Risk Management Task Force

Risk Management
Task Force

Economic Capital Calculation and Allocation (ECCA) Minutes

Economic Capital Calculation and Allocation (ECCA) Subgroup
April 23, 2004
9:30 a.m. Central Time

Participants:
Jenny Bowen (leader), Jeff Mohrenweiser, Hubert Mueller, Brett Roush

C-3 Phase II
Hubert reported on the April 16th 2-hour conference call that was sponsored jointly by the C-3 Phase II Work Group and the Variable C-3 Phase II Work Group of the American Academy of Actuaries. The purpose of the session was to present information about the proposed RBC and reserve requirements, as well as the “Standard Scenario” minimum reserve and RBC proposal authored by Dennis Lauzon of the New York State Insurance Department.

If the proposed requirements are adopted, required capital for variable annuities with guarantees will be based on an economic-capital-type model of a company’s liabilities. Using a subset of the 10,000 scenarios posted on the Academy’s website, insurance companies will be asked to develop stochastic scenario analyses and determine risk-based capital based on the average of the worst 10% of outcomes (“CTE 90”). Consistent with this proposed methodology for required capital, reserves for variable annuities will be based on the average of the worst 35% of outcomes (“CTE 65”).

A May 5th conference call will be held to solicit feedback on these proposals. This is an AAA sponsored call.

Fitch Capital Charges
Jeff reported that Fitch is in the process of releasing its own VA capital charges, which will reflect this proposed methodology whether or not it has been adopted by NAIC in 2004.

Farewell For Now
We concluded that this subgroup has reached a natural stopping point, having accomplished all that can reasonably be done until the discipline of ECCA has developed further.

The ECCA Specialty Guide and its annotated bibliography were great achievements and give readers a very accurate picture of the state of the art. While readers and subgroup members are clamoring for more guidance on practical applications, we are not yet able to identify sufficient sources of “best practices” to share. It appears that too many people are still trying to find their way, and not yet ready to lead.

We will re-evaluate the situation in 12-18 months, with respect to updating the bibliography as well as taking on new projects.