•
C3 Phase 1 (annuities and single premium life insurance): C3 capital is based on the distribution of cash shortfalls or deficits modeled over the period of time such that the net modeled cash flows approach zero (e.g., thirty years). This cash flow position is estimated by modeling the business over a number of prescribed interest rate scenarios. The capital requirement for a given scenario is the worst present value of the projected deficit over the modeled time period, divided by the modeled reserves. The results for the scenarios are ranked and the required capital is based on scenario results falling between the 92nd and 98th percentile of the distribution.
•
C3 Phase 2 (VA): C3 capital is based on a CTE 90 confidence level over the period of time such that the net modeled cash flows approach zero (e.g., thirty years). The risk metric is the worst present value over the time horizon. The multi-scenario based result is subject to a deterministic floor consisting of a single scenario with prescribed contractholder behavior assumptions.
•
C3 Health Credit risk: The Health Credit Risk is an offset to some portions of the managed care discount factor. Since the managed care discount factor assumes that health risks are transferred to health care providers through fixed prepaid amounts, the Health Credit Risk compares these capitation payments to the securities held by the company. To the extent that the securities do not completely cover the credit risk of capitated payments, a risk charge is applied to the exposed portion. The charge ranges from 2-4% of capitations reported as paid claims, with reductions allowed when letters of credit have been secured.
5. C4 The C4 risk category includes the wide range of general business risks faced by life insurers. The characteristics of these risks are difficult to quantify in a general way for all companies. General business risk is based on premium income, annuity considerations and separate account liabilities. The formula factors were based on considering a company’s exposure to guaranty fund assessments without attempting to exactly mirror the assessment formulas. Also considered were other general business risk exposures; e.g., litigation, etc. Many general risks were considered. Best guesses were often used for these tail risks, as limited industry-wide data were available. It was also assumed that not all of these business risk events would likely occur at the same time. Therefore, the factors were based on the largest estimates for the risks where data were available; assuming that by so doing the other risks would also be covered. For life and annuity business, the LRBC pre-tax contribution is 3.08 percent of Schedule T life premiums and annuity considerations before taxes (based on the largest annual guarantee fund assessment). A smaller pre-tax factor of 0.77 percent is applied against Schedule T accident and health premiums. The reason for the smaller factor for accident and health business was a recognition that general business risk exposure is, in part, a function of reserves. Since life and annuity business typically carries higher reserves than accident and health business, a lower factor was used to achieve the same relative risk coverage as for life and annuity business.
72