CATASTROPHE RISK (E) SUBGROUP Friday, April 7, :00 6:00 p.m. Colorado Convention Center Street Level 201/203 ROLL CALL

Transcription

1 Date: 3/29/ Spring National Meeting Denver, Colorado CATASTROPHE RISK (E) SUBGROUP Friday, April 7, :00 6:00 p.m. Colorado Convention Center Street Level 201/203 ROLL CALL Ron Dahlquist, Chair Robert Ridenour, Vice Chair Mitchell Bronson Susan Gozzo Andrews/Wanchin Chou Judy Mottar Gordon Hay Alan Seeley Gloria Huberman/Sak-man Luk Dale Bruggeman/Tom Botsko John D. Doak/Frank Stone Nicole Elliott/Jennifer Wu California Florida Colorado Connecticut Illinois Nebraska New Mexico New York Ohio Oklahoma Texas AGENDA 1. Consider Adoption of its Feb. 1 and 2016 Fall National Meeting Minutes Ron Dahlquist (CA) Attachment A 2. Consider Adoption of Agenda Item CR Using Models Other than the Five Attachment B Approved Commercially Available Model Losses Ron Dahlquist (CA) Comments: American Insurance Association (AIA) Adam E. Kerns Swiss Re Matt McKenney 3. Consider Adoption of Agenda Item CR Rcat Implementation Ron Dahlquist (CA) Attachment C 4. Consider Exposure of Agenda Item CR Rcat Calculation Methodology Ron Dahlquist (CA) Attachment D 5. Discuss Other Catastrophe Risks for Possible Inclusion in the Property/Casualty Risk-Based Capital Formula Ron Dahlquist (CA) 6. Discuss Any Other Matters Brought Before the Subgroup Ron Dahlquist (CA) 7. Adjournment w:\national meetings\2017\spring\tf\capadequacy\pcrbc\ cat risk agenda.docx 2017 National Association of Insurance Commissioners 1

2 This page intentionally left blank. 2

3 Attachment A Attachment Capital Adequacy (E) Task Force 4/9/17 Draft: 3/2/17 Catastrophe Risk (E) Subgroup E-Vote February 1, 2017 The Catastrophe Risk (E) Subgroup of the Property and Casualty Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force conducted an e-vote that concluded Feb. 1, The following Subgroup members participated: Ron Dahlquist, Chair (CA); George Bradner and Wanchin Chou (CT); Robert Ridenour (FL); Judy Mottar (IL); Gordon Hay (NE); Alan Seeley (NM); Sak-man Luk (NY); Tom Botsko (OH); Frank Stone (OK); and Nicole Elliott (TX). 1. Adopted the Updated 2016 U.S. and Non-U.S. Catastrophe Risk Event Lists The Subgroup conducted an e-vote that concluded Feb. 1 to consider adoption of the updated 2016 U.S. and non-u.s. catastrophe risk event lists. Mr. Botsko made a motion, seconded by Mr. Luk, to adopt the lists. The motion passed. Having no further business, the Catastrophe Risk (E) Subgroup adjourned. W:\National Meetings\2017\Spring\TF\CapAdequacy\PCRBC\Att01_02-01propertycatsg.doc 2017 National Association of Insurance Commissioners 1 3

4 This page intentionally left blank. 4

5 Draft Pending Adoption Attachment A Attachment Six-B Capital Adequacy (E) Task Force 12/11/16 Draft: 12/15/16 Catastrophe Risk (E) Subgroup Miami, Florida December 9, 2016 The Catastrophe Risk (E) Subgroup of the Property and Casualty Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force met in Miami, FL, Dec. 9, The following Subgroup members participated: Ron Dahlquist, Chair (CA); George Bradner and Wanchin Chou (CT); Robert Ridenour (FL); Alan Seeley (NM); Marc Allen (NY); Tom Botsko (OH); and John D. Doak, Tyler Laughlin and Joel Sander (OK). 1. Adopted its Nov. 18, Oct. 20 and Oct. 5 Minutes Mr. Botsko made a motion, seconded by Commissioner Doak, to adopt the Subgroup s Nov. 18 (Attachment Six-C1), Oct. 20 (Attachment Six-C2) and Oct. 5 (Attachment Six-C3) minutes. The motion passed unanimously. 2. Adopted Agenda Item CR (2016 Annual Catastrophe Event Lists) Mr. Dahlquist said the Subgroup conducted an e-vote that concluded Oct. 20 to adopt the update process for the annual catastrophe event lists, which allows interested parties to provide the list of catastrophe events for the current year by Oct. 31 on a voluntary basis. The lists were exposed on the Nov. 18 conference call and no comments were received during the exposure period. Mr. Botsko made a motion, seconded by Mr. Seeley, to adopt agenda item CR (2016 Annual Catastrophe Event Lists). The motion passed unanimously. 3. Re-exposed Agenda Item CR (Rcat Implementation) Mr. Dahlquist said the purpose of this agenda item is to implement the earthquake and hurricane catastrophe risk charges into the risk-based capital (RBC) calculation for 2017 reporting. Further discussion will continue after the exposure period. Commissioner Doak made a motion, seconded by Mr. Bradner, to expose agenda item CR (Rcat Implementation) for a 30-day public comment period ending Jan. 8, The motion passed unanimously. 4. Discussed Other Catastrophe Risks for Possible Inclusion in the P/C RBC Formula Mr. Dahlquist said the Subgroup is charged with continuing to refine the catastrophe risk charges, and it has always been the Subgroup s intention to determine if the risk charges of any other catastrophic perils (e.g., tornado, wildfire and terrorism) should be added to the RBC formula. He said he will contact the NAIC support staff who assist with the Own Risk Solvency Assessment (ORSA) to obtain more information regarding the availability and robustness of other catastrophe models for developing estimated losses in the near future. He also stated that this discussion is expected to continue through the upcoming Subgroup conference calls. 5. Discussed Agenda Item CR (Using Models Other Than the Five Approved Commercially Available Model Losses Mr. Dahlquist said the purpose of this proposal is to develop appropriate criteria to allow a company to use its own internal catastrophe model as the basis for the catastrophe risk charge, instead of one or more of the approved commercially available external models. Matt McKenney (Swiss Re) had previously submitted a proposed approach for consideration. At the request of the Subgroup, he provided a redraft, which was included in the meeting materials as Option One. Mr. Dahlquist mentioned further that NAIC staff and state insurance regulators had developed a second alternative to address this issue during the exposure period; this was included in the meeting materials as Option Two. Mr. Dahlquist expressed his opinion that this second option is really an expansion on the first option and not a separate option. There was general agreement among Subgroup members that this was correct National Association of Insurance Commissioners 1 5

6 Draft Pending Adoption Attachment A Attachment Six-B Capital Adequacy (E) Task Force 12/11/16 Dan Daveline (NAIC) explained that he had worked with Missouri and Nebraska regulators during the exposure period to develop the proposal labeled Option Two. This approach would require that any internal models would have to meet three tests in order to be approved for use in determining a company s catastrophe risk charge for RBC: 1) it would have to be used in the company s own catastrophe risk management, capital assessment and capital allocation processes; 2) it must be demonstrated that it is based on reasonable data and assumptions and that model results reflect exposure data that is no older than six months; and 3) the insurer must have validated the model regularly, including thoroughly testing its results against available evidence. The expanded proposal would include different treatment of companies depending on whether their group-wide supervisor is a U.S. regulator. If the group supervisor is a non-u.s. regulator, it would only be necessary for the insurer to have its internal model approved by its group supervisor, subject to the model having passed the three listed tests. If the group-wide supervisor is a U.S. regulator, the insurer would be required to submit a report by a qualified third party demonstrating that the three conditions had been met. In addition, the internal model would be subject to current or future review through either a full-scope examination or a targeted examination, by a lead state and/or domestic state or other impacted states. Mr. Chou expressed concern for the states limited technical capability on reviewing and approving the internal models. Mr. Dahlquist responded that this has been a concern of Subgroup members, and is a reason for the proposal to require a report from a qualified third party. Mr. Dahlquist suggested the Subgroup re-expose this proposal and stated that the discussion of this internal model issue is expected to continue through upcoming Subgroup conference calls. Eva Yeung (NAIC) informed the Subgroup that as long as this issue is resolved by the end of April 2017, the proposed approach could by implemented for 2017 annual financial statement reporting. Mr. Botsko made a motion, seconded by Mr. Bradner, to re-expose agenda item CR (Using Models Other than the Five Approved Commercially Available Model Losses) for a 45-day public comment period ending Jan. 23, The motion passed unanimously. Having no further business, the Catastrophe Risk (E) Subgroup adjourned. W:\National Meetings\2016\Fall\TF\CapAdequacy\PCRBC\Att01_12_09propertycatsg.doc 2016 National Association of Insurance Commissioners 2 6

7 Attachment B Capital Adequacy (E) Task Force RBC Proposal Form [ ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group [ x ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] Op Risk RBC (E) Subgroup [ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup DATE: 9/28/2016 CONTACT PERSON: Eva Yeung TELEPHONE: ADDRESS: eyeung@naic.org ON BEHALF OF: Catastrophe Risk (E) Subgroup NAME: Matthew McKenney / Ron Dahlquist TITLE: Senior Risk Officer P&C/Cat Risk SG Chair AFFILIATION: Swiss Re / Cat Risk SG ADDRESS: FOR NAIC USE ONLY Agenda Item # CR Year 2017 [ ] ADOPTED [ ] REJECTED [ ] DEFERRED TO DISPOSITION [ ] REFERRED TO OTHER NAIC GROUP [ x ] EXPOSED 10/05/16, 12/09/16, 03/07/17 [ ] OTHER (SPECIFY) IDENTIFICATION OF SOURCE AND FORM(S)/INSTRUCTIONS TO BE CHANGED [ ] Health RBC Blanks [ x ] Property/Casualty RBC Blanks [ ] Life RBC Instructions [ ] Fraternal RBC Blanks [ ] Health RBC Instructions [ x ] Property/Casualty RBC Instructions [ ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER DESCRIPTION OF CHANGE(S) Revised PR027 instruction to allow approved internal catastrophe models as the basis for the catastrophe risk charge R-CAT. REASON OR JUSTIFICATION FOR CHANGE ** Insurers may use a range of catastrophe models for internal catastrophe risk management. For an insurer using a catastrophe model other than AIR, EQECAT, RMS, ARA HurLoss, or the Florida Public Model, the existing instruction could result in an RBC requirement that is inconsistent with the insurer's own assessment of its exposure to catastrophe risk. If an insurer uses an internal catastrophe model for its catastrophe risk management, and that model is accepted by the insurer's group supervisor as the basis for the insurer's capital requirement, that model also may be accepted as the basis for the insurer s catastrophe risk RBC charge. Additional Staff Comments: 10/05/16 The Catastrophe Risk SG exposed the proposal for 30 days. 12/2/16 The Catastrophe Risk SG and NAIC staff developed an option 2 instruction for discussion at the Fall National Meeting. 12/09/16 The Catastrophe Risk SG re-expose this item for a 45-day comment period ending Jan /10/17 Revised Instructions and Footnotes were exposed for 14 days ending Mar. 28 ** This section must be completed on all forms. Revised National Association of Insurance Commissioners 7

8 This page intentionally left blank. 8

9 Option 2 Attachment B An Approved Accepted Internal Catastrophe Model is a model other than AIR, EQECAT, RMS, ARA HurLoss, and the Florida Public Model that has either been approved for determining the insurer s catastrophe risk capital requirement by the insurer s non-u.s. group-wide supervisor, or is subject to current or future review through either a full scope examination, or targeted examination, by a lead state and/or domestic state or other impacted states A) In the case of being approved by the non-u.s. group-wide supervisor, a letter from the non-u.s. groupwide supervisor shall be submitted to the lead state indicating that the group-wide supervisor has approved the model. The letter should certify that the group-wide supervisor has been provided: 1. Evidence produced by the insurer or the group that the model is used for catastrophe risk management, capital assessment, and the capital allocation process; 2. Evidence that the model has been developed using reasonable data and assumptions and that model results used in determining the catastrophe risk capital requirement reflect exposure data that is no older than six months; 3. Evidence that the insurer or the group has validated the model regularly, including through testing its results against available evidence; 4. Evidence that the perils included in the RBC Catastrophe Risk Charge have been validated by the insurer or group and that these perils include the U.S.exposures. B) In the case of being subject to current or future review by a lead state and/or domestic state, the following specific elements shall be applied: 1. Evidence produced by the insurer or the group that the model is used for catastrophe risk management, capital assessment, and the capital allocation process; 2. Evidence that the model has been developed using reasonable data and assumptions and that model results used in determining the catastrophe risk capital requirement reflect exposure data that is no older than six months; 3. Evidence that the insurer or the group has validated the model regularly, including through testing its results against available evidence; 4. A report from a qualified third party demonstrating that the qualified third party has reviewed the information from items 1, 2 and 3, along with any other information necessary to assess that the model and the figures used in this risk-based capital formula are a fair representation of the exposure of the reporting entity for the identified peril. The insurer is responsible for paying the third party for its services. Prior to completing the work, the third party must provide to the regulator individual qualifications of the team to perform the work, as well as a description as to why they are collectively qualified and a general plan for achieving the expectations as required within this point. In the situation where the model output will be used to determine the catastrophe risk capital requirement for a single entity, the regulator is the domestic state. In the situation where the model output will be used to determine the catastrophe risk capital requirement for a group, the regulator is the lead state If during such an examination the lead state or domestic state determines that the insurer s model does not meet such criteria, the insurer shall be required to resubmit the risk-based capital filing and any past filings so impacted where such internal model was used. The resubmitted filing(s) should reflect a catastrophe risk capital requirement determined through the use of the AIR, EQECAT, RMS, ARA HurLoss, or Florida Public Model. An insurer considering the use of a model other than AIR, EQECAT, RMS, ARA HurLoss, or Florida Public Model and other than those considered Approved Internal Catastrophe Models for determining the catastrophe risk capital requirement must first seek approval from its domestic state and must provide evidence that: 1. Such use is reasonable considering the nature, scale, and complexity of the insurer; 2. Such use is reasonable based upon the insurer s relative level of available capital compared to required capital, under the knowledge that misreporting could materially hide the insurer s true capital position; 9

10 Option 2 Attachment B 3. The insurer has individuals with experience in developing, testing and validating internal models or engages third parties with such experience; 4. The insurer has used such a model for 3 years for catastrophe risk management; 5. The insurer has the financial resources to engage a qualified third party to review the required information, both when the model is initially considered for use in determining the catastrophe risk charge and when there are material changes to the model. 10

11 CALCULATION OF CATASTROPHE RISK CHARGE RCAT (FOR INFORMATIONAL PURPOSES ONLY) PR027 Attachment B The catastrophe risk charge for earthquake (PR027A) and hurricane (PR027B) risks is calculated by multiplying the RBC factors by the corresponding modeled losses and reinsurance recoverables. The risk applies on a net basis with a corresponding contingent credit risk charge for certain categories of reinsurers. Data must be provided for the worst year in 50, 100, 250, and 500; however, only the worst year in 100 will be used in the calculation of the catastrophe risk charge. While projected losses modeled on an Aggregate Exceedance Probability basis is preferred, companies are permitted to report on an Occurrence Exceedance Probability basis if that is consistent with the company s internal risk management process. An Accepted Internal Catastrophe Model is a model other than AIR, EQECAT, RMS, ARA HurLoss, and the Florida Public Model that has either been approved for determining the insurer s catastrophe risk capital requirement by the insurer s non-u.s. group-wide supervisor, or is subject to current or future review through either a full scope examination, or targeted examination, by a lead state and/or domestic state or other impacted states A) In the case of being approved by the non-u.s. group-wide supervisor, a letter from the non-u.s. group-wide supervisor shall be submitted to the lead state indicating that the group-wide supervisor has approved the model. The letter should certify that the group-wide supervisor has been provided: 1. Evidence produced by the insurer or the group that the model is used for catastrophe risk management, capital assessment, and the capital allocation process; 2. Evidence that the model has been developed using reasonable data and assumptions and that model results used in determining the catastrophe risk capital requirement reflect exposure data that is no older than six months; 3. Evidence that the insurer or the group has validated the model regularly, including through testing its results against available evidence; 4. Evidence that the perils included in the RBC Catastrophe Risk Charge have been validated by the insurer or group and that these perils include the U.S. exposures. B) In the case of being subject to current or future review by a lead state and/or domestic state, the following specific elements shall be applied: 1. Evidence produced by the insurer or the group that the model is used for catastrophe risk management, capital assessment, and the capital allocation process; 2. Evidence that the model has been developed using reasonable data and assumptions and that model results used in determining the catastrophe risk capital requirement reflect exposure data that is no older than six months; 3. Evidence that the insurer or the group has validated the model regularly, including through testing its results against available evidence; 4. A report from a qualified third party demonstrating that the qualified third party has reviewed the information from items 1, 2 and 3, along with any other information necessary to assess that the model and the figures used in this risk-based capital formula are a fair representation of the exposure of the reporting entity for the identified peril. The insurer is responsible for paying the third party for its services. Prior to completing the work, the third party must provide to the regulator individual qualifications of the team to perform the work, as well as a description as to why they are collectively qualified and a general plan for achieving the expectations as required within this point. In the situation where the model output will be used to determine the catastrophe risk capital requirement for a single entity, the regulator is the domestic state. In the situation where the model output will be used to determine the catastrophe risk capital requirement for a group, the regulator is the lead state If during such an examination the lead state or domestic state determines that the insurer s model does not meet such criteria, the insurer shall be required to resubmit the risk-based capital filing and any past filings so impacted where such internal model was used. The resubmitted filing(s) should reflect a catastrophe risk capital requirement determined through the use of the AIR, EQECAT, RMS, ARA HurLoss, or Florida Public Model. An insurer considering the use of a model other than AIR, EQECAT, RMS, ARA HurLoss, or Florida Public Model and other than those considered Approved Internal Catastrophe Models for determining the catastrophe risk capital requirement must first seek approval from its domestic state and must provide evidence that: National Association of Insurance Commissioners 1 11

12 Attachment B 1. Such use is reasonable considering the nature, scale, and complexity of the insurer; 2. Such use is reasonable based upon the insurer s relative level of available capital compared to required capital, under the knowledge that misreporting could materially hide the insurer s true capital position; 3. The insurer has individuals with experience in developing, testing and validating internal models or engages third parties with such experience; 4. The insurer has used such a model for 3 years for catastrophe risk management; 5. The insurer has the financial resources to engage a qualified third party to review the required information, both when the model is initially considered for use in determining the catastrophe risk charge and when there are material changes to the model. The contingent credit risk charge should be calculated in a manner consistent with the way the company internally evaluates and manages its modeled net catastrophe risk. Note that no tax effect offsets or reinstatement premiums should be included in the modeled losses. Further note that the catastrophe risk charge is for earthquake and hurricane risks only. As per the footnote on this page, modeled losses to be entered PR027A and PR027B in Lines (1) through (84) are to be calculated using either one of the approved commercially available catastrophe models AIR, EQECAT, RMS, ARA HurLoss (hurricane only); or, the Florida Public Model (hurricane only) or the approved internal model; and using the insurance company s own insured property exposure information as inputs to the model. The insurance company may elect to use the modeled results from any one of the models, or any combination of results of two or more of the models. Each insurer will not be required to utilize any prescribed set of modeling assumptions, but will be expected to use the same exposure data, modeling, and assumptions that the insurer uses in its own internal catastrophe risk management process. Any exceptions must be explained in the required Attestation Re: Catastrophe Modeling Used in RBC Catastrophe Risk Charges within this RBC Report Detail Eliminated To Conserve Space National Association of Insurance Commissioners 2 12

13 Attachment B CALCULATION OF CATASTROPHE RISK CHARGE FOR EARTHQUAKE PR027A (For Informational Purposes Only) Modeled Losses (1) (2) 3 (4) Earthquake Reference Direct and Assumed Net Ceded Amounts Recoverable Ceded Amounts Recoverable with zero Credit Risk Charge (1) Worst Year in 50 Company Records (2) Worst Year in 100 Company Records (3) Worst Year in 250 Company Records (4) Worst Year in 500 Company Records (5) Y/N (5) Has the company reported above, its modeled earthquake losses using an occurrence exceedance probability (OEP) basis? Reference (6) (7) Amount Factor RBC Requirement (C(6) * Factor) (6) Net Earthquake Risk L(2) C(2) (7) Contingent Credit Risk for Earthquake Risk L(2) C(3) - C(4) (8) Total Earthquake Catastrophe Risk (AEP Basis) If L(5) C(5) = "N", L(8) C(7) = L(6) C(7)+ L(7) C(7), otherwise "0" (9) Total Earthquake Catastrophe Risk (OEP Basis) If L(5) C(5) = "Y", L(9) C(7) = L(6) C(7)+ L(7) C(7), otherwise "0" (10) Total Earthquake Catastrophe Risk L(8) C(7) + L(9) C(7) 0 Lines (1)-(8): Modeled losses to be entered on these lines are to be calculated using one of the approved commercially available catastrophe models - AIR, EQECAT, RMS; and using the insurance company's own insured property exposure information as inputs to the model. The insurance company may elect to use the modeled results from any one of the models, or any combination of the results of two or more of the models. Each insurer will not be required to utilize any prescribed set of modeling assumptions, but will be expected to use the same data, modeling, and assumptions that the insurer uses in its own internal catastrophe risk management process. An attestation to this effect and an explanation of the company's key assumptions may be required, and the company's catastrophe data and modeling may be subject to examination. For any company using model other than the approved ones, please refer to the PR027 instructions for details. Column (3) is modeled catastrophe losses that would be ceded under reinsurance contracts. This should be associated with the Net Modeled Losses shown in Column (2). Column (4) is modeled catastrophe losses that would be ceded to the categories of reinsurers that are not subject to the RBC credit risk charge (i.e., U.S. affiliates and mandatory pools, whether authorized, unauthorized, or certified). Denotes items that must be manually entered on the filing software. PR027A 13

14 This page intentionally left blank. 14

15 Attachment B th Street NW Suite 550 Washington, DC Fax March 28, 2017 Catastrophe Risk (E) Subgroup National Association of Insurance Commissioners c/o Ms. Eva Yeung Via eyeung@naic.org Re: Agenda Item CR to Allow Approved Internal Catastrophe Models Dear Ms. Yeung: The American Insurance Association (AIA) appreciates the opportunity to comment on agenda item CR to revise the PR027 instruction to allow approved internal catastrophe models as the basis for the catastrophe risk charge R-CAT (Proposal). AIA represents approximately 325 major U.S. and non-u.s. insurance companies that provide all lines of property-casualty insurance to U.S. consumers and businesses. AIA members write more than $127 billion annually in U.S. property-casualty premiums. AIA appreciates the thoughtful approach the Subgroup has taken with regard to introducing a catastrophe risk charge in the RBC calculation and understands the Subgroup s desire to move forward with full implementation. As we have said in prior comments, AIA believes that the catastrophe risk capital requirement should be based on a model that is consistent with an insurer's internal risk management view. A model used for the catastrophe risk charge should reflect an insurer's true exposure to catastrophe risk, while meeting minimum criteria to ensure that the model is robust. As such, AIA fully supports the ability of companies to use approved internal catastrophe models as proposed. We hope you find these comments helpful as the Subgroup works to fully implement the catastrophe risk charge. Thank you for this opportunity to comment and please do not hesitate to contact me with questions. Respectfully submitted, Adam E. Kerns Assistant General Counsel 15

16 This page intentionally left blank. 16

17 Attachment B From: Matt McKenney [mailto:matt_mckenney@swissre.com] Sent: Tuesday, March 28, :22 PM To: Yeung, Eva K. Subject: RE: Re-Exposure Draft Notice Hi Eva. As we discussed on the phone, I think the proposed 4 th element of part A could be clarified to say the following. 4. Evidence that the model considers the perils included in the RBC Catastrophe Risk Charge have been validated by the insurer or group and that these perils include reflects the insurer's U.S. exposures. I hope this helps. Thanks. Matt Matthew McKenney Senior Risk Officer P&C Vice President Americas Regulatory Risk Management Swiss Re 900 G Street NW, Suite 201, Washington DC 20001, United States (USA) Direct: Mobile: Matt_McKenney@swissre.com swissre.com 17

18 This page intentionally left blank. 18

19 Attachment C Capital Adequacy (E) Task Force RBC Proposal Form [ ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group [ x ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] SMI RBC (E) Subgroup [ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup DATE: 4/25/2016 CONTACT PERSON: Eva Yeung TELEPHONE: ADDRESS: eyeung@naic.org ON BEHALF OF: Catastrophe Risk (E) Subgroup NAME: Ron Dahlquist TITLE: Chair AFFILIATION: California Department of Insurance ADDRESS: 45 Fremont Street, 24 rd Floor San Francisco, CA FOR NAIC USE ONLY Agenda Item # CR Year 2017 DISPOSITION [ ] ADOPTED [ ] REJECTED [ ] DEFERRED TO [ ] REFERRED TO OTHER NAIC GROUP [ x ] EXPOSED 4/29/16, 12/09/16 [ ] OTHER (SPECIFY) IDENTIFICATION OF SOURCE AND FORM(S)/INSTRUCTIONS TO BE CHANGED [ ] Health RBC Blanks [ x ] Property/Casualty RBC Blanks [ ] Life RBC Instructions [ ] Fraternal RBC Blanks [ ] Health RBC Instructions [ ] Property/Casualty RBC Instructions [ ] Life RBC Blanks [ ] Fraternal RBC Instructions [ ] OTHER DESCRIPTION OF CHANGE(S) Several pages are either updated or eliminated. See the attached structure for details. REASON OR JUSTIFICATION FOR CHANGE ** The purpose of this proposal is to implement the catastrophe risk charge into the RBC Calculation for 2017 reporting. Additional Staff Comments: 4/29/16 - The Catastrophe Risk (E) Subgroup exposed this item for a 30-day comment period ending June /09/16 The Catastrophe Risk (E) Subgroup re-exposed this item for a 30-day comment period ending Jan. 8 at the Fall National Meeting. ** This section must be completed on all forms. Revised National Association of Insurance Commissioners 19

20 This page intentionally left blank. 20

21 Attachment C CALCULATION OF CATASTROPHE RISK CHARGE RCAT (FOR INFORMATIONAL PURPOSES ONLY) PR027 Detail Eliminated To Conserve Space PR031 - PR033 - Computation of Total Risk-Based Capital After Covariance The components of R0, R1, R2, R3, R4, and R5 and Rcat are shown on the following pages of the booklet. The covariance adjustment is used to discount the Total RBC Before Covariance because the RBC amounts for the individual R components, when simply added together, overstate the true risk. It is assumed that not all of the events for which RBC is required would occur simultaneously. The components of the Total RBC After Covariance formula are: R0 Affiliated Insurance Company Assets RBC R1 Fixed Income Assets RBC R2 Equity Assets RBC R3 Credit-Related Assets RBC R4 Underwriting Risk Reserves RBC R5 Underwriting Risk Net Written Premiums Rcat Catastrophe Risk If loss reserve RBC is greater than the sum of other credit RBC and one half of reinsurance recoverable RBC, then half of reinsurance recoverable is allocated to the R4 component and half is allocated to R3. If loss reserve RBC is less than or equal to the sum of other credit RBC plus one half of reinsurance recoverable RBC, then the entire amount of reinsurance RBC is allocated to the R3 component. To compute the Total RBC After Covariance, the following formula is used: R0 + SQRT(R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + Rcat^2) = Total RBC After Covariance The Authorized Control Level RBC, which is reported in the Five-Year Historical Exhibit on Line 29 along with Total Adjusted Capital, is one-half of the Total RBC After Covariance National Association of Insurance Commissioners 21

22 This page intentionally left blank. 22

23 Attachment C DETAILS FOR AFFILIATED BONDS AND STOCKS PR003 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) NAIC Company Code or Alien ID Number Affiliate's RBC After Covariance* LR031 L67 PR033 L72 XR025 L37 Book/Adjusted Carrying Value (statement value) of Affiliate's Common Stock** Valuation Basis of Column (5) E - Equity Method with zero/no unamortized goodwill A - All Other Total Value of Affiliate's Outstanding Common Statutory Surplus of Affiliate Subject to RBC (Adjusted for % Book/Adjusted Carrying Value (statement value) of Affiliate's Preferred Stock Total Value of Affiliate's Outstanding Preferred Stock Book/Adjusted Carrying Value (statement value) of Affiliate's Bonds Total Value of Affiliate's Outstanding Bonds Fair Value Excess Component Affiliate Common Stock RBC Required (R2 Component) Percent Percent Percent Name of Affiliate Affil Type Stock Owned) Owned Owned Owned RBC Required % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% 0 0 ( ) Total XXX XXX 0 0 XXX XXX XXX XXX 0 XXX XXX 0 XXX XXX 0 0 * Enter carrying value of underlying insurers for Holding Company (Affiliate Code 10) in Column (4). ** Enter Book/Adjusted Carrying Value in excess of the carrying value for Holding Company (Affiliate Code 10 in Column (5). Denotes items that must be manually entered on the filing software. PR003 23

24 Attachment C DETAILS FOR AFFILIATED BONDS AND STOCKS (For Informational Purposes Only) PR003A (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) NAIC Company Code or Alien ID Number Affiliate's RBC After Covariance* LR031 L67 PR033 L80 XR025 L37 Book/Adjusted Carrying Value (statement value) of Affiliate's Common Stock** Valuation Basis of Column (5) E - Equity Method with zero/no unamortized goodwill A - All Other Total Value of Affiliate's Outstanding Common Statutory Surplus of Affiliate Subject to RBC (Adjusted for % Book/Adjusted Carrying Value (statement value) of Affiliate's Preferred Stock Total Value of Affiliate's Outstanding Preferred Stock Book/Adjusted Carrying Value (statement value) of Affiliate's Bonds Total Value of Affiliate's Outstanding Bonds Fair Value Excess Component Affiliate Common Stock RBC Required (R2 Component) Percent Percent Percent Name of Affiliate Affil Type Stock Owned) Owned Owned Owned RBC Required % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% % 0% 0% 0 0 ( ) Total XXX XXX 0 0 XXX XXX XXX XXX 0 XXX XXX 0 XXX XXX 0 0 * Enter carrying value of underlying insurers for Holding Company (Affiliate Code 10) in Column (4). ** Enter Book/Adjusted Carrying Value in excess of the carrying value for Holding Company (Affiliate Code 10 in Column (5). Denotes items that must be manually entered on the filing software. PR003 24

25 Attachment C SUBSIDIARY, CONTROLLED AND AFFILIATED INVESTMENTS PR004 Affiliate Types Affil Code RBC Basis (1) (2) (3) (4) (5) Number of Companies RBC Required for Affiliated Com Stock RBC Required for Affiliated Pref'd Stock RBC Required for Affiliated Bonds Total RBC Required (1) Directly Owned P&C Insurance Affiliates 1 Sub's RBC After Covariance (2) Directly Owned Life Insurance Affiliates 2 Sub's RBC After Covariance (3) Directly Owned Health Insurance Affiliates 3 Sub's RBC After Covariance (4) Indirectly Owned P&C Insurance Affiliates 4 Sub's RBC After Covariance (5) Indirectly Owned Life Insurance Affiliates 5 Sub's RBC After Covariance (6) Indirectly Owned Health Insurance Affiliates 6 Sub's RBC After Covariance (7) Investment Subsidiary 7 Sub's RBC After Covariance (8) Directly Owned Alien Insurance Affiliates (9) Indirectly Owned Alien Insurance Affiliates (10) Holding Company in Excess of Indirect Subs (11) Investment in Parent (12) Other Affiliate - P&C Ins Not Subj to RBC (13) Other Affiliate - Life Ins Not Subj to RBC (14) Other Affiliate - Health Insurer Not Subj to RBC (15) Other Affiliate - Non-insurer (16) Total PR004 25

26 Attachment C SUBSIDIARY, CONTROLLED AND AFFILIATED INVESTMENTS (For Informational Purposes Only) PR004A Affiliate Types Affil Code RBC Basis (1) (2) (3) (4) (5) Number of Companies RBC Required for Affiliated Com Stock RBC Required for Affiliated Pref'd Stock RBC Required for Affiliated Bonds Total RBC Required (1) Directly Owned P&C Insurance Affiliates 1 Sub's RBC After Covariance (2) Directly Owned Life Insurance Affiliates 2 Sub's RBC After Covariance (3) Directly Owned Health Insurance Affiliates 3 Sub's RBC After Covariance (4) Indirectly Owned P&C Insurance Affiliates 4 Sub's RBC After Covariance (5) Indirectly Owned Life Insurance Affiliates 5 Sub's RBC After Covariance (6) Indirectly Owned Health Insurance Affiliates 6 Sub's RBC After Covariance (7) Investment Subsidiary 7 Sub's RBC After Covariance (8) Directly Owned Alien Insurance Affiliates (9) Indirectly Owned Alien Insurance Affiliates (10) Holding Company in Excess of Indirect Subs (11) Investment in Parent (12) Other Affiliate - P&C Ins Not Subj to RBC (13) Other Affiliate - Life Ins Not Subj to RBC (14) Other Affiliate - Health Insurer Not Subj to RBC (15) Other Affiliate - Non-insurer (16) Total PR004 26

27 UNDERWRITING RISK - NET WRITTEN PREMIUMS PR018 Attachment C (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (1) (2) SCH P LINE OF BUSINESS H/F PPA CA WC CMP MPL OCCURRENCE MPL CLMS MADE SL OL FIDELITY / SURETY INDUSTRY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO COMPANY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO (3) (2)/(1) (4) INDUSTRY LOSSES & LOSS ADJUSTMENT EXPENSE RATIO COMPANY RBC LOSSES & LOSS (5) ADJUSTMENT EXPENSE RATIO (3)*(4)*0.5+(4)* (6) COMPANY UNDERWRITING EXPENSE RATIO (7) ADJUSTMENT FOR INVESTMENT INCOME (8) C/Y NET WRITTEN PREMIUM (in 000s) BASE WRITTEN PREMIUM RISK-BASED CAPITAL (in 000s) (9) MAX {0,(8)*[(5)*(7)+(6)-1]} (10) % DIRECT LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (11) % ASSUMED LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (12) LOSS SENSITIVE DSCT - WP (in 000s) (13) NWP RBC AFTER DSCT (in 000s) (14) PREMIUM CONCENTRATION FACTOR (15) NET WRITTEN PREMIUM RBC x 1000 (converted to whole dollars) This worksheet is to show the results of the calculation of Underwriting Risk - Net Written Premiums Enter data in PR036 through PR040, PR100 through PR701 and PROTH PR018 27

28 UNDERWRITING RISK - NET WRITTEN PREMIUMS PR018 Attachment C (1) (2) SCH P LINE OF BUSINESS INDUSTRY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO COMPANY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) SPECIAL PROPERTY AUTO PHYSICAL DAMAGE OTHER (INCLUDE CREDIT,A&H) FINANCIAL / MORTGAGE GUARANTY INTL REIN. PROPERTY & FINANCIAL LINES REIN. LIABILITY PL WARRANTY TOTAL XXX XXX (3) (2)/(1) INDUSTRY LOSSES & LOSS ADJUSTMENT (4) EXPENSE RATIO COMPANY RBC LOSSES & LOSS ADJUSTMENT EXPENSE RATIO (5) (3)*(4)*0.5+(4)*0.5 (6) COMPANY UNDERWRITING EXPENSE RATIO XXX XXX XXX XXX (7) ADJUSTMENT FOR INVESTMENT INCOME XXX (8) C/Y NET WRITTEN PREMIUM (in 000s) BASE WRITTEN PREMIUM RISK-BASED CAPITAL (in 000s) (9) MAX {0,(8)*[(5)*(7)+(6)-1]} (10) % DIRECT LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% XXX (11) % ASSUMED LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% XXX (12) LOSS SENSITIVE DSCT - WP (in 000s) (13) NWP RBC AFTER DSCT (in 000s) (14) PREMIUM CONCENTRATION FACTOR (15) NET WRITTEN PREMIUM RBC x 1000 (converted to whole dollars) This worksheet is to show the results of the calculation of Underwriting Risk - Net Written Premiums Enter data in PR036 through PR040, PR100 through PR701 and PROTH PR018 28

29 UNDERWRITING RISK - NET WRITTEN PREMIUMS PR018A (For Informational Purposes Only) Attachment C (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) SCH P LINE OF BUSINESS H/F PPA CA WC CMP MPL OCCURRENCE MPL CLMS MADE SL OL FIDELITY / SURETY (1) (2) INDUSTRY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO COMPANY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO (3) (2)/(1) (4) (5) (6) INDUSTRY LOSSES & LOSS ADJUSTMENT EXPENSE RATIO COMPANY RBC LOSSES & LOSS ADJUSTMENT EXPENSE RATIO (3)*(4)*0.5+(4)* COMPANY UNDERWRITING EXPENSE RATIO (7) ADJUSTMENT FOR INVESTMENT INCOME (8) C/Y NET WRITTEN PREMIUM (in 000s) (9) BASE WRITTEN PREMIUM RISK-BASED CAPITAL (in 000s) MAX {0,(8)*[(5)*(7)+(6)-1]} (10) % DIRECT LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (11) % ASSUMED LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (12) LOSS SENSITIVE DSCT - WP (in 000s) (13) NWP RBC AFTER DSCT (in 000s) (14) PREMIUM CONCENTRATION FACTOR (15) NET WRITTEN PREMIUM RBC x 1000 (converted to whole dollars) This worksheet is to show the results of the calculation of Underwriting Risk - Net Written Premiums Enter data in PR036 through PR040, PR100 through PR701 and PROTH PR018 29

30 UNDERWRITING RISK - NET WRITTEN PREMIUMS PR018A (For Informational Purposes Only) SCH P LINE OF BUSINESS Attachment C (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) SPECIAL PROPERTY AUTO PHYSICAL DAMAGE OTHER (INCLUDE CREDIT,A&H) FINANCIAL / MORTGAGE GUARANTY INTL REIN. PROPERTY & FINANCIAL LINES REIN. LIABILITY PL WARRANTY TOTAL (1) (2) INDUSTRY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO COMPANY AVERAGE LOSS & LOSS ADJUSTMENT EXPENSE RATIO XXX XXX (3) (2)/(1) XXX (4) (5) (6) INDUSTRY LOSSES & LOSS ADJUSTMENT EXPENSE RATIO COMPANY RBC LOSSES & LOSS ADJUSTMENT EXPENSE RATIO (3)*(4)*0.5+(4)*0.5 COMPANY UNDERWRITING EXPENSE RATIO XXX XXX XXX (7) ADJUSTMENT FOR INVESTMENT INCOME XXX (8) C/Y NET WRITTEN PREMIUM (in 000s) BASE WRITTEN PREMIUM RISK-BASED CAPITAL (in 000s) (9) MAX {0,(8)*[(5)*(7)+(6)-1]} (10) % DIRECT LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% XXX (11) % ASSUMED LOSS SENS WP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% XXX (12) LOSS SENSITIVE DSCT - WP (in 000s) (13) NWP RBC AFTER DSCT (in 000s) (14) PREMIUM CONCENTRATION FACTOR (15) NET WRITTEN PREMIUM RBC x 1000 (converted to whole dollars) This worksheet is to show the results of the calculation of Underwriting Risk - Net Written Premiums Enter data in PR036 through PR040, PR100 through PR701 and PROTH PR018 30

31 Attachment C CALCULATION OF CATASTROPHE RISK CHARGE FOR EARTHQUAKE (For Informational Purposes Only) PR027A Modeled Losses (1) (2) 3 (4) Earthquake Reference Direct and Assumed Net Ceded Amounts Recoverable Ceded Amounts Recoverable with zero Credit Risk Charge (1) Worst Year in 50 Company Records (2) Worst Year in 100 Company Records (3) Worst Year in 250 Company Records (4) Worst Year in 500 Company Records Detail Eliminated To Conserve Space PR027A 31

32 Attachment C CALCULATION OF CATASTROPHE RISK CHARGE FOR Hurricane (For Informational Purposes Only) PR027B Modeled Losses (1) (2) 3 (4) Hurricane Reference Direct and Assumed Net Ceded Amounts Recoverable Ceded Amounts Recoverable with zero Credit Risk Charge (1) Worst Year in 50 Company Records (2) Worst Year in 100 Company Records (3) Worst Year in 250 Company Records (4) Worst Year in 500 Company Records Detail Eliminated To Conserve Space PR027B 32

33 Attachment C CALCULATION OF CATASTROPHE RISK CHARGE PR027 (For Informational Purposes Only) Reference (1) RBC Amount (1) Total Earthquake Catastrophe Risk PR027A L(10) C(7) 0 (2) Total Hurricane Catastrophe Risk PR027B L(10) C(7) 0 (3) Total Catastrophe Risk (Rcat) SQRT(L(1)^2 + L(2)^2) 0 Detail Eliminated To Conserve Space PR027 33

34 Attachment C Calculation of Total Risk-Based Capital After Covariance PR031 R0-R1 (1) R0 - Asset Risk - Subsidiary Insurance Companies PRBC O&I Reference RBC Amount (1) Affiliated US P&C Insurers - Directly Owned PR004 L(1)C(5) 0 (2) Affiliated US P&C Insurers - Indirectly Owned PR004L(4)C(5) 0 (3) Affiliated US Life Insurers - Directly Owned PR004 L(2)C(5) 0 (4) Affiliated US Life Insurers - Indirectly Owned PR004 L(5)C(5) 0 (5) Affiliated US Health Insurer - Directly Owned PR004 L(3)C(5) 0 (6) Affiliated US Health Insurer - Indirectly Owned PR004 L(6)C(5) 0 (7) Affiliated Alien Insurers - Directly Owned PR004 L(8)C(5) 0 (8) Affiliated Alien Insurers - Indirectly Owned PR004 L(9)C(5) 0 (9) Misc Off-Balance Sheet - Non-Controlled Assets PR014 L(15) C(3) 0 (10) Misc Off-Balance Sheet - Guarantees for Affiliates PR014 L(16) C(3) 0 (11) Misc Off-Balance Sheet - Contingent Liabilities PR014 L(17) C(3) 0 (12) Misc Off-Balance Sheet - SSAP No.101 Par. 11A DTA PR014 L(19) C(3) 0 (13) Misc Off-Balance Sheet - SSAP No.101 Par. 11B DTA PR014 L(20) C(3) 0 (14) Total R0 L(1)+L(2)+L(3)+L(4)+L(5)+L(6)+L(7)+L(8)+L(9)+L(10)+L(11)+L(12)+L(13) 0 R1 - Asset Risk - Fixed Income (15) NAIC 01 U.S. Government Agency Bonds PR006 L(2)C(2) 0 (16) Unaffiliated Bonds Subject to Size Factor PR006 L(21)C(2)+PR015 L(9)C(4) 0 (17) Bond Size Factor RBC PR006 L(24)C(2) 0 (18) Bonds - Aff'd Invest Sub PR004 L(7)C(4) 0 (19) Bonds - Aff'd Hold. Co. in Excess of Ins. Subs. PR004 L(10)C(4) 0 (20) Bonds - Investment in Parent PR004 L(11)C(4) 0 (21) Bonds - Affil US P&C Not Subj to RBC PR004 L(12)C(4) 0 (22) Bonds - Affil US Life Not Subj to RBC PR004 L(13)C(4) 0 (23) Bonds - Affil US Health Insurer Not Subj to RBC PR004 L(14)C(4) 0 (24) Bonds - Affil Non-Insurer PR004 L(15)C(4) 0 (25) Other Long -Term Assets - Mortgage Loans, LIHTC & WCFI PR008 L(10)+L(13)+L(14)+L(15)+L(16)+L(17)+L(20)+L(21)C(2) 0 (26) Misc Assets - Collateral Loans PR009 L(14)C(2) 0 (27) Misc Assets - Cash PR009 L(3)C(2) 0 (28) Misc Assets - Cash Equivalents PR009 L(6)C(2)+PR015 L(20)+L(21)C(4) 0 (29) Misc Assets - Other Short-Term Investments PR009 L(11)C(2) 0 (30) Replication - Synthetic Asset: One Half PR010 L( )C(7) 0 (31) Asset Concentration RBC - Fixed Income PR011 L(13)C(3) Grand Total Page 0 L(15)+L(16)+L(17)+L(18)+L(19)+L(20)+L(21)+L(22)+L(23)+L(24) (32) Total R1 L(25)+L(26)+L(27)+L(28)+L(29)+L(30)+L(31) 0 PR031 34