

dequ

acy

Ana

lysi

s ove

r a lo

nger

per

iod

than

the

30 y

ears

gen

erat

ed b

y th

e in

tere

st-r

ate

scen

ario

gen

erat

or, t

hesc

enar

io ra

tes s

houl

d be

hel

d co

nsta

nt a

t the

yea

r 30

leve

l for

all

futu

re y

ears

. A c

onsi

sten

t tes

ting

horiz

on is

impo

rtant

for a

ll lin

es if

the

C-3

resu

lts fr

om d

iffer

ent l

ines

of b

usin

ess

are

aggr

egat

ed.

7.TA

X T

REA

TMEN

T -T

he ta

x tre

atm

ent s

houl

d be

con

sist

ent w

ith th

at u

sed

in A

sset

Ade

quac

y A

naly

sis.

App

ropr

iate

disc

losu

re o

f tax

ass

umpt

ions

may

be

requ

i red.

8.R

EIN

VES

TMEN

T ST

RA

TEG

Y -

The

rein

vest

men

t stra

tegy

shou

ld b

e th

at u

sed

in A

sset

Ade

quac

y A

naly

sis m

odel

ing.

9.D

ISIN

VES

TMEN

T ST

RA

TEG

Y -

In g

ener

al, n

egat

ive

cash

flow

s sh

ould

be

hand

led

just

as t

hey

are

in th

e A

sset

Ade

quac

y A

naly

sis.

The

one

cave

at is

, sin

ce th

e R

BC

sce

nario

sar

e m

ore

seve

re, m

odel

s tha

t dep

end

on b

orro

win

g ne

ed to

be

revi

ewed

to b

e co

nfid

ent t

hat l

oans

in th

e ne

cess

ary

volu

me

are

likel

y to

be

avai

labl

e un

der t

hese

circ

umst

ance

s at a

rate

con

sist

ent w

ith th

e m

odel

’s a

ssum

ptio

ns. I

f not

, adj

ustm

ents

nee

d to

be

mad

e.

If ne

gativ

e ca

sh fl

ows a

re h

andl

ed b

y se

lling

ass

ets,

then

app

ropr

iate

mod

elin

g of

con

tribu

tions

and

with

draw

als t

o th

e IM

R n

eed

to b

e re

flect

ed in

the

mod

elin

g.

10.

STA

TUTO

RY

PR

OFI

TS R

ETA

INED

-Th

e m

easu

re is

bas

ed o

n a

prof

its re

tain

ed m

odel

, ant

icip

atin

g th

at s

tatu

tory

net

inco

me

earn

ed o

ne p

erio

d is

reta

ined

to s

uppo

rt ca

pita

lre

quire

men

ts in

futu

re p

erio

ds. I

n ot

her w

ords

, no

stoc

khol

der d

ivid

ends

are

with

draw

n, b

ut p

olic

yhol

der d

ivid

ends

, exc

ess

inte

rest

, dec

lare

d ra

tes,

etc.

, are

mod

eled

real

istic

ally

and

assu

med

, pai

d or

cre

dite

d.

11.

LIA

BIL

ITY

and

ASS

ET A

SSU

MPT

ION

S -T

he li

abili

ty a

nd a

sset

ass

umpt

ions

sho

uld

be th

ose

used

in A

sset

Ade

quac

y A

naly

sis

mod

elin

g. D

iscl

osur

e of

thes

e as

sum

ptio

ns m

aybe

requ

ired.

12.

SEN

SITI

VIT

Y T

ESTI

NG

-K

ey a

ssum

ptio

ns s

hall

be s

tress

test

ed (

e.g.

, lap

ses

incr

ease

d by

50

perc

ent)

to e

valu

ate

sens

itivi

ty o

f th

e re

sulti

ng C

-3re

quire

men

t to

the

vario

usas

sum

ptio

ns m

ade

by th

e ac

tuar

y. D

iscl

osur

e of

thes

e re

sults

may

be

requ

ired.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

258/

17/2

018

App

endi

x 1b

-Fr

eque

ntly

Ask

ed Q

uest

ions

for

Cas

h Fl

ow T

estin

g M

odel

ing

for

C-3

RB

C

1.W

here

can

the

scen

ario

gen

erat

or b

e fo

und?

Wha

t is n

eede

d to

run

it?

The

scen

ario

gen

erat

or is

a M

icro

soft

Exce

l spr

eads

heet

. By

ente

ring

the

Trea

sury

yie

ld c

urve

at t

he d

ate

for w

hich

the

test

ing

is d

one,

it w

ill g

ener

ate

the

sets

of 5

0 or

12

scen

ario

s.It

requ

ires

Win

dow

s 95

or h

ighe

r. Th

is s

prea

dshe

et a

nd in

stru

ctio

ns a

re a

vaila

ble

on th

e N

AIC

Web

site

at (

http

://w

ww

.nai

c.or

g/cm

te_e

_lrb

c.ht

m).

It is

als

o av

aila

ble

on d

iske

ttefr

om th

e A

mer

ican

Aca

dem

y of

Act

uarie

s.

2.Th

e re

sults

may

incl

ude

sens

itive

info

rmat

ion

in so

me

inst

ance

s. H

ow c

an it

be

kept

con

fiden

tial?

As p

rovi

ded

for i

n Se

ctio

n 8

of th

e R

isk-

Bas

ed C

apita

l (R

BC

) For

Insu

rers

Mod

el A

ct, a

ll in

form

atio

n in

supp

ort o

f and

pro

vide

d in

the

RB

C re

ports

(to

the

exte

nt th

e in

form

atio

nth

erei

n is

not

req

uire

d to

be

set f

orth

in a

pub

licly

ava

ilabl

ean

nual

sta

tem

ent s

ched

ule)

, with

res

pect

to a

ny d

omes

tic o

r fo

reig

n in

sure

r, w

hich

is f

iled

with

the

com

mis

sione

rco

nstit

ute

info

rmat

ion

that

mig

ht b

e da

mag

ing

to th

e in

sure

r if m

ade

avai

labl

e to

its

com

petit

ors,

and

ther

efor

e sh

all b

e ke

pt c

onfid

entia

l by

the

com

mis

sion

er. T

his

info

rmat

ion

shal

l not

be

mad

e pu

blic

or b

e su

bjec

t to

subp

oena

, oth

er th

an b

y th

e co

mm

issi

oner

and

then

onl

y fo

r the

pur

pose

of e

nfor

cem

ent a

ctio

ns ta

ken

by th

e co

mm

issi

oner

und

er th

e R

isk-

Bas

ed C

apita

l (R

BC

) For

Insu

rers

Mod

el A

ctor

any

oth

er p

rovi

sion

of t

he in

sura

nce

law

s of t

he st

ate.

3.Th

e de

finiti

on o

f the

ann

uitie

s cat

egor

y ta

lks a

bout

“de

bt in

curr

ed fo

r fun

ding

an

inve

stm

ent a

ccou

nt…

”Co

uld

you

give

a sp

ecifi

c de

scrip

tion

of w

hat i

s int

ende

d?

One

exa

mpl

e is

a s

ituat

ion

whe

re a

n in

sure

r is

borr

owin

g un

der a

n ad

vanc

e ag

reem

ent w

ith a

fede

ral h

ome

loan

ban

k, u

nder

whi

ch a

gree

men

t col

late

ral,

on a

cur

rent

fair

valu

eba

sis,

is re

quire

d to

be

mai

ntai

ned

with

the

bank

. Thi

s arr

ange

men

t has

man

y of

the

char

acte

ristic

s of a

GIC

, but

is c

lass

ified

as d

ebt.

4.Th

e in

stru

ctio

ns sp

ecify

that

ass

umpt

ions

con

sist

ent w

ith th

ose

used

for A

sset

Ade

quac

y A

naly

sis t

estin

g be

use

d fo

r C-3

RB

C, b

ut m

y co

mpa

ny c

ash

flow

test

s a c

ombi

natio

n of

univ

ersa

l life

and

ann

uitie

s for

that

ana

lysi

s and

usi

ng th

e sa

me

assu

mpt

ions

will

pro

duce

inco

rrec

t res

ults

. Wha

t was

inte

nded

in th

is si

tuat

ion?

Whe

re th

is s

ituat

ion

exis

ts, a

ssum

ptio

ns s

houl

d be

use

d fo

r th

e ris

k-ba

sed

capi

tal w

ork

that

are

con

sist

ent w

ith th

ose

used

for t

he A

sset

Ade

quac

y C

ash

Flow

Tes

ting.

In o

ther

wor

ds, t

he a

ssum

ptio

ns u

sed

shou

ld b

e ap

prop

riate

to th

e an

nuity

com

pone

nt b

eing

eva

luat

ed fo

r R

BC

and

con

sist

ent w

ith th

e ov

eral

l ass

umpt

ion

set u

sed

for

Ass

et A

dequ

acy

Ana

lysi

s.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

268/

17/2

018

App

endi

x 2

–A

ppen

dix

8 fr

om th

e Ju

ne 2

005

Aca

dem

y do

cum

ent t

o be

inse

rted

here

with

adj

ustm

ents

for t

he n

ew ta

x ra

tes.

App

endi

x 2

–A

ltern

ativ

e M

etho

d fo

r GM

DB

Ris

ks (2

020

Inst

ruct

ions

)

{Dra

ftin

g N

ote:

the

follo

win

g is

cop

ied

from

the

Am

eric

an A

cade

my

of A

ctua

ries

Jun

e 20

05 R

epor

t to

the

NA

IC C

apita

l Ade

quac

y T

ask

Forc

eT

his

App

endi

x de

scri

bes

the

Alte

rnat

ive

Met

hod

for

GM

DB

exp

osur

e in

sig

nific

ant

deta

il; h

ow it

is t

o be

app

lied

and

how

the

fac

tors

wer

e de

velo

ped.

Fac

tor

tabl

es h

ave

been

dev

elop

ed u

sing

the

Con

ditio

nal T

ail E

xpec

tatio

n (“

CT

E”)

risk

mea

sure

at t

wo

conf

iden

ce le

vels

: 65%

and

90

%.

The

latt

er is

det

erm

ined

on

an “

afte

r ta

x” b

asis

and

is r

equi

red

for

the

RB

C C

3 Ph

ase

II st

anda

rd fo

r T

otal

Ass

et R

equi

rem

ent (

“TA

R”)

. T

he fo

rmer

is a

pre

-tax

cal

cula

tion

and

shou

ld a

ssis

t the

Var

iabl

eA

nnui

ty R

eser

ve W

orki

ng G

roup

(“V

AR

WG

”) in

form

ulat

ing

a co

nsis

tent

“a

ltern

ativ

e m

etho

d” fo

r st

atut

ory

rese

rves

.

Gen

eral

1.It

is e

xpec

ted

that

the

Alte

rnat

ive

Met

hod

(“A

ltM”)

will

be

appl

ied

on a

pol

icy-

by-p

olic

y ba

sis

(i.e.

, ser

iatim

). If

the

com

pany

ado

pts

a ce

ll-ba

sed

appr

oach

, onl

y m

ater

ially

sim

ilar c

ontra

cts s

houl

d be

gro

uped

toge

ther

. Sp

ecifi

cally

, all

polic

ies c

ompr

isin

g a “

cell”

mus

t dis

play

subs

tant

ially

sim

ilar

char

acte

ristic

s for

thos

e at

tribu

tes e

xpec

ted

to a

ffec

t ris

k-ba

sed

capi

tal (

e.g.

, def

initi

on o

f gua

rant

eed

bene

fits,

atta

ined

age

, pol

icy

dura

tion,

yea

rs-to

-m

atur

ity, m

arke

t-to-

guar

ante

ed v

alue

, ass

et m

ix, e

tc.).

2.Th

e A

ltern

ativ

e M

etho

d de

term

ines

the

TAR

as

the

sum

of t

he C

ash

Surr

ende

r Val

ue a

nd th

e fo

llow

ing

thre

e (3

) pro

visi

ons,

colle

ctiv

ely

refe

rred

to

as th

e Ad

ditio

nal A

sset

Req

uire

men

t(“A

AR

”):

Prov

isio

n fo

r am

ortiz

atio

n of

the

outs

tand

ing

(una

mor

tized

) sur

rend

er c

harg

es –

“Cha

rge

Am

ortiz

atio

n” o

r “C

A”;

Prov

isio

n fo

r fix

ed d

olla

r exp

ense

s/co

sts n

et o

f fix

ed d

olla

r rev

enue

–“F

ixed

Exp

ense

s” o

r “FE

”; a

ndPr

ovis

ion

for

clai

ms

(in e

xces

s of

acc

ount

val

ue)

unde

r th

e gu

aran

teed

ben

efits

net

of

avai

labl

e sp

read

-bas

ed r

even

ue (

“mar

gin

offs

et”)

–“G

uara

ntee

d C

ost”

or “

GC

”.

All

of th

ese

com

pone

nts r

efle

ct th

e im

pact

of i

ncom

e ta

xesa

nd a

re e

xpla

ined

in m

ore

deta

il la

ter i

n th

is A

ppen

dix.

The

Ris

k B

ased

Cap

ital a

mou

nt (C

-3 R

BC)

is d

eter

min

ed in

agg

rega

te fo

r the

blo

ck o

f pol

icie

s as

the

TAR

less

the

rese

rve

dete

rmin

ed b

ased

on

Sect

ion

7 of

VM

-21.

Not

e th

e fo

llow

ing

rega

rdin

g in

com

e ta

xes:

The

com

pany

det

erm

ines

the

CA

and

FE

amou

nts b

y pr

ojec

ting

the

info

rce

data

and

inco

rpor

atin

g a

21%

tax

rate

and

a p

ost-t

ax d

isco

unt r

ate

of 4

.54%

(=

5.7

5% x

[1-2

1%])

.


4/7/19


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iona

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ocia

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sion

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17/2

018

In d

eter

min

ing

the

GC

am

ount

s, a

“loo

k-up

” fu

nctio

n is

use

d w

hich

pro

vide

s a

GM

DB

Cos

t Fac

tor “

f” a

nd B

ase

Mar

gin

Offs

et F

acto

r “g”

. The

se

fact

ors (

“f”

and

“g”)

repr

esen

t CTE

90 fa

ctor

s on

a po

st-ta

x ba

sis w

here

a 3

5% ta

x ra

tes a

nd 3

.74%

(= 5

.75%

x (1

-35%

)) d

isco

unt r

ate

has b

een

used

. Th

e co

mpa

ny n

eeds

to m

ultip

ly th

ese

fact

ors

by(.7

9/.6

5) to

adj

ust t

he fa

ctor

s fo

r a 2

1% ta

x ra

te b

asis

. It i

s no

ted

that

this

adj

ustm

ent o

vers

tate

s th

e im

pact

of t

he lo

wer

tax

rate

as t

he im

pact

of t

he h

ighe

r dis

coun

t rat

e ha

s not

bee

n re

flect

ed.

3.Th

e to

tal A

AR

(in

exce

ss o

f cas

h su

rren

der v

alue

) is

the

sum

of t

he A

AR

cal

cula

tions

for e

ach

polic

y or

cel

l. T

he re

sult

for a

ny g

iven

pol

icy

(cel

l)m

ay b

e ne

gativ

e, z

ero

or p

ositi

ve.

4.Fo

r var

iabl

e an

nuiti

es w

ithou

t gua

rant

ees,

the

Alte

rnat

ive

Met

hod

for c

apita

l use

s the

met

hodo

logy

whi

ch a

pplie

d pr

evio

usly

to a

ll va

riabl

e an

nuiti

es.

The

char

ge is

11

perc

ent o

f the

diff

eren

ce b

etw

een

fund

bal

ance

and

cas

h su

rren

der v

alue

if th

e cu

rren

t sur

rend

er c

harg

e is

bas

ed o

n fu

nd b

alan

ce.

If th

e cu

rren

t sur

rend

er c

harg

e is

bas

ed o

n fu

nd c

ontri

butio

ns, t

he c

harg

e is

2.4

per

cent

of t

he d

iffer

ence

for t

hose

con

tract

s for

whi

ch th

e fu

nd b

alan

ce

exce

eds

the

sum

of p

rem

ium

s le

ss w

ithdr

awal

s an

d 11

per

cent

for t

hose

for w

hich

that

is n

ot th

e ca

se.

In a

ll ca

ses,

the

resu

lt is

to b

e m

ultip

lied

by

0.79

to a

djus

t for

Fed

eral

Inc

ome

Tax.

Fo

r in

-sco

pe c

ontra

cts,

such

as

man

y pa

yout

ann

uitie

s w

ith n

o ca

sh s

urre

nder

val

ue a

nd n

o pe

rfor

man

ce

guar

ante

es, t

here

is n

o ca

pita

l cha

rge.

5.Fo

r var

iabl

e an

nuiti

es w

ith d

eath

ben

efit

guar

ante

es, t

he A

AR

for a

giv

en p

olic

y is

equ

al to

: ×

(+

) +w

here

:

CA

(Cha

rge

Amor

tizat

ion)

=Pr

ovis

ion

for a

mor

tizat

ion

of th

e ou

tsta

ndin

g (u

nam

ortiz

ed) s

urre

nder

cha

rges

FE (F

ixed

Exp

ense

)=

Prov

isio

n fo

r fix

ed d

olla

r exp

ense

s/co

sts n

et o

f fix

ed d

olla

r rev

enue

GC

(Gua

rant

eed

Cos

t)=

Prov

isio

n fo

r cla

ims (

in e

xces

s of a

ccou

nt v

alue

) und

er th

e gu

aran

teed

ben

efits

net

of a

vaila

ble

spre

ad-b

ased

re

venu

e (“

mar

gin

offs

et”)

The

com

pone

nts C

A,FE

and

GC

are

calc

ulat

ed se

para

tely

. CA

and

FEar

e de

fined

by

dete

rmin

istic

“si

ngle

-sce

nario

” ca

lcul

atio

ns w

hich

acc

ount

for

asse

t gro

wth

, int

eres

t, in

flatio

n an

d ta

x at

pre

scrib

ed r

ates

. M

orta

lity

is ig

nore

d.

How

ever

, the

act

uary

det

erm

ines

the

appr

opria

te “

prud

ent b

est

estim

ate”

laps

es/w

ithdr

awal

rate

s for

the

calc

ulat

ions

. Th

e co

mpo

nent

s CA,

FEan

d G

Cm

ay b

e po

sitiv

e, z

ero

or n

egat

ive.

is

a “

scal

ing

fact

or”

that

de

pend

s on

certa

in ri

sk a

ttrib

utes

fo

r the

pol

icy

and

the

prod

uct p

ortfo

lio.

6.Th

e “A

ltern

ativ

e M

etho

d” fa

ctor

s and

form

ulas

for G

MD

B ris

ks (c

ompo

nent

GC

) hav

e be

en d

evel

oped

from

stoc

hast

ic te

stin

g us

ing

the

10,0

00 “

Pre-

pack

aged

” sc

enar

ios

(Mar

ch

2005

). Th

e pr

e-pa

ckag

ed

scen

ario

s ha

ve

been

fu

lly

docu

men

ted

unde

r se

para

te

cove

r –

see

http

://w

ww

.act

uary

.org

/pdf

/life

/c3s

upp_

mar

ch05

.pdf

at th

e A

mer

ican

Aca

dem

y of

Act

uarie

s’ w

ebsi

te.


4/7/19


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ocia

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ers

288/

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018

7.Th

e m

odel

ass

umpt

ions

for t

he A

ltMFa

ctor

s (co

mpo

nent

GC

) are

doc

umen

ted

in th

e se

ctio

n of

this

App

endi

x en

title

d C

ompo

nent

GC

.

8.Th

e ta

ble

of G

Cfa

ctor

s th

at h

as b

een

deve

lope

d as

sum

es m

ale

mor

talit

y at

100

% o

f the

MG

DB

94

ALB

tabl

e. C

ompa

nies

usi

ng th

e A

ltern

ativ

eM

etho

d m

ay u

se th

ese

fact

ors,

or m

ay u

se th

e pr

oced

ure

desc

ribed

in M

etho

dolo

gy N

ote

C3-

04 to

adj

ust f

or th

e ac

tuar

y’s

Prud

ent B

est E

stim

ate

of

mor

talit

y.O

nce

a co

mpa

ny u

ses t

he m

odifi

ed m

etho

d fo

r a b

lock

of b

usin

ess,

the

optio

n to

use

the

unad

just

ed ta

ble

is n

o lo

nger

ava

ilabl

e fo

r tha

t par

t of

its b

usin

ess.

In a

pply

ing

the

fact

ors t

o ac

tual

info

rce

busin

ess,

a 5-

year

age

setb

ack

shou

ld b

e us

ed fo

r fem

ale

annu

itant

s.

9.Th

ere

are

five

(5) m

ajor

step

s in

usin

g th

e G

Cfa

ctor

s to

dete

rmin

e th

e “G

C”

com

pone

nt o

f the

AA

R fo

r a g

iven

pol

icy/

cell:

a)C

lass

ifyin

g th

e as

set e

xpos

ure;

b)D

eter

min

ing

the

risk

attri

bute

s;

c)R

etrie

ving

the

appr

opria

te n

odes

from

the

fact

or g

rid;

d)In

terp

olat

ing

the

noda

l fac

tors

, whe

re a

pplic

able

(opt

iona

l);

e)A

pply

ing

the

fact

ors t

o th

e po

licy

valu

es.

Cat

egor

izin

g th

e as

set v

alue

for

the

give

n po

licy

or c

ell i

nvol

ves

map

ping

the

entir

e ex

posu

re to

one

of

the

eigh

t (8)

pre

scrib

ed “

fund

cla

sses

”.

Alte

rnat

ive

Met

hod

fact

ors a

re p

rovi

ded

for e

ach

asse

t cla

ss.

The

seco

nd s

tep

requ

ires

the

com

pany

to d

eter

min

e (o

r der

ive)

the

appr

opria

te a

ttrib

utes

for t

he g

iven

pol

icy

or c

ell.

The

se a

ttrib

utes

are

nee

ded

to

calc

ulat

e th

e re

quire

d va

lues

and

acc

ess t

he fa

ctor

tabl

es:

Prod

uct f

orm

(“G

uara

ntee

Def

initi

on”)

, P.

Adj

ustm

ent t

o gu

aran

teed

val

ue u

pon

parti

al w

ithdr

awal

(“G

MD

B A

djus

tmen

t”),

A.

Fund

cla

ss, F

.

Atta

ined

age

of t

he a

nnui

tant

, X.

Polic

y du

ratio

n si

nce

issu

e, D

.

Rat

io o

f acc

ount

val

ue to

gua

rant

eed

valu

e,

.

Tota

l acc

ount

cha

rges

, MER

.

Oth

er re

quire

d po

licy

valu

es in

clud

e:


4/7/19


© 1

993-

2018

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iona

l Ass

ocia

tion

of In

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nce

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mis

sion

ers

298/

17/2

018

Acc

ount

val

ue, A

V.

Cur

rent

gua

rant

eed

min

imum

dea

th b

enef

it, G

MD

B.

Net

dep

osit

valu

e (s

um o

f dep

osits

less

sum

of w

ithdr

awal

s), N

etD

epos

its1 .

Net

spre

ad a

vaila

ble

to fu

nd g

uara

ntee

d be

nefit

s (“m

argi

n of

fset

”),

.

The

next

step

s –re

triev

ing

the

appr

opria

te n

odes

from

the

fact

or g

rid a

nd in

terp

olat

ion

–ar

e ex

plai

ned

in th

e se

ctio

n en

title

d C

ompo

nent

GC

of th

is A

ppen

dix.

To

ols

are

prov

ided

to a

ssis

t the

com

pany

in

thes

e ef

forts

(se

e A

ppen

dix

9), b

ut th

eir

use

is n

ot m

anda

tory

. Th

is d

ocum

enta

tion

is

suffi

cien

tly d

etai

led

to p

erm

it th

e co

mpa

ny to

writ

e its

ow

n lo

okup

and

ext

ract

ion

rout

ines

. A

cal

cula

tion

exam

ple

to d

emon

stra

te th

e ap

plic

atio

n of

th

e va

rious

com

pone

nt fa

ctor

s to

sam

ple

polic

y va

lues

is sh

own

in th

e se

ctio

n C

ompo

nent

GC

of th

is A

ppen

dix.

10.T

he to

tal a

ccou

nt c

harg

es s

houl

d in

clud

e al

l am

ount

s as

sess

ed a

gain

st p

olic

yhol

der a

ccou

nts,

expr

esse

d as

a le

vel s

prea

d pe

r yea

r (in

bas

is p

oint

s).

This

qua

ntity

is c

alle

d th

e M

anag

emen

t Exp

ense

Rat

io (“

MER

”) a

nd is

def

ined

as t

he a

vera

ge a

mou

nt (i

n do

llars

) cha

rged

aga

inst

pol

icyh

olde

r fun

ds

in a

giv

en y

ear d

ivid

ed b

y av

erag

e ac

coun

t val

ue.

Nor

mal

ly, t

he M

ER w

ould

var

y by

fund

cla

ss a

nd b

e th

e su

m o

f inv

estm

ent m

anag

emen

t fee

s, m

orta

lity

& e

xpen

se ch

arge

s, gu

aran

tee f

ees/

risk

prem

ium

s, et

c. T

he sp

read

avai

labl

e to

fund

the

GM

DB

cost

s (“m

argi

n of

fset

”, d

enot

ed b

y ) s

houl

d be

net

of

spre

ad-b

ased

cos

ts a

nd e

xpen

ses

(e.g

., ne

t of

mai

nten

ance

exp

ense

s, in

vest

men

t man

agem

ent f

ees,

trail

com

mis

sion

s, et

c.),

but m

ay b

ein

crea

sed

for R

even

ue S

harin

g as

can

be

refle

cted

in m

odel

ing

(i.e.

, had

the

Alte

rnat

ive

Met

hod

not b

een

elec

ted)

by

adhe

ring

to th

e re

quire

men

ts se

t fo

rth in

sect

ion

6 of

the

Mod

elin

g M

etho

dolo

gy.

The

sect

ion

of th

is A

ppen

dix

on C

ompo

nent

GC

desc

ribes

how

to d

eter

min

e M

ERan

d .

‘Tim

e-to

-m

atur

ity’ i

s un

ique

ly d

efin

ed in

the

fact

or m

odel

ing

by T

= 95

X.

(Th

is a

ssum

es a

n as

sum

ed m

atur

ity a

ge o

f 95

and

a cu

rren

t atta

ined

age

of X

.)

Net

dep

osits

are

use

d in

det

erm

inin

g be

nefit

cap

s und

er th

e G

MD

B R

oll-u

p an

d En

hanc

ed D

eath

Ben

efit

(“ED

B”)

des

igns

.

11.T

he G

MD

B de

finiti

on f

or a

giv

en p

olic

y/ce

ll m

ay n

ot e

xact

ly c

orre

spon

d to

tho

se p

rovi

ded.

In

som

e ca

ses,

it m

ay b

e re

ason

able

to

use

the

fact

ors/

form

ulas

for

a di

ffer

ent p

rodu

ct fo

rm (

e.g.

, for

a “

roll-

up”

GM

DB

pol

icy

near

or

beyo

nd th

e m

axim

um r

eset

age

or a

mou

nt, t

he c

ompa

ny

shou

ld u

se th

e “r

etur

n-of

-pre

miu

m”

GM

DB

fact

ors/

form

ulas

, pos

sibl

y ad

just

ing

the

guar

ante

ed v

alue

to re

flect

furth

er re

sets

, if a

ny).

In o

ther

cas

es,

the

com

pany

mig

ht d

eter

min

e th

e R

BC b

ased

on

two

diff

eren

t gua

rant

ee d

efin

ition

s and

inte

rpol

ate

the

resu

lts to

obt

ain

an a

ppro

pria

te v

alue

for t

he

give

n po

licy/

cell.

H

owev

er, i

f th

e po

licy

form

(de

finiti

on o

f th

e gu

aran

teed

ben

efit)

is s

uffic

ient

ly d

iffer

ent f

rom

thos

e pr

ovid

ed a

nd th

ere

is n

o pr

actic

al o

robv

ious

way

to o

btai

n a

good

resu

lt fr

om th

e pr

escr

ibed

fact

ors/

form

ulas

, the

com

pany

mus

t sel

ect o

ne o

f the

follo

win

g op

tions

:

a)M

odel

the

“C3

Phas

e II

RBC

” us

ing

stoc

hast

ic p

roje

ctio

ns a

ccor

ding

to th

e ap

prov

ed m

etho

dolo

gy;

b)Se

lect

fact

ors/

form

ulas

from

the

pres

crib

ed se

t suc

h th

at th

e va

lues

obt

aine

d co

nser

vativ

ely

estim

ate

the

requ

ired

capi

tal;

or

1N

et d

epos

its a

re re

quire

d on

ly fo

r cer

tain

pol

icy

form

s (e.

g., w

hen

the

guar

ante

ed b

enef

it is

cap

ped

as a

mul

tiple

of n

et p

olic

y co

ntrib

utio

ns).


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

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308/

17/2

018

c)C

alcu

late

com

pany

-spe

cific

fact

ors o

r adj

ustm

ents

to th

e pu

blis

hed

fact

ors b

ased

on

stoc

hast

ic te

stin

g of

its a

ctua

l bus

ines

s. T

his o

ptio

n is

desc

ribed

mor

e fu

lly in

the

sect

ion

of th

is A

ppen

dix

on C

ompo

nent

GC

.

12.T

he ac

tuar

y m

ust d

ecid

e if

exis

ting

rein

sura

nce

arra

ngem

ents

can

be

acco

mm

odat

ed b

y a s

traig

ht-f

orw

ard

adju

stm

ent t

o th

e fa

ctor

s and

form

ulas

(e.g

.,qu

ota-

shar

e re

insu

ranc

e w

ithou

t cap

s, flo

ors o

r slid

ing

scal

es w

ould

nor

mal

ly b

e re

flect

ed b

y a

sim

ple

pro-

rata

adj

ustm

ent t

o th

e “g

ross

” G

Cre

sults

).

For m

ore

com

plic

ated

form

s of

rein

sura

nce,

the

com

pany

will

nee

d to

justi

fy a

ny a

djus

tmen

ts o

r app

roxi

mat

ions

by

stoc

hast

ic m

odel

ing.

How

ever

, th

is m

odel

ing

need

not

be

perf

orm

ed o

n th

e w

hole

por

tfolio

, but

can

be

unde

rtake

n on

an

appr

opria

te se

t of r

epre

sent

ativ

e po

licie

s. S

ee th

e se

ctio

n of

th

is A

ppen

dix

on C

ompo

nent

GC

.

Com

pone

nt C

A

Com

pone

nt C

Apr

ovid

es fo

r the

am

ortiz

atio

n of

the

unam

ortiz

ed s

urre

nder

cha

rges

usi

ng th

e ac

tual

sur

rend

er c

harg

e sc

hedu

le a

pplic

able

to th

e po

licy.

O

ver t

ime,

the

surre

nder

cha

rge

is re

duce

d an

d a

porti

on o

f the

cha

rges

in th

e po

licy

are

need

ed to

fund

the

resu

lting

incr

ease

in s

urre

nder

val

ue.

This

co

mpo

nent

can

be

inte

rpre

ted

as th

e “a

mou

nt n

eede

d to

am

ortiz

e th

e un

amor

tized

surr

ende

r cha

rge

allo

wan

ce fo

r the

per

sist

ing

polic

ies p

lus a

n im

plie

d bo

rrow

ing

cost

”. B

y de

finiti

on, t

he a

mor

tizat

ion

for n

on-p

ersi

stin

g liv

es in

eac

h tim

e pe

riod

is e

xact

ly o

ffse

t by

the

colle

cted

sur

rend

er c

harg

e re

venu

e (ig

norin

g tim

ing

diff

eren

ces

and

any

wai

ver u

pon

deat

h).

The

com

pany

mus

t pro

ject

the

unam

ortiz

ed b

alan

ce to

the

end

of th

e su

rren

der c

harg

e pe

riod

and

disc

ount

the

year

-by-

year

am

ortiz

atio

n un

der t

he fo

llow

ing

assu

mpt

ions

. A

ll ca

lcul

atio

ns sh

ould

refle

ct th

e im

pact

of i

ncom

e ta

xes.

Net

ass

et re

turn

(i.e

., af

ter f

ees)

as s

how

n in

Tab

le 1

bel

ow.

Thes

e ra

tes r

ough

ly e

quat

e to

an

annu

aliz

ed 5

th p

erce

ntile

retu

rn o

ver a

10-

year

horiz

on2.

The

10

year

hor

izon

was

sele

cted

as a

reas

onab

le c

ompr

omis

e be

twee

n th

e le

ngth

of a

typi

cal s

urre

nder

cha

rge

perio

d an

d th

e lo

nger

te

stin

g pe

riod

usua

lly n

eede

d to

cap

ture

all

the

cost

s on

"m

ore

expe

nsiv

e" p

ortfo

lios

(i.e.

, low

er a

vaila

ble

spre

ad, l

ower

AV

/GV

ratio

, old

er

ages

, etc

.). N

ote,

how

ever

, tha

t it m

ay n

ot b

e ne

cess

ary

to u

se th

ese

retu

rns i

f sur

rend

er c

harg

es a

re a

func

tion

of d

epos

its/p

rem

ium

s.

Inco

me

tax

and

disc

ount

rate

s (af

ter-

tax)

as d

efin

ed in

Tab

le 9

of t

his A

ppen

dix.

.

The “

Dyn

amic

Lap

se M

ultip

lier”

calc

ulat

ed at

the v

alua

tion

date

(a fu

nctio

n of

Acc

ount

Val

ue (A

V)

Gua

rant

eed

Val

ue (G

V) r

atio

) is a

ssum

edto

app

ly in

eac

h fu

ture

yea

r. T

his

fact

or a

djus

ts th

e la

pse

rate

to re

flect

the

antis

elec

tion

pres

ent w

hen

the

guar

ante

e is

in-th

e-m

oney

. La

pse

rate

s may

be

low

er w

hen

the

guar

ante

es h

ave

mor

e va

lue.

Surr

ende

r cha

rges

and

free

par

tial w

ithdr

awal

pro

visi

ons s

houl

d be

refle

cted

as p

er th

e co

ntra

ct sp

ecifi

catio

ns.

“Pru

dent

bes

t est

imat

e” la

pse

and

with

draw

al ra

tes.

Rat

es m

ay v

ary

acco

rdin

g to

the

attri

bute

s of t

he b

usin

ess b

eing

val

ued,

incl

udin

g, b

ut n

otlim

ited

to, a

ttain

ed a

ge, p

olic

y du

ratio

n, e

tc.

For s

impl

icity

, mor

talit

y m

ay b

e ig

nore

d in

the

calc

ulat

ions

.

2A

5th

perc

entil

e re

turn

is c

onsi

sten

t with

the

CTE

90 ri

sk m

easu

re a

dopt

ed in

the

C3

Phas

e II

RB

C m

etho

dolo

gy.


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2018

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iona

l Ass

ocia

tion

of In

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318/

17/2

018

Unl

ike

the

GC

com

pone

nt, w

hich

req

uire

s th

e ac

tuar

y to

map

the

entir

e co

ntra

ct e

xpos

ure

to a

sin

gle

“equ

ival

ent”

ass

et c

lass

,the

CA

calc

ulat

ion

sepa

rate

ly p

roje

cts e

ach

fund

(as m

appe

d to

the

8 pr

escr

ibed

cat

egor

ies)

usi

ng th

e ne

t ass

et re

turn

s in

Tabl

e 2-

1.

Tab

le 2

-1: N

et A

sset

Ret

urns

for

“CA

” C

ompo

nent

Ass

et C

lass

/Fun

dN

et A

nnua

lized

R

etur

n

Fixe

d A

ccou

ntG

uara

ntee

d R

ate

Mon

ey M

arke

t and

Fix

ed In

com

e0%

Bal

ance

d1%

Div

ersi

fied

Equi

ty2%

Div

ersi

fied

Inte

rnat

iona

l Equ

ity3%

Inte

rmed

iate

Ris

k Eq

uity

5%

Agg

ress

ive

or E

xotic

Equ

ity8%

Com

pone

nt F

E

Com

pone

nt F

Ees

tabl

ishe

s a p

rovi

sion

for f

ixed

dol

lar c

osts

(i.e

., al

loca

ted

cost

s, in

clud

ing

over

head

and

thos

e ex

pens

es d

efin

ed o

n a

“per

pol

icy”

bas

is)

less

any

fixe

d do

llar r

even

ue (e

.g.,

annu

al a

dmin

istra

tive

char

ges o

r pol

icy

fees

). T

he c

ompa

ny m

ust p

roje

ct fi

xed

expe

nses

net

of a

ny “

fixed

reve

nue”

to

the

earli

er o

f con

tract

mat

urity

or 3

0 ye

ars,

and

disc

ount

the

year

-by-

year

am

ount

s un

der t

he fo

llow

ing

assu

mpt

ions

. A

ll ca

lcul

atio

ns s

houl

d re

flect

the

impa

ct o

f inc

ome

taxe

s.

Inco

me

tax

and

disc

ount

rate

s (af

ter-

tax)

as d

efin

ed in

Tab

le 9

of t

his A

ppen

dix.

The

“Dyn

amic

Lap

se M

ultip

lier”

cal

cula

ted

at th

e va

luat

ion

date

(a fu

nctio

n of

MV

GV

ratio

) is a

ssum

ed to

app

ly in

eac

h fu

ture

yea

r. T

his

fact

or a

djus

ts th

e la

pse

rate

to r

efle

ct th

e an

tisel

ectio

n pr

esen

t whe

n th

e gu

aran

tee

is in

-the-

mon

ey.

Laps

e ra

tes

may

be

low

er w

hen

the

guar

ante

es h

ave

mor

e va

lue.

Per p

olic

y ex

pens

es a

re a

ssum

ed to

gro

w w

ith in

flatio

n st

artin

g in

the

seco

nd p

roje

ctio

n ye

ar.

The

ultim

ate

infla

tion

rate

of 3

% p

er a

nnum

isre

ache

d in

the

8th

year

afte

r the

val

uatio

n da

te.

The

com

pany

mus

t gra

de li

near

ly fr

om th

e cu

rren

t inf

latio

n ra

te (“

CIR

”) to

the

ultim

ate

rate

. Th

e C

IR is

the

high

er o

f 3%

and

the

infla

tion

rate

ass

umed

for e

xpen

ses i

n th

e co

mpa

ny’s

mos

t rec

ent a

sset

ade

quac

y an

alys

is fo

r sim

ilar b

usin

ess.


4/7/19


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993-

2018

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l Ass

ocia

tion

of In

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nce

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sion

ers

328/

17/2

018

“Pru

dent

bes

t est

imat

e” f

or p

olic

y te

rmin

atio

n (i.

e., t

otal

sur

rend

er).

Rat

es m

ay v

ary

acco

rdin

g to

the

attri

bute

s of

the

busi

ness

bei

ng v

alue

d,in

clud

ing,

but

not

lim

ited

to, a

ttain

ed a

ge, p

olic

y du

ratio

n, e

tc.

Parti

al w

ithdr

awal

s sho

uld

be ig

nore

d as

they

do

not a

ffec

t sur

vivo

rshi

p.

For s

impl

icity

, mor

talit

y m

ay b

e ig

nore

d in

the

calc

ulat

ions

.

Com

pone

nt G

C

The

gene

ral f

orm

at f

or G

Cm

ay b

e w

ritte

n as

: =

××

×w

here

GV

= cu

rren

t gua

rant

eed

min

imum

dea

th b

enef

it, A

V=

curr

ent a

ccou

nt v

alue

and

=×

. Th

e fu

nctio

ns

() ,

() ,

and

() d

epen

d on

the

risk

attri

bute

s of t

he p

olic

y an

d pr

oduc

t por

tfolio

.

()

=w

as in

trodu

ced

in th

e “G

ener

al”

sect

ion

as a

“sc

alin

g fa

ctor

”.

is th

e co

mpa

ny-d

eter

min

ed n

et sp

read

(“m

argi

n of

fset

”) a

vaila

ble

to fu

nd th

e gu

aran

teed

be

nefit

s and

=

100

basi

s poi

nts i

s the

mar

gin

offs

et a

ssum

ed in

the

deve

lopm

ent o

f the

“Ba

se”

tabu

lar f

acto

rs.

The

func

tions

(

) ,(

) ,an

d (

)ar

e m

ore

fully

des

crib

ed la

ter i

n th

is se

ctio

n.

Rea

rrang

ing

term

s fo

r GC

, we

have

=

××

. A

dmitt

edly

, is

a c

ompl

icat

ed fu

nctio

n th

at d

epen

ds o

n th

e ris

k at

tribu

te

sets

an

d , b

ut c

once

ptua

lly w

e ca

n vi

ew

×as

a sh

ock

to th

e cu

rren

t acc

ount

val

ue (i

n an

ticip

atio

n of

the

adve

rse

inve

stm

ent r

etur

n sc

enar

ios

that

typi

cally

com

pris

e th

e C

TE(9

0) ri

sk m

easu

re fo

r the

AA

R) s

o th

at th

e te

rm in

the

squa

re b

rack

ets

is a

“m

odifi

ed n

et a

mou

nt a

t ris

k”.

Acc

ordi

ngly

, ca

n be

loos

ely

inte

rpre

ted

as a

fact

or th

at a

djus

ts fo

r int

eres

t (i.e

., di

scou

ntin

g) a

nd m

orta

lity

(i.e.

, the

pro

babi

lity

of th

e an

nuita

nt d

ying

).

In p

ract

ice,

(

) ,(

) ,an

d (

) are

not

func

tions

in th

e ty

pica

l sen

se, b

ut v

alue

s int

erpo

late

d fro

m th

efa

ctor

grid

. Th

e fac

tor g

rid is

a la

rge

pre-

com

pute

d ta

ble

deve

lope

d fr

om st

ocha

stic

mod

elin

g fo

r a w

ide

arra

y of

com

bina

tions

of t

he ri

sk a

ttrib

ute

set.

The

risk

attr

ibut

e se

t is d

efin

ed b

y th

ose

polic

y an

d/or

pr

oduc

t por

tfolio

cha

ract

eris

tics t

hat a

ffec

t the

risk

pro

file

(exp

osur

e) o

f the

bus

ines

s: a

ttain

ed a

ge, p

olic

y du

ratio

n, A

V/G

V ra

tio, f

und

clas

s, et

c.

Fun

d C

ateg

oriz

atio

n

The

fol

low

ing

crite

ria

shou

ld b

e us

ed t

o se

lect

the

app

ropr

iate

fac

tors

, par

amet

ers

and

form

ulas

for

the

exp

osur

e re

pres

ente

d by

a s

peci

fied

guar

ante

ed b

enef

it.

Whe

n av

aila

ble,

the

vol

atili

ty o

f th

e lo

ng-t

erm

ann

ualiz

ed t

otal

ret

urn

for

the

fund

(s)

–or

an

appr

opri

ate

benc

hmar

k –

shou

ld c

onfo

rm to

the

limits

pre

sent

ed.

Thi

s cal

cula

tion

shou

ld b

e m

ade

over

a r

easo

nabl

y lo

ng p

erio

d, su

ch a

s 25

to 3

0 ye

ars.

Whe

re d

ata

for t

he fu

nd o

r ben

chm

ark

are

too

spar

se o

r unr

elia

ble,

the

fund

exp

osur

e sh

ould

be

mov

ed to

the

next

hig

her v

olat

ility

cla

ss th

an o

ther

wis

e in

dica

ted.

In

revi

ewin

g th

e as

set c

lass

ifica

tions

, car

e sh

ould

be

take

n to

refle

ct a

ny a

dditi

onal

vol

atili

ty o

f ret

urns

add

ed b

y th

e pr

esen

ce o

f cur

renc

y ris

k,

liqui

dity

(bid

-ask

) eff

ects

, sho

rt se

lling

and

spec

ulat

ive

posi

tions

.

All

expo

sure

s/fu

nds m

ust b

e ca

tego

rized

into

one

of t

he fo

llow

ing

eigh

t (8)

ass

et c

lass

es:

1.Fi

xed

Acc

ount


4/7/19


© 1

993-

2018

Nat

iona

l Ass

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tion

of In

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nce

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sion

ers

338/

17/2

018

2.M

oney

Mar

ket

3.Fi

xed

Inco

me

4.B

alan

ced

5.D

iver

sifie

d Eq

uity

6.D

iver

sifie

d In

tern

atio

nal E

quity

7.In

term

edia

te R

isk

Equi

ty

8.A

ggre

ssiv

e or

Exo

tic E

quity

Fix

ed A

ccou

nt.

The

fund

is c

redi

ted

inte

rest

at g

uara

ntee

d ra

tes

for a

spec

ified

term

or a

ccor

ding

to a

‘por

tfolio

rate

’ or ‘

benc

hmar

k’ in

dex.

The

fund

s of

fer a

min

imum

pos

itive

gua

rant

eed

rate

that

is p

erio

dica

lly a

djus

ted

acco

rdin

g to

com

pany

pol

icy

and

mar

ket c

ondi

tions

.

Mon

ey M

arke

t/Sho

rt-T

erm

.Th

e fu

nd is

inve

sted

in m

oney

mar

ket i

nstru

men

ts w

ith a

n av

erag

e re

mai

ning

term

-to-m

atur

ity o

f les

s tha

n 36

5 da

ys.

Fix

ed I

ncom

e.Th

e fu

nd is

inve

sted

prim

arily

in in

vest

men

t gra

de fi

xed

inco

me

secu

ritie

s. U

p to

25%

of t

he fu

nd w

ithin

this

cla

ss m

ay b

e in

vest

ed in

di

vers

ified

equ

ities

or h

igh-

yiel

d bo

nds.

The

exp

ecte

d vo

latil

ity o

f the

fund

retu

rns w

ill b

e lo

wer

than

the

Bal

ance

d fu

nd c

lass

.

Bal

ance

d.Th

is c

lass

is a

com

bina

tion

of fi

xed

inco

me

secu

ritie

s w

ith a

larg

er e

quity

com

pone

nt.

The

fixed

inco

me

com

pone

nt s

houl

d ex

ceed

25%

of

the

portf

olio

and

may

incl

ude

high

yie

ld b

onds

as l

ong

as th

e to

tal l

ong-

term

vol

atili

ty o

f the

fund

doe

s not

exc

eed

the

limits

not

ed b

elow

. A

dditi

onal

ly,

any

aggr

essi

ve o

r ‘sp

ecia

lized

’ equ

ity c

ompo

nent

sho

uld

not e

xcee

d on

e-th

ird (3

3.3%

) of t

he to

tal e

quiti

es h

eld.

Sho

uld

the

fund

vio

late

eith

er o

f the

se

cons

train

ts, i

t sho

uld

be c

ateg

oriz

ed a

s an

equi

ty fu

nd.

Thes

e fu

nds u

sual

ly h

ave

a lo

ng-te

rm v

olat

ility

in th

e ra

nge

of 8

%

13%

.

Div

ersi

fied

Equ

ity.

The

fund

is in

vest

ed in

a b

road

bas

edbr

oad-

base

d m

ix o

f U.S

. and

fore

ign

equi

ties.

The

fore

ign

equi

ty c

ompo

nent

(max

imum

25%

of

tota

l hol

ding

s) m

ust b

e co

mpr

ised

of l

iqui

d se

curit

ies i

n w

ell-d

evel

oped

mar

kets

. Fu

nds i

n th

is c

ateg

ory

wou

ld e

xhib

it lo

ng-te

rm v

olat

ility

com

para

ble

to th

at o

f the

S&

P500

. Th

ese

fund

s sho

uld

usua

lly h

ave

a lo

ng-te

rm v

olat

ility

in th

e ra

nge

of 1

3%18

%.

Div

ersi

fied

Inte

rnat

iona

l Equ

ity.

The

fund

is si

mila

r to

the

Div

ersi

fied

Equi

ty c

lass

, exc

ept t

hat t

he m

ajor

ity o

f fun

d ho

ldin

gs a

re in

fore

ign

secu

ritie

s.

Thes

e fu

nds s

houl

d us

ually

hav

e a

long

-term

vol

atili

ty in

the

rang

e of

14%

19%

.

Inte

rmed

iate

Ris

k E

quity

.Th

e fu

nd h

as a

mix

of c

hara

cter

istic

s fro

m b

oth

the

Div

ersi

fied

and

Agg

ress

ive

Equi

ty C

lass

es.

Thes

e fu

nds h

ave

a lo

ng-te

rm

vola

tility

in th

e ra

nge

of 1

9%

25%

.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

348/

17/2

018

Agg

ress

ive

or E

xotic

Equ

ity.

This

clas

s com

pris

es m

ore

vola

tile

fund

s whe

re ri

sk c

an a

rise

from

: (a)

unde

rdev

elop

ed m

arke

ts, (

b) u

ncer

tain

mar

kets

, (c)

hi

gh v

olat

ility

of r

etur

ns, (

d) n

arro

w fo

cus

(e.g

., sp

ecifi

c m

arke

t sec

tor)

, etc

. Th

e fu

nd (o

r mar

ket b

ench

mar

k) e

ither

doe

sno

t hav

e su

ffic

ient

his

tory

to

allo

w fo

r the

cal

cula

tion

of a

long

-term

exp

ecte

d vo

latil

ity, o

r the

vol

atili

ty is

ver

y hi

gh.

This

cla

ss w

ould

be

used

whe

neve

r the

long

-term

exp

ecte

d an

nual

ized

vol

atili

ty is

inde

term

inab

le o

r exc

eeds

25%

.

TH

E S

EL

EC

TIO

N O

F A

N A

PPR

OPR

IAT

E I

NV

EST

ME

NT

TY

PE S

HO

UL

D B

E D

ON

E A

T T

HE

LE

VE

L F

OR

WH

ICH

TH

E G

UA

RA

NT

EE

A

PPL

IES.

FO

R G

UA

RA

NT

EE

S A

PPL

YIN

G O

N A

DE

POSI

T-B

Y-D

EPO

SIT

BA

SIS,

TH

E F

UN

D S

EL

EC

TIO

N I

S ST

RA

IGH

TFO

RW

AR

D.

HO

WE

VE

R, W

HE

RE

TH

E G

UA

RA

NT

EE

APP

LIE

S A

CR

OSS

DE

POSI

TS

OR

FO

R A

N E

NT

IRE

CO

NT

RA

CT

, TH

E A

PPR

OA

CH

CA

N B

E

MO

RE

CO

MPL

ICA

TE

D.

IN S

UC

H I

NST

AN

CE

S, T

HE

APP

RO

AC

H I

S T

O I

DE

NT

IFY

FO

R E

AC

H P

OL

ICY

WH

ER

E T

HE

“G

RO

UPE

DFU

ND

HO

LD

ING

S” F

IT W

ITH

IN T

HE

CA

TE

GO

RIE

SL

IST

ED

AN

D T

O C

LA

SSIF

Y T

HE

ASS

OC

IAT

ED

ASS

ET

S O

N T

HIS

BA

SIS.

A se

riatim

pro

cess

is u

sed

to id

entif

y th

e “g

roup

ed fu

nd h

oldi

ngs”

, to

asse

ss th

e ris

k pr

ofile

of t

he c

urre

nt fu

nd h

oldi

ngs (

poss

ibly

cal

cula

ting

the

expe

cted

lo

ng-te

rm v

olat

ility

of t

he fu

nds h

eld

with

refe

renc

e to

the

indi

cate

d m

arke

t pro

xies

), an

d to

cla

ssify

the

entir

e “a

sset

exp

osur

e” in

to o

ne o

f the

spec

ified

ch

oice

s. H

ere,

“as

set e

xpos

ure”

ref

ers

to th

e un

derly

ing

asse

ts (

sepa

rate

and

/or

gene

ral a

ccou

nt in

vest

men

t opt

ions

) on

whi

ch th

e gu

aran

tee

will

be

dete

rmin

ed.

For e

xam

ple,

if th

e gu

aran

tee

appl

ies

sepa

rate

ly fo

r eac

h de

posi

t yea

r with

in th

e co

ntra

ct, t

hen

the

clas

sific

atio

n pr

oces

s w

ould

be

appl

ied

sepa

rate

ly fo

r the

exp

osur

e of

eac

h de

posi

t yea

r.

In su

mm

ary,

map

ping

the

bene

fit e

xpos

ure

(i.e.

, the

ass

et e

xpos

ure

that

app

lies t

o th

e ca

lcul

atio

n of

the

guar

ante

ed m

inim

um d

eath

ben

efits

) to

one

of th

e pr

escr

ibed

ass

et c

lass

es is

a m

ulti-

step

pro

cess

:

1.M

ap e

ach

sepa

rate

and

/or g

ener

al a

ccou

nt in

vest

men

t opt

ion

to o

ne o

f the

pre

scrib

ed a

sset

cla

sses

. Fo

r som

e fu

nds,

this

map

ping

will

be

obvi

ous,

but f

or o

ther

s it w

ill in

volv

e a

revi

ew o

f the

fund

’s in

vest

men

t pol

icy,

per

form

ance

ben

chm

arks

, com

posi

tion

and

expe

cted

long

-term

vol

atili

ty.

2.C

ombi

ne th

e m

appe

d ex

posu

re to

det

erm

ine

the

expe

cted

long

-term

“vo

latil

ity o

f cur

rent

fund

hol

ding

s”.

This

will

requ

ire a

cal

cula

tion

base

d on

the

expe

cted

long

-term

vol

atili

ties f

or e

ach

fund

and

the

corr

elat

ions

bet

wee

n th

e pr

escr

ibed

ass

et c

lass

es a

s giv

en in

Tab

le 2

-2.

3.Ev

alua

te th

e as

set c

ompo

sitio

n an

d ex

pect

ed v

olat

ility

(as

calc

ulat

ed in

ste

p 2)

of c

urre

nt h

oldi

ngs

to d

eter

min

e th

e si

ngle

ass

et c

lass

that

bes

tre

pres

ents

the

expo

sure

, with

due

con

side

ratio

n to

the

cons

train

ts a

nd g

uide

lines

pre

sent

ed e

arlie

r in

this

sect

ion.

In st

ep 1

., th

e co

mpa

ny sh

ould

use

the

fund

’s a

ctua

l exp

erie

nce

(i.e.

, his

toric

al p

erfo

rman

ce, i

nclu

sive

of r

einv

estm

ent)

only

as a

gui

de in

det

erm

inin

g th

e ex

pect

ed lo

ng-te

rm v

olat

ility

. D

ue to

lim

ited

data

and

cha

nges

in in

vest

men

t obj

ectiv

es, s

tyle

and

/or m

anag

emen

t (e.

g., f

und

mer

gers

, rev

ised

inve

stm

ent

polic

y, d

iffer

ent f

und

man

ager

s, et

c.),

the

com

pany

may

nee

d to

giv

e m

ore

wei

ght t

o th

e ex

pect

ed lo

ng-te

rm v

olat

ility

of

the

fund

’s b

ench

mar

ks.

In

gene

ral,

the

com

pany

sho

uld

exer

cise

cau

tion

and

not b

e ov

erly

opt

imis

tic in

ass

umin

g th

at f

utur

e re

turn

s w

ill c

onsi

sten

tly b

e le

ss v

olat

ile th

an th

e un

derly

ing

mar

kets

.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

358/

17/2

018

In s

tep

2., t

he c

ompa

ny s

houl

d ca

lcul

ate

the

“vol

atili

ty o

f cur

rent

fund

hol

ding

s” (

for t

he e

xpos

ure

bein

g ca

tego

rized

) by

the

follo

win

g fo

rmul

a us

ing

the

vola

tiliti

es a

nd c

orre

latio

ns in

Tab

le 2

.

=

whe

re

=is

the

rela

tive

valu

e of

fund

iex

pres

sed

as a

pro

porti

on o

f tot

al c

ontra

ct v

alue

, is

the

corr

elat

ion

betw

een

asse

t cla

sses

ian

d ja

nd

is th

e vo

latil

ity o

f ass

et c

lass

i(s

ee T

able

2).

An

exam

ple

is p

rovi

ded

at th

e en

d of

this

sect

ion.


4/7/19


© 1

993-

2018

Nat

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l Ass

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of In

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sion

ers

368/

17/2

018

Tab

le 2

-2: V

olat

ilitie

s and

Cor

rela

tions

for

Pres

crib

ed A

sset

Cla

sses

ANN

UAL

VO

LATI

LITY

FIXE

D

ACC

OU

NT

MO

NEY

M

ARKE

TFI

XED

IN

CO

ME

BALA

NC

EDD

IVER

SE

EQU

ITY

INTL

EQU

ITY

INTE

RM

EQ

UIT

YAG

GR

EQ

UIT

Y

1.0%

FIXE

D

ACC

OU

NT

10.

500.

150

00

00

1.5%

MO

NEY

M

ARKE

T0.

501

0.20

00

00

0

5.0%

FIXE

D

INC

OM

E0.

150.

201

0.30

0.10

0.10

0.10

0.05

10.0

%BA

LAN

CED

00

0.30

10.

950.

600.

750.

60

15.5

%D

IVER

SE

EQU

ITY

00

0.10

0.95

10.

600.

800.

70

17.5

%IN

TLEQ

UIT

Y0

00.

100.

600.

601

0.50

0.60

21.5

%IN

TER

M

EQU

ITY

00

0.10

0.75

0.80

0.50

10.

70

26.0

%AG

GR

EQ

UIT

Y0

00.

050.

600.

700.

600.

701


4/7/19


© 1

993-

2018

Nat

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l Ass

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of In

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nce

Com

mis

sion

ers

378/

17/2

018

As

an e

xam

ple,

sup

pose

thre

e fu

nds

(Fix

ed In

com

e, d

iver

sifie

d U

.S. E

quity

and

Agg

ress

ive

Equi

ty) a

re o

ffer

ed to

clie

nts

on a

pro

duct

with

a c

ontra

ct

leve

l gua

rant

ee (i

.e.,

acro

ss a

ll fu

nds h

eld

with

in th

e po

licy)

. The

cur

rent

fund

hol

ding

s (in

dol

lars

) for

five

sam

ple

cont

ract

s are

show

n in

Tab

le 2

-3.

TA

BL

E 2

-3: F

UN

D C

AT

EG

OR

IZA

TIO

N E

XA

MPL

E

12

34

5

MV

Fund

X (F

ixed

Inco

me)

:5,

000

4,00

08,

000

-5,

000

MV

Fund

Y (D

iver

sifie

d Eq

uity

):9,

000

7,00

02,

000

5,00

0-

MV

Fund

Z (A

ggre

ssiv

e Eq

uity

):1,

000

4,00

0-

5,00

05,

000

Tota

l Mar

ket V

alue

:15

,000

15,0

0010

,000

10,0

0010

,000

Tota

l Equ

ity M

arke

t Val

ue:

10,0

0011

,000

2,00

010

,000

5,00

0

Fixe

d In

com

e %

(A):

33%

27%

80%

0%50

%

Fixe

d In

com

e Te

st (A

>75%

):N

oN

oYe

sN

oN

o

Aggr

essi

ve %

of E

quity

(B):

10%

36%

n/a

50%

100%

Bala

nced

Tes

t (A

>25%

& B

<33.

3%):

Yes

No

n/a

No

No

Vola

tility

of C

urre

nt F

und

Hol

ding

s:10

.9%

13.2

%5.

3%19

.2%

13.4

%

Fund

Cla

ssifi

catio

n:B

alan

ced

Div

ersi

fied*

Fixe

d In

com

eIn

term

edia

teD

iver

sifie

d

*A

lthou

gh th

e vo

latil

ity s

ugge

sts

“Bal

ance

d Fu

nd”,

the

Bala

nced

Fun

d cr

iteria

wer

e no

t met

. Th

eref

ore,

this

‘exp

osur

e’ is

mov

ed “

up”

to D

iver

sifie

dEq

uity

. For

thos

e fu

nds

clas

sifie

d as

Div

ersi

fied

Equi

ty, a

dditi

onal

ana

lysi

s w

ould

be

requ

ired

to a

sses

s w

heth

er th

ey s

houl

dbe

inst

ead

desi

gnat

ed a

s “D

iver

sifie

d In

tern

atio

nal E

quity

”.

As a

n ex

ampl

e, th

e “V

olat

ility

of C

urre

nt F

und

Hol

ding

s” fo

r pol

icy

#1 is

cal

cula

ted

as

+w

here

:

So th

e vo

latil

ity fo

r con

tract

#1

= 0.

0092

+0.

0026

= 0.

109

or 1

0.9%

.


4/7/19


© 1

993-

2018

Nat

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l Ass

ocia

tion

of In

sura

nce

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mis

sion

ers

388/

17/2

018

Der

ivat

ion

of T

otal

Equ

ival

ent A

ccou

nt C

harg

es (M

ER

) and

Mar

gin

Off

set (

)

The

tota

l equ

ival

ent a

ccou

nt c

harg

e (“

MER

”) is

mea

nt to

capt

ure a

llam

ount

s tha

t are

ded

ucte

d fr

om p

olic

yhol

der f

unds

, not

onl

y th

ose t

hat a

re c

omm

only

ex

pres

sed

as sp

read

-bas

ed fe

es.

The

MER

, exp

ress

ed a

s an

equi

vale

nt a

nnua

l bas

is p

oint

cha

rge

agai

nst a

ccou

nt v

alue

, sho

uld

incl

ude

(but

not

be

limite

d to

) the

follo

win

g: in

vest

men

t man

agem

ent f

ees,

mor

talit

y &

expe

nse c

harg

es, a

dmin

istra

tive l

oads

, pol

icy

fees

and

risk

prem

ium

s. In

ligh

t of t

he fo

rego

ing,

it

may

be

nece

ssar

y to

est

imat

e th

e “e

quiv

alen

t MER

” if

ther

e ar

e fe

es w

ithdr

awn

from

pol

icyh

olde

r acc

ount

s tha

t are

not

exp

ress

ed a

s bas

is p

oint

cha

rges

ag

ains

t acc

ount

val

ue.

The

mar

gin

offs

et,

, rep

rese

nts

the

tota

l am

ount

ava

ilabl

e to

fund

the

guar

ante

ed b

enef

it cl

aim

s an

d am

ortiz

atio

n of

the

unam

ortiz

ed s

urre

nder

cha

rge

allo

wan

ce a

fter c

onsi

derin

g m

ost o

ther

pol

icy

expe

nses

(inc

ludi

ng o

verh

ead)

. Th

e m

argi

n of

fset

, exp

ress

ed a

s an

equ

ival

ent a

nnua

l bas

is p

oint

cha

rge

agai

nst a

ccou

nt v

alue

, may

incl

ude

the

effe

ct o

f Rev

enue

Sha

ring

in th

e sa

me

man

nera

s w

ould

be

done

for m

odel

ing

as d

escr

ibed

in s

ectio

n 6

of th

e M

odel

ing

Met

hodo

logy

, exc

ept a

s m

ay b

e th

ereb

y pe

rmitt

ed, s

houl

d be

dee

med

“pe

rman

ently

ava

ilabl

e” in

all

futu

re s

cena

rios.

How

ever

, the

mar

gin

offs

et s

houl

d no

t inc

lude

per

pol

icy

char

ges

(e.g

., an

nual

pol

icy

fees

) sin

ce th

ese

are

incl

uded

in F

E. I

t is

ofte

n he

lpfu

l to

inte

rpre

t the

mar

gin

offs

et a

s =

+RS

, whe

re X

is th

e su

m o

f:

Inve

stm

ent m

anag

emen

t exp

ense

s and

adv

isor

y fe

es;

Com

mis

sion

s, bo

nuse

s (di

vide

nds)

and

ove

rrid

es;

Mai

nten

ance

exp

ense

s, ot

her t

han

thos

e in

clud

ed in

FE;

and

Una

mor

tized

acq

uisi

tion

cost

s not

refle

cted

in C

A.

And

RS

is th

e R

even

ue S

harin

g to

the

exte

nt p

erm

itted

as d

escr

ibed

abo

ve.

Prod

uct A

ttrib

utes

and

Fac

tor T

able

s

The

tabu

lar

appr

oach

for

the

GC

com

pone

nt c

reat

es a

mul

ti-di

men

sion

al g

rid (

arra

y) b

y te

stin

g a

very

larg

e nu

mbe

r of

com

bina

tions

for

the

polic

y at

tribu

tes.

The

resu

lts a

re e

xpre

ssed

as f

acto

rs.

Giv

en th

e se

ven

(7) a

ttrib

utes

for a

pol

icy

(i.e.

, P,A

,F,X

,D,

,MER

), tw

o fa

ctor

s are

retu

rned

for

()

and

() .

The

fact

ors a

re d

eter

min

ed b

y lo

okin

g up

(bas

ed o

n a “

key”

) int

o th

e lar

ge, p

re-c

ompu

ted

mul

ti-di

men

sion

al ta

bles

and

usin

g m

ulti-

dim

ensi

onal

lin

ear i

nter

pola

tion.

The

polic

y at

tribu

tes f

or c

onst

ruct

ing

the

test

cas

es a

nd th

e lo

okup

key

s are

giv

en in

Tab

le 2

-4.

As c

an b

e se

en, t

here

are

6

28

85

73

= 80

,640

“no

des”

in th

e fa

ctor

grid

. In

terp

olat

ion

is o

nly

perm

itted

acr

oss t

he la

st fo

ur (4

) dim

ensi

ons:

Atta

ined

Age

(X),

Polic

y D

urat

ion

(D),

AV

GV

Rat

io (

) and

MER

. Th

e “M

ER D

elta

” is

cal

cula

ted

base

d on

the

diff

eren

ce b

etw

een

the

actu

al M

ER

and

that

ass

umed

in th

e fa

ctor

test

ing

(see

Tab

le 1

0), s

ubje

ct to

a c

ap (f

loor

) of 1

00 b

ps (

100

bps)

.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

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ers

398/

17/2

018

Func

tions

are

ava

ilabl

e to

ass

ist t

he c

ompa

ny in

app

lyin

g th

e A

ltern

ativ

e M

etho

d fo

r GM

DB

risks

. Th

ese

func

tions

per

form

the

fact

or ta

ble

look

ups a

nd

asso

ciat

ed m

ulti-

dim

ensi

onal

line

ar in

terp

olat

ions

. The

ir us

e is

not m

anda

tory

. B

ased

on

the

info

rmat

ion

in th

is d

ocum

ent,

the

com

pany

sho

uld

be a

ble

to w

rite

its o

wn

look

up a

nd re

triev

al ro

utin

es.

Inte

rpol

atio

n in

the

fact

or ta

bles

is d

escr

ibed

furth

er la

ter i

n th

is se

ctio

n.

Tab

le 2

-4: N

odes

of t

he F

acto

r G

rid

Polic

y A

ttri

bute

Key

: Po

ssib

le V

alue

s & D

escr

iptio

n

Prod

uct D

efin

ition

, P.

0 : 0

Ret

urn-

of-p

rem

ium

.1

: 1R

oll-u

p (3

% p

er a

nnum

).2

: 2R

oll-u

p (5

% p

er a

nnum

).3

: 3M

axim

um A

nniv

ersa

ry V

alue

(MA

V).

4 : 4

Hig

h of

MA

V a

nd 5

% R

oll-u

p.5

: 5En

hanc

ed D

eath

Ben

efit

(exc

l. G

MD

B)G

V A

djus

tmen

t Upo

n Pa

rtial

W

ithdr

awal

, A.

0 : 0

Pro-

rata

by

mar

ket v

alue

.1

: 1D

olla

r-for

-dol

lar.

Fund

Cla

ss, F

.

0 : 0

Fixe

d A

ccou

nt.

1 : 1

Mon

ey M

arke

t.2

: 2Fi

xed

Inco

me

(Bon

d).

3 : 3

Bal

ance

d A

sset

Allo

catio

n.4

: 4D

iver

sifie

d Eq

uity

.5

: 5In

tern

atio

nal E

quity

.6

: 6In

term

edia

te R

isk

Equi

ty.

7 : 7

Agg

ress

ive

/ Exo

tic E

quity

.

Atta

ined

Age

(Las

t Birt

hday

), X.

0 : 3

54

: 65

1 : 4

55

: 70

2 : 5

56

: 75

3 : 6

07

: 80

Polic

y D

urat

ion

(yea

rs-s

ince

-issu

e),

D.

0 : 0

.51

: 3.5

2 : 6

.53

: 9.5

4 : 1

2.5


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

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408/

17/2

018

Acc

ount

Val

ue-to

-Gua

rant

eed

Val

ue R

atio

, .

0 : 0

.25

4 : 1

.25

1 : 0

.50

5 : 1

.50

2 : 0

.75

6 : 2

.00

3 : 1

.00

Ann

ualiz

ed A

ccou

nt C

harg

e D

iffer

entia

l fro

m T

able

2-1

0A

ssum

ptio

ns (“

MER

Del

ta”)

0 :

100

bps

1 : +

02

: +10

0

A te

st c

ase

(i.e.

, a n

ode

on th

e m

ulti-

dim

ensi

onal

mat

rix o

f fac

tors

) can

be

uniq

uely

iden

tifie

d by

its

key,

whi

ch is

the

conc

aten

atio

n of

the

indi

vidu

al

‘pol

icy

attri

bute

’ key

s, pr

efix

ed b

y a

lead

ing

‘1’.

For

exa

mpl

e, th

e ke

y ‘1

2034

121’

indi

cate

s the

fact

or fo

r a 5

% ro

ll-up

GM

DB,

whe

re th

e G

V is

adj

uste

d pr

o-ra

ta u

pon

parti

al w

ithdr

awal

, bal

ance

d as

set a

lloca

tion,

atta

ined

age 6

5, p

olic

y du

ratio

n 3.

5, 7

5% A

V/G

V ra

tio an

d “e

quiv

alen

t” an

nual

ized

fund

bas

ed

char

ges e

qual

to th

e ‘b

ase’

ass

umpt

ion

(i.e.

, 250

bps

p.a

.).

The

fact

ors

are

cont

aine

d in

the

file

“C3-

II G

MD

B Fa

ctor

s 10

0%M

ort C

TE(9

0) (

2005

-03-

29).c

sv”,

a c

omm

a-se

para

ted

valu

e te

xt f

ile.

Each

“ro

w”

repr

esen

ts th

e fa

ctor

s/pa

ram

eter

s fo

r a te

st p

olic

y as

iden

tifie

d by

the

look

up k

eys

show

n in

Tab

le 2

-4.

Row

s ar

e te

rmin

ated

by

new

line

and

line

feed

ch

arac

ters

.

Each

row

con

sist

s of 5

ent

ries,

desc

ribed

furth

er b

elow

.

12

34

5Te

st C

ase

Iden

tifie

r (Ke

y)Ba

se G

MD

B C

ost

Fact

orBa

se M

argi

n O

ffset

Fac

tor

Scal

ing

Adju

stm

ent

(Inte

rcep

t)Sc

alin

g Ad

just

men

t (S

lope

)

GM

DB

Cos

t Fac

tor.

This

is th

e ter

m

in th

e fo

rmul

a fo

r GC

. Th

e pa

ram

eter

set

is d

efin

ed b

y (

,,

,,

,,

) . H

ere,

is

the

AV

/GV

ratio

fo

r the

ben

efit

expo

sure

(e.g

., po

licy)

und

er c

onsi

dera

tion.

The

val

ues

in th

e fa

ctor

grid

repr

esen

t CTE

(90)

of t

he s

ampl

e di

strib

utio

n3fo

r the

pre

sent

va

lue

of g

uara

ntee

d be

nefit

cas

h flo

ws (

in e

xces

s of a

ccou

nt v

alue

) in

all f

utur

e ye

ars (

i.e.,

to th

e ea

rlier

of c

ontra

ct m

atur

ity a

nd 3

0 ye

ars)

, nor

mal

ized

by

guar

ante

ed v

alue

.

3Te

chni

cally

, the

sam

ple d

istri

butio

n fo

r “pr

esen

t val

ue o

f net

cost

” =

PV[G

MD

B cl

aim

s] –

PV[M

argi

n O

ffset

] w

as u

sed

to d

eter

min

e the

scen

ario

resu

lts th

at co

mpr

ise t

he C

TE90

risk

mea

sure

. H

ence

, th

e “G

MD

B C

ost F

acto

rs”

and

“Bas

e M

argi

n O

ffset

Fac

tors

” ar

e ca

lcul

ated

from

the

sam

e sc

enar

ios.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

mis

sion

ers

418/

17/2

018

Bas

e M

argi

n O

ffse

t Fac

tor.

This

is th

e te

rm

in th

e fo

rmul

a fo

r GC

. Th

e pa

ram

eter

set

is

def

ined

by

(,

,,

,,

,) .

Her

e,

is th

e A

V/G

V ra

tio fo

r the

ben

efit

expo

sure

(e.g

., po

licy)

und

er c

onsi

dera

tion.

The

val

ues i

n th

e fa

ctor

grid

repr

esen

t CTE

(90)

of t

he sa

mpl

e di

strib

utio

n fo

r the

pr

esen

t val

ue o

f mar

gin

offs

et c

ash

flow

s in

all f

utur

e ye

ars (

i.e.,

to th

e ea

rlier

of c

ontra

ct m

atur

ity a

nd 3

0 ye

ars)

, nor

mal

ized

by

acco

unt v

alue

. N

ote

that

th

e B

ase

Mar

gin

Off

set F

acto

rs a

ssum

e =

100

basi

s poi

nts o

f “m

argi

n of

fset

” (n

et sp

read

ava

ilabl

e to

fund

the

guar

ante

ed b

enef

its).

All

else

bei

ng e

qual

, the

mar

gin

offs

et

has a

pro

foun

d ef

fect

on

the

resu

lting

AA

R.

In c

ompa

ring

the

Alte

rnat

ive

Met

hod

agai

nst m

odel

s for

a v

arie

ty

of G

MD

B p

ortfo

lios,

it be

cam

e cl

ear t

hat s

ome

adju

stm

ent f

acto

r wou

ld b

e re

quire

d to

“sc

ale”

the

resu

lts to

acc

ount

for t

he d

iver

sific

atio

n ef

fect

s4of

at

tain

ed a

ge, p

olic

y du

ratio

n an

d A

V/G

V ra

tio.

The t

estin

g ex

amin

ed

==

0.20

and

==

0.60

,whe

re

= av

aila

ble

mar

gin

offs

et an

d M

ER=

tota

l “eq

uiva

lent

” ac

coun

t bas

ed c

harg

es, i

n or

der t

o un

ders

tand

the

inte

ract

ion

betw

een

the

mar

gin

ratio

(“W

”) a

nd A

AR

.

Base

d on

this

ana

lysi

s, th

e Sc

alin

g Fa

ctor

is d

efin

ed a

s:

==

+×

and

are

resp

ectiv

ely

the

inte

rcep

t and

slop

e fo

r the

line

ar re

latio

nshi

p, d

efin

ed b

y th

e pa

ram

eter

set

=(

,,

) . H

ere,

is

90%

of t

he a

ggre

gate

A

V/G

V fo

r the

pro

duct

form

(i.e.

, not

for t

he in

divi

dual

pol

icy

or c

ell)

unde

r con

side

ratio

n. I

n ca

lcul

atin

g th

e Sc

alin

g Fa

ctor

dire

ctly

from

this

line

ar

func

tion,

the

mar

gin

ratio

“W

” m

ust b

e co

nstra

ined

5to

the

rang

e [ 0

.2,0

.6] .

It is

impo

rtant

to re

mem

ber t

hat

=0.

90×

for t

he p

rodu

ct fo

rm b

eing

eva

luat

ed (e

.g.,

all 5

% R

oll-u

p po

licie

s).

The

90%

fact

or is

mea

nt to

refle

ct

the f

act t

hat t

he co

st (p

ayof

f stru

ctur

e) fo

r a b

aske

t of o

ther

wis

e ide

ntic

alpu

t opt

ions

(e.g

., G

MD

B) w

ith v

aryi

ng d

egre

es o

f in-

the-

mon

eyne

ss (i

.e.,

AV

/GV

ra

tios)

is m

ore

left-

skew

ed th

an th

e co

st fo

r a si

ngle

put

opt

ion

at th

e “w

eigh

ted

aver

age”

ass

et-to

-stri

ke ra

tio.

To ap

prec

iate

the f

oreg

oing

com

men

t, co

nsid

er a

bask

et o

f tw

o 10

-yea

r Eur

opea

n pu

t opt

ions

as sh

own

in T

able

2-5

. Th

ese o

ptio

ns ar

e oth

erw

ise i

dent

ical

ex

cept

for t

heir

“mar

ket-t

o-st

rike

pric

e” ra

tios.

The

opt

ion

valu

es a

re c

alcu

late

d as

sum

ing

a 5%

con

tinuo

us ri

sk-f

ree

rate

and

16%

ann

ualiz

ed v

olat

ility

. Th

e co

mbi

ned

optio

n va

lue

of th

e po

rtfol

io is

$9.

00, e

quiv

alen

t to

a si

ngle

put

opt

ion

with

S=

$180

.92

and

X=

$200

. Th

e m

arke

t-to-

strik

e (i.

e., A

V/G

V)

ratio

is 0

.905

, whi

ch is

less

than

the

aver

age

AV/G

V=

1 =

.

4B

y de

sign

, the

Alte

rnat

ive

Met

hodo

logy

doe

s not

dire

ctly

cap

ture

the

dive

rsifi

catio

n be

nefit

s due

to a

var

ied

asse

t pro

file

and

prod

uct m

ix.

This

is n

ot a

flaw

of t

he m

etho

dolo

gy, b

ut a

con

sequ

ence

of

the

stru

ctur

e. S

peci

fic a

ssum

ptio

ns w

ould

be

requ

ired

to c

aptu

re s

uch

dive

rsifi

catio

n ef

fect

s. U

nfor

tuna

tely

, suc

h as

sum

ptio

ns m

ight

not

be

appl

icab

le to

a g

iven

com

pany

and

cou

ld g

ross

ly o

ver-

estim

ate

the

ensu

ing

redu

ctio

n in

requ

ired

capi

tal.

5Th

e sc

alin

g fa

ctor

s wer

e de

velo

ped

by te

stin

g “m

argi

n ra

tios”

=

0.2

and

=0.

6. U

sing

val

ues o

utsi

de th

is ra

nge

coul

d gi

ve a

nom

alou

s res

ults

.


4/7/19


© 1

993-

2018

Nat

iona

l Ass

ocia

tion

of In

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nce

Com

mis

sion

ers

428/

17/2

018

Tab

le 2

-5: E

quiv

alen

t Sin

gle

Eur

opea

n Pu

t Opt

ion

Equ

ival

ent

Sing

le P

ut

Opt

ion

Put O

ptio

n A

(“in

-the

-mon

ey”)

Put O

ptio

n B

(“ou

t-of

-the

-m

oney

”)

Mar

ket v

alue

(AV

)$1

80.9

2$7

5$1

25

Stri

ke p

rice

(GV

)$2

00.0

0$1

00$1

00

Opt

ion

Val

ue$9

.00

$7.5

2$1

.48

Scal

ing

Adj

ustm

ent (

Inte

rcep

t).

The

scal

ing

fact

or

=is

a li

near

func

tion

of W

, the

ratio

of m

argi

n of

fset

to M

ER.

This

is th

e in

terc

ept

that

defin

es th

e lin

e.

Scal

ing

Adj

ustm

ent (

Slop

e).

The

scal

ing

fact

or

=is

a li

near

func

tion

of W

, the

ratio

of m

argi

n of

fset

to M

ER.

This

is th

e sl

ope

1th

at d

efin

esth

e lin

e.

Tabl

e 2-

6 sh

ows t

he “

Base

Cos

t” a

nd “

Base

Mar

gin

Offs

et”

valu

es fr

om th

e fa

ctor

grid

for s

ome

sam

ple

polic

ies.

As m

entio

ned

earli

er, t

he B

ase

Mar

gin

Off

set f

acto

rs a

ssum

e 10

0 ba

sis

poin

ts o

f “av

aila

ble

spre

ad”.

The

“M

argi

n Fa

ctor

s” a

re th

eref

ore

scal

ed b

y th

e ra

tio, w

here

=

the

actu

al m

argi

n of

fset

(in

bas

is p

oint

s pe

r an

num

) fo

r th

e po

licy

bein

g va

lued

. H

ence

, the

mar

gin

fact

or f

or th

e 7th

sam

ple

polic

y is

exa

ctly

hal

f th

e fa

ctor

for

nod

e 12

0441

21 (t

he 4

thsa

mpl

e po

licy

in T

able

6).

Tha

t is,

0.02

160

= 0.

5 ×

0.04

319.


4/7/19


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993-

2018

Nat

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438/

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018

Tab

le 2

-6: S

ampl

e N

odes

on

the

Fact

or G

rid

KEY

GM

DB

TYPE

GV

ADJU

STFU

ND

CLA

SSAG

EPO

LIC

Y DU

RAV

/GV

MER

(b

ps)

OFF

SET

CO

ST

FAC

TOR

MAR

GIN

FA

CTO

R

1013

2031

RO

P$-

for-$

Bala

nced

Al

loca

tion

550.

51.

0025

010

00.

0107

30.

0417

2

1013

3031

RO

P$-

for-$

Bala

nced

Al

loca

tion

600.

51.

0025

010

00.

0161

90.

0394

0

1013

4031

RO

P$-

for-$

Bala

nced

Al

loca

tion

650.

51.

0025

010

00.

0228

60.

0363

4

1204

4121

5% Rol

lup

Pro-

rata

Div

erse

Eq

uity

653.

50.

7525

010

00.

1848

40.

0431

9

1204

4131

5% Rol

lup

Pro-

rata

Div

erse

Eq

uity

653.

51.

0025

010

00.

1293

10.

0394

4

1204

4141

5% Rol

lup

Pro-

rata

Div

erse

Eq

uity

653.

51.

2525

010

00.

0875

70.

0370

7

1204

4121

5% Rol

lup

Pro-

rata

Div

erse

Eq

uity

653.

50.

7525

050

0.18

484

0.02

160

Inte

rpol

atio

n in

the

Fac

tor T

able

s

Inte

rpol

atio

n is

onl

y pe

rmitt

ed a

cros

s the

last

four

(4) d

imen

sion

s of t

he ri

sk p

aram

eter

set

: Atta

ined

Age

(X),

Polic

y D

urat

ion

(D),

AV

GV

Rat

io (

)an

d M

ER.

The

“MER

Del

ta” i

s cal

cula

ted

base

d on

the

diff

eren

ce b

etw

een

the a

ctua

l MER

and

that

assu

med

in th

e fa

ctor

test

ing

(see

Tab

le 2

-10)

, sub

ject

to

a ca

p (f

loor

) of 1

00 b

ps (

100

bps)

. In

gene

ral,

the c

alcu

latio

n fo

r a si

ngle

pol

icy

will

requ

ire th

reea

pplic

atio

ns o

f mul

ti-di

men

sion

al li

near

inte

rpol

atio

n be

twee

n th

e 16

= 2

4fa

ctor

s/va

lues

in th

e gr

id:

(1)

To o

btai

n th

e Ba

se F

acto

rsan

d .

(2)

To o

btai

n th

e Sc

alin

g Fa

ctor

=.

Base

d on

the

inpu

t par

amet

ers,

the

supp

lied

func

tions

(see

App

endi

x 9)

will

aut

omat

ical

ly p

erfo

rm th

e re

quire

d lo

okup

s, in

terp

olat

ions

and

cal

cula

tions

fo

r =

. , in

clud

ing

the

cons

train

ts im

pose

d on

the

mar

gin

ratio

W.

Use

of t

he to

ols n

oted

in A

ppen

dix

9 is

not

man

dato

ry.

Mul

ti-di

men

sion

al in

terp

olat

ion

is a

n ite

rativ

e ex

tens

ion

of th

e fa

mili

ar tw

o-di

men

sion

al li

near

inte

rpol

atio

n fo

r a d

iscr

ete

func

tion

() :


4/7/19


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448/

17/2

018

In th

e ab

ove

form

ulat

ion,

(

) is a

ssum

ed c

ontin

uous

and

an

d ar

e de

fined

val

ues (

“nod

es”)

for

() .

By

defin

ition

, (

+)

so th

at 0

1. I

n ef

fect

, mul

ti-di

men

sion

al in

terp

olat

ion

repe

ated

ly a

pplie

s si

mpl

e lin

ear i

nter

pola

tion

one

dim

ensi

on a

t a ti

me

until

a si

ngle

val

ue

is o

btai

ned.

Mul

ti-di

men

sion

al in

terp

olat

ion

acro

ss a

ll fo

ur d

imen

sion

s is

not

requ

ired.

How

ever

, sim

ple

linea

r int

erpo

latio

n fo

r AV

GV

Rat

io (

) is

man

dato

ry.

In

this

cas

e, th

e co

mpa

ny m

ust c

hoos

e no

des f

or th

e ot

her t

hree

(3) d

imen

sion

s acc

ordi

ng to

the

follo

win

g ru

les:

Ris

k A

ttri

bute

(D

imen

sion

)N

ode

Det

erm

inat

ion

Atta

ined

Age

Use

nex

t hig

her a

ttain

ed a

ge.

Polic

y D

urat

ion

Use

nea

rest

.

MER

Del

taU

se n

eare

st (c

appe

d at

+10

0 &

floo

red

at –

100

bps.

For

exam

ple,

if th

e ac

tual

pol

icy/

cell

is a

ttai

ned

age

62, p

olic

y du

ratio

n 4.

25 a

nd M

ER

Del

ta =

+55

bps

, the

com

pany

sho

uld

use

the

node

s de

fined

by

atta

ined

age

65,

pol

icy

dura

tion

3.5

and

ME

R D

elta

= +

100.

Tabl

e 2-

7 pr

ovid

es a

n ex

ampl

e of

the

fully

inte

rpol

ated

resu

lts fo

r a 5

% R

oll-u

p “P

ro R

ata”

pol

icy

map

ped

to th

e D

iver

sifie

d Eq

uity

cla

ss (f

irst r

ow).

W

hile

Tab

le 2

-7 d

oes

not d

emon

stra

te h

ow to

per

form

the

mul

ti-di

men

sion

al in

terp

olat

ion,

it d

oes

show

the

requ

ired

16 n

odes

from

the

Base

Fac

tors

.Th

e m

argi

n of

fset

is a

ssum

ed to

be

100

basi

s poi

nts.


4/7/19


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Nat

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458/

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018

Tab

le 2

-7: B

ase

Fact

ors f

or a

5%

Rol

lup

GM

DB

Pol

icy,

Div

ersi

fied

Equ

ity

Key

Age

Polic

y D

urPo

licy

Av/

Gv

Mer

(Bps

)B

ase

Cos

t Fa

ctor

Bas

e M

argi

n Fa

ctor

INTE

RPO

LATE

D62

4.25

0.80

265

0.15

010

0.04

491

1204

3121

603.

50.

7525

00.

1463

40.

0481

512

0431

2260

3.5

0.75

350

0.15

914

0.04

511

1204

3131

603.

51.

0025

00.

1026

30.

0436

512

0431

3260

3.5

1.00

350

0.11

859

0.04

139

1204

3221

606.

50.

7525

00.

1294

60.

0480

712

0432

2260

6.5

0.75

350

0.14

206

0.04

511

1204

3231

606.

51.

0025

00.

0882

50.

0434

912

0432

3260

6.5

1.00

350

0.10

331

0.04

129

1204

4121

653.

50.

7525

00.

1848

40.

0431

912

0441

2265

3.5

0.75

350

0.19

940

0.04

074

1204

4131

653.

51.

0025

00.

1293

10.

0394

412

0441

3265

3.5

1.00

350

0.14

747

0.03

757

1204

4221

656.

50.

7525

00.

1682

90.

0431

312

0442

2265

6.5

0.75

350

0.18

263

0.04

072

1204

4231

656.

51.

0025

00.

1150

90.

0393

412

0442

3265

6.5

1.00

350

0.13

245

0.03

751

The

inte

rpol

atio

ns re

quire

d to

com

pute

the

Scal

ing

Fact

orar

e sl

ight

ly d

iffer

ent f

rom

thos

e ne

eded

for t

he B

ase

Fact

ors.

Spe

cific

ally

, the

use

r sho

uld

not

inte

rpol

ate

the

inte

rcep

t and

slop

e te

rms f

or e

ach

surr

ound

ing

node

, but

rath

er in

terp

olat

e th

e Sc

alin

g Fa

ctor

sapp

licab

le to

eac

h of

the

node

s.

Tabl

e 2-

8 pr

ovid

es a

n ex

ampl

e of

the

Scal

ing

Fact

orfo

r the

sam

ple

polic

y gi

ven

earli

er in

Tab

le 2

-7 (i

.e.,

a 5%

Rol

l-up

“Pro

Rat

a” p

olic

y m

appe

d to

the

Div

ersi

fied

Equi

ty c

lass

) as

wel

l as

the

node

s us

ed in

the

inte

rpol

atio

n.

The

aggr

egat

e A

V/G

V fo

r the

pro

duct

por

tfolio

(i.e

., al

l 5%

Rol

l-up

polic

ies

com

bine

d) is

0.7

5; h

ence

, 90%

of t

his

valu

e is

0.6

75 a

s sh

own

unde

r “A

djus

ted

Prod

uct A

V/G

V”.

As

befo

re, t

he m

argi

n of

fset

is 1

00 b

asis

poi

nts

per

annu

m.


4/7/19


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993-

2018

Nat

iona

l Ass

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of In

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nce

Com

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sion

ers

468/

17/2

018

Tab

le 2

-8: I

nter

pola

ted

Scal

ing

Fact

ors f

or a

5%

Rol

lup

GM

DB

Pol

icy,

Div

ersi

fied

Equ

ity

Key

Age

Polic

y D

ur

Adj

uste

d Pr

oduc

t A

v/G

v

Mer

(Bps

)In

terc

ept

Slop

eSc

alin

g Fa

ctor

INTE

RPO

LATE

D62

4.25

0.67

526

5n/

an/

a0.

8719

96

1204

3111

603.

50.

5025

00.

8557

240.

0928

870.

8928

7912

0431

1260

3.5

0.50

350

0.85

5724

0.09

2887

0.88

2263

1204

3121

603.

50.

7525

00.

8342

070.

0788

120.

8657

3212

0431

2260

3.5

0.75

350

0.83

4207

0.07

8812

0.85

6725

1204

3211

606.

50.

5025

00.

8557

240.

0928

870.

8928

7912

0432

1260

6.5

0.50

350

0.85

5724

0.09

2887

0.88

2263

1204

3221

606.

50.

7525

00.

8342

070.

0788

120.

8657

3212

0432

2260

6.5

0.75

350

0.83

4207

0.07

8812

0.85

6725

1204

4111

653.

50.

5025

00.

8557

240.

0928

870.

8928

7912

0441

1265

3.5

0.50

350

0.85

5724

0.09

2887

0.88

2263

1204

4121

653.

50.

7525

00.

8342

070.

0788

120.

8657

3212

0441

2265

3.5

0.75

350

0.83

4207

0.07

8812

0.85

6725

1204

4211

656.

50.

5025

00.

8557

240.

0928

870.

8928

7912

0442

1265

6.5

0.50

350

0.85

5724

0.09

2887

0.88

2263

1204

4221

656.

50.

7525

00.

8342

070.

0788

120.

8657

3212

0442

2265

6.5

0.75

350

0.83

4207

0.07

8812

0.85

6725

Adj

ustm

ents

to G

C fo

r Pro

duct

Var

iatio

ns &

Ris

k M

itiga

tion/

Tran

sfer

In so

me

case

s, it

may

be

nece

ssar

y fo

r the

com

pany

to m

ake

adju

stm

ents

to th

e pu

blis

hed

fact

ors d

ue to

:

1.A

var

iatio

n in

pro

duct

form

whe

rein

the

defin

ition

of t

he g

uara

ntee

d be

nefit

is m

ater

ially

diff

eren

t fro

m th

ose

for w

hich

fact

ors a

re a

vaila

ble

(see

Tabl

e 2-

9); a

nd/o

r


4/7/19


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2.A

risk

miti

gatio

n / m

anag

emen

t stra

tegy

that

can

not b

e ac

com

mod

ated

thro

ugh

a st

raig

ht-f

orw

ard

and

dire

ct a

djus

tmen

t to

the

publ

ishe

d va

lues

.

Any

adj

ustm

ents

to th

e pu

blis

hed

fact

ors

mus

t be

fully

doc

umen

ted

and

supp

orte

d th

roug

h st

ocha

stic

ana

lysi

smod

elin

g.

Such

ana

lysi

smod

elin

g m

ay

requ

ire st

ocha

stic

sim

ulat

ions

, but

wou

ld n

ot o

rdin

arily

be

base

d on

full

info

rce

proj

ectio

ns.

Inst

ead,

a re

pres

enta

tive

“mod

el o

ffic

e” sh

ould

be

suff

icie

nt.

In th

e abs

ence

of m

ater

ial c

hang

es to

the p

rodu

ct d

esig

n, ri

sk m

anag

emen

t pro

gram

and

Alte

rnat

ive M

etho

d (in

clud

ing

the p

ublis

hed

fact

ors)

, the

com

pany

w

ould

not

be

expe

cted

to re

do th

is a

naly

sism

odel

ing

each

yea

r.

Not

e th

at m

inor

var

iatio

ns in

pro

duct

des

ign

do n

ot n

eces

saril

y re

quire

add

ition

al e

ffor

t. In

som

e ca

ses,

it m

ay b

e re

ason

able

to u

se th

e fa

ctor

s/fo

rmul

as

for a

diff

eren

t pro

duct

form

(e.g

., fo

r a “

roll-

up”

GM

DB

polic

y ne

ar o

r bey

ond

the

max

imum

rese

t age

or a

mou

nt, t

he c

ompa

ny s

houl

d us

e th

e “r

etur

n-of

-pre

miu

m”

GM

DB

fact

ors/

form

ulas

, pos

sibl

y ad

just

ing

the

guar

ante

ed v

alue

to

refle

ct f

urth

er r

eset

s, if

any)

. In

oth

er c

ases

, the

com

pany

mig

ht

dete

rmin

e th

e R

BC b

ased

on

two

diff

eren

t gu

aran

tee

defin

ition

s an

d in

terp

olat

e th

e re

sults

to o

btai

n an

app

ropr

iate

val

ue f

or th

e gi

ven

polic

y/ce

ll.

Like

wis

e, it

may

be p

ossi

ble t

o ad

just

the A

ltern

ativ

e Met

hod

resu

lts fo

r cer

tain

risk

tran

sfer

arra

ngem

ents

with

out s

igni

fican

t add

ition

al w

ork

(e.g

., qu

ota-

shar

e re

insu

ranc

e w

ithou

t cap

s, flo

ors o

r slid

ing

scal

es w

ould

nor

mal

ly b

e re

flect

ed b

y a

sim

ple

pro-

rata

adj

ustm

ent t

o th

e “g

ross

” G

Cre

sults

).

How

ever

, if t

he p

olic

y de

sign

is su

ffic

ient

ly d

iffer

ent f

rom

thos

e pr

ovid

ed a

nd/o

r the

risk

miti

gatio

n st

rate

gy is

non

-line

ar in

its i

mpa

ct o

n th

e A

AR

, and

th

ere

is n

o pr

actic

al o

r ob

viou

s w

ay t

o ob

tain

a g

ood

resu

lt fr

om t

he p

resc

ribed

fac

tors

/form

ulas

, th

e co

mpa

ny m

ust

just

ify a

ny a

djus

tmen

ts o

r ap

prox

imat

ions

by

stoc

hast

ic m

odel

ing.

Not

ably

this

mod

elin

g ne

ed n

ot b

e pe

rfor

med

on

the

who

le p

ortfo

lio, b

ut c

an b

e un

derta

ken

on a

n ap

prop

riate

se

t of r

epre

sent

ativ

e po

licie

s.

The

rem

aind

er o

f thi

s sec

tion

sugg

ests

a p

roce

ss fo

r adj

ustin

g th

e pu

blis

hed

“Cos

t” a

nd “

Mar

gin

Off

set”

fact

ors d

ue to

a v

aria

tion

in p

rodu

ct d

esig

n (e

.g.,

a “s

tep-

up”

optio

n at

eve

ry 7

than

nive

rsar

y w

here

by th

e gu

aran

teed

val

ue is

rese

t to

the

acco

unt v

alue

, if h

ighe

r). N

ote

that

the

“Sca

ling

Fact

ors”

(as

dete

rmin

ed b

y th

e sl

ope

and

inte

rcep

t ter

ms i

n th

e fa

ctor

tabl

e) w

ould

not

be

adju

sted

.

The

step

s for

adj

ustin

g th

e pu

blis

hed

Cos

tand

Mar

gin

Offs

etfa

ctor

s for

pro

duct

des

ign

varia

tions

are

:

1.Se

lect

a p

olic

y de

sign

in th

e pu

blis

hed

tabl

es th

at is

sim

ilar t

o th

e pr

oduc

t bei

ng v

alue

d. E

xecu

te c

ashf

low

pro

ject

ions

usi

ng th

e do

cum

ente

d as

sum

ptio

ns (

see

Tabl

es 2

-9 a

nd 2

-10

)10)

and

the

pre

-pac

kage

d sc

enar

ios

from

the

pre

scrib

ed g

ener

ator

s fo

r a

set

of r

epre

sent

ativ

e ce

lls

(com

bina

tions

of a

ttain

ed a

ge, p

olic

y du

ratio

n, a

sset

cla

ss, A

V/G

V ra

tio a

nd M

ER).

The

se c

ells

sho

uld

corr

espo

nd to

nod

es in

the

fact

or g

rid.

Ran

k (o

rder

) the

sam

ple

dist

ribut

ion

of re

sults

for t

he p

rese

nt v

alue

of n

et c

ost6

. D

eter

min

e th

ose

scen

ario

s whi

ch c

ompr

ise

CTE

(90)

.

6Pr

esen

t val

ue o

f net

cos

t = P

V[ g

uara

ntee

d be

nefit

cla

ims i

n ex

cess

of a

ccou

nt v

alue

] –

PV[ m

argi

n of

fset

]. T

he d

isco

untin

g in

clud

es c

ashf

low

s in

all f

utur

e ye

ars (

i.e.,

to th

e ea

rlier

of c

ontra

ct

mat

urity

and

the

end

of th

e ho

rizon

).


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018

2.U

sing

the

resu

lts fr

om st

ep 1

., av

erag

e th

e pr

esen

t val

ue o

f cos

t for

the

CTE

(90)

scen

ario

s an

d di

vide

by

the

curr

ent g

uara

ntee

d va

lue.

For

a th

eJth

cell,

den

ote

this

val

ue b

y .

Sim

ilarly

, ave

rage

the

pres

ent v

alue

of

mar

gin

offs

et r

even

ue fo

r th

e sa

me

subs

et o

f sce

nario

s an

d di

vide

by

acco

unt v

alue

. Fo

r the

Jth

cell,

den

ote

this

val

ue b

y .

3.Ex

tract

the

corr

espo

ndin

g fa

ctor

s fro

m th

e pu

blis

hed

grid

. Fo

r eac

h ce

ll, c

alib

rate

to th

e pu

blis

hed

tabl

es b

y de

finin

g a

“mod

el a

djus

tmen

t fac

tor”

(den

oted

by

aste

risk)

sepa

rate

ly fo

r the

“co

st”

and

“mar

gin

offs

et”

com

pone

nts:

=an

d=

4.Ex

ecut

e “p

rodu

ct s

peci

fic”

cash

flow

pro

ject

ions

usi

ng th

e do

cum

ente

d as

sum

ptio

ns a

nd p

re-p

acka

ged

scen

ario

s fr

om th

e pr

escr

ibed

gen

erat

ors

fort

he sa

me s

et o

f rep

rese

ntat

ive c

ells

. H

ere,

the

com

pany

shou

ld m

odel

the a

ctua

l pro

duct

des

ign.

Ran

k (o

rder

) the

sam

ple

dist

ribut

ion

of re

sults

fo

r the

pre

sent

val

ue o

f net

cos

t. D

eter

min

e th

ose

scen

ario

s whi

ch c

ompr

ise

CTE

(90)

.

5.U

sing

the

resu

lts fr

om st

ep 4

., av

erag

e th

e pr

esen

t val

ue o

f cos

t for

the

CTE

(90)

scen

ario

s an

d di

vide

by

the

curr

ent g

uara

ntee

d va

lue.

For

a th

eJth

cell,

den

ote

this

val

ue b

y .

Sim

ilarly

, ave

rage

the

pres

ent v

alue

of

mar

gin

offs

et r

even

ue fo

r th

e sa

me

subs

et o

f sce

nario

s an

d di

vide

by

acco

unt v

alue

. Fo

r a th

e Jth

cell,

den

ote

this

val

ue b

y .

6.To

cal

cula

te th

e A

AR

for t

he sp

ecifi

c pr

oduc

t in

ques

tion,

the

com

pany

shou

ld im

plem

ent t

he A

ltern

ativ

e M

etho

d as

doc

umen

ted,

but u

se

×in

pla

ce o

f an

d ×

inst

ead

of

. Th

e co

mpa

ny m

ust u

se th

e “S

calin

g Fa

ctor

s” fo

r the

pro

duct

eva

luat

ed in

step

1. (

i.e.,

the

prod

uct

used

to c

alib

rate

the

com

pany

’s c

ashf

low

mod

el).


4/7/19


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018

Ass

umpt

ions

for t

he A

ltern

ativ

e M

etho

d Pu

blis

hed

GM

DB

Fac

tors

This

sub

sect

ion

revi

ews

the

mod

el a

ssum

ptio

ns u

sed

to d

evel

op th

e A

ltern

ativ

e M

etho

d fa

ctor

s. E

ach

node

in th

e fa

ctor

grid

is e

ffect

ivel

y th

e m

odel

ed

resu

lt fo

r a g

iven

“ce

ll”.

Tab

le 2

-9: M

odel

Ass

umpt

ions

& P

rodu

ct C

hara

cter

istic

s

Acc

ount

Cha

rges

(MER

)V

ary

by fu

nd c

lass

. Se

e Ta

ble

2-10

late

r in

this

sect

ion.

Bas

e M

argi

n O

ffse

t10

0 ba

sis p

oint

s per

ann

um

GM

DB

Des

crip

tion

1.R

OP

= re

turn

of p

rem

ium

RO

P.2.

RO

LL =

5%

roll-

up, c

appe

d at

2.5

pr

emiu

m, f

roze

n at

age

80.

3.M

AV

= a

nnua

l rat

chet

(max

imum

ann

iver

sary

val

ue),

froz

en a

t age

80.

4.H

IGH

= H

ighe

r of 5

% ro

ll-up

and

ann

ual r

atch

et fr

ozen

at a

ge 8

0.5.

EDB

= R

OP

+ 40

% E

nhan

ced

Dea

th B

enef

it (c

appe

d at

40%

of d

epos

it).

Adj

ustm

ent t

o G

MD

B U

pon

Parti

al W

ithdr

awal

“Pro

-Rat

a by

Mar

ket V

alue

” an

d “D

olla

r-for

-Dol

lar”

are

teste

d se

para

tely

.

Surr

ende

r Cha

rges

Igno

red

(i.e.

, zer

o).

Ref

lect

ed in

the

“CA

” co

mpo

nent

of t

he A

AR

.

Sing

le P

rem

ium

/ D

epos

it$1

00,0

00.

No

futu

re d

epos

its; n

o in

tra-p

olic

y fu

nd re

bala

ncin

g.

Bas

e Po

licy

Laps

e R

ate

Pro-

rata

by

MV

:10

% p

.a. a

t all

polic

y du

ratio

ns (b

efor

e dy

nam

ics)

Dol

lar-f

or-d

olla

r:2%

p.a

. at a

ll po

licy

dura

tions

(no

dyna

mic

s)

Parti

al W

ithdr

awal

sPr

o-ra

ta b

y M

V:

Non

e (i.

e., z

ero)

Dol

lar-f

or-d

olla

r:Fl

at 8

% p

.a. a

t all

polic

y du

ratio

ns (a

s a %

of A

V).

No

dyna

mic

s or a

nti-s

elec

tive

beha

vior

.

Mor

talit

y10

0% o

f MG

DB

94

ALB

.

Gen

der /

Age

Dis

tribu

tion

100%

mal

e. M

etho

dolo

gy a

ccom

mod

ates

diff

eren

t atta

ined

age

s and

pol

icy

dura

tions

. A

5-y

ear a

ge se

tbac

k w

ill b

e us

ed fo

r fem

ale

annu

itant

s.

Max

. Ann

uitiz

atio

n A

geA

ll po

licie

s ter

min

ate

at a

ge 9

5.

Fixe

d Ex

pens

es, A

nnua

l Fee

sIg

nore

d (i.

e., z

ero)

. R

efle

cted

in th

e “F

E” c

ompo

nent

of t

he A

AR

.

Inco

me

Tax

Rat

e21

35%


4/7/19


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ers

508/

17/2

018

Dis

coun

t Rat

e3.

74.5

4% (a

fter-t

ax) e

ffect

ive

= 5.

75%

pre

-tax.

Dyn

amic

Lap

se M

ultip

lier

(App

lies o

nly

to p

olic

ies w

here

G

MD

B is

adj

uste

d “p

ro-ra

ta b

y M

V”

upon

with

draw

al)

U=1

, L=0

.5, M

=1.2

5, D

=1.1

App

lied

to th

e ‘B

ase

Polic

y La

pse

Rat

e’ (n

ot w

ithdr

awal

s).

Not

es o

n G

MD

B F

acto

r Dev

elop

men

t

The

roll-

up is

con

tinuo

us (n

ot s

impl

e in

tere

st, n

ot s

tepp

ed a

t eac

h an

nive

rsar

y) a

nd is

app

lied

to th

e pr

evio

us ro

ll-up

gua

rant

eed

valu

e (i.

e., n

ot th

e co

ntra

ct g

uara

ntee

d va

lue

unde

r HIG

H).

The

Enha

nced

Dea

th B

enef

it (“

EDB”

) is f

loor

ed a

t zer

o. I

t pay

s out

40%

of t

he g

ain

in th

e po

licy

upon

dea

th a

t tim

e t:

=[ 0

.40

×,0

.40

×( 0

,)]

. T

he t

est

polic

y al

so h

as a

100

% r

etur

n-of

-pre

miu

m G

MD

B, b

ut t

he E

DB

A

ltern

ativ

e Fa

ctor

s will

be

net o

f the

GM

DB

com

pone

nt.

That

is, t

he E

DB

fact

ors a

re ‘s

tand

-alo

ne’ a

nd a

pplie

d in

add

ition

toth

e G

MD

B fa

ctor

s.

The

“Bas

e Po

licy

Laps

e R

ate”

is th

e ra

te o

f pol

icy

term

inat

ion

(tota

l sur

rend

ers)

. Po

licy

term

inat

ions

(sur

rend

ers)

are

ass

umed

to o

ccur

thro

ugho

ut

the

polic

y ye

ar (n

ot o

nly

on a

nniv

ersa

ries)

.

Parti

al w

ithdr

awal

s(if

appl

icab

le) a

re a

ssum

ed to

occ

ur a

t the

end

of e

ach

time

perio

d (q

uarte

rly).

Acc

ount

cha

rges

(“M

ER”)

rep

rese

nt t

he t

otal

am

ount

(an

nual

ized

, in

basi

s po

ints

) as

sess

ed a

gain

st p

olic

yhol

der

fund

s (e

.g.,

sum

of

inve

stm

ent

man

agem

ent f

ees,

mor

talit

y an

d ex

pens

e ch

arge

s, ris

k pr

emiu

ms,

polic

y/ad

min

istra

tive

fees

, etc

.). T

hey

are

assu

med

to o

ccur

thro

ugho

ut th

e po

licy

year

(not

onl

y on

ann

iver

sarie

s).

Tab

le 2

-10:

Acc

ount

-Bas

ed F

und

Cha

rges

(bps

per

ann

um)

Ass

et C

lass

/ Fu

ndA

ccou

nt V

alue

C

harg

es (M

ER

)Fi

xed

Acc

ount

0M

oney

Mar

ket

110

Fixe

d In

com

e (B

ond)

200

Bal

ance

d25

0


4/7/19


© 1

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518/

17/2

018

Div

ersi

fied

Equi

ty25

0D

iver

sifie

d In

tern

atio

nal E

quity

250

Inte

rmed

iate

Ris

k Eq

uity

265

Agg

ress

ive

or E

xotic

Equ

ity27

5


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018

Cal

cula

tion

Exa

mpl

e

Con

tinui

ng t

he p

revi

ous

exam

ple

(see

Tab

les

2-7

and

2-8)

for

a 5

% R

oll-u

p G

MD

B po

licy

map

ped

to D

iver

sifie

d Eq

uity

, su

ppos

e w

e ha

ve t

he

polic

y/pr

oduc

t par

amet

ers a

s spe

cifie

d in

Tab

le 2

-11.

Tab

le 2

-11:

Sam

ple

Polic

y R

esul

ts fo

r 5%

Rol

l-up

GM

DB

, Div

ersi

fied

Equ

ity

Para

met

erV

alue

Des

crip

tion

Dep

osit

Val

ue$1

00.0

0To

tal d

epos

its a

djus

ted

for p

artia

l with

draw

als.

Acc

ount

Val

ue$9

8.43

Tota

l acc

ount

val

ue a

t val

uatio

n da

te, i

n do

llars

.

GM

DB

$123

.04

Cur

rent

gua

rant

eed

min

imum

dea

th b

enef

it, in

dol

lars

.

Atta

ined

Age

62A

ttain

ed a

ge a

t the

val

uatio

n da

te (i

n ye

ars)

.

Polic

y D

urat

ion

4.25

Polic

y du

ratio

n at

the

valu

atio

n da

te (i

n ye

ars)

.

GV

Adj

ustm

ent

Pro-

Rat

aG

MD

B ad

just

ed p

ro-r

ata

by M

V u

pon

parti

al w

ithdr

awal

.

Fund

Cla

ssD

iver

sifie

d Eq

uity

Con

tract

exp

osur

e m

appe

d to

Div

ersi

fied

Equi

ty a

s per

the

Fund

Cat

egor

izat

ion

inst

ruct

ions

in th

e se

ctio

n of

this

A

ppen

dix

on C

ompo

nent

GC

.

MER

265

Tota

l cha

rge

agai

nst p

olic

yhol

der f

unds

(bps

).

Prod

uctC

ode

2Pr

oduc

t Def

initi

on c

ode

as p

er lo

okup

key

in T

able

4.

GV

Adj

ust

0G

V A

djus

tmen

t Upo

n Pa

rtial

With

draw

al a

s per

key

in

Tabl

e 2-

4.

Fund

Cod

e4

Fund

Cla

ss c

ode

as p

er lo

okup

key

in T

able

2-4

.

Polic

yMV

GV

0.80

0C

ontra

ct a

ccou

nt v

alue

div

ided

by

GM

DB.

Adj

Prod

uctM

VG

V0.

675

90%

of t

he a

ggre

gate

AV

/GV

for t

he P

rodu

ct p

ortfo

lio.

RC

150

Mar

gin

offs

et (b

asis

poi

nts p

er a

nnum

).

Usi

ng th

e us

ual n

otat

ion,

=

××

×.

= 0.

1500

99 =

Get

Cos

tFac

tor(

2, 0

, 4, 6

2, 4

.25,

0.8

, 265

)


4/7/19


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Nat

iona

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sion

ers

538/

17/2

018

= 0.

0673

61 =

Get

Mar

ginF

acto

r(2,

0, 4

, 62,

4.2

5, 0

.8, 2

65, 1

50)

= 0.

8876

63 =

Get

Scal

ingF

acto

r(2,

0, 4

, 62,

4.2

5, 0

.675

, 265

, 150

)

Hen

ce, G

C=

$12.

58 =

( 12

3.04

× 0

.150

099

) –( 9

8.43

× 0

.067

361

× 0.

8876

63 ).

As a

nor

mal

ized

val

ue, t

his q

uant

ity is

12.

78%

of a

ccou

nt v

alue

, 10.

23%

of

gua

rant

eed

valu

e an

d 51

.1%

of t

he c

urre

nt n

et a

mou

nt a

t ris

k (N

et a

mou

nt a

t ris

k =

GV

–A

V).

Not

e th

at

=×

=15

010

0×

0.04

4907

whe

re

is “

per 1

00 b

asis

poi

nts”

of a

vaila

ble

mar

gin

offs

et.

= 0.

0449

07 =

Get

Mar

ginF

acto

r(2,

0, 4

, 62,

4.2

5, 0

.8, 2

65, 1

00)


4/7/19


Attachment Five-G Capital Adequacy (E) Task Force

4/7/19


Attachment Six Capital Adequacy (E) Task Force

4/7/19


Draft: 4/2/19

Operational Risk (E) Subgroup Conference Call March 27, 2019

The Operational Risk (E) Subgroup of the Capital Adequacy (E) Task Force met via conference call March 27, 2019. The following Subgroup members participated: Stephen Wiest, Chair (NY); Richard Ford (AL); Susan Bernard (CA); Tish Becker (KS); John Robinson (MN); John Rehagen (MO); Anna Krylova (NM); Joel Sander (OK); and Patrick McNaughton and Steven Drutz (WA).

1. Adopted its Feb. 26 Minutes

Mr. Sander made a motion, seconded by Mr. Rehagen, to adopt the Subgroup’s Feb. 26 minutes (Attachment Six-A). The motion passed unanimously.

2. Adopted a Referral for Collecting Longer-Term Information on Operational Risk

Mr. Wiest stated that the public comment period for the exposure of this document ended March 13, and one comment letter was received from the National Association of Mutual Insurance Companies (NAMIC). In response to the NAMIC letter, some minor edits were made to the referral document. Mr. Wiest said the referral is to both the Group Solvency Issues (E) Working Group and the Risk-Focused Surveillance (E) Working Group, and it is supported by Justin Schrader (NE), who chairs both working groups. There were no further comments.

Mr. McNaughton made a motion, seconded by Ms. Bernard, to adopt a referral for collecting longer-term information on operational risk and send it to the target working groups for further action (Attachment Six-B). The motion passed unanimously.

3. Adopted a “Hand-Off” Memorandum on Growth Risk

Mr. Wiest stated that a “hand-off” memorandum on growth risk is included in the materials. This document is intended to provide information to the Life Risk-Based Capital (E) Working Group about the work and discussion that has taken place thus far with the Operational Risk (E) Subgroup related to growth operational risk for life insurers.

Mr. Wiest stated that Philip Barlow (DC), who chairs the Life Risk-Based Capital (E) Working Group, has agreed to present the document to the Working Group members, who would then decide the priority, timing and extent of any additional work on growth risk for the life risk-based capital (RBC) formula.

Because Mr. Barlow was unable to attend this conference call, Mr. Wiest relayed that Mr. Barlow expressed some reservations about the ability to find an appropriate measurement of growth risk for life insurance business, but he does see value in the discussion and including a common health growth risk measurement between the health RBC and life RBC formulas.

Mr. Drutz made a motion, seconded by Ms. Bernard, to adopt a “hand-off” memorandum on growth risk and send it to the Life Risk-Based Capital (E) Working Group for further consideration (Attachment Six-C). The motion passed unanimously.

4. Discussed Other Matters

Mr. Wiest stated that he would provide a report at the Spring National Meeting advising Commissioner David Altmaier (FL) and the members of the Capital Adequacy (E) Task Force that the work of the Subgroup is now concluded and the Subgroup should be disbanded.

Mr. Wiest noted that a basic operational risk charge is in place in all RBC formulas, and further work on growth risk for the property and health RBC formulas has been referred to the respective RBC working groups and added to their agendas. The Life Risk-Based Capital (E) Working Group will decide what additional work should be added to the Working Group’s agenda based on its review of the “hand-off” memorandum adopted today.

Attachment Six Capital Adequacy (E) Task Force

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Mr. Wiest thanked the Subgroup members, NAIC support staff, interested state insurance regulators and interested parties for their work over the lifespan of the Subgroup. He specifically recognized the contributions and leadership of the late Alan Seeley (NM), who served as chair of the Subgroup until April 2018.

Having no further business, the Operational Risk (E) Subgroup adjourned.

W:\National Meetings\2019\Spring\TF\CapAdequacy\OpRisk\3_27_19OPRSGmins

Attachment Six-A Capital Adequacy (E) Task Force

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Draft: 3/7/19

Operational Risk (E) Subgroup Conference Call

February 26, 2019

The Operational Risk (E) Subgroup of the Capital Adequacy (E) Task Force met via conference call Feb. 26, 2019. The following Subgroup members participated: Stephen Wiest, Chair (NY); Jennifer Haskell (AL); Susan Bernard (CA); Tish Becker (KS); John W. Robinson (MN); John Rehagen (MO); Anna Krylova (NM); Andrew Schallhorn (OK); Patrick McNaughton (WA); and Richard Hinkel (WI).

1. Adopted its Jan. 24, 2019, and Dec. 20, 2018, Minutes

Ms. Bernard made a motion, seconded by Mr. McNaughton, to adopt the Subgroup’s Jan. 24, 2019 (Attachment Six-A1), and Dec. 20, 2018 (Attachment Six-A2) minutes. The motion passed unanimously.

2. Adopted a Proposal to Remove the “Informational Only” Growth Risk from the Health, Life and Fraternal RBC Formulasin 2019

Mr. Wiest stated that the public comment period for the exposure of this change ended Feb. 25, and no comments were received. Mr. Robinson made a motion, seconded by Mr. Hinkel, to adopt the proposal (Attachment Six-A3) to remove the “informational only” growth risk pages from the health, life and fraternal risk-based capital (RBC) formulas in 2019. The motion passed unanimously.

3. Adopted a Referral to the Health Risk-Based Capital (E) Working Group

Mr. Wiest stated that he had presented the referral language to the Health Risk-Based Capital (E) Working Group during its most recent conference call, noting that the Working Group is prepared to accept the referral. Mr. McNaughton, chair of the Working Group, agreed.

Bill Weller (America’s Health Insurance Plans—AHIP) noted that a slight revision he had suggested previously was not included in the version of the referral being considered. Mr. Wiest stated that the final version of the referral would include Mr. Weller’s suggested language.

With that change, Mr. McNaughton made a motion, seconded by Ms. Krylova, to adopt the referral to the Working Group to continue the review of growth risk in the health RBC formula (Attachment Six-A4). The motion passed unanimously.

4. Discussed a Referral for Collecting Longer-Term Information on Operational Risk

Mr. Wiest said both the Group Solvency Issues (E) Working Group and Risk-Focused Surveillance (E) Working Group are now the target NAIC groups for this referral. He stated that he had spoken with Justin Schrader (NE) who chairs both working groups, and Mr. Schrader is open to the idea that both working groups could have a role in considering how to address the referral.

Lou Felice (NAIC) summarized the contents of the referral, noting that it suggests a more general review with some examples of areas of focus.

Mr. Wiest said the concept and content of referring further review of operational risk has previously been discussed and exposed. Therefore, the Subgroup could probably consider adoption of the referral today but, given the new target groups and the revised language, Mr. Wiest suggested a 15-day exposure. There were no objections. Thus, the referral document will be exposed for a public comment period ending March 13.

Brian O’Neill (American Academy of Actuaries—Academy) stated that the Academy’s Life Operational Risk Work Group would review the document. He also expressed the Academy’s willingness to assist the Group Solvency Issues (E) Working Group and the Risk-Focused Surveillance (E) Working Group, if requested.

Attachment Six-A Capital Adequacy (E) Task Force

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Mr. Wiest stated that work continues on a document the Subgroup plans to provide to the Life Risk-Based Capital (E) Working Group concerning reasons and suggestions for continuing a review of adding a growth risk charge to the life RBC formula. He said a document will be distributed for the Subgroup’s final conference call later in March.

Mr. Wiest asked Mr. Felice to canvass Subgroup members’ availability for an open conference call during the period March 20–27.



Attachment Six-A1 Capital Adequacy (E) Task Force

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Draft: 1/31/19

Operational Risk (E) Subgroup Conference Call January 24, 2019

The Operational Risk (E) Subgroup of the Capital Adequacy (E) Task Force met via conference call Jan. 24, 2019. The following Subgroup members participated: Stephen Wiest, Chair (NY); Susan Bernard (CA); Chut Tee (KS); John W. Robinson (MN); John Rehagen (MO); Anna Krylova (NM); Andrew Schallhorn (OK); Patrick H. McNaughton and Steve Drutz (WA); and Richard Hinkel (WI). Also participating was: James Jakielo (CT).

1. Exposed a Proposal to Remove the “Informational Only” Growth Risk from the Health, Life and Fraternal RBCFormulas in 2019

Mr. Wiest said that the Subgroup members had previously discussed removing the “informational only” growth risk pages from the health, life and the fraternal risk-based capital (RBC) formulas. He referred to the attachments that deleted the instructions and structure from the formulas. Mr. Wiest said that the documents must be exposed for a minimum of 30 days. Bill Weller (America’s Health Insurance Plans—AHIP) stated his organization’s support for the exposure.

Hearing no comments in opposition, the Subgroup exposed the material for a 30-day comment period ending Feb. 25, 2019.

2. Discussed a Potential Referral to the Health Risk-Based Capital (E) Working Group for Continued Review of GrowthRisk

Mr. Wiest noted that during several recent conference calls, the Subgroup had been discussing ways to move potential adjustments or a review of the growth risk component of health RBC forward. During the prior conference call, he asked Lou Felice (NAIC) to put together a draft referral outline for review of the existing growth risk calculation in health RBC that the Subgroup can pass along to the Health Risk-Based Capital (E) Working Group. Mr. Felice summarized the contents of the document and noted the Subgroup used a similar path to refer further review of the existing growth risk in the property RBC formula to the Property and Casualty Risk-Based Capital (E) Working Group. The document provided some history of the current growth risk charge in the health RBC formula and suggested some areas for review and consideration.

Mr. Robinson asked if there were a historical record that could be referred to as part of the work to be referred. Mr. Felice said that the document relied on some historical documentation, but another review could be helpful. Mr. McNaughton said that the Health Risk-Based Capital (E) Working has previously done some work on the growth risk issue and did receive some historical documentation several years ago. He added that he is expecting a referral based on the Subgroup’s previous discussion. Mr. Weller said that the document looks like a fair representation of the issues around growth risk and expressed a willingness of his organization to work with the Health Risk-Based Capital (E) Working Group in reviewing the existing growth risk charge. He requested an edit to the considerations section of the document to say that additional operational risk may be caused by rapid growth rather than is caused by rapid growth.

Mr. Wiest said that he is on the agenda for the next conference call of the Health Risk-Based Capital (E) Working Group scheduled for Feb. 1. After getting feedback from that Working Group, a formal referral will be drafted, discussed and subject to adoption during the Subgroup’s next conference call.

3. Discussed a Potential Referral for Collecting Longer-Term Information on Operational Risk

Mr. Wiest said that work is going on via coordination with other NAIC staff and state insurance regulator outreach to determine a suitable target group to continue this work, which has the potential to greatly enhance regulators’ knowledge about operational risk and how it is assessed by insurers. He said that given prior comments and outreach, the ORSA Implementation (E) Subgroup will not be the target group for continuing the work. He said that draft wording for a referral is being developed and that the Subgroup will discuss a potential referral and target NAIC group(s) during its next conference call.

Mr. Wiest stated that at the request of himself and Mr. Robinson, David Sandberg (David Sandberg LLC) took a look at the questions posed in the most recent exposure. Mr. Sandberg submitted edited versions of questions that had previously been exposed for comment. Mr. Wiest noted that Mr. Sandberg has been involved with operational risk at the international level


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and has presented on the subject. Mr. Sandberg said that his input was based on research that he participated in at the International Actuarial Association (IAA), which is moving focus away from quantifying operational risk based on data and moving toward assessment of different categories of operational risk to establish an approximate a charge. He said that this approach leads to using mitigation and improved processes to lower the operational risk charge. Mr. Wiest said that Mr. Sandberg’s input would be considered in developing a referral. 4. Discussed Other Matters Mr. Wiest stated that work continues on a document that the Subgroup plans to provide to the Life Risk-Based Capital (E) Working Group concerning reasons and suggestions for continuing a review for adding a growth risk charge to the life RBC formula. He said he will be discussing the matter further with Philip Barlow (DC), chair of the Life Risk-Based Capital (E) Working Group. Any further developments will be included in the agenda for a conference call in late March. Mr. Wiest asked Mr. Felice to canvass Subgroup members’ availability for an open conference call during the last week in February or the first few working days in March. Having no further business, the Operational Risk (E) Subgroup adjourned. W:\National Meetings\2019\Spring\TF\CapAdequacy\OpRisk\1_24_19OPRSGmins


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Draft: 1/8/19

Operational Risk (E) Subgroup Conference Call

December 20, 2018

The Operational Risk (E) Subgroup of the Capital Adequacy (E) Task Force met via conference call Dec. 20, 2018. The following Subgroup members participated: Stephen Wiest, Chair (NY); Susan Bernard (CA); Tish Becker (KS); John Robinson (MN); John Rehagen (MO); Anna Krylova (NM); Andy Schallhorn (OK); and Patrick McNaughton (WA). Also participating was: James Jakielo (CT).

1. Discussed Comment Letters Received for the Exposed Document on Growth Risk in Health RBC

Mr. Wiest asked for the authors of the two comment letters that were submitted to summarize their comments. William Weller (America’s Health Insurance Plans—AHIP) also spoke on behalf of the Blue Cross and Blue Shield Association (BCBSA). He said that there are other regulatory tools that are better suited for state insurance regulators to monitor growth than risk-based capital (RBC) such that it does not make sense to look at alternatives to the existing health RBC treatment of growth risk. He said that state insurance regulators should monitor the actual vs. expected growth for new health entities in another way.

James Braue (UnitedHealth Group—UHG) said that the existing operational risk charge in the health RBC formula is adequate and otherwise generally agreed with Mr. Weller’s comments.

Lou Felice (NAIC) said that two options were presented in the exposure and that the comments focused on Option 1 and did not really address Option 2, which was to provide some recommended areas for review to the Health Risk-Based Capital (E) Working Group. He said that one such area is addressing growth for start-up health entities. He also said that identifying embedded operational risk in other risk types has been a difficult issue and that the focus of any risk charge should be on stand-alone operational risk, for now. Mr. Braue said that although it addresses underwriting risk, the existing growth risk charge is not focused solely on that risk. However the other risks, including pure operational risks, are not material relative to underwriting risk. Mr. Weller said that monitoring the operating plan and upfront accumulation of capital for new entities are more pertinent to assessing growth risk than is the growth risk charge in RBC. Crystal Brown (NAIC) said that new entities that are operating consistent with their projections would not trigger the growth risk charge.

Mr. Wiest expressed continuing concern over whether the existing operational risk charge is working as intended, but recognized that there is general opposition to the alternatives. So he recommended that the Subgroup move forward with Option 2 and provide some suggested areas for review in the existing growth risk charge by the Health Risk-Based Capital (E) Working Group, similar to what was done last year with regard to the existing growth charge in the property RBC formula. He also recommended that the informational growth risk page and instructions be deleted from the 2019 health RBC formula. Mr. Wiest asked Mr. Felice to draft a proposal to remove the informational growth risk page and instructions. Mr. McNaughton, who is chair of the Health Risk-Based Capital (E) Working Group, said he is on board with the course of action, but he asked about the interaction between the Operational Risk (E) Subgroup and the Health Risk-Based Capital (E) Working Group going into 2019. Mr. Wiest said the Health Risk-Based Capital (E) Working Group can comment on the proposal to delete the informational growth risk page and that any suggested review areas for the existing growth risk charge will be passed to the Working Group for its consideration. The Subgroup had no objections to Mr. Wiest’s recommended course of action. The Subgroup plans to discuss implementing this course of action during its next conference call.

2. Discussed Comment Letters on the Exposed Document on Collecting Longer-Term Information on Operational Risk

Mr. Wiest asked the author of the single comment letter submitted to summarize the comments therein. Mr. Weller spoke on behalf of all the interested parties that signed the “Joint Trades” letter. He said the RBC formulas were not the appropriate venue for the questions since they are not directly related to RBC. He also questioned the use of the term “data collection” and whether actual data would be collected. He said that no data should be collected until there was information presented from NAIC data that there were historical instances where operational risk events have affected RBC. Jonathan Rogers (National Association of Mutual Insurance Companies—NAMIC) agreed with Mr. Weller’s comments. Mr. Braue echoed the comments in the “Joint Trades” letter with regard to presenting historical data on the relevance of operational risk.

Mr. Jakielo said that any questions to be related to operational risk that are recommended to the ORSA Implementation (E) Subgroup must not impose any prescriptive requirements for specific data to be included in Own Risk and Solvency Assessment


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(ORSA) filings. He noted that the answers may be inconsistent across ORSA filers. He asked that a referral be provided to the ORSA Implementation (E) Subgroup for discussion in order to assure that it does not circumvent the spirit of the ORSA process.

Mr. Felice noted that there is a connection between the questions asked in the exposed document and RBC in that the response may ultimately lead to a more refined approach to an RBC charge for operational risk. He agreed that there could be other venues beside RBC for collecting the desired information but that confidentiality remains a concern. Mr. Felice said it had already been established that operational risk was missing from the RBC formulas (based on the fact that the Subgroup was tasked with, and, in fact, adopted a charge for operational risk) and that isolating data to demonstrate its impact on capital was difficult. Therefore, the best resource for understanding how operational risk is defined and quantified rests with the insurers that are doing that internally and not from NAIC data. Mr. Wiest agreed with this assessment.

Mr. Robinson said that research may be best conducted by an external entity that is equipped to do the analysis. He cited the use of an external consultant in developing reserving changes related to the principle-based reserving (PBR) initiative. Mr. Wiest said that the Subgroup should remain open to further comments on asking the best questions and how to get the best information. He recommended that referrals to one or more of the following groups be considered: 1) the Capital Adequacy (E) Task Force on the premise that a potential purpose of the information is to lead to better understanding for a potentiallymore risk-focused quantitative and qualitative capital requirement; 2) the ORSA Implementation (E) Subgroup as a mechanismfor state insurance regulators to better focus on operational risk, but with a possibility for sharing that knowledge among stateinsurance regulators based on the responses; and 3) the Financial Stability (EX) Task Force to recognize arguments that muchof the focus in ORSA, and internally at companies, is at the group level.

Mr. Robinson expressed concern over coordinating responses to multiple referrals. Mr. Wiest noted that there will be outreach to these NAIC groups and that the Subgroup may decide on only one referral, if any.

3. Discussed Growth Risk for Life RBC

Mr. Wiest said that he believes that the risk of additional operational risk due to growth applies to life insurers. However, at this point, he thinks that the most that the Subgroup can do is prepare a list of arguments for and against adding growth operational risk to the life RBC formula based on previous comments and discussions and present them to the Life Risk-Based Capital (E) Working Group to determine if it would like to pursue the issue further. In addition, he recommended that a proposal should be drafted to remove the informational growth risk page and instructions from the 2019 life RBC formula since that methodology is not favored. He asked Mr. Felice to draft a proposal to remove the informational growth risk page and instructions. He further recommended that the Subgroup should consider making a proposal to adopt the health RBC growth risk charge (in current or eventual revised form) for inclusion in the life RBC formula for health business. Mr. Wiest asked NAIC staff to provide input during a future conference call on how adding the existing health growth risk page to the life RBC formula might work. Mr. Wiest said that he would work with the Life Risk-Based Capital (E) Working Group chair to get his thoughts on these proposals. The Subgroup had no objections to Mr. Wiest’s recommended course of action.

Mr. Wiest asked if current Subgroup members would continue until the Subgroup disbands at the end of March 2019. No members indicated that they would withdraw from the Subgroup.

Mr. Wiest asked Mr. Felice to canvass Subgroup members’ availability for an open conference call during the latter half of January 2019.



Capital Adequacy (E) Task ForceRBC Proposal Form

[ ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group

[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ x ] Op Risk RBC (E) Subgroup[ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup

DATE: 1/24/2019

CONTACT PERSON: Lou Felice

TELEPHONE: 212-386-1956


ON BEHALF OF: Operational Risk(E) Subgroup

NAME: Stephen Wiest

TITLE: Chair

AFFILIATION: New York Department of Financial Services

FOR NAIC USE ONLY

Agenda Item # 2019-01-O

Year 2019

DISPOSITION

[ ] ADOPTED 2/26/2019

[ ] REJECTED

[ ] DEFERRED TO


[ X ] EXPOSED

[ ] OTHER (SPECIFY)


[ x ] Health RBC Blanks [ ] Property/Casualty RBC Blanks [ ] Life RBC Instructions[ x ] Fraternal RBC Blanks [ ] Health RBC Instructions [ ] Property/Casualty RBC Instructions[ x ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER

DESCRIPTION OF CHANGE(S)Life / Fraternal RBC: Delete “informational only” Growth Operational Risk page (LR029-A – Life RBC; FR029-A

Fraternal RBC) and related instructions.

Health RBC: Delete “informational only” Growth Operational Risk page (XR022) and related instructions.

REASON OR JUSTIFICATION FOR CHANGE **To revise the 2019 Life, Fraternal and Health RBC formulas to remove the “informational only” growth risk structure and instructions from those RBC formulas

Additional Staff Comments:Operational Risk (E) Subgroup to Consider referring further work on life RBC growth risk to the LifeRisk- Based Capital (E) Working Group for considerationRetain existing active growth risk methodology in the health RBC formula and Operational Risk (E) Subgroup to consider referring areas where the existing growth risk methodology can be reviewed to the Health Risk-Based Capital (E) Working Group for further consideration.2017 the Property and Casualty Working Group adopted to remove the informational only page from the RBC formula.

** This section must be completed on all forms. Revised 11-2013


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4/7/19


MEMORANDUM

TO: Patrick McNaughton, Chair, Health Risk-Based Capital (E) Working Group

FROM: Stephen Wiest, Chair, Operational Risk (E) Subgroup

DATE: February 26, 2019

RE: Referral for Further Work on Health Growth Operational Risk

The operational Risk (E) Subgroup believes that there is an opportunity to improve the assessment of growth risk in the Health Risk-based Capital (HRBC) formula. While alternatives to the existing growth risk methodology that have been tested by the Subgroup have not proved to be better indicators of risk, there are reasons to consider whether the existing methodology is working as intended. The Health RBC (E) Working Group is best positioned to continue the review. The Operational Risk (E) Subgroup recommends that the review focus on the existing growth risk by forming an ad hoc subgroup of regulators and interested parties familiar with the HRBC formula similar to what was utilized to review the existing growth risk methodology and factors in the Property RBC formula. This document should be used as a starting point for that review. That ad hoc group would provide suggestions for potential enhancements to the existing growth charge to the HRBCWG. The review could include:

• Given the current array of company types that now file Health RBC, should the variables used in theapplication of the 10% threshold be reversed (i.e., the charge is assessed if risk revenue is increasingfaster than RBC)?

• Determine if a 10% threshold is still reasonable.• Should the normal growth risk calculation (existing or as adjusted) apply to start-up companies? If

not, what adjustments should be applied to the calculation for start-ups?• Should the Health RBC growth risk methodology (existing or as adjusted) be adopted into the Life

RBC formula for companies that write a material amount (e.g. > X%) of their premiums in healthbusiness, where such business would be subject to the growth risk calculation in the Health RBCformula?

Background

How the Existing Growth Risk Charge Works:

• Growth in Underwriting Risk RBC year over year is measured against growth in underwriting riskrevenue year over year. Thus, the formula recognized that as risk was added, revenue should respondaccordingly.

• If growth Underwriting Risk RBC exceeds growth in underwriting risk revenue by greater than 10%,growth risk is triggered.


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• A factor of 50% is applied to the excess of growth in Underwriting Risk RBC above the 10%threshold.

Considerations in Developing the Existing Methodology:

• The risk of growth, while included in H-4, is most related to increased pricing risk caused by growthrather than increased operational risk that that may be caused by rapid growth.

• The methodology is better designed to capture change in product mix or introductions of newmanaged care products with differing levels of managed care features.

• At the time that the HRBC formula was being developed, there were significant issues around transferof risk to providers which were driving a change from capitated arrangements and HMO products togreater use of contractual fee-for-service and withholds / incentives in provider agreements and PPOand POS products.

• The developers of the HRBC formula considered the potential for premium rate impact related toincreasing competition from national carriers into local markets, and consolidation in the market.

Reasons to Consider a Change to the Existing Methodology:

• The original Health Organizations RBC (HORBC) formula applied primarily to HMOs and Not-for-profit health plans (e.g., hospital and medical indemnity plans). In the early 2000s, with the adoptionof Statutory Accounting Principles and the Health financial reporting blank (and the addition of ahealth test to that reporting blank), insurers became subject to the renamed Heath RBC (HRBC)formula.

• Relatively few entities triggered the current growth risk charge, even during recent periods of rapidgrowth caused by the ACA.

• The application of growth risk to new entities is unclear. A number of entities that were new to themarket and which grew rapidly in 2014 and 2015 ultimately failed regardless of original projections.If sufficient capital was put in place during the licensing process based on reasonably accurateprojections, then there should be little impact from growth risk. If not, perhaps growth risk should berecognized as an early warning indicator. The growth should smooth out over time and the chargeremoved.

• For various reasons, neither the informational approach nor other alternatives explored thus far by theOperational Risk (E) Subgroup have indicated a significantly improved ability to identify companiesthat are not sufficiently capitalized to absorb the impact of rapid growth.

• Companies that file the Life RBC formula, but write the same type of health business written bycompanies that are required to file the Health RBC formula are not currently subject to a growth riskcapital requirement.

Attachment Six-B Capital Adequacy (E) Task Force

4/7/19


MEMORANDUM

TO: Justin Shrader, Chair, Group Solvency Issues (E) Working Group and Risk-Focused Surveillance (E) Working Group


DATE: February 26, 2019

RE: Improving Regulator Knowledge and Assessment of Operational Risk

As Operational Risk is recognized as a key consideration of the Group Solvency Issues (E) Working Group and Risk-Focused Surveillance (E) Working Group process, the Operational Risk (E) Subgroup recommends that one or both of the above referenced working groups take steps to encourage ongoing study and knowledge development in this area. In particular, regulators may benefit from a greater understanding of the definition and scoping of operational risk, and application of the concept. Specifically, regulators could benefit from a greater understanding of methodologies used in measuring, quantifying and mitigating operational risks, as well as a comparison of the amount of capital insurers allocate to cover their operational losses to that calculated through the risk-based capital (RBC) Operational Risk charge. To the extent that knowledge is gained that could inform further development or refinement of the RBC operational risk charge, or improve the overall evaluation of operational risk in solvency monitoring, the working group(s) is (are) encouraged to share the information with the Capital Adequacy (E) Task Force or other NAIC groups for future consideration. Attached you will find a list of possible areas of regulator review that are provided as examples of the type of information that could be most helpful in gaining further insight into how insurers address operational risk.

Relevant Charges:

Group Solvency Issues (E) Working Group (Parent of ORSA Subgroup)

A. Continue to develop potential enhancements to the current regulatory solvency system as it relates to groupsolvency-related issues.

Risk-Focused Surveillance (E) Working Group

A. Continually review the effectiveness of risk-focused surveillance and develop enhancements to processes asnecessary.

Background

Operational risk was identified as a material risk during the NAIC’s solvency modernization work. The Operational Risk (E) Subgroup was charged with developing an RBC charge for operational risk in all RBC formulas. The Subgroup completed its work on basic operational risk in 2018. In deciding on the approach to quantify basic operational risk, the Subgroup looked to methods and capital charges used by other foreign jurisdictions to gauge appropriate treatment for operational risk in RBC. As a result, a percentage of RBC (3 percent) after covariance (an “add-on” approach) was adopted to be effective in all 2018 RBC formulas. Bermuda, Canada and Japan currently use such a method in their regulatory capital formulas. The RBC add-on factor will be applied beginning with 2018 RBC.


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RBC for Basic Operational Risk:

The operational risk definition for Subgroup purposes is generally consistent if not identical to that used by other global financial regulators:

The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.

Some operational risk types or events are picked up (embedded) in other risk categories in RBC. However, it was determined that there are existing or emerging risk types or events that are not currently addressed elsewhere in the RBC formulas. Among these are cyber risk, model risk / calculation errors, political risk, outsourcing / delegation risk, legal / contractual risk, business interruption, and some components of fraud related expenses. The focus of the Operational Risk Subgroup in developing an initial factor based on the “add-on” methodology turned to the widespread inclusion of operational risk in other advanced jurisdictions as a starting point.

The Risk Factor:

Since there is currently little or no NAIC data that isolates or assigns a dollar value to the operational risk of insurers, the Operational Risk Subgroup relied heavily on the operational risk charges of other jurisdictions.

Initial results presented by Europe based organizations that have begun collecting data on operational risk losses from member insurers was considered by the Subgroup members. They indicated target levels between 8% and 12%, or more, of total capital requirements. However, there were questions raised about the applicability of these levels to the U.S. insurance market, and as to how potential embedded operational risk was addressed.

Other input from interested parties suggested that the factor should be minimal and that operational risk is better handled via other qualitative measures rather than in Risk Based Capital. It appears that the larger more sophisticated insurer groups do model operational risk as a separate risk, while recognizing that some is embedded in other risks, and some not. The extent that smaller companies/groups address operational risk is not clear.

Given this input, the Operational Risk Subgroup members decided to go forward with a 3% post covariance add-on. The Subgroup selected 3% as the full factor primarily due to the following reasons:

• The Subgroup’s after covariance add-on was set at the low end of the spectrum for the ratio of operational risk to totalcapital requirement observed for other jurisdictions in order to recognize a desire not to “overshoot” based on the lackof precision and uncertainty about the extent of embedded operational risk.

• There are clearly similar calibration issues being confronted by other advanced insurance regulators around the globeand therefore there is heavy reliance on supervisory judgement rather than operational risk data.

• There are op risk events that are not captured on other risk categories. A primary example is cyber risk, but there areother examples (as discussed above). Events which are captured through historical data used for other risks in RBCmay not reflect these emerging operational risks.

• Operational risk can be very company specific and some jurisdictions have opted for internal capital models whichmay better reflect a particular firm’s operational risk exposure relative to other risks, but U.S regulators have notembraced broad-based internal capital models for RBC purposes at this time.

• The add-on approach was designed to be a first step in addressing operational risk.

The Subgroup is also interested in promoting efforts to better identify and assess operational risk. The Subgroup members also believe that regulators can gain considerable insight from understanding how companies assess and quantify operational risk for their own internal capital purposes. This could eventually lead to refinement of the operational risk methodology and charge adopted for the RBC formulas.


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Sample Regulator Review Areas

• Improve understanding of how insurers / insurance groups define operational risk. This includes defining whichaspects of operational risk might be included in other risk charges as well how specific categories of operational riskare defined. What kinds of scenarios/categories of exposure are considered – e.g., cyber, inappropriate u/w, productflaws, outsourcing failures, etc.

• Improve understanding of how insurers / insurance groups identify possible operational risk events and what data isused to identify operational risk events (e.g., loss data or event tracking). If based on scenarios and/or corporateprocesses, which ones are used?

• Gain an understanding of the methodology and data that is used to assess operational risk (e.g., factors, scenariotesting; stress testing, distribution of losses, expert judgement / assessment of internal processes).NOTE: Since there is rarely enough data to calibrate an OR model, if expert judgement is used, how is external dataused/scaled to be appropriate? If based on an assessment of internal processes, describe how this is done (and bywhom) within a lines of defense framework.

• Does the insurer / insurance group use an internal model to quantify required capital for operational risk? If so, isoperational risk a stand-alone module or is it integrated into a full internal capital model, and what key parameters,assumptions and inputs are included in the model?

• Identify the proportion of own required risk capital that insurers / insurance groups attribute to operational risk (ifzero, determine how operational risk capital is eliminated).

• Do insurers / insurance groups assess operational risk on both a gross and net (after application of mitigatingmeasures or controls) basis? If net, what is being considered (e.g., management action, mitigation measures,controls, etc.) and who determines effectiveness?

• Review whether operational risk is considered by insurers / insurance groups as correlated or independent of otherrisks and how are diversification benefits assessed, both between different ORs and between OR and other risks?

Attachment Six-C Capital Adequacy (E) Task Force

4/7/19


MEMORANDUM

TO: Philip Barlow, Chair, Life Risk-Based Capital (E) Working Group


DATE: March 27, 2019

RE: Potential Further Work on Life Growth Operational Risk

During its conference call on February 26, 2019, the Operational Risk Subgroup members adopted a motion to delete the “informational only” growth risk page and instructions from the Life and Fraternal RBC formulas. In taking that action, the Subgroup’s members asked NAIC staff to draft a memo summarizing the work conducted to date and to provide rationale both for and against conducting further work to determine whether a growth risk charge should be added to the Life RBC formula. This memorandum is the result of that direction.

Overview:

Unlike Property & Casualty and Health Risk-based Capital (RBC), Growth Risk capital requirements have not been part of the Life RBC Formula. During its review of Operational Risk the Operational Risk (OR) Subgroup relied heavily on the practices and considerations of other advanced global insurance regulators. All of the jurisdictions reviewed, except Switzerland, include a basic operational risk charge for Life insurers. However, some do not apply the growth risk charge to life insurers. Those jurisdictions that do impose a life insurer growth risk charge include: Australia; Canada; China; E.U. / Solvency II; and the IAIS Global Insurance Capital Standard (proposed). All use a factor times either premium growth, reserve growth or the greater of both. Alternatively, Bermuda applies a discretionary additional capital “add-on” for cases where the insurer’s risk profile deviates significantly from its risk assumptions or from the insurer’s assessment of its risk management policies and practices. The add-on may be applied to items such as: significant growth in premiums, and the quality of risk management surrounding operational risk.

For 2015 RBC, the OR Subgroup chose to insert an “informational only” worksheet into the Life RBC formula that aggregated life and annuity business and includes a separate section for health business. The approach measured growth in premiums over a specified threshold and applied a risk factor to the excess growth (see attachments 1A and 1B). Data was collected for 2015 through 2017 based on the RBC filings for those years.

For 2015, Annual Statement data was compared to the data included in the RBC filings. There were numerous crosscheck errors for calendar year 2015. The situation improved somewhat for calendar years 2016 and 2017. In general, the growth risk charge did not push many insurers into an RBC action level, but a few anomalies in certain large insurers’ data were observed where large single premium reinsurance or pension transactions created a cliff in growth risk RBC (i.e., a huge growth risk charge with significant impact on RBC in one year that essentially disappeared in the next).

In 2018, two alternatives were proposed. The first would add a C-4a (Business Risk) offset to the original informational method for any C-4a that was not already used to offset basic operational risk. The second


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alternative would apply an RBC add-on of 1.5% based on exceeding the growth thresholds, also with C-4a offset allowed. It was accompanied by an NAIC Staff analysis that is included as Appendix A to this memorandum.

In addition to the concerns with the aforementioned anomalies observed that related to certain transaction types, interested parties (mainly the ACLI and the AAA) were fairly aligned in providing the following comments with regard to the initial and alternative approaches:

• Rapid growth is not a significant, unaddressed risk for life insurers. Life insurance is generally a stable,mature, long-duration business, and growing companies are already subject to higher capital chargesthrough the existing C1- C4 factors in the current RBC formula.

• Unlike the majority of health insurance and property & casualty (P/C) insurance businesses, life insurancebusiness is long duration in nature. Therefore, should a company experience rapid growth, any potentialimpact would manifest itself over many years.

• Using premium growth as an exposure proxy creates unnecessary volatility.

• Rapid growth for life insurance companies has typically been the result of an acquisition, entrance into anew market, or introduction of a new product type. In such instances, any additional risk exposure hastypically been absorbed within a relatively short period of time, and normal operations continued, subject tothe insurer’s existing controls.

• There are other tools which regulators have at their disposal that would likely be more effective inaddressing any cases of rapid growth in the circumstance where an insurer has not successfully absorbed thegrowth.

• The lack of any past circumstances where life insurance company insolvency was the direct result of rapidgrowth.

• If a growth factor were to be included at some point in the future, there needs to be a robust discussionabout its applicability to life companies. Only when that need is demonstrated can there be a discussionabout an appropriate basis for measurement that accurately reflects actual growth without creatingunnecessary volatility.

In response to these comments it was noted that:

• All RBC formulas recognize growth to a certain level for non-operational risks that are already includedin the formulas, but the OR Subgroup’s charge is to quantify additional operational risk that may becaused by rapid growth.

• Rapid growth is recognized as an indicator of increased operational risk by other advanced insuranceregulators.

• Operational risk is constantly evolving and cyber risk and growth via merger or acquisition, and politicalrisk are increasing the potential for increased operational risk that may result from rapid organic ortransactional growth.

• The OR Subgroup members recognize that C-4a does address growth risk related to increases in directpremium volume. Therefore, any unused offset for C-4a capital charges after offsetting basic operationalrisk should be applied to reduce a growth risk charge.


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• Rapid growth may be most impactful to smaller, more vulnerable insurers where other robust regulatorytools may be less available or reliable.

• RBC is an integral part of the regulatory framework for addressing risk.

The OR Subgroup members acknowledged that the current informational only approach was flawed and a replacement approach could not be agreed upon during the remaining time of the OR Subgroup’s existence. During its conference call on February 26, 2019, the Operational Risk Subgroup members adopted a motion to delete the “informational only” growth risk page and instructions from the Life and Fraternal RBC formulas. That action was taken in conjunction with a request to develop this memorandum.

Suggestions:

The Life Risk-based Capital (E) Working Group is best suited to evaluate the issues raised by industry concerning operational risk related to rapid growth experienced by life insurers and determine whether and when it should work on this as an agenda item for the Working Group. If the Working Group elects to move forward, some points to be considered include:

a) The AAA suggested that should the NAIC move forward with an explicit Life RBC charge forgrowth, we recommend that it be based on some characteristics of growth (for example, Xpercent increase in reserves year-over-year) rather than premium growth or a percentage of RBC.

b) A mechanism for smoothing large single year transactions to avoid cliffs and valleys in RBCshould be considered.

c) If a growth risk charge is implemented, any C-4a charge in excess of the amount used to offsetbasic operational risk should be applied to offset the growth risk charge.

d) Growth risk for traditional health business should continue to be treated separately from growthrisk for life and annuity business.

e) Companies that file the Life RBC formula, but write the same type(s) of health business writtenby companies that are required to file the Health RBC formula are not currently subject to agrowth risk capital requirement. The work of the Health RBC Working Group should bemonitored, and when completed, adding the growth risk for traditional health business that is inthe Health RBC formula to the Life RBC formula should be considered, in order to addressgrowth in similar business across the two formulas.


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APPENDIX A

Operational Risk Analysis – Growth Risk Life RBC - Proposed Growth Risk – June 2018

Analysis: Unlike P&C and Health, Life RBC currently does not include a provision for growth risk. An informational methodology and factors were added to the 2015 RBC formula. The purpose for a growth risk charge is to provide additional capital for an enhanced level of operational risk that accompanies rapid growth. That is the assumption behind growth risk capital requirements in other jurisdictional capital formulas. The current informational approach applied separate factors to life / annuity premiums and health premiums in excess of the growth threshold (20% for life / annuities and 25% for health). The Life RBC factors for life / annuity business were derived using an approach that attempted to replicate the industry average percentage of RBC generated by the existing growth methodology in the P/C formula. For health business, the factors and growth threshold (25%) used were the same as the ones used in the informational Health RBC growth risk method. However, that methodology may be adjusted for Health RBC and consideration should be given to using the same methodology chosen for Health RBC in the Life RBC formula (with regard to comparable health insurance business) for consistency purposes. The Operational Risk Subgroup members recognize that the Current C-4a risk carried by Life RBC filers picks up basic operational risk. However, since C-4a is based on direct life and health premiums, as those rise, C-4a picks up additional capital. Therefore, it does seem logical to allow an offset for any C-4a risk based capital carried by Life RBC filers that is in excess of the amount of C-4a to be used to offset against basic operational risk as an additional offset to calculated growth risk. This analysis described below used amounts reported on Page LR 29A of the Life RBC formula for calendar years 2016 and 2017. It was noted that there was one specific anomalous instance in 2016 and several instances for the 2017 data that resulted in extreme growth risk and RBC impact. Staff Note: For purposes of the analysis, growth risk was placed outside the covariance square root and was offset by C-4a RBC that was in excess of 3% of RBC after covariance (residual C-4a). For further analysis, a decision could be taken by the Operational Risk Subgroup or the Life RBC WG as to where to include growth risk for covariance purposes. Including growth risk under the covariance square root will result in a lower capital requirement for growth risk. This analysis looked at applying the existing informational approach with C-4a offset (referred to as Method 1), and as an alternative it used an enhanced “add-on” approach that applied an additional growth charge of 1.5% of RBC after covariance with the same C-4a offset based on exceeding the growth threshold in the informational approach (referred to as Method 2). The analysis focusses on 4 basic areas:

1. Number of companies triggering growth risk 2. Average impact of growth risk on RBC ratio > 5% 3. Combined impact of growth risk and basic op risk (after C-4a offset) 4. Profile of high impact companies

Method 1 – Informational Approach:

• In 2016, 163 companies triggered the informational growth risk method before a C-4a offset. One company accounted for 62% of the total. After application of residual C-4a, the number was reduced to 106


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companies. The average impact of growth risk across the population of triggering companies was 11.3% of RBC after covariance and before C-4a offset (4.3% without one large company’s result). After C-4a offset, the percentages were reduced to 9.5% and 2.5% of RBC after covariance, respectively.

• In 2017, 139 companies triggered the informational growth risk method before C-4A offset. Five of thesecompanies accounted for 73% of the growth risk capital. After the application of residual C-4a, the numberwas reduced to 83 companies. The average impact of growth risk across the population of triggeringcompanies was 20.1% of RBC after covariance and before C-4a offset (5.4% without 5 large companyresults). After C-4a offset, the percentages were reduced to 16.2% and 3.2% of RBC after covariance,respectively.

• For 2016, just over 32% (54) of triggering companies had a decrease of more than 5% in their RBC ratioafter considering the C-4a offset.

• For 2017, just over 30% (42) of triggering companies had a decrease of more than 5% in their RBC ratioafter considering the C-4a offset.

• In 2016, about 1/3 of the companies that triggered growth risk also were subject to positive basicoperational risk (@ 3% add-on less C-4a).

• For 2017, about 1/4 of the companies that triggered growth risk also were subject to positive basicoperational risk (@ 3% add-on less C-4a).

• In 2016, of the 54 companies that triggered growth risk with an impact of greater than 5% of their RBCratio, 31 of these companies had a TAC of below $25 million. Only 3 reported TAC over $500 million.Three companies moved to an RBC action level as a result of growth risk. One had an anomalous amount ofgrowth risk.

• In 2017, of the 42 companies that triggered growth risk with an impact of greater than 5% of their RBCratio, 19 of these companies had a TAC of less than $25 million. Eight reported TAC over $500 million.Two companies moved into an RBC action level as a result of growth risk. Three others remained in anRBC action level.

• Of the 106 Companies with net growth risk after C-4a offset in 2016, 42 also triggered growth risk in 2017(about 40%).

Method 2 - Enhanced Add-on Method:

• In 2016, 61 companies triggered the enhanced add-on method after C-4A offset. The average impact ofgrowth risk across the population of triggering companies was 0.7% of RBC after covariance with amaximum of 1.5% of RBC after covariance.

• In 2017, 46 companies triggered the enhanced add-on method after C-4A offset. The average impact ofgrowth risk across the population of triggering companies was 0.4% of RBC after covariance, with amaximum of 1.5% of RBC after covariance.

• Maximum impact on any company was less than a 1.5% reduction in RBC ratio in both 2016 and 2017.

• For 2016, 51 of the 62 companies triggering growth risk also had positive basic op risk charges. This wasdue to the companies either not reporting any C-4a capital, or reporting C-4a capital that was less than 3%of RBC after covariance.


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• For 2017, 36 of the 46 companies triggering growth risk also had positive basic op risk charges. This wasdue to the companies either not reporting any C-4a capital, or reporting C-4a capital that was less than 3%of RBC after covariance.

• In 2016, of the 61 companies that triggered growth risk, 40 companies had a TAC of below $25 million.Eight reported TAC over $500 million. No companies moved to an RBC action level as a result of growthrisk. Two companies were already at an RBC action level.

• In 2017, of the 46 companies that triggered growth risk, 24 companies had a TAC below $25 million. Sevenreported TAC of over $500 million. One company moved to an action level as a result of growth risk. Threeother companies were already at an RBC action level and remained.

• Of the 61 Companies with net growth risk in 2016, 24 also triggered growth risk in 2017 (about 40%).

Initial Observations:

1. Interested Parties have noted potential unintended consequences with single premium products andassumption of lump sum liabilities such as pensions whereby large premium amounts are reported in oneyear and disappear the next year. These transactions may cause an extreme growth risk result in thetransaction year followed by a reduction in the subsequent year.

2. Although there are some pure health insurers that file Life RBC, much of the health business written bylife carriers is of a long-term nature (e.g., LTC and disability) and it may not be appropriate to applytraditional health factors or growth threshold to such business.

3. If the informational charge is retained, consideration should be given to covariance treatment of growthrisk, and whether it should be combined with any other risk under the covariance square root.

4. If an enhanced “add-on” is preferred, then consideration should be given as to whether a single factor isappropriate or if a tiered factor, based on extent of excess growth, is more risk sensitive.

Draft Pending Adoption Attachment Seven



Draft: 4/8/19

Property and Casualty Risk-Based Capital (E) Working Group Orlando, Florida

April 7, 2019 The Property and Casualty Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met in Orlando, FL, April 7, 2019. The following Working Group members participated: Tom Botsko, Chair (OH); Richard Ford (AL); Rachel Hemphill (CA); Rolf Kaumann (CO); Wanchin Chou (CT); Carolyn Morgan, Ray Spudeck and Virginia Christy (FL); Judy Mottar (IL); Marshal L. Bozzo and Stephen Wiest (NY); Joe Cregan (SC); Mike Boerner (TX); and Randy Milquet (WI). Also participating were: Philip Barlow (DC); Debbie Doggett (MO); John Sirovetz (NJ); Kimberly Rankin (PA); and Patrick McNaughton (WA). 1. Adopted its Feb. 20 Minutes The Working Group and the Catastrophe Risk (E) Subgroup met jointly Feb. 20 and took the following action: 1) adopted its 2018 Fall National Meeting minutes; 2) re-exposed proposal 2018-16-P (2019 Underwriting Risk Line 4 Factors); 3) exposed proposal 2018-20-P (Asset Concentration PS and Hybrid Labels); 4) exposed proposal 2019-02-P (Modify RBC Average Growth Risk Calculations); 5) heard an update from the American Academy of Actuaries (Academy); 6) discussed the possible changes of the R3 related to the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance”; and 7) discussed the factor of using aggregate exceedance probability (AEP) basis versus occurrence exceedance probability (OEP) basis. Mr. Chou made a motion, seconded by Ms. Hemphill, to adopt the Working Group and Subgroup’s Feb. 20 minutes (Attachment Seven-A). The motion passed unanimously. 2. Adopted the Report of the Catastrophe Risk (E) Subgroup Mr. Botsko said the Catastrophe Risk (E) Subgroup met April 5 and took the following action: 1) adopted its Feb. 20 minutes; and 2) heard presentations from AIR Worldwide and A.M. Best regarding wildfire risk. Mr. Chou made a motion, seconded by Ms. Mottar, to adopt the report of the Catastrophe Risk (E) Subgroup (Attachment Seven-B). The motion passed unanimously. 3. Adopted Proposal 2018-16-P (2019 Underwriting Risk Line 4 Factors) Mr. Botsko said, during the Feb. 20 conference call, the Working Group decided to re-expose the proposal for another 30 days to allow companies to submit their comments. He said the Working Group received a comment letter from Nationwide during the comment period. Michael P. Leach (Nationwide) said Nationwide requests the Working Group to consider: 1) asking the Academy to evaluate whether to introduce additional granularity within the various lines of business and the related underwriting line 4 factors; 2) exposing comments for any follow-up recommendations from the Academy to the Working Group; 3) continue evaluating the aggregate impact that all changes to the RBC formula; and 4) whether there should be an alternative treatment or exemption for insurers that are deemed to be in “runoff.” Mr. Botsko said the Working Group will work closely with the Academy to develop the underwriting risk factors in the future. Also, he agreed with the Nationwide comment that the issue for the runoff insurers should be handled by the Restructuring Mechanisms (E) Subgroup. However, the intent of this Working Group is to move forward with the proposed changes at this meeting. Ralph Blanchard (Travelers) suggested that updated data should be used when reviewing the factors. Mr. Chou made a motion, seconded by Ms. Mottar, to adopt proposal 2018-16-P (2019 Underwriting Risk Line 4 Factors) (see NAIC Proceedings - Spring 2019, Capital Adequacy (E) Task Force, Attachment Eleven). The motion passed unanimously.

Draft Pending Adoption Attachment Seven



4. Adopted Proposal 2018-20-P (Asset Concentration Preferred Stock and Hybrid Labels)

Mr. Botsko said this proposal provides minor edits to the line descriptions on PR011 Asset Concentration page. He stated that no comments were received during the exposure period.

Mr. Milquet made a motion, seconded by Mr. Chou, to adopt proposal 2018-20-P (Asset Concentration Preferred Stock and Hybrid Labels) . (see NAIC Proceedings - Spring 2019, Capital Adequacy (E) Task Force, Attachment Twelve). The motion passed unanimously.

5. Adopted Proposal 2019-02-P (Modify RBC Average Growth Risk Calculation Instructions)

Mr. Botsko said the purpose of this proposal is to address the inconsistencies between the current instructions and formula for the computation of the selected average growth rate. During the Feb. 20 conference call, the Working Group agreed to modify the instructions to match the current formula. He stated that no comments were received during the exposure period.

Mr. Chou made a motion, seconded by Ms. Mottar, to adopt proposal 2019-02-P (Modify RBC Average Growth Risk Calculation Instructions) (see NAIC Proceedings - Spring 2019, Capital Adequacy (E) Task Force, Attachment Thirteen). The motion passed unanimously

6. Exposed Proposal 2019-05-P (Underwriting Risk Line 1 Factors)

Mr. Botsko said this proposal provided a routine annual update to the Line 1 premium and reserve industry underwriting factors in the property/casualty (P/C) risk-based capital (RBC) formula.

The Working Group agreed to expose proposal 2019-05-P for a 30-day public comment period ending May 6.

7. Heard Updates on Current P/C Risk-Based Capital (RBC) Projects from the Academy

Richard Gibson (Academy) said the Academy’s main project is to support the NAIC’s efforts to enhance the calibration of factors used to calculate underwriting risk. He stated that the current efforts are ongoing to analyze: 1) investment income adjustment; and 2) loss concentration and premium concentration factors. He also indicated that the Academy is in the process of receiving and reviewing data provided by the NAIC staff. He said the Academy’s next step is to provide a scope letter to the Working Group.

Scott Williamson (Reinsurance Association of America—RAA) asked the Academy to consider allowing input from interested parties during the review process. Mr. Gibson said the Academy will discuss the request, noting that feedback will be provided in the near future.

Mr. Botsko said the Working Group will schedule a conference call by the end of May to discuss the Academy’s scope letter.

8. Discussed the Possible Changes of the R3 Related to the “Bilateral Agreement Between the United States of Americaand the European Union on Prudential Measures Regarding Insurance and Reinsurance”

Mr. Botsko said it is still the Working Group’s intent to phase-in charges over a three- or four-year period for non-rated reinsurers or those with a vulnerable NAIC 6 designation. The Working Group is closely monitoring the developments of the Reinsurance (E) Task Force. This issue will continue to be discussed during the Working Group’s upcoming conference call.

Mr. Williamson asked the Working Group to consider adding additional categories for runoff or captive reinsurers that can be considered non-rated companies.

Having no further business, the Property and Casualty Risk-Based Capital (E) Working Group adjourned.

W:\National Meetings\2019\Summer\TF\CapAdequacy\PCRBC\Att01_04_7propertyrbcwg.doc

Attachment Seven-A Capital Adequacy (E) Task Force

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Draft: 3/6/19

Property and Casualty Risk-Based Capital (E) Working Group and Catastrophe Risk (E) Subgroup Conference Call

February 20, 2019

The Property and Casualty Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met via conference call Feb. 20, 2019, in joint session with the Catastrophe Risk (E) Subgroup of the Property and Casualty Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force. The following Working Group members participated: Tom Botsko, Chair, and Dale Bruggeman (OH); Richard Ford and Sheila Travis (AL); Giovanni Muzzarelli (CA); Mitchell Bronson (CO); Susan Andrews and Wanchin Chou (CT); Robert Ridenour (FL); Judy Mottar (IL); Anna Krylova (NM); Sakman Luk (NY); Nicole Elliott and Jennifer Wu (TX); and Randy Milquet (WI). The following Subgroup members participated: Tom Botsko, Chair, and Dale Bruggeman (OH); Robert Ridenour, Vice Chair (FL); Giovanni Muzzarelli (CA); Mitchell Bronson (CO); Susan Andrews and Wanchin Chou (CT); Judy Mottar (IL); Anna Krylova (NM); Andy Schallhorn, Donald Ashwood and Joel Sander (OK); and Nicole Elliott, Miriam Fisk and Jennifer Wu (TX). Also participating were: Julie Lederer (MO); and Steven Drutz (WA). 1. Adopted its 2018 Fall National Meeting Minutes The Working Group and Subgroup met jointly Nov. 16, 2018 and took the following action: 1) adopted its Oct. 11, 2018 minutes; 2) adopted its 2018 working agenda; and 3) adopted proposal 2018-15-CR (2018 U.S. and Non-U.S. Catastrophe Event Lists). Ms. Mottar made a motion, seconded by Mr. Milquet, to adopt its Nov. 16, 2018, minutes. The motion passed unanimously. 2. Re-exposed Proposal 2018-16-P (2019 Underwriting Risk Line 4 Factors)

Mr. Botsko said, at the 2018 Fall National Meeting, the Working Group decided to use the 35% capped factors for commercial insurance, medical professional liability, and all other lines. The Working Group also decided to use the uncapped factors for personal lines and reinsurance lines. The proposal was exposed for a 60-day public comment period, and no comments were received during the exposure period. David Garman (Nationwide) said Nationwide has concerns regarding these proposed factors that may have impacts on some of the run-off companies. He requested that the Working Group re-expose this proposal so Nationwide will be able to come up with alternative options for the run-off companies. Mr. Luk said 16 companies failed the trend test in 2017 reporting. Ms. Elliott commented that the Working Group will need to discuss whether an adjustment of the factors is necessary, with only a handful of companies impacted by this proposal. The Working Group and Subgroup agreed to re-expose proposal 2018-16-P for a 30-day public comment period ending March 22. 3. Exposed Proposal 2018-20-P (Asset Concentration PS and Hybrid Labels) Mr. Botsko said this proposal provides some minor edits to the line descriptions on the PR011 Asset Concentration page. He asked interested parties to provide comments at the Spring National Meeting. The Working Group and Subgroup agreed to expose proposal 2018-20-P for a 30-day public comment period ending March 22. 4. Exposed Proposal 2019-02-P (Modify RBC Average Growth Risk Calculations) Mr. Botsko said there are inconsistencies between the current instructions and formula for computation of the selected average growth rate. The instructions state that the selected growth rate is the three-year average growth rate calculated using the four most recent year’s gross written premiums. If only the three most recent years of premiums are available, a two-year average growth rate is used. If only the two most recent years of premiums are available, a one-year average growth rate is used. A default 40% growth rate is used for the first year for a startup company. However, the risk-based capital (RBC) formula indicates that the selected growth rate is the three-year average growth rate if the four most recent year’s gross written premiums

Attachment Seven-A Capital Adequacy (E) Task Force

4/7/19


are available. If the gross written premiums of the four most recent years are not available, a default 40% growth rate is assigned to the first year in which the premiums are available. The selected growth rate is the average of the available growth rates.

Mr. Botsko stated that the proposal lists two possible alternatives to resolve this issue: 1) modifying the formula to match the current instructions; or 2) modifying the instructions to match the current formula. He said having the 40% capped in the first few years was the intent of the calculation for growth. The Working Group members agreed.

The Working Group and Subgroup agreed to expose proposal 2018-20-P to modify the instructions to match the current formula for a 30-day public comment period ending March 22.

5. Heard an Update from the Academy

Lauren Cavanaugh (American Academy of Actuaries—Academy) said the Academy is reviewing data provided by the NAIC. Recommendations related to investment income offsets, premium/loss concentration factors, underwriting investment line 4 factors, growth risk charges and the potential RBC impacts related to the new federal tax law will be submitted to the Working Group in the future.

6. Discussed the Possible Changes of the R3 Related to the Bilateral Agreement

Mr. Botsko said the Reinsurance (E) Task Force is still discussing the possible changes to the Annual Statement Schedule F related to the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” (Bilateral Agreement). The Working Group also identified the following changes to the annual financial statement and RBC instructions: 1) eliminating the different treatments of uncollateralized reinsurance recoverable from authorized vs. unauthorized unrated reinsurers; and 2) adjusting the factor for uncollateralized, unrated reinsurers.

Mr. Botsko also stated that, as discussed at the 2018 Fall National Meeting, the information from the Standard & Poor’s 500 index (S&P 500) indicates that the actual credit risk associated with the use of an unrated insurer (whether authorized or unauthorized) without collateral is in excess of 30% and possibly as much as 50%. He said phase-in charges over a three or four-year period after the charges are determined should be considered.

Mr. Botsko asked interested parties to monitor the development closely, noting that the Working Group and Subgroup would continue to discuss this item at the Spring National Meeting.

7. Discussed the Factor of Using AEP Basis vs. OEP Basis

Mr. Botsko said the current formula appears to be using the same factor for aggregate exceedance probability (AEP) basis and occurrence exceedance probability (OEP) basis lines. He said the formula should be kept as-is until further study is completed. Mr. Chou suggested that inviting some of the subject-matter experts to present at the national meeting would be a good starting point in reviewing this issue. Mr. Botsko agreed.


Mr. Botsko announced that the Catastrophe Risk (E) Subgroup will have two presentations related to wildfire peril at the Spring National Meeting. He encouraged interested parties to participate in the meeting. Thoughts and comments are welcome after the presentations.

Having no further business, the Property and Casualty Risk-Based Capital (E) Working Group and the Catastrophe Risk (E) Subgroup adjourned.

W:\National Meetings\2019\Spring\TF\CapAdequacy\PCRBC\Att01 02-20propertyrbcwg-catrisksgmin .doc


Attachment Seven-B Capital Adequacy (E) Task Force

4/7/19


Draft: 4/8/19

Catastrophe Risk (E) Subgroup Orlando, Florida

April 5, 2019

The Catastrophe Risk (E) Subgroup of the Property and Casualty Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met in Orlando, FL, April 5, 2019. The following Subgroup members participated: Tom Botsko, Chair (OH); Virginia Christy, Vice Chair, and Susanne Murphy (FL); Susan Bernard (CA); Rolf Kaumann (CO); Wanchin Chou (CT); Judy Mottar (IL); Michael Wise (SC); and Mike Boerner (TX). Also participating was: Jerry Workman (AL).

1. Adopted its Feb. 20 Minutes

The Subgroup and the Property and Casualty Risk-Based Capital (E) Working Group met jointly Feb. 20 and took the following action: 1) adopted its 2018 Fall National Meeting minutes; 2) re-exposed proposal 2018-16-P (2019 Underwriting Risk Line 4 Factors); 3) exposed proposal 2018-20-P (Asset Concentration PS and Hybrid Labels); 4) exposed proposal 2019-02-P (Modify RBC Average Growth Risk Calculations); 5) heard an update from the American Academy of Actuaries (Academy); 6) discussed the possible changes of the R3 related to the “Bilateral Agreement Between the United States of America and theEuropean Union on Prudential Measures Regarding Insurance and Reinsurance”; and 7) discussed the factor of using aggregateexceedance probability (AEP) basis versus occurrence exceedance probability (OEP) basis.

Mr. Boerner made a motion, seconded by Mr. Chou, to adopt the Property and Casualty Risk-Based Capital (E) Working Group and Subgroup’s Feb. 20 minutes (Attachment Seven-A). The motion passed unanimously.

2. Heard Presentations from AIR and A.M. Best Regarding Wildfire Risk

Brandie Andrews (AIR Worldwide—AIR) said the AIR wildfire model includes the top loss-causing states. It is a physically based spread model that considers wind speed and direction, slope, fuel and topography. She indicated that the model accounts for all the ways a fire can spread. It also captures the spatial impacts of climate and ecology, as well as the temporal impacts of weather throughout the year. In addition, the model can simulate mitigation incentives, which can significantly impact losses and realistically captures fire spread into urban areas and explicitly accounts for suppression efforts.

Matthew Mosher (A.M. Best) said the catastrophe analysis in A.M. Best ratings includes enterprise risk management and balance sheet strength. He said there are several difficulties in assessing wildfire risk, such as: 1) probabilistic modeling in infancy stage; 2) insurers’ own loss data insufficient to quantify today’s risk; 3) climate changes; and 4) regulatory restrictions. Mr. Mosher stated that discussions with insurers’ management on risk tolerances, reinsurance structure, their view of risk and mitigation efforts, and model analysis will be able to address some of the difficulties. He indicated that although the vast majority of companies absorbed 2017 and 2018 losses without an impact on ratings, micro-concentration of risk led to a few negative rating actions because the modeled outputs do not reflect the concentration of risk.

Mr. Botsko encouraged interested parties to review the materials AIR and A.M. Best provided and share their comments during an upcoming conference call.

Having no further business, the Catastrophe Risk (E) Subgroup adjourned.

W:\National Meetings\2019\Spring\TF\CapAdequacy\PCRBC\Att01_4_05propertycatsg.doc

2019 National Association of Insurance Commissioners

Capital Adequacy (E) Task Force RBC Proposal Form

[ X ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] Operational Risk (E) Subgroup[ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Longevity Risk (A/E) Subgroup

DATE: 2/19/2019

CONTACT PERSON: Jane Barr

TELEPHONE:

EMAIL ADDRESS:

ON BEHALF OF: Commissioner Altmaier

NAME: Florida Commissioner

TITLE: Capital Adequacy Task Force chair

AFFILIATION:

ADDRESS:

FOR NAIC USE ONLY

Agenda Item # 2019-06-CA

Year 2019

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO


[ D ] EXPOSED Mar. 22, 2019

[ ] OTHER (SPECIFY)


[ ] Health RBC Blanks [ ] Property/Casualty RBC Blanks [ ] Life and Fraternal RBC Instructions[ ] Health RBC Instructions [ ] Property/Casualty RBC Instructions [ ] Life and Fraternal RBC Blanks

[X ] OTHER ____RBC Procedures posted on TF Committee webpage________

DESCRIPTION OF CHANGE(S)Provided clarifying language that the Task Force will prioritize referrals received and may request an impact analysis before structural changes are considered.

REASON OR JUSTIFICATION FOR CHANGE **

Recommendations sent to other Working Groups or Task Forces with the purpose of lower RBC without addressing the concerns with the Capital Adequacy Task Force. Referrals may need an impact analysis prior to consideration or discussion by the Task Force.

Additional Staff Comments:3/22/19 jdb Comments received.

___________________________________________________________________________________________________** This section must be completed on all forms. Revised 2-2019

Attachment Eight Capital Adequacy (E) Task Force

4/7/19


PROCEDURES OF THE FINANCIAL CONDITION (E) COMMITTEE’SCAPITAL ADEQUACY TASK FORCE IN CONNECTION WITH PROPOSED AMENDMENTS

TO RISK-BASED CAPITAL BLANKS AND INSTRUCTIONS

The following establishes procedures and rules of the Financial Condition (E) Committee’s Capital Adequacy Task Force (TaskForce) with respect to proposed amendments to the NAIC RBC Forecasting (blanks) and Instructions.

1. The Task Force may consider relevant proposals to change the RBC blanks and instructions at the national meeting or designatedinterim meeting as scheduled by the Task Force.

2. All proposals for suggested changes and amendments shall use NAIC Proposal Forms and shall be stated in a concise andcomplete manner and include the appropriate blank and instruction modifications. The Proposal Form and its instructions areavailable online under related documents and resources at http://www.naic.org/committees_e_capad.htm and should be emailed tothe appropriate NAIC staff support.

The following guidelines apply:Any proposal that affects a RBC blank must be exposed by the Task Force or its Working Groups by January 31 of theeffective year of the change and adopted by the Task Force no later than April 30 of the effective year of the change.Any proposal that only affects the instructions or factors must be exposed by the Task Force / Working Group by April30 and adopted by the Task Force by June 30 of the current year.The Task Force may extend the June 30th adoption deadline for previously considered proposals regarding instructions orfactors upon a super majority (two-thirds) consent of the Task Force members present where such extension can be nolater than July 30th of the current year. This would be considered only in rare circumstances where urgency of suchadoption is high.

An illustration of the proposed change to the RBC blank or instructions should accompany the Proposal Form. In addition, an impact analysis will be required for any factor change. If another NAIC Committee, Task Force or Working Group is known to have considered this proposal, that Committee, Task Force or Working Group should provide any relevant information.

The Task Force/Working Group will review the proposal and determine whether to receive the proposal and expose for public comment (initial exposure of at least 30-days) or whether to reject the proposal. The comment period ends at least 10 days prior to the next designated national or interim meeting of the Task Force/ Working Group. The Task Force/Working Group will consider comments received on each proposal at its next meeting. Proposals under consideration may be deferred by the Task Force/Working Group if there is general consensus among members that the proposal has merit but warrants additional work or input. However, the Task Force will limit the number of deferrals to two. The proposal must be acted upon by the third meeting, and absent action, the proposal is deemed to have been rejected and will be removed from the agenda. The Task Force may also refer proposals to other NAIC groups due to their technical expertise or for additional review. If a proposal has been referred to another NAIC group, the proposal will be reprioritized on the working agenda and will be considered again in the form of a modified or new proposal after comments/recommendations are received. The Task Force will review and adopt the working agenda at each National Meeting, if necessary, to ensure all items designated as a priority 1 are being addressed, to add or delete items that have been addressed or to reprioritize the remaining items on the working agenda.

Referrals sent to the Task Force or Working Groups will be reviewed and prioritized by the Task Force/Working Group. If the referral suggests changes to the RBC factors or structural changes for added granularity, an impact analysis may be conducted.

3. Proposals filed with the appropriate NAIC staff support shall be considered at the next regularly scheduled meeting of the TaskForce/Working Group if the proposal is filed at least twenty days prior to the meeting. Items filed less than twenty days prior to aregularly scheduled meeting will be considered at the following regularly scheduled meeting.

4. The NAIC staff support shall prepare an agenda of all suggested proposals. The agenda will be posted one week prior to thescheduled meeting.

5. At each meeting, the Task Force/Working Group will review comments that were received by the comment exposure due date forsuggested proposals.

6. NAIC staff support will present to the Task Force/ Working Group a list of necessary non-substantive changes discovered in theprocess of implementing proposals, e.g., reference changes due to new SSAPs or required changes discovered in the process ofimplementing proposals. The Task Force/ Working Group will review these changes and may adopt the appropriate items at any


4/7/19


regularly scheduled meeting. Such actions will be documented in the minutes of the Task Force/Working Group. NAIC staffsupport may also request that the Task Force/Working Group reconsider items adopted, if these items contain substantial errors.

7. The Task Force/Working Group may, when deemed necessary, appoint an Ad Hoc Group to study proposals and/or certain issues.

8. The NAIC will publish each agenda approximately one week prior to each interim or national meeting (including proposalsreceived for comment and comments received) on the NAIC Web site.

9. The NAIC will retain all current and subsequent adopted proposals on the Task Force website up to the publication date ofNovember 1 for current and subsequent years.

10. The NAIC will publish the RBC Forecasting and Instructions for the next subsequent year on, or about November 1 each year.NAIC staff support will post to the NAIC Web site any subsequent corrections to these publications.


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1


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[ x ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] SMI RBC (E) Subgroup[ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup

DATE: 8-6-18


TELEPHONE: 816-783-8146








FOR NAIC USE ONLY

Agenda Item # 2018-14-CAYear 2019

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO


[ x ] EXPOSED Dec. 17, 2018, Feb. 19, 2019

[ ] OTHER (SPECIFY)


[ x ] Health RBC Blanks [ x ]Property/Casualty RBC Blanks [ x ] Life RBC Instructions[ x ] Fraternal RBC Blanks [ x ] Health RBC Instructions [ x ] Property/Casualty RBC Instructions[ x ] Life RBC Blanks [ x ] Fraternal RBC Instructions [ x ] OTHER ______________

DESCRIPTION OF CHANGE(S)Revise Table 2 of the electronic only stop loss tables to be split out between specific stop loss and aggregate stop loss

REASON OR JUSTIFICATION FOR CHANGE **The table currently captures stop loss contracts by group size, this would include the number of groups, average specific attachment point and average aggregate attachment. The proposed change would allow for regulators to distinguish between aggregate and specific stop loss data.

Additional Staff Comments:9-21-18 cgb HRBCWG discussed the proposal on the 9/21 WG call and agreed to refer the proposal to the TF for exposurefor all LOB and any comments received to come back to the WG for discussion.11-16-18 cgb Capital Adequacy Task Force exposed proposal for 30-day comment period ending on Dec.171-15-19 cgb Two comment letters received: ACLI and SIIA2-1-19 cgb Revisions to the proposal were made based on the comments received.2-1-19 cgb The WG agreed with proposed revisions and agreed to additional revisions. The WG referred the proposal to theTF for re-exposure until 2-19-19.2-4-19 cgb the TF re-exposed the proposal until 2-19-19 and no comments were received.___________________________________________________________________________________________________** This section must be completed on all forms. Revised 11-2013

Attachment Nine Capital Adequacy (E) Task Force

4/7/19


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A 50

In

clude


4/7/19


Calcu

latio

n:

(2

00,0

00 x

90

+ 1

00,0

00 x

60

+ 1

20,0

00 x

50) /

(90

+ 6

0 +

50)

=

$150

,000

Aver

age

Aggr

egat

e At

tach

men

t Per

cent

age

(Tab

le 2

b) –

Is b

ased

on

expe

cted

clai

ms.

Subg

roup

s of g

roup

s tha

t hav

e se

para

te st

op lo

ss co

ntra

cts

shou

ld b

e ag

greg

ated

in te

rms o

f det

erm

inin

g th

e gr

oup

size.

The

ave

rage

shou

ld b

e w

eigh

ted

by th

e nu

mbe

r of c

over

ed li

vese

xpec

ted

claim

s in

the

resp

ectiv

e gr

oup

size

brac

ket,

exclu

ding

the

coun

t of c

over

ed li

vese

xpec

ted

claim

s with

in th

e de

nom

inat

or w

here

spec

ific/

aggr

egat

e co

vera

ge w

as n

ot p

rovi

ded.

Exam

ple:

Ave

rage

Agg

rega

te A

ttac

hmen

t Per

cent

age

(%) (

Tabl

e 2b

, 50-

99 C

over

ed Li

ves i

n Gr

oup)

=

(S

um o

f Exp

ecte

d Cl

aim

s x A

ttac

hmen

t Per

cent

age

%) /

(Sum

of E

xpec

ted

Clai

ms)

In

sure

d Sp

ecifi

c Ag

greg

ate

Expe

cted

Nu

mbe

r In

clude

Re

ason

to

Grou

p At

t Poi

nt ($

) At

t (%

) Cl

aim

s of

Live

s Ex

clude

Ex

clude

1

$

200

,000

11

5%

$

500

,000

90

In

clude

2

$

100

,000

12

0%

$

300

,000

60

In

clude

3

$

50

,000

14

0%

$

200

,000

40

Ex

clude

No

t in

Grou

p Si

ze B

and

4 $

1

20,0

00

N/A

$

400

,000

50

Ex

clude

Ag

greg

ate

not p

urch

ased

by

grou

p

Calcu

latio

n:

(5

00,0

00 x

115

% +

300

,000

x 1

20%

) / (

500,

000

+ 3

00,0

00)

= 11

6.7%

Foot

note

– T

he n

umbe

r of c

over

ed li

ves f

or st

op lo

ss co

vera

ge is

repo

rted

in th

e Ac

ciden

t and

Hea

lth P

olicy

Exp

erie

nce

Exhi

bit f

or Y

ear (

April

1st

fil

ing)

in C

olum

n 6,

Sec

tion

C. O

ther

Bus

ines

s, Lin

e 2.

If st

op lo

ss p

olici

es a

re so

ld o

n a

Pper

Eem

ploy

ee, P

per M

mon

th b

asis

and

the

actu

al n

umbe

r of c

over

ed li

ves i

s unk

now

n, it

wou

ld b

e re

ason

able

to e

stia

mat

e th

e nu

mbe

r of c

over

ed li

ves i

f the

exa

ct in

form

atio

n is

not a

dmin

istra

tivel

y av

aila

ble

to th

e re

port

ing

entit

y. T

his

met

hod

of e

stim

atio

n m

ay b

e sim

ilar t

o es

timat

ions

pro

vide

d fo

r the

Sim

ilarly

as a

ppro

xim

ated

in th

e Ac

ciden

t and

Hea

lth P

olicy

Exp

erie

nce

Exhi

bit f

or Y

ear.

. If

estim

ated

, aAn

exp

lana

tion

of th

e m

etho

d us

ed to

est

imat

e th

e nu

mbe

r of c

over

ed li

ves s

houl

d be

pro

vide

d in

the

foot

note

.


4/7/19


Tab

le 2

a - C

alen

dar

Yea

r - X

XX

XSp

ecifi

c St

op L

oss C

ontr

acts

by

Gro

up S

ize

Page

XR

014,

PR

019,

LR

019,

FR

019

Cov

ered

Liv

es in

G

roup

Num

ber

of G

roup

s*A

vera

ge S

peci

fic

Att

achm

ent P

oint

($)

1.<1

0$0

2.10

-24

$03.

25-4

9$0

4.50

-99

$05.

100-

499

$06.

>=50

0$0

Tab

le 2

b - C

alen

dar

Yea

r - X

XX

X A

ggre

gate

Sto

p L

oss C

ontr

acts

by

Gro

up S

ize

Page

XR

014,

PR

019,

LR

019,

FR

019

Cov

ered

Liv

es in

G

roup

Num

ber

of G

roup

s*A

vera

ge A

ggre

gate

A

ttac

hmen

t (%

)1.

<10

0%2.

10-2

40%

3.25

-49

0%4.

50-9

90%

5.10

0-49

90%

6.>=

500

0%

*Fo

otno

te: W

as th

e nu

mbe

r of c

over

ed li

ves i

n th

e gr

oup

rep

orte

d an

est

imat

ed n

umbe

r? Y

es__

___

No

____

__If

the

answ

er w

as y

es, p

rovi

de a

n ex

plan

atio

n fo

r th

e as

sum

ptio

ns u

sed

and

how

the

estim

atio

n w

as c

alcu

late

d.Sp

ecifi

c:A

ggre

gate

:

pp

yp

LR

019,

FR

019

in

Num

ber

of G

roup

s*A

vera

ge S

peci

fic

Att

achm

ent P

oint

($) $0 $0 $0 $0 $0$000 $$$0$0$0$0

r Y

ear

- XX

XX

Agg

rega

te S

top

Los

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4/7/19



[ ] Capital Adequacy (E) Task Force [ x ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group [ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] SMI RBC (E) Subgroup [ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup

DATE: 5-16-18


TELEPHONE: 816-783-8146








FOR NAIC USE ONLY

Agenda Item # 2018-12-H Year 2019

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO


[ x ] EXPOSED 30 days

[ ] OTHER (SPECIFY)


[ x ] Health RBC Blanks [ ] Property/Casualty RBC Blanks [ ] Life RBC Instructions

[ ] Fraternal RBC Blanks [ ] Health RBC Instructions [ ] Property/Casualty RBC Instructions [ ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER ______________

DESCRIPTION OF CHANGE(S) Correct the Bond and Preferred Stock descriptions on page XR011.

REASON OR JUSTIFICATION FOR CHANGE ** The bond descriptions on page XR011 have included the term “unaffiliated” since the formula’s inception in 1998, however, all bonds (affiliated and unaffiliated) should be included in the asset concentration consistent with the bond reporting on page XR007 which includes all bonds.

The preferred stock description should have the term “unaffiliated” added to the blanks page to be consistent with the RBC instructions for the asset concentration.

Additional Staff Comments: 5-18-18 cgb The WG agreed to expose the proposal for a 30 day comment period, ending June 19, 20186-19-18 cgb One comment letter was received from CT.6-29-18 cgb Suggested modifications to insert “and hybrids” and delete “affiliated bonds” in paragraph 2 of the instructionshas been included in the revised draft.7-12-18 cgb the WG adopted proposal 2018-12-H, with modifications to add the terms “and hybrids” and delete the terms“affiliated bonds” from the second paragraph ___________________________________________________________________________________________________** This section must be completed on all forms. Revised 11-2013


Attachment Ten Capital Adequacy (E) Task Force

4/7/19


[ ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] Operational Risk (E) Subgroup[ ] C3 Phase II/ AG43 (E/A) Subgroup [ x ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup

DATE: 11/16/2018

CONTACT PERSON: Eva Yeung

TELEPHONE: 816-783-8407


ON BEHALF OF: P/C RBC WG

NAME: Tom Botsko

TITLE: Chair

AFFILIATION: Ohio Department of Insurance

ADDRESS: 50 W. Town Street, Third Floor – Suite 300

Columbus, OH 43215

FOR NAIC USE ONLY

Agenda Item # 2018-16-P

Year 2019

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO


[ ] EXPOSED

[ ] OTHER (SPECIFY)


[ ] Health RBC Blanks [ x ] Property/Casualty RBC Blanks [ ] Life RBC Instructions[ ] Fraternal RBC Blanks [ ] Health RBC Instructions [ ] Property/Casualty RBC Instructions[ ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER ______________

DESCRIPTION OF CHANGE(S)

American Academy of Actuaries (Academy) Report for 2017 Property and Casualty Risk-Based Capital Underwriting Line 4 Factors.The factors are based on the scenario #1 (10% capped) Underwriting Factors proposed by the Academy were adopted for 2017 RBC reporting (See the proposal 2016-14-P). During the 10/11 PCRBC WG conference call, the WG decided to develop a proposal to include four different options: 1) factors capped at 35% for all lines of business;2) uncapped factors for all lines of business;3) factors capped at 35% on Commercial lines and Medical Professional Liability lines and uncapped on all other lines ofbusiness; and4) any other alternatives suggested by interested parties.

REASON OR JUSTIFICATION FOR CHANGE **

At the request of the PCRBC WG, the Academy examined the underwriting risk charges used the NAIC RBC formula. The Academy recommended that the Working Group consider adopting factors resulting from the revised methodology outlined in the report.

Attachment Eleven Capital Adequacy (E) Task Force

4/7/19


Additional Staff Comments:

11/16/18 – During the Joint P/C RBC WG and Catastrophe Risk Subgroup meeting, the members agreed to 1) use the 35 percent capped factors for Commercial Insurance, Medical Professional Liability, and All Other Lines; and use uncapped factors for Personal Lines and Reinsurance Lines and 2) expose this proposal for a 60-day comment period ending January 18, 2019.

2/20/19 - Per discussion in the Joint PC RBC WG and Cat Risk SG call, the members agreed to re-expose this proposal for 30 days comment period.___________________________________________________________________________________________________ ** This section must be completed on all forms. Revised 11-2013


4/7/19


2019

Pro

pose

d Lin

e 4

Rese

rves

and

Pre

miu

ms F

acto

rs

35 p

erce

nt ca

pped

fact

ors f

or C

omm

erci

al In

sura

nce,

Med

ical

Pro

fess

iona

l Lia

bilit

y, a

nd A

ll O

ther

Line

s; u

ncap

ped

fact

ors f

or P

erso

nal L

ines

and

Rei

nsur

ance

Sche

dule

P L

ine

of B

usin

ess

LOB

Shor

t ta

iled

Prop

osed

for

adop

tion

- 201

9 PR

017

Line

4

2018

PR

017

Line

4

Prop

osed

for

adop

tion

- 201

9 PR

018A

Lin

e 4

2018

PR

018A

Li

ne 4

H/F

A0.

213

0.21

30.

936

0.92

7

PPA

B0.

179

0.18

10.

969

0.96

9

CA

C0.

276

0.24

31.

010

1.00

5

WC

D0.

344

0.33

61.

044

1.04

4

CM

PE

0.49

40.

494

0.88

30.

892

MM

Occ

urre

nce

F10.

383

0.41

71.

668

1.77

8

MM

Clm

s M

ade

F20.

276

0.29

71.

130

1.10

3

SLG

0.30

40.

270

0.92

20.

898

OL

H0.

531

0.53

11.

013

1.02

7

Fide

lity

/ Sur

ety

KX

0.37

10.

338

0.85

40.

875

Spec

ial P

rope

rtyI

X0.

246

0.20

70.

863

0.90

7

Auto

Phy

sica

l Dam

age

JX

0.15

50.

121

0.83

60.

836

Oth

er (C

redi

t, A&

H)

LX

0.22

00.

186

0.93

50.

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Fina

ncia

l / M

ortg

age

Gua

rant

yS

X0.

179

0.19

41.

598

1.51

5

Intl

M0.

359

0.33

61.

234

1.18

7

Rei

n. P

rope

rty &

Fin

anci

al L

ines

NP

0.41

50.

304

1.17

01.

223

Rei

n. L

iabi

lity

O0.

656

0.71

11.

322

1.44

9

PLR

0.80

20.

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1.26

31.

228

Wa r

rant

yT

X0.

371

0.33

80.

854

0.87

5

Rese

rves

Prem

ium

s


4/7/19


Compa

rionof

P&CUnd

erwritingFactorsb

etweenCu

rren

t(20

17)R

BCform

ula,Und

erwritingFactorsC

appe

dat

35%an

dUncap

pedFactors

PR01

7Line

4CA

LWC

CMP

OL

SPPL

H/F

PPAL

APD

Curren

t0.24

30.33

60.49

40.53

10.20

70.68

80.21

30.18

10.12

135

%Cap

0.27

60.34

40.49

40.53

10.24

60.80

20.21

30.17

90.14

3Uncap

0.34

80.34

40.49

40.53

10.42

81.34

50.21

30.17

90.15

5

PR01

7Line

4MM

Occ

MM

CMRe

innA&

CRe

inB

SLFid/Surety

Other

Finan/Mort

Int'l

Waranty

Curren

t0.41

70.29

70.30

40.71

10.27

00.33

80.18

60.19

40.33

60.33

835

%Cap

0.38

30.27

60.34

80.65

60.30

40.37

10.22

00.17

90.35

90.37

1Uncap

0.29

60.08

90.41

50.65

60.43

10.91

70.37

50.06

00.69

50.31

6

PR01

8Line

4CA

LWC

CMP

OL

SPPL

H/F

PPAL

APD

Curren

t1.00

51.04

40.89

21.02

70.90

71.22

80.92

70.96

90.83

635

%Cap

1.01

01.04

40.88

31.01

30.86

31.26

30.93

60.96

90.83

6Uncap

1.01

01.04

40.88

31.01

30.81

61.28

50.93

60.96

90.83

6

PR01

8Line

4MM

Occ

MM

CMRe

innA&

CRe

inB

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Other

Finan/Mort

Int'l

Waranty

Curren

t1.77

81.10

31.22

31.44

90.89

80.87

50.90

61.51

51.18

70.87

535

%Cap

1.66

81.13

01.17

01.32

20.92

20.85

40.93

51.59

81.23

40.85

4Uncap

1.49

01.17

61.17

01.32

20.93

30.68

00.93

52.51

31.63

81.02

8

CommercialLine

sWriters

Person

alLine

sWriters

Med

MalWriter

Prof

Reinsurers

Other

Line

sWriters

CommercialLine

sWriters

Person

alLine

sWriters

Med

MalWriter

Prof

Reinsurers

Other

Line

sWriters


4/7/19




DATE: 12/6/2018


TELEPHONE: 816-783-8407



NAME: Tom Botsko

TITLE: Chair



Columbus, OH 43215

FOR NAIC USE ONLY


Year 2019

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO


[ x ] EXPOSED 3/22/19

[ ] OTHER (SPECIFY)


[ ] Health RBC Blanks [ x ] Property/Casualty RBC Blanks [ ] Life RBC Instructions[ ] Fraternal RBC Blanks [ ] Health RBC Instructions [ x ] Property/Casualty RBC Instructions[ ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER ______________

DESCRIPTION OF CHANGE(S) Update the PR011 Blanks and Instructions Asset Concentration Preferred Stock and Hybrid Securities line descriptions to Unaffiliated Preferred Stock and Hybrid Securities.

REASON OR JUSTIFICATION FOR CHANGE **Change the line descriptions to be consistent with the PR011 instructions.


2/20/19 – Per discussion in the Joint PC RBC WG and Cat Risk SG call, the members agreed to expose this proposal for 30 days comment period.___________________________________________________________________________________________________** This section must be completed on all forms. Revised 11-2013

Attachment Twelve Capital Adequacy (E) Task Force

4/7/19


ASS

ET

CO

NC

EN

TR

AT

ION

P

R01

1

(1)

(2)

(3)

ISSU

ER #

1

Book

/Adj

uste

d C

arry

ing

Val

ueFa

ctor

Add

ition

al R

BC

(1)

NA

IC 0

2 Bo

nds

00.

0100

0(2

)N

AIC

03

Bond

s0

0.02

000

(3)

NA

IC 0

4 Bo

nds

00.

0450

0(4

)N

AIC

05

Bond

s0

0.10

000

(5)

Col

late

ral L

oans

00.

0500

0(6

)M

ortg

age

Loan

s0

0.05

000

(7)

NA

IC 0

2 W

orki

ng C

apita

l Fin

ance

Inve

stm

ents

00.

0125

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dera

l Gua

rant

eed

Low

Inco

me

Hou

sing

Tax

Cre

dits

00.

0014

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)Fe

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l Non

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me

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sing

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dits

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me

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- FIX

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ME

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(14)

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refe

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(16)

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ybrid

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ybrid

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ions

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a g

rand

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l pag

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ill b

e av

aila

ble

on th

e fil

ing

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are.

The

gra

nd to

tal p

age

is c

alcu

ated

as t

he su

m o

f iss

uers

1-1

0 by

ass

et ty

pe.

Den

otes

item

s tha

t mus

t be

man

ually

ent

ered

on

the

filin

g so

ftwar

e.

Attachment Twelve Capital Adequacy (E) Task Force

4/7/19


© 1

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Atta

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hirte

enAttachment Twelve





DATE: 1/17/2019


TELEPHONE: 816-783-8407



NAME: Tom Botsko

TITLE: Chair



Columbus, OH 43215

FOR NAIC USE ONLY


Year 2019

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO


[ x ] EXPOSED 3/22/19

[ ] OTHER (SPECIFY)


[ ] Health RBC Blanks [ ] Property/Casualty RBC Blanks [ ] Life RBC Instructions[ ] Fraternal RBC Blanks [ ] Health RBC Instructions [ x ] Property/Casualty RBC Instructions[ ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER ______________

DESCRIPTION OF CHANGE(S)Modify P&C RBC Instructions/PR016 to eliminate the observed inconsistence

REASON OR JUSTIFICATION FOR CHANGE **Inconsistencies are observed between the current P/C RBC Instructions and the current P/C RBC Formula for the computation of the Selected Average Growth Rate.

Under the current P/C RBC Instructions, the Selected Growth Rate is the three-year average growth rate calculated using the four most recent years gross written premiums. If only the latest three years of premium are available, a two-year average growth rate is used. If only the most recent two years of premium are available, a one-year average growth rate is calculated, and a default 40% growth rate is used for the first year for a start-up company.

Under the current P/C RBC Formula, the Selected Growth Rate is also the three-year average growth rate if the four most recent years gross written premiums are available. However, if the gross written premium of the most four recent years are not available, a default 40% growth rate is assigned to the first year of which the premiums are available. The Selected Growth Rate is the average of the available growth rates.

For example, if a company has only three years of premiums, a two-year average growth rate will be calculated under the current P/C RBC Instructions. However, under the current RBC Formula, a three-year average growth rate will be computed (with the third year growth rate being equal to 40%).

Attachment Thirteen Capital Adequacy (E) Task Force

4/7/19


Two options are proposed to modify either the current P/C RBC Instructions or the P/C RBC Formula so that they are consistent with each other. Option One is to modify the P/C RBC formula (PR016) so that the revised formula will match with the current P/C RBC Instructions. Option Two is to modify the P/C RBC Instructions so that it match with the current P/C RBC Formula.


2/20/19 – Per discussion in the Joint PC RBC WG and Cat Risk SG call, the members agreed to expose the option 2 for 30 days comment period.___________________________________________________________________________________________________** This section must be completed on all forms. Revised 11-2013


4/7/19


EX

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rent

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200

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00

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00

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)20

150

00

00

xxx

xxx

(5)

2018

Gro

wth

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e=[L

(1)-

L(2)

]/L(2

)0.

250

(6)

2017

Gro

wth

Rat

e=[L

(2)-

L(3)

]/L(3

)0.

200

(7)

2016

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wth

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e=[L

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]/L(4

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(8)

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e Y

ear A

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row

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(10)

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r Ave

rage

Gro

wth

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250

(11)

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cted

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rage

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wth

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C A

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ket

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ustm

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(000

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(000

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9999

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tal

0


4/7/19


Option Two

EXCESSIVE PREMIUM GROWTHPR016

Studies have shown that rapidly growing companies tend to have larger reserve deficiencies than other insurers with more normal growth. Companies with an average annual premium growth rate of more than 10 percent will be charged with additional risk-based capital to reflect this additional risk. For members of a group, the growth rate is based on a group growth rate rather than the individual member’s growth rate. A group consists of all Property and Casualty companies with the same NAIC Group Code number. Enter four years of group gross written premiums for the current year group code even though the reporting company was not part of the group for all years. If the reporting company is not a member of a group, the premium to be entered is the premium of the individual company. Enter both company written premiums and group written premiums if the reporting company is a member of a group.

Servicing Carriers may exclude Gross Written Premiums from involuntary pool business from the Group Gross Written Premium. In the context of residual markets and/or assigned-risk business, a servicing carrier is a licensed insurer that, either through a competitive bid process or by virtue of a state appointment, administers the business. Such administration may include policy issuance, billing and collection, rating, fraud control, medical management and claim payment. In general, the accounts are written on the servicing carriers paper; however, the results are pooled and distributed to all licensed companies (for that particular line of business) in the state, that are assessed by market share. The servicing carrier is paid a fee for the administrative services it provides. If the company for which this report is being prepared is part of a group of companies, enter the group adjustments in Column (4); otherwise, enter the individual company adjustments in Column (2). DO NOT DEDUCT PARTICIPATION IN RESIDUAL MARKET MECHANISMS. However, an adjustment is required for carriers that are servicing carriers for an assigned risk mechanism. Those carriers shall exclude gross written premiums from involuntary pool business for any of those years. That adjustment for the company and for the group must be entered on the appropriate lines in the program.

The growth rate used in this calculation is a three-year average growth rate of gross written premiums. Gross written premiums are direct written premiums plus written premiums assumed from non-affiliates and are calculated from the Underwriting and Investment Exhibit, Part 1B as the sum of Column 1, Line 35 plus Column 3, Line 35. The four most recent years of data are required to compute the growth rate. However, an adjustment is allowed for carriers which are servicing carriers for an assigned risk mechanism. Those carriers may exclude gross written premiums from involuntary pool business for any of those years. That adjustment for the company and for the group must be entered on the appropriate lines in the program.

In determining the gross written premium, all years of gross written premium should be included for any P&C affiliate that was acquired during the four-year period. Similarly, all years of gross written premium should be excluded for any P&C affiliate that was divested during the four-year period. The exception to this rule applies to a P&C affiliate acquired without the parent assuming any of the affiliate’s liability obligations (i.e., the parent acquired a “shell” company). In that case, the gross written premiums of the acquired insurer(s) should be excluded. Similarly, if a P&C affiliate is divested but the parent retains the affiliate’s liability obligations (that is, the parent divested a “shell” company), then the gross written premiums of that affiliate should remain in the parent’s group gross written premiums.

When the only the most recent three years gross written premium are available, a 40 percent growth rate is assigned to the third year growth rate and the three-year average growth rate is computed. If only the most two recent years gross written premium are available, a 40 percent growth rate is assigned to the second year growth rate, and the two-year average growth rate is computeddata necessary to calculate a three-year average growth rate is not available, a two-year average growth rate should be calculated using the latest three years of premiums. If only the most recent two years of gross written premiums are available, then a one year average growth rate should be calculated. If the company has no gross written premiums in the latest year, then the growth rate will be set to zero. A default growth rate of 40 percent is used in the first year for a start-up company.

Each individual year’s growth rate is capped at 40 percent. The Selected Average Growth Rate is the average of individual years’ growth rates. The excess of the growth rate over 10 percent is the RBC Average Growth Rate Factor. This factor is multiplied by 0.45 to determine the excessive growth charge factor for loss and expense reserves and


4/7/19


by .225 to determine the excessive growth charge factor for written premiums. The total amount of loss & expense reserves from Schedule P Part 1–Summary C24 L12 is multiplied by 1,000 to bring it up to whole dollars, and this amount is entered on the appropriate line on the CD Rom to calculate the required RBC for excessive growth. The total net written premiums from the Underwriting and Investment Exhibit Part 1B L35 C6 are entered on the appropriate line to calculate the excessive growth for net written premiums.


4/7/19


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