June was a busy risk-based capital (RBC) month. Why? Because instructional and factor changes need to be adopted by the end of June to be used in the 2024 formulas. A few other groups also met. Check out the activity below.
Health RBC Working Group – June 6, 2024
The Working Group adopted a response to a referral from the Financial Analysis Solvency Tools Working Group and the Financial Examiners Handbook Technical Group regarding the possible inclusion of pandemic risk in the Health RBC formula. After some research, the response indicates that changes for pandemic risk are not currently needed.
| Reference # | Subject | Disposition |
|---|---|---|
| 2021-12-H | Revises the factors to be used for healthcare receivables. | Re-exposed for comment through June 20; later adopted by an email vote. |
Prior to the above action, the American Academy of Actuaries (the Academy) Health Care Receivables Factors Working Group presented an update to its activities and a revised proposal using a tiered-factor approach to pharmaceutical rebates receivables. Even with the re-exposure, the goal is a 2024 implementation. This item was later adopted by an email vote and sent to the Capital Adequacy Task Force for a final vote. The Working Group reported it had conducted research on the excessive growth charge, with the result being no recommendation for changing the current way the charge works. Accordingly, the Working Group will remove the excessive growth charge review from its working agenda.
Restructuring Mechanisms Working Group, via email June 7, 2024
The Working Group extended the comment period for the Best Practices Procedures for IBT/Corporate Divisions and the Restructuring Mechanisms White Paper through July 12, 2024. The extension was requested by several parties and likely originates because of previous revisions made to the documents during 2023 exposure periods. Both documents can be found on the Working Group’s webpage.
Catastrophe Risk Subgroup – June 10, 2024
Earlier this year, the Capital Adequacy Task Force disbanded the Geographic Concentration Ad Hoc Subgroup. As part of that action, the Task Force decided to refer the geographic concentration issue to the Catastrophe Risk Subgroup for further study and to decide if the Property/Casualty RBC formula should be revised accordingly. During this meeting, the chair urged all interested parties to review the referral for discussion at the next meeting and then exposed the referral for comment through July 10. The Subgroup heard an update on the process undergone for a discussion of modeling of severed convective storm perils. The next step will be to use data collected in the Property/Casualty RBC in each of the four modeling software and compare the results. An update on the activity around analysis of wildfire peril indicated that data collected from the 2023 Property/Casualty RBC will be added to the analysis process. However, because nondisclosure agreements are not yet in place for all of the vendors and states taking part in the analysis, discussion at this point has been limited. CoreLogic provided a brief summary of its different wildfire models. The discussion then turned to the possibility of adding flood peril to the Property/Casualty RBC formula in the future. One of the committee members expressed the opinion that flood is a small peril for the insurance industry and, accordingly, part of the analysis process should be to decide if flood should be included in the formula or not.
Financial Conditions (E) Committee – June 12, 2024
The focus of this meeting was how to address climate scenario analysis within the Property/Casualty RBC formula. It was an unusual meeting, as the E Committee does not normally become involved with this level of detail incorporated into RBC formulas. The discussion began with the introduction of Property/Casualty RBC proposal 2023-17-CR, which would incorporate climate scenario analysis into the catastrophe section (Rcat) of the Property/Casualty RBC formula for hurricane and wildfire. (Keep in mind, wildfire is not yet an official part of the formula, but currently provides a data collection tool for regulators.) Proposal 2023-17-CR was crafted by the Solvency Workstream of the Climate and Resiliency Task Force with the assistance of NAIC staff. The proposal is unusual in that the instructions allow insurers optionality not normally found in RBC calculations. Companies may use a climate-conditioned catalog developed by a commercial catastrophe model vendor, an equivalent internal process (with approval), or any other method the company feels best reflects its own risk exposures. Other catastrophes addressed in the Rcat must use approved vendor models or an approved internal procedure. Although under this proposal approval is not always needed, the methodology used must be disclosed.
Some feel the flexibility built into this proposal would include the methodology proposed in 2023-20-CR, an industry proposal alternative, but industry does not feel that way. Industry’s proposal takes a different approach, as it feels the methodologies suggested in 2023-17-CR will not generate meaningful information for regulators. This would be a defined approach using a 50% increased frequency of major hurricanes (category 3 or higher) but for hurricane wind losses only and a 50% increased frequency of all wildfire events. Industry’s proposal was exposed for comment through July 20, 2024 with the goal of further discussion at the upcoming NAIC National Meeting in August.
Property RBC Working Group – June 17, 2024
Proposal 2023-14-P was adopted, putting in place new underwriting risk premium and reserve factors for the 2024 Property RBC formula. The Working Group then had a brief discussion on the possible inclusion of flood risk to the formula. (Although flood risk appears in the formula now, reported amounts have only been used for the collection of data for further study.) No decision was made. The Academy presented a quick update on its current and future RBC projects, which included wildfire peril in the Rcat, assessing the growth charge, further line of business diversification, monitoring the relationship between risk factors and interest rates, and updating the calibration of premium and reserve risk calculation to reflect more recent experience.
Life RBC Working Group – June 18, 2024
This meeting was scheduled for two hours to allow for detailed updates on two ongoing projects; it took the entire scheduled time.
| Reference # | Subject | Disposition |
|---|---|---|
| 2024-15-L | Revises the “mapping” of collateral loans within the Life/Fraternal RBC formulas. | Adopted, effective December 31, 2024. |
With new collateral loan reporting categories being implemented in Schedule BA for 2024 annual statement reporting, mapping changes for the reporting of collateral loans within the Life/Fraternal RBC were needed. This proposal is considered a “fix” for 2024 with further research expected in the future. The instructional revisions maintain the current capital treatment for 2024, which was the temporary goal.
| Reference # | Subject | Disposition |
|---|---|---|
| 2024-17-L | Adds a factor for the new reporting line on page LR009 addressing “Affiliated Mortgages – Residential – All Other.” | Adopted, effective December 31, 2024. |
The meeting then moved onto presentations/updates on the covariance and C-3 projects for Life/Fraternal RBC. The Academy presented its reasoning for reviewing the current covariance calculation, including the review of historical information on its development. It emphasized that currently the process will look at the final covariance calculation used in the formula, but the process may be expanded in the future to drill down further into related RBC components. The Academy indicated changes could have significant results for individual companies, but not necessarily a negative result, as well as significantly impacting the effectiveness of Life/Fraternal RBC for regulatory purposes. The goal is to complete a preliminary evaluation by the end of the year. An update on the review of the C-3 component methodology followed, emphasizing the current key difference between the C-3 Phase 1 and Phase 2 components of the formula. Regulators asked several questions during both presentations.
Valuation of Securities (VOS) Task Force – June 18, 2024
The following proposed revisions to the Purpose and Procedures Manual of the NAIC’s Investment Analysis Office (P&P Manual) had previously been exposed for comment and were acted upon during this meeting.
| Subject | Disposition |
|---|---|
| Permitting of NAIC Designations for the reporting of cash equivalents and short-term asset-backed securities (ABSs). | Adopted. |
Currently, NAIC Designations or NAIC Designation Categories are not required when reporting cash equivalents and short-term investments in the statutory statement. However, beginning with the first quarter of 2025, ABSs must be reported in the statutory statement as long-term investments, not cash equivalents or short-term investments, regardless of the maturity date at acquisition. Accordingly, NAIC Designations and NAIC Designation Categories will become part of the reporting, and revisions to the P&P Manual were needed. The adopted revisions revise the definition of short-term investments and indicate following current guidance in the manual for the assignment of the NAIC Designation and Designation Category.
| Subject | Disposition |
|---|---|
| Addition of Spain to the list of foreign (Non-U.S.) jurisdictions eligible for netting when determining exposure to counterparties for derivatives. | Adopted. |
| Changes the effective date for the implementation of collateral loan obligations (CLOs) modeling to year-end 2025. | Adopted. |
| Clarifies when insurers can self-assign an NAIC Designation 6*. | Adopted. |
Self-assigning of an NAIC Designation 6* is not a new concept. However, there has been some confusion on when the 6* can be self-assigned and the methodology that should be used in that determination. The Designation can be used when required documentation is not available for the current Securities Valuation Office (SVO) filing process, but the requirements to assign a 5.B.GI are not met. Once assigned a 6*, the securities are treated as all other NAIC 6 Designation securities.
| Subject | Disposition |
|---|---|
| Updates the list of current SVO processes. | Adopted. |
The following items were reviewed and considered for exposure.
| Subject | Disposition |
|---|---|
| Updates the definition of NAIC Designation and combines the discussion into one section of the P&P Manual. | Exposed for comment through July 18. |
| Establishes the procedures for the SVO to review, accept, and/or override NAIC Designations assigned through the filing exemption process. | Exposed for commenting July 26. |
Neither of the exposed documents above are new concepts; both have been in the works and discussed several times. Therefore, these are the newest iteration of several months’ work and should be thoroughly reviewed during the comment period. The meeting ended with NAIC staff providing an update on the development of the CLO modeling process, which has now been delayed for implementation until December 31, 2025.
Investment RBC Working Group – June 22, 2024
The focus of this meeting was the factor to be applied to residuals in the RBC formulas. For 2023 reporting, this Working Group applied a 30% factor and had adopted a 45% factor for 2024 for the Life/Fraternal formula. No 2023 changes were made to the Property/Casualty and Health formulas. Although the Life/Fraternal RBC 2024 factor was adopted, there was a caveat attached to the adoption stating if information was provided indicating the 45% factor was not appropriate, the Working Group would consider that information. Earlier this year, information was provided to the Working Group that industry felt indicated the use of a different factor. At that time, the Working Group exposed the information for comment, while also considering some alternative proposals. After parties were given a chance to discuss possibilities during this meeting, the Working Group opted to take further action. That resulted in the 45% factor being maintained.
Capital Adequacy Task Force – June 28, 2024
The Task Force had a very busy agenda, as instructional revisions and revised factors for the 2024 formulas needed to be adopted by the end of June. The goal was achieved.
| Reference # | Subject | Disposition |
|---|---|---|
| 2024-09-CA | Updates underwriting factors for the investment income adjustment for comprehensive medical, Medicare supplement, dental, and vision for all formulas. | Adopted effective 2024. |
| 2024-13-CA | Adjusts the factor for receivables for securities in all formulas. | Adopted effective 2024. |
| 2024-15-L | Changes the mapping of collateral loans reported in Schedule BA into the Life/Fraternal RBC formula. | Adopted effective 2024. |
The reporting of certain mortgage-type investments as collateral loans backed by mortgages is changing for 2024 statement reporting. However, the change occurred too late for corresponding structural changes to be incorporated into the 2024 Life/Fraternal RBC formula. Therefore, mapping changes were incorporated into the RBC instructions, with the result being a “no change” for factors in 2024.
| Reference # | Subject | Disposition |
|---|---|---|
| 2024-17-L | Adds factor to the previously inserted line reporting mortgage loans—residential—all other in good standing to the Life/Fraternal formula. | Adopted effective 2024. |
| 2024-16-CA | Revises the Preamble for all of the RBC formulas. | Deferred. |
Because of the remarks received on this proposal during its comment period, the Task Force decided a more detailed discussion was needed and deferred action at this time. The Preamble revisions were drafted to clarify and emphasize the purposes, intent, and usage of RBC. Although not explicit in the suggested revisions, it was understood that along with the Preamble revisions, removal of the two reported RBC amounts in the annual statement Five-Year Historical pages also would occur. Most of the comments received were against the removal of the public disclosure, with each commenter having a different reason for the opposition.
| Reference # | Subject | Disposition |
|---|---|---|
| 2024-12-H | Implements a tiered-factor approach for healthcare receivable in the Health RBC. | Adopted effective 2024. |
| 2024-18-CA | Adopts a 20% factor for residuals for Property/Casualty and Health companies. | Adopted effective 2024. |
Prior to the adoption of the above item, the Task Force adopted the summary of recent meetings of the RBC Investment Risk and Analysis Working Group. The summary included meetings that occurred on June 21, May 22, and April 12 regarding the handling of residuals in the RBC formulas. During those meetings, it had been decided to use a 45% factor in the formulas. The summary was adopted by the Task Force.
The discussion then moved to the above proposal. Many felt that not enough research had been done on whether the 45% factor was appropriate for the Property/Casualty and Health companies, pointing out that those industries did not have significant investments in residuals and usually invested in different types of residuals than do Life/Fraternal companies. This proposal was adopted, maintaining the current 20% factor for those industries but keeping the 45% factor in the Life/Fraternal formula.
| Reference # | Subject | Disposition |
|---|---|---|
| 2024-14-P | Provides the annual update of the premium and reserve industry underwriting factors in the Property/Casualty formula. | Adopted effective 2024. |
The Task Force briefly discussed establishing a new working group to evaluate non-investment risk issues in all the formulas. No action was taken at this time but will most likely happen at the upcoming NAIC Summer National Meeting. Also discussed was a referral from Statutory Accounting Principles Working Group (SAPWG) regarding investments in tax credit instructions and an update from SAPWG regarding potential revisions to Schedule BA collateral loan reporting.
If you have any questions or need more information, please reach out to a professional at Forvis Mazars.