© 2016 National Association of Insurance Commissioners

12/11/18 Conference Call

OPERATIONAL RISK (E) SUBGROUP

OF THE CAPITAL ADEQUACY (E) TASK FORCE Thursday December 20, 2018

11:00 AM ET / 10:00 AM CT / 9:00 AM MT / 8:00AM PT

ROLL CALL

Stephen Wiest

New York

Richard Ford Alabama Susan Bernard California Tish Becker John Robinson

Kansas Minnesota

John Rehagen Missouri Anna Krylova John Doak/Joel Sander

New Mexico Oklahoma

Patrick McNaughton / Steven Drutz Washington Richard Hinkel Wisconsin

AGENDA

1. Discuss Comment Letters Received for Exposed Document on Health Growth Risk Background Attachment 1 And Options a. Comment letters Attachment 2 b. Comment summary Attachment 3 c. Next steps / transition No materials

2. Discuss Comment Letters Received on Exposed Document on Collection of Operational Risk Attachment 4 Data and Information

a. Comment letters Attachment 5 b. Comment summary Attachment 3 c. Next Steps No Materials

3. Discussion of Next Steps / Transition for Life Growth Risk No Materials 4. Other Matters Brought Before the Subgroup

5. Adjournment

w:\QA\RBC\OpRSG\2018\December\ 12-20 open call\Op Risk Agenda_12-20-18 Call.docx

Operational Risk Analysis – Health RBC Growth Risk Existing vs. Current Informational Growth Risk and Further Options for Consideration

How the Existing Growth Risk Charge Works: Growth in Underwriting Risk RBC year over year is measured against growth in underwriting risk

revenue year over year. If growth Underwriting Risk RBC exceeds growth in underwriting risk revenue by greater than

10%, growth risk is triggered A factor of 50% is applied to the excess of growth in Underwriting Risk RBC above the 10%

threshold.

Considerations in developing the Existing Methodology The risk of growth while included in H-4 is most related to increased pricing risk caused by

growth rather than increased op risk that is caused by growth. The methodology is better designed to capture change in product mix or introductions of new

products with a lower level of managed care features At the time that the HRBC formula was being developed, there were significant issues around

transfer of risk to providers which were driving a change from capitated arrangements and HMOproducts to greater use of contractual fee-for service and withholds / incentives in provideragreements and PPO and POS products. Such agreements are subject to a lower level of controlover variances in underwriting results. Thus the formula recognized that as risk was added,revenue should respond accordingly.

The developers of the HRBC considered the potential for premium rate impact related toincreasing competition from national carriers into local markets, and consolidation in.

Reasons to consider a Change to the Existing Methodology The mix of managed care arrangements is shifting, perhaps more toward capitated risk sharing

arrangements rather than away from such arrangements Relatively few entities triggered the current growth risk charge even during recent periods of

rapid growth caused by ACA The application of growth risk to new entities is unclear. A number of entities that were new to

the market and which grew rapidly in 2014 and 2015 ultimately failed. There may be a better way to measure increased operational risk than via use of premium

exposures alone

Original Work Conducted by the Operational Risk (E) Subgroup Using 5 years of RBC data (2011 – 2015), the RBC impact of the existing growth risk charged to the informational methodology. In order to isolate the impact of the informational charge, the existing charge was removed from the data for each year and data for the proposed method, using the informational factors was substituted and included within H-4. The informational factor is 2.0% of net premium revenue in excess of a growth threshold of 25% year over year. The following was observed:

Attachment 1

There were some advantages of the proposed informational method:

• The RBC ratios for Companies triggering the informational growth risk charge are generallylower than for the companies triggering the existing method.

• The lowest average RBC ratios for companies triggering the informational method (2015)followed the highest average RBC ratios (2014). This may be indicative of a negative trend inRBC as a result of rapid growth in 2014 and 2015.

• The proportion of companies that trigger growth risk and are at an action level in the first yearand over time is similar, but again the numbers are larger for the proposed method

There were some drawbacks to the proposed informational method:

• The amount of premiums in excess of the growth risk threshold for the proposed method hasgrown remarkably in 2014 and 2015. The impact of significant premium rate increases orchanges in product mix cannot be filtered out of potentially large growth risk capital resultscompared to the existing method.

• More than 25% of all Companies trigger the proposed growth risk in 2014 and 2015 years.Again, the impact of rate increases during this period is not filtered.

• The proposed method produces a higher percentage of growth risk to total RBC for all RBC filers;this is especially pronounced in 2014 and 2015.

There were circumstances where the proposed method had no advantage over the existing method:

• The proportion of non-growth risk triggering companies that get to action level in current yearand eventually is similar between the existing and proposed method and is a much lower ratethan for companies that trigger growth risk.

• The median loss ratios for companies triggering growth risk under each method appearcomparable.

Initial conclusions: Growth in the Health industry appeared to have accelerated in 2014 and to a slightly lesser extent in 2015, likely due to the commencement of enrollment in State and Federal exchanges and some new participants in the market.

Although the informational method may be equivalent or a slightly better predictor of risk, the large increase in the number of companies that trigger the informational charge must be considered since many more companies may not have increased risk. This is partially due to the observed growth can be attributed to premium rate increases rather than membership increases. In such cases the increases in premium rates may be a positive solvency factor.

The far larger number of companies triggering growth at a 25% threshold should be taken into account in considering how effective the informational method is relative to the existing method.

Attachment 1

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Potential Revisions to current Informational Growth Risk Approach In order to filter out the impact of large rate increases which continued in 2016 and 2017, two alternate methodologies may be tested for calendar years 2016 and 2017. The first option applies the current factor of 2% of premium revenue in excess of 25% of the prior year premium revenue but applies the result only to those insurers where membership has grown more than premium growth rate minus 10% (e.g. premium growth = 25% and membership growth > or = 15%) The second option applies an escalating add-on factor (e.g. 1%, 1.5% and 2% of RBC after covariance) to those insurers that experienced membership growth of 20%- 50%; 51% and 100%; and >100% respectively.

Potential Advantages / drawbacks of alternate methods:

Option 1 Advantages: • A better indicator of growth as this option should trigger companies with large growth in

membership while factoring out premium increased to a certain degree.• Arguably more geared toward additional op risk from as oppose to underwriting risk

Option 1 Drawbacks: • It does not account well for changes in product mix or introduction of a new product or

products which may be more indicative of operational risk• Applies a charge to net premiums which may indicate some level of false precision

Option 2 Advantages: • Consistent with basic operational risk methodology• Relies on growth in membership alone• Can be applied to start up insurers, but…

Option 2 Drawbacks: • May be duplicative of capital for start-up insurers• Not risk sensitive within growth ranges

Potential ways forward

1. Recommend further testing and evaluation of one or both of the alternative informationalmethodologies.

2. Provide suggestions for potential enhancements to the existing growth to the HRBC WG whichcould include: Review of the how the 10 % threshold criteria are applied Addressing start-up companies Addressing additional op risk from growth vs. additional underwriting risk from growth

Attachment 1

December 14, 2018

Mr. Stephen Wiest, Chair, NAIC Operational Risk € Subgroup

Re: Comments on Exposure of Health RBC Growth Risk Memorandum

The Operational Risk (E) Subgroup has asked for comments on the exposure of an analysis of the (i) existing, (ii) current informational and (iii) potential revisions to the Health RBC Growth Risk aspect of the Health RBC formula. America’s Health Insurance Plans (AHIP)1 and Blue Cross and Blue Shield Association (BCBSA)2 appreciate the opportunity to provide this response.

We believe that the analysis of the “growth in risk” relative to the “growth in premiums” that the existing growth risk identifies is a relevant risk to mature companies. The RBC factors in the current RBC formula correctly identify higher underwriting risks per dollar of premium collected. We recognize that it does not identify rapid growth in exposure to risk of the same level from one year to the next. The Academy model assumed a block of business that was relatively stable (same risk from year to year) to develop the H-2 factors. The model dealt with updating for adverse trend in loss ratios so more of the same type of premium/risk adds more similar H-2 risk. The model did not add risk from a new approach (less managed care) that carries a higher risk factor.

We do not believe that the current informational risk provides any improvement from the existing growth risk in correctly identifying high growth companies from other companies at similar positions of maturity. In addition, as noted in the comments, overall changes in the health insurance marketplace may cause any premium growth break point to be inappropriate for

1 America’s Health Insurance Plans (AHIP) is the national trade association representing the health insurance community. AHIP’s members provide health and supplemental benefits through employer-sponsored coverage, the individual insurance market, and public programs such as Medicare and Medicaid. AHIP advocates for public policies that expand access to affordable health care coverage to all Americans through a competitive marketplace that fosters choice, quality, and innovation.

2 The Blue Cross and Blue Shield Association is a national federation of 36 independent, community-based and locally operated Blue Cross and Blue Shield companies that collectively provide health care coverage for one in three Americans. BCBSA provides health care insights through The Health of America Report series and the national BCBS Health Indexsm.

Attachment 2

AHIP and BCBSA Comments on Exposure of Health RBC Growth Risk Memorandum December 14, 2018 the actual causes of premium increases (more enrollees, medical trend, mandated increases in covered benefits, etc.). We do not believe that the potential revision will provide any improvement from the existing growth risk but would be an improvement over the current informational approach. Other risk analysis functions of the NAIC’s solvency regulations may be better oriented to deal with levels of new risks undertaken to capital, operational capacity to handle such growth etc. as they are focused on the completion of an annual report but may involve company plans as reviewed with the lead regulators and interim results against expectations. Mid-year corrections to excessive growth cannot result from RBC filings.

We recommend that the informational filings for alternative growth risk approaches be stopped and the Health RBC filings continue to use the existing growth risk approach but recognize that regulators should be aware that some companies, especially those in their early years of operations, should be monitored for actual growth substantially above expected levels of growth in enrollment.

We would be happy to answer any questions you may have about this response.

Sincerely:

William Weller Carl Labus

Consultant to AHIP BCBSA

301-695-2697 312-297-5875

c/c: Patrick McNaughton, Chair, Health RBC Working Group

Jane Barr

Lou Felice

Attachment 2

Corporate Finance – Actuarial Services Division 185 Asylum Street, CityPlace I ● Hartford, CT 06103

December 14, 2018 Stephen Wiest, Chair Operational Risk (E) Subgroup National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197 Via electronic mail to Lou Felice and Jane Barr. Re: October 31, 2018, exposure document regarding Health Growth Risk Options. Dear Mr. Wiest: We are responding to the NAIC’s October 31, 2018 exposure document on “Health Growth Risk Options.” We come to this discussion from the perspective that current capital requirements on health insurers already are excessive, and we are aware of no evidence by the NAIC or anyone else that suggests otherwise. Relevant here, no historical evidence has been presented indicating that the Health RBC formula has failed to address the risk of excessive growth. While the exposure document references the failure of the CO-OPs as a rationale for the alternatives in the exposure document, CO-OPs are not instructive to this discussion. Operational risks played no part in the failure of CO-OPs. CO-OPs failed because they were start-up entities focused on a nascent market characterized by significantly flawed pricing, and that lost the financial support of the federal government, which initially created them. In the absence of any evidence that the Health RBC formula has failed, from our vantage point the process seems to be trying to fashion a solution with no corresponding problem. Adequacy of the existing Excessive Growth Risk component. The exposure document states, “The risk of growth while included in H-4 is most related to increased pricing risk caused by growth rather than increased op[erational] risk that is caused by growth.” While we may not view operational risk in precisely the same manner as the NAIC, we disagree. As described below, we believe that the existing Excessive Growth Risk Charge, which applies when an entity’s underwriting risk increases disproportionately relative to business growth, does in fact already account for risks that might be present from an insurer’s operations. Furthermore, we believe the NAIC already has addressed this yet-to-be-quantified “risk” by its recent 3% operational risk surcharge. There are a variety of risks that may be faced by insurers, including the following:

Attachment 2

Page 2 of 3

• Business mix may be shifting from provider payment mechanisms that control underwriting risk to a higher degree (e.g., capitation) to mechanisms that provide less control (though this is contrary to current trend).

• Business mix may be shifting from products that are considered to have a lower degree of

risk to products that are deemed higher-risk.

• The degree of risk control provided via premium stabilization reserves may have been reduced as such reserves decrease.

• The loss ratio for the business may be deteriorating for some reason other than the three

just listed. Collectively, these are the types of normal pricing and underwriting risks faced by health insurers, and in the vast majority of situations Section H-2 of the RBC formula adequately addresses them. While Section H-2 does not necessarily address the inability of a reporting entity to fully account for those risks through pricing and underwriting processes, the Excessive Growth Risk Charge does. The inability of a reporting entity to account for risks through pricing and underwriting is itself an “operational risk,” as that term is used by the NAIC. Accordingly, the Excessive Growth Risk Charge already accounts for operational risk. Suggested methods in the exposure document. There are two alternative growth risk approaches suggested by the exposure document, referred to as “Option 1” and “Option 2.” In each option, an additional charge is applied if a specific growth threshold is exceeded. In Option 1, there are growth thresholds for both premium and membership; in Option 2, only membership growth is referenced. As discussed below, we believe neither Option 1 nor Option 2 is viable. The proposed thresholds are purely arbitrary. As noted above, no analysis has been offered by the NAIC as to what level of growth actually has produced failures or severe financial distress among insurance entities. In the absence of empirical data, there is no reason to believe that the proposed thresholds bear any relation to genuine risk. It is also noteworthy that the arbitrary thresholds make no distinction between growth that is expected and planned for (and therefore presents relatively little additional risk), and growth that is unexpected. (The same criticism could be offered about the threshold used for the existing Excessive Growth Risk charge. There at least, though, we know from history relatively few entities are ever subject to that charge, and that the charge is triggered by considerations beyond simple growth.) Option 2 presents even more arbitrariness, as the growth risk charge in that option is tied to the amount of RBC after covariance. There is absolutely no reason to suppose that the risks related to excessive growth are proportionate to an entity’s other risks. Rapid growth in business does not necessarily affect underwriting risk, expense risk, credit risk, investment risk, and guaranty fund risk to the same degree. Therefore, it seems inappropriate to configure growth risk as a surcharge on RBC after covariance.

Attachment 2

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Conclusion.

We believe that operational risk is adequately accounted for through the operational risk surcharge and the existing Health RBC formula. No compelling reason has been offered for abandoning the current approach. Furthermore, the proposed alternatives appear to be significantly flawed. Accordingly, we strongly recommend that the existing Excessive Growth Risk charge be maintained, and that the alternative Option 1 and Option 2 of the exposure document be rejected.

We would be happy to discuss this matter with you further.

Sincerely,

James R. Braue Director, Actuarial Services UnitedHealth Group

cc: Jane Barr, NAIC Lou Felice, NAIC Randi Reichel, UnitedHealth Group

Attachment 2

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OP RISK EXPOSURES – SUMMARY OF COMMENTS 12/20/2018 – HRBC GROWTH RISK

Commenter Exposure 1 – Health Growth risk Comments AHIP / BCBSA Option 1 is rejected:

Existing growth risk identifies a relevant risk to mature companies. Neither the current informational nor the proposed alternatives provide improvement in identifying high growth companies at similar levels

of maturity. Other risk analysis functions of the NAIC’s solvency regulations may be better oriented to deal with levels of new risks undertaken to capital,

operational capacity to handle such growth etc. as they are focused on the completion of an annual report but may involve company plansas reviewed with the lead regulators and interim results against expectations.

Option 2 is addressed in part: …recognize that regulators should be aware that some companies, especially those in their early years of operations, should be monitored

for actual growth substantially above expected levels of growth in enrollment.

Staff Observation:

Option 1: Agree in principle with the 1st bullet above, but not sure that it is functioning as originally intended.

Agree with the 2nd bullet as to the current informational methodology, but cannot assess its accuracy as regards the alternative methods without further testing.

With regard to the 3rd bullet above, capital is a part of the regulatory framework and is supplemented by other regulatory tools. The comment touches on the exposure related to collecting information about how insurers view operational risk. It could be difficult to make the recommended assessment without that understanding.

Option 2: If option 2 is chosen by the Op Risk SG then this issue would certainly be the subject of potential recommendations transitioned to the HRBC Working Group among other review points. The validity of the assumptions in developing the current growth risk charge noted in the letter would also appear to merit review after 20 years and given the evolving market over that time including the development of the heath blank and addition of other in insurer types that are covered by the formula.

Attachment 3

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OP RISK EXPOSURES – SUMMARY OF COMMENTS 12/20/2018 – HRBC GROWTH RISK

Commenter

Exposure 1 – Health Growth risk Comments

UnitedHealth Group

Option 1 in the exposed document is rejected: 1. Operational risks played no part in the failure of CO-OPs. CO-OPs failed because they were start-up entities focused on a nascent market

characterized by significantly flawed pricing, and that lost the financial support of the federal government, which initially created them. 2. …the existing Excessive Growth Risk Charge, which applies when an entity’s underwriting risk increases disproportionately relative to

business growth, does in fact already account for risks that might be present from an insurer’s operations. 3. There are a variety of risks that may be faced by insurers, including the following (see list in letter)… Collectively, these are the types of

normal pricing and underwriting risks faced by health insurers, and in the vast majority of situations Section H-2 of the RBC formula adequately addresses them.

4. The inability of a reporting entity to account for risks through pricing and underwriting is itself an “operational risk,” as that term is used by the NAIC. Accordingly, the Excessive Growth Risk Charge already accounts for operational risk.

5. It is also noteworthy that the arbitrary thresholds make no distinction between growth that is expected and planned for (and therefore presents relatively little additional risk), and growth that is unexpected. (The same criticism could be offered about the threshold used for the existing Excessive Growth Risk charge. There at least, though, we know from history relatively few entities are ever subject to that charge, and that the charge is triggered by considerations beyond simple growth.)

No comment is made relative to option 2, but non-support may be inferred.

Staff Observation

Option 1 (reference to comments listed above): 1. Agree that there was likely flawed pricing that led to unexpected growth. However, the failure of government support is an operational

risk and an increasing one (political risk) 2. Possibly, but its focus is underwriting risk. This is why identification of how companies view and assess operational risk is important. 3. Generally agree, but not clear on the relevance to growth risk 4. There is some amount of operational risk embedded in underwriting risk, but that may be the only aspect of operational risk that is

picked up in the excessive growth charge. However, there are other definable operational risks that need to be addressed that may be increased by rapid growth.

5. Generally agree with the point except for the last sentence. In periods of widespread rapid growth it is not clear that the appropriate result is that few companies trigger growth risk.

Attachment 3

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OP RISK EXPOSURES – SUMMARY OF COMMENTS 12/20/2018 – OP RISK DATA COLLECTION

Commenter Exposure 2 – Basic Op risk Data Collection Joint Trades • We do not support the use of the RBC filings as an appropriate place for any initial collection of responses to questions about the ways that

companies evaluate potential operational risk events on their plans and capital adequacy. We do this for the following reasons: 1. RBC filings are intended to “identify potentially weakly capitalized companies” and adding the function of data accumulation to the filings

is inconsistent with that purpose. Note that past “informational” aspects of RBC filings have focused on potential alternative calculations to assess this identification function.

2. Companies that are part of an insurance group are more likely to evaluate capital requirements for operational risk at the group level using different personnel than those used to complete RBC filings at the entity level. By requiring each entity to respond to a series of questions, the answers may lead to unintended variations from the group’s approach. It would also potentially give inappropriate weights to answers from groups with a large number of smaller entities.

3. Companies’ evaluation of operational risk for “stand-alone” operational risks versus those which are incorporated into other insurance risks (assets, reserves, premium adequacy etc.) will likely vary widely from group to group and potentially among the companies in each group. The replies to standardized questions in RBC filings will not allow for understanding of these variations.

4. Companies’ strategies for the mitigation of operational risk cannot be easily described and reflected in an RBC filing. 5. Each group’s modeling of capital may not be readily available to or understood by the person identified to complete each entity’s RBC

filing. In addition, follow-up questions may not be able to be answered appropriately because they are asked of the wrong individual with respect to a group’s assessment modeling.

• Prior to further work, we request that the Operational Risk Subgroup recommend to the Capital Adequacy Task Force that during 2019 the NAIC staff review the RBC Events during the periods 2000-2007, 2008-2012 and 2013-2018 and provide a report of the frequency of such events having been caused by stand-alone operational risks (as defined by the Subgroup)

Staff Observation

Reference to Points 1 thru 5, above: 1. The requested information is related to enhancing the understanding use of the current charge in the long run. So does connect to RBC

in that sense 2. The issue lack of communication between risk assessment and RBC is potentially problematic in and of itself. In addition, only Q #5

alludes to actual numerical data and can be modified if desired. However, it was recognized that other groups such as ORSA Subgroup of financial Stability TF could be an equally good location where access and review of this type of information could be housed.

3. Although the Questions are standardized, the responses are expected to differ but to provide insights or direction. A question on this very point was deleted due to prior comments, but an understanding of differences in how embedded risks are separated from stand-alone op risk would be informative to regulators.

4. This seems to be a fundamental issue that firms would need to prepare for the financial examinations. However, again this information can be handled via the work of other groups provided that there is an adequate feedback loop.

Attachment 3

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5. See observation related to point # 2 With reference to the other point noted in the joint trades letter. It is unnecessary for the CADTF to undertake work to prove the relevance of operational risk. Its relevance has already been established as a missing risk by NAIC members and via the deliberate work of the Subgroup in implementation of the existing RBC charge based on a moderate application of global recognition of operational risk as a significant risk. The issue no longer if there should be a charge. That has already been decided. The issue now before regulators is whether a more risk focused approach should be considered in the future based on the way that insurers view operational risk internally. That is something that only the industry can provide.

Attachment 3

Collecting Operational Risk Data

One way to begin this process is to provide regulators with some basic questions that could be presented to ORSA filers as part of the regulatory review process (the questions could also be part of guidance to be included in other analysis tools or elsewhere in the regulatory structure). Below are examples of potential questions that could be asked to help collect the desired information.

The goal of collecting such information is to be able to use it to better understand and refine the way operational risk is recognized for solvency purposes. Therefore, the information should be collected in a way that allows for sharing of analysis of responses among regulators involved in assessing operational risk and reviewing the current operational risk charge in the RBC formulas/reports while preserving confidentiality and avoiding any inference that the information requested is considered a prescriptive ORSA requirement. The below questions could be placed in the RBC reports on an informational basis and also added to the examination planning memorandum so follow-up procedures can be performed during a risk-focused examination of the insurer. The questions can be modified to ask for changes after the initial year responses. The questions relate to information about operational risk that is NOT implicitly included or embedded within other risk categories:

1. How does the company define operational risk?*

2. How does the company identify possible operational risks events? What data is used to identifyoperational risk events (e.g., loss data or event tracking)?

3. What methodology and data is used to quantify operational risk (e.g., factors; scenario testing;stress testing; distribution of losses for (T)VaR purposes)?

4. Does the company use an internal model to quantify required capital for operational risk? If so,is operational risk a stand-alone module or is it integrated into a full internal capital model, andwhat inputs are included in the model?

5. What proportion of own required risk capital does the company attribute to operational risk (ifzero, explain how operational risk capital is eliminated)?

6. Does the company assess operational risk on both a gross and net (after application ofmitigating measures or controls) basis? If net, what is being considered (e.g., managementaction, mitigation measures, controls, etc.)

7. Is operational risk quantified on both a pre and post diversification basis?

The questions below may be asked by survey or other means or as part of ORSA reviews, but would not be included in the RBC formula or the examination planning memorandum:

8. Does the company contribute data to one of the existing databases for operational risk (i.e., ORXor ORIC)? If not, does the company accumulate such data for internal purposes? If so, how isthe company currently using the databases for identifying and quantifying operational risk (e.g.,does it impact the methodology described in response to Question 4, above)?

Attachment 4

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2

9. Would the company be willing to participate in a voluntary fee based confidential database if one was developed and administered via the State Regulators / NAIC? If so, how does the company envision using the databases for identifying and quantifying operational risk?

*NOTE: The Operational Risk (E) Subgroup adopted the following definition of operational risk: “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events but excluding strategic and reputational risk.”

Attachment 4

December 14, 2018

To: Stephen Wiest, Chair NAIC Operational Risk Subgroup

From: Interested Parties

Re: Joint Response to the Operations Risk RBC Working Group on Data Questions

The undersigned Interested Parties appreciate the opportunity to provide our response to the exposure of the Operational Risk Subgroup titled: “Collecting Operational Risk Data.” The various Trades and other parties have reviewed the alternatives for the collection of “desired information” on companies’ assessment of operational risk. We do not support the use of the RBC filings as an appropriate place for any initial collection of responses to questions about the ways that companies evaluate potential operational risk events on their plans and capital adequacy. We do this for the following reasons:

1. RBC filings are intended to “identify potentially weakly capitalized companies” and addingthe function of data accumulation to the filings is inconsistent with that purpose. Note thatpast “informational” aspects of RBC filings have focused on potential alternative calculationsto assess this identification function.

2. Companies that are part of an insurance group are more likely to evaluate capitalrequirements for operational risk at the group level using different personnel than thoseused to complete RBC filings at the entity level. By requiring each entity to respond to aseries of questions, the answers may lead to unintended variations from the group’sapproach. It would also potentially give inappropriate weights to answers from groups witha large number of smaller entities.

3. Companies evaluation of operational risk for “stand-alone” operational risks versus thosewhich are incorporated into other insurance risks (assets, reserves, premium adequacy etc.)will likely vary widely from group to group and potentially among the companies in eachgroup. The replies to standardized questions in RBC filings will not allow for understandingof these variations.

4. Companies strategies for the mitigation of operational risk cannot be easily described andreflected in an RBC filing.

5. Each group’s modeling of capital may not be readily available to or understood by theperson identified to complete each entity’s RBC filing. In addition, follow-up questions maynot be able to be answered appropriately because they are asked of the wrong individualwith respect to a group’s assessment modeling.

We do not support the development of a NAIC operational risk event data base nor the use of specific, detailed questions about gross operational risk (before risk offset and mitigation). Prior to further work, we request that the Operational Risk Subgroup recommend to the Capital Adequacy Task Force that during 2019 the NAIC staff review the RBC Events during the periods 2000-2007, 2008-2012 and 2013-2018 and provide a report of the frequency of such events having been caused by stand-alone operational risks (as defined by the Subgroup) and those caused by other aspects of the involved company but with significant added capital lost because of operational risks. While we cannot be involved in the analysis of actual RBC events, we would be willing to assist in the development of the approach to be used for this analysis.

Attachment 5

Thank you for considering these comments. Sincerely:

Interested Party Name E-mail Address Telephone Number

American Council of Life Insurers

Brian Bayerle BrianBayerle@acli.com 202-624-2169

American Insurance Association Matthew Vece mvece@aiadc.org 202-828-7145 America’s Health Insurance Plans

William C Weller omegasquared@msn.com 301-695-2697

Blue Cross and Blue Shield Association

Carl Labus Carl.Labus@bcbsa.org 312-297-5875

National Association of Mutual Insurance Companies

Jonathan Rodgers jrodgers@namic.org 317-876-4206

Property and Casualty Insurance Association of America

Stephen Broadie steve.broadie@pciaa.net 847-553-3606

c/c: Jane Barr Lou Felice

Attachment 5