D. Calibration Level of Individual LRBC Components In the LRBC formula, there are many risks captured within each of the major categories of risk. As stated previously, each LRBC factor has a different calibration level and time horizon. Generally, the factors were originally calibrated between the 92nd – 96th percentile, with the intent of aggregating to approximately the 95th percentile for each major risk category (i.e., each “C”). The time horizon for each factor was established to be consistent with the time period where risks could cause rapid deterioration in statutory solvency. In the following section, the calibration assumption (statistical risk metric and time horizon) level for each of the major risk categories is summarized, including the calibration assumption for individual risk types. More details on each of the risk factors can be found in various publications documenting the basis for each factor, including those listed in the Bibliography section. 1. C0 The C0 risk category covers the risk of default of assets for affiliated investments and certain offbalance sheet risks. For downstream insurance subsidiaries owned by an insurer, the C0 amount is equal to the risk-based capital requirement of the downstream insurance subsidiaries. For other subsidiaries, the C0 amount is calculated by applying a factor to the carrying value. In this way, a parent is required to include an equivalent amount of risk-based capital to protect against financial downturns of affiliates in its RBC. For life companies, off-balance sheet items are included in this risk component and these include non-controlled assets, derivative instruments, guarantees for affiliates and contingent liabilities. Capital requirements for affiliated investments are based on a “look-through” approach, meaning that a parent’s RBC is determined as the same level of RBC as would be required if the affiliate were stand-alone. As such, there was no additional risk analysis performed on the risks associated with affiliated investments where RBC for a parent was based on a specific time horizon and calibration level. The RBC for insurance companies operating in other countries with a regulatory RBC type structure is assumed to be that determined by their respective capital formula. Similarly, non-insurance companies will use their GAAP surplus as required capital adjusted by the appropriate RBC factor. 2. C1 C1 risk represents the potential for default of principal and interest or fluctuation in fair value of assets. Fixed income assets include bonds, collateral loans and mortgage loans, short-term investments, cash, and other long-term invested assets. Equity assets include unaffiliated common and preferred stock, real estate, and certain long-term assets reported in Schedule BA. Factors are applied to the statutory carrying values to determine their risk- based capital charges. The factors for bonds, commercial mortgage loans (assumed to be in good standing) and unaffiliated common stock were determined through stochastic modeling. Bond factors were modeled for each of the six NAIC bond rating categories. A bond’s Nationally Recognized Statistical Rating Organization (NRSRO) rating directly maps to one of these six categories. Commercial mortgage
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