806 KAR 3:190. Risk-based capital for insurers.

806 KAR 3:190. Risk-based capital for insurers.

RELATES TO: KRS 304.3-120, 304.3-140, 304.6, 304.7, 304.24-350, 304.33

STATUTORY AUTHORITY: KRS 304.2-110, 304.3-125

NECESSITY, FUNCTION, AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of Insurance may make reasonable administrative regulations necessary for or as an aid to the effectuation of any provision of the Kentucky Insurance Code. KRS 304.3-125 provides that the commissioner is granted the authority to adopt administrative regulations that are promulgated and adopted by the National Association of Insurance Executive Directors and a requirement of certification for the office. The NAIC requires that the office have this administrative regulation for accreditation. This administrative regulation established risk-based capital requirements for all insurers authorized to transact insurance business in Kentucky. The risk-based capital requirements will assist the office in determining financial strength.

Section 1. Definitions. (1) "Adjusted RBC report" means an RBC report which has been adjusted by the executive director in accordance with Section 2(7) of this administrative regulation.

(2) "Corrective order" means an order issued by the executive director specifying corrective actions which the executive director has determined are required.

(3) The definition of "domestic insurer" shall be governed by KRS 304.1-070(1).

(4) The definition of "foreign insurer" shall be governed by KRS 304.1-070(2).

(5) "NAIC" means the National Association of Insurance Commissioners.

(6) "Life and health insurer" means any insurance company licensed to write insurance as defined in KRS 304.5-020, 304.5-030, and 304.5-040 or a licensed property and casualty insurer writing only accident and health insurance.

(7) "Property and casualty insurer" means any insurance company licensed to write insurance as defined in KRS 304.5-050, 304.5-060, 304.5-070, 304.5-080, and 304.5-110 but shall not include monoline mortgage guaranty insurers, financial guaranty insurers and title insurers.

(8) "Negative trend" means, with respect to a life or health insurer, negative trend over a period of time, as determined in accordance with the "Trend Test Calculation" included in the RBC instructions.

(9) "RBC" means risk-based capital.

(10) "RBC instructions" means the RBC Report including risk-based capital instructions adopted by the NAIC.

(11) "RBC Level" means an insurer's company action level RBC, regulatory action level RBC, authorized control level RBC, or mandatory control level RBC where:

(a) "Company action level RBC" means, the product of two (2.0) and its authorized control level RBC;

(b) "Regulatory action level RBC" means the product of one and five-tenths (1.5) and its authorized control level RBC;

(c) "Authorized control level RBC" means the number determined under the risk-based capital formula in accordance with the RBC instructions;

(d) "Mandatory control level RBC" means the product of seven-tenths (.70) and the authorized control level RBC.

(12) "RBC plan" means a comprehensive financial plan containing the elements specified in Section 3(2) of this administrative regulation.

(13) "RBC report" means the report required in Section 2 of this administrative regulation.

(14) "Revised RBC plan" means an RBC plan that has been rejected by the executive director and then revised by the insured.

(15) "Total adjusted capital" means the sum of:

(a) An insurer's statutory capital and surplus as determined in accordance with the statutory accounting applicable to the annual financial statements required to be filed under KRS 304.3-240; and

(b) Any other items as specified in the RBC instructions.

Section 2. RBC Reports. (1) On or prior to March 1, every domestic insurer shall prepare and submit to the executive director an RBC report for the calendar year just ended.

(2) The RBC report shall be filed in a form and contain information as is required by the RBC instructions.

(3) In addition, every domestic insurer shall file its RBC report with:

(a) The NAIC in accordance with the RBC instructions; and

(b) The insurance executive director in any state in which the insurer is authorized to do business, if the insurance executive director has notified the insurer of its request in writing, in which case the insurer shall file its RBC report not later than the later of:

1. Fifteen (15) days from the receipt of notice to file its RBC report with that state; or

2. The filing date.

(4) Requirements for life and health insurers:

(a) A life and health insurer's RBC shall be determined in accordance with the formula set forth in the RBC instructions.

(b) The formula shall take into account and may adjust for the covariance between the following which are determined in each case by applying the factors in the manner set forth in the RBC instructions:

1. The risk with respect to the insurer's assets;

2. The risk of adverse insurance experience with respect to the insurer's liabilities and obligations;

3. The interest rate risk with respect to the insurer's business; and

4. All other business risks and other relevant risks as are set forth in the RBC instructions;

(5) Requirements for property and casualty insurers:

(a) A property and casualty insurer's RBC shall be determined in accordance with the formula set forth in the RBC instructions.

(b) The formula shall take into account and may adjust for the covariance between the following which shall be determined in each case by applying the factors in the manner set forth in the RBC instructions:

1. Asset risk;

2. Credit risk;

3. Underwriting risk; and

4. All other business risk and other relevant risks as are set forth in the RBC instructions;

(6) Insurers shall seek to maintain capital above the RBC levels required by this administrative regulation. An excess of capital over the amount produced by the risk-based capital requirements contained in this administrative regulation and the formulas, schedules and instructions referenced in this administrative regulation is desirable in the business of insurance. Additional capital is used and useful in the insurance business and helps to secure an insurer against various risks inherent in, or affecting, the business of insurance and not accounted for or only partially measured by the risk-based capital requirements contained in this administrative regulation.

(7) If a domestic insurer files an RBC report which in the judgment of the executive director is inaccurate, then the executive director shall:

(a) Adjust the RBC report to correct the inaccuracy;

(b) Notify the insurer of the adjustment;

(d) Once the RBC report is adjusted, refer to the report as the adjusted RBC report.

Section 3. Company Action Level Event. (1) A company action level event is any of the following events:

(a) The filing of an RBC report by an insurer which indicates that:

1. The insurer's total adjusted capital is greater than or equal to its regulatory action level RBC but less than its company action level RBC; or

2. If a life or health insurer, the insurer has:

a. Total adjusted capital which is greater than or equal to its company action level RBC but less than the product of its authorized control level RBC and two and five-tenths (2.5); and

b. A negative trend;

(b) The notification by the executive director to the insurer of an adjusted RBC report that indicates an event in paragraph (a) of this subsection, provided the insurer does not challenge the adjusted RBC report under Section 7 of this administrative regulation; or

(c) If, pursuant to Section 7 of this administrative regulation, an insurer challenges an adjusted RBC report that indicates the event in paragraph (a) of this subsection, the notification by the executive director to the insurer that the executive director has, after a hearing, rejected the insurer's challenge.

(2) In the event of a company action level event, the insurer shall prepare and submit to the executive director an RBC plan which shall:

(a) Identify the conditions which contribute to the company action level event;

(b) Propose corrective actions which the insurer intends to take in order to eliminate the company action level event;

(c) Provide projections of the insurer's financial results in the current year and at least the four (4) succeeding years, both in the absence of proposed corrective actions and giving effect to the proposed corrective actions including:

1. Projections of statutory operating income, net income, capital, or surplus;

2. The projections for both new and renewal business may include separate projections for each major line of business and separately identify each significant income, expense, and benefit component.

(d) Identify the key assumptions impacting the insurer's projections and the sensitivity of the projections to the assumptions; and

(e) Identify the quality of the insurer's business and problems associated with the insurer's business, including the following:

1. Assets;

2. Anticipated business growth and associated surplus strain;

3. Extraordinary exposure to risk;

4. Mix of business;

5. Use of reinsurance; and

6. Other important factors.

(3) The RBC plan shall be submitted:

(a) Within forty-five (45) days of the company action level event; or

(b) If the insurer challenges an adjusted RBC report pursuant to Section 7 of this administrative regulation, within forty-five (45) days after notification to the insurer that the executive director has, after a hearing, rejected the insurer's challenge.

(4) Within sixty (60) days after the submission by an insurer of an RBC plan to the executive director, the executive director shall notify the insurer whether the RBC plan shall be implemented or is, in the judgment of the executive director, unsatisfactory.

(5) If the executive director determines that the RBC plan is unsatisfactory, the notification to the insurer shall set forth the reasons for the determination, and may set forth proposed revisions which will render the RBC plan satisfactory, in the judgment of the executive director.

(6) Upon notification from the executive director, the insurer shall prepare a revised RBC plan which may incorporate by reference any revisions proposed by the executive director, and shall submit the revised RBC plan to the executive director:

(a) Within forty-five (45) days after the notification from the executive director; or

(b) If the insurer challenges the notification from the executive director under Section 7 of this administrative regulation, within forty-five (45) days after a notification to the insurer that the executive director has, after a hearing, rejected the insurer's challenge.

(7) In the event of a notification by the executive director to an insurer that the insurer's RBC plan or revised RBC plan is unsatisfactory, the executive director may at the executive director’s discretion, subject to the insurer's right to a hearing under Section 7 of this administrative regulation, specify in the notification that the notification constitutes a regulatory action level event.

(8) Every domestic insurer that files an RBC plan or revised RBC plan with the executive director shall file a copy of the RBC plan or revised RBC plan with the insurance executive director in any state in which the insurer is authorized to do business if:

(a) The state has an RBC provision substantially similar to Section 8(1) of this administrative regulation; and

(b) The insurance executive director of that state has notified the insurer of its request for the filing in writing.

(9) If the insurer is required by subsection (8) of this section to file an RBC plan or revised RBC plan with another state, then it shall be filed in that state by the latter of the following time periods:

(a) Fifteen (15) days after the receipt of notice to file a copy of its RBC plan or revised RBC plan with the state; or

(b) The date on which the RBC plan or revised RBC plan is filed under subsections (3) and (4) of this section.

Section 4. Regulatory Action Level Event. (1) A regulatory action level event is any of the following events:

(a) The filing of an RBC report by the insurer which indicates that the insurer's total adjusted capital is greater than or equal to its authorized control level RBC but less than its regulatory action level RBC;

(b) The notification by the executive director to an insurer of an adjusted RBC report that indicates a regulatory action level event, provided the insurer does not challenge the adjusted RBC report under Section 7 of this administrative regulation;

(c) If, pursuant to Section 7 of this administrative regulation, the insurer challenges an adjusted RBC report that indicates a regulatory action level event, the notification by the executive director to the insurer that the executive director has, after a hearing, rejected the insurer's challenge;

(d) The failure of the insurer to file an RBC report by the filing date, unless the insurer has provided an explanation for that failure which is satisfactory to the executive director and has cured the failure within ten (10) days after the filing date;

(e) The failure of the insurer to submit an RBC plan to the executive director within the time period set forth in Section 3(3) of this administrative regulation;

(f) Notification by the executive director to the insurer that:

1. The RBC plan or revised RBC plan submitted by the insurer is, in the judgment of the executive director, unsatisfactory; and

2. The notification constitutes a regulatory action level event with respect to the insurer, provided that the insurer has not challenged the determination under Section 7 of this administrative regulation;

(g) If, pursuant to Section 7 of this administrative regulation, the insurer challenges a determination by the executive director under paragraph (f) of this subsection, the notification by the executive director to the insurer that the executive director has, after a hearing, rejected such challenge;

(h) Provided that the insurer has not challenged the determination under Section 7 of this administrative regulation, notification by the executive director to the insurer that:

1. The insurer has failed to adhere to its RBC plan or revised RBC plan; and

2. The insurer's failure has a substantial adverse effect on the ability of the insurer to eliminate the company action level event in accordance with its RBC plan or revised RBC plan.

(i) If, pursuant to Section 7 of this administrative regulation, the insurer challenges a determination by the executive director under paragraph (h) of this subsection, the notification by the executive director to the insurer that the executive director has, after a hearing, rejected the challenge.

(2) In the event of a regulatory action level event the executive director shall:

(a) Require the insurer to prepare and submit an RBC plan or, if applicable, a revised RBC plan;

(b) Perform an examination or analysis as the executive director deems necessary of the assets, liabilities, and operations of the insurer including a review of its RBC plan or revised RBC plan; and

(c) Subsequent to the examination or analysis, issue a corrective order specifying corrective actions as the executive director shall determine are required.

(3) In determining corrective actions, the executive director may take into account relevant factors based upon the executive director’s examination or analysis of the assets, liabilities, and operations of the insurer, which shall include but not be limited to, the results of any sensitivity tests undertaken pursuant to the RBC instructions.

(4) The RBC plan or revised RBC plan shall be submitted:

(a) Within forty-five (45) days after the occurrence of the regulatory action level event;

(b) If the insurer challenges the adjusted RBC report pursuant to Section 7 of this administrative regulation and the challenge is not frivolous in the judgment of the executive director, within forty-five (45) days after the notification to the insurer that the executive director has, after a hearing, rejected the insurer's challenge; or

(c) If the insurer challenges a revised RBC plan pursuant to Section 7 of this administrative regulation and the challenge is not frivolous in the judgment of the executive director, within forty-five (45) days after the notification to the insurer that the executive director has, after a hearing, rejected the insurer's challenge.

(5) The executive director may retain actuaries and investment experts and other consultants as may be necessary in the judgment of the executive director to:

(a) Review the insurer's RBC plan or revised RBC plan;

(b) Examine or analyze the assets, liabilities, and operations of the insurer; and

(6) The fees, costs, and expenses relating to consultants shall be borne by the affected insurer or other party as directed by the executive director.

Section 5. Authorized Control Level Event. (1) An authorized control level event is any of the following events:

(a) The filing of an RBC report by the insurer which indicates that the insurer's total adjusted capital is greater than or equal to its mandatory control level RBC but less than its authorized control level RBC;

(b) The notification by the executive director to the insurer of an adjusted RBC report that indicates an authorized control level event, provided the insurer does not challenge the adjusted RBC report under Section 7 of this administrative regulation;

(c) If, pursuant to Section 7 of this administrative regulation, the insurer challenges an adjusted RBC report that indicates an authorized control level event, notification by the executive director to the insurer that the executive director has, after a hearing, rejected the insurer's challenge;

(d) The failure of the insurer to respond, in a manner satisfactory to the executive director, to a corrective order, provided that the insurer has not challenged the corrective order under Section 7 of this administrative regulation; or

(e) If the insurer has challenged a corrective order under Section 7 of this administrative regulation and the executive director has, after a hearing, rejected the challenge or modified the corrective order, the failure of the insurer to respond, in a manner satisfactory to the executive director, to the corrective order subsequent to rejection of modification by the executive director.

(2) In the event of an authorized control level event with respect to an insurer, the executive director shall:

(a) Take actions as are required under Section 4 of this administrative regulation regarding an insurer to which a regulatory action level event has occurred; or

(b) Take actions as are necessary to cause the insurer to be placed under regulatory control pursuant to KRS Chapter 304, Subtitle 33 if the executive director deems it to be in the best interest of the policyholders, creditors of the insurer, and public.

(3) The authorized control level event shall be deemed sufficient grounds for the executive director to take action under KRS Chapter 304, Subtitle 33. In the event the executive director takes actions under this section pursuant to an adjusted RBC report, the insurer shall be entitled to such protections as are afforded to insurers under the provisions of the section pertaining to summary proceedings.

Section 6. Mandatory Control Level Event. (1) A mandatory control level event is any of the following events:

(a) The filing of an RBC report which indicates that the insurer's total adjusted capital is less than its mandatory control level RBC;

(b) Notification by the executive director to the insurer of an adjusted RBC report that indicates a mandatory control level event, provided the insurer does not challenge the adjusted RBC report under Section 7 of this administrative regulation; or

(c) If, pursuant to Section 7 of this administrative regulation, the insurer challenges an adjusted RBC report that indicates a mandatory control level event, notification by the executive director to the insurer that the executive director has, after a hearing, rejected the insurer's challenge.

(2) In the event of a mandatory control level event for a life insurer:

(a) The executive director shall take actions as are necessary to place the insurer under regulatory control pursuant to KRS Chapter 304, Subtitle 33.

(b) If the executive director takes actions pursuant to an adjusted RBC report, the insurer shall be entitled to the protections of KRS Chapter 304, Subtitle 33 pertaining to summary proceedings.

(c) The executive director may forego action for up to ninety (90) days after the mandatory control level event if the executive director finds there is a reasonable expectation that the mandatory control level event may be eliminated within the ninety (90) day period.

(3) In the event of a mandatory control level event for a property and casualty insurer:

(a) The executive director shall take actions as are necessary to place the insurer under regulatory control pursuant to KRS Chapter 304, Subtitle 33.

(b) In the case of an insurer which is writing no business and which is running-off its existing business, the executive director may allow the insurer to continue its run-off under the supervision of the executive director.

(c) In either event, the mandatory control level event shall be deemed sufficient grounds for the executive director to take action under KRS Chapter 304, Subtitle 33.

(d) If the executive director takes actions pursuant to an adjusted RBC report, the insurer shall be entitled to the protections of KRS Chapter 304, Subtitle 33 pertaining to summary proceedings.

(e) The executive director may forego action for up to ninety (90) days after the mandatory control level event if the executive director finds there is a reasonable expectation that the mandatory control level event may be eliminated within the ninety (90) day period.

Section 7. Hearings. (1) Upon any of the following notifications, the insurer shall have the right to a confidential office hearing at which the insurer may challenge any determination or action by the executive director:

(a) Notification to an insurer by the executive director of an adjusted RBC report; or

(b) Notification to an insurer by the executive director that:

1. The insurer's RBC plan or revised RBC plan is unsatisfactory; and

2. The notification constitutes a regulatory action level event with respect to the insurer; or

1. The insurer has failed to adhere to its RBC plan or revised RBC plan; and

2. This failure has a substantial adverse effect on the ability of the insurer to eliminate the company action level event with respect to the insurer in accordance with its RBC plan or revised RBC plan; or

(d) Notification to an insurer by the executive director of a corrective order.

(2) The insurer shall notify the executive director of its request for a hearing within five (5) days after the notification by the executive director under subsection (1) of this section.

(3) Upon receipt of the insurer's request for a hearing, the executive director shall set a date for the hearing, which shall be no less than ten (10) nor more than thirty (30) days after the date of the insurer's request.

Section 8. Confidentiality; Prohibition on Announcements, Prohibition on Use in Ratemaking. (1) The following records are confidentially disclosed pursuant to the requirements of this administrative regulation and shall constitute proprietary information that, if disclosed, would create an unfair competitive advantage to competitors and shall be kept confidential by the executive director:

(a) RBC reports;

(b) RBC plans;

(d) Corrective order.

(2) Comparison of insurer's total adjusted capital to any RBC levels shall be a regulatory tool and shall not be used to rank insurers.

(3) An insurer, agent, broker, or other person engaged in the insurance business shall not disseminate orally or in any manner or cause to be disseminated directly or indirectly to the public an assertion, representation, or statement with regard to RBC levels of any insurer or any component of the calculation. The comparison of an insurer's total adjusted capital to any of its RBC levels is a regulatory tool which may indicate the need for possible corrective action with respect to the insurer, and is not intended as a means to rank insurers generally.

(4) If a false statement with regard to a comparison of an insurer’s total adjusted capital to its RBC levels or an inappropriate comparison is made, and the falsity is substantially proved, an insurer may issue a statement to rebut the false statement.

(5) RBC instructions, RBC reports, adjusted RBC reports, RBC plans, and revised RBC plans:

(a) Shall be used solely by the executive director in monitoring the solvency of insurers and the need for possible corrective action with respect to insurers;

(b) Shall not be used in rate making or as evidence in rate proceedings; and

(c) Shall not be used by the executive director to calculate or derive any elements of an appropriate premium level or rate of return for any line of insurance which an insurer or any affiliate is authorized to write.

Section 9. Exemption. The executive director may exempt from the application of this administrative regulation any domestic property and casualty insurer which:

(1) Writes direct business only in this state;

(2) Writes direct annual premiums of $2,000,000 or less; and

(3) Assumes no reinsurance in excess of five (5) percent of direct premium written.

Section 10. Foreign Insurers. (1) Any foreign insurer shall, upon the written request of the executive director, submit to the executive director an RBC report for the calendar year just ended.

(2) The RBC report of a foreign insurer shall be filed as follows:

(a) On the date an RBC report would be required to be filed by a domestic insurer under this administrative regulation; or

(b) Fifteen (15) days after the request is received by the foreign insurer.

(3) Any foreign insurer shall, at the written request of the executive director, promptly submit to the executive director a copy of any RBC plan that is filed with the insurance executive director of any other state.

(4) The executive director may require a foreign insurer to file an RBC plan if:

(a) A company action level event, regulatory action level event, or authorized control level event exists as determined by:

1. RBC law applicable in the insurer's state of domicile; or

2. This administrative regulation; and

(b) If the insurance executive director of the insurer's state of domicile fails to require the foreign insurer to file an RBC.

(5) In the event that the executive director requires the foreign insurer to file an RBC plan pursuant to subsection (4) of this section, the failure of the foreign insurer to file an RBC Plan with the executive director shall be grounds to order the insurer to cease and desist from writing new insurance business in this state.

(6) In the event of a mandatory control level event with respect to any foreign insurer, if no domiciliary receiver has been appointed with respect to the foreign insurer under the rehabilitation and liquidation statute applicable in the state of domicile of the foreign insurer:

(a) The executive director may make application to the Franklin Circuit Court permitted under KRS Chapter 304, Subtitle 33 with respect to the liquidation of property of foreign insurers found in this state; and

(b) The occurrence of the mandatory control level event shall be considered adequate grounds for the application.

Section 11. Notices. (1) All notices by the executive director to an insurer which may result in regulatory action pursuant to this administrative regulation shall be effective upon dispatch if transmitted by registered or certified mail; or

(2) In the case of any other transmission shall be effective upon the insurer's receipt of the notice.

Section 12. Incorporation by Reference. (1) The following material is incorporated by reference:

(a) 1996 NAIC Life Risk-Based Capital Report including Overview and Instructions for Companies (December 31, 1996); and

(b) 1996 NAIC Property and Casualty Risk-Based Capital Report including Overview and Instructions for Companies (December 31, 1996).

(2) This material may be inspected, copied, or obtained at Kentucky Office of Insurance, 215 West Main Street, Frankfort, Kentucky 40601, Monday through Friday, 8 a.m. to 4:30 p.m. (23 Ky.R. 4029; Am. 24 Ky.R. 122; eff. 8-11-97; TAm eff. 8-9-2007.)