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NAIC Risk-Based Capital (RBC)

NAIC Risk-Based Capital (RBC) . HISTORY. HISTORY OF RBC. History of RBC. State Capital Requirements (Fixed) Minimum $ for Licensing & Operation Problems? Growth Rate of the Company? Size of the Company? Mix of Lines of Business? Financial Condition of the Company?

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NAIC Risk-Based Capital (RBC)

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  1. NAIC Risk-Based Capital (RBC) HISTORY

  2. HISTORY OF RBC

  3. History of RBC State Capital Requirements (Fixed) • Minimum $ for Licensing & Operation • Problems? • Growth Rate of the Company? • Size of the Company? • Mix of Lines of Business? • Financial Condition of the Company? • Unrelated to the Company’s Risk Exposure! (Risk = Exposure to Financial Loss) • No Provision for Timely Regulatory Action!

  4. History of RBC (Cont.) • RBC for Banks Early 1990s • NAIC Begins Work on RBC in 1990 • NAIC Implements RBC Formulas • Life 1993 • Property/Casualty 1994 • Health 1998 • Separate Formulas Reflect Unique Industry Risks • Sections Within each Formula Recognize Unique Operational Risks

  5. Current RBC Formula Regulatory Purpose / Use • Rules Based • Formulaic / Factor Driven • One Size Fits All • Industry Averages • Benchmark – Not Meant to be Precise • Action Driven • Model Law / Accreditation Standard

  6. Current U.S. RBC – Framework / Structure • Part of Regulatory Safety Net • RBC • Financial Analysis and Reporting • Examinations • Accounting • Coming Soon – Governance / Risk Assessment / Internal Capital

  7. Overview of RBC Model Laws (Cont.) • RBC Plan • Identify Conditions • Proposed Corrective Actions • Current + 4 Year Financial Projections • Key Assumptions for Projections • Quality of & Problems with Insurer’s Business • Submitted within 45 Days of Company Action Level Event • Commissioner Response to RBC Plan (60 Days) • Plan to be Implemented, or • Unsatisfactory (Revised RBC Plan or Reg. A.L. Event)

  8. Overview of RBC Model Law Actions • Authorized Control Level Event • RBC Plan (within 45 days) to Commissioner AND • Commissioner Examination or Analysis AND • Commissioner’s Order for Corrective Actions AND • Experts to Review RBC Plan at Insurer’s Expense OR • Place • Mandatory Control Level Event • Place Company under “Regulatory Control”

  9. Solvency II • Solvency II Identifies Target Capital as Well as Regulatory Capital • Minimum Capital Requirement (MCR), similar to RBC concept • Solvency Capital Requirement (SCR) • Standard Formula with Simplifications • Standard Formula • Standard Formula with USPs • Partial Internal Models • Full Internal Model

  10. RBC - Different from Solvency II • RBC is a Tool for Use with Potentially Troubled Insurers • NOT about a company’s target capital level for solvency purposes • RBC formula is not a perfect fit for all companies, but is just ONE of many tools used to identify potentially troubled insurers • Provides explicit regulatory actions by statute • Insurers cannot contest these actions in court as they can less explicit issues and authority

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