Risk Based Capital

Question 1

Regulatory actions levels for Health RBC ratios (41)

Answer 1

Actions are based on the Health RBC ratio (defined in a separate list)

1. Company Action Level (ratio of 150%-200%) - requires that a company submit a corrective action plan
2. Regulatory Action Level (ratio of 100%-150%) - allows the commissioner to examine the company and issue and order specifying corrective actions
3. Authorized Control Level (ratio of 70%-100%) - allows the commissioner to place the company under regulatory control if deemed to be in the best interests of policyholders and creditors
4. Mandatory Control Level (ratio less than 70%) - requires the commissioner to take regulatory control of the company

For a ratio between 200-300%, no regulatory action level applies, but a trend test is done and its results could trigger the company action level

Question 2

Formula for Health RBC after Covariance (RBCAC) (41)

Answer 2

1. RBCAC = H0 + {H1^2 + H2^2 + H3^2 + H4^2} ^ (1/2)
   a. H0 is the Asset Risk for Affiliates - the risk that a stock investment in an affiliate may lose value
   b. H1 is the Asset Risk for Other Assets - the risk that investments may default or decrease in value
   c. H2 is the Underwriting Risk - the risk of having inadequate premiums in the future (most impactful risk for health insurers)
   d. H3 is the Credit Risk - the risk of not recovering the amounts owed to the insurer
   e. H4 is the Business Risk - includes several misc. types of risk, such as admin expense risk and excessive growth risk
2. Authorized control level capital = RBCAC / 2
3. Health RBC ratio = total adjusted capital / authorized control level capital

Question 3

Formulas for the H2 (U/W Risk) component of Health RBC (42)

Answer 3

1. U/W Risk = Claim Experience Fluctuation Risk + Other U/W Risk
2. Claim Experience Fluctuation Risk is the sum of risk charges for 5 product groupings (comprehensive, Med Supp, dental and vision, Medicare Pt D, and other)
   a. For each grouping, the risk charge = premium * ratio of incurred claims to premium * risk factor * managed care risk adjustment factor
   b. The last 2 components of this formula are pulled from tables of factors that vary by coverage type (see separate lists)
3. Other U/W Risk includes:
   a. Coverages not included in claim experience fluctuation risk, such as DI, LTC, stop loss, and AD&D. Various tables of factors are used for calculating risk charges for these coverages.
   b. Adjustments for rate guarantees and premium stabilization reserves

Question 4

Calculation of risk factors (42)

Answer 4

1. The factor is based on the type of coverage and the amount of annual UW revenue
2. For each coverage type, a weighted average of the following factors is calculated based on the amount of revenue in each tier

Question 5

Calculation of managed care risk adjustment factors (43)

Answer 5

1. The managed care risk adjustment factors are 1 - the discount factors
2. All claims paid over the previous 12 months are assigned to the following categories, and a weighted average of the factors in the table below is calculated
3. The overall adjustment factor is applied to all product groupings except Medicare Part D and Other

Question 6

Characteristics of the ideal insolvency process (97)

Answer 6

1. Good relationships between the task force and receiver
2. Good policy records
3. Few uncovered obligations
4. Facts and solution are clear and agreed on by the receiver and the task force
5. Joint solicitation of proposals and negotiation of an assumption reinsurance agreement with a strong reinsurer
6. No resistance to a court order of liquidation with a finding of insolvency
7. Prompt regulatory approvals of agreements among the receiver and the affected guaranty associations
8. Quick closing to move policyholders to a solid insurer
9. Guaranty associations’ obligations fully satisfied at closing
10. Task force involvement in asset recovery

Question 7

Duties of the state-appointed receiver of a health insurer at risk of insolvency (107)

Answer 7

1. Sell members and/or assets to another health insurer
2. Examine corporate holdings for previously unidentified assets
3. Prioritize providers and vendors for payment adjudication
4. Determine the payment amount for each provider and vendor
5. Draw on state funding to support care transitions for affected members

Question 8

Reasons why comanies need surplus (109)

Answer 8

1. To fund future capital investments and growth
2. To support loss reserves
3. To prepare for future regulatory changes
4. To protect themselves and their policyholders from adverse cash flow shocks

Question 9

Other underwriting risk for DI and LTC (43)

Answer 9

Question 10

H0, H1, H3, and H4 (44)

Answer 10

1. H0 – risk that a stock investment in an affiliated company may lose value
   
   • If subject to RBC = RBCAC*% ownership
   • If not subject to RBC = book value of stock*30% (100% for non-US)
   • 1% book value of off-balance sheet items
2. H1 – risk that investments may default or decrease (see table below)
   
   • Doubled but capped at 30% for assets in the 10 largest issuers
3. H3 – risk of not recovering amounts owed
   
   • Reinsurance – 0.5%
   • Investment income – 1%
   • Health care receivables – 5%
   • Capitation – 2% (4% if intermediary)
4. H4
   
   • Administrative expense – 4-7% of admin
   • ASO/ASC – 2% of admin + 1% extra for ASC
   • Guarantee fund assessments – 0.5%
   • Excessive growth – 50% of excess over safe harbor of current year underwriting revenue/prior year underwriting revenue + 10%