The Group Capital Calculation (E) Working Group continued its development of a group capital calculation (GCC) as an analytical tool for regulators to evaluate the financial condition of an insurance group. While it has been determined that the GCC will utilize a risk-based capital (RBC) aggregation approach in order to leverage existing legal capital requirements, it is not clear which entities within any group will be subject to the GCC or how the GCC will apply to those entities within a group that do not have existing capital requirements. The Working Group discussed comments from interested parties in response to a June 26, 2018 NAIC staff memorandum regarding the scope of application of the GCC. The intent of the draft memorandum is to provide guidance to field testing volunteers and their respective lead state regulators on the scope of the group subject to the GCC.
The American Insurance Association, the National Association of Mutual Insurance Companies, the Property and Casualty Insurers Association of America and the Reinsurance Association of America jointly submitted comments on the NAIC memorandum (Trades Letter). The Trades Letter suggests, among other things, (a) a method for determining the scope of the group which principally relies on an initial determination made by the group’s management, (b) the use of an exemption for U.S.-based groups that are not required to file an Own Risk and Solvency Assessment (ORSA), (c) the use of an “expedited approach” for groups that are subject to certain alternative group capital assessments, and (d) the use of alternative risk charges for non-insurance entities, including regulated and non-regulated financial entities as well as other non-insurance and non-financial entities. At the Summer Meeting, the Working Group agreed to expose the Trades Letter for a 45-day comment period. In addition to comments on the recommendations outlined in the Trades Letter, the Working Group is requesting additional input on (i) whether a specific materiality threshold should be utilized in the analysis of whether to include a non-financial entity in the scope of the group, (ii) whether to assume that non-U.S. based groups with group-wide supervisors in current qualified jurisdictions would not be required to complete a GCC (which may impact the decision by such groups to volunteer for field testing), and (iii) whether to include an exemption for groups that will submit a GCC to the Federal Reserve. In addition, the Working Group is also requesting input on alternative methods to inventory the entities in the broader insurance group that could potentially be subject to the GCC. The Trades Letter proposes an expanded Schedule Y approach, which would include all entities listed in the insurer’s most recent Schedule Y and any entity directly or indirectly owned by the ultimate controlling person and included in other relevant holding company filings. While the next step for the Working Group is to begin field testing, which will be focused on the scope of the group subject to the GCC, the final decision as to the scope of application of the GCC will ultimately reside with each lead state regulator (in coordination with any other involved regulators).