Risk-Based Capital (RBC) was the April phrase of the month. The step-up in activity is normal for April each year, as format changes to the formulas must be finalized by the last day of April. That does not mean the formulas are complete yet, as instructional revisions and/or factor changes have until July to be finalized. Here is a summary of the April RBC activity.
RBC Investment Risk and Evaluation Working Group – April 12, 2024
NAIC staff presented 2023 reported data for residual tranches. Among the data available, it was noted that Life entities overwhelming hold the majority of residuals in the insurance industry, with 10 companies holding 55% of the reported residuals. In addition, almost half of the residuals held by Life entities involve a related party (not so for Property/Casualty and Health entities). It also was noted that there was a significant increase within the industry in the value of reported residuals; however, NAIC staff could not definitively say if that was caused by an increase in the investments or the reclassification of residuals taking place because of changes in accounting and report. The report also indicated that changing the residual RBC factor from 30% to 45% would not make a material difference in industry’s RBC results and that change alone would not put any of the 2023 reporting companies into a different level of RBC results.
The NAIC’s Structured Securities Group (SSG), a division of the Investment Analysis Office, presented information on its analysis of the Oliver Wyman (OW) Report, which had recently been released for comment by the Working Group. The presentation was very complex and somewhat confusing since it did not really provide an overall evaluation of the OW report. The confusion was apparent by the number and type of questions asked by the group’s regulators, including whether the SSG agreed or disagreed with the OW Report. The SSG was hesitant to provide a clear opinion.
The discussion then moved on to the 33 comment letters that had been received on the OW Report. Most of the comments didn’t address the reporting itself but, not unexpectedly, comments indicated a preference for a one-year delay in changing the RBC residual factor from 30% to 45% for 2024 reporting. Most responding entities believed more analysis was needed and some were even critical of the NAIC for rushing into an RBC factor change without enough analysis.
A motion was made to delay the 45% factor implementation. Prior to voting on the motion, the chair indicated they didn’t think work should stop on this issue but was not in favor of delaying the 45% factor for another year. The motion to delay was defeated. However, a commissioner on the call indicated they would like to see additional time provided for industry to provide feedback on a possible one-year delay. The chair agreed to this idea, as long as industry could provide a detailed, specific plan for moving forward.
On April 16, the chair released via email a memorandum entitled Consideration of Additional Information on Interim Factor for Residual Tranches for comment. The memorandum provides specific guidance the Working Group would expect to see in any additional feedback. The comment period ends May 15 and then the Working Group will meet again on May 22 to consider the additional feedback.
Health RBC Working Group – April 16, 2024
The Working Group took the following actions.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-09-CA | Adjusts the underwriting factors for comprehensive medical, Medicare supplement, dental and vision for investment income. | Referred to Capital Adequacy Task Force. |
The referral was required since the change would affect the RBC for all insurer types that have health business.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-12-H | Revises factors for Health Care Receivables. | Exposed for comment through May 16. |
This proposal was developed by the American Academy of Actuaries (Academy), which also provided an update on its work on developing the factors. The Academy’s original work had included data from the Life/Fraternal statement, but the Academy has decided that any further work would delete that data and use data from the Health statement (orange statement) only. In addition, non-pharmaceutical receivables will be treated as one type of health care receivable instead of five separate receivables. If adopted, the proposed format change will be effective in 2025. For 2024 reporting, the current format will have to be used, but the new tiered factors could be implemented.
A referral letter to the Financial Analysis Solvency Tools Working Group and the Examiners Handbook Working Group was exposed for comment through May 16. The letter states that in the opinion of the Health RBC Working Group, changes to the RBC formula regarding pandemic risk were not needed, but asked the above groups if they felt pandemic risk was being sufficiently addressed from their perspective and if not, what changes would be needed to the financial analysis and/or financial examination process. The group’s attention then moved to a review of the excessive growth charge that had been conducted. The group concluded further work on this issue should be tabled for now but will possibly be addressed again in the future.
Life/Fraternal RBC Working Group – April 19, 2024
The meeting began by acting upon two items that had previously been exposed for comment.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-04-L | Adds line for total adjusted capital (TAC) to adjust for nonadmitted affiliates. | Adopted for 2024 reporting. |
This is a format change only to correct the omission of that line when the revision was adopted earlier. There are no factor or calculation changes.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-05-L 2024-17-L | Revision adds line to page LR009 for Schedule BA mortgages. | Format change was adopted for 2024; factor revision was exposed for comment through May 28. |
This revision is a structural change to correct the omission of an Asset Valuation Reserve line needed for RBC. After the omission was discovered last year, companies were instructed to include the amount in one of the other lines on that RBC page. Adding the specific line will now allow for a direct pull into the Life/Fraternal RBC. The format change was adopted; the factor to be applied was released for comment as proposal 2024-17-L, along with a comment letter from the American Council of Life Insurers (ACLI).
The Working Group then moved on to other issues on the agenda.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-15-L | Update instructions for the handling of collateral loans backed by mortgages reported in Schedule BA. | Exposed for comment through May 22, 2024. |
Submitted by the ACLI, the proposal was crafted in response to a referral from the Statutory Accounting Principles Working Group (SAPWG) resulting from the work that SAPWG is conducting regarding collateral loans backed by mortgages. The revision is meant to maintain the current RBC factor until SAPWG completes its work. If adopted, the change would be effective for year-end 2024 reporting, with further changes expected in 2025.
Next on the agenda was the ACLI’s repurchase agreement proposal. Previously, a referral on this issue had been sent to SAPWG, which then recommended deferring the proposal until SAPWG finishes its current work on repurchase agreements. The Working Group supported this recommendation. More discussion will occur later for 2025 formula consideration. The final item discussed suggests that changes to the “Other Long-Term Assets” section of the Life/Fraternal RBC need to include MODCO adjustments for residual tranches. NAIC staff indicated there might be some additional items that this change would affect. Accordingly, the proposal was deferred for further study. The chair announced that the group is in the process of scheduling two other meetings to be held shortly. One of those meetings will allow the Academy to provide an update on its C3 work and the other meeting will cover a review of the formula’s covariance calculation.
Catastrophe Risk Subgroup – April 23, 2024
The focus of this meeting was the possible adoption of proposal 2023-17-CR.
| Reference# | Subject | Disposition |
|---|---|---|
| 2023-17-CR | Adds disclosure of climate conditioned catastrophe exposure for information collection only. | Adopted. Referred to Property/Casualty RBC for action. |
The original proposal was revised for a few regulator suggestions, most of which came from an earlier regulator-to-regulator meeting. Prior to adoption, there was a great deal of discussion regarding the comment letters that had been received. Those comments centered on what many considered the weaknesses of the proposal, mainly that the requested information would not provide regulators with the information they are seeking. Industry presented an alternative proposal it felt would be more useful. The Working Group decided to move ahead with the current proposal but indicated enhancements would be considered in the future. With the adoption, disclosure will be in the same format as used for other catastrophes. The Working Group received a brief update regarding the ongoing analysis of the severe convective storm and wildfire peril information collected from the 2023 filings. More details of the analyses will be provided at a later date.
Property/Casualty RBC Working Group, April 25, 2024
The Working Group took the following actions during the meeting.
| Reference# | Subject | Disposition |
|---|---|---|
| 2023-17-CR | Adds disclosure of climate conditioned catastrophe exposure for information collection only. Was previously adopted by the Catastrophe Risk Subgroup (see discussion above). | Adopted for 2024 reporting. |
| 2024-10-P | Provides explicit instructions for the reporting of stop-loss premium and eliminates a double-counting issue for the same. | Adopted for 2024 reporting. |
This change applies to stop-loss premium where the reporting company provides excess-of-loss protection for its providers. This is not excess-of-loss reinsurance procured by the reporting company.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-11-P | Provides the annual updates for the reserve and premium underwriting risk factors by line of business, as well as the adjustment for investment income factor. | Adopted for 2024 reporting. |
The below tables indicate the revised 2024 factors in comparison to the 2023 factors.
| PR017 Underwriting Risk – Reserves | PR017 Underwriting Risk – Reserves | ||||||
|---|---|---|---|---|---|---|---|
| Line (4), Industry Loss & Expense RBC Factors | Line (8), Adjustment for Investment Income | ||||||
| Col. | Line of Business | 2024 Factor | 2023 Factor | Col. | Line of Business | 2024 Factor | 2023 Factor |
| (1) | H/F | 0.220 | 0.213 | (1) | H/F | 0.945 | 0.938 |
| (2) | PPA | 0.192 | 0.179 | (2) | PPA | 0.933 | 0.928 |
| (3) | CA | 0.318 | 0.276 | (3) | CA | 0.919 | 0.911 |
| (4) | WC | 0.363 | 0.344 | (4) | WC | 0.807 | 0.830 |
| (5) | CMP | 0.485 | 0.494 | (5) | CMP | 0.887 | 0.876 |
| (6) | MPL Occurrence | 0.327 | 0.383 | (6) | MPL Occurrence | 0.863 | 0.865 |
| (7) | MPL Claims Made | 0.224 | 0.276 | (7) | MPL Claims Made | 0.890 | 0.883 |
| (8) | SL | 0.353 | 0.344 | (8) | SL | 0.887 | 0.890 |
| (9) | OL | 0.514 | 0.531 | (9) | OL | 0.858 | 0.852 |
| (10) | Fidelity/Surety | 0.479 | 0.371 | (10) | Fidelity/Surety | 0.924 | 0.940 |
| (11) | Special Property | 0.259 | 0.246 | (11) | Special Property | 0.960 | 0.966 |
| (12) | Auto Physical Damage | 0.146 | 0.155 | (12) | Auto Physical Damage | 0.977 | 0.976 |
| (13) | Other (Credit A&H) | 0.223 | 0.220 | (13) | Other (Credit A&H) | 0.952 | 0.967 |
| (14) | Financial/Mortgage Guaranty | 0.163 | 0.179 | (14) | Financial/Mortgage Guaranty | 0.921 | 0.926 |
| (15) | INTL | 0.514 | 0.359 | (15) | INTL | 0.878 | 0.874 |
| (16) | REIN. P&F Lines | 0.367 | 0.656 | (16) | REIN. P&F Lines | 0.907 | 0.901 |
| (17) | REIN. Liability | 0.626 | 0.656 | (17) | REIN. Liability | 0.816 | 0.838 |
| (18) | PL | 1.014 | 0.802 | (18) | PL | 0.843 | 0.841 |
| (19) | Warranty | 0.363 | 0.371 | (19) | Warranty | 0.951 | 0.940 |
| (20) | Pet Insurance | 0.259 | (20) | Pet Insurance | 0.960 | ||
| PR018 Underwriting Risk – Premiums | P018 Underwriting Risk – Premiums | ||||||
|---|---|---|---|---|---|---|---|
| Line (4), Industry Losses & Loss Adjustment Expense Ratio | Line (7), Adjustment for Investment Income | ||||||
| Col. | Line of Business | 2024 Factor | 2023 Factor | Col. | Line of Business | 2024 Factor | 2023 Factor |
| (1) | H /F | 0.933 | 0.936 | (1) | H /F | 0.960 | 0.954 |
| (2) | PPA | 0.970 | 0.969 | (2) | PPA | 0.931 | 0.925 |
| (3) | C A | 1.012 | 1.010 | (3) | C A | 0.897 | 0.890 |
| (4) | WC | 1.041 | 1.044 | (4) | WC | 0.836 | 0.839 |
| (5) | C MP | 0.878 | 0.883 | (5) | C MP | 0.909 | 0.896 |
| (6) | MPL Occurrence | 1.531 | 1.668 | (6) | MPL Occurrence | 0.781 | 0.767 |
| (7) | MPL Claims Made | 1.138 | 1.130 | (7) | MPL Claims Made | 0.845 | 0.827 |
| (8) | SL | 0.908 | 0.922 | (8) | SL | 0 .911 | 0.898 |
| (9) | OL | 1.003 | 1.013 | (9) | OL | 0.827 | 0.816 |
| (10) | Fidelity/Surety | 0.756 | 0.854 | (10) | Fidelity/Surety | 0.913 | 0.904 |
| (11) | Special Property | 0 .829 | 0.863 | (11) | Special Property | 0.953 | 0.949 |
| (12) | Auto Physical Damage | 0.836 | 0.836 | (12) | Auto Physical Damage | 0.975 | 0.971 |
| (13) | Other (Credit A&H) | 0.931 | 0.935 | (13) | Other (Credit A&H) | 0.953 | 0.947 |
| (14) | Financial/Mortgage Guaranty | 1.805 | 1.598 | (14) | Financial/Mortgage Guaranty | 0.888 | 0.884 |
| (15) | INTL | 1.355 | 1.234 | (15) | INTL | 0.915 | 0.905 |
| (16) | REIN, P&L Lines | 1.072 | 1.170 | (16) | REIN, P&L Lines | 0.906 | 0.893 |
| (17) | REIN, Liability | 1.253 | 1.322 | (17) | REIN, Liability | 0.794 | 0.777 |
| (18) | PL | 1.229 | 1.263 | (18) | PL | 0.788 | 0.774 |
| (19) | Warranty | 0.920 | 0.854 | (19) | Warranty | 0 .938 | 0.904 |
| (20) | Pet Insurance | 0.829 | (20) | Pet Insurance | 0.953 | ||
| Key: | |||
|---|---|---|---|
| Factor increases are highlighted in gray | Teal-highlighted factors indicate a decrease from 2023 | ||
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-14-P | Updates the underwriting risk industry average development factor for reserves and the industry average loss and expense ratio for premiums. | Exposed for comment for 30 days, ending May 25. |
Capital Adequacy Task Force – April 30, 2024
This Task Force oversees all of the activity of the RBC working and subgroups. Changes to the RBC formula changes adopted by those groups are not considered final until the Task Force puts its stamp of approval on those revisions. Working group adoptions that come to the Task Force but affect more than one type of formula are usually re-exposed by the Task Force prior to considering adoption. In addition, the Task Force can develop its own RBC revisions.
The following items had previously been exposed for comment. All adopted items will be incorporated into the 2024 RBC formulas.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-04-L | TAC for nonadmitted affiliates (see Life/Fraternal RBC summary above). | Adopted. |
| 2024-05-L | Revision adds line to page LR009 for Schedule BA mortgages (see Life/Fraternal RBC summary above). | Adopted. |
| 2024-08-CA | Revisions to the Health RBC and the Property/Casualty RBC remove references to “H0 Component” and “R0 Component” for column 12 of the affiliated worksheet. | Adopted. |
| 2024-10-P | Provides explicit instructions for the reporting of stop-loss premium and eliminates a double-counting issue for the same (see Property/Casualty RBC summary above). | Adopted. |
| 2024-11-P | Provides the annual updates for the reserve and premium underwriting risk factors by line of business, as well as the adjustment for the investment income factor (see Property/Casualty RBC summary above). | Adopted. |
| 2023-17-CR | Adds disclosure of climate conditioned catastrophe exposure for information collection only (see Catastrophe Risk Subgroup summary above). | Adopted. |
This proposal continues to create a lot of discussion as it moves up the NAIC’s ladder of groups for final approval. No new issues were raised from the previous discussions occurring at the Catastrophe Risk Subgroup and the Property RBC Working Group meetings. Once again, the chair of the Catastrophe Risk Subgroup emphasized that the inclusion was only for data collection, would not affect a company’s official RBC results, and is subject to future revisions prior to becoming an official part of the formula. Although the proposal did pass without any “No” votes, seven states officially abstained from the vote.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-02-CA | Amendments to the Health RBC and the Property/Casualty RBC add a line for separate reporting of residual tranches and propose a 45% factor. | Reporting format adopted; factor deferred. |
A little history here might help. Previously, a separate line for the reporting of residual tranches or interests was added to the Life/Fraternal RBC, but not the Property/Casualty or Health formulas. The Life/Fraternal formula used a 30% factor for 2023 and is scheduled to apply a 45% factor for 2024. During this meeting, the reporting format adding a separate reporting line was adopted for the Property/Casualty and Health formulas. However, the decision regarding an applicable factor was delayed. The factor will be decided later after an upcoming meeting of the RBC Investment Risk and Evaluation Working Group. At that meeting, the appropriate factor for residual tranches and interests will be the topic of discussion for all of the formulas, including the Life/Fraternal formula.
The Task Force then exposed the following items for comment.
| Reference# | Subject | Disposition |
|---|---|---|
| 2024-09-CA | Adjusts the underwriting factors for comprehensive medical, Medicare supplement, dental and vision for investment income in all RBC formulas. | Exposed for comment through May 30. |
| 2024-13-CA | Updates the factor for Receivable for Securities in all RBC formulas. | Exposed for comment through May 30. |
| 2024-16-CA | Edits the Preamble of all of the formulas to emphasize the purpose and intent of RBC. | Exposed for comment through May 30. |
A referral was sent to the RBC Investment Risk and Evaluation Working Group as a result of work done by the now disbanded RBC Risk Evaluation Asset Concentration Ad Hoc Subgroup. The referral asks the Working Group to further investigate potential concentration issues. During its tenure, the Subgroup developed a decision tree to evaluate when an asset concentration element may warrant an RBC solution and a list of potential asset concentration elements, both of which will be furnished to the Working Group.
Another referral was sent to the Catastrophe (CAT) Risk Subgroup regarding RBC geographic concentration issues. This referral was developed based on work done by another now disbanded group, the Geographic Concentration Ad Hoc Subgroup. The CAT Subgroup is asked to further investigate outstanding issues and possibly change the Property/Casualty RBC to address specific risks.
A referral from SAPWG was exposed for comment through May 30. The referral, sent to both the Task Force and the Life/Fraternal RBC Working Group, notifies the groups of the definition change of qualifying tax credit investments recently adopted by SAPWG. Because of these changes, SAPWG feels a review of the RBC handling of these investments may be warranted.
The Task Force created a new subgroup that will initially address removing TAC and Authorized Control Level amounts from the Five-Year Historical Data page in the annual statement, re-evaluating missing risks associated with non-investment risks, and the review of sections of the RBC formulas that have not been reviewed since development.
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