© 2016 National Association of Insurance Commissioners

Conference Call

OPERATIONAL RISK (E) SUBGROUP OF THE CAPITAL ADEQUACY (E) TASK FORCE

Wednesday March 27, 2019 12:00 PM ET / 11:00 AM CT / 10:00 AM MT / 9:00AM PT

ROLL CALL

Stephen Wiest

New York

Richard Ford Alabama Susan Bernard California Tish Becker John Robinson

Kansas Minnesota

John Rehagen Missouri Anna Krylova Joel Sander

New Mexico Oklahoma

Patrick McNaughton / Steven Drutz Washington Richard Hinkel Wisconsin

AGENDA

1. Consider Adoption of Subgroup Minutes from the Conference Call on February 26,2019 Attachment 1

2. Consider Adoption of a Referral to Expand Regulator Knowledge About Operational Risk a. Comment letter from NAMIC Attachment 2 b. Revised referral document Attachment 3

3. Discuss Hand-off Memorandum to be Sent to the Life Risk-based Capital (E) Working Group Attachment 4 Concerning Growth Risk

4. Other Matters Brought Before the Subgroup Adjournment

w:\QA\RBC\OpRSG\2018\March\ 3-27 open call\Op Risk Agenda_3-27-19 Call.docx

Attachment 1

© 2019 National Association of Insurance Commissioners 1

Operational Risk (E) Subgroup

Conference Call February 26, 2019

The Operational Risk (E) Subgroup of the Capital Adequacy (E) Task Force met via conference call Feb. 26, 2019. The following Subgroup members participated: Stephen Wiest, Chair (NY); Jennifer Haskell (AL); Susan Bernard (CA); Tish Becker (KS); John W. Robinson (MN); John Rehagen (MO); Anna Krylova (NM); Andrew Schallhorn (OK); Patrick McNaughton (WA); and Richard Hinkel (WI). 1. Adopted its Jan. 24, 2019, and Dec. 20, 2018, Minutes Ms. Bernard made a motion, seconded by Mr. McNaughton, to adopt the Subgroup’s Jan. 24, 2019 (Attachment A), and Dec. 20, 2018 (Attachment B) minutes. The motion passed unanimously. 2. Adopted a Proposal to Remove the “Informational Only” Growth Risk from the Health, Life and Fraternal RBC

Formulas in 2019 Mr. Wiest stated that the public comment period for the exposure of this change ended Feb. 25, and no comments were received. Mr. Robinson made a motion, seconded by Mr. Hinkel, to adopt the proposal to remove the “informational only” growth risk pages from the health, life and fraternal risk-based capital (RBC) formulas in 2019. The motion passed unanimously. 3. Adopted a Referral to the Health Risk-Based Capital (E) Working Group Mr. Wiest stated that he had presented the referral language to the Health Risk-Based Capital (E) Working Group during its most recent conference call, noting that the Working Group is prepared to accept the referral. Mr. McNaughton, chair of the Working Group, agreed. Bill Weller (America’s Health Insurance Plans—AHIP) noted that a slight revision he had suggested previously was not included in the version of the referral being considered. Mr. Wiest stated that the final version of the referral would include Mr. Weller’s suggested language. With that change, Mr. McNaughton made a motion, seconded by Ms. Krylova, to adopt the referral to the Working Group to continue the review of growth risk in the health RBC formula (Attachment C). The motion passed unanimously. 4. Discussed a Referral for Collecting Longer-Term Information on Operational Risk Mr. Wiest said both the Group Solvency Issues (E) Working Group and Risk-Focused Surveillance (E) Working Group are now the target NAIC groups for this referral. He stated that he had spoken with Justin Schrader (NE) who chairs both working groups, and Mr. Schrader is open to the idea that both working groups could have a role in considering how to address the referral. Lou Felice (NAIC) summarized the contents of the referral, noting that it suggests a more general review with some examples of areas of focus. Mr. Wiest said the concept and content of referring further review of operational risk has previously been discussed and exposed. Therefore, the Subgroup could probably consider adoption of the referral today but, given the new target groups and the revised language, Mr. Wiest suggested a 15-day exposure. There were no objections. Thus, the referral document will be exposed for a public comment period ending March 13. Brian O’Neill (American Academy of Actuaries—Academy) stated that the Academy’s Life Operational Risk Work Group would review the document. He also expressed the Academy’s willingness to assist the Group Solvency Issues (E) Working Group and the Risk-Focused Surveillance (E) Working Group, if requested.

Attachment 1

© 2019 National Association of Insurance Commissioners 2

5. Discussed Other Matters Mr. Wiest stated that work continues on a document the Subgroup plans to provide to the Life Risk-Based Capital (E) Working Group concerning reasons and suggestions for continuing a review of adding a growth risk charge to the life RBC formula. He said a document will be distributed for the Subgroup’s final conference call later in March. Mr. Wiest asked Mr. Felice to canvass Subgroup members’ availability for an open conference call during the period March 20–27. Having no further business, the Operational Risk (E) Subgroup adjourned. W:\National Meetings\2019\Spring\TF\CapAdequacy\OpRisk\1_24_19OPRSGmins

March 13, 2019

Steve Wiest Chair, Operational Risk Subgroup National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO 64106

VIA Email Transmission: lfelice@naic.org; jbarr@naic.org

RE: NAMIC Comments on Improving Regulator Knowledge and Assessment of Operational Risk

Dear Mr. Wiest:

The following comments are submitted on behalf of the member companies of the National Association of Mutual Insurance Companies1 regarding the February 26, 2019 memo to the chairs of the Group Solvency Issues Working Group and Risk-Focused Surveillance Working Group.

Background As identified through the self-evaluation process known as the Solvency Modernization Initiative (SMI), the NAIC recognized that the risk-based capital calculation did not explicitly include operational risk; however, they did conclude that operational risk was included in certain existing risk charges. The re-evaluation of “missing risks” that identified operational risk posed the question of whether those risks should be included in the RBC calculation or whether they aught to be handled utilizing other regulatory methods. Ultimately, the Capital Adequacy Task Force decided to implement the development of an explicit operational risk charge for all formulas. In 2018, the Operational Risk Subgroup, who was tasked with developing an RBC charge for operational risk, adopted a basic operational risk charge of 3 percent after covariance. The “add-on” approach was adopted for all formulas and became effective for 2018 RBC filings.

The Feb. 26 memo acknowledges that some operational risk types are embedded in other risk categories in RBC and that operational risk tends to be company specific, leading NAMIC members to wonder whether the adopted factor would be

1 NAMIC is the largest property/casualty insurance trade association in the country, with more than 1,400-member companies representing 39 percent of the total market. NAMIC supports regional and local mutual insurance companies on main streets across America and many of the country’s largest national insurers. NAMIC member companies serve more than 170 million policyholders and write more than $230 billion in annual premiums. Our members account for 54 percent of homeowners, 43 percent of automobile, and 32 percent of the business insurance markets. Through our advocacy programs we promote public policy solutions that benefit NAMIC member companies and the policyholders they serve and foster greater understanding and recognition of the unique alignment of interests between management and policyholders of mutual companies.

Attachment 2

subject to further modification. The charge that was adopted was based off written premiums, which provides no correlation between the inadequacy or failure of internal processes, personnel and systems, procedures, or controls. For that reason, it was never clear whether the “proxy” approach was just a temporary approach or if the NAIC would later refine the charge once it found a better approach. Based on our interpretation of the memo, it appears the recommendation to further study operational risk is rooted in refining the “operational risk methodology and charge adopted for the RBC formula.” Improving Regulator Knowledge of Operational Risk While we agree that additional regulator knowledge on the subject of operational risk would be beneficial to regulators, we do not agree that it should be done in order to refine the current operational risk charge. The Operational Risk Subgroup spent five years studying and developing the risk charge, deliberating many of the issues raised in the memo. At the end of the day, the subgroup was unable to address the notion that operational risk is embedded within the other risk categories of the RBC formula. Throughout the development of the operational risk charge, NAMIC indicated concern with creating an appropriate formula that would capture the differences in operational risk between companies. Our chief concern then as it is now is the fact that operational risk is already part of the RBC formula in each of the existing segments. The risk of fraud, decision-making errors, inadequate succession planning, reputational risk, etc. are all part of the risks already captured in the existing capital formula. Further, there has been no identified deficiency in the U.S. insurance company RBC levels that would indicate companies are going insolvent at unacceptable rates in the U.S. The improvement of regulator knowledge and assessment of operational risk is a good idea and should be pursued by the NAIC; however, it should not come with additional quantitative charges to the RBC formula. As regulators further develop their knowledge and assessment of operational risk, the current factor-based approach should be re-evaluated and assessed to determine its usefulness. The decision to go with a capital charge instead of other regulatory methods, such as qualitative methods was made as part of the SMI. If the NAIC decides after further study that a qualitative approach is the best method of understanding and assessing operational risk rather than a capital charge, NAMIC would be supportive of that initiative. Thank you for your consideration of these comments on this matter of importance to NAMIC, its member companies and their policyholders. If there are any questions, please feel free to contact me at 317-876-4206. Sincerely,

Jon Rodgers Director of Financial and Tax Policy National Association of Mutual Insurance Companies

Attachment 2

Attachment 3

MEMORANDUM TO: Justin Shrader, Chair, Group Solvency Issues (E) Working Group and Risk-Focused Surveillance (E) Working Group FROM: Stephen Wiest, Chair, Operational Risk (E) Subgroup DATE: February 26, 2019 RE: Improving Regulator Knowledge and Assessment of Operational Risk As Operational Risk is recognized as a key consideration of the Group Solvency Issues (E) Working Group and Risk-Focused Surveillance (E) Working Group process, the Operational Risk (E) Subgroup recommends that one or both of the above referenced working groups take steps to encourage ongoing study and knowledge development in this area. In particular, regulators may benefit from a greater understanding of the definition and scoping of operational risk, and application of the concept. Specifically, regulators could benefit from a greater understanding of methodologies used in measuring, quantifying and mitigating operational risks, as well as a comparison of the amount of capital insurers allocate to cover their operational losses to that calculated through the risk-based capital (RBC) Operational Risk charge. To the extent that knowledge is gained, thatis could inform further development or refinement of the RBC operational risk charge, or improve the overall evaluation of operational risk in solvency monitoring,. tThe working group(s) is (are) encouraged to share theis information with the Capital Adequacy (E) Task Force or other NAIC groups for future consideration. Attached you will find a list of possible areas of regulator review that are provided as examples of the type of information that could be most helpful in gaining further insight into how insurers address operational risk. Relevant Charges:

Group Solvency Issues (E) Working Group (Parent of ORSA Subgroup)

A. Continue to develop potential enhancements to the current regulatory solvency system as it relates to group solvency-related issues.

Risk-Focused Surveillance (E) Working Group

A. Continually review the effectiveness of risk-focused surveillance and develop enhancements to processes as necessary.

Background

Operational risk was identified as a material risk during the NAIC’s solvency modernization work. The Operational Risk (E) Subgroup was charged with developing an RBC charge for operational risk in all RBC formulas. The Subgroup completed its work on basic operational risk in 2018. In deciding on the approach to quantify basic operational risk, the Subgroup looked to methods and capital charges used by other foreign jurisdictions to gauge appropriate treatment for operational risk in RBC. As a result, a percentage of RBC (3 percent) after covariance (an “add-on” approach) was adopted to be effective in all 2018 RBC formulas. Bermuda, Canada and Japan currently use such a method in their regulatory capital formulas. The RBC add-on factor will be applied beginning with 2018 RBC.

Attachment 3

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RBC for Basic Operational Risk:

The operational risk definition for Subgroup purposes is generally consistent if not identical to that used by other global financial regulators:

The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.

Some operational risk types or events are picked up (embedded) in other risk categories in RBC. However, it was determined that there are existing or emerging risk types or events that are not currently addressed elsewhere in the RBC formulas. Among these are cyber risk, model risk / calculation errors, political risk, outsourcing / delegation risk, legal / contractual risk, business interruption, and some components of fraud related expenses. The focus of the Operational Risk Subgroup in developing an initial factor based on the “add-on” methodology turned to the widespread inclusion of operational risk in other advanced jurisdictions as a starting point.

The Risk Factor:

Since there is currently little or no NAIC data that isolates or assigns a dollar value to the operational risk of insurers, the Operational Risk Subgroup relied heavily on the operational risk charges of other jurisdictions.

Initial results presented by Europe based organizations that have begun collecting data on operational risk losses from member insurers was considered by the Subgroup members. They indicated target levels between 8% and 12%, or more, of total capital requirements. However, there were questions raised about the applicability of these levels to the U.S. insurance market, and as to how potential embedded operational risk was addressed.

Other input from interested parties suggested that the factor should be minimal and that operational risk is better handled via other qualitative measures rather than in Risk Based Capital. It appears that the larger more sophisticated insurer groups do model operational risk as a separate risk, while recognizing that some is embedded in other risks, and some not. The extent that smaller companies/groups address operational risk is not clear.

Given this input, the Operational Risk Subgroup members decided to go forward with a 3% post covariance add-on. The Subgroup selected 3% as the full factor primarily due to the following reasons:

• The Subgroup’s after covariance add-on was set at the low end of the spectrum for the ratio of operational risk to total capital requirement observed for other jurisdictions in order to recognize a desire not to “overshoot” based on the lack of precision and uncertainty about the extent of embedded operational risk.

• There are clearly similar calibration issues being confronted by other advanced insurance regulators around the globe and therefore there is heavy reliance on supervisory judgement rather than operational risk data.

• There are op risk events that are not captured on other risk categories. A primary example is cyber risk, but there are other examples (as discussed above). Events which are captured through historical data used for other risks in RBC may not reflect these emerging operational risks.

• Operational risk can be very company specific and some jurisdictions have opted for internal capital models which may better reflect a particular firm’s operational risk exposure relative to other risks, but U.S regulators have not embraced broad-based internal capital models for RBC purposes at this time.

• The add-on approach was designed to be a first step in addressing operational risk.

The Subgroup is also interested in promoting efforts to better identify and assess operational risk. The Subgroup members also believe that regulators can gain considerable insight from understanding how companies assess and quantify operational risk for their own internal capital purposes. This could eventually lead to refinement of the operational risk methodology and charge adopted for the RBC formulas.

Attachment 3

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Attachment - Sample Regulator Review Areas

• Improve understanding of how insurers / insurance groups define operational risk. This includes defining which aspects of operational risk might be included in other risk charges as well how specific categories of operational risk are defined. What kinds of scenarios/categories of exposure are considered – e.g. cyber, inappropriate u/w, product flaws, outsourcing failures, etc.

• Improve understanding of how insurers / insurance groups identify possible operational risk events and what data is used to identify operational risk events (e.g., loss data or event tracking). If based on scenarios and/or corporate processes, which ones are used?

• Gain an understanding of methodology and data that is used to assess operational risk (e.g., factors, scenario testing; stress testing, distribution of losses, expert judgement / assessment of internal processes). NOTE: Since there is rarely enough data to calibrate an OR model, if expert judgement is used, how is external data used/scaled to be appropriate? If based on an assessment of internal processes, describe how this is done (and by whom) within a lines of defense framework.

• Does the insurer / insurance group use an internal model to quantify required capital for operational risk?

If so, is operational risk a stand-alone module or is it integrated into a full internal capital model, and what key parameters, assumptions and inputs are included in the model?

• Identify the proportion of own required risk capital that insurers / insurance groups attribute to operational

risk (if zero, determine how operational risk capital is eliminated).

• Do insurers / insurance groups assess operational risk on both a gross and net (after application of mitigating measures or controls) basis? If net, what is being considered (e.g., management action, mitigation measures, controls, etc.) and who determines effectiveness?

• Review whether operational risk is considered by insurers / insurance groups as correlated or independent of other risks and how are diversification benefits assessed, both between different ORs and between OR and other risks?

Attachment 4

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MEMORANDUM TO: Philip Barlow, Chair, Life Risk-Based Capital (E) Working Group FROM: Stephen Wiest, Chair, Operational Risk (E) Subgroup DATE: March 27, 2019 RE: Potential Further Work on Life Growth Operational Risk During its conference call on February 26, 2019, the Operational Risk Subgroup members adopted a motion to delete the “informational only” growth risk page and instructions from the Life and Fraternal RBC formulas. In taking that action, the Subgroup’s members asked NAIC staff to draft a memo summarizing the work conducted to date and to provide rationale both for and against conducting further work to determine whether a growth risk charge should be added to the Life RBC formula. This memorandum is the result of that direction. Overview: Unlike Property & Casualty and Health Risk-based Capital (RBC), Growth Risk capital requirements have not been part of the Life RBC Formula. During its review of Operational Risk the Operational Risk (OR) Subgroup relied heavily on the practices and considerations of other advanced global insurance regulators. All of the jurisdictions reviewed, except Switzerland, include a basic operational risk charge for Life insurers. However, some do not apply the growth risk charge to life insurers. Those jurisdictions that do impose a life insurer growth risk charge include: Australia; Canada; China; E.U / Solvency II; and the IAIS Global Insurance Capital Standard (proposed). All use a factor times either premium growth, reserve growth or the greater of both. Alternatively, Bermuda applies a discretionary additional capital “add-on” for cases where the insurer’s risk profile deviates significantly from its risk assumptions or from the insurer’s assessment of its risk management policies and practices. The add-on may be applied to items such as: significant growth in premiums, and the quality of risk management surrounding operational risk. For 2015 RBC, the OR Subgroup chose to insert an “informational only” worksheet into the Life RBC formula that aggregated life and annuity business and includes a separate section for health business. The approach measured growth in premiums over a specified threshold and applied a risk factor to the excess growth (see attachments 1A and 1B). Data was collected for 2015 through 2017 based on the RBC filings for those years. For 2015, Annual Statement data was compared to the data included in the RBC filings. There were numerous crosscheck errors for calendar year 2015. The situation improved somewhat for calendar years 2016 and 2017. In general, the growth risk charge did not push many insurers into an RBC action level, but a few anomalies in certain large insurers’ data were observed where single large single premium reinsurance or pension transactions created a cliff in growth risk RBC (i.e., a huge growth risk charge with significant impact on RBC in one year that essentially disappeared in the next). In 2018, two alternatives were proposed. The first would add a C-4a (Business Risk) offset to the original informational method for any C-4a that was not already used to offset basic operational risk. The second alternative applies an RBC add-on of 1.5 % based on exceeding the growth thresholds, also with C-4a offset allowed. It was accompanied by an NAIC Staff analysis that is included as Appendix A to this memorandum.

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In addition to the concerns with the aforementioned anomalies observed that related to certain transaction types, interested parties (mainly the ACLI and the AAA) were fairly aligned in providing the following comments with regard to the initial and alternative approaches:

• Rapid growth is not a significant, unaddressed risk for life insurers. Life insurance is generally a stable, mature, long-duration business, and growing companies are already subject to higher capital charges through the existing C1- C4 factors in the current RBC formula.

• Unlike the majority of health insurance and property & casualty (P/C) insurance businesses, life insurance

business is long duration in nature. Therefore, should a company experience rapid growth, any potential impact would manifest itself over many years.

• Using premium growth as an exposure proxy creates unnecessary volatility. • Rapid growth for life insurance companies has typically been the result of an acquisition, entrance into a

new market, or introduction of a new product type. In such instances, any additional risk exposure has typically been absorbed within a relatively short period of time, and normal operations continued, subject to the insurer’s existing controls.

• There are other tools which regulators have at their disposal that would likely be more effective in

addressing any cases of rapid growth in the circumstance where an insurer has not successfully absorbed the growth.

• The lack of any past circumstances where life insurance company insolvency was the direct result of rapid

growth.

• If a growth factor were to be included at some point in the future, there needs to be a robust discussion about its applicability to life companies. Only when that need is demonstrated can there be a discussion about an appropriate basis for measurement that accurately reflects actual growth without creating unnecessary volatility.

In response to these comments it was noted that:

• All RBC formulas recognize growth to a certain level for non-operational risks that are already included in the formulas, but the OR Subgroup’s charge is to quantify additional operational risk that may be caused by rapid growth.

• Rapid growth is recognized as an indicator of increased operational risk by other advanced insurance regulators.

• Operational risk is constantly evolving and cyber risk and growth via merger or acquisition, and political risk are increasing the potential for increased operational risk that may result from rapid organic or transactional growth.

• The OR Subgroup members recognize that C-4a does address growth risk related to increases in direct premium volume. Therefore, any unused offset for C-4a capital charges after offsetting basic operational risk should be applied to reduce a growth risk charge.

• Rapid growth may be most impactful to smaller, more vulnerable insurers where other robust regulatory

tools may be less available or reliable.

• RBC is an integral part of the regulatory framework for addressing risk.

Attachment 4

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The OR Subgroup members acknowledged that the current informational only approach was flawed and a replacement approach could not be agreed upon during the remaining time of the OR Subgroup’s existence. During its conference call on February 26, 2019, the Operational Risk Subgroup members adopted a motion to delete the “informational only” growth risk page and instructions from the Life and Fraternal RBC formulas. . That action was taken in conjunction with a request to develop this memorandum. Suggestions: The Life Risk-based Capital (E) Working Group is best suited to evaluate the issues raised by industry concerning operational risk related to rapid growth experienced by life insurers and determine whether and when it should work on this as an agenda item for the Working Group. If the Working Group elects to move forward, some points to be considered include:

a) The AAA suggested that should the NAIC move forward with an explicit Life RBC charge for growth, we recommend that it be based on some characteristics of growth (for example, X percent increase in reserves year-over-year) rather than premium growth or a percentage of RBC.

b) A mechanism for smoothing large single year transactions to avoid cliffs and valleys in RBC

should be considered.

c) If a growth risk charge is implemented, any C-4a charge in excess of the amount used to offset basic operational risk should be applied to offset the growth risk charge.

d) Growth risk for traditional health business should continue to be treated separately from growth

risk for life and annuity business.

e) Companies that file the Life RBC formula, but write the same type(s) of health business written by companies that are required to file the Health RBC formula are not currently subject to a growth risk capital requirement. The work of the Health RBC Working Group should be monitored, and when completed, adding the growth risk for traditional health business that is in the Health RBC formula to the Life RBC formula should be considered, in order to address growth in similar business across the two formulas.

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APPENDIX A

Operational Risk Analysis – Growth Risk

Life RBC - Proposed Growth Risk – June 2018

Analysis: Unlike P&C and Health, Life RBC currently does not include a provision for growth risk. An informational methodology and factors were added to the 2015 RBC formula. The purpose for a growth risk charge is to provide additional capital for an enhanced level of operational risk that accompanies rapid growth. That is the assumption behind growth risk capital requirements in other jurisdictional capital formulas. The current informational approach applied separate factors to life / annuity premiums and health premiums in excess of the growth threshold (20% for life / annuities and 25% for health). The Life RBC factors for life / annuity business were derived using an approach that attempted to replicate the industry average percentage of RBC generated by the existing growth methodology in the P/C formula. For health business, the factors and growth threshold (25%) used were the same as the ones used in the informational Health RBC growth risk method. However, that methodology may be adjusted for Health RBC and consideration should be given to using the same methodology chosen for Health RBC in the Life RBC formula (with regard to comparable health insurance business) for consistency purposes. The Operational Risk Subgroup members recognize that the Current C-4a risk carried by Life RBC filers picks up basic operational risk. However, since C-4a is based on direct life and health premiums, as those rise, C-4a picks up additional capital. Therefore, it does seem logical to allow an offset for any C-4a risk based capital carried by Life RBC filers that is in excess of the amount of C-4a to be used to offset against basic operational risk as an additional offset to calculated growth risk. This analysis described below used amounts reported on Page LR 29A of the Life RBC formula for calendar years 2016 and 2017. It was noted that there was one specific anomalous instance in 2016 and several instances for the 2017 data that resulted in extreme growth risk and RBC impact. Staff Note: For purposes of the analysis, growth risk was placed outside the covariance square root and was offset by C-4a RBC that was in excess of 3% of RBC after covariance (residual C-4a). For further analysis, a decision could be taken by the Operational Risk Subgroup or the Life RBC WG as to where to include growth risk for covariance purposes. Including growth risk under the covariance square root will result in a lower capital requirement for growth risk. This analysis looked at applying the existing informational approach with C-4a offset (referred to as Method 1), and as an alternative it used an enhanced “add-on” approach that applied an additional growth charge of 1.5% of RBC after covariance with the same C-4a offset based on exceeding the growth threshold in the informational approach (referred to as Method 2). The analysis focusses on 4 basic areas:

1. Number of companies triggering growth risk 2. Average impact of growth risk on RBC ratio > 5% 3. Combined impact of growth risk and basic op risk (after C-4a offset). 4. Profile of high impact companies

Method 1 – Informational Approach:

• In 2016, 163 companies triggered the informational growth risk method before a C-4a offset. One company accounted for 62% of the total. After application of residual C-4a, the number was reduced to 106 companies. The average impact of growth risk across the population of triggering companies was 11.3% of

Attachment 4

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RBC after covariance and before C-4a offset (4.3% without one large company’s result). After C-4a offset, the percentages were reduced to 9.5% and 2.5% of RBC after covariance, respectively.

• In 2017, 139 companies triggered the informational growth risk method before C-4A offset. Five of these companies accounted for 73% of the growth risk capital. After the application of residual C-4a, the number was reduced to 83 companies. The average impact of growth risk across the population of triggering companies was 20.1% of RBC after covariance and before C-4a offset (5.4% without 5 large company results). After C-4a offset, the percentages were reduced to 16.2% and 3.2% of RBC after covariance, respectively.

• For 2016, just over 32% (54) of triggering companies had a decrease of more than 5% in their RBC ratio

after considering the C-4a offset.

• For 2017, just over 30% (42) of triggering companies had a decrease of more than 5% in their RBC ratio after considering the C-4a offset.

• In 2016, about 1/3 of the companies that triggered growth risk also were subject to positive basic operational risk (@ 3% add-on less C-4a).

• For 2017, about 1/4 of the companies that triggered growth risk also were subject to positive basic operational risk (@ 3% add-on less C-4a).

• In 2016, of the 54 companies that triggered growth risk with an impact of greater than 5% of their RBC ratio, 31 of these companies had a TAC of below $25 million. Only 3 reported TAC over $500 million. Three companies moved to an RBC action level as a result of growth risk. One had an anomalous amount of growth risk.

• In 2017, of the 42 companies that triggered growth risk with an impact of greater than 5% of their RBC

ratio, 19 of these companies had a TAC of less than $25 million. Eight reported TAC over $500 million. Two companies moved into an RBC action level as a result of growth risk. Three others remained in an RBC action level.

• Of the 106 Companies with net growth risk after C-4a offset in 2016, 42 also triggered growth risk in 2017

(about 40%). Method 2 - Enhanced Add-on Method:

• In 2016, 61 companies triggered the enhanced add-on method after C-4A offset. The average impact of growth risk across the population of triggering companies was 0.7% of RBC after covariance with a maximum of 1.5% of RBC after covariance.

• In 2017, 46 companies triggered the enhanced add-on method after C-4A offset. The average impact of

growth risk across the population of triggering companies was 0.4% of RBC after covariance, with a maximum of 1.5% of RBC after covariance.

• Maximum impact on any company was less than a 1.5% reduction in RBC ratio in both 2016 and 2017. • For 2016, 51 of the 62 companies triggering growth risk also had positive basic op risk charges. This was

due to the companies either not reporting any C-4a capital, or reporting C-4a capital that was less than 3% of RBC after covariance.

• For 2017, 36 of the 46 companies triggering growth risk also had positive basic op risk charges. This was

due to the companies either not reporting any C-4a capital, or reporting C-4a capital that was less than 3% of RBC after covariance.

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• In 2016, of the 61 companies that triggered growth risk, 40 companies had a TAC of below $2 5million.

Eight reported TAC over $500 million. No companies moved to an RBC action level as a result of growth risk. Two companies were already at an RBC action level.

• In 2017, of the 46 companies that triggered growth risk, 24 companies had a TAC below $25 million. Seven

reported TAC of over $500 million. One company moved to an action level as a result of growth risk. Three other companies were already at an RBC action level and remained.

• Of the 61 Companies with net growth risk in 2016, 24 also triggered growth risk in 2017 (about 40%).

Initial Observations:

1. Interested Parties have noted potential unintended consequences with single premium products and assumption of lump sum liabilities such as pensions whereby large premium amounts are reported in one year and disappear the next year. These transactions may cause an extreme growth risk result in the transaction year followed by a reduction in the subsequent year.

2. Although there are some pure health insurers that file Life RBC, much of the health business written by life carriers is of a long-term nature (e.g., LTC and disability) and it may not be appropriate to apply traditional health factors or growth threshold to such business.

3. If the informational charge is retained, consideration should be given to covariance treatment of growth risk, and whether it should be combined with any other risk under the covariance square root.

4. If an enhanced “add-on” is preferred, then consideration should be given as to whether a single factor is appropriate or if a tiered factor, based on extent of excess growth, is more risk sensitive.