Title
Adoption of RBC Framework for Life Insurance
Law
Ic Insurance Memorandum Circular No. 6-2006
Decision Date
Oct 5, 2006
The Insurance Commission mandates life insurance companies to adopt a Risk-Based Capital (RBC) Framework, requiring a minimum RBC ratio of 100% to ensure financial stability in relation to their investment and insurance risks, with escalating regulatory interventions based on compliance levels.
risk based
capital
life insurance

Regulatory policy and purpose

  • The circular establishes the required amounts of capital that life insurance companies must maintain in relation to their investment and insurance risks.
  • The circular classifies company risks for capital purposes into four major categories and then links required capital to those quantified risks through an RBC requirement and RBC ratio.

Core definitions and risk classifications

  • The circular classifies investments and insurance risks into four categories, denoted as:
    • C-1: Asset Default Risk
    • C-2: Insurance Pricing Risk
    • C-3: Interest Rate Risk
    • C-4: General Business Risk
  • RBC Requirement is computed using the formula: RBC Requirement = (C1 + C3)2 + C22 + C4.
  • RBC Ratio is computed as Networth divided by the RBC requirement determined using RBC Exhibit Instructions and Disclosures.
  • 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.

Covered entities and annual compliance duty

  • Every life insurance company must annually maintain a minimum RBC ratio of 100%.
  • Every life insurance company must not fail the Trend Test.
  • Every life insurance company must annually accomplish and file the relevant RBC Exhibits and Items that form part of the Annual Statements, in accordance with the RBC Exhibit instructions.
  • Every life insurance company must comply with the RBC requirement in addition to:
    • Minimum statutory networth and minimum paid-up capital under Department Order No. 27-06, and
    • Margin of Solvency required under Section 194 of the Insurance Code.

RBC ratio thresholds and regulatory intervention levels

  • The circular requires that the RBC ratio be treated as Y, and it defines regulatory intervention based on the range of Y.
  • 100% < Y < 125% triggers a Trend Test.
  • 75% < Y < 100% triggers a Company Action Event.
  • 50% < Y < 75% triggers a Regulatory Action Event.
  • 35% < Y < 50% triggers an Authorized Control Event.
  • Y < 35% triggers a Mandatory Control Event.

Trend Test rule and Company Action Event duties

  • The Trend Test applies when the next year’s ratio is projected to be below 100%; it uses linear extrapolation if the next year’s ratio is less than 100%.
  • If the Trend Test fails, it constitutes a Company Action Event.
  • A Company Action Event occurs if either:
    • The RBC ratio is less than 100% but not below 75%, or
    • The Trend Test has failed under the following conditions:
      • The RBC ratio is less than 125% but not below 100%
      • The RBC ratio has decreased over the past year
      • The difference between the RBC ratio and the decrease in the RBC ratio over the past year is less than 100%
  • Upon a Company Action Event, the company must file a RBC plan with the Commissioner within 45 days from the event.
  • The RBC plan must:
    • Identify the conditions that contributed to the event
    • Contain proposals of corrective action expected to eliminate the event
    • Provide projections of Annual Statements for at least two (2) years with and without the proposed corrective actions, including projections on:
      • Balance sheets
      • Analysis of operations (total)
      • Surplus accounts
      • RBC Exhibits
      • Lines of business information relevant to the RBC plan
    • Identify the key assumptions impacting the projections and the sensitivity of the projections to those assumptions
    • Identify the quality of, and problems associated with, the business, including (as applicable) assets, anticipated business growth, surplus strain, extraordinary exposure to risk, mix of business, and use of reinsurance (if any)
  • The Commissioner must notify the company within 60 days upon submission whether the RBC plan shall be implemented or is unsatisfactory.
  • If unsatisfactory, the Commissioner must include reasons and proposed revisions, and the company must resubmit the RBC plan within 30 days of notice.

Regulatory Action Event and Authorized Control rules

  • A Regulatory Action Event occurs if either:
    • The RBC ratio is less than 75% but not below 50%, or
    • The company fails to submit an RBC plan satisfactory to the Commissioner within the filing deadline, or
    • The Commissioner notifies the company of failure to adhere to its RBC plan, and that failure adversely affects the company’s ability to eliminate the Company Action Event under the RBC plan.
  • Upon a Regulatory Action Event, the Commissioner is authorized to:
    • Require the company to submit a RBC plan within 45 days of the event
    • Perform examination or analysis as deemed necessary of accounts, operations, and the RBC plan
    • Issue a Corrective Order specifying corrective actions the company must undertake after the examination or analysis
  • The Commissioner may retain actuaries and other consultants as necessary to review accounts, operations, and the RBC plan and to formulate corrective orders.
  • The fees and costs of such consultants are borne by the affected company.
  • An Authorized Control Event occurs if either:
    • The RBC ratio is less than 50% but not below 35%, or
    • The Commissioner notifies the company of its failure to satisfactorily respond to a Corrective Order under the Regulatory Action Event framework.
  • Upon an Authorized Control Event, the Commissioner is authorized to place the company under regulatory control under Section 247 of the Insurance Code if doing so is in the best interests of the company’s policyholders and creditors and the general public.
  • The Authorized Control Event is deemed sufficient grounds for the Commissioner to act under Section 247 of the Insurance Code.

Mandatory Control and placement under Section 247

  • A Mandatory Control Event occurs when the RBC ratio is less than 35%.
  • Upon a Mandatory Control Event, the Commissioner is required to place the company under regulatory control under Section 247 of the Insurance Code.
  • The Mandatory Control Event is deemed sufficient grounds for the Commissioner to take action under Section 247 of the Insurance Code.

Transition period and RBC framework review

  • The company receives a maximum of 24 months from the date of effectivity of the circular to improve its RBC ratio.
  • The RBC Framework is subject to review at least once every three (3) years.

Confidentiality and disclosure limits

  • RBC Exhibits that form part of the Annual Statements are treated as part of disclosures that follow the Annual Statements framework.
  • All other disclosures and RBC plans filed with the Commissioner must be kept confidential in the same manner as Annual Statement Schedules and other confidential reports required by the Commission.

Compliance with statutory capital solvency requirements

  • The circular requires RBC compliance together with other capital and solvency requirements, including:
    • Minimum statutory networth and minimum paid-up capital under Department Order No. 27-06
    • Margin of Solvency under Section 194 of the Insurance Code
  • The company must comply with the RBC requirement in addition to those other minimum requirements.

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