naic risk-based capital
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NAIC Risk-Based Capital. Walter Bell NAIC President and Alabama Insurance Commissioner Vice Chair of IAIS Executive Committee ASSAL ANNUAL CONFERENCE Santiago, Chile. History of Risk Based Capital. Risk based capital concept began in 1989 - PowerPoint PPT PresentationTRANSCRIPT
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NAIC Risk-Based CapitalNAIC Risk-Based Capital
Walter BellWalter Bell
NAIC President and NAIC President and
Alabama Insurance CommissionerAlabama Insurance Commissioner
Vice Chair of IAIS Executive CommitteeVice Chair of IAIS Executive Committee
ASSAL ANNUAL CONFERENCEASSAL ANNUAL CONFERENCE
Santiago, Chile Santiago, Chile
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History of Risk Based History of Risk Based CapitalCapital
Risk based capital concept began in 1989Risk based capital concept began in 1989
September 1990, Examination Oversight September 1990, Examination Oversight
Task Force of NAIC determined Risk Based Task Force of NAIC determined Risk Based
Capital requirements were preferable to Capital requirements were preferable to
minimum capital and surplus minimum capital and surplus
requirementsrequirements
December 1990, NAIC formed two RBC December 1990, NAIC formed two RBC
working groups (one life and one property working groups (one life and one property
and casualty)and casualty)
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History of Risk Based Capital History of Risk Based Capital (Continued)(Continued)
1991 and 1992 Risk-Based Capital 1991 and 1992 Risk-Based Capital
survey distributed to companiessurvey distributed to companies
Life RBC formula finalized in 1993Life RBC formula finalized in 1993
P/C RBC formula finalized in 1994P/C RBC formula finalized in 1994
RBC standards for health RBC standards for health
organizations were implemented in organizations were implemented in
19981998
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History of Risk Based Capital History of Risk Based Capital (Continued)(Continued)
The NAIC RBC formula is generally The NAIC RBC formula is generally
a formula-based calculation of a a formula-based calculation of a
minimum level of capitalminimum level of capital
Total Adjusted Capital is compared Total Adjusted Capital is compared
to 4 action levels of RBC where to 4 action levels of RBC where
action is taken by the company or action is taken by the company or
the regulator:the regulator:
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History of Risk Based Capital History of Risk Based Capital (Continued)(Continued)
RBC Action Levels:RBC Action Levels: Company Action LevelCompany Action Level
Regulatory Action LevelRegulatory Action Level
Authorized Control LevelAuthorized Control Level
Mandatory Control LevelMandatory Control Level
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History of Risk Based Capital History of Risk Based Capital (Continued)(Continued)
The number of companies at The number of companies at
action levels has remained action levels has remained
relatively constant for life and relatively constant for life and
property/casualty (non-life) RBC property/casualty (non-life) RBC
since inception: since inception:
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Life and P/C RBC Life and P/C RBC StatisticsStatistics
20002000 19991999 19981998 19919977
19919966
19919955
CompanyCompany 4444 4141 3737 5555 6060 4444
RegulatorRegulatoryy
2525 1818 1818 1414 2222 2020
AuthorizeAuthorizedd
55 88 99 88 1111 99
MandatorMandatoryy
3030 2727 2828 2727 3434 2525
Total Total ActionAction
104104 9494 9292 104104 127127 9898
Total Co’sTotal Co’s 3,623,6288
3,543,5466
3,783,7811
3,843,8433
3,923,9255
3,933,9333
% of Total% of Total 2.9%2.9% 2.7%2.7% 2.4%2.4% 2.72.7%%
3.23.2%%
2.52.5%%
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Life and P/C RBC Life and P/C RBC StatisticsStatistics
20062006 20052005 20042004 20020033
20020022
20020011
CompanyCompany 2828 3737 4444 4343 6060 3838
RegulatorRegulatoryy
1919 1919 2929 1616 3232 3232
AuthorizeAuthorizedd
77 66 88 1111 1111 66
MandatorMandatoryy
3535 3535 4444 3939 3333 4040
Total Total ActionAction
8989 9797 125125 109109 136136 116116
Total Co’sTotal Co’s 3,523,5266
3,503,5011
3,533,5322
3,473,4755
3,593,5944
3,623,6255
% of Total% of Total 2.5%2.5% 2.8%2.8% 3.5%3.5% 3.13.1%%
3.83.8%%
3.23.2%%
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History of Risk Based Capital History of Risk Based Capital (Continued)(Continued)
As a result of P/C insolvencies in the As a result of P/C insolvencies in the
early 2000’s, a ‘trend test’ was early 2000’s, a ‘trend test’ was
added to P/C RBC in 2005added to P/C RBC in 2005
The ‘trend test’ may trigger a The ‘trend test’ may trigger a
company action level if a ratio of company action level if a ratio of
the companies claims and expenses the companies claims and expenses
to premiums is unfavorableto premiums is unfavorable
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History of Risk Based Capital History of Risk Based Capital (Continued)(Continued)
The number of health companies The number of health companies
at action levels started high and at action levels started high and
has declined subsequently: has declined subsequently:
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Health RBC StatisticsHealth RBC Statistics
20022002 20012001 20002000 19991999 19981998
CompanyCompany 3737 4848 1919 3030 3737
RegulatorRegulatoryy
3333 4343 1616 2222 3333
AuthorizeAuthorizedd
1717 2323 4646 2929 1717
MandatorMandatoryy
2121 2626 4242 3636 2121
Total Total ActionAction
108108 140140 123123 117117 108108
Total Co’sTotal Co’s 672672 578578 543543 563563 672672
% of Total% of Total 16.116.1%%
24.224.2%%
22.722.7%%
20.820.8%%
16.116.1%%
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Health RBC StatisticsHealth RBC Statistics
20062006 20052005 20042004 20032003 20022002
CompanyCompany 99 1212 88 2323 3232
RegulatorRegulatoryy
77 55 88 2121 2525
AuthorizeAuthorizedd
66 11 22 44 1212
MandatorMandatoryy
1212 99 77 1010 1414
Total Total ActionAction
3434 2727 2525 5858 8383
Total Co’sTotal Co’s 791791 754754 704704 698698 687687
% of Total% of Total 4.3%4.3% 3.6%3.6% 3.5%3.5% 8.3%8.3% 12.112.1%%
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Principles-Based CapitalPrinciples-Based CapitalProperty and Casualty RBCProperty and Casualty RBC
Catastrophe RiskCatastrophe Risk Potentially use modeling of catastrophe Potentially use modeling of catastrophe
risk in the RBC formularisk in the RBC formula Allow companies to use their own RMS, Allow companies to use their own RMS,
Equecat, etc. modelsEquecat, etc. models
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Principles-Based CapitalPrinciples-Based CapitalLife RBCLife RBC
C-3 – Interest Rate Risk and Market C-3 – Interest Rate Risk and Market RiskRisk C-3 Phase I – 2000C-3 Phase I – 2000 C-3 Phase II – 2005C-3 Phase II – 2005 C-3 Phase III – 2008 or 2009C-3 Phase III – 2008 or 2009 C-3 Phase IV C-3 Phase IV Future ?Future ?
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C-3 Phase IC-3 Phase I
Interest rate risk of annuities and single Interest rate risk of annuities and single premium lifepremium life
Based on cash flow testing of assets and Based on cash flow testing of assets and liabilitiesliabilities
Originally, only companies that Originally, only companies that triggered one of two tests for materialitytriggered one of two tests for materiality
May be changed to a CTE methodology May be changed to a CTE methodology for modeling in the future.for modeling in the future.
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C-3 Phase IIC-3 Phase II
Interest rate risk and market risk of Interest rate risk and market risk of annuities with guaranteed benefitsannuities with guaranteed benefits VAGLB (Variable Annuity with Guaranteed VAGLB (Variable Annuity with Guaranteed
Living Benefits) Living Benefits) GMIB (Guaranteed Minimum Income Benefit) GMIB (Guaranteed Minimum Income Benefit) GMDB (Guaranteed Minimum Death Benefit) GMDB (Guaranteed Minimum Death Benefit)
Modeling using a CTE approachModeling using a CTE approach Relatively small number of companiesRelatively small number of companies
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C-3 Phase IIIC-3 Phase III
Interest rate risk and market risk for Interest rate risk and market risk for life productslife products
Modeling using a CTE approachModeling using a CTE approach
Affect a large number of companiesAffect a large number of companies
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C-3 Phase IVC-3 Phase IV
Interest rate risk for all annuitiesInterest rate risk for all annuities
Modeling using a CTE approachModeling using a CTE approach
Replace current C-3 Phase I and Replace current C-3 Phase I and perhaps Phase IIperhaps Phase II
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FutureFuture
Combine C-3 Phases into one ?Combine C-3 Phases into one ?
Asset Risk ?Asset Risk ?
Insurance Risk ?Insurance Risk ?
Comprehensive internal models ?Comprehensive internal models ?
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Future (Continued)Future (Continued)
NAIC Overarching Consideration: NAIC Overarching Consideration:
Capital standards and compliance Capital standards and compliance measurements should be firmly rooted in measurements should be firmly rooted in an auditing, accounting, and actuarial an auditing, accounting, and actuarial context that is cost-justified, practical, context that is cost-justified, practical, and workable.and workable.
Especially, when regarding an adversarial Especially, when regarding an adversarial regulatory action that must proceed based on regulatory action that must proceed based on legal findings.legal findings.
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THANK YOUTHANK YOU
Walter BellWalter Bell
NAIC President and NAIC President and
Alabama Insurance CommissionerAlabama Insurance Commissioner
Vice Chair of IAIS Executive CommitteeVice Chair of IAIS Executive Committee
[email protected]@insurance.alabama.gov