Being the end of a quarter for industry and a prime vacation month for regulators, June was a slow month with a late start. Let’s take a look.
Group Capital Calculation (GCC) Working Group – June 13, 2023
The intent of the June 13 meeting was the discussion and possible exposure of the proposed scalar for the 2023 GCC prepared by the American Council of Life Insurers (ACLI). What is a scalar? A scalar is a physical quantity that is completely described by its magnitude; for example, temperature, distance, energy, or speed. In the GCC, placeholder scalars ae used to convert non-U.S. available and required capital figures into a risk-based capital (RBC) equivalent on a 1:1 basis. The ACLI is proposing an excess relative ratio (ERR) scalar approach. It feels the ERR approach best recognizes cross-jurisdictional differences in required reserves and best reflects capital management practices of prudent global insurers. Although the ACLI focuses on the Life and Health sectors, it feels this approach would be appropriate for all types of insurers. Of course, this project would come with a cost. The ACLI and six individual insurers have agreed to fund the total $300,000 consultant cost to help the NAIC transition to ERR scalars during 2023. The GCC scalar proposal was exposed for comment through July 13, 2023.
RBC Investment Risk and Evaluation Working Group – June 14, 2023
The goal of this meeting was to establish factors for the residual tranche base and the corresponding residual tranche sensitivity test to be used in the Life RBC formula. Both issues had been discussed during the Working Group’s previous meeting but were re-exposed for comment with the chair asking that only new comments be submitted during that time. Previously received comment letters were against the proposed treatment, with one exception. New comment letters were received from three departments of insurance (DOIs) and two insurers. The comments from the DOIs offered alternatives, with the insurers agreeing that an alternative approach should be implemented. The motion was made to use the current 30% base factor with a 15% sensitivity factor for 2023. Then for 2024, the base factor would move to 45% with the sensitivity factor going to zero, unless further evidence supports a different factor (higher or lower) for either. This approach was unanimously adopted via a roll call vote. The unanimous vote was interesting, as from the very beginning the chair of the group has been adamant that the original proposal of 45% should be the solution at this time. (The chair does not vote except in the case of a tie.) Most of those voting against the original proposal pointed to the lack of analysis and evidence to support the 45% factor. Although this settled the handling of the residual tranches for 2023, more will be forthcoming for 2024 reporting.
Statutory Accounting Principles Working Group (SAPWG) – June 28, 2023
The focus of this meeting was the admission (or nonadmission) of a negative Interest Maintenance Reserve (IMR). The issue, which originated from industry, first received formal action by SAPWG in December 2022 and included the NAIC staff working with the Life Actuarial Task Force (LATF) and setting up regulator information sessions with industry. During a March 2023 meeting, NAIC staff was instructed to work on an interim solution first and then plan and address a long-term solution. Referrals also were sent to the LATF and the Capital Adequacy Task Force. In April 2023, SAPWG exposed for comment a limited-time, optional interpretation, INT 23-01T. That brief history led to this meeting to discuss comments received during the exposure period and the possible adoption of the INT. Adoption did not occur.
A brief reminder of the role of IMR is probably warranted. IMR applies only to life and fraternal companies. And although it is labeled a “reserve” and is reported as a liability, it really isn’t either one. The IMR is not an amount owed to anyone. It is established as a matching concept for life insurance products to handle the disposal of investments due to interest rate environments, not a credit-related environment. Although that concept might be confusing, let’s move on to what happened during the meeting.
Based on comments received during the exposure period, eight key areas of the INT were discussed. In some cases, revisions resulted. In other cases, no revisions were deemed necessary. As you review those eight points below, keep in mind that the INT is only an interim solution. A final solution is yet to be developed.
- The admittance of negative IMR, but with a limit.
- Exclusion of fair value derivatives from determining admitted net negative IMR.
- Book Value guaranteed separate accounts.
- An immediate reinvestment and allocation.
- The use of a special surplus account for the reporting of allowed IMR.
- Other existing safeguards.
- An RBC sensitivity analysis with and without admitted negative IMR.
- The effective duration of the INT, including an automatic nullification date.
NAIC staff has made the needed revisions to the INT and it has been reposted to the SAPWG webpage for review, with the intention of adopting it at the upcoming NAIC Summer National Meeting. The agenda did list two other topics to be discussed, but the scheduled 90 minutes ran out before that could happen. Those issues will be carried forward to the next meeting.
Capital Adequacy Task Force – June 30, 2023
The end of June meeting of this Task Force is always an important one, as it is the last opportunity for instructional and factor changes to be adopted for the current year RBC formulas. Accordingly, the following actions were taken.
|2023-02-P||Updates three Underwriting Risk, Line 1 factors in the Property RBC. The originally adopted factors had errors.||Adopted for 2023 implementation.|
|2023-09-IRE||Establishes a 30% factor for residual tranches in the Life/Fraternal RBC.||Adopted for 2023 implementation.|
|2023-10-IRE||Sets a 15% factor for the residual tranche sensitivity test for the Life/Fraternal RBC.||Adopted for 2023 implementation.|
|2022-09-CA (MOD)||Implements an instructional revision to the reporting of affiliated investments in all RBC formulas. Although previously adopted, revisions were needed for clarity.||Adopted for 2023 implementation.|
|2022-16-CA||Adjusts the health underwriting risk factors for investment income in all RBC formulas.||Adopted for 2023 implementation.|
|2023-01-CA||Provides instructions on the correct report of stop-loss premiums as a health line of business in all RBC formulas.||Adopted for 2023 implementation.|
The Task Force approved charges for the newly formed Generator of Economic Scenario Subgroup, which falls under the umbrella of both the Life/Fraternal RBC Working Group and LATF. In essence, the Subgroup will monitor all things economic scenario, including implementation of a generator for use in statutory reserve and capital calculations. The Task Force received an update on things happening in the banking industry after the banking insolvencies earlier this year. Included in that report was a brief summary of bills introduced in the House of Representatives to deal with what it perceives as banking problems. An update from the Risk Evaluation Ad Hoc Group indicated it has started meeting but would still like to have some additional regulatory and industry volunteers.
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