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© 2018 National Association of Insurance Commissioners 1

Date: 8/20/18

Conference Call

GROUP CAPITAL CALCULATION (E) WORKING GROUP Monday, October 1, 2018

1:00 p.m. ET / 12:00 p.m. CT / 11:00 a.m. MT / 10:00 a.m. PT

ROLL CALL

David Altmaier, Chair Florida Justin Schrader Nebraska Susan Bernard/Rachel Hemphill California Peter Hartt New Jersey Kathryn Belfi Connecticut Edward Kiffel New York Philip Barlow District of Columbia Jackie Obusek North Carolina Kevin Fry Illinois Dale Bruggeman Ohio Jim Armstrong Iowa Mike Boerner/Doug Slape Texas Gary Anderson Massachusetts David Smith/Doug Stolte Virginia John Rehagen Missouri

NAIC Support Staff: Julie L. Garber

AGENDA

1. Discuss Comment Letters Received Related to the Proposed Approach to Scope and Non-Insurance Testing—Commissioner David Altmaier (FL)a. Proposed Approach, including Questions from NAIC Staffb. Comment Letters

Attachment 1 Attachment 2

2. Discuss Any Other Matters Brought Before the Working Group—Commissioner David Altmaier (FL)

3. Adjournment

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Draft Date: 08-07-18

1. This is an NAIC working document which includes general concepts and proposed technicalspecifications and options to be used for field testing and analysis of the NAIC’s proposed GroupCapital Calculation (GCC)

General Comments

2. Criteria in this document are intended to provide uniform guidance to field test Volunteers, theirrespective Lead State Regulator and field test analysts as to the Scope of Application for thespecific purpose of the GCC. The “Scope of Application” (i.e., for purposes of the GCC specifically)may be narrower, i.e., comprise a subset of, the entities controlled by the Ultimate ControllingPerson of the insurer(s) (Broader Group).

3. The initial identification of the Insurance Group and the determination of the Scope of Application ismade by a field test Volunteer for submission to its Lead State Regulator, following the principlesand steps discussed herein, However, the final decisions as to the identification of the InsuranceGroup and the determination of the Scope of Application remain the ultimate responsibility of theLead State Regulator, cooperating and coordinating with other involved regulators. In particular, inthe case of Insurance Groups that operate on a cross-border basis, the Lead State Regulatorshould be able to explain the appropriateness of the identification of the Insurance Group and thedetermination of the Scope of Application to involved supervisors in other jurisdictions. The LeadState Regulator, in cooperation with other involved regulators, should review the appropriateness ofthe Scope of Application at least annually and to confirm continued relevance.

4. The fundamental reason for state insurance regulation is to protect American insuranceconsumers1. Therefore, the objective of the GCC is to assess quantitatively the collective risks to,and capital of, the entities within the Scope of Application. This assessment should consider risksthat originate within the Insurance Group along with risks that emanate from outside the InsuranceGroup but within the Broader Group. The overall purpose of this assessment is to better understandthe risks that could adversely impact the ability of the entities within the Scope of Application to paypolicyholder claims consistent with the primary focus of insurance regulators. Consistent with soundregulation, the benefits of the quantitative analysis facilitated by the GCC should exceed the cost ofimplementation. Such an approach could be achieved by leveraging existing statutory informationfiled with the Lead State Regulator wherever practical.

1 State Insurance Regulation History, Purpose and Structure, p. 2, National Association of Insurance Commissioners: https://www.naic.org/documents/consumer_state_reg_brief.pdf

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Definitions 5. Broader Group: The entire set of legal entities that are controlled by the Ultimate Controlling

Person of insurers within a corporate group.

6. Field Test Volunteer, or Volunteer: An Insurance Group that is participating with its Lead State Regulator and the NAIC in the development of the GCC through the submission of confidential data and field testing exercises.

7. Financial Entity: A non-insurance financial institution that makes or facilitates financial intermediary operations (accepting deposits, granting of credits and loans, investments, etc.). The primary examples of financial entities are commercial banks, intermediation banks, investment banks, saving banks, credit unions, savings and loan institutions, investment companies, private funds, commodity pools, swap dealers etc.

8. Insurance Group: For purposes of the GCC, a group that is comprised of two or more entities of

which at least one is an insurer, and which includes all of the insurers in the Broader Group. Another (non-insurance) entity may exercise significant influence on the insurer(s), i.e. a holding company or a mutual holding company; in other cases, such as mutual insurance companies, the mutual insurer itself may be the Ultimate Controlling Person. The exercise of significant influence is determined based on criteria such as (direct or indirect) participation, influence and/or other contractual obligations; interconnectedness; risk exposure; risk concentration; risk transfer; and/or intragroup agreements, transactions and exposures. An Insurance Group may include entities which facilitate, finance or service the group’s insurance operation, such as holding companies, branches, non-regulated entities, and other regulated financial institutions. An Insurance Group could be headed by:

an insurance legal entity; a holding company; or a mutual holding company.

An Insurance Group may be:

a subset/part of bank-led or securities-led financial conglomerate; or a subset of a wider group.

An Insurance Group is thus comprised of the head of the Insurance Group and all entities under its direct or indirect control.

9. Lead State Regulator: as defined in the NAIC’s Financial Analysis Handbook, i.e., generally

considered to be the one state that “takes the lead” with respect to conducting group-wide supervision within the U.S. solvency system.

10. Reciprocal Jurisdiction: as defined in the Model Law for Credit for Reinsurance.

Drafting Note: The term “Reciprocal Jurisdiction” is from the proposed revisions incorporated to the exposure draft dated June 21, 2018 to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). The content of this reference may need to be modified if it does not incorporate the mutual recognition of group supervision concept.

Question 1- For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should a group assume that groups with Group-Wide Supervisors in current qualified jurisdictions (e.g., Bermuda, Japan, Switzerland, Ireland and the EU (including the UK, France and Germany specifically) would not

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be required to complete the NAIC Group Capital Calculation, and therefore influence their decision in volunteering? If yes, are further changes to paragraph 13 needed?

11. Scope of Application: Refers to the entities that meet the criteria listed herein for inclusion in theGCC. Depending on the facts and circumstances involving a specific group, the application of suchcriteria may result in the Scope of Application being the same as, or a subset of, the entitiescontrolled by the Ultimate Controlling Person of the insurer(s).

12. Ultimate Controlling Person: As used in the NAIC’s Insurance Holding Company SystemRegulatory Act.

Groups Exempted from the GCC

13. A non-U.S. based group (a group with a non-U.S. group-wide supervisor) may be exempt from theGCC if:

i. The non-U.S. based group is based in a Reciprocal Jurisdiction that recognizes the U.S.regulatory regime and accepts the GCC from U.S. based groups to satisfy the ReciprocalJurisdiction’s group capital requirement;

ii. The non-U.S. Group-Wide Supervisor’s home jurisdiction requires a group capital calculationbe applied at a level that includes the same (or substantially similar) Scope of Application aswould otherwise be determined by the Lead State Regulator in the absence of thisexemption; and

iii. The Lead State Regulator can obtain information from the foreign group’s Group-WideSupervisor either through a Supervisory College or otherwise, that allows the Lead StateRegulator to understand the financial condition of the group and complete the expectationsof other states in its Group Profile Summary (GPS).

14. A U.S. based group is exempt from the GCC if it is not required to file an ORSA with its Lead StateRegulator.

Question 2 - For purposes of field testing, since a decision to participate in field testing isvoluntary between an Insurance Group and its lead state, should paragraph 14 be deleted?

Guiding Principles and Steps to Determine the Scope of Application

15. The Scope of Application is initially determined by the Insurance Group in a series of steps, listedhere and then further explained as necessary in the text that follows:

Develop an initial inventory of potential entities using the Inventory of the Group template(Schedule 1)

Denote in the Inventory of the Group template the following entities as “included in the Scope ofApplication”:

o All of the entities within the Insurance Groupo All other Financial Entities that are outside the Insurance Group but within the Broader

Groupo All non-Financial Entities that are outside the Insurance Group but within the Broader

Group and that pose material risks to the Insurance Group Denote in the Inventory of the Group template all other entities as “excluded from the Scope of

Application”

Attachment 1

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Submit the completed Inventory of the Group template to the Lead State Regulator, who would then review and discuss as necessary with the Insurance Group and consult with other involved regulators to determine the final Scope of Application

Question 3 - For purposes of field testing, do regulators or members of the industry believe any further definitions of materiality should be added to the “Guiding Principles and Steps to Determine the Scope of Application” to increase consistency in application between groups and lead-states?

Document the Inventory of the Group

16. When developing an initial inventory of all potential entities, the Field Test Volunteer shall complete the Inventory of the Group template (Schedule 1), which includes all the entities in the insurer's most recent Schedule Y, along with other relevant Holding Company Filings pertaining to entities directly or indirectly owned by the Ultimate Controlling Person.

i. This will require entities to complete basic information about each entity, including assets,

revenue and net income for each entity on an annual basis. A Volunteer may agree with its Lead State Regulator to provide the data on a sub-grouping basis (see also paragraph 26).

Question 4 - The attached includes a proposed list of items for an inventory (Schedule 1), which already contemplates within paragraph 25 that the group and the lead state should work together to determine how the inventory of companies (but including all) such should be aggregated, but are there other alternatives such as those proposed by Cigna/Aetna (US regulated entities, Non-US regulated entities, Material Non-Regulated Entities) or some variation of Schedule Y that can be used instead to avoid duplicative reporting?

Question 5 - For purposes of maximizing the usefulness of field testing and the calculation, NAIC staff proposes adding elements to the Schedule 1 for “Written Premiums” and “Debt.” Are you opposed to this additional information, or do you have any proposed definitions that you think are necessary to be included with these, or any of the other items in Schedule 1 to assist with Field Testing (such definitions may be submitted at a later date)?

Identify the Insurance Group 17. Include all entities that fit the criteria identified in the definition of the Insurance Group, above, and

denote as such (i.e., included or excluded in the Scope of Application) in the Inventory of the Group template.

Identify and Include all Financial Entities 18. Financial Entities within the Inventory of the Group template shall be included in the Scope of

Application regardless of where they reside within the Broader Group.

Identify Risks from the Broader Group

19. An Insurance Group may be a subset of a Broader Group, such as a larger diversified conglomerate with insurance legal entities, Financial Entities and non-financial entities.

i. In considering the risks to which the Insurance Group is exposed, it is important to take account of those material risks to the Insurance Group from the Broader Group within which the Insurance Group operates. Entities within the Broader Group but outside the Insurance Group that pose such risks to the Insurance Group should be included within the Scope of Application.

Attachment 1

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Expedited Approaches 20. To avoid duplicative capital measures for approaches that are essentially similar to the NAIC’s

aggregation approach and to address cost/benefit considerations, an expedited alternative is available for the following classes of insurance groups:

i. U.S. groups subject to the Federal Reserve Board’s group capital requirement may provide that capital assessment measure as an acceptable alternative; or Question 6 - Should groups that will submit a group capital calculation to the Federal Reserve be allowed to be exempt from the NAIC calculation, and therefore not considering volunteering for Field Testing, and a decision made after testing?

ii. U.S. groups where the Ultimate Controlling Party is an underwriting company that

directly or indirectly owns all of the other entities within the Broader Group may provide its Annual RBC report as an acceptable alternative.

Question 7 - For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should paragraph 20ii be deleted, and a decision made after testing?

Documentation and on-going assessment 21. The Lead State Regulator should review the Inventory of the Group template to determine if there

are entities excluded by the Volunteer that the Lead State Regulator nonetheless believes create other than a non-material risk to its insurance operations. Additional information may be requested by the Lead State Regulator to facilitate this analysis.

22. The exclusion or inclusion of entities within the Scope of Application should be regularly re-assessed.

23. The Field Test Volunteer, together with the Lead State Regulator and with technical support from

the field test analysts, would use the above steps, which includes considering the Lead State Regulator’s understanding of the group, including inputs such as Form F, ORSA, and other information from other involved regulators, to determine the Scope of Application.

Considerations for Subsequent Field Test Exercises

24. The Scope of Application should be considered for update on an ongoing basis throughout the field

testing exercise, but at least annually. To assist the Lead State Regulator in assessing the Scope of Application, the Inventory of the Group template will be completed by participants to provide information and certain financial data on all the entities in the group for the Lead State Regulator’s and field test analyst’s use in assessing if the entities excluded from the Scope of Application are appropriate. The Lead State Regulator and the Insurance Group should agree on a designation of entities from the inventory that may pose risk of a material adverse impact on the group’s insurance entities and operations. This may allow the GCC to reflect a more risk-sensitive approach and allow the Lead State Regulator to better understand the group.

25. The Lead State Regulator should work with the group in determining whether the inventory should

list all entities individually, or whether some should be grouped in a specified way in future iterations of the field test exercise to better illuminate potential areas of risk. For example, groupings of non-insurance, non-Financial Entities with some common traits (business unit, purpose, e.g.) could allow the Lead State Regulator to better understand the group and how they are managed. Thus, while the inventory would include the full combined financial results/key financial information (net

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premiums for insurers, total revenues, total net income, total assets, total debt, total capital or equity) for all entities of the Ultimate Controlling Person and all of its controlled entities, such data may be reported based upon major groupings of entities to maximize its usefulness and allow the Lead State Regulator to better understand trends. Annually the Lead State Regulator and the Insurance Group should agree on such groupings.

Determine Risk Factors for Non-Insurance Entities within the Scope of Application

26. Non-insurance entities not directly owned by an insurer but within the Scope of Application should

use the following methodology to determine the appropriate risk charge to be applied. Non-Insurance Testing 27. Non-insurance entities that have been determined to be within the Scope of Application should

include within the template the required risk charges and available capital amounts determined by either the respective regulator of the entity, the methodology outlined below or as modified for captives or scalars. Such entities must be individually listed in the template, and will be tested based upon the following:

A. Regulated Financial Entities

i. All banks and other depository institutions - Minimum required by their regulator.

Test both a) unscaled; and b) scaled to an RBC equal to 300% ACL.

ii. All asset managers and registered investment advisors – Test both a) 22.5% of Book/Adjusted Carrying Value (BACV); and b) 12% of three-year average revenue based upon ACLI suggestion (BASEL operational risk). In addition to an unscaled calculation, test the BASEL operational risk methodology scaled to an RBC equal to 300% ACL.

iii. All other financially regulated entities - Minimum required by their regulator (not scaled)

B. Unregulated Financial Entities

i. Other entities that engage in financial activities or services that support the

insurer(s) – Because these entities can pose more risk of a material adverse impact on the group’s insurance entities and operations than other non-regulated entities, a 22.5% charge on the BACV should be tested. These entities are not subject to a minimum capital requirement.

ii. Other Financial Entities-For purpose of the GCC, unregulated Financial Entities

include those which create financial risks through products or transactions such as a mortgage, other credit offering, a derivative, corporate guarantees, intercompany indebtedness, operational interdependence, materiality to the application of credit rating methodologies to the overall group rating and other financial links. Because these entities can pose more risk of a material adverse impact on the group’s insurance entities and operations than other non-regulated entities, apply the greater of the following factors:

22.5% of the BACV

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Notional value of the contract (e.g. a net worth guaranty/indemnification/guaranty multiplied by a probability factor as determined by the company based upon past historical experience)

Other proposed factors suggested by testing participants

Grouping of like entities in type 27 Aii and 27 Bi above would be allowed, assuming that the members of the group all use the same accounting rules (e.g., all GAAP), and are at least consistent with the way the group manages their business.

C. Other Non-Insurance, Non-Financial Entities

Non-insurance, non-Financial Entities (including holding companies that are not insurance legal entities) may not be as risky as regulated entities and other Financial Entities. The Lead State Regulator and the group may decide together how best to group such entities and subject them collectively to the following charges for field testing. The agreed-upon basis for such groupings should be disclosed to the field test analysts. Test 1-Principle-Past Income/Loss is a sound predictor of risk Test a factor that considers the specific net losses/fluctuation in profitability over an economic cycle, where five years is used as a proxy for an economic cycle. This factor will be risk-based not only to the industry, but to the individual company since it considers past performance. The calculation would be determined based upon the following (for each entity or group of entities): Test 1a-Factor to Apply = (Absolute value of the greatest net loss in the past five years/Gross revenue in that year for that entity or grouped entities) Multiplied by the current year gross revenue for the same entity or grouped entities Test 1b-Same as Test 1a, except subject to a minimum charge that assumes a net loss equal to 2% of total gross revenues. The minimum is expected to cover the fact that the group is not consistently profitable or that the losses are not material, but it covers this risk in this way as opposed to requiring a calculation that considers this dependence through the use of a more complex standard deviation of profits over a period of time. Test 2- Principle-Potential Capital Needs of Non-Financial Entities is Equivalent to an Operational Risk Charge Test a factor that considers non-financial entities as operational risk. Test 2a- Non-regulated entities should be subject to either an operational risk charge as used in Basel III or a 22.5% charge on the BACV. The 12% Basel charge should be scaled to convert to U.S. RBC, thus the scaled factor becomes 2.47% for life insurers (based upon an average RBC Company Action Level ratio of 486%) and a factor of 3.64% for property/casualty (P/C) insurers (based on an average RBC Company Action Level ratio of 332%). A life factor of 3.7% and P/C factor of 5.4% should also be tested, which corresponds to the 300% RBC trend test calibration. Test 2B-Test 3% of BACV. Test 3- Principle-Simplicity and Consistency with RBC Requirements Test a simpler method specifically, a factor applied to the absolute value of the entities BACV. The relevant RBC charge (22.5% for P&C and Health and 19.5% (post tax) for Life) applied to BACV (post-covariance) should be tested, as well as other alternatives that may be more appropriate for risks posed by entities not owned by an insurer. Consider using the relevant

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RBC charge applied to BACV, provided groups do so consistently from one year to the next and across all of their entities.

Question 8 - Should the participating groups and lead states be able to consider other tests that provide information that helps inform the Working Group on whether other considerations to the proposed calculation are appropriate (e.g. that the amount of business within the group’s foreign insurers is so small [e.g., some of the health insurers] that the impact of the scalars can be shown to be immaterial, and utilized to develop thresholds that could be used for eliminating this requirement if met)?

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Schedule 1

The following columns are taken from a proposed Schedule 1 (excel file) and included herein within this format to make readability of what is expected to be in included in the Schedule 1 more easily read.

NAIC # FEIN # Name of Securities Exchange if Publicly Traded (U.S. or International) Name of Parent, Subsidiaries or Affiliates Domicile Primary Regulator and Contact Primary Regulator E-Mail Description & Purpose of Entity Business Segment Intercompany Guarantee Capital Maintenance Agreement (if yes, describe) Contractual Relationship with Affiliates (if yes, describe) Basis of Accounting Assets Liabilities Capital Revenue Net Income AM Best Rating Moody’s Rating S&P Rating Prospective Risks Scope of Application (Y=Include, X=Exclude) Required Capital

W:\QA\RBC\Group Capital\NAIC Staff Memos\2018\08-07-18 Scope and Non-Insurance Testing Exposed with Questions.docx

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1850 M Street NW Suite 300 Washington, DC 20036 Telephone 202 223 8196 Facsimile 202 872 1948 www.actuary.org

September 20, 2018

Commissioner David Altmaier

Chair, Group Capital Calculation (E) Working Group

National Association of Insurance Commissioners (NAIC)

Via email: [email protected]

RE: Group Capital Calculation Scope and Non-Insurance Testing (August 7, 2018)

Dear Commissioner Altmaier,

On behalf of the Solvency Committee of the American Academy of Actuaries,1 I appreciate the

opportunity to offer the following comments on the document, 08-07-18 Scope and Non-

Insurance Testing Exposed with Questions (the exposure draft).

At the outset, we would like to reiterate our agreement with the objective stated in the fourth

paragraph on page 1 of the exposure draft that the Group Capital Calculation (GCC) “should

consider risks that originate within the Insurance Group along with risks that emanate from

outside the Insurance Group but within the Broader Group.”

To better implement this objective, the Solvency Committee believes that there could be fewer

exemptions for field testing purposes. While the final scope for GCC is still being decided, it

would be beneficial to cast a wide net for the purposes of field testing. Analyzing results across a

wide variety of groups can provide a basis for making informed decisions on the many policy

questions under consideration by the working group. In order to provide an informative measure

for insolvency risk and help avoid future financial crises, GCC field testing should consider risks

across all groups and entities within a group—even if a specific entity itself may not appear to

present significant solvency risk. In addition, to adequately test a range of groups and entities,

broad participation from companies that wish to be a part of field testing should be encouraged,

recognizing that doing so may require states to provide more resources to support the field

testing exercise.

The following lists the Solvency Committee’s comments on questions 1, 2, 6, and 7 in the

exposed document, in addition to recommended edits:

1 The American Academy of Actuaries is a 19,500-member professional association whose mission is to serve the

public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on

all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The

Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.

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mailto:[email protected]


1) Questions 1 and 2: Groups exempted from the GCC—Exemptions for both groups and

entities within non-U.S.-based groups should be limited and determined through field

testing data. The NAIC might wish to seek a broad field testing audience to gather

sufficient data that could sustain any of the suggested exemptions. To accomplish this:

o Recommendation: Remove Paragraphs 13 and 14, in relation to scope for GCC

field testing.

In addition, for purposes of field testing, we believe that Paragraphs 15., 16., 17., 18., and

19. should be interpreted so as to encourage a broad scope of entities included in the field

testing exercise.

2) Questions 6 and 7: Expedited approaches for companies that are subject to federal

requirements and underwriting company-owned groups—Paragraph 20. provides

expedited approaches to the GCC in certain circumstances. In subparagraph (i), U.S.

groups subject to the Federal Reserve Board’s group capital requirements may use such

federal requirements for the purposes of GCC. While federal and NAIC frameworks may

have similar objectives, the Federal Reserve Board has yet to release a formal Notice of

Proposed Rulemaking relating to its proposed group capital standards. The NAIC has a

unique opportunity to compare the results of its GCC with the results of federal capital

standards for applicable groups.

Paragraph 20.(ii) allows for Annual Risk-Based Capital (RBC) reports to be provided for

U.S. groups where the Ultimate Controlling Party is an underwriting company that owns

all other entities. We believe there are likely to be differences in the results of the GCC

and RBC, which will be driven in part by differences in the purposes for each calculation.

The purpose of RBC is to provide an early warning sign for weakly capitalized

companies, whereas GCC may provide further insights into groupwide solvency risk.

Additionally, RBC may not capture all of the entities which will be in scope for the GCC.

A notable example might be a life insurance company that may own a foreign insurance

entity that does not report RBC and, therefore, would not be accounted for in the NAIC

Life RBC formula. We understand that foreign insurance entities would be in scope for

the GCC. Given the potential for differences in purpose and scope, the NAIC might use

the field testing exercise to validate the appropriateness of the proposed expedited

approaches. To that end:

o Recommendation: Remove Paragraph 20., in relation to scope for GCC field

testing.

In addition, the exposure includes certain carve outs and guidance that can be simplified and

made more consistent:

RBC Ratio Inconsistencies—Paragraph 27.A. (i) and (ii) require scaling to an RBC level equal to

300% of the Authorized Control Level (ACL). In comparison, Paragraph 27.C., Test 2a provides

non-financial entities the option to scale to a factor based on 486% of ACL for life insurers and

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332% for P&C insurers. In addition, Paragraph 27.C., Test 2a mentions life and

property/casualty average RBC Company Action Level ratios, but does not address health

business.

o Recommendation: Make Paragraph 27.A. and Paragraph 27.C. reflect a

consistent level of RBC and add the health average RBC Company Action Level

ratio to Paragraph 27.C., Test 2a.

Historical Look-Back Period—With respect to Paragraph 27.C., Test 1a, material changes to the

entity over the past five years could significantly distort the ratio being applied to the current-

year gross revenue. A five-year look-back at the greatest loss may not reflect volatility and risk

over the economic cycle. In addition, a five-year look-back period is inconsistent with other risk

measures that try to capture adverse economic conditions, such as economic capital and stress

testing. Therefore, a longer historical look-back period would be preferable and would better

reflect tail risk to the group. Therefore:

o Recommendation: Modify Paragraph 27.C., Test 1a to be based on a longer

historical time period. In setting the time period, there should be consideration

for whether companies generally have net cash flow data available for the

proposed historical length.

Expenses as Basis for Risk of Net Loss—Tests 1a and 1b in Paragraph 27.C. base the factor

applied on gross revenue. However, the risk of lost income is based on whether revenue is

greater than the expenses being incurred, including fixed costs and overhead. For example, risk

of loss for a service organization is largely driven by the level of operating expenses, and is not

necessarily based on revenue alone. It therefore would be more appropriate to measure risk of

future losses based on expenses instead of revenue for non-insurance, non-financial entities.

o Recommendation: Modify the ratio in Paragraph 27.C., Test 1a and Test 2a to be

based on operating expenses (both fixed and variable) rather than revenue.

*****

We are grateful for your time and attention to our comments. If you have any questions or would

like to further discuss this topic, please contact Nikhail Nigam, the Academy’s policy analyst for

risk management and financial reporting issues, at 202-223-8196 or [email protected].

Sincerely,

Elizabeth K. Brill, MAAA, FSA

Chairperson, Solvency Committee

American Academy of Actuaries

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COVER LETTER—RE: AUGUST 7, 2018 GCC SCOPE MEMO

Commissioner David Altmaier, Chair Group Capital Calculation (E) Working Group National Association of Insurance Commissioners Via email: [email protected]; [email protected]

Re: Scope of Group/Non-Insurance Testing Memorandum

Dear Commissioner Altmaier:

America’s Health Insurance Plans, the American Insurance Association, the Blue Cross Blue Shield Association, the National Association of Mutual Insurance Companies, the Property Casualty Insurers Association of America, and the Reinsurance Association of America (the “Trades”) appreciate the opportunity to comment on the August 7, 2018 Scope of Group/Non-Insurance Testing memo, and we thank NAIC staff and the Group Capital Calculation Working Group (the “Working Group”) for their continued efforts to advance this important project in collaboration with stakeholders.

The Trades offer responses to the eight questions posed by NAIC staff below, but we first set forth the following general comments to briefly emphasize and clarify certain points within the proposed memo, which the Trades originally submitted for the Working Group’s consideration in July.

Since the fundamental role of insurance regulation is policyholder protection, the Trades have previously expressed that the objective of the Group Capital Calculation (“GCC”) should be to augment current regulatory tools with an inventory of group entities along with quantitative and qualitative information to assist the lead state regulator in assessing risks that may adversely affect the ability of the group’s insurers to meet commitments to policyholders. The Trades were pleased to see NAIC leadership allude to this GCC objective in their August 16, 2018 letter to Senators Tim Scott and Mike Rounds.1 We believe recognizing this objective—which is embedded in paragraph (4) of the proposed memo—is critical and worth reemphasizing here.

Furthermore, the proposed memo’s general mechanics may warrant further clarification. The memo sets forth a process to determine the “Scope of Application” for the GCC; entities within the Scope of Application are included in the GCC computations, whereas entities outside the Scope of Application are excluded from the GCC.

The Scope of Application process begins with a group’s ultimate controlling person and an initial inventory of all entities under and including the UCP (the “Scope of the Group”) using the Inventory of the Group template (Schedule 1). This template includes all entities in the insurer’s most recent Schedule Y along with other

1 https://www.naic.org/documents/government_relations_181816_scott_rounds_letter.pdf (“The GCC was a natural extension of work state insurance regulators had already begun…to better understand the risks to insurance groups and their policyholders. While insurance regulators currently have authorities to obtain information regarding the capital positions of non-insurance affiliates, we do not have a consistent analytical framework for evaluating such information. The GCC is designed to address this shortcoming and will serve as an additional financial metric that will assist regulators in identifying risks that may emanate from a holding company system.”)

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Holding Company filings pertaining to entities directly or indirectly owned by the ultimate controlling person. From there, a group’s Scope of Application is determined using principle-based criteria that govern which entities must be included in, or excluded from, the GCC. Determining the Scope of Application is initially management’s responsibility. The lead state regulator, however, ultimately retains the authority to review management’s determinations, screen for possible exceptions, and resolve those through discussion with management. Finally, the Trades would like to clarify how the proposed memo applies to field testing vis-à-vis the final GCC. We recognize that field testing must be completed before the Working Group can reach final decisions on several points in the proposed memo. For instance, we understand that by including exemptions and expedited approaches, it may have added to the confusion for what is desired for field-testing and what is desired for the final GCC. In our responses to the NAIC staff questions below, we attempt to clarify what our recommendations are for, what is to be excluded for field-testing, and what should be included. We reiterate our appreciation for the staff and Working Group’s continued collaboration with stakeholders, and we hope our comments will help the Working Group in its efforts to develop the GCC in a manner that is both efficient as well as appropriate for the business of insurance and its regulation in the United States.

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1. This is an NAIC working document which includes general concepts and proposed technicalspecifications and options to be used for field testing and analysis of the NAIC’s proposed GroupCapital Calculation (GCC)

General Comments

2. Criteria in this document are intended to provide uniform guidance to field test Volunteers, theirrespective Lead State Regulator and field test analysts as to the Scope of Application for thespecific purpose of the GCC. The “Scope of Application” (i.e., for purposes of the GCC specifically)may be narrower, i.e., comprise a subset of, the entities controlled by the Ultimate ControllingPerson of the insurer(s) (Broader Group).

3. The initial identification of the Insurance Group and the determination of the Scope of Application ismade by a field test Volunteer for submission to its Lead State Regulator, following the principlesand steps discussed herein, However, the final decisions as to the identification of the InsuranceGroup and the determination of the Scope of Application remain the ultimate responsibility of theLead State Regulator, cooperating and coordinating with other involved regulators. In particular, inthe case of Insurance Groups that operate on a cross-border basis, the Lead State Regulatorshould be able to explain the appropriateness of the identification of the Insurance Group and thedetermination of the Scope of Application to involved supervisors in other jurisdictions. The LeadState Regulator, in cooperation with other involved regulators, should review the appropriateness ofthe Scope of Application at least annually and to confirm continued relevance.

4. The fundamental reason for state insurance regulation is to protect American insuranceconsumers1. Therefore, the objective of the GCC is to assess quantitatively the collective risks to,and capital of, the entities within the Scope of Application. This assessment should consider risksthat originate within the Insurance Group along with risks that emanate from outside the InsuranceGroup but within the Broader Group. The overall purpose of this assessment is to better understandthe risks that could adversely impact the ability of the entities within the Scope of Application to paypolicyholder claims consistent with the primary focus of insurance regulators. Consistent with soundregulation, the benefits of the quantitative analysis facilitated by the GCC should exceed the cost ofimplementation. Such an approach could be achieved by leveraging existing statutory informationfiled with the Lead State Regulator wherever practical.

1 State Insurance Regulation History, Purpose and Structure, p. 2, National Association of Insurance Commissioners: https://www.naic.org/documents/consumer_state_reg_brief.pdf

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Definitions 5. Broader Group: The entire set of legal entities that are controlled by the Ultimate Controlling

Person of insurers within a corporate group.

6. Field Test Volunteer, or Volunteer: An Insurance Group that is participating with its Lead State Regulator and the NAIC in the development of the GCC through the submission of confidential data and field testing exercises.

7. Financial Entity: A non-insurance financial institution that makes or facilitates financial intermediary operations (accepting deposits, granting of credits and loans, investments, etc.). The primary examples of financial entities are commercial banks, intermediation banks, investment banks, saving banks, credit unions, savings and loan institutions, investment companies, private funds, commodity pools, swap dealers etc.

8. Insurance Group: For purposes of the GCC, a group that is comprised of two or more entities of

which at least one is an insurer, and which includes all of the insurers in the Broader Group. Another (non-insurance) entity may exercise significant influence on the insurer(s), i.e. a holding company or a mutual holding company; in other cases, such as mutual insurance companies, the mutual insurer itself may be the Ultimate Controlling Person. The exercise of significant influence is determined based on criteria such as (direct or indirect) participation, influence and/or other contractual obligations; interconnectedness; risk exposure; risk concentration; risk transfer; and/or intragroup agreements, transactions and exposures. An Insurance Group may include entities which facilitate, finance or service the group’s insurance operation, such as holding companies, branches, non-regulated entities, and other regulated financial institutions. An Insurance Group could be headed by:

• an insurance legal entity; • a holding company; or • a mutual holding company.

An Insurance Group may be:

• a subset/part of bank-led or securities-led financial conglomerate; or • a subset of a wider group.

An Insurance Group is thus comprised of the head of the Insurance Group and all entities under its direct or indirect control.

9. Lead State Regulator: as defined in the NAIC’s Financial Analysis Handbook, i.e., generally

considered to be the one state that “takes the lead” with respect to conducting group-wide supervision within the U.S. solvency system.

10. Reciprocal Jurisdiction: as defined in the Model Law for Credit for Reinsurance.

Drafting Note: The term “Reciprocal Jurisdiction” is from the proposed revisions incorporated to the exposure draft dated June 21, 2018 to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). The content of this reference may need to be modified if it does not incorporate the mutual recognition of group supervision concept.

Question 1- For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should a group assume that groups with Group-Wide Supervisors in current qualified jurisdictions (e.g., Bermuda, Japan, Switzerland, Ireland and the EU (including the UK, France and Germany specifically) would not

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be required to complete the NAIC Group Capital Calculation, and therefore influence their decision in volunteering? If yes, are further changes to paragraph 13 needed?

Response: If all three of the criteria listed in paragraph 13 of the memo are met, a group would be exempt from the GCC. Since participation in field testing is voluntary, we are unable to predict how that might impact such a group’s decision to participate. Regardless, further changes to paragraph 13 are not needed. Exemption from the final GCC on the basis provided in paragraph 13 is important for the U.S. system to obtain mutual recognition and for that reason the exemption is limited to reciprocal jurisdictions only. The concept of mutual recognition, which is being worked out at the Reinsurance Task Force, has not been completed but is supported through the Covered Agreement process. It should not be necessary to field test the application of the Paragraph 13 exemption. The Paragraph 13 exemption guides the application of the GCC to the US operations of a non-US Group. The starting point for the Paragraph 13 exemption is that the non-US regulator recognizes the US regulatory regime, which relates to the concept of mutual recognition and the expected reciprocal treatment of certain other jurisdictions in the proposed revisions to the Credit for Reinsurance Model. Field testing exercises that focus on Paragraph 13 will not inform the NAIC regarding the likelihood that a non-US regulatory will recognize the US state regulatory system.

11. Scope of Application: Refers to the entities that meet the criteria listed herein for inclusion in the

GCC. Depending on the facts and circumstances involving a specific group, the application of such criteria may result in the Scope of Application being the same as, or a subset of, the entities controlled by the Ultimate Controlling Person of the insurer(s).

12. Ultimate Controlling Person: As used in the NAIC’s Insurance Holding Company System Regulatory Act.

Groups Exempted from the GCC 13. A non-U.S. based group (a group with a non-U.S. group-wide supervisor) may be exempt from the

GCC if:

i. The non-U.S. based group is based in a Reciprocal Jurisdiction that recognizes the U.S. regulatory regime and accepts the GCC from U.S. based groups to satisfy the Reciprocal Jurisdiction’s group capital requirement;

ii. The non-U.S. Group-Wide Supervisor’s home jurisdiction requires a group capital calculation be applied at a level that includes the same (or substantially similar) Scope of Application as would otherwise be determined by the Lead State Regulator in the absence of this exemption; and

iii. The Lead State Regulator can obtain information from the foreign group’s Group-Wide Supervisor either through a Supervisory College or otherwise, that allows the Lead State Regulator to understand the financial condition of the group and complete the expectations of other states in its Group Profile Summary (GPS).

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14. A U.S. based group is exempt from the GCC if it is not required to file an ORSA with its Lead State Regulator.

Question 2 - For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should paragraph 14 be deleted?

Response:

No. We recommend that the field testing proceed on the assumption that a U.S.-based group will be exempt from the GCC based on the following criteria:

- The group is not required to file an ORSA, and - It has no gross premiums written outside the United States (this would be an additional criterion

to our initial comment letter discussed at the GCC Working Group’s August 2018 meeting in Boston, and as suggested in that meeting by Texas).

The primary purpose of the GCC is to help regulators understand large and complex groups. With these criteria, it is unlikely that there will be any such groups that would not be required to file a GCC. Given the limited resources available at the NAIC and its State Regulator members and the limited time frame for field testing, we do not believe that the initial field testing exercises should be expanded to other groups, i.e., those that do not meet these criteria. Rather, resources would be more effectively dedicated to addressing issues raised by the large and complex groups that do meet the criteria.

Guiding Principles and Steps to Determine the Scope of Application

15. The Scope of Application is initially determined by the Insurance Group in a series of steps, listed here and then further explained as necessary in the text that follows:

• Develop an initial inventory of potential entities using the Inventory of the Group template (Schedule 1)

• Denote in the Inventory of the Group template the following entities as “included in the Scope of Application”:

o All of the entities within the Insurance Group o All other Financial Entities that are outside the Insurance Group but within the Broader

Group o All non-Financial Entities that are outside the Insurance Group but within the Broader

Group and that pose material risks to the Insurance Group • Denote in the Inventory of the Group template all other entities as “excluded from the Scope of

Application” • Submit the completed Inventory of the Group template to the Lead State Regulator, who would

then review and discuss as necessary with the Insurance Group and consult with other involved regulators to determine the final Scope of Application

Question 3 - For purposes of field testing, do regulators or members of the industry believe any further definitions of materiality should be added to the “Guiding Principles and Steps to Determine the Scope of Application” to increase consistency in application between groups and lead-states?

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Response: No. The concept of materiality as proposed by the joint-trades is principles-based focusing on the risk to the insurance group. This is consistent with ICP 23 and avoids a complex formulaic approach. Instead of applying materiality based on the size of the group’s operations, regulators can look at a variety of methods during the data analysis phase of field-testing to assess a group’s application of those principles and, if deemed appropriate based on that analysis, the guidance could then be clarified. Therefore, we do not believe any further changes to the definition of materiality are needed at this time.

Document the Inventory of the Group

16. When developing an initial inventory of all potential entities, the Field Test Volunteer shall complete the Inventory of the Group template (Schedule 1), which includes all the entities in the insurer's most recent Schedule Y, along with other relevant Holding Company Filings pertaining to entities directly or indirectly owned by the Ultimate Controlling Person.

i. This will require entities to complete basic information about each entity, including assets,

revenue and net income for each entity on an annual basis. A Volunteer may agree with its Lead State Regulator to provide the data on a sub-grouping basis (see also paragraph 26).

Question 4 - The attached includes a proposed list of items for an inventory (Schedule 1), which already contemplates within paragraph 25 that the group and the lead state should work together to determine how the inventory of companies (but including all) such should be aggregated, but are there other alternatives such as those proposed by Cigna/Aetna (US regulated entities, Non-US regulated entities, Material Non-Regulated Entities) or some variation of Schedule Y that can be used instead to avoid duplicative reporting?

Response: Yes. Schedule 1 can be viewed as the variation of Schedule Y that is alluded to in the question. Schedule 1 would be an inventory of all entities under the ultimate controlling person and prepared at the same level of granularity as Schedule Y. It would be completed with financial data based on local jurisdictional GAAP and Statutory Accounting (SAP), as appropriate for the subject entity. It would be a tool to facilitate an assessment of the entities in the scope of the group that would then also be included in the scope of application of the GCC. It would facilitate determination of any groupings of entities as contemplated by paragraph 25 of the NAIC’s Working Document. Regulators would have a comprehensive view of key financial and business characteristics of all entities in the group to support the Scope of Application as well as the rationale and appropriateness of any groupings that may have been made. In some cases, e.g., where a group is comprised of material insurance as well as non-insurance operations, a single, consolidated or aggregated group capital metric would, in effect, mix very technical insurance-related capital charges and much less sophisticated non-insurance capital charges. For the group as whole, the result could be misleading, and be virtually impossible to compare with any other large, complex IAIG, much less across jurisdictions. As a result, the states/NAIC could take advantage of a key attribute that the aggregation method provides that is clearly not attainable in a consolidated structure such as the ICS put forward by the IAIS: to provide "sub-aggregation ratios" at meaningful levels where the results are more homogeneous for the

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underlying businesses, be they insurance or otherwise, or aligned by sectors/regions with more common capital regimes. Moreover, such sub-aggregations can also be aligned with business unit breakouts provided in ORSAs and other regulatory filings which can help Lead State Regulators to better understand the context underlying a groups GCC result with knowledge gained from other supervisory tools. These sub-aggregations, or "groupings" can benefit the process on the "front end" (data gathering) as well as on the "back end" (the ultimate reporting of multiple values - i.e., not just a single conglomerated figure) Ultimately, the issue of duplicative reporting is one that is expected to be resolved in implementation. As a field testing exercise, there will inherently be some duplication and gathering of more data than will ultimately be necessary in implementation. In the case of determining the scope of group, that is because the company will apply the stated principles, and the Lead State Regulator and field test analysts will require quantifiable and qualitative information about the entities within the broader group so as to independently test if the company’s determination is appropriate. While much information about the ultimate controlling person and entities under its control is already included in Schedule Y, that schedule predates this process; thus it lacks sufficient information to facilitate the needs of field testing. Further, as the field testing process progresses and the GCC moves into implementation, it would be expected that issues around duplicative reporting will eventually be resolved.

Question 5 - For purposes of maximizing the usefulness of field testing and the calculation, NAIC staff proposes adding elements to the Schedule 1 for “Written Premiums” and “Debt.” Are you opposed to this additional information, or do you have any proposed definitions that you think are necessary to be included with these, or any of the other items in Schedule 1 to assist with Field Testing (such definitions may be submitted at a later date)?

Response: We have no objection to the addition of data elements for written premium and debt in Schedule 1. With respect to debt there are various types which qualify for capital treatment in the GCC based on different criteria. Therefore, we recommend that Schedule 1 detail debt by category, e.g.: - Senior debt that is structurally subordinated - Surplus notes - Other contractually subordinated debt - Other debt Further, the Working Group should consider whether the elements listed in Schedule 1 are described with sufficient clarity, e.g.: - For written premiums, whether gross or net - Whether capital includes all paid-in financial instruments and retained earnings/surplus, or also

capital resources such as accumulated other comprehensive income, restricted or unrestricted reserves, etc.

- As to financial ratings, clarify the type of rating, e.g., credit rating, claims-paying ability rating, etc.

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Identify the Insurance Group 17. Include all entities that fit the criteria identified in the definition of the Insurance Group, above, and

denote as such (i.e., included or excluded in the Scope of Application) in the Inventory of the Group template.

Identify and Include all Financial Entities 18. Financial Entities within the Inventory of the Group template shall be included in the Scope of

Application regardless of where they reside within the Broader Group.

Identify Risks from the Broader Group

19. An Insurance Group may be a subset of a Broader Group, such as a larger diversified conglomerate with insurance legal entities, Financial Entities and non-financial entities.

i. In considering the risks to which the Insurance Group is exposed, it is important to take account of those material risks to the Insurance Group from the Broader Group within which the Insurance Group operates. Entities within the Broader Group but outside the Insurance Group that pose such risks to the Insurance Group should be included within the Scope of Application.

Expedited Approaches 20. To avoid duplicative capital measures for approaches that are essentially similar to the NAIC’s

aggregation approach and to address cost/benefit considerations, an expedited alternative is available for the following classes of insurance groups:

i. U.S. groups subject to the Federal Reserve Board’s group capital requirement may provide that capital assessment measure as an acceptable alternative; or Question 6 - Should groups that will submit a group capital calculation to the Federal Reserve be allowed to be exempt from the NAIC calculation, and therefore not considering volunteering for Field Testing, and a decision made after testing?

Response: Once implemented, no group should be subject to multiple group capital calculations. Thus, and assuming the NAIC and the states will have implemented the GCC, and the Federal Reserve will have implemented its group capital measures, then at that time firms subject to the Federal Reserve’s requirements should not also have to perform and submit a GCC to the states. However, the relevant state regulators should have access to the information filed by the group with the Federal Reserve. However, prior to implementation we believe that there is much benefit to allowing large and complex firms supervised by the Federal Reserve to volunteer to participate in GCC field testing. As both approaches are being developed, we foresee benefit to those involved in the process in understanding how they compare as to design, construct, calibration, and quantum result. Assuming it is desirable to minimize differences between such calculations required by state and federal regulators, such a comparison would seem to be necessary to facilitate any convergence. The information learned could also assist in engagement by state and federal representatives at the IAIS.

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ii. U.S. groups where the Ultimate Controlling Party is an underwriting company that directly or indirectly owns all of the other entities within the Broader Group may provide its Annual RBC report as an acceptable alternative.


Response: No. We believe U.S. groups where the Ultimate Controlling Person is an underwriting entity should be allowed to provide their annual RBC report as an acceptable alternative to the final version of the GCC. For this reason, we believe the reference in paragraph 20ii should not be deleted. If consistency between RBC and the GCC is to be maintained, we believe an expedited approach should be built into the process for these types of groups.

Documentation and on-going assessment 21. The Lead State Regulator should review the Inventory of the Group template to determine if there

are entities excluded by the Volunteer that the Lead State Regulator nonetheless believes create other than a non-material risk to its insurance operations. Additional information may be requested by the Lead State Regulator to facilitate this analysis.

22. The exclusion or inclusion of entities within the Scope of Application should be regularly re-assessed.

23. The Field Test Volunteer, together with the Lead State Regulator and with technical support from

the field test analysts, would use the above steps, which includes considering the Lead State Regulator’s understanding of the group, including inputs such as Form F, ORSA, and other information from other involved regulators, to determine the Scope of Application.

Considerations for Subsequent Field Test Exercises

24. The Scope of Application should be considered for update on an ongoing basis throughout the field

testing exercise, but at least annually. To assist the Lead State Regulator in assessing the Scope of Application, the Inventory of the Group template will be completed by participants to provide information and certain financial data on all the entities in the group for the Lead State Regulator’s and field test analyst’s use in assessing if the entities excluded from the Scope of Application are appropriate. The Lead State Regulator and the Insurance Group should agree on a designation of entities from the inventory that may pose risk of a material adverse impact on the group’s insurance entities and operations. This may allow the GCC to reflect a more risk-sensitive approach and allow the Lead State Regulator to better understand the group.

25. The Lead State Regulator should work with the group in determining whether the inventory should

list all entities individually, or whether some should be grouped in a specified way in future iterations of the field test exercise to better illuminate potential areas of risk. For example, groupings of non-insurance, non-Financial Entities with some common traits (business unit, purpose, e.g.) could

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allow the Lead State Regulator to better understand the group and how they are managed. Thus, while the inventory would include the full combined financial results/key financial information (net premiums for insurers, total revenues, total net income, total assets, total debt, total capital or equity) for all entities of the Ultimate Controlling Person and all of its controlled entities, such data may be reported based upon major groupings of entities to maximize its usefulness and allow the Lead State Regulator to better understand trends. Annually the Lead State Regulator and the Insurance Group should agree on such groupings.

Determine Risk Factors for Non-Insurance Entities within the Scope of Application

26. Non-insurance entities not directly owned by an insurer but within the Scope of Application should

use the following methodology to determine the appropriate risk charge to be applied. Non-Insurance Testing 27. Non-insurance entities that have been determined to be within the Scope of Application should

include within the template the required risk charges and available capital amounts determined by either the respective regulator of the entity, the methodology outlined below or as modified for captives or scalars. Such entities must be individually listed in the template, and will be tested based upon the following:

A. Regulated Financial Entities

i. All banks and other depository institutions - Minimum required by their regulator. Test

both a) unscaled; and b) scaled to an RBC equal to 300% ACL.

ii. All asset managers and registered investment advisors – Test both a) 22.5% of Book/Adjusted Carrying Value (BACV); and b) 12% of three-year average revenue based upon ACLI suggestion (BASEL operational risk). In addition to an unscaled calculation, test the BASEL operational risk methodology scaled to an RBC equal to 300% ACL.

iii. All other financially regulated entities - Minimum required by their regulator (not scaled)

B. Unregulated Financial Entities

i. Other entities that engage in financial activities or services that support the insurer(s) – Because these entities can pose more risk of a material adverse impact on the group’s insurance entities and operations than other non-regulated entities, a 22.5% charge on the BACV should be tested. These entities are not subject to a minimum capital requirement.

ii. Other Financial Entities-For purpose of the GCC, unregulated Financial Entities

include those which create financial risks through products or transactions such as a mortgage, other credit offering, a derivative, corporate guarantees, intercompany indebtedness, operational interdependence, materiality to the application of credit rating methodologies to the overall group rating and other financial links. Because these entities can pose more risk of a material adverse impact on the group’s insurance entities and operations than other non-regulated entities, apply the greater of the following factors:

• 22.5% of the BACV

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• Notional value of the contract (e.g. a net worth guaranty/indemnification/guaranty multiplied by a probability factor as determined by the company based upon past historical experience)

• Other proposed factors suggested by testing participants

Grouping of like entities in type 27 Aii and 27 Bi above would be allowed, assuming that the members of the group all use the same accounting rules (e.g., all GAAP), and are at least consistent with the way the group manages their business.

C. Other Non-Insurance, Non-Financial Entities

Non-insurance, non-Financial Entities (including holding companies that are not insurance legal entities) may not be as risky as regulated entities and other Financial Entities. The Lead State Regulator and the group may decide together how best to group such entities and subject them collectively to the following charges for field testing. The agreed-upon basis for such groupings should be disclosed to the field test analysts. Test 1-Principle-Past Income/Loss is a sound predictor of risk Test a factor that considers the specific net losses/fluctuation in profitability over an economic cycle, where five years is used as a proxy for an economic cycle. This factor will be risk-based not only to the industry, but to the individual company since it considers past performance. The calculation would be determined based upon the following (for each entity or group of entities): Test 1a-Factor to Apply = (Absolute value of the greatest net loss in the past five years/Gross revenue in that year for that entity or grouped entities) Multiplied by the current year gross revenue for the same entity or grouped entities Test 1b-Same as Test 1a, except subject to a minimum charge that assumes a net loss equal to 2% of total gross revenues. The minimum is expected to cover the fact that the group is not consistently profitable or that the losses are not material, but it covers this risk in this way as opposed to requiring a calculation that considers this dependence through the use of a more complex standard deviation of profits over a period of time. Test 2- Principle-Potential Capital Needs of Non-Financial Entities is Equivalent to an Operational Risk Charge Test a factor that considers non-financial entities as operational risk. Test 2a- Non-regulated entities should be subject to either an operational risk charge as used in Basel III or a 22.5% charge on the BACV. The 12% Basel charge should be scaled to convert to U.S. RBC, thus the scaled factor becomes 2.47% for life insurers (based upon an average RBC Company Action Level ratio of 486%) and a factor of 3.64% for property/casualty (P/C) insurers (based on an average RBC Company Action Level ratio of 332%). A life factor of 3.7% and P/C factor of 5.4% should also be tested, which corresponds to the 300% RBC trend test calibration. Test 2B-Test 3% of BACV. Test 3- Principle-Simplicity and Consistency with RBC Requirements Test a simpler method specifically, a factor applied to the absolute value of the entities BACV. The relevant RBC charge (22.5% for P&C and Health and 19.5% (post tax) for Life) applied to BACV (post-covariance) should be tested, as well as other alternatives that may be more appropriate for risks posed by entities not owned by an insurer. Consider using the relevant

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RBC charge applied to BACV, provided groups do so consistently from one year to the next and across all of their entities.

Question 8 - Should the participating groups and lead states be able to consider other tests that provide information that helps inform the Working Group on whether other considerations to the proposed calculation are appropriate (e.g. that the amount of business within the group’s foreign insurers is so small [e.g., some of the health insurers] that the impact of the scalars can be shown to be immaterial, and utilized to develop thresholds that could be used for eliminating this requirement if met)? Response: Yes. Considering such ideas for the GCC that would result in it being fit for purpose while also enhancing its benefits relative to its costs is an appropriate objective for field testing. Field testing should explore the most appropriate methods for assessing risk. Some methods to test are already known and included in the document. Other options may not become apparent until field testing has commenced, and possibly until later subsequent iterations of field testing are underway. For example, how the elimination of investments in a holding company’s affiliates would yield a negative book value for the holding company on a stand-alone basis and how an operational risk-like charge to the BACV of the holding company would work. It may be necessary to consider an assessment of a holding company based on its remaining assets (after elimination of investments in affiliates) and in a way that assures that the GCC promotes appropriate risk management while discouraging capital arbitrage.

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Schedule 1 The following columns are taken from a proposed Schedule 1 (excel file) and included herein within this format to make readability of what is expected to be in included in the Schedule 1 more easily read. NAIC # FEIN # Name of Securities Exchange if Publicly Traded (U.S. or International) Name of Parent, Subsidiaries or Affiliates Domicile Primary Regulator and Contact Primary Regulator E-Mail Description & Purpose of Entity Business Segment Intercompany Guarantee Capital Maintenance Agreement (if yes, describe) Contractual Relationship with Affiliates (if yes, describe) Basis of Accounting Assets Liabilities Capital Revenue Net Income AM Best Rating Moody’s Rating S&P Rating Prospective Risks Scope of Application (Y=Include, X=Exclude) Required Capital W:\QA\RBC\Group Capital\NAIC Staff Memos\2018\08-07-18 Scope and Non-Insurance Testing Exposed with Questions.docx

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September 21, 2018

Via Electronic Delivery

Commissioner David AltmaierFlorida Office of Insurance RegulationChairman, NAIC Group Capital Calculation (E) Working GroupVia email to [email protected]

Re: August 7 NAIC Group Capital Calculation “Scope of Group/Non-Insurance Testing” Memorandum


The Companies (AIG, MetLife, New York Life, Northwestern Mutual, Prudential Financial, and Travelers, collectively referred to as “we” hereafter) thank the Group Capital Calculation Working Group (the “Working Group”) for continuing to seek input on foundational elements of the Group Capital Calculation (the “GCC”).

We share a view that a GCC that aims to both provide additional insight into insurance groups and to enhance comparability of results within and across insurance groups would be of greatest value to state regulators, the NAIC, and market participants more broadly. With respect to transparency, the inventory approach envisioned to serve as the foundation of the GCC will provide state regulators insight into all entities within the group – insurance and non-insurance – and the location and sources of capital. We believe that comparability can be achieved by applying targeted adjustments, where appropriate, as part of the aggregation process; such targeted adjustments should, for example, aim to ensure the corporate structure or location of an entity / activity within the group does not impact the overall GCC results. By achieving comparability of results within and across insurance groups, the GCCwill be better suited to serve as a basis for communication in forums such as supervisory colleges, where it is important for members to both understand entity level developments and financial strength and share a common language for discussing the status of the group. More broadly, we believe a GCC of this form would:

Serve as a more meaningful and informative complement to existing legal entity orientedsupervisory tools;

Serve as a credible framework to advance at the global level as an “outcome equivalent”approach to the International Association of Insurance Supervisors’ (the “IAIS”) InsuranceCapital Standard (the “ICS”), which aspires to produce comparable outcomes acrossjurisdictions; and

Position the GCC to contribute to broader NAIC risk assessment initiatives underway, such asthose envisioned through the Macro-Prudential Initiative (the “MPI”).

To ensure consistency in application and reporting of the GCC we believe guiding principles should be employed and inform the work of Lead State Regulators and reporting insurance groups. This point is especially relevant in the context of the two topics addressed in the Scope of Group/Non-Insurance Testing Memorandum (the “current exposure memo”). With respect to setting the scope of group (i.e., the entities to be included in the GCC), we believe that the process should begin with the presumption that all entities below the ultimate controlling person are in scope and exclusions, where justified and

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permitted, should be minimal. With respect to the treatment of non-insurance entities, we reiterate our view that an entities’ position within the corporate structure should not affect the results of the GCC. We are encouraged by the Working Group’s decision to explore a variety of approaches and recommend the alternatives be more broadly field tested than proposed in the current exposure memo.

Establishing the scope of application (i.e., which insurance groups must submit the GCC to their lead state regulator) should be a function of the purpose the GCC is expected to serve. If the GCC is applied to too few insurance groups, state regulators and the NAIC might not be able to achieve their intended regulatory objectives; if the GCC is applied to more groups than is necessary to achieve the stated purpose, small companies might be unduly burdened. To the extent limits are placed on the scope ofapplication, we believe these should align with other risk focused regulatory tools such as the Own Risk and Solvency Assessment (the “ORSA”). Doing so would ensure consistency across risk focused regulatory tools, enhanced insight into risk across a material portion of the U.S. insurance market rather than a narrow subset of it, and a level playing field for the industry. More broadly, however, we agree that insurance groups at the ultimate controlling level should only be subject to one group capital calculation.

Field testing will serve as an important next step in the development of the GCC. We believe the initial field test should be broadly designed (e.g., explore a variety of approaches to various elements of the GCC) to ensure it provides the Working Group a comprehensive range of data from a diverse sample of insurers and lead state regulators. Such an approach will ensure that the Working Group has the information necessary to analyze key design elements and inform the structure of future field tests, which can and should be employed to gradually refine the GCC and ensure that the final version achieves its intended objectives.

In addition to the perspectives provided above, we have included responses to the questions in the current exposure memo and further proposed edits thereto in the pages that follow. We again thank the Working Group for seeking stakeholder input on foundational elements of the GCC and would welcome the opportunity to discuss the information included in this response should the Working Group or NAIC staff engaged in the GCC project wish to do so.

Sincerely,

Joseph DeMauroVice President, Regulatory Policy American International Group, Inc.

Kevin MackaySenior Vice President, Corporate TreasuryMetLife

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Joel M. SteinbergSenior Vice President, Chief Actuary & Chief Risk OfficerNew York Life Insurance Company

David R. RemstadSenior Vice President & Chief ActuaryThe Northwestern Mutual Life Insurance Company

Ann KapplerSenior Vice President, Deputy General Counsel and Head of External AffairsPrudential Financial, Inc.

D. Keith BellSenior Vice President, Corporate FinanceThe Travelers Companies, Inc.

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Responses to Questions Within the Current Exposure Memo

Question 1 – For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should a group assume that groups with Group-Wide Supervisors in current qualified jurisdictions (e.g., Bermuda, Japan, Switzerland, Ireland and the EU (including the UK, France and Germany specifically) would not be required to complete the NAIC Group Capital Calculation, and therefore influence their decision in volunteering? If yes, are further changes to paragraph 13 needed?

Question 2 – For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should paragraph 14 be deleted?

Question 6 – Should groups that will submit a group capital calculation to the Federal Reserve be allowed to be exempt from the NAIC calculation, and therefore not considering volunteering for Field Testing, and a decision made after testing?

Question 7 – For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should paragraph 20ii be deleted, and a decision made after testing?

Response to Questions 1, 2, 6 and 7 – As the current exposure memo is intended to serve as a guide for field testing, we believe it is unnecessary to embed policy related points within the text and thusrecommend that they be removed. Further, we believe field testing should be open to all insurance groups that are interested in participating and recommend paragraphs 13, 14 and 20, including its sub-bullets, be deleted.

Question 3 – For purposes of field testing, do regulators or members of the industry believe any further definitions of materiality should be added to the “Guiding Principles and Steps to Determine the Scopeof Application” to increase consistency in application between groups and lead-states?

Response to Question 3 – We fully support efforts to ensure there is consistency in application between groups and lead-states. With respect to the concept of materiality, we believe it may be most informative to not allow exclusions on this basis in the first field test. As noted above, we believe the Working Group should use the initial field test to collect a comprehensive range of data that could be used to inform design decisions, such as materiality definitions, and provide the Working Group flexibility to assess the impact of different materiality definitions on the back end of the exercise. In addition, field testing could be used as a vehicle for collecting volunteer feedback on alternative definitions that the Working Group could consider.

Question 4 – The attached includes a proposed list of items for an inventory (Schedule 1), which already contemplates within paragraph 25 that the group and the lead state should work together to determine how the inventory of companies (but including all) such should be aggregated, but are there other alternatives such as those proposed by Cigna/Aetna (US regulated entities, Non- US regulated entities, Material Non-Regulated Entities) or some variation of Schedule Y that can be used instead to avoid duplicative reporting?

Response to Question 4 – We believe the approach to aggregation should be a function of the objectives of the GCC. A GCC that consists only of an inventory of the entities within a group and the

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items identified in Schedule 1 would only be able to satisfy an objective of gaining further insight into the entities within an insurance group. As noted above, we believe the objectives of the GCC should be broader and thus, that an inventory alone would not suffice.

In addition to an objective of providing insight into the entities within a group, we believe the GCC should enhance comparability of results within and across insurance groups. This can be achieved by applying appropriate targeted adjustments, including scaling, during the aggregation process to ensure similar activities are treated consistently across groups regardless of corporate structure or location of an entity / activity within a group. We believe a GCC that achieves these objectiveswould:

Be of greater utility and of higher information value to lead state regulators and the NAIC(e.g., it would address the “no real value in aggregating apples/oranges” comment within the CIGNA/Aetna proposal);

Serve as a more meaningful complement to existing legal entity oriented supervisory tools; and

Serve as a credible framework to advance at the global level as an “outcome equivalent” approach to the IAIS’ ICS.

To facilitate further consideration of this question and the Cigna/Aetna proposal we ask that the Working Group provide further insight on the objectives it is aiming to achieve with the GCC.

Question 5 – For purposes of maximizing the usefulness of field testing and the calculation, NAIC staff proposes adding elements to the Schedule 1 for “Written Premiums” and “Debt.” Are you opposed to this additional information, or do you have any proposed definitions that you think are necessary to be included with these, or any of the other items in Schedule 1 to assist with Field Testing (such definitions may be submitted at a later date)?

Response to Question 5 – As noted above and in our response to question 3, we support efforts to maximize the usefulness of the field test through the collection of a comprehensive range of data points and therefore, we do not oppose adding the proposed elements to “schedule 1”. In addition, with respect to the collection of data on “debt”, we believe it would be helpful for schedule 1 to differentiate between senior and subordinated debts. We also support adding “available capital” to the schedule and potentially “received capital contribution (if yes, describe frequency)”. Finally, to ensure consistency across field test participants we ask that the Working Group provide descriptions for what type of information is expected for the various elements (e.g., clarify / provide examples of what should be reported for “Capital Maintenance Agreement (if yes, describe)”, “Contractual Relationship with Affiliates (if yes, describe)”, etc.).

Question 8 - Should the participating groups and lead states be able to consider other tests that provide information that helps inform the Working Group on whether other considerations to the proposed calculation are appropriate (e.g. that the amount of business within the group’s foreign insurers is so small [e.g., some of the health insurers] that the impact of the scalars can be shown to be immaterial, and utilized to develop thresholds that could be used for eliminating this requirement if met)?

Response to Question 8 – Participating groups and lead states should be able to consider and submit other tests that may help inform the efforts of the Working Group (e.g., exploring alternative

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approaches for the treatment of non-insurance entities, approaches to diversification, etc.), which –if supported by the Working Group – could be included in future field tests. With respect to scalars, we believe their application is a critical element of the GCC as they help ensure the group level ratio reflects comparable levels of conservatism to that embedded in U.S. RBC and therefore is informative to Lead State Regulators. That said, and more broadly, we acknowledge that it would be reasonable to establish materiality thresholds for various elements of the GCC provided they are applied consistently across states.

Additional Comments on the Current Exposure Memo

In addition to the points above, we would like to highlight the following proposed edits and perspectives:

We recommend paragraphs 3, 4, and 21 through 25 of the current exposure memo be deleted as they are not relevant or necessary in a document that is intended to serve as a guide for field testing and could prematurely influence decisions that should be informed by data gathered through the field testing.

We recommend editing the definition of insurance group (paragraph 8) to make explicit that entities that exercise significant influence on insurers within the group, or facilitate, finance or service the group’s insurance operation are part of the “Insurance Group”, whether or not they are under the direct or indirect control of the head of the Insurance Group.

As noted above, we believe the initial field test should collect a comprehensive range of data that could be used to inform design decisions as the GCC project progresses. More broadly, we believe one of the objectives of the GCC should be to enhance comparability of results within and across insurance groups; ensuring the corporate structure or location of an entity / activity within the group does not impact the overall GCC results is a key step to achieving this objective. With these points in mind we recommend the following changes to the non-insurance entity portion of the current exposure memo:

o We believe the range of options field tested should apply to all non-insurance entities(regulated or unregulated), regardless of the type of entity they are owned by. We recommend paragraph 26 and its related header be deleted.

o We recommend the approaches proposed within paragraphs 27.A and 27.B be streamlined and more broadly applied (e.g., collect data on a scaled and unscaled basis for 27.A.iii, scale approaches to both an RBC equal to 200% and 300% ACL, replace the approaches under 27.B with the broader set under 27.A.ii, etc.)

Finally, we reiterate our view that multiple rounds of field testing should be employed over time to gradually refine the GCC and ensure that the final version achieves its intended objectives.

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American Council of Life Insurers 101 Constitution Ave, NW, Suite 700, Washington, DC 20001-2133

September 21, 2018


Florida Office of Insurance Regulation

Chairman, NAIC Group Capital Calculation (E) Working Group

Via email to [email protected]

Re: Scope of Group/Non-Insurance Testing Memo, Exposure Dated August 7, 2018


The American Council of Life Insurers (ACLI) advocates on behalf of 290 member companies dedicated

to providing products and services that promote consumers’ financial and retirement security. 90 million

American families depend on our members for life insurance, annuities, retirement plans, long-term

care insurance, disability income insurance, reinsurance, dental and vision and other supplemental

benefits. ACLI represents member companies in state, federal and international forums for public policy

that supports the industry marketplace and the families that rely on life insurers’ products for peace of

mind. ACLI members represent 95 percent of industry assets in the United States.

We appreciate the opportunity to comment on the Working Group’s Exposure Draft dated August 7,

2018 (“Exposure Draft”). We found the Working Group’s meeting during the NAIC’s National Meeting in

Boston to be informative and helpful. We appreciated the time that you, your fellow Commissioners

and staff devoted to listening to and engaging with the industry on issues surrounding the development

of the group capital calculation (“GCC”). We were encouraged to hear that the NAIC intends to develop

its GCC to be a tool that works for the U.S. state-based regulatory system.

We found it instructive and important that the NAIC explained to Congress in its August 16, 2018 letter

that the GCC is intended to be a tool that will act as an “early warning signal” and not as a new capital

requirement.

This letter, which is intended to complement the attached proposed revisions to the Exposure Draft, is

broken into four parts. First, we make several general comments. Second, we outline our proposed

changes to the “Guidance for Field Testing” Exposure Draft, based on those general views. Third, we

provide specific responses to the eight questions posed by the Working Group in the Exposure Draft.

Finally, we capture additional issues that are outside the purpose of building a field testing template and

which we removed from the Exposure Draft but are nonetheless important.

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COMMISSIONER DAVID ALTMAIER NAIC GROUP CAPITAL CALCULATION WORKING GROUP

EXPOSURE DRAFT DATED AUGUST 7, 2018 PAGE 2

SEPTEMBER 21, 2018

A. General Comments

1. Field Testing Should Inform Policy Decisions

As the Exposure Draft is intended to be used for field testing, we recommend that its scope should be

limited to providing guidelines for field testing. Our edits to the Exposure Draft and this letter reflect

that intent.

Our Member Companies appreciate and welcome the opportunity to continue to engage in the

discussions about broader policy decisions, such as scaling benchmarks and which groups will and will

not be subject to the GCC. However, we believe that such policy decisions can and should be informed

by field test results and thus finalized at a later date.

2. Field Testing Should be Broadly Accessible

To maximize the value of the field test, a representative cross-section of the life industry – including

insurance groups that will not ultimately not be subject to the GCC – should be permitted to participate

and provide data on a variety of approaches. Participation by a group and/or providing data for various

approaches should not be interpreted as endorsing application of or inclusion in the final version of the

GCC.

3. Field Testing Should be Conducted in a Transparent Manner

We ask that the Working Group continue to develop the GCC in a transparent manner during field

testing. This would include making the specifications available to all interested parties rather than

limiting distribution to the volunteering groups and their Lead State Regulators. Further, we expect that

volunteers and the Lead State Regulators will identify issues during field testing, some of which may be

substantive. We encourage capturing and resolving such issues in a public manner. We also ask that the

Working Group be as transparent as possible in sharing their findings from field testing while respecting

the confidentiality of the participating insurers and their data. It would be most useful to interested

parties if insights from field testing were presented relative to the NAIC’s goals for the GCC.

4. The Inventory Process Should Be Streamlined

As we will describe in more detail in the “Responses to Specific Questions Posed” Section, below, and in

the proposed changes to the Exposure Draft, we believe that an inventory should begin with a complete

listing of entities within the insurance group (Schedule Y). However, we do not think that it is beneficial

to require detailed information from every entity. Instead, within that broad listing of entities, the

volunteer should identify all entities that pose material risk to the insurance entities. Once the entities

that pose a material risk are identified, the volunteer should provide additional information that the

Lead State Regulator and volunteer can use to determine whether the particular entity should be

included in the GCC. When providing the additional information, it would be appropriate to permit

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SEPTEMBER 21, 2018

grouping of like entities to better illuminate potential areas of risk and/or ease operational complexity

of field testing.

5. The Inclusion of Scalars Should Be a Function of the Objectives of the GCC

As ACLI has previously stated, scalars can help ensure that a single group capital ratio reflects relatively comparable levels of conservatism to that embedded in U.S. RBC and therefore be more informative to Lead State Regulators. To comment on the appropriateness of not applying scalars or not aggregating all entities within the scope of application, as proposed in the Cigna/Aetna proposal, our members would require further insight on the objectives the Working Group and NAIC are hoping to achieve with the GCC. For example, if the objective was limited to gaining further insight into the entities within an insurance group, then an inventory alone, absent any degree of aggregation and without scalars, may be sufficient. However, if the objectives were different, such an approach could have short-comings.

B. We Revised and Streamlined the Exposure Draft to Align with the General Comments.

In brief, our suggested edits are as follows:

• Revise the Exposure Draft to focus solely on field testing directions. For example, our Exposure

Draft deletes the paragraphs on exemptions, on-going assessments and subsequent field

testing.

• Employ a streamlined approach to identifying entities to be included in the GCC. In summary,

the approach is as follows:

o Begin by identifying all entities within the group (consistent with Schedule Y).

o Indicate for each entity listed in it whether the entity poses a material risk to the

insurance group (Yes/No).

o Provide the complete Schedule 1 information for all entities marked “Yes”.

o All entities marked “Yes” will be included in the GCC, i.e., within the scope of application

▪ We believe that all entities downstream of the Head of the Insurance Group

would be marked, “yes” for purposes of field testing.

o Each type of entity has its own proposed ‘treatment’ within the GCC, which are listed in

paragraphs 12-17.

• Suggest the following refinements to the process of selecting and grouping of entities:

o Each Volunteer should share the Schedule Y and the completed Schedule 1 with its Lead

State Regulator.

o The Lead State could include additional entities based on its review of that information.

o Volunteers should be permitted to group entities.

• Revise or add certain definitions:

o Delete reference to the definition of ‘reciprocal jurisdiction’ in the draft NAIC

amendments to its Credit for Reinsurance Models as such language was unnecessary for

the purpose of field testing.

o Add a definition of ‘field testing’.

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SEPTEMBER 21, 2018

o Add a sentence to the definition of ‘insurance group’ to acknowledge that there may be

multiple insurance groups within the same holding company system.

• Streamline and broaden paragraphs on alternative charges to be tested.

C. Responses to Specific Questions Posed

ACLI viewed each of these questions through the lens of core principles relating to any NAIC-designed

GCC. First, ACLI continues to believe that any NAIC-designed GCC should validate, and not diverge from,

the existing framework of state-insurance financial regulation, including recognition of the use of

properly regulated captives and permitted and prescribed practices. We believe that the U.S. state-

based regulatory regime and its RBC system have proven themselves and should be recognized in the

GCC. For example, the group capital calculation for an insurance group with an RBC-filer as its ultimate

control person and its RBC-outcome should be identical. Second, we believe in the importance of a

“one group / one capital standard” paradigm to ensure insurance groups already subject to a group

capital requirement are not subject to, or forced to comply with, a second framework.

As such, the ACLI supports exemptions from application of the GCC itself for:

1. Groups that do not file an ORSA with their Lead State Regulator;

2. Groups subject to group-wide supervision and a group-capital assessment, if their home country

supervisor: (1) accepts the GCC filed for U.S.-based groups; and (2) shares relevant information

with lead states upon request; and

3. Groups subject to consolidated supervision by the Federal Reserve Board if relevant information

is made available to lead states upon request.

Question 1 – For purposes of field testing, since a decision to participate in field testing is voluntary

between an Insurance Group and its lead state, should a group assume that groups with Group-Wide

Supervisors in current qualified jurisdictions (e.g., Bermuda, Japan, Switzerland, Ireland and the EU

(including the UK, France and Germany specifically) would not be required to complete the NAIC Group

Capital Calculation, and therefore influence their decision in volunteering? If yes, are further changes to

paragraph 13 needed?

Answer 1 – Our members believe that a final decision regarding the groups to which a NAIC-

designed GCC should apply need not be within the field-testing paradigm contemplated by the

Exposure Draft. Therefore, we have removed paragraph 13 in our updated version of the

Exposure Draft.

If an insurance group chooses to volunteer to participate in field testing and, after discussion

with that organization’s Lead State Regulator, it is concluded that such participation would bring

value to field testing, then that volunteer should be accepted. However, our Member

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SEPTEMBER 21, 2018

Companies do caution with a reminder that that even if an organization participates as a

volunteer, the final GCC regime may exclude that organization.

Question 2 – For purposes of field testing, since a decision to participate in field testing is voluntary

between an Insurance Group and its lead state, should paragraph 14 be deleted?

Answer 2 – As discussed in the answer to Question 1. For purposes of field testing, yes. We

have removed paragraph 14 in our proposed changes to the Exposure Draft.

Question 3 - For purposes of field testing, do regulators or members of the industry believe any further

definitions of materiality should be added to the “Guiding Principles and Steps to Determine the Scope

of Application” to increase consistency in application between groups and lead-states?

Answer 3 – We have not added a definition of materiality as we believe that the development of

an appropriate materiality standard should be part of the field testing goals. Volunteers should

make their determination of materiality in developing Schedule 1 and should explain to the Lead

State Regulator the basis for such decision making. Lead State Regulators should clearly

document their rationale for including or excluding certain entities. This documentation and

decision-making process should be part of the feedback that ultimately informs the final GCC.

Question 4 - The attached includes a proposed list of items for an inventory (Schedule 1), which already

contemplates within paragraph 25 that the group and the lead state should work together to determine

how the inventory of companies (but including all) should be aggregated, but are there other

alternatives such as those proposed by Cigna/Aetna (US regulated entities, Non- US regulated entities,

Material Non-Regulated Entities) or some variation of Schedule Y that can be used instead to avoid

duplicative reporting?

Question 5 - For purposes of maximizing the usefulness of field testing and the calculation, NAIC staff

proposes adding elements to the Schedule 1 for “Written Premiums” and “Debt.” Are you opposed to

this additional information, or do you have any proposed definitions that you think are necessary to be

included with these, or any of the other items in Schedule 1 to assist with Field Testing (such definitions

may be submitted at a later date)?

Answers 4 & 5 – Our Member Companies examined these questions holistically through the lens

of ¶15 in the Exposure Draft and the elements in Schedule 1 and, in the attached, have

suggested some changes. Thematically, we believe: 1) an Insurance Group should provide a

complete listing of entities; 2) entities that pose material risk to the insurance legal entities

should be identified; 3) following identification of entities that pose a material risk to insurance

legal entities, those entities should provide additional detail as suggested in Schedule 1

(including “Written Premiums” and “Debt”); 4) grouping of like entities should be permitted

when providing information requested in Schedule 1 to better illuminate potential areas of risk

and/or ease operational complexity of field testing.

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SEPTEMBER 21, 2018

This proposal is different than what was proposed in the Exposure Draft, which seeks completed

data for all entities – even those that pose no material risk to any insurance legal entity. We

have suggested this process to make completing Schedule 1 more efficient.

In addition, we feel it important to point out that the data received in the completed inventory

will, for many companies, include data on differing accounting bases. While Schedule 1 has the

Volunteer identify the accounting basis, the data itself will not be ‘converted’ into a single

accounting basis. This is not necessarily a problem, but the Working Group should consider this

and be cautious about “rolling up” the data.

In addition, Volunteers would benefit from clarification of what data is specifically being

contemplated in Schedule 1. For example, what types of contracts/information, specifically,

would the Working Group seek to be included in, “Contractual Relationship with Affiliates (if yes,

describe)”?

Question 6 - Should groups that will submit a group capital calculation to the Federal Reserve be

allowed to be exempt from the NAIC calculation, and therefore not considering volunteering for Field

Testing, and a decision made after testing?

Answer 6 – For the reasons that we articulate in the preamble to these answers, ACLI supports

such an exemption, but yes, the final decision can be made after testing. We have removed

paragraph 20i in our proposed changes to the Exposure Draft.

Question 7 - For purposes of field testing, since a decision to participate in field testing is voluntary

between an Insurance Group and its lead state, should paragraph 20ii be deleted, and a decision made

after testing?

Answer 7 –ACLI supports the U.S. state-based regulatory regime and its RBC system. After

reviewing field testing results, the NAIC will be better positioned to consider such an exemption;

however, for the purpose of the Exposure Draft, yes, the paragraph should be deleted and the

final decision can be made after testing. We have removed paragraph 20ii in our proposed

changes to the Exposure Draft.

Question 8 - Should the participating groups and lead states be able to consider other tests that

provide information that helps inform the Working Group on whether other considerations to the

proposed calculation are appropriate (e.g. that the amount of business within the group’s foreign

insurers is so small [e.g., some of the health insurers] that the impact of the scalars can be shown to be

immaterial, and utilized to develop thresholds that could be used for eliminating this requirement if

met)?

Answer 8 – As we note above, we believe that for field testing purposes, a number of tests

should be used to ensure ample data is received and available to inform further development of

the GCC. Fundamentally, we believe that using a range of tests, on a variety of volunteers with a

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SEPTEMBER 21, 2018

comprehensive and transparent feedback process and a robust and transparent development of

a final regime will help answer this question.

Further, we believe that field testing should be iterative and flexible based on the information

learned as the process progresses. Consider the following example: The field testing plan is to

test multiple percentages of BACV. If during the testing, it becomes clear that certain

percentages tested provide meaningless results, the field testing should be flexible enough to

capture the finding, document the decision and cease using that certain parameter in future

field tests.

D. Additional Issues

In our mark up of the Exposure Draft, we deleted paragraph 22 as we believe it is unnecessary for field

testing purposes. However, we do believe that in practice, the final GCC should require periodic

reassessment of entities included or excluded. We also deleted paragraphs 24 and 25 of the Exposure

Draft (under “Considerations for Subsequent Field Test Exercises), for the same reason.

In addition, because the current consultation focuses on non-insurance entities, we added placeholder

sections for the treatment for the treatment of insurance legal entities.

We appreciate the opportunity to provide these comments. Please let us know if you have any

comments, questions or concerns.

Very truly yours,

Carolyn Cobb Vice President & Chief Counsel, Reinsurance & International Policy [email protected] (202) 624-2340

David Leifer Vice President & Associate General Counsel [email protected] (202) 624-2128

Patrick Reeder Vice President & Deputy General Counsel [email protected] (202) 624-2195

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mailto:[email protected]%20(

of 4 ACLI Proposed Edits Rev 09-21-2018


GUIDANCE FOR FIELD TESTING 1. This document provides uniform guidance to field testing Volunteers, their respective Lead

State Regulators, and Working Group members on the Scope of Application for the specific purpose of field testing possible constructions of the proposed Group Capital Calculation (GCC).

2. The objective of the GCC is to assess quantitatively the collective risks to, and capital of,

the entities within the Scope of Application. This assessment should consider risks that originate within the Insurance Group along with risks that emanate from outside the Insurance Group but within the Broader Group.

Definitions for Field Testing 3. Broader Group: The entire set of legal entities that are controlled by the Ultimate

Controlling Person of insurers within a corporate group. 4. Field Testing: The process of collecting confidential data submitted by Insurance Groups

(and their Lead State Regulators) for the purpose of exploring and assessing the appropriateness of potential approaches to various elements of the GCC.

5. Field Test Volunteer, or Volunteer: An Insurance Group (and its Lead State Regulator)

that is participating in the development of the GCC through the submission of confidential data.

6. Financial Entity: A non-insurance financial institution that makes or facilitates financial

intermediary operations (accepting deposits, granting of credits and loans, investments, etc.). The primary examples of financial entities are commercial banks, intermediation banks, investment banks, saving banks, credit unions, savings and loan institutions, investment companies, private funds, commodity pools, swap dealers etc.

7. Insurance Group: For purposes of field testing, a group that comprises two or more

entities of which at least one is an insurer, and which includes all of the insurers in the Broader Group. There may be instances where there are multiple Insurance Groups within the same holding company system.

8. Lead State Regulator: as defined in the NAIC’s Financial Analysis Handbook, i.e., generally considered to be the one state that “takes the lead” with respect to conducting group-wide supervision within the U.S. solvency system.

9. Scope of Application: Refers to the entities that meet the criteria listed in Paragraph 11 for inclusion in the GCC field test. Depending on the facts and circumstances involving a specific group, the application of such criteria may result in the Scope of Application being the same as, or a subset of, the entities controlled by the Ultimate Controlling Person of the insurer(s).

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10. Ultimate Controlling Person: As used in the NAIC’s Insurance Holding Company System Regulatory Act.

Scope of Application 11. The determination of the Scope of Application is made by the Field Test Volunteer for

submission to its Lead State Regulator using the Inventory of the Group template (Schedule 1), following the principles and steps discussed below.

a. Identify the Insurance Group.

b. Schedule Y should be the starting point of the analysis. c. The Field Test Volunteer should indicate for each listed entity whether it poses a

material risk to the Insurance Group (Y/N).

i. All entities downstream of the Head of an Insurance Group would be marked “Yes,” for purposes of field testing.

ii. The Field Test Volunteer should document its rationale(s) for its decisions on the materiality of such risk(s), share that documentation with the Lead State Regulator, and discuss its decisions and its documentation with the Lead State Regulator.

d. For each entity identified as posing a material risk to the Insurance Group, the Field Test Volunteer should provide the data requested in Schedule 11, and the entity should be included within the Scope of Application.

e. The Field Test Volunteer should provide the data requested in Schedule 1 for each insurance entity, U.S. and non-U.S.

f. Like entities (e.g., those that are similar in nature in the operations they engage in and/or role within the insurance group) should be individually identified on Schedule 1. The data requested, however, may be provided on a grouped basis to better illuminate potential areas of risk and/or ease operational complexity of field testing. Considerations for grouping may include consistency in the applicable accounting basis, the way the entities are managed, etc. with the ultimate approach employed disclosed as part of the field test submission.

g. The Lead State Regulator should review the Schedule Y and Schedule 1

inventories to determine if there are entities excluded by the Volunteer that the Lead State Regulator nonetheless believes create other than a non-material risk to its insurance operations. Additional information may be requested by the Lead State Regulator to facilitate this analysis.

1 Schedule 1 data is listed at the end of this document.

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Treatment of Subsidiaries of U.S. Insurance Legal Entities 12. Notwithstanding the following sections, all subsidiaries of U.S. insurance legal entities will

follow their treatment in Risk-Based Capital in order to ensure that the GCC for these entities is consistent with state law. For example, the GCC outcome for an insurance group with an RBC-filer as its ultimate controlling person and its RBC outcome should be identical.

Treatment of Non-Insurance Financial Entities 13. Banks and other depository institutions – The following alternatives will be tested

a. Minimum required by their regulator, unscaled b. Minimum required by their regulator, scaled to an RBC equal to 200% ACL c. Minimum required by their regulator, scaled to an RBC equal to 300% ACL

14. Asset managers and registered investment advisors – The following alternatives will be

tested

a. 22.5% of Book/Adjusted Carrying Value (BACV); b. 12% of three-year average revenue c. 12% of three-year average revenue, scaled to an RBC equal to 200% ACL d. 12% of three-year average revenue, scaled to an RBC equal to 300% ACL

15. Other regulated financial entities – The following alternatives will be tested

a. Minimum required by their regulator, unscaled b. Minimum required by their regulator, scaled to an RBC equal to 200% ACL c. Minimum required by their regulator, scaled to an RBC equal to 300% ACL

16. Unregulated Financial Entities (including holding companies) – The following

alternatives will be tested

a. 22.5% of BACV b. 12% of three-year average revenue c. 12% of three-year average revenue, scaled to an RBC equal to 200% ACL d. 12% of three-year average revenue, scaled to an RBC equal to 300% ACL

Treatment of Non-Insurance, Non-Financial Entities

17. Non-Insurance, Non-Financial Entities– the following alternatives will be tested

a. (Absolute value of the greatest net loss in the past five years/Current year gross

revenue) multiplied by current year gross revenue

b. Maximum of [(Absolute value of the greatest net loss in the past five years/Current year gross revenue), 2%] multiplied by current year gross revenue

c. A scaled Basel III operational risk charge, with scaling based on CAL RBC. The scaled factors will need to be finalized.

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d. A scaled Basel III operational risk charge, with scaling based on the RBC trend test level. The scaled factors will need to be finalized.

e. 22.5% of book adjusted carrying value

f. 3% of book adjusted carrying value

g. The following factors:

i. P&C: 22.5% of book adjusted carrying value ii. Health: 22.5% of book adjusted carrying value iii. Life: 19.5% of book adjusted carrying value

Schedule 1 The following columns are taken from a proposed Schedule 1 (excel file) and included herein within this format to make readability of what is expected to be in included in the Schedule 1 more easily read.

NAIC # FEIN # Name of Securities Exchange if Publicly Traded (U.S. or International) Name of Parent, Subsidiaries or Affiliates Domicile Primary Regulator and Contact Primary Regulator E-Mail Description & Purpose of Entity Business Segment Intercompany Guarantee Capital Maintenance Agreement (if yes, describe) Contractual Relationship with Affiliates (if yes, describe) Basis of Accounting Assets Liabilities Capital Revenue Net Income AM Best Rating Moody’s Rating S&P Rating Prospective Risks within the Entity Required Capital Available Capital Debt (describe each type of debt) Written Premium

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50

September 21, 2018

Commissioner David Altmaier, Chair Group Capital Calculation (E) Working Group National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197

Via electronic mail – Submitted on behalf of Cigna, Aetna, and Anthem


Cigna, Aetna, and Anthem thank you for this opportunity to provide comments on the Group Capital Calculation Working Group’s August 7, 2018 exposure, which contains general concepts and proposed technical specifications and options for field testing the Group Capital Calculation (GCC).

As an initial matter, we would like to take this opportunity to thank the NAIC for its comments made to Senators Scott and Rounds in its August 16 letter on the GCC. More specifically, the statements that (1) that the GCC is not intended to be a new capital standard for insurers; (2) the calculation will not limit the amount of debt a group can issue; and (3) it is intended to be “relatively easy to assemble” at minimal implementation costs, are all consistent with the objectives of our companies as we continue our work with you on the development of the GCC. Thank you for these clarifying comments and for providing additional context around the NAIC’s objectives.

We view the NAIC’s proposal as having three main components: the inventory, the calculation (aggregation plus application of the scalers), and the development the final capital ratio. We fully support the inventory approach, and this exposure provides a strong foundation for the development of an inventory. “Schedule 1”, as outlined in the exposure draft, could be the inventory basis for our proposed GCC approach, which is described more fully below and in previous comment letters. With respect to the calculation itself, we also support aggregating capital – but only of like regulatory regimes – to allow regulators an “apples to apples” view of the capital position of a holding company system.1 However, as we have said in previous comment letters, we do not see the regulatory utility in the development and application of scalers for international business. Our suggested approach will not yield a single capital ratio, however, we believe it meets the NAIC’s stated regulatory objectives by providing both quantitative data and transparency into holding company capital and debt for regulated and non-regulated entities operating in and out of the United States.

In addition, many strong and stable health insurers have grown through acquisition, which necessitates taking on debt, goodwill and related intangible assets. Therefore, we oppose any adjustment that would limit capital based on the level of a company’s debt, goodwill and related intangible assets. The quality of debt, goodwill and related intangible assets are based on available cashflows and the strength of the business, which is outside of the scope of GCC.

In this context, we offer the following comments for your consideration.

General Comments: We support the idea that the lead state regulator, in cooperation with other involved regulators, would review the appropriateness of Scope of Application. We also appreciate the Working Group’s comment that the benefits of the GCC should exceed the cost of implementation.

1 See Exhibit 1 for an illustration of this concept.

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September 21, 2018 Page 2

Question 1: We agree that the types of groups noted in the exposure should be exempt from the GCC.

Question 2: We do not have a position on this question. Question 3: We strongly support the notion that materiality should be based on the judgement of the filing company and not based on a formulaic approach, which may lead to the arbitrary result of companies being excluded one year and included in other years. While we believe that it is reasonable for a lead state regulator to challenge exclusions based on materiality, we do not believe we need prescriptive and burdensome regulations around materiality. Question 4: As referenced above, after the development of the inventory, our methodology diverges from the current exposure. In our preferred methodology, once the inventory is compiled, we would prepare a summary group capital report that groups together and aggregates entities with like regulatory standards. More specifically:

1. For US regulated entities, report an inventory of legal entities subject to RBC along with an aggregated RBC ratio.

2. For non-US regulated entities, report an inventory of material non-domestic legal entities, including actual capital, regulatory target capital, and the applicable local capital regime. Report an aggregate result for those entities under like regulatory regimes.

3. For material non-regulated entities, report an inventory of material non-regulated legal entities including GAAP capital.

4. For immaterial non-regulated Entities, either (1) group them together with total GAAP capital or (2) exclude them, based on managerial judgement, while allowing the lead state regulator to review and request additional information on excluded entities and/or request inclusion in an inventory.

In our view, the Schedule Y presents a strong foundation upon which to build a calculation based on our preferred approach – as well as the other approach currently under consideration. We would go one step further, however, and add an additional column to “Schedule 1”, which would be entitled “Entity Grouping” to designate how entities should be grouped for purposes of the summary group capital report referenced above. For the Working Group’s consideration, the attached illustration of the GCC (Exhibit 1) is an example of a report that would be provided to the lead regulator, along with the “Schedule 1” inventory which provides full transparency into all legal entities. We believe that our alternative promotes transparency, eliminates complexity, and removes the potential for distorting a holding company’s capital position. The adoption of this approach, in combination with a holding company’s ORSA report and other existing regulatory tools, will give the lead regulator a transparent view into relevant financial data for regulated entities and their non-regulated subsidiaries, affiliates or partners. We understand the desire for a single capital ratio across regulatory regimes as well as regulated and non-regulated entities; however, we do not think that this objective is achievable, desirable or advisable.

Question 5: We believe revenue is a better measure than written premium in this context. Written premium can be defined in multiple ways and has questionable regulatory value given that it cannot apply to non-insurance entities. Further, we would support including debt to give regulators visibility into where debt is held. While the treatment of senior debt was not expressly included in the July 20 exposure, we continue to oppose the proposal outlined in the working group’s most recent memo on this issue. However, we can support other options to provide regulators with a view into holding company debt. For example, we support providing regulators with debt-related data within the context of the inventory itself or providing our lead state with GAAP-audited financial information. It has recently come to our attention that the Working Group never

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intended to limit holding company debt and we hope that providing transparency will meet regulatory objectives.. Question 6: We do not have a position on this question. Question 7: We support the concept stated in 20ii and believe this paragraph should remain. Question 8: Yes. We believe that our alternative should be field tested. As we have stated on several occasions, the development of a single capital ratio that includes non-US and non-regulated entities will not accurately account for differences in regulatory regimes and risks to non-regulated entities. This will result in the reporting of unreliable information and will create competitive disadvantages among holding company systems. We believe these risks outweigh any potential advantages that may exist in trying to aggregate capital ratios of holding company systems across regulatory regimes and applicable to non-regulated entities. Conversely, our approach eliminates all of these risks while providing regulators with complete transparency into holding company capital and debt, which we believe will provide lead states with the quantitative regulatory tool the NAIC is committed to developing. Thank you again for this opportunity to provide comments. We look forward to our continued dialogue on this issue. If you have any questions or would like to discuss our comments further, please do not hesitate to contact us. Sincerely, Amy Lazzaro

Regulatory Affairs, Cigna [email protected]

Gregg Martino

Regulatory Affairs, Aetna [email protected]

Christine Cappiello State Government Affairs, Anthem [email protected]

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cc: Commissioner Katie Wade Kathy Belfi, Director of Financial Regulation Lou Felice, NAIC

Dan Daveline, NAIC

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54

Illustration - Group Capital Summary Exhibit I"Schedule 1" , the complete inventory, would be the basis for creating this summary level report, which simply organizes the inventory and summarizes for easier to review

CapitalRequired

Capital

Ratio Actual to Required Regulation

Domestic Entities Subject to RBCregulated entity A 5,000 2,000 250% RBC list regulated entities subject to RBCregulated entity B 35,000 10,000 350% RBC some value to showing an aggregated RBC

regulated HMO entities 20,000 6,000 333% RBC Subtotal Regulated Domestic 60,000 18,000 333% RBC

International Entities Subject to Regulationregulatory entity of Canada A 3,000 800 375% LIMATregulatory entity of Canada B 4,000 1,000 400% LIMAT Subtotal Regulated Canada 7,000 1,800 389% LIMAT list material regulated non domestic entitiesregulatory entity of Korea 4,000 1,200 333% K- ICS there is value showing foreign entity capitalizationregulatory entity of China 2,000 500 400% C-ROSS relative to the local capital requirementregulated international entities 500 n/a n/a Subtotal Regulated International 11,500 n/a n/a

non regulated entity A 4,000 n/anon regulated entity B 3,000 n/a gives regulators list of largest non regulated entitiesnon regulated entity C 3,000 n/a (capital of the entity on a stand alone basis)Holding Parent Entity A 75,000 Holding Parent Entity B 70,000

non regulated entities - other 4,000 n/a (sum of remaining small, non regulated entities)

may make sense to group similar entities (example, this row may group 20 regulated HMO entities listed

separately in schedule 1)

Entity Name

Non Regulated Entities (list entities above a certain size)

Non Regulated Entities (group entities below a certain size)

Attachment 2

55


56

September 21, 2018


Florida Office of Insurance Regulation

Chairman, NAIC Group Capital Calculation (E) Working Group

via email to [email protected] & [email protected]

Re: Exposed Memo “Scope of Group/Non-Insurance Testing,” June 26, 2018


A coalition of 11 companies (Brighthouse Financial, Global Atlantic Financial Group,

Jackson National, Lincoln Financial, National Life Group, Ohio National, Pacific Life,

Principal Financial Group, Protective Life, Reinsurance Group of America, and

Transamerica, collectively “the Coalition”) appreciates the opportunity to comment on the

Working Group document exposed on 08-07-18 related to a proposed approach to scope of

the group and non-insurance testing.

The Coalition appreciates the clarifications about the Group Capital Calculation (GCC)

provided by the NAIC’s August 16 letter to Senators Tim Scott and Mike Rounds. As we

understand it, the letter affirms that while both the GCC and Risk Based Capital (RBC) are

intended to be tools that assess insurer solvency, the GCC is not a new capital requirement.

Regardless, the Coalition continues to believe that the foundational principle for the GCC

should be conformity to domestic state legal entity rules, without adjustment. State

regulators should avoid creating a complex and costly “dual system,” with one set of

solvency measures at the legal entity level and a somewhat different set of measures at the

group level.

A dual system would negate many of the benefits of creating an aggregation-based group

capital measure. It would open the door to re-deliberating a host of well-vetted topics. It

could require resource-intensive efforts to maintain and reconcile the two systems.

Moreover, the ambiguity created by a dual system would lead to confusion about the

financial strength of insurers. This would negatively impact regulators, analysts, investors,

financing providers, and insurance policyholders. The ambiguity of a dual system could

even erode the efficacy of both the GCC and RBC by calling into question the GCC’s

compliance with the Covered Agreement and/or eroding the regulator’s ability to take

formal action on a legal entity RBC basis. The tools used by state regulators need to

harmonize and work together.

The Coalition’s foundational principle also upholds the core strength of the state-based

regulatory system. Outside observers—such as those at the federal and international

levels—will expect consistency between legal entity and group metrics. They would

struggle to understand the rationale for discrepancies. They would be perplexed as to why

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57

2

the GCC might accept only a portion of the U.S. state-based solvency system. The Working

Group should ensure that the GCC—intended to strengthen the credibility of the state-

based system—does not inadvertently undermine confidence in existing state-based

regulation of insurance legal entities, which has served insurance consumers and the

industry well over the years.

The current consultation addresses issues related to scope and the treatment of non-

insurance entities. The Coalition’s foundational principle addresses a subset of those

issues. Specifically, for groups covered by the GCC, the GCC should include all subsidiaries

of U.S. insurance legal entities in the manner prescribed by legal entity RBC. Alternatives

should not be considered without the involvement of the relevant NAIC working groups.

We anticipate that the GCC will, over time, identify potential improvements to the RBC

framework. For example, the GCC may lead to refinement of the RBC treatment of non-

insurance entities. The NAIC should address perceived shortcomings through

improvements to the applicable RBC formulas, not by creating a dual system of solvency

regulation.

The Coalition appreciates the opportunity to comment and we look forward to working

with regulators to create a GCC that fully supports the U.S. system of state-based regulation.

Sincerely,

Brighthouse Financial

Global Atlantic Financial Group

Jackson National

Lincoln Financial

National Life Group

Ohio National

Pacific Life

Principal Financial Group

Protective Life

Reinsurance Group of America

Transamerica

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TEXAS DEPARTMENT OF INSURANCE 333 Guadalupe, Austin, Texas 78701 * PO Box 149104, Austin, Texas 78714-9104 (512) 676-6000 I (800) 578-4677 I TDl.texas.gov I @TexasTDI

Commissioner David Altmaier, Chair Group Capital Calculation (E) Working Group National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, Missouri 64106-2197


September 21, 2018

The Texas Department of Insurance (TDI) offers the following comments to the questions raised by NAIC staff which were included in the exposure for Scope and non-insurance testing exposed dated August 7, 2018:

Question 1- For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should a group assume that groups with GroupWide Supervisors in current qualified jurisdictions (e.g., Bermuda, Japan, Switzerland, Ireland and the EU (including the UK, France and Germany specifically) would not be required to complete the NAIC Group Capital Calculation (GCC), and therefore influence their decision in volunteering? If yes, are further changes to paragraph 13 needed?

Response: All volunteers for the GCC field testing should be welcome without regard to the group-wide supervisor's standing as a Qualified Jurisdiction (QJ) or Reciprocal Jurisdiction (RJ). The application of scope for field testing should not be narrowed based upon the whether the group wide supervisor is a QJ or RJ. However, this question seems to confuse applicability of the GCC vs volunteers for field testing of the GCC.

Question 2 - For purposes of field testing, since a decision to participate in field testing is voluntary between an Insurance Group and its lead state, should paragraph 14 be deleted?

Response: Consider amending Paragraph 14 as follows: "A U.S. based group is exempt from GCC if it is not required to file an ORSA with its Lead State regulator and does not have international insurance operations." There should be other considerations on the capital calculation in the ORSA.filing if completed on a group basis.

Question 3 - For purposes of field testing, do regulators or members of the industry believe any further definitions of materiality should be added to the "Guiding Principles and Steps to Determine the Scope of Application" to increase consistency in application between groups and lead-states?

Response: No additional comments at this time.

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Question 4 - The attached includes a proposed list of items for an inventory (Schedule 1), which already contemplates within paragraph 25 that the group and the lead state should work together to determine how the inventory of companies (but including all) such should be aggregated, but are there other alternatives such as those proposed by Cigna/Aetna (US regulated entities, NonUS regulated entities, Material Non-Regulated Entities) or some variation of Schedule Y that can be used instead to avoid duplicative reporting?

Response: No additional comments at this time.

Question 5 - For purposes of maximizing the usefulness of field testing and the calculation, NAIC staff proposes adding elements to the Schedule 1 for "Written Premiums" and "Debt." Are you opposed to this additional information, or do you have any proposed definitions that you think are necessary to be included with these, or any of the other items in Schedule 1 to assist with Field Testing (such definitions may be submitted at a later date)?

Response: It would be helpful to expand the written premium description to include direct, gross, ceded, and/or net as intended.

Question 6 - Should groups that will submit a group capital calculation to the Federal Reserve be allowed to be exempt from the NAIC calculation, and therefore not considering volunteering for Field Testing, and a decision made after testing?

Response: Volunteers for field testing should be open to all wishing to participate and groups with international insurance operations should be encouraged to participate. However, groups subject to FRB oversight, should be exempt from the GCC.


Response: U.S. Groups where the UPC is an underwriting company (insurer) with !!Q

international insurance operations should be allowed to submit its annual RBC report as an acceptable alternative.

Question 8 - Should the participating groups and lead states be able to consider other tests that provide information that helps inform the Working Group on whether other considerations to the proposed calculation are appropriate (e.g. that the amount of business within the group's foreign insurers is so small [e.g., some of the health insurers] that the impact of the scalars can be shown to be immaterial, and utilized to develop thresholds that could be used for eliminating this requirement if met)?

Response: Yes.

Attachment 2

60

Respectfully,

t'<}-�A/1-� � Mike Arendall

µ.,, U ,

Assistant Chief Analyst /7Yl,(1µ1.....,,1 (Financial Analysis Section

Attachment 2

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62

1 Corporate Way

Lansing, MI 48951

Phone: 615/861‐5503

[email protected]

Brad Harris

Chief Risk Officer

September 21, 2018

Commissioner David Altmaier Chairman, NAIC Group Capital Calculation (E) Working Group Florida Office of Insurance Regulation

200 E. Gaines St.

Tallahassee, FL 32399

Re: Scope of Group/Non‐Insurance Testing Memo, Exposure Dated August 7, 2018


Jackson National Life Insurance, the largest provider of individual annuities in the United States1,

appreciates the opportunity to comment on the Working Group’s Exposure Draft dated August 7, 2018.

As a member of the American Council of Life Insurers (ACLI), which consists of 290 member companies

dedicated to providing products and services that promote consumers’ financial and retirement security,

we write to strongly support ACLI’s comment letter and its proposed revisions to the Exposure Draft.

1 Jackson National Life Insurance Company ("Jackson") and its U.S. affiliates employ more than 4,500 workers, who manage more than $215 billion in fixed and variable annuities for over 1.7 million investors.

Jackson's insurance products are offered by nearly 150,000 financial advisers affiliated with more than 600 independent broker‐dealers, wirehouses, financial institutions and independent insurance agents. Thus, Jackson has a unique perspective as a leading manufacturer of annuity products.

According to LIMRA's Secure Retirement Institute, Jackson has been the largest provider of individual annuities in the United States since 2012. See LIMRA Secure Retirement Institute, US Individual Annuity Sales Survey, 2012, http://www.limra.com/uploadedFiles/limracom/Posts/PR/Data Bank/ PDF/AnnuityCompanyRankings‐Q42012.pdf; LIMRA Secure Retirement Institute, US Individual Annuity Sales Survey, 2013, http://www.limra.com/uploadedFiles/limra.com/LIMRA Root/Posts/PR/Data Bank/ PDF/Annuity‐CompanyRankings‐2013‐Q4.pdf; LIMRA Secure Retirement Institute, US Individual Annuity Sales Survey, 2014, http://www.limra.com/uploadedFiles/limra.com/LIMRA Root/Posts/PR/Data Bank/ PDF/2014 yearend AnnuityCompanyRankings.pdf; LIMRA Secure Retirement Institute, US Individual Annuity Sales Survey, 2015, http://www.limra.com/uploadedFiles/limra.com/LIMRA Root/Posts/PR/ Media/PDFs/2015‐Top‐20‐ Rankings.pdf; LIMRA Secure Retirement Institute, US Individual Annuity Sales Survey, 2016, http://www.limra.com/Posts/PR/Data Bank/ PDF/2016‐Q4‐Annuity‐Company‐Rankings.aspx.

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Commissioner David Altmaier Florida Office of Insurance Regulation Chairman, NAIC Group Capital Calculation (E) Working Group September 21, 2018 Page 2

Jackson has been encouraged by the NAIC’s willingness to engage with the industry and welcomes the

opportunity to highlight the following principles, outlined in ACLI’s submission, that we believe should

guide the NAIC as it works to develop the Group Capital Calculation (GCC).

First, the GCC must recognize and validate the United States’ state‐based insurance financial

regulation. The U.S.’ system of state‐based insurance regulation and its risk‐based capital (RBC) regime

has been proven effective throughout its employment. Therefore, the subsidiaries of U.S. insurance legal

entities should follow their treatment in Risk‐Based Capital to ensure that the GCC for these entities is

consistent with state law. For instance, the group capital calculation for an insurance group with an RBC‐

filer as its ultimate controlling person and its RBC outcome should be identical. The GCC should not

diverge from the existing regulatory framework, including recognition of the use of properly regulated

captives and permitted and prescribed practices.

Second, Jackson stresses the importance of a “one group/one capital standard” paradigm and is

supportive of an exemption for foreign domiciled groups. This is important to prevent groups already

subject to a group capital requirement from being forced to comply with a second framework.

Finally, Jackson agrees with the NAIC’s view, as explained in its August 2018 letter to Congress, that the

GCC should be a tool that will act as an “early warning signal” and not as a new capital requirement –

nor should it be used as a means of comparing insurance groups. This will help ensure that any NAIC‐

designed GCC serves as an instrument that supports and reaffirms the U.S. state‐based insurance

regulatory system and does not supersede it.

Thank you for your consideration of our comments on the Working Group’s Exposure Draft as well as our

strong support for ACLI’s comment letter. We appreciate the opportunity to provide our thoughts and

perspective and hope they are helpful as the NAIC works toward development of a GCC. Please contact

me with any questions or if we can provide additional information.

Sincerely,

Brad Harris Chief Risk Officer

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September 21, 2018

By email to Dan Daveline

Commissioner David Altmaier, Chairman Group Capital Calculation (E) Working Group Commissioner, Office of Insurance Regulation State of Florida The Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0305


UNITEDHEALTH GROUP

Thank you for the opportunity to provide input on the Working Group's August 17 exposure on

Scope and Non-Insurance Testing with Questions in the context of the proposed Group Capital

Calculation (GCC). We appreciate being provided the opportunity to comment on these questions, although it appears that the questions in this exposure are focused on the detailed

specifics of field testing. In our view, any discussion of field testing is premature given the

number of outstanding issues that are still under development and directly impact the nature

and extent of field testing.

Among the open issues, the resolution of which would impact field testing, are:

• Treatment of senior debt in a GCC has not yet been clarified in any public exposure

despite comments from a number of stakeholders;• The uniform application of the GCC as it relates to scope and consolidation;• The application of scalars and the concept of a single group ratio; and,

• The treatment of centralized internal services/functions versus external providers.

The exposed limitation on capital funded by senior debt of 20% would unfairly disadvantage groups with health insurers and non-financially regulated businesses as compared to other

entities that solely deliver non-insurance related health care services.

Field testing is also premature given that Insurance Commissioners do not regulate stand-alone primary care practices, surgical care or urgent care clinics, technology-based health services or

pharmacy distribution activities. Absence of regulatory activity in these areas alone suggests

that a GCC that includes these entities is beyond the authority of Insurance Commissioners.

Equally important, there is no risk to the financial system when these same non-financially regulated businesses reside within a group that includes a health insurer, nor has any analysis

been presented that suggests otherwise.

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65

UNITEDHEALTH GROUP

We are also not aware of any evidence presented to justify a single uniform approach to a GCC

for all lines of insurance. As we have noted in prior comment letters, health insurance is

significantly differentiated from other types of insurers, as claim reserves typically liquidate to

cash in under two months; group loss ratios and reserve development are very stable with no

history of catastrophic failure; there is no dependence on investment results to pay claims; there

is no risk of geographic contagion, and health care delivery and financing in the United States is

unlike any other country in the world.

Our perspective on the critical differences between health and other lines of insurance is shared

by independent analysts and capital markets, which view health insurance differently than other

lines of insurance both in the way health insurers operate and how capital is structured for

managed care organizations. Health insurance group operations facilitate higher leverage and

lower tangible net worth than traditional life insurers (Life) or property & casualty insurers (P&C).

Despite this, the equity price/book ratios for health insurers are higher than those of Life and

P&C, health insurers maintain higher credit ratings than Life and P&C, and health insurers

achieve lower bond, bank loan and credit default swap credit spreads than Life and P&C.

Similarly, investment indexes classify health insurers differently than traditional insurers.

Standard & Poor's classifies health insurers as "Health Care" - which includes pharmaceutical

and device manufacturers - not "Financials" like Life and P&C insurers. Similarly, the Barclay

U.S. Bond Aggregate includes health insurers in "Consumer, Non-Cyclical" and the Bloomberg

Industry Classification System includes health insurers in "Health Care," under Corporate, rather

than under Financials. Each of these independent measures validates that health insurance is

different from other lines of insurance, and supports our strongly held position that health

insurance should be excluded from any GCC. Absent clarification or documentation of unique

risks in health insurance it seems premature to move to field testing in a one-size-fits-all

approach to the GCC.

What began for the National Association of Insurance Commissioners (NAIC) as the

development of a Group Capital standard focused on internationally active long-tail insurance

groups tied to the financial services sector has expanded significantly and now seeks to include U.S. health insurers that were never contemplated as being subject to a Group Capital standard

by either international or federal policymakers. As recently as July 2018, the NAIC wrote that

"The ultimate goal is for the Group Capital Calculation to be considered the outcome equivalent

to the international capital standard currently under development at the IAIS." These IAIS

international standards do not apply to health insurance.

Indeed, we are not aware of any international or federal intent - including Dodd-Frank or the

E.U./U.S. Covered Agreement - to apply a Group Capital standard to groups with health

insurers. Nor has the NAIC presented any research or evidence during its consideration of a

GCC demonstrating any deficiencies in the current state-based system of regulation to justify

imposing a GCC on groups with health insurers.

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UNITEDHEALTH GROUP

At a time when health care is challenged by rising costs and lack of access, our concern is that

the application and enforcement of statutory analysis to non-financially regulated entities will

deter investors and management from the current path of a more integrated, efficient health

care system. Put simply, there are real capital markets implications for the NAIC's approach to

a GCC, implications that dictate the exclusion of health insurance from a GCC.

Thank you, once again, for the opportunity to provide our comments. We are available to

discuss this issue further at your convenience.

Sincerely,

Peter M. Gill

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