materials - property and casualty risk-based capital (e

Date: 10/20/21

Virtual Meeting (in lieu of meeting at the 2021 Fall National Meeting)

PROPERTY AND CASUALTY RISK‐BASED CAPITAL (E) WORKING GROUP Monday, October 25, 2021 2:00 – 3:00 p.m. ET / 1:00 – 2:00 p.m. CT / 12:00 – 1:00 p.m. MT / 11:00 a.m. – 12:00 p.m. PT

ROLL CALL

Tom Botsko, Chair Ohio Anna Krylova New Mexico Charles Hale Alabama Halina Smosna New York Wanchin Chou Connecticut Will Davis South Carolina Robert Ridenour Florida Miriam Fisk Texas Judy Mottar Illinois Adrian Jaramillo Wisconsin

NAIC Support Staff: Eva Yeung

AGENDA

1. Consider Adoption of its Summer National Meeting Minutes—Tom Botsko (OH) Attachment A

2. Hear an Update from the Catastrophe Risk (E) Subgroup on the Developmentof the Wildfire Risk Charge—Wanchin Chou (CT)

3. Consider Exposure of a Draft Recommendation to the Restructuring Mechanisms Attachment B (E) Subgroup—Tom Botsko (OH)

4. Consider Exposure of Proposal 2021‐14‐P (R3 Factor Adjustment)—Tom Botsko (OH) Attachment C

5. Hear Updates on Current Property/Casualty (P/C) Risk‐Based Capital (RBC) Projects Attachment D from the American Academy of Actuaries (Academy)—David Traugott (Academy)

6. Discuss Any Other Matters Brought Before the Working Group—Tom Botsko (OH)

7. Adjournment

W:\National Meetings\2021\Fall\Agenda\PCRBCWG.docx

This page intentionally left blank.

Draft Pending Adoption Attachment Six

Capital Adequacy (E) Task Force 07/28/21

© 2021 National Association of Insurance Commissioners 1

Draft: 07/26/21

Property and Casualty Risk-Based Capital (E) Working Group Virtual Meeting (in lieu of meeting at the 2021 Summer National Meeting)

July 22, 2021

The Property and Casualty Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met July 22, 2021. The following Working Group members participated: Tom Botsko, Chair (OH); Wanchin Chou (CT); Robert Ridenour (FL); Judy Mottar (IL); Anna Krylova (NM); Halina Smosna (NY); Miriam Fisk (TX); and Randy Milquet (WI).

1) Adopted its June 9 and April 27 Minutes

Mr. Botsko said the Working Group met June 9 and April 27 and took the following action: 1) adopted proposal 2021-05-P (Underwriting Risk Line 1 Factors); 2) adopted proposal 2021-08-P (P/C Bond Factors and Instructions); 3) adopted proposal 2021-03-P (Credit Risk Instruction Modification); 4) forwarded the response to the Restructuring Mechanisms (E) Subgroup; and 5) heard a presentation on property/casualty (P/C) risk-based capital (RBC) underwriting risk factors from the American Academy of Actuaries (Academy).

Mr. Chou made a motion, seconded by Mr. Milquet, to adopt the Working Group June 9 (Attachment Six-xx) and April 27 minutes (Attachment Six-xx). The motion passed unanimously.

2. Adopted the Report of the Catastrophe Risk (E) Subgroup

Mr. Chou said the Subgroup met July 15 and took the following action: 1) adopted its June 1 and April 26 minutes, which included the following action: a) exposed and forwarded the response to a request for proposed changes to the P/C RBC catastrophe component; b) heard an update from its Catastrophe Model Technical Review Ad Hoc Group; and c) discussed the possibility of allowing additional third-party models or adjustments to the vendor models; 2) adopted its 2021 working agenda items; 3) received an update from its Catastrophe Model Technical Review Ad Hoc Group and 4) heard a presentation from AIR Worldwide on the wildfire model.

Mr. Chou made a motion, seconded by Ms. Smosna, to adopt the report of the Catastrophe Risk (E) Subgroup. The motion passed unanimously.

3. Adopted the 2021 P/C RBC Newsletter

Mr. Botsko said each year, NAIC staff incorporate all adopted current year proposals into the current year (RBC) formula. The 2021 changes have been incorporated into the P/C RBC newsletter.

Mr. Chou made a motion, seconded by Mr. Milquet, to adopt the 2021 P/C RBC newsletter (Attachment Six-D). The motion passed unanimously

4. Discussed 2020 P/C RBC Statistics

Mr. Botsko said the results of the 2020 P/C RBC report compiled by NAIC staff were fairly consistent with prior years. There were 24 companies that triggered the trend test; only 1.7% of the total companies fell under the 200% RBC ratio, which is slightly less than the historical failing percentage of around 2.3%. Overall, the asset risk has slightly increased over time.

The Working Group unanimously approved the 2020 P/C RBC statistics to be posted to the Working Group’s web page.

5. Discussed its 2021 Working Agenda

Mr. Botsko summarized the changes to the Working Group’s 2021 working agenda, which included the following substantial changes: 1) changing the completion date of the “evaluate the possibility of allowing additional third-party models or adjustments to the vendor models to calculate the cat model losses,” “evaluate if changes should be made to the P/C formula to better assess companies in runoff,” “evaluate the underwriting risk line 1 factors in the P/C formula,” and “evaluate R3

Attachment A

Draft Pending Adoption Attachment Six

Capital Adequacy (E) Task Force 07/28/21

© 2021 National Association of Insurance Commissioners 2

adjustment for operational risk charge” items; and 2) deleting the “consider eliminating the different treatment of uncollateralized reinsurance recoverable from authorized versus unauthorized, unrated reinsurers” and “remove the embedded 3% operational risk component contained in the reinsurance contingent credit risk factor of Rcat” items from the working agenda.

Mr. Chou made a motion, seconded by Mr. Milquet, to adopt the Working Group’s 2021 working agenda. The motion passed unanimously.

6. Heard Updates on P/C RBC Underwriting Risk Projects from the Academy

David Traugott (Academy) provided a status on different projects being conducted by the Academy that all related to calibrating various components of the premium risk and reserve risk in the P/C RBC formula. He said all the Academy projects are described in three different reports. The first report, which was distributed during the Spring National Meeting provided indicated premium and reserve risk line 4 factors based on an analysis of data through 2017. Mr. Traugott also said the second report, which will be shared with the Working Group by the end of 2021, related to updating the investment income adjustment factors (IIAs) in the RBC formula line 7 and line 8 for premium risk and reserve risk, respectively. As many of the line 4 factors are decreasing, Mr. Traugott said the Academy recommended the Working Group consider implementing the line 4 factors along with updated investment income adjustment factors to offset the decreases. Lastly, Mr. Traugott stated that the concentration factors for the underwriting premium and reserve risks have not been reviewed since the RBC formula was first implemented. The Academy planned to provide the last report, which is related to updating these factors during the first half of 2022. Furthermore, Mr. Traugott said there are two additional analyses requested by the Working Group, which are related to catastrophe adjustment factors and industry average development/loss ratios. Scott Williamson (Reinsurance Association of America—RAA) thanked the Academy for the improvements made to the calibration methodology for the R4 and R5 line 4 factors. Those improvements resolved the concerns RAA raised several years ago about the prior methodology. Mr. Williamson said the results from the recent update of the factors underscore that the improvements are working, as evidenced by the decreased volatility in the indicated change by line. He also asked the Academy to continue working to prevent double counting of CAT losses between underwriting risk and Rcat. With respect to proposed changes to the investment income adjustment factors, he recommended that the Academy consider using the discount method, corporate bond index yield curve segment rates, and payment patterns that are now prescribed for tax loss reserve discounting under the federal Tax Cuts and Jobs Act. He said these rates better approximate the industry’s investment yield and bond portfolio duration. Ralph Blanchard (Travelers) advised the Academy that the preliminary estimate of losses from Property Claims Services (PCS) may not be the same as the final estimate of losses. Mr. Traugott anticipated that the Academy will complete the review before mid-2022.

Mr. Botsko said he appreciates what all the Academy does for the Working Group. He said the Working Group will provide the needed support to ensure the projects are completed in time.

Having no further business, the Property and Casualty Risk-Based Capital (E) Working Group adjourned.

W:\National Meetings\2021\Summer\TF\CapAdequacy\PCRBC\Att01_07_22propertyrbcwg.doc

Attachment A

MEMORANDUM

TO: David Smith (VA) and Doug Stolte (VA), Co‐Chairs of the Restructuring Mechanisms (E) Subgroup Judith L. French (OH), Chair of the Capital Adequacy (E) Task Force

FROM: Tom Botsko (OH), Chair of the Property and Casualty Risk‐Based Capital (E) Working Group

DATE: Oct. 25, 2021

RE: Response to Request for Input Regarding Runoff Companies

The Property and Casualty Risk‐Based Capital (E) Working Group formed a small ad hoc group to discuss this topic and try to determine the best course of action. The Restructuring Mechanisms (E) Subgroup requested that the Working Group take the lead in addressing the charge to “consider the need to make changes to the RBC formula to better assess the minimum surplus requirements for companies in runoff. “

After several discussions about what adjustments should be made to the risk‐based capital (RBC) formula, the ad hoc group concluded that the best course of action is to monitor these companies through the state analysis and exam team functions. The characteristics and financial conditions of these runoff companies are very diverse, and it would be difficult to incorporate these varied characteristics into one adjusted formula. Many international countries monitor these companies through the analysis and exam processes and do not have a separate RBC formula.

Of the 2020 RBC filers, we identified 111 companies out of 2,477 that have the characteristics of a runoff company. Most of these companies have an RBC ratio greater than 300%. Five are below 200%.

During a series of discussions, the ad hoc group agreed that a runoff company, voluntary or involuntary, should include the following characteristics: 1) no renewing of policies for at least 12 months; 2) no new direct or new assumed business; and 3) no additional runoff blocks of business. In addition, the amount of renewal premium to reserves has also been identified as a characteristic of these types of companies when this ratio is de minimis.

The ad hoc group also recommends that a general and RBC interrogatory be added for the purpose of identifying a runoff company. The domiciliary state shall have the ability to verify the interrogatory response during the annual company financial analysis process.

As the ad hoc group considered various types and conditions of runoff companies, it became apparent that while many of these companies share the characteristic of very long tail liabilities, there are other characteristics of these companies that are so diverse that it made it difficult to summarize them into their own RBC formula.

Attachment B

The ad hoc group reviewed several international perspectives of runoff companies. The international treatment of runoff companies is handled through the Analysis and Exam Teams. The ad hoc group agrees that a similar treatment of runoff companies is warranted.

The ad hoc group has some recommendations for the Working Group regarding the RBC instructions, specifically to the runoff companies. These include the following:

Remove the Trend Test from the RBC calculation. These are runoff companies, and thepossible retrospective premium should not complicate the already diverse situation.

Remove the charge for premium growth if the company is no longer writing business.

Remove Rcat from the formula. Because one of the characteristics of a runoff company is tonot have written any new business for at least 12 months, we believe this short‐term liabilityrisk is not warranted.

As the ad hoc group shares its findings with the other two RBC working groups, we expect to hear other perspectives regarding the unique conditions of runoff companies from the Life Risk‐Based Capital (E) Working Group and the Health Risk‐Based Capital (E) Working Group.

Please contact Eva Yeung, NAIC staff support for the Property and Casualty Risk‐Based Capital (E) Working Group, at [email protected] with any questions.

Cc: Robin Marcotte; Dan Daveline; Jane Barr; Eva Yeung

Attachment B

2019 National Association of Insurance Commissioners

Capital Adequacy (E) Task Force RBC Proposal Form

[ ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group

[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] Operational Risk (E) Subgroup

[ ] C3 Phase II/ AG43 (E/A) Subgroup [x ] P/C RBC (E) Working Group [ ] Longevity Risk (A/E) Subgroup

DATE: 10/1/2021

CONTACT PERSON: Eva Yeung

TELEPHONE: 816-783-8407

EMAIL ADDRESS: [email protected]

ON BEHALF OF: P/C RBC (E) Working Group

NAME: Tom Botsko

TITLE: Chair

AFFILIATION: Ohio Department of Insurance

ADDRESS: 50 W. Town Street, Third Floor – Suite 300

Columbus, OH 43215

FOR NAIC USE ONLY

Agenda Item # 2021-14-P

Year 2022

DISPOSITION

[ ] ADOPTED

[ ] REJECTED

[ ] DEFERRED TO

[ ] REFERRED TO OTHER NAIC GROUP

[ ] EXPOSED

[ ] OTHER (SPECIFY)

IDENTIFICATION OF SOURCE AND FORM(S)/INSTRUCTIONS TO BE CHANGED

[ ] Health RBC Blanks [ ] Property/Casualty RBC Blanks [ ] Life and Fraternal RBC Instructions

[ ] Health RBC Instructions [ x ] Property/Casualty RBC Instructions [ ] Life and Fraternal RBC Blanks

[ ] OTHER ____________________________

DESCRIPTION OF CHANGE(S) The proposed change would remove the embedded 2% operational risk contained in the R3 credit risk component.

REASON OR JUSTIFICATION FOR CHANGE **

When the reinsurance recoverable credit risk charge was implemented in 2018, a load of operational risk was embedded in the charge. Now, the operational risk is separately addressed in RBC as a standard-alone capital add-on, it results with duplication of the operational risk charge on the reinsurance recoverable component. This proposal intends to eliminate the double-counting effect of the operational risk charge on the component.

Additional Staff Comments:

___________________________________________________________________________________________________ ** This section must be completed on all forms. Revised 2-2019

Attachment C

PR012 – Credit Risk for Receivables

Reinsurance Recoverables

Detail Eliminated To Conserve Space

Description Secure 1 Secure 2 Secure 3 Secure 4 Secure 5 Vulnerable 6 or Unrated

A.M. Best A++ A+ A A- B++, B+ B, B-, C++, C+, C, C-, D, E, F

Standard & Poor’s AAA AA+, AA, AA- A+, A A- BBB+, BBB, BBB- BB+, BB, BB-, B+, B, B-, CCC, CC, C, D, R

Moody's Aaa Aa1, Aa2, Aa3 A1, A2 A3 Baa1, Baa2, Baa3 Ba1, Ba2, Ba3, B1, B2, B3, Caa, Ca, C

Fitch AAA AA+, AA, AA- A+, A A- BBB+, BBB, BBB- BB+, BB, BB-, B+, B, B-, CCC, CC, C, D, R

Collateralized Amounts Factors 1.6% 2.1% 2.8% 3.0% 3.0% 3.0%

Uncollateralized Amounts Factors

1.6% 2.1% 2.8% 3.3% 5.1% 12.0%

Detail Eliminated To Conserve Space

Reinsurer Designation Equivalent Rating Category and Corresponding Factors—For RBC R3 Credit Risk Charge

Attachment C

MCL ACL RAL CAL Trend Test No Action Total

MCL 9 9

ACL 2 2

RAL 1 2 3

CAL 1 13 14

Trend Test 2 22 24

No Action 1 2 2,420 2,423

Total 9 3 4 15 24 2,420 2,475


MCL 6 6

ACL 1 1

RAL 2 2

CAL 6 6

Trend Test 1 5 6

No Action 1 236 237

Total 6 1 3 7 5 236 258


MCL 3 3

ACL 0

RAL 0

CAL 1 5 6

Trend Test 1 8 9

No Action 1 761 762

Total 3 0 1 6 9 761 780


MCL 0

ACL 1 1

RAL 1 1

CAL 0

Trend Test 5 5

No Action 1 578 579

Total 0 2 0 0 6 578 586


MCL 0

ACL 0

RAL 0

CAL 2 2

Trend Test 2 2

No Action 430 430

Total 0 0 0 2 2 430 434


MCL 0

ACL 0

RAL 0

CAL 0

Trend Test 1 1

No Action 267 267

Total 0 0 0 0 1 267 268


MCL 0

ACL 0

RAL 0

CAL 0

Trend Test 1 1

No Action 148 148

Total 0 0 0 0 1 148 149

20

20

RB

C A

ctio

n

Leve

l un

de

r

Alt

ern

ativ

e R

BC

Form

ula

(Companies with TAC Greater Than $1 Billion)

2020 RBC Action Level under Current RBC Formula

20

20

RB

C A

ctio

n

Leve

l un

de

r

Alt

ern

ativ

e R

BC

Form

ula

(Companies with TAC Between $5 and $25 MIllion)


20

20

RB

C A

ctio

n

Leve

l un

de

r

Alt

ern

ativ

e R

BC

Form

ula

(Companies with TAC Between $75 Million and $250 Million)


20

20

RB

C A

ctio

n

Leve

l un

de

r

Alt

ern

ativ

e R

BC

Form

ula

(Companies with TAC Bewteen $250 Million and $1 Billion)


20

20

RB

C A

ctio

n

Leve

l un

de

r

Alt

ern

ativ

e R

BC

Form

ula


2020 P&C RBC - Comparison of Action LevelsCurrent RBC Action Levels vs Alternative RBC Action Level

Alternative RBC: 2% Reduction on Reinsurance Recoverable RBC Charge for ALL Reinsurance Designation Equivalents

(Excluding Companies with Negative TAC)


20

20

RB

C A

ctio

n

Leve

l un

de

r

Alt

ern

ativ

e R

BC

Form

ula

(Companies with TAC Between $0 and $5 MIllion)


20

20

RB

C A

ctio

n

Leve

l un

de

r

Alt

ern

ativ

e R

BC

Form

ula

(Companies with TAC Between $25 Million and $75 Million)

Attachment C

RBC Ratio Change\TAC Range $0 to $5 $5 to $25 $25 to $75 $75 to $250 $250 to $1,000 Over $1,000 Total

Less than -50% 0 0 0 0 0 0 0

-50% to -25% 0 0 0 0 0 0 0

-25% to -15% 0 0 0 0 0 0 0

-15% to -5% 0 0 0 0 0 0 0

-5% to 5% 227 662 494 381 249 140 2,153

5% to 15% 12 56 33 22 9 8 140

15% to 25% 9 21 15 11 2 58

25% to 50% 5 18 21 12 5 1 62

Greater than 50% 5 23 23 8 3 62

Subtotal 258 780 586 434 268 149 2,475

TAC Range ($ Million) $0 to $5 $5 to $25 $25 to $75 $75 to $250 $250 to $1,000 Over $1,000 Total

R3 - Current 71,884,508 267,078,272 829,927,624 1,471,721,675 1,935,441,255 5,794,628,606 10,370,681,940

R3 - Alternative 56,439,676 183,797,021 536,125,852 916,477,625 1,278,922,632 4,052,194,696 7,023,957,502

Percentage Change -21.5% -31.2% -35.4% -37.7% -33.9% -30.1% -32.3%

R4 - Current 394,872,924 798,332,703 2,428,351,877 7,678,683,209 19,336,240,504 99,340,612,630 129,977,093,847

R4 - Alternative 385,941,326 773,790,796 2,382,242,619 7,519,699,697 19,005,250,705 97,621,362,500 127,688,287,643


RBC After Covariance (incl. Oper Risk) - Current 562,635,300 1,914,873,807 5,366,308,507 14,478,094,005 36,933,609,966 314,404,511,521 373,660,033,106

RBC After Covariance (incl. Oper Risk) - Alternative 547,596,925 1,852,681,348 5,154,973,034 14,028,875,322 36,390,326,203 312,701,382,248 370,675,835,080


Alternative RBC: 2.0% Reduction on Reinsurance Recoverable RBC Charge for ALL Reinsurance Designation Equivalents

Distributions of Percentage Change in 2020 RBC Ratios by Company Size under Alternative RBC FormulaAlternative RBC: 2.0% Reduction on Reinsurance Recoverable RBC Charge for ALL Reinsurance Designation Equivalents

Comparison of 2020 RBC Charge under Alternative RBC Formula

Attachment C

© 2021 National Association of Insurance Commissioners attC04_RBC_Schedule_F_Part_3_Factors_Proposal.docx 1

NAIC BLANKS (E) WORKING GROUP

Blanks Agenda Item Submission Form

DATE:

CONTACT PERSON: Eva Yeung

TELEPHONE: (816) 783-8407

EMAIL ADDRESS: [email protected] ON BEHALF OF: P/C RBC (E) Working Group

NAME: Tom Botsko

TITLE: Chair

AFFILIATION: Ohio Department of Insurance

ADDRESS: 50 W. Town Street, Third Floor – Suite 300

Columbus, OH 43215

FOR NAIC USE ONLY Agenda Item # Year 2022 Changes to Existing Reporting [ X ] New Reporting Requirement [ ]

REVIEWED FOR ACCOUNTING PRACTICES AND PROCEDURES IMPACT

No Impact [ X ] Modifies Required Disclosure [ ]

DISPOSITION [ ] Rejected For Public Comment [ ] Referred To Another NAIC Group [ ] Received For Public Comment [ ] Adopted Date [ ] Rejected Date [ ] Deferred Date [ ] Other (Specify)

BLANK(S) TO WHICH PROPOSAL APPLIES

[ X ] ANNUAL STATEMENT [ X ] INSTRUCTIONS [ ] CROSSCHECKS [ ] QUARTERLY STATEMENT [ ] BLANK

[ ] Life, Accident & Health/Fraternal [ ] Separate Accounts [ ] Title [ X ] Property/Casualty [ ] Protected Cell [ ] Other _______________________ [ ] Health [ ] Health (Life Supplement)

Anticipated Effective Date: Annual 2022

IDENTIFICATION OF ITEM(S) TO CHANGE Change the factors for Columns 35 and 36 of Schedule F, Part 3.

REASON, JUSTIFICATION FOR AND/OR BENEFIT OF CHANGE** When the reinsurance recoverable credit risk charge was implemented in 2018, a load of operational risk was embedded in the charge. Now, the operational risk is separately addressed in RBC as a standard-alone capital add-on, it results with duplication of the operational risk charge on the reinsurance recoverable component. This proposal intends to eliminate the double-counting effect of the operational risk charge on the component.

NAIC STAFF COMMENTS Comment on Effective Reporting Date: Other Comments: ___________________________________________________________________________________________________ ** This section must be completed on all forms. Revised 7/18/2018

Attachment C

© 2021 National Association of Insurance Commissioners attC04_RBC_Schedule_F_Part_3_Factors_Proposal.docx 2

ANNUAL STATEMENT INSTRUCTIONS – PROPERTY

SCHEDULE F – PART 3

CEDED REINSURANCE AS OF DECEMBER 31, CURRENT YEAR

Detail Eliminated to Conserve Space

Column 35 – Credit Risk on Collateralized Recoverables

Following is a table of factors applicable to the respective reinsurer designation equivalent categories in Column 34

Code 1 2 3 4 5 6

Factor 31.6% 42.1% 42.8% 53.0% 53.0% 53.0%

Column 36 – Credit Risk on Uncollateralized Recoverables

Following is a table of factors applicable to the respective reinsurer designation equivalent categories in Column 34

Code 1 2 3 4 5 6

Factor 31.6% 42.1% 42.8% 53.3% 75.1% 1412.0%

Detail Eliminated to Conserve Space

W:\QA\BlanksProposals\Proposals In Progress\RBC Schedule F Part 3 Factors\RBC_Schedule_F_Part_3_Factors_Proposal.doc

Attachment C

© 2021 American Academy of Actuaries. All rights reserved.May not be reproduced without express permission.

Presentation to NAIC Property and Casualty Risk-Based Capital (E) Working Group

David Traugott, MAAA, FCASChairperson, Academy Property and Casualty Risk-Based Capital

Committee

Discussion of Preliminary Results – For Discussion Only

National Association of Insurance Commissioners (NAIC) – October 25

Attachment D


2

Preliminaries

• This material is a work in progress• Results may change, perhaps materially, based on input from this

meeting and further review by this Committee• This material relates to premium risk only. An analysis of reserve

risk is underway.• The analysis uses Annual Statement, primarily Schedule P, data

and summaries of Confidential RBC Filing data evaluated at yearends through December 31, 2017. We also consider economicdata through June 30, 2021.

Attachment D


3

Background - Committee Work Status

• This discussion relates to Committee work on the InvestmentIncome Adjustment (IIA) Factors, Line 8 (Reserve Risk) and Line7 (Premium Risk) in the Reserve and Premium Risk pages(PR017 and PR018) of the RBC Formula.

• The analysis underlying this report uses the approach describedin the April 2021, Committee Report to the Working Group thatpresented indicated Line of Business (“LOB”) risk factors, “Line 4”in the Reserve and Premium Risk pages (PR017 and PR018) ofthe RBC Formula.

Attachment D


4

Background - IIAs

• In the RBC Formula, the Investment Income Adjustments (IIAs)reflect the fact that, in addition to capital, investment income onassets corresponding to loss reserves and future premium will beavailable to provide for adverse loss reserve development and/orinadequate premiums.

• The effect of the IIAs is to reduce the reserve and premium riskcharges by the amount of such investment income.

• This is the first review of the interest rate element of the IIAssince the RBC Formula was implemented in 1996.

Attachment D


5

Definitions

• Risk charge means the 87.5th percentile loss ratio plus 2017expenses minus 100%, i.e., the 87.5th percentile operating ratio.

• “Committee” = American Academy of Actuaries Property andCasualty Risk-Based Capital Committee.

• “Working Group” = National Association of InsuranceCommissioners (NAIC) Property and Casualty (P&C) Risk-BasedCapital (E) Working Group

Attachment D


6

Interest Rate History

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

PER

AN

NU

M R

ATE

CALENDAR YEAR

US TREASURY INTEREST RATES3 Year 5 Year

Attachment D


7

Risk Charge Sensitivity to Interest Rates

14.8% 14.5% 15.2% 16.0% 16.8% 17.7% 18.6%19.5%

20.4%21.4%

22.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Interest Rate

Attachment D


8

Alternative Payment Patterns – IIA at 5% Interest Rate

PREMIUM IIAs Set in 20105% interest rate (1) (2) (3) (4) (5) (6)

Current Prem 15-year 15-year 25-year 40-yearIndicated

changeLine IIA's 1986 FILT "academy" method 2017 FITL current method from current

(1) Homeowners & Farmowners 0.954 0.958 0.958 0.958 0.958 0.36%(2) Private Passenger Auto Liability 0.925 0.923 0.923 0.923 0.922 -0.26%(3) Commercial Auto Liability 0.890 0.882 0.882 0.882 0.881 -0.87%(4) Workers' Compensation 0.839 0.818 0.824 0.816 0.803 -3.62%(5) Commercial Multiple Peril 0.896 0.904 0.904 0.905 0.903 0.74%

(6) Medical Professional Liability (Occurrence) 0.767 0.762 0.762 0.763 0.754 -1.33%

(7) Medical Professional Liability (Claims Made) 0.827 0.837 0.837 0.838 0.834 0.74%

(8) Special Liability 0.898 0.910 0.910 0.911 0.908 1.00%(9) Other Liability 0.816 0.809 0.809 0.810 0.803 -1.28%

(10) Special Property 0.949 0.947 0.947 0.947 0.947 -0.17%(11) Auto Physical Damage 0.971 0.975 0.975 0.975 0.975 0.35%(12) Fidelity & Surety 0.904 0.904 0.904 0.905 0.905 0.07%(13) Other (Inc Credit, Accident & Health) 0.947 0.948 0.948 0.948 0.948 0.12%(14) International 0.905 0.911 0.913 0.907 0.908 0.35%

(15) Reinsurance: Nonproportional Assumed Property/Financial 0.893 0.902 0.903 0.903 0.902 0.86%

(16) Reinsurance: Nonproportional Assumed Liability 0.777 0.791 0.794 0.792 0.775 -0.18%

(17) Product Liability 0.774 0.773 0.773 0.773 0.762 -1.18%(18) Financial & Mortgage Guaranty 0.884 0.881 0.881 0.881 0.880 -0.39%(19) Warranty 0.904 0.966 0.966 0.966 0.966 6.25%

Data through 2017

Attachment D


9

Year-to-Year Variation in Risk Charges – Average of 11 LOBs

y = -0.0077x + 15.635R² = 0.3666

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1980 1985 1990 1995 2000 2005 2010 2015

Indi

cate

d Ri

sk C

harg

e

Accident Year

Attachment D


10

Risk Charge vs. Interest Rate – Part 1

y = -0.0077x + 15.635R² = 0.3666

y = -0.003x + 5.9975R² = 0.8451

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1980 1985 1990 1995 2000 2005 2010 2015

Risk Chg T_Du

Attachment D


11

Risk Charge vs. Interest Rate – Part 2

198413.6%73.7%

20111.6%

30.1%

y = 2.9727x + 0.1124R² = 0.5739

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

-1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0%

Nom

inal

Ris

k Ch

arge

Interest Rate

Attachment D


12

“Present Value” (PV) and “Nominal Value” (NV) Risk Charges – 11 LOBs

y = -0.0077x + 15.635R² = 0.3666

y = -0.0005x + 1.08R² = 0.0043

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1980 1985 1990 1995 2000 2005 2010 2015

Risk

Cha

rge

Accident Year

Riskj Charge PV Risk Charge

Attachment D


13

Stability of Present Value Risk Charges

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%19

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

17

Indi

cate

d Ri

sk C

harg

e

Accident Year

PV Risk Charge By Decade All Yrs

Attachment D


14

Stability of PV and NV Indicated Risk Charges

(1) (2) (3) (4) (5)

Indicated Risk charge

% vs. all Years

Indicated Risk charge

% vs. all Years

1980-1987 18.6% 16.7% 45.2% 51.2%1988-1997 13.8% -13.5% 27.9% -6.9%1998-2007 16.3% 2.5% 28.2% -5.8%2008-2017 16.4% 2.8% 21.0% -30.0%All Years 16.0% 0.0% 29.9% 0.0%B. Twenty-Year Ranges - 11 LOBs1980-1998 15.6% -2.0% 34.2% 14.3%1999-2017 16.4% 2.8% 24.2% -19.2%All Years 16.0% 0.0% 29.9% 0.0%

PV Indications NV IndicationsYear Range

Therefore, easier to forecast combined 87.5th percentile loss ratio and IIA, than it is to predict the 87.5th percentile loss ratio alone.

Attachment D


15

Premium Risk Charge Sensitivity to Interest Rate/Calibration Method/Safety Margin

14.8% 14.5%18.6%

20.4%22.4%

15.2%19.2%

33.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2020 IAA 5.0%-NV 2.5%-NV 1.5%-NV 0.5%-NV PV-87.5 PV-90 PV-95

Attachment D


16

Questions? Please contact Rob Fischer, Academy casualty

analyst ([email protected]) with questions or if you wish to discuss further.

Attachment D

mailto:[email protected]

materials - property and casualty risk-based capital (e

Documents