Life/Fraternal Risk-Based Capital Working Group – September 11, 2020

Thoughtware Article Published: Sep 11, 2020
Charts, people and a laptop

The conference call began with the Life/Fraternal Risk-Based Capital (L/F RBC) Working Group hearing an update from the American Academy of Actuaries’ C2 Mortality Risk Work Group (Academy Group). In addition to providing an update, the Academy Group asked for regulatory feedback on two specific items—adding a new catastrophe component for sustained mortality increase from an unknown risk and discriminating factors for individual life products. 

The factors currently used in the C2 mortality risk include large, temporary risk increases from a severe event such as a pandemic or terrorism, but no consideration has been included for a sustained mortality increase from an unknown risk. The recommendation is to add that additional element. The recommendation of different factors between life products would distinguish between products that have different in-force pricing flexibility. Although the Academy Group’s update indicated that, ideally, product-specific data that’s not currently available in the annual statement would be needed, the L/F RBC Working Group chair indicated it needs to work with the information that’s readily available. After a prolonged discussion on the two recommendations, the Academy Group indicated it felt it had received the needed regulatory feedback to move forward with the project. 

The L/F RBC Working Group then moved to a continuing discussion concerning the use of 2020 net operating income within the mortgage loan section of the L/F RBC. Time didn’t allow for any action at this time, so the discussion will be continued during the next L/F RBC Working Group call, which is expected to be scheduled in approximately two weeks. 

Health Risk-Based Capital (HRBC) Working Group – September 11, 2020

The HRBC Working Group previously considered incorporating investment income into the HRBC formula—a subject that was first discussed in 2018. The original suggestion was to incorporate investment income into the development of bond default risk. However, the American Academy of Actuaries (the Academy) responded that investment income might be more appropriately handled as part of the HRBC underwriting risk, in a manner similar to the handling in the PRBC formula. The HRBC Working Group voted to send a referral letter back to the Academy requesting that the Academy’s Health Solvency Subcommittee evaluate the inclusion of investment income in the existing underwriting risk factors. The referral specifically indicated the existing methodology or assumptions underlying the current factors not be altered in any other way. 

At the NAIC Summer National Meeting, the HRBC Working Group had exposed for comment a proposal to move forward using both a two- and five-year time horizon for bond factors to perform an impact analysis. No comments were received on the exposure; therefore, the HRBC Working Group is moving forward with the impact analysis accordingly. An updated 2020 working agenda was adopted by the group, adding the development of the HRBC bond factors. Proposal 2020-07-H was exposed for a 30-day comment period ending September 12. This proposal only changes the reporting format for Bonds and Miscellaneous Fixed-Income Assets. The change was felt necessary due to the increase in the bond reporting format, as well as the addition of some tables that will only be captured electronically. If adopted, the change would become effective for the 2021 formula. The proposal will soon be posted to the HRBC Working Group website for review. 

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