Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Life Health > Life Insurance

C-3, Phase II Is Coming And So Are The Questions

Your article was successfully shared with the contacts you provided.


Regulators and actuaries are trying to field questions from insurers who write variable annuities with guarantees. These insurers are preparing to use C-3, Phase II RBC requirements for the first time.

The discussion took place during the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo., at the life risk-based capital working group.

The risk-based capital guidelines use stochastic modeling as well as a standard scenario, which creates a floor to ensure a certain measure of conservatism. The guidelines become effective at year-end for 2005 RBC.

A companion project currently is being developed to create reserving for VA products with guarantees. The VA-CARVM project is still in development.

Lou Felice, a New York regulator and chair of the NAIC’s capital adequacy task force, said all RBC reports will remain confidential, although there may be some information-sharing among regulators who agree to keep information confidential.

Among the 21 questions the NAIC has received to date is one asking whether the changes in C-3, Phase II apply to fixed subaccounts for a company accounting for variable annuity fixed subaccounts within the general account.

Another question asked whether a company with surrender charges defined as a percentage of premiums deposited should calculate its standard scenario amount using lapse and margin assumptions for the surrender charge period even if a renewal deposit is small relative to the total policy value.

Larry Gorski, a life actuary with Claire Thinking, who helped develop the C-3 project with other members of the American Academy of Actuaries, said some guidance may be found in the Academy practice notes in Q9-17. Felice added that the New York department also could offer guidance.

Gorski noted that although the definition of standard scenario is, in general, prescriptive, in the event additional guidance is needed, companies can look to Academy recommendations in order to interpret and implement the standard scenario.

Another question raised was how to treat small blocks of VAs such as legacy blocks of business. Tom Campbell, a life actuary with Hartford Life and chair of the VA CARVM working group of the Academy, said one option would be to go to the Academy website and download models for an alternative methodology. Another possibility, he added, is to talk to regulators in the company’s state of domicile and present an analysis showing that the company would need to hold a lot more than it currently needs to hold. However, he noted that it was not clear whether regulators would be amenable to such discussions.

Philip Barlow, a life actuary with the District of Columbia department and chair of the life risk-based capital working group, said that depending on the circumstance, regulators might be willing to discuss such an issue if adequate RBC could be demonstrated.

When the issue was raised that companies with these blocks of business could use assumption reinsurance, Gorski explained that risk-based capital formulas are net of reinsurance, unlike reserving calculations. So, since RBC is net of reinsurance, an assumption reinsurance transaction would not be needed. However, Gorski explained that since this is an evolving process, the same might not be true for RBC statements that are being filed for next year.

Felice said questions and answers will be posted on the NAIC website,, as well as a survey in which regulators are asking companies to participate. The survey consists of nine questions and has been sent out by states with filing information on the new requirements. Regulators say it is a simple survey that will not require research. They are asking companies to return their responses by Dec. 15.

The question and answer session on C-3, Phase II RBC will be available on the website of the American Academy of Actuaries, Washington, at

During the discussion, John Bruins, a life actuary with the American Council of Life Insurers, Washington, said, “this is a living document” and is a first step in implementing a principle-based system.

In addition to the C-3, Phase I work, Blaine Shepherd, a Minnesota life actuary and regulator, requested that all companies with assets of $100 million or more be required to perform C-3, Phase I testing, which addresses the interest rate component of RBC. The reason for the recommendation, he explained, is that “it seems like a good next step for companies to offer a more appropriate measure of risk sensitivity rather than using a factor approach.”

Bruins asked, “What problem are we trying to solve? What is the cost benefit and how would companies do what they haven’t done before?”

These things will create added work and added expense, he said.

A third phase of the C-3 project was suggested by Nancy Bennett, chair of the Academy’s life capital adequacy subcommittee. The new phase would examine interest rate risk for life products for companies that are reserving using a principle-based methodology.

Questions and answers on the new guideline will be posted on the NAIC website,


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.