June 2021 NAIC-Related Activity
The focus of NAIC-related activity this month was the risk-based capital formulas, which needed to be finalized by the end of June. But some other groups also met. Here is a summary of activity.
Catastrophe Risk Subgroup – June 1, 2021
The meeting began with a review of a prepared response to the Climate and Resiliency Task Force regarding the Task Force’s recommendations for risks to be included in the Property Risk-Based Capital Calculation for 2022 reporting. The Subgroup’s response indicated agreement with the need to include additional risks but also states that it will take time to study each of the risks and decide upon a methodology for formula inclusion. Therefore, the Subgroup feels it will not be possible to meet the 2022 date. The Subgroup than received an update from the Catastrophe Model Technical Review Ad Hoc Group regarding its review of the AIR wildfire risk model. The discussion then moved to the use of third-party models for the different catastrophe risks. It was pointed out that an insurer’s domiciliary state would have the responsibility of reviewing and approving any internal models for use and that process can be quite lengthy and expensive.
Interested Parties (IP) SSAP No. 43R Group – June 3, 10, & 24, 2021
The June 3 meeting began with a quick summary of five current NAIC projects that could ultimately affect the SSAP No. 43R project, including the current proposal for a risk-based definition of a bond. The discussion then moved to the Statutory Accounting Principles Working Group’s (SAPWG) exposure of the definition of a bond that was exposed for comment during its May 20 meeting. The IP group will be crafting a comment letter on the exposure. During this call, a list of items to be covered in the comment letter was developed. Some items to be covered were topics that previously IPs had “agreed to disagree” upon during the definition development process. The IP group plans to stay in touch with the Iowa Department of Insurance, the originator of the idea of a principles-based definition, during the comment period.
With the proposed new bond definition exposed for comment during the last SAPWG meeting, the June 10 meeting began with a discussion of possible new Schedule D reporting. The group briefly reviewed the pros, cons, and questions of what was outlined in a document furnished by NAIC staff. The group then considered the submission of a comment letter on the exposed bond definition, even though IPs had significant input into the crafting of that definition. A decision was made on what topics to submit as part of the letter.
The June 24 meeting continued the discussion of the exposure document and comments that the IP groups will be submitting. The conversation included a couple of clarification items and then moved onto new comments the group had received.
Life/Fraternal Risk-Based Capital (LRBC) Working Group – June 3, 4, & 11, 2021
The June 3 meeting began with the adoption of two proposals, both effective for 2021 reporting. The adoption of proposal 2021-12-L updates a line caption and the corresponding instructions to indicate the correct reporting of amounts held for reciprocal jurisdiction reinsurance. The adoption of proposal 2021-13-L establishes factors and instructions for the longevity risk. The longevity risk reporting format had previously been adopted. There was quite a lengthy discussion from regulators on this issue prior to adoption. The result was clarification that this proposal is to be considered a starting point for the factors, with ongoing monitoring and possible changes in the future. The discussion then moved to the two different bond factor proposals that are being considered, with a review of the comment letters received. The Working Group received 16 comment letters, all but one supporting the American Council of Life Insurers’ (ACLI) approach as prepared by Moody’s Analytics (Moody’s). To use terminology found in many of the comment letters, the ACLI proposal is perceived as “less punitive” to the small and medium-sized insurers.
The June 4 meeting continued the review of the bond factor comment letters, with the American Academy of Actuaries (Academy) providing detailed information on the development of its suggested factors. The Academy also covered some of its concerns regarding the methodology used by Moody’s. The ACLI was given an opportunity to respond not only to the Academy’s remarks but also comments received from other organizations. Members of the Working Group were then given the opportunity to ask questions of both the Academy and Moody’s, as there are significant differences not only in the results but in the methodologies used by both parties.
The June 11 meeting became a historical marker for this Working Group. After 10 years of work, new bond factors were adopted for the LRBC. For some time, the Task Force had been considering two different proposals for the bond factors. (See previous discussions.) In the end, the ACLI/Moody’s proposal was overwhelmingly adopted by a roll-call vote. The newly adopted item encompasses several different parts. Obviously, revised or new bond factors for each of the 20 bond reporting categories are the most prominent feature. But also included was a revision to the bond size factor, including a new regulator-requested tier to the calculation and a correction to the tax factors applied toward the end of the LRBC calculation. Remember, to be “official” for 2021, the Capital Adequacy Task Force must also adopt the factors in its June 30 meeting. Since there are now several changes that have been made to the 2020 LRBC, a guidance document will be developed for regulators explaining these changes. This document will call attention to the fact that as a result of the 2021 changes to the bond, real estate, and longevity risk factors, insurers may trigger a trend test that has not been activated before. The guidance document will stress that the trend test being activated may be a direct result of formula changes and not an indication of underlying changes in the company’s risk exposure. Finally, the chair indicated he would like to set up a subgroup to more closely monitor what is happening to cumulative RBC results and to keep the entire Working Group informed. At the end of the meeting, one could almost hear champagne corks popping in the background!
Reinsurance Task Force – June 6 & 17, 2021
Although the Task Force did not formally meet this month, it did release two documents for 30-day comment periods. The final evaluation report for the Republic of Korea as a qualified jurisdiction was released on June 3, with the comment period ending July 6. This paper was prepared by the Mutual Recognition of Jurisdictions Working Group. On June 17, the Task Force released a paper prepared by the Reinsurance Financial Analysis Working Group regarding the review process for passporting certified and reciprocal jurisdiction reinsurers. The comment period ends July 19. Both documents are available on the Task Force’s webpage under the Draft Exposures tab.
Health Risk-Based Capital (HRBC) Working Group – June 8, 2021
The meeting began with the adoption of a referral letter to the Academy asking for a comprehensive review of the H2 – Underwriting Risk component and the managed care credit calculation in the HRBC formula. The next agenda item was a discussion regarding incorporating investment income into the formula’s underwriting risk factors. The chair reviewed his thoughts on developing a review process and determining which lines of business should be incorporated into the review. Both the Health Test Ad Hoc Group and the HRBC Excessive Charge Ad Hoc Group provided updates of recent activity. The final subject was the recently adopted bond factors. The chair reminded the group that the new factors include an embedded bond portfolio adjustment (not a separate calculation as in the LRBC and PRBC) and that the new factors will be applied not only to the Schedule D, DA, and E bonds but to bonds reported as off-balance sheet collateral for securities lending transactions.
Property Risk-Based Capital (PRBC) Working Group – June 9, 2021
The annual updating of Line 1 underwriting factors was accomplished with the adoption of proposal 2021-05-P. Proposal 2021-08-P was then adopted, resulting in new bond factors, modification of the bond size factor, and the reclassifying of hybrids. Prior to the adoption, a short discussion ensued regarding the different treatment of the bond size factor between the LRBC and the PRBC. This issue will be reviewed again in the future. A response to a referral from the Restructuring Mechanisms Subgroup regarding the definition of run-off companies and their treatment in the PRBC was adopted. The response letter will be sent to the Subgroup. The Academy had previously submitted its Report #1 regarding development of PRBC underwriting factors using evaluation data through 12/31/2017. During this meeting, the Academy finished a presentation on the report. The presentation was then exposed for a 30-day comment period ending July 9. Report #1 is the first of three reports that will be prepared and submitted on this topic.
Group Capital Calculation (GCC) Working Group – June 17, 2021
The Working Group held a meeting for the volunteer companies participating in the GCC trial implementation, but all those interested were invited to attend. The purpose of the meeting was to provide a high-level overview and observations/explanations for volunteer companies participating in the trial. The rationale of the trial is to discover any unintended results of the calculation, as well as to clarify and refine both the instructions and the calculation template. Trial submissions are due to each lead state by July 31. A review and discussion with the calculation volunteers will be held in August and September, with the goal of having the trial completed by October 1 and any needed refinements in place for the NAIC Fall National Meeting (December). The current instructions and template are available on the Working Group’s website. In addition, as the NAIC receives questions during the trial, a QA document will be posted and updated making responses available to everyone.
Capital Adequacy Task Force – June 30, 2021
The annual end-of-June meeting held by the Task Force is always a very significant meeting. All instructional and factor changes to the various RBC formulas must be approved by the Task Force by the end of June to be effective for that year’s RBC filing. This meeting was actually anticlimactic considering the number of items that were addressed and the amount of time it took to develop some of the proposals. The Task Force took the following actions.
All adopted proposals will be posted to the Task Force’s webpage soon.
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