unable to perform service according to their contract. It was moved from the underwriting risk (H2) to the credit risk (H3). Business Risk (H4) The business risk was developed by the NAIC with industry input and includes factors for administrative expense, non‐underwritten and limited risk business, premiums subject to guaranty fund assessments and excessive growth risk. Covariance In part the health formula moved from employing the factors for each individual risk to an overall company RBC through use of a covariance formula similar to the ones that were in the Life and P&C formulas already (that used covariance factors that were 1 or 0). The covariance is calculated as H0 + Square Root (H12+H22+H32+H42). The effect of using the covariance for the H1 through H4 risks is that the RBC is less than it would be otherwise if the risks were all added together and is driven by the underwriting risk (H2), since it is much larger than the other risks. The covariance formula is based on the assumption that the risks under the square root are independent of one another. After those results were developed for HRBC, the primary issue considered in the development of the formula appears to have been the percent of companies that the regulators anticipated would fall within monitoring levels based on alternative factors or calibration levels. This drove much of how the final formula was developed and the final factors and covariance selected. 2. An identification of risks that are missing from RBC and a consideration of which of those risks may be reasonably quantifiable or otherwise merit inclusion in RBC. For those missing risks that may be quantifiable, advice on potential approaches to such quantification. This analysis should also consider potential enhancements, if any, to the inclusion of risk mitigation practices in RBC. Since the implementation of HRBC, there have been a number of risks that either did not exist at the time that HRBC was finalized or have increased (or our awareness of which has increased) since that time, including: •
Pandemic: With new bacterial and viral strains appearing that are immune to current vaccines and anti‐biotics, there has been increased awareness and concern over a potential pandemic. Even the concerns of a pandemic sends people to the doctor’s office for vaccination. Once
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