The push was on in April to finalize the 2023 reporting formats for the various risk-based capital (RBC) formulas. In addition, accounting issues that need to be resolved before a final reporting format for the 2023 annual statements can be finalized headlined the other activity. Let’s take a look.
Statutory Accounting Principles Working Group (SAPWG) – Email Notifications
On April 10, Interpretation (INT) 2023-01 – Net Negative (Disallowed) IMR was released for comment through May 5, but that date was later extended at the request of industry through June 9. If adopted, the INT will allow a limited-time, optional admittance of net negative (disallowed) interest maintenance reserve (IMR) in the Life general account statement. The temporary guidance is specific to the Life/Fraternal general account statement only; separate accounts will continue to follow the current guidance. Life/Fraternal companies with an RBC ratio greater than 300% would be permitted to admit net negative IMR of up to 5% of its general account adjusted capital and surplus. Insurers whose RBC ratio is 300% or lower would not be permitted to admit the negative IMR. Capital and surplus would need to be adjusted for certain exclusions before calculating the 5% limitation and restrictions on what is permitted in the net negative IMR balance would exist. The INT also provides guidelines for the reporting and disclosure of IMR. This is intended to provide short-term guidance for 2023, allowing more time for the development of revisions to the Statement of Statutory Accounting Principles (SSAP) No. 7 – Asset Valuation Reserve and Interest Maintenance Reserve. Since this INT would override existing guidance, a two-thirds majority vote is required for adoption. The full exposure can be found on the SAPWG webpage, under the Exposure Drafts tab.
On April 13, a revision to INT 22-02 – Reporting of the Inflation Reduction Act – Corporate Alternative Minimum Tax (CAMT) was exposed for comment through May 5. The exposed revision would extend the effective date of the INT through the second quarter of 2023. The extension will allow SAPWG and industry additional time to develop more permanent guidance for the CAMT.
In an April 17 email, SAPWG announced it would not be responding to a referral from the Valuation of Securities Task Force on the acquisition of commercially available analytical data. Responses to referrals are only required if the response is in the affirmative. In the email announcement, SAPWG acknowledged the analysis being contemplated might be useful to other NAIC groups, but it would not have a direct impact on work done by SAPWG.
Collateralized Loan Obligations (CLOs) Ad Hoc Group – April 12, 2023
This was the kickoff meeting of the new NAIC group. The purpose of the group is to determine the modeling methodology to be used for CLOs. As a reminder, beginning in 2024, CLOs will no longer be part of the NAIC’s filing exempt process, but instead will be subject to modeling for statutory valuation purposes. Members of the group are composed of state regulators, insurance company personnel, and other interested parties. The discussion during this meeting focused on the methodology to be used in determining the final modeling process and proxy deals that will be used to run stress scenarios. Care was taken to choose deals that are not currently associated with any insurer. The group will begin regularly scheduled meetings soon. Because of the technical nature of the discussions and the level of understanding necessary, in the future this group is not one that will be regularly included in the NAIC-related activity summary.
Life RBC Working Group – April 14, 2023
The Working Group took the following action. (Remember, adoption by the Working Group also must be approved by the Capital Adequacy Task Force to become final.)
| Reference # | Subject | Disposition |
|---|---|---|
| 2023-05-L | Removal of dual trend test. | Adopted for 2023 reporting. |
| 2023-06-L | Structural changes for the C-2 life insurance section. | Adopted Update 2 for 2023 reporting. |
This adoption expands the reporting in the C-2 to include separate sections for group and credit permanent life policies with pricing flexibility and those without flexibility. There were two different options considered for adoption, with Update 2 winning the vote. The only difference between Update 2 and Update 1 is the addition of a note to the annual statement specifically designed to provide data elements that can be directly pulled into the RBC. The Working Group was informed that the reporting format for that note may change as SAPWG and the BWG both have proposals being considered for that note. The Working Group indicated format changes would be acceptable as long as no pieces of needed data were lost in that process.
| Reference # | Subject | Disposition |
|---|---|---|
| 2023-07-L | Revises the Life RBC CM6 and CM7 reporting and factors for nonperforming commercial and farm mortgages. | Adopted for 2023 reporting. |
| 2023-08-L | Use of Custody Control Accounts (also referred to as custodied collateral) as accepted collateral for reinsurance within the Life/Fraternal RBC. | Exposed for comment through June 2. |
Even with a 45-day exposure period, the goal for 2021-08-L is possible adoption for 2023 reporting. This would be possible since the revisions are instructional only and do not result in reporting format changes.
Health RBC Working Group – April 17, 2023
Reference #2023-01-CA will now be sent to the Capital Adequacy Task Force for discussion and exposure. The item had previously been exposed and discussed by the Health RBC Working Group, but since its adoption would impact other RBC formulas, final adoption needs to be decided on the Task Force level. The proposal would clarify the reporting of health stop-loss premiums in the RBC formulas. The discussion then turned to a short presentation by the American Academy of Actuaries (Academy) on healthcare receivables. No formula recommendations were proposed at this time, but the Academy did mention a couple of issues it feels need some further investigation. The Academy has noticed a number of companies report amounts as healthcare receivables that appear to not be healthcare receivables. Examples included interest receivables, reinsurance receivables, and administrative fees receivables. These types of receivables are handled elsewhere in the formula. The other odd finding was the number of companies that appear to not be receiving payments for their healthcare receivables, or at least not reporting receipts. The Academy will be providing a list of specific insurers to the NAIC for follow-up on these two issues. The Academy briefly discussed its work on the H-2 Underwriting Risk project and indicated a more detailed progress report would be available at the NAIC Summer National Meeting. Members of the Working Group were asked to consider if pandemic risk should be a risk included in the Health RBC. Inclusion might go beyond the direct effect of a pandemic; for example, the effect a “shutdown” might have on other elective procedures during that time, as well as government intervention. More discussion will occur on this topic. The Health Test Ad Hoc Group reported it is continuing its work and feels more clarification is needed in the current instructions. The final act of business was a reminder that a new Capital Adequacy Task Force is being formed to review all of the formulas for missing elements and/or items currently included but which have not been reviewed in some time.
RBC Investment Risk and Evaluation Working Group – April 20, 2023
What could have been a mundane meeting turned out to be anything but. The agenda looked simple; consider for adoption a structural change that would provide separate handling of residual tranches and the addition of a sensitivity test for residual tranches to the Life/Fraternal RBC. Both of these revisions are considered interim measures until a more permanent solution can be researched and implemented. The format change was adopted. Two things should be noted: the format change only applies to the Life/Fraternal RBC, not to the Health or the Property/Casualty RBC, and no factor was adopted at this time. Attention then moved to adoption of the sensitivity test. Because the proposed sensitivity test had not been released for comment by the process deadline, it was announced that a two-thirds super majority vote would be needed for adoption. The adoption passed but not by the needed two-thirds vote. However, a little further research found that the super majority vote needed to occur on the Task Force level, not on the Working Group level. So, the sensitivity test was passed and moved onto the Capital Adequacy Task Force for final disposition. In between the voting, a discussion occurred questioning whether an interim solution should even be considered. It did not sit well with some that no research had been done to indicate if a separate factor for residual tranches was even necessary. It was suggested that maybe regulators were overreacting to what was perceived as an industry problem, where it might only be a problem specific to certain companies. All sides of the controversy were very vocal. The chair had to halt the discussion more than once to try to proceed with voting. A motion also was made to expose a 45% interim residual tranche factor for a 21-day comment period ending May 12, as well as a 10% factor for use in the sensitivity test. It was stressed, however, that these factors were to be regarded as a starting point for decision making, not necessarily a final recommendation.
Property/Casualty RBC Working Group – April 24, 2023
The meeting began with the adoption of 2023-02-P, which provides the annual update of the Underwriting Risk Line 1 factors. Attention was then focused on a referral from BWG regarding its proposal 2023-01, which would add pet insurance as a separate line of business in statement reporting. The Property/Casualty RBC Working Group decided to respond to BWG recommending the statement amendment be delayed for at least one year. The response suggests collecting pet information via a supplement, in much the same way as cybersecurity coverage is now collected, or even by the use of an interrogatory. BWG proposal 2022-15, which has already been adopted by BWG, was then reviewed. It was decided the revision would not require any adjustments to the Property/Casualty RBC. The chair read a brief summary from the Academy regarding the status of current Property/Casualty RBC projects it is working on. The chair announced that an ad hoc group of regulators, industry, and interested parties will begin meeting in May to review and discuss RBC charges that have not been reviewed since their original development. This ad hoc group will be overseen by the Capital Adequacy Task Force.
Capital Adequacy Task Force – April 28, 2023
Although the various RBC Working Groups do most of the work in updating the different RBC formulas, none of those changes are considered final until adopted by the Capital Adequacy Task Force. Structural changes to the formulas needed to be adopted by April 30 for inclusion in the current-year formulas. Therefore, this meeting concentrated on getting those structural changes in place. The Task Force heard an update on the current upheaval in the banking industry, mainly caused by financial difficulties of two banks. The summary emphasized that account withdrawals have been more severe than previously thought and that at least one of the banks involved is looking for some additional bailout funds. The possible effect on financial markets both for insurers and non-insurers was briefly included in the discussion. The group then took the following actions on proposed RBC formula revisions.
| Reference # | Subject | Disposition |
|---|---|---|
| 2023-02-P | Annual updating for Underwriting Risk, Line 1 factors for PRBC. | Adopted for 2023 implementation. |
| 2023-03-IRE | Separate handling of residual tranches reported in Schedule BA for L/F RBC. | Adopted for 2023 implementation. |
| 2023-01-IRE | Addition of sensitivity test for residual tranches in L/F RBC. | Adopted for 2023 implementation. |
| 2023-05-L | Removal of dual trend test in L/F RBC. | Adopted for 2023 implementation. |
| 2023-06-L | Changes to the reporting format of the C-2 Mortality Risk in the L/F RBC. | Adopted for 2023 implementation. |
| 2023-07-L | Revisions for the reporting of CM6 and CM7 mortgages in the L/F RBC. | Adopted for 2023 implementation. |
| 2022-16-CA | Adjusts some health underwriting risk factors for investment income (all formulas). | Exposed for 30-day comment period ending May 27. |
| 2023-01-CA | Instructional revisions on the handling of health stop-loss premiums (all formulas). | Exposed for 30-day comment period ending May 27. |
The Task Force had received referrals from the Valuation of Securities Task Force. It was decided not to respond formally to either referral, as only affirmative responses were required. The Task Force indicated it was neutral on the subjects but saw no immediate value of either to RBC. The chair reminded everyone of the formation of the Risk Evaluation Ad Hoc Group, which will begin meeting in May. Industry has shown an overwhelming response to the call for volunteers, with more than 80 individuals indicating their interest in participating.
For more information, reach out to a professional at FORVIS or submit the Contact Us form below.