Introduction to NAIC Group Capital Calculation
November 28, 2023
In the realm of insurance regulation, the Group Capital Calculation (GCC) stands as a crucial tool for assessing the financial health and stability of insurance groups. Developed by the National Association of Insurance Commissioners (NAIC), the GCC provides a comprehensive framework for evaluating the capital adequacy of insurance holding companies and their subsidiaries. After the financial crisis in 2008, regulators have continued to develop ways to better identify and monitor risks related to insurance companies. The Group Capital Calculation Working Group was formed in early 2016 and was tasked with creating a group capital calculation based on an RBC aggregation methodology. The GCC serves as a valuable complement to traditional holding company analysis, offering a broader perspective on the overall risk profile and capital distribution within an insurance group. By extending the assessment beyond individual insurance companies, the GCC sheds light on potential risks to policyholders stemming from non-insurance entities within the group. In 2020, the NAIC adopted the group capital calculation template and instructions as well as amendments to NAIC Model Law (#440) and Model Regulation (#450) which provided the framework and legislative language to states adopt the group capital calculation.
To understand the GCC, it's essential to grasp a few key concepts. The GCC's primary function is to identify which entities fall within the insurance group's scope. This determination is based on ownership and control principles outlined in Models #440 and #450. Ultimately, the lead state with which the insurance company files decides which entities belong to the group, drawing upon the provided information. For included entities, the GCC considers a range of data that facilitates the analysis of risk and capital availability for the insurance group. While some of this information is accessible from other sources, consolidating it into the GCC template enables regulators to conduct the desired analysis. As mentioned earlier, the methodology employed in this analysis is an RBC aggregation approach. While insurance carriers are mandated to calculate RBC regularly, other entities within the insurance group likely don't perform the same calculation. This analysis helps determine the capital requirements for other entities in the group and further allows regulators to assess the overall capital sufficiency of the group. The significance of this is evident in scenarios where an insurance company is well-capitalized, but other entities within the insurance group are not. In such cases, regulators may be concerned that if other entities require capital, it may be diverted from the insurance company to support them. This potential capital transfer could jeopardize the insurance company's financial stability and ultimately impact policyholders.
Despite its benefits, the implementation of the GCC has presented some challenges, including the following:
- Data collection and aggregation: The GCC requires a significant amount of data from various entities within an insurance group. Gathering and consolidating this data can be a time-consuming and resource-intensive process.
- Interpretation of results: The analysis of GCC results can be complex, requiring expertise in insurance risk assessment and capital adequacy. Regulators need to carefully interpret the results to make informed regulatory decisions.
- Consistency of application: Ensuring consistent application of the GCC across jurisdictions can be challenging due to differences in regulatory practices and interpretations.
What does implementation of the GCC look like? For the initial implementation, all holding groups will be required to file an initial calculation with their lead state. After that initial filing, only groups with premiums over $1 billion will be required to file the GCC. For groups with premiums less than $1 billion, lead states will be able to determine which groups are required to continue filing the GCC. The NAIC has provided a template and extensive instructions on how to complete the required filing. If you have questions on the calculation or which entities should be included, reach out to your state regulators.
The NAIC instructions and templates can be found here:
Please contact us with any additional questions you may have regarding this topic.
Allison is an Audit Senior Manager specializing in the insurance industry. She is the Education and NAIC specialist for the Insurance Practice Group at Larson & Company.