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Agenda
RiskBasedCapital
I Insurance Company C Regulation R l i
TheU U.S. S Insuranceindustryisregulatedbythestates states. ThestateInsuranceCommissionershaveestablishedtheNational AssociationofInsuranceCommissioners(NAIC),which: Isgovernedbythechiefinsuranceregulatorsfromthe50states, D.C.,andfiveU.S.territories, Providessupport pp tothestateregulators g tohelp pmakeregulation g moreefficient,and Helpscoordinateregulatoryeffortstoenhanceuniformityof regulation. regulation Stateregulatorsfocusonthelegalentitylevel.
RiskBasedCapital
RBCBackground B k d RBCframework was createdbyNAICandbecameeffectivein1992 Responds R d t toi insurancecompanyf failures il i inth the1980 1980scaused d l largely l b by realestateandjunkbondconcentrations Intendedtoserveasanearlywarningtooltoidentifyundercapitalized companies i Setaminimumthresholdforregulatoryaction Regulatesadequateinsurancecompanysolvency TheNAICmodellaw,andeachstateslaw,looktotheNAICformulatocompute RBC.
RiskBasedCapital
RBC Background RBCisusedtosetcapitalrequirementsconsideringthesizeanddegreeof risktakenbytheinsurer RBCisaroughmeasureofrisk Eachelementofriskisassigned g a"riskfactor Eachriskfactorismultipliedbysomemeasureofvolumeforeach riskclasswhicharethenaddedtogetherresultinginatotal"risk requirement requirement Themajorcategoriesofriskinclude: Assetrisk,insurancerisk,interestraterisk,andbusinessrisk
RiskBasedCapital
RBCRatio TheRBCRatioisthemaintestusedto determinewhetheracompany'scapital levelisadequategiventhesizeanddegree ofriskthatfirmhastaken
TotalAdjustedCapital TotalRiskBasedCapital
TotalRiskBasedCapital
TotalAdjustedCapital
TotalAdjustedCapital(TAC)ismadeupprimarilyofcapitalandsurplus,and theassetvaluationreserve(AVR)
RiskBasedCapital
TheRBCFormula
Determines i the h minimum i i amountof fcapital i lani insurerneeds d given i i itsrisks ik For example, ata300%RBClevel,acompanyholds$3ofcapitalfor every$1ofriskassumed RBCwasdesignedtodifferentiateadequatecapitalfrominadequate capital,butnottodistinguishgoodfrombetter Theratiocanberaisedbyeitherincreasingtotaladjustedcapitalorby loweringriskbasedcapitalrequirements
RBC Ratio =
"Equity" Equity Total Adjusted Capital (TAC) = "Risk Charges" Risk Based Capital (RBC)
RiskBasedCapital
RegulatoryActionLevels RBCLevel Above 200% 150%to200% 100%to150% 70%to100% Below70% RequiredAction Nonegativetrend,Noaction Companysubmitsaplantoimprovecapital Stateregulatorspecifies correctiveactions Stateregulatormaytakecontrolofcompany Stateregulator takescontrolofcompany
RiskBasedCapital
TheRBCFormula AssetRiskRequirements
RiskCategory U S Treasuries U.S. NAIC1(AaaA) NAIC2(Baa) NAIC3(Ba) NAIC4(B) NAIC5 NAIC6 MortgagesinGoodStanding RealEstate RealEstateJV CommonStock PreTaxRBCFactor 0 0% 0.0% 0.4% 1.3% 4.6% 10.0% 23.0% 30.0% 2.6% 15 0% 15.0% 23.0% 30.0%
RiskBasedCapital
MortgageRBCFactors
Mortgages in Good Standing 1 Restructured Mortgages Mortgages 90 Days Overdue Mortgages in Foreclosure
1
RiskBasedCapital
Wh MEAF? Why Mortgages g g areanunratedassetclass Regulatorsneededtodistinguishrisk Therewasminimalamountoflossexperiencedata Therewasapresumptionthatthequalityofacompanysunderwriting wouldemergeovertimeinmeasurablelossexperience Therefore,MEAFwasdeveloped
RiskBasedCapital
MEAFDefined f d MortgageExperienceAdjustmentFactor(MEAF) MortgagesonlyassetclasswhoseRBCfactorcanvarybyrelative experience MEAF Ratioofcompany p yproblem p loanstoindustry yproblem p loans. Through2008,MEAFhasaminimumandmaximumof50%to350%. MortgageRBCfactoris: StandardRBCfactorxMEAF Thenappliedtoentiremortgageportfolio
RiskBasedCapital
MEAFIssues GivenhistoriclowdelinquencyratesMEAFcanbevolatile NegativeRBCimpactevenifproblemloansdecline NegativeRBCimpactevenwhenlifecompanyachievesoptimaleconomic outcomeinresolvingproblemloans
RiskBasedCapital
MEAFExample
RiskBasedCapital
MEAFExample Athistorically ylowlossrates, ,theMEAFsability ytoquantify q yrelative companyperformancebreaksdown LifeCompanylevelofproblemloansimprovesby20%(0.005%to 0.004%) ) Industrylevelofproblemloansimprovesby38%(0.008%to0.005%) LifeCompanymortgageRBCrequirementincreasesfrom1.6%to2.1% LifeCompanysRBCratiodecreasesby8points
RiskBasedCapital
RegulatoryGoalsforRBCReplacement
RiskBasedCapital
IndustryGoalsforRBCReplacement Relyonobjectivemeasurestoassessrisk Balanceprecisionwithaframeworkthatisworkableforcompany reporting Canbeaudited/verifiedbyregulators Donotdiscouragesoundeconomicdecisionsbycompanieswithregardto investmentmanagement g Commercialmortgagesareheldtoasimilarstandardasotherassets
RiskBasedCapital
Alt Alternatives ti Evaluated E l t dBut B t Not N tAccepted A t dby b Regulators R l t orIndustry I d t
RiskBasedCapital
RBCProposal P lOverview: O i Commercial C i lMortgages M t
RiskBasedCapital
RBCProposal P lOverview: O i Commercial C i lMortgages M t
RiskBasedCapital
ProposalOverview:CommercialMortgages
ProposedRBCfactorsforthefiveriskcategoriesforperformingloans:
RiskCategory CM1 CM2 CM3 CM4 CM5 RecommendedRBCValues 0.90% 1 75% 1.75% 3.00% 5.00% 7.50%
DSCandLTVranges g usedtoassign g loantoariskcategory g y DSCisthedominantfactor Broadlyspeaking,CM1:DSC>=1.50xandLTV<85%,CM2: DSC> >=0 0.95x 95 and dLTV>55%b but t<75%
RiskBasedCapital
ProposalOverview:CommercialMortgages
RiskBasedCapital
RBCProposal P l ReducesRBCvolatilitycausedbyMEAF ProblemloansimpacttheirownRBC,nottheoverallportfolio SinceDSCisthedominantfactor, ,volatility yisreduced Differentiatesriskbycompanyandwithineachcompanysportfolio HighestcreditqualitymortgagesreceiveaRBCrequirement closeto,but stillabove,NAIC1
RiskBasedCapital
St t Update Status U d t
NAICapprovedshorttermRBCextensionthroughDecember2012 2012, whichisMEAFbasedwithafloorof80%andcapof175%x2.6%base requirement SeekingNAICapprovalbyNovember1,2012 Proposaltargetedtobeeffectivein2013 Proposal P lsubmitted b itt dto t the th NAICin i May M ReviewproposalwithNAIC(MaytoAugust) ProposaltobereviewedbytheAmericanAcademyofActuaries(July to August)