QuestionsQuestions (IC INSURANCE MEMORANDUM CIRCULAR NO. 6-2006)
To establish the required amounts of capital that life insurance companies must maintain in relation to their investment and insurance risks by adopting the Risk-Based Capital (RBC) framework under the Insurance Code.
Into four major categories: Asset Default Risk (C-1), Insurance Pricing Risk (C-2), Interest Rate Risk (C-3), and General Business Risk (C-4).
RBC Requirement = (C1 + C3)^2 + C2^2 + C4.
RBC Ratio = Networth / RBC Requirement. Networth includes the company’s paid-up capital, contributed and contingency surplus, and unassigned surplus; revaluation and fluctuation reserve accounts form part of networth only to the extent authorized by the Insurance Commissioner.
It must maintain a minimum RBC ratio of 100% and not fail the Trend Test.
The Trend Test involves linear extrapolation. It fails if: (1) the RBC ratio is less than 125% but not below 100%; (2) the RBC ratio decreased over the past year; and (3) the difference between the RBC ratio and the decrease in the RBC ratio over the past year is less than 100%.
A Company Action Event applies, requiring submission of an RBC plan and financial projections.
File with the Commissioner an RBC plan identifying conditions that contributed to the event; proposing corrective actions expected to eliminate the event; providing projections for at least two years (with and without corrective actions) including balance sheets, surplus accounts, RBC exhibits, and relevant business lines; identifying key assumptions and sensitivities; and identifying quality of and problems associated with its business, including assets, anticipated growth, surplus strain, extraordinary exposure to risk, mix of business, and use of reinsurance.
The Commissioner must notify the company within 60 days whether the plan will be implemented or is unsatisfactory. If unsatisfactory, the Commissioner provides reasons and proposed revisions, and the company must resubmit within 30 days.
When the RBC ratio is less than 75% but not below 50%; or when the company fails to submit a RBC plan satisfactory to the Commissioner within the filing deadline; or when the Commissioner notifies the company of failure to adhere to its RBC plan such that it adversely affects the company’s ability to eliminate the Company Action Event.
Authorized to require a RBC plan within 45 days, perform examinations or analyses of accounts/operations/RBC plan, and issue a Corrective Order specifying required corrective actions. The Commissioner may retain actuaries/consultants at the affected company’s expense.
Authorized Control Event occurs when RBC ratio is less than 50% but not below 35% (or failure to satisfactorily respond to a Corrective Order). It allows the Commissioner to place the company under regulatory control under Sec. 247 if deemed in the best interests of policyholders/creditors and the public. Mandatory Control Event occurs when RBC ratio is less than 35%, and the Commissioner is required to place the company under regulatory control under Sec. 247.
Section 247 of the Insurance Code.
The Circular takes effect immediately, but companies are given a maximum of 24 months from date of effectivity to improve their RBC ratio.
Every life insurance company must annually accomplish and file the relevant RBC Exhibits and Items that form part of the Annual Statements, following the RBC Exhibit Instructions and Disclosures.
All disclosures and RBC Plans filed with the Commissioner (except the RBC Exhibits that form part of the Annual Statements) are kept confidential in the same manner as Annual Statement Schedules and other confidential reports required by the Commission.
It must comply with minimum statutory net worth and minimum paid-up capital, margin of solvency (under Sec. 194), and the RBC requirements.