Key Takeaways on the NAIC’s Group Capital Calculation
By John Gradwell, ACAS, MAAA, CPCU, ARe
October 31, 2022
In the United States regulation of insurers for financial solvency is implemented at the state level but heavily influenced by the National Association of Insurance Commissioners (NAIC). A key focus of solvency regulation is the ability of insurers to timely pay claims to or on behalf of policyholders. The Group Capital Calculation (GCC) is a new tool available to regulators to assess group risks and capital adequacy and assist in the regulation of insurer solvency.
The group capital calculation is proscribed by the NAIC and contains dozens of exhibits and tables, into which the filer must enter financial information. It is filled out by the group making the filing and lays out sources of capital, where that capital is located by company and jurisdiction, and identifies sources of risk arising from all group entities. For some groups, the first of annual GCC filings must be made by May 1, 2023.
A bottom-up calculation is used that starts with the group’s in-scope entities, which are then accumulated up to the group level. A “group capital ratio” is used to summarize results by dividing the “available capital” by the “calculated capital” after elimination of double counting. The available capital is sometimes also referred to as “financial resources”, and calculated capital is sometimes also referred to as “required capital”.
For US-based insurers the required capital is generally equal to the result of the existing risk-based capital (RBC) calculation. The required capital for all other entities must be calculated particularly for non-insurer/non-financial entities. Additionally, for some entities a “scalar” adjustment is used to convert the entity’s capital figures calculated on a “local regime” basis to a basis that can be combined with the capital figures for US-based insurer entities.
The group capital ratio is calculated for a base case. In addition, the potential impact on the base group capital ratio is calculated under each of eight “sensitivity analyses”. The regulator will use the capital ratios to inform their view of the group’s solvency. In general higher capital ratios indicate stronger financial solvency but the calculation does not indicate if a given capital ratio is good or bad.
Entities are initially divided into three high-level categories including insurers, financial non-insurer entities, and non-insurer/non-financial entities. A key concern in developing the GCC was the risk that non-insurers could pose to the solvency of insurer entities.
A comprehensive approach is used to identify the risks that fall within the scope of the GCC. All “enterprise” risks of a “material” nature must be included, which requires use of judgment. In other words, all entities must be included in the GCC unless they do not present a material risk to the group. The group making the filing may request exclusion of non-insurer/non-financial entities that do not present a material risk to the group’s solvency, subject to regulatory approval.
Nominally the GCC applies only to US-based groups. Furthermore, some US-based groups may be exempt if comprised of a single insurer writing direct business in only its domestic state.
Groups headquartered outside of the US can be exempt from the GCC. Exemptions can be given if the foreign groupwide supervisor “recognizes and accepts” the GCC for US-based insurers doing business in their foreign jurisdiction1. Another exemption can apply if the foreign group is regulated by a “reciprocal” supervisor2. In any event, the lead state regulator can order a US-based insurer subsidiary of a foreign group to submit the GCC.
For many groups the GCC will be performed and submitted annually. However, after the first GCC submission groups that meet five conditions may qualify for an exemption to annual filings or may qualify for a slimmed down “limited” GCC.
The GCC is a product of the NAIC’s Solvency Modernization Initiative (SMI), which was begun in 2008 and motivated by insurer’s solvency challenges arising from the Great Recession. A variety of tools besides the GCC were developed and are used in tandem to assist regulators in solvency regulation including the Own Risk and Solvency Assessment (ORSA) and the Enterprise Risk Form F.
Roll out of the GCC is being realized at the state level by approving changes to two NAIC Model Acts namely 440 and 450. As of August 2022 both Model Acts were adopted by nine states3. Groups in those states generally must file their first GCC by May 1, 2023.
The GCC is new and guidance on completing the submission is limited. For more information on the GCC or help preparing a filing please contact John Gradwell, Consulting Actuary with Huggins Actuarial Services, Inc., at John.Gradwell@hugginsactuarial.com
1 There are presently no approved “recognize and accept” jurisdictions.
2 Presently including FINMA (Switzerland), the BMA (Bermuda), the PRA (UK), the EU, and the Japanese FSA.
3 CA, DE, IL, MO, MT, NE, NV, PA, WI