Date: 8/2/17 2017 Summer National Meeting Philadelphia, Pennsylvania CAPITAL ADEQUACY (E) TASK FORCE Monday, August 7, 2017 5:00 – 6:00 p.m. Grand Ballroom GH, Level 5, Marriott ROLL CALL David Altmaier, Chair Florida Chlora Lindley-Myers Missouri Todd E. Kiser, Vice Chair Utah Matthew Rosendale Montana Lori K. Wing-Heier Alaska Richard J. Badolato New Jersey Dave Jones California John G. Franchini New Mexico Katharine L. Wade Connecticut Maria T. Vullo New York Trinidad Navarro Delaware Jillian Froment Ohio Stephen C. Taylor District of Columbia John D. Doak Oklahoma Gordon I. Ito Hawaii Elizabeth Kelleher Dwyer Rhode Island Jennifer Hammer Illinois Kevin Brady Texas Doug Ommen Iowa Mike Kreidler Washington Ken Selzer Kansas Andrew R. Pauley West Virginia Mike Rothman Minnesota Ted Nickel Wisconsin NAIC Support Staff: Jane Barr/ Lou Felice AGENDA 1. Consider Adoption of its June 28 Conference Call Minutes Attachment One —Commissioner David Altmaier (FL) 2. Consider Adoption of its Working Group Reports—Commissioner David Altmaier (FL) • Health Risk-Based Capital (E) Working Group Attachment Two • Investment Risk-Based Capital (E) Working Group Attachment Three • Life Risk-Based Capital (E) Working Group Attachment Four • Operational Risk (E) Subgroup Attachment Five • Property and Casualty Risk-Based Capital (E) Working Group Attachment Six 3. Receive a Status Update on the Affiliate Investment Ad Hoc Group—Tom Botsko (OH) 4. Consider Credit Risk PR012 Proposal—Tom Botsko (OH) Attachment Seven 5. Consider its 2018 Charges—Commissioner David Altmaier (FL) Attachment Eight 6. Consider its 2017 Working Agenda—Commissioner David Altmaier (FL) Attachment Nine 7. Discuss Any Other Matters Brought Before the Task Force—Commissioner David Altmaier (FL) • Discuss RBC Confidentiality—Kara Binderup (NAIC) 8. Adjournment W:\National Meetings\2017\Summer\Agenda\Agenda_CAdTF Meeting 1.docx © 2017 National Association of Insurance Commissioners 1 This page intentionally left blank. 2 Attachment One Attachment__ Capital Adequacy (E) Task Force 8/--/17 Draft: 7/13/17 Capital Adequacy (E) Task Force Conference Call June 28, 2017 The Capital Adequacy (E) Task Force met via conference call June 28, 2017. The following Task Force members participated: David Altmaier, Chair (FL); Todd E. Kiser, Vice Chair, represented by Jake Garn (UT); Lori K. Wing-Heier represented by Wally Thomas (AK); Dave Jones represented by Ron Dahlquist (CA); Katharine L. Wade represented by Kathy Belfi (CT); Stephen C. Taylor (DC); Trinidad Navarro represented by Dave Lonchar (DE); Doug Ommen represented by Mike Yanacheak (IA); Jennifer Hammer represented by Kevin Fry (IL); Ken Selzer (KS); Chlora Lindley-Myers represented by William Leung and John Rehagen (MO); Richard J. Badolato represented by Steve Kerner and Kristine Maurer (NJ); John G. Franchini represented by Alan Seeley (NM); Maria T. Vullo represented by Stephen Wiest (NY); Jillian Froment represented by Tom Botsko (OH); John D. Doak represented by Joel Sander (OK); TBD represented by Mike Boerner and Doug Slape (TX); Mike Kreidler represented by Patrick McNaughton and Ron Pastuch (WA); Ted Nickel represented by Randy Milquet (WI); and Andrew R. Pauley represented by Leah Cooper (WV). 1. Adopted its Spring National Meeting Minutes Mr. Botsko made a motion, seconded by Ms. Cooper, to adopt the Task Force’s April 9 minutes (see NAIC Proceedings – Spring 2017, Capital Adequacy (E) Task Force). The motion passed unanimously. 2. Heard an Update from the Academy David Olsho (American Academy of Actuaries—Academy) summarized the Academy’s response to America’s Health Insurance Plans (AHIP) comment letter regarding the factors proposed and adopted by the Task Force during the Spring National Meeting. The concerns expressed in the comment letter were: 1) whether the data used was sufficient; and 2)whether the new recommended factors were based off the old recommended factors. The Academy’s response was: 1) a simplified method was used to calibrate the factors based on the data that was provided and the number of calendar years that contained that data; and 2) the results were based on actuarial judgment and did not rely solely on past recommended factors (with the limited data available, the factors were modified based on the volume of premium; i.e., lower factor for higher premium amounts). Mr. Olsho said the data for smaller companies had more variability than the larger companies and the data was prior to enactment of the federal Affordable Care Act (ACA), which changed the lifetime maximum to unlimited. The Academy continues to believe that, given the data that was obtainable, the factors presented to, and adopted by, the Task Force were reasonable. He added that the Academy can revisit the issue when the ACA data is available and adjust the factors accordingly (Attachment ___). Bill Weller (AHIP) asked how the Task Force could justify the increased factors based on actuarial judgment instead of asking the Academy to obtain the data and then update the factors as needed. He asked that the Task Force set aside their adoption of the factors during the Spring National Meeting and keep them as they were, and revisit the change in factors for 2018. Mr. McNaughton said the segment of the industry is small and the analysis has been going on for several years. He said the data is valid based on the time frame of the analysis conducted by the Academy, adding that the factor needs to be adjusted and the adoption by the Task Force should remain in place. He agreed that the Health Risk-Based Capital (E) Working Group will continue to evaluate this factor as the federal law changes. Commissioner Altmaier concurred that the factor adoption from the Spring National Meeting will remain in place for 2017. 3. Adopted Proposal 2017-06-CA Commissioner Altmaier said proposal 2016-06-CA was drafted in reaction to a recent adoption by the Blanks (E) Working Group of a proposal on non-government money market mutual funds (MMMFs) and the removal of that line item from Schedule D, Part 2. This proposal will remove the factor on the RBC common stock page to avoid double-counting. Connie Jasper Woodruff (StoneRiver) summarized her comment letter, stating that the blanks should contain “not applicable” to indicate that the line item was removed from the annual financial statement blanks to eliminate any confusion when © 2017 National Association of Insurance Commissioners 1 3 Attachment One Attachment__ Capital Adequacy (E) Task Force 8/--/17 completing the RBC for 2017. Commissioner Altmaier said that, given the time and the fact that the line will be removed in 2018, the proposal should go forward as-is. Mr. Fry made a motion, seconded by Mr. Botsko, to adopt the removal of the factor for non-government MMMFs to avoid double-counting (Attachment ___). The motion passed unanimously. 4. Adopted the May 17 Minutes of the Operational Risk (E) Subgroup Commissioner Altmaier said that before considering the operational risk proposal, the Task Force will need to consider adoption of the Subgroup’s May 17 minutes. Mr. Seeley made a motion, seconded by Mr. Sander, to adopt the Subgroup’s May 17 minutes (Attachment ___). The motion passed. 5. Adopted Proposal 2016-13-O Mr. Seeley said that, during the Spring National Meeting, the Task Force adopted the structure to add the operational risk charge to the RBC formulas. He added that proposal 2016-13-O (Attachment ___) presented today is to consider the instructions and factor charge for 2017 reporting. Mr. Seeley said numerous health insurers have submitted comment letters requesting a delay of the operational risk charge. Some letters expressed that there is not a need for an operational risk charge or that it is embedded within the current RBC formula through other risks. Mr. Seeley said, however, that other countries and state regulators believe there is a need to capture operational risk in the RBC. He added that, a few days ago, it was reported that Anthem reported a settlement of $115 million for a data breach suit, which is clearly an operational risk issue. Cyber risk is an emerging concern of the NAIC and its members, and this settlement further proves that this type of risk is not embedded in the current RBC formula and maintaining capital for this type of risk is prudent. Mr. Seeley said the comment letters refer to the uncertainty of the ACA as a reason to delay or cite double-counting issues for parent companies. He added that the Academy has voiced this concern and is reviewing the issue. Mr. Seeley said the option to the Task Force is to adopt the changes to the instructions but delay the factor charge for another year. Mr. Dahlquist asked what percentage of RBC the data breach settlement represents and if a 0% charge is adopted for 2017 would there still be reporting for 2017. Mr. Seeley said the settlement represents between 5% to 6% of Anthem’s RBC ratio. Mr. McNaughton asked if the 2017 factor was zero, what would be phased-in for 2018; i.e., whether it would be the full 3% and whether it would apply to all statement types. Commissioner Altmaier said that if the Task Force agrees to zero for 2017 for all statement types, then the Operational Risk (E) Subgroup will have the flexibility to recommend a factor for 2018, whatever it deems appropriate. Amy Lazzaro (Cigna) said Cigna appreciates the work of the Operational Risk (E) Subgroup and its recognition that more work is needed to address the double-counting issue. Sara Boyle (Cigna) summarized the potential impact of the double- counting issue for life filers that have subsidiaries with operational risk greater than that of the parent. Cigna agrees with the Academy’s need to review and address the double-counting of this operational risk charge. She summarized the scenario provided in the comment letter (Attachment ___), which shows an over-statement of the operational risk in the parent company without an offset in the formula to the subsidiary’s operational risk (Attachment ___). She reiterated that, along with the other commenters, she asks the Task Force to not adopt a charge for 2017. Dan Wolke (Anthem) asked that the Task Force delay the charge for 2018 and that it considers a phased-in approach in 2018/2019 reporting years. Candy Gallaher (AHIP) reiterated that AHIP requests a delay in adopting a factor until all issues are addressed with the formula. Joseph Alfano (Aetna) said that if an operational risk charge is deemed necessary and not covered in other corporate governance disclosures, he asks that the Task Force delay implementation until the insurers can get comfortable with the additional charges. James Braue (UnitedHealth Group) concurred with the comments provided, noting that he had previously expressed to the Operational Risk (E) Subgroup that the RBC formula, in its current form, adequately captures all necessary risks, adding that further analysis should done to quantify the need to add operational risk to the formula. Ms. Maurer recognized the work of the Operational Risk (E) Subgroup and acknowledged that the Task Force had unanimously agreed to implement the operational risk charge into the RBC formulas. Although she supports that decision, Ms. Maurer said that if there is an ability to fix the technical issues discussed today regarding the double-counting for some © 2017 National Association of Insurance Commissioners 2 4 Attachment One Attachment__ Capital Adequacy (E) Task Force 8/--/17 groups, she agrees that implementing a capital charge should be delayed in order to allow the Subgroup to complete its review. Ms. Maurer made a motion, seconded by Mr. Taylor to adopt proposal 2016-13-O and reduce the recommended charge to zero for 2017 in all RBC formulas (Attachment ___). The motion passed. 6. Adopted Proposal 2016-14-P and Proposal 2017-05-P Mr. Botsko summarized proposal 2016-14-P for line 4 ex-cat factors, explaining that the factors were developed by the Academy using an updated methodology. He added that the proposal was exposed twice: 1) for a 60-day public comment period ending Feb. 8; and 2) using a 10% capped factor, for a 30-day public comment period ending May 9. The Property and Casualty Risk-Based Capital (E) Working Group clarified that it would not take 10 years to reach the recommended factors from the Academy; it was agreed to review the factors in two to three years. Mr. Botsko said proposal 2017-05-P includes annual updates to the line 1 factors for PR017 and PR018, noting that this proposal was exposed for a 30-day public comment period ending May 9 and no comments were received. Mr. Dahlquist made a motion, seconded by Mr. Milquet to adopt proposal 2016-14-P (Attachment ___) and proposal 2017- 05-P (Attachment ___). The motion passed. 7. Adopted Proposal 2017-02-L Mr. Boerner said the purpose of proposal 2017-02-L is to provide coordination between Actuarial Guideline XLVIII— Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (AG 48) and the adoption of the Term and Universal Life Insurance Reserve Financing Model Regulation (#787). Anything that AG 48 address would not be addressed in Model #787; likewise, a similar coordination if any state has not adopted Model #787, then AG 48 would provide guidance for the shortfall reflected in the authorized control level. Mr. Boerner made a motion, seconded by Ms. Belfi to adopt proposal 2017-02-L (Attachment ___). The motion passed. Having no further business, the Capital Adequacy (E) Task Force adjourned. W:\National Meetings\2017\Summer\TF\CapAdequacy\06-_CapitalAdequacyTFmin_final.docx © 2017 National Association of Insurance Commissioners 3 5 This page intentionally left blank. 6 Attachment Two 2017 Summer National Meeting Philadelphia, Pennsylvania HEALTH RISK-BASED CAPITAL (E) WORKING GROUP Monday, August 7, 2017 10:00 – 11:00 a.m. Meeting Summary Report The Health Risk-Based Capital (E) Working Group met Aug. 7, 2017. During this meeting, the Working Group: 1. Adopted its July 11 and May 30 minutes, which included the following action: a. Adopted the 2018 Health RBC Working Agenda and its Spring National Meeting minutes. b. Exposed proposal 2017-08-H – Medicaid Pass –Through Payments for a 45-day public comment period ending July 14. c. Heard an update on the federal Affordable Care Act (ACA) and the American Health Care Act (AHCA). 2. Discussed the Medicaid Pass-Through Payment proposal (2017-08-H) for the health risk-based capital (RBC) formula and the application of the proposal to the life and property/casualty (P/C) RBC formulas. The Working Group agreed to refer the proposal to the Capital Adequacy (E) Task Force for exposure at a meeting subsequent to the Summer National Meeting. 3. Adopted the 2017 Health Risk-Based Capital newsletter with a modification to add an additional editorial change to the annual statement reference on line 23 and line 24 on page XR007 from Note 5I to Note 5M. 4. Discussed the summary of the 2016 Health RBC Statistical Report. The Working Group approved the report, and it will be posted to the Working Group’s web page. 5. Discussed the Risk Adjustment and Risk Corridor Sensitivity Test proposal (2017-09-CA) to remove the risk corridor components from the sensitivity test. The Working Group exposed the proposal for a 30-day comment period ending Sept. 7. 6. Discussed the Federal Affordable Care Act Reinsurance proposal (2017-10-H) to remove line 4, line 5, line 10 and line 11 from page XR019 due to the ending of the reinsurance program. The Working Group exposed the proposal for a 30- day comment period ending Sept. 7. 7. Received a status update on the Investment Risk-Based Capital (E) Working Group, which included discussion on the bond granularity structure and factors for health RBC. The Working Group agreed to send a referral letter to the American Academy of Actuaries (Academy) Health Solvency Subcommittee to review the proposed bond factors for the health RBC formula. 8. Discussed with NAIC legal staff the obstacles and concerns regarding information sharing of RBC data for formula and factor analysis with the actuarial groups. The Working Group discussed the importance to continue using these groups as it relates to the health RBC formula. 9. Received a status update from NAIC staff regarding updates and/or changes to the ACA. NAIC staff encouraged Working Group members and interested parties to continue to track changes to the ACA, as these may eventually affect the Health Risk-Based Capital (E) Working Group work stream. W:\National Meetings\2017\Summer\Final Summaries © 2017 National Association of Insurance Commissioners 1 7 Attachment Three 2017 Summer National Meeting Philadelphia, Pennsylvania INVESTMENT RISK-BASED CAPITAL (E) WORKING GROUP Monday, August 7, 2017 8:00 – 9:00 a.m. Meeting Summary Report The Investment Risk-Based Capital (E) Working Group met Aug. 7, 2017. During this meeting, the Working Group: 1. Adopted its Spring National Meeting minutes. 2. Adopted its June 13 minutes, which included the following action: a. Exposed a June 8 report from the American Academy of Actuaries (Academy) on bond factors in the risk-based capital (RBC) formulas for a 40-day public comment period ending July 24. b. Discussed a comment letter received related to proposed revisions to the health and property/casualty (P/C) RBC formulas and instructions to increase bond granularity. c. Discuss referrals sent to the Statutory Accounting Principles (E) Working Group and the Valuation of Securities (E) Task Force to inform them of the decision to increase the bond granularity in the RBC formulas. The referrals asked these groups to review their current publications, manuals and procedures to consider whether the bond granularity project will have any impact on them. 3. Discussed comment letters received related to the Academy’s June 8 report with updated bond factors and portfolio adjustment factors. The Academy indicated that it will be updating its portfolio adjustment scheme and the corresponding base factors and will provide this information to the Working Group in the next few weeks. 4. Discussed that the Working Group will be scheduling a joint conference in the coming weeks with the Health Risk- Based Capital (E) Working Group, the Life Risk-Based Capital (E) Working Group and the Property and Casualty Risk- Based Capital (E) Working Group to consider adoption of the increased granularity in the bond structure in the RBC formulas. Obtaining approval on this is necessary in order for the NAIC Investment Analysis Office to begin the process of mapping national recognized statistical rating organization (NRSRO) ratings to the proposed 20 RBC categories for bonds. 5. Discussed comment letters received related to proposal 2017-06-L from the American Council of Life Insurers (ACLI) regarding the treatment of real estate in the life RBC formula. The ACLI will be updating its proposal for items noted in the Academy’s comment letter and will provide this information to the Working Group in the coming weeks. W:\National Meetings\2017\Summer\Summaries\Draft Summaries\Investment RBC WG.docxx © 2017 National Association of Insurance Commissioners 1 8 Attachment Four 2017 Summer National Meeting Philadelphia, Pennsylvania LIFE RISK-BASED CAPITAL (E) WORKING GROUP Sunday, August 6, 2017 10:00 – 11:00 a.m. Meeting Summary Report The Life Risk-Based Capital (E) Working Group met Aug. 6, 2017. During this meeting, the Working Group: 1. Adopted its June 19, June 9 and Spring National Meeting minutes, which included the following action: a. Adopted proposal 2017-02-L, the primary security shortfall instructional change. b. Re-exposed proposal 2017-03-L, the American Council of Life Insurers’ (ACLI) Federal Home Loan Bank (FHLB) proposal, for a 45-day public comment period ending July 24. c. Disbanded the Stress Testing (E) Subgroup. 2. Adopted the 2017 life and fraternal risk-based capital (RBC) newsletters. 3. Adopted its 2017 working agenda. 4. Heard an update from the American Academy of Actuaries’ (Academy) Longevity Risk Task Force. 5. Heard an update from the Academy’s C2 Work Group. 6. Received an update from the Investment Risk-Based Capital (E) Working Group. 7. Continued discussion of the ACLI FHLB proposal. The Working Group directed NAIC staff to produce a report reviewing the 2016 data by Oct. 1. 8. Discussed with NAIC legal staff the obstacles and concerns regarding information sharing of RBC data for analysis of the RBC formula and factors with actuarial groups. 9. Discussed the 2017 life and fraternal RBC statistics. W:\National Meetings\2017\Summer\Summaries\Final Summaries\LRBC.doc © 2017 National Association of Insurance Commissioners 1 9 Attachment Five Attachment__ Capital Adequacy (E) Task Force 8/--/17 Draft: 7/11/17 Operational Risk (E) Subgroup Conference Call June 23, 2017 The Operational Risk (E) Subgroup of the Capital Adequacy (E) Task Force met via conference call June 23, 2017. The following Subgroup members participated: Alan Seeley, Chair (NM); Susan Bernard (CA); Tish Becker (KS); John Robinson (MN); Stephen Wiest (NY); Joel Sander (OK); Steve Drutz (WA); and Tom Houston (WI). 1. Adopted Instructional Changes for the Basic Operational Risk Add-on Methodology Mr. Seeley described the progression of the Subgroup’s recent adoptions related to the basic operational risk add-on. He stated that the structure for the add-on was adopted up the NAIC hierarchy through the Financial Condition (E) Committee and that the 3% factor was adopted, with a phase-in factor of 1.5% for 2017, during the Subgroup’s May 17 conference call. Mr. Seeley stated that this call was to consider adoption of changes needed to move the instruction from the informational section to the active section of the risk-based capital (RBC) formulas. The instructions also eliminate the double-counting of operational risk calculated by RBC filing subsidiaries of RBC filing parent insurers. Mr. Seeley further stated that the two comment letters received from American Council of Life Insurers (ACLI) and the American Academy of Actuaries (Academy) did not contain specific comments about the instructions, but instead referenced other issues that the Subgroup members are considering for 2018 RBC. He asked if any participants on the call had any comments concerning the exposed instructional changes for 2017 RBC. John Bruins (ACLI) asked that the informational growth risk instructions for life RBC be removed because the methodology used therein was likely not workable for most life insurance business. Brian O’Neill (Academy) agreed that at least some parts of the methodology were not suitable for certain life products and particularly large one-time transactions like pension plan purchases. He stated that the Academy will consider non-capital measures to address growth risk. Mr. Robinson expressed support for removing the instructions. Mr. Felice stated that it is too late for the Subgroup to make structural changes, so leaving the structure while deleting the instructions would be odd. He added that eliminating the entire set of instructions might not be correct, because the health section of the informational growth risk page is the same as what is in the health RBC informational growth risk page. He recommended that the Subgroup members review the informational page and decide which lines are no longer applicable and issue guidance for 2017 to insurers that they should not fill in those lines in 2017 RBC. Both Mr. Bruins and Mr. Robinson were amenable to moving forward on that basis. Mr. Wiest made a motion, seconded by Mr. Robinson, to adopt the 2017 instructional changes, with the provision that guidance be issued for the informational life RBC growth risk page (Attachment ___). The motion passed unanimously. 2. Discussed Comments Related to 2018 RBC Mr. Seeley called for the authors of the two comment letters to go over their other comments not related to the 2017 instructions. Mr. Bruins stated that the Subgroup should consider removing operational risk capital charges imposed by foreign regulators on non-U.S. insurance subsidiaries of RBC filing insurers. Lou Felice (NAIC) stated that only Canadian insurance subsidiaries’ capital requirements are included in the RBC of U.S. insurance parents. The issue does not exist for either property/casualty (P/C) or health RBC under the current formulas. Mr. Seeley agreed that the Subgroup would look at the issue for 2018 RBC. Mr. O’Neill stated that the Academy continues to work on the “double-counting” issue and is looking at more than one corrective approach. Mr. Seeley stated that a different proposal to address the issue was received from CIGNA. Mr. O’Neill agreed to look at that proposal if forwarded to the Academy as part of its ongoing work. Mr. O’Neill also stated that the Academy “on balance” felt that a proxy approach is preferable to an add-on approach for life insurers. © 2017 National Association of Insurance Commissioners 1 10