The NAIC is making significant progress on the development of a U.S. group capital calculation (GCC) for insurers. The objective is to provide a quantitative view of capital at the group level and identify contagion risk across the group. Most recently the Group Capital Calculation Working Group (GCCWG) met in August during the NAIC Summer National Meeting to primarily consider comments from interested parties on the scope of the group and treatment of non-insurance entities in the capital calculation.
As a result of discussions at the Summer Meeting, the GCCWG exposed a joint proposal from a group of property & casualty trade associations (the “Trades”) for a forty-five day comment period ending September 21, 2018. The proposal focuses on the scope of the group and determining elements for non-insurance field testing. NAIC staff also integrated questions into the proposal on field testing approaches including related topics not specifically discussed at the meeting. The NAIC plans for field testing to be completed by the November Fall National Meeting. Following are key areas brought forth in the Trades proposal that insurers should follow closely to be proactive in determining how the resulting field testing and implementation of the GCC may affect their organization.
The Trades proposal considers certain exemptions and expedited approaches in reporting a GCC. A foreign based insurance group will be exempt from the GCC if the non-U.S. group recognizes the U.S. regulatory system and accepts a U.S. supervisor’s capital requirement to satisfy its home jurisdiction group capital. The foreign based group is expected to file group capital at the same or substantially similar scope as determined by the lead state regulator. The lead state regulator must be able to obtain information from the foreign group supervisor to fully understand the group’s financial condition. Also the Trades suggest that a U.S. based group be exempt from the GCC if they file an ORSA report with the lead state.
An expedited approach is proposed for U.S. groups that have a Federal Reserve group capital requirement to provide that calculation instead of completing the GCC. Also U.S. groups where the ultimate controlling party in an underwriting entity required to submit a Risk Based Capital (RBC) report may submit the RBC report.
Scope will be determined by the group based on an inventory of entities in their NAIC Annual Statement Schedule Y. Other Holding Company Filings for entities owned by the Ultimate Controlling Person should also be considered. Note that all financial entities and all entities owned directly or indirectly by an insurer will need to in the GCC.
Non-financial entities not owned directly or indirectly by an insurer that pose material risk to the group should be included in the scope. To make this determination, a formulaic approach may be field tested such as previously proposed by the NAIC where an entity with capital/stockholder’s equity less than 5% of the group’s capital at prior year-end is not a material source of capital, and an entity with net income in each of the most recent five years is not a material user of capital.
Aggregation of non-insurance, non-financial entities should be coordinated between the lead state regulator and the group. Combining entities with common characteristics may provide a clearer view of potential risks and greater informed insight on financial performance.
The lead state regulator will review a list of excluded entities to determine any that may create material risk. Examples of risks to be evaluated include a material dependency, providing intra-group financial support, structural or contractual relationships, or where the addition or subtraction of an entity’s activities could have a material impact on the group. Regulatory discretion will allow entities to be added or subtracted to the group list depending on the likelihood of a capital loss. The final decision on scope is the responsibility of the lead state regulator.
An important objective of field testing is to determine appropriate capital charges. All insurance entities will be required to be listed in the calculation at their minimum regulatory required capital. Other financial entities will be individually listed in the calculation and tested as regulated or unregulated financial entities. Regulated financial entities such as banks and other depositories will be tested at a scaled and unscaled minimum required by their regulator to a Risk Based Capital (RBC) of 300%. Asset managers and registered investment advisers will be tested at Book Adjusted Carrying Value (BACV) and average revenue. Other financially regulated entities are to be tested at the minimum required by their regulator.
Field testing of unregulated financial entities will be differentiated based on those that provide financial activities to insurers and entities providing other than financial services. Unregulated financial entities providing financial services will receive a 22.5% BACV capital charge and entities providing other than financial services will be at the same BACV charge plus other factors based on input from testing participants.
Other non-financial entities will also be tested for capital charges. Industry participants are concerned that these entities do not transfer risk to the group to the same degree as regulated entities. Several testing methods have been proposed subject to agreement between the group and the regulator on how to best consider these entities including aggregation for a collective capital charge.
Continued input from insurers and interested parties will go a long way to inform development and implementation of the calculation. The GCC is intended to be an analytical tool, not a standard, while being consistent with existing state laws. Detailed and transparent field testing should accomplish that goal.