© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

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Risk-Based Capital UpdateRisk-Based Capital Update

Crystal Brown – Sr. Insurance Reporting Analyst – RBCJulie Garber – Sr. Manager – Solvency Regulation

National Association of Insurance Commissioners (NAIC)

© 2016 National Association of Insurance Commissioners

This presentation is pre-qualified for NAIC Designation Renewal Credits (DRCs). If you currently hold an NAIC APIR, PIR, or SPIR designation and are pursuing continuing education credit to maintain it, you may be awarded credits for your participation. To receive credit, you must be in attendance for the duration of the presentation.

Attention APIR, PIR, or SPIR Designees…

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

Learning Objectives

At the end of this presentation, you will be able to:

• Identify changes to the 2016 Health RBC Formula.

• Identify changes to the 2016 Life RBC Formula.

• Identify changes to the 2016 P/C RBC Formula.

• Discuss how the Investment Risk-Based Capital (E) Working Group plans to move forward with bonds and common stock.

© 2016 National Association of Insurance Commissioners

NAIC RBC ContactsCapital Adequacy (E) Task Force

Jane Barr jbarr@naic.org 816-783-8413

Health Risk-Based Capital (E) Working Group & Health RBC Formula

Crystal Brown cbrown@naic.org 816-783-8146

Life Risk-Based Capital (E) Working Group & Life & Fraternal RBC Formula

Dave Fleming dfleming@naic.org 816-783-8121

Property/Casualty Risk-Based Capital (E) Working Group & P/C RBC Formula

Eva Yeung eyeung@naic.org 816-783-8407

Investment Risk-Based Capital (E)Working GroupJulie Garber jgarber@naic.org 816-783-8130

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

Capital Adequacy (E) Task Force

© 2016 National Association of Insurance Commissioners

2015-18-CA – Asset Concentration Blank

This proposal removes the factor column from the Grand Total Issuer within the RBC forecasting spreadsheet. It also adds a note to the Asset Concentration page for the RBC blank indicating the that the requirements for Issuers 1-10 are calculated based on the factor and the Grand Total is calculated based on the sum of Issuers 1-10.

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2016-08-CA – Receivables for Securities• Based on a weighted average of bonds,

common, preferred and hybrid stock investments, the broker receivable factors were adjusted for all RBC forecasting blanks.

• Life – proposed to stay the same at .014

• Health – proposed to change to .024

• Property – proposed to change to .023

© 2016 National Association of Insurance Commissioners

2016-05-O – Operational Risk Factors• The proposed change would modify the factors for the

base charge affecting only premiums and reserves• Operational risk continues to be on an informational

only basis for 2016• P/C – Factor changed from 2% to 1.1%• Health – Premium factor changed from .3% to .2%

and Net Claim Liability changed from 3.5% to 2.5%• Life & Fraternal – Net Direct Premium factor

changed from 1.2% to .6% and Net Claim Liability and Agg. Reserves changed from .3% to .15%. A&H Net Direct Premiums changed from .3% to .2% and Net Direct Claim Liability changed from 3.5% to 2.5%.

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2015-14-H & 2015-26-H – XR012 & XR012-A – Other Non-Health Column & Medicaid Pass-Through Payments

© 2016 National Association of Insurance Commissioners

2016-01-H – Footnote 3 &4 – Individual Premiums & Claims Inside & Outside of the Exchanges

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2016-04-H – Health Entity Definition

Health Entity – Any issuer of a policy or contract providing or offering to provide a plan of Comprehensive Medical and Hospital; Medicare Supplement; Dental/Vision; Stand-Alone Medicare Part D Coverage or Other health benefits through individual or group plans and which files the Health Annual Statement blank. The term Health Entity was previously expanded and replaced MCO beginning in the 2015 instructions.

© 2016 National Association of Insurance Commissioners

2016-06-H – Health Care Receivable Factors

• The Health RBC WG received a recommendation from the American Academy of Actuaries to revise the Health Care Receivable Factors.

• The Academy recommends that the factors increase from 0.050 to .0190 for:– Claim Overpayment Receivables– Loan & Advances to Providers – Capitation Arrangement Receivables– Risk-Sharing Receivables– Other Health Care Receivables

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2016-03-L – Modifications to XXX/AXXX Captive Reinsurance Consolidated Exhibit Instructions

© 2016 National Association of Insurance Commissioners

2015-19-CR – Rcat Component

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2015-19-CR – Rcat Component

© 2016 National Association of Insurance Commissioners

2015-19-CR – Rcat Component

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2015-20-P – Alternative to Calculating Line (1) Factors on Page PR017

© 2016 National Association of Insurance Commissioners

2015-20-P – Alternative to Calculating Line (1) Factors on Page PR018

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2015-21-CR – Exemption for PR027

© 2016 National Association of Insurance Commissioners

2015-22-CR – Earthquake Model Loss CALCULATION OF CATASTROPHE RISK CHARGE R6 AND R7

(FOR INFORMATIONAL PURPOSES ONLY)PR027

The catastrophe risk charge for earthquake and hurricane risks is calculated by multiplying the RBC factors by the corresponding modeled losses and reinsurance recoverables. The risk applies on a net basis with a corresponding contingent credit risk charge for certain categories of reinsurers. Data must be provided for the worst year in 50, 100, 250, and 500; however, only the worst year in 250 will be used in the calculation of the earthquake risk charge and the worst year in 100 will be used in the calculation of the hurricane risk charge. While projected losses modeled on an Aggregate Exceedance Probability basis is preferred, companies are permitted to report on an Occurrence Exceedance Probability basis if that is consistent with the company’s internal risk management process.

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2015-23-P Line 1 - Factors for PR017 & PR018

© 2016 National Association of Insurance Commissioners

2015-24-CR – Line 1 – Ex-CAT Factors

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

2015-25-CR – PR027 Interrogatory

© 2016 National Association of Insurance Commissioners

2016-02-P – Credit Risk for Receivables

• A pre-requisite of this proposal is to add an electronic only column to Schedule F, Parts 3, 5 and 6, Section 1 that would contain the reinsurer’s financial strength rating. – The Blanks Working Group exposed proposal

2016-08-BWG at the Spring National Meeting.

• The purpose of this proposal to calculate the required credit risk for reinsurance receivables by utilizing the secure ratings from the proposed electronic only columns in Schedule F.

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

PR012A – C1 - C13

© 2016 National Association of Insurance Commissioners

2016-09-P – Multiple Financial Strength Rating

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

Investment Risk-Based Capital (E) Working Group Updates

© 2016 National Association of Insurance Commissioners

History of Investment Risk-Based Capital (E) Working Group

• Originally, the C-1 Factor Review (E) Subgroup for the Life RBC Formula only– Review asset risk factors in the C-1

component in the Life Formula

• Transitioned to the Investment Risk-Based Capital (E) Working Group in 2013– Charge revised to review the asset risk

factors for all lines of business

• Four plus years of discussion on the topic

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

“A Way Forward”

• “A Way Forward” document discussed at 2016 Spring National Meeting– Intended to be a discussion draft and

“conversation-starter”– Time to bring some of these discussions to

decision points– Determine if factors should be updated and if

they should be more consistent between statement types

• Exposed through May 19

© 2016 National Association of Insurance Commissioners

Key Principles of “A Way Forward”

• Will consider investment-related issues for all RBC blanks concurrently

• Will consider the issues of consistency between the factors used by the different statement types– Issue has been raised both domestically and

internationally

• Will begin by focusing on bonds and common stock

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

Bonds• General consensus: factors need to be updated• Recommend increasing granularity by expanding

the categories to 20– Maintain current 6 NAIC designations for statutory

accounting and state investment laws– 20 designations included in an electronic only column– Proposed factors based on bond rating and Academy

analysis– Consideration of different treatment for P/C and

Health• Willing to consider proposals for use of different

factors for certain asset classes, but at a later time– Municipals, sovereign debt, etc.

© 2016 National Association of Insurance Commissioners

Why Be More Granular?

• With larger range within an NAIC designation, there could be incentive to invest in the lower quality bonds with in the same NAIC designation– Lower quality bonds get same RBC charge as

higher quality bonds in NAIC designation

• More granularity will eliminate that incentive

• See example on the next slide

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

Example: Proposed Bond Factors

Bond Rating

Current Category

Proposed Category

Current Factor

Proposed Factor

Aaa NAIC 1 Proposed 1 0.40% 0.28%Aa1 NAIC 1 Proposed 2 0.40% 0.43%Aa2 NAIC 1 Proposed 3 0.40% 0.63%Aa3 NAIC 1 Proposed 4 0.40% 0.79%A1 NAIC 1 Proposed 5 0.40% 0.96%A2 NAIC 1 Proposed 6 0.40% 1.13%A3 NAIC 1 Proposed 7 0.40% 1.30%

© 2016 National Association of Insurance Commissioners

Common Stock

• Propose RBC factor be the same for all statement types (after adjusting for varying tax treatment)

• Propose increasing the P/C and Health factors to 19.5%, consistent with the current after-tax life factor– Current factor is 15%

• Consider the use of beta in the formulas

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

Example: Proposed Unaffiliated Common Stock Factors

Statement Type

Current Factor Proposed Factor

Life 19.5% (+/- beta)Beta: 14.625% - 29.25%

19.5% (+/- beta)Beta: 14.625% - 29.25%

P/C 15% (no beta used) 19.5% (beta???)Health 15% (no beta used) 19.5% (beta???)

© 2016 National Association of Insurance Commissioners

What is Beta?

• Adjustment to the bonds RBC charge• Indicates stock’s volatility relative to the

overall market– Beta < 1: Stock is less volatile than the market– Beta > 1: Stock is more volatile than the

market– Computed on individual or aggregate basis

• Relative volatility will affect the RBC charge

© 2016 National Association of Insurance Commissioners

© 2016 National Association of Insurance Commissioners

Goals & Timeline

• Aggressive timeline, so that why only focusing on bonds and common stock

• Goal: Updated factors in place by year-end 2017 reporting

• Capital Adequacy (E) Task Force approval deadlines– Structural changes by April 30, 2017– Factor and instruction changes by June 30,

2017

© 2016 National Association of Insurance Commissioners

Review by Health and P/C Drafting Groups

• Health RBC Drafting Group– Reviewed current treatment of asset risk in health

formula– Health formula has focused primarily on

underwriting risk– Tended to follow the P/C formula asset risk

treatment • P/C RBC Drafting Group

– Reviewed inclusion of beta adjustment for common stock in the P/C formula

– Recommended that no beta adjustment is needed in the P/C formula