Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
304.3-120,
304.3-140,
304.3-240,
304.5-020,
304.5-030,
304.5-040,
304.5-050,
304.5-060,
304.5-070,
304.5-080,
304.5-110,
304.6, 304.7,
304.24-350,
304.33,
304.49-010
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
304.2-110 authorizes the Commissioner of
Insurance to promulgate administrative regulations necessary for or as an aid
to the effectuation of any provision of the Kentucky Insurance Code, as defined
by
KRS
304.1-010.
KRS
304.3-125 authorizes the commissioner to
promulgate administrative regulations addressing requirements for additional
capital and surplus based on the kind, type, volume, and nature of insurance
business transacted, up to the standards prescribed by the National Association
of Insurance Commissioners. This administrative regulation establishes
risk-based capital requirements for all insurers authorized to transact
insurance business in Kentucky.
Section
1. Definitions.
(1) "Adjusted
RBC report" means an RBC report which has been adjusted by the commissioner in
accordance with Section 3(6) of this administrative regulation.
(2) "Authorized control level RBC" means the
number determined under the risk-based capital formula in accordance with the
RBC instructions.
(3) "Company
action level RBC" means the product of two (2.0) and its authorized control
level RBC.
(4) "Corrective order"
means an order issued by the commissioner specifying corrective actions which
the commissioner has determined are required.
(5) "Domestic insurer" is defined by
KRS
304.1-070(1).
(6) "Foreign insurer" is defined by
KRS
304.1-070(2).
(7) "Fraternal benefit society" is defined by
KRS
304.29-011.
(8) "Insurer" is defined by
KRS
304.1-040.
(9) "Life and health insurer" means any
insurer licensed to write insurance as defined in
KRS
304.5-020,
304.5-030,
and
304.5-040
or a licensed property and casualty insurer writing only accident and health
insurance.
(10) "Mandatory control
level RBC" means the product of seven-tenths (.70) and the authorized control
level RBC.
(11) "NAIC" is defined
by
KRS
304.7-012(59).
(12) "Negative trend" means, with respect to
a life or health insurer or a fraternal benefit society, negative trend over a
period of time, as determined in accordance with the "Trend Test Calculation"
included in the Life or Fraternal RBC instructions.
(13) "Property and casualty insurer" means
any insurer licensed to write insurance as defined in
KRS
304.5-050,
304.5-060,
304.5-070,
304.5-080,
and
304.5-110,
except for monoline mortgage guaranty insurers, financial guaranty insurers,
and title insurers.
(14) "RBC"
means risk-based capital.
(15) "RBC
instructions" means the RBC Report including risk-based capital instructions
adopted by the NAIC.
(16) "RBC
Level" means an insurer's company action level RBC, regulatory action level
RBC, authorized control level RBC, or mandatory control level RBC.
(17) "RBC plan" means a comprehensive
financial plan containing the elements specified in Section 4(2) of this
administrative regulation.
(18)
"RBC report" means the report required in Section 3 of this administrative
regulation.
(19) "Regulatory action
level RBC" means the product of one and five-tenths (1.5) and its authorized
control level RBC.
(20) "Revised
RBC plan" means an RBC plan that has been rejected by the commissioner and then
revised by the insured.
(21) "Total
adjusted capital" means the sum of:
(a) An
insurer's statutory capital and surplus as determined in accordance with the
statutory accounting applicable to the annual financial statements required to
be filed under
KRS
304.3-240; and
(b) Any other items as specified in the RBC
instructions.
Section
2. The provisions of this administrative regulation shall apply to
the following insurers:
(1) All domestic
insurers, whether or not they purport to do business in this state;
(2) All insurers who are doing or have done
an insurance business in this state and against whom claims arising from that
business may exist now or in the future;
(3) All insurers who purport to do an
insurance business in this state;
(4) All insurers who have insureds resident
in this state;
(5) All other
persons organized or in the process of organizing with the intent to do an
insurance business in this state;
(6) A fraternal benefit society as defined in
KRS Chapter 304, Subtitle 29; and
(7) An industrial insured captive insurer as
defined by
KRS
304.49-010(8).
Section 3. RBC Reports.
(1) On or prior to March 1, every domestic
insurer shall prepare and submit to the commissioner an RBC report for the
calendar year just ended.
(2) The
RBC report shall be filed in a form and contain information as is required by
the RBC instructions.
(3) In
addition, every domestic insurer shall file its RBC report with:
(a) The NAIC in accordance with the RBC
instructions; and
(b) The insurance
commissioner in any state in which the insurer is authorized to do business, if
the insurance commissioner has notified the insurer of its request in writing,
in which case the insurer shall file its RBC report no later than:
1. Fifteen (15) days from the receipt of
notice to file its RBC report with that state; or
2. The filing date.
(4) Requirements for life and
health insurers:
(a) A life and health
insurer's or a fraternal benefit society's RBC shall be determined in
accordance with the formula set forth in the RBC instructions.
(b) The formula shall take into account and
may adjust for the covariance between the following which are determined in
each case by applying the factors in the manner set forth in the RBC
instructions:
1. The risk with respect to the
insurer's assets;
2. The risk of
adverse insurance experience with respect to the insurer's liabilities and
obligations;
3. The interest rate
risk with respect to the insurer's business; and
4. All other business risks and other
relevant risks as are set forth in the RBC instructions.
(5) Requirements for property and
casualty insurers:
(a) A property and casualty
insurer's RBC shall be determined in accordance with the formula set forth in
the RBC instructions.
(b) The
formula shall take into account and may adjust for the covariance between the
following which shall be determined in each case by applying the factors in the
manner set forth in the RBC instructions:
1.
Asset risk;
2. Credit
risk;
3. Underwriting risk;
and
4. All other business risk and
other relevant risks as are set forth in the RBC instructions.
(6) If a domestic
insurer files an RBC report which in the judgment of the commissioner is
inaccurate, then the commissioner shall:
(a)
Adjust the RBC report to correct the inaccuracy;
(b) Notify the insurer of the
adjustment;
(c) Inform the insurer
in writing of the reason for the adjustment; and
(d) Once the RBC report is adjusted, refer to
the report as the adjusted RBC report.
Section 4. Company Action Level Event.
(1) A company action level event shall be any
of the following events:
(a) The filing of an
RBC report by an insurer which indicates that:
1. The insurer's total adjusted capital is
greater than or equal to its regulatory action level RBC but less than its
company action level RBC;
2. If a
life or health insurer or a fraternal benefit society, the insurer has:
a. Total adjusted capital which is greater
than or equal to its company action level RBC but less than the product of its
authorized control level RBC and three (3.0); and
b. A negative trend; or
3. If a property and casualty insurer, the
insurer:
a. Has total adjusted capital which
is greater than or equal to its company action level RBC but less than the
product of its authorized control level RBC and three (3.0); and
b. Triggers the trend test determined in
accordance with the trend test calculation included in the Risk-Based Capital
Forecasting & Instructions, Property/Casualty;
(b) The notification by the
commissioner to the insurer of an adjusted RBC report that indicates an event
in paragraph (a) of this subsection, if the insurer does not challenge the
adjusted RBC report under Section 8 of this administrative regulation;
or
(c) If, pursuant to Section 8 of
this administrative regulation, an insurer challenges an adjusted RBC report
that indicates the event in paragraph (a) of this subsection, the notification
by the commissioner to the insurer that the commissioner has, after a hearing,
rejected the insurer's challenge.
(2) If a company action level event occurs,
the insurer shall prepare and submit to the commissioner an RBC plan which
shall:
(a) Identify the conditions which
contribute to the company action level event;
(b) Propose corrective actions which the
insurer intends to take in order to eliminate the company action level
event;
(c) Provide projections of
the insurer's financial results in the current year and at least the four (4)
succeeding years, both in the absence of proposed corrective actions and giving
effect to the proposed corrective actions including:
1. Projections of statutory operating income,
net income, capital, or surplus; and
2. The projections for both new and renewal
business may include separate projections for each major line of business and
separately identify each significant income, expense, and benefit
component;
(d) Identify
the key assumptions impacting the insurer's projections and the sensitivity of
the projections to the assumptions; and
(e) Identify the quality of the insurer's
business and problems associated with the insurer's business, including the
following:
1. Assets;
2. Anticipated business growth and associated
surplus strain;
3. Exposure to
risk;
4. Mix of business;
and
5. Use of
reinsurance.
(3) The RBC plan shall be submitted:
(a) Within forty-five (45) days of the
company action level event; or
(b)
If the insurer challenges an adjusted RBC report pursuant to Section 8 of this
administrative regulation, within forty-five (45) days after notification to
the insurer that the commissioner has, after a hearing, rejected the insurer's
challenge.
(4) Within
sixty (60) days after the submission by an insurer of an RBC plan to the
commissioner, the commissioner shall notify the insurer whether the RBC plan
shall be implemented or is unsatisfactory.
(5) If the commissioner determines that the
RBC plan is unsatisfactory, the notification to the insurer shall set forth the
reasons for the determination, and may set forth proposed revisions which will
render the RBC plan satisfactory.
(6) Upon notification from the commissioner,
the insurer shall prepare a revised RBC plan which may incorporate by reference
any revisions proposed by the commissioner, and shall submit the revised RBC
plan to the commissioner:
(a) Within
forty-five (45) days after the notification from the commissioner; or
(b) If the insurer challenges the
notification from the commissioner under Section 8 of this administrative
regulation, within forty-five (45) days after a notification to the insurer
that the commissioner has, after a hearing, rejected the insurer's
challenge.
(7) If there
is a notification by the commissioner to an insurer that the insurer's RBC plan
or revised RBC plan is unsatisfactory, the commissioner may subject to the
insurer's right to a hearing under Section 8 of this administrative regulation,
specify in the notification that the notification constitutes a regulatory
action level event.
(8) Every
domestic insurer that files an RBC plan or revised RBC plan with the
commissioner shall file a copy of the RBC plan or revised RBC plan with the
insurance commissioner in any state in which the insurer is authorized to do
business if:
(a) The state has an RBC
provision substantially similar to Section 9(1) of this administrative
regulation; and
(b) The insurance
commissioner of that state has notified the insurer of its request for the
filing in writing.
(9)
If the insurer is required by subsection (8) of this section to file an RBC
plan or revised RBC plan with another state, then it shall be filed in that
state by the latter of the following time periods:
(a) Fifteen (15) days after the receipt of
notice to file a copy of its RBC plan or revised RBC plan with the state;
or
(b) The date on which the RBC
plan or revised RBC plan is filed under subsections (3) and (4) of this
section.
Section
5. Regulatory Action Level Event.
(1) A regulatory action level event shall be
any of the following events:
(a) The filing
of an RBC report by the insurer which indicates that the insurer's total
adjusted capital is greater than or equal to its authorized control level RBC
but less than its regulatory action level RBC;
(b) The notification by the commissioner to
an insurer of an adjusted RBC report that indicates a regulatory action level
event, if the insurer does not challenge the adjusted RBC report under Section
8 of this administrative regulation;
(c) If, pursuant to Section 8 of this
administrative regulation, the insurer challenges an adjusted RBC report that
indicates a regulatory action level event, the notification by the commissioner
to the insurer that the commissioner has, after a hearing, rejected the
insurer's challenge;
(d) The
failure of the insurer to file an RBC report by the filing date, unless the
insurer has provided an explanation for that failure and has cured the failure
within ten (10) days after the filing date;
(e) The failure of the insurer to submit an
RBC plan to the commissioner within the time period set forth in Section 4(3)
of this administrative regulation;
(f) Notification by the commissioner to the
insurer that:
1. The RBC plan or revised RBC
plan submitted by the insurer is unsatisfactory; and
2. The notification constitutes a regulatory
action level event with respect to the insurer, if the insurer has not
challenged the determination under Section 8 of this administrative
regulation;
(g) If,
pursuant to Section 8 of this administrative regulation, the insurer challenges
a determination by the commissioner under subsection (1)(f) of this section,
the notification by the commissioner to the insurer that the commissioner has,
after a hearing, rejected the challenge;
(h) If the insurer has not challenged the
determination under Section 8 of this administrative regulation, notification
by the commissioner to the insurer that:
1.
The insurer has failed to adhere to its RBC plan or revised RBC plan;
and
2. The insurer's failure has a
substantial adverse effect on the ability of the insurer to eliminate the
company action level event in accordance with its RBC plan or revised RBC plan;
or
(i) If, pursuant to
Section 8 of this administrative regulation, the insurer challenges a
determination by the commissioner under paragraph (h) of this subsection, the
notification by the commissioner to the insurer that the commissioner has,
after a hearing, rejected the challenge.
(2) If a regulatory action level event
occurs, the commissioner shall:
(a) Require
the insurer to prepare and submit an RBC plan or, if applicable, a revised RBC
plan;
(b) Perform an examination or
analysis of the assets, liabilities, and operations of the insurer including a
review of its RBC plan or revised RBC plan; and
(c) Subsequent to the examination or
analysis, issue a corrective order specifying corrective actions as the
commissioner shall determine are required.
(3) In determining corrective actions, the
commissioner may take into account relevant factors based upon the
commissioner's examination or analysis of the assets, liabilities, and
operations of the insurer, which shall include the results of any sensitivity
tests undertaken pursuant to the RBC instructions.
(4) The RBC plan or revised RBC plan shall be
submitted:
(a) Within forty-five (45) days
after the occurrence of the regulatory action level event;
(b) If the insurer challenges the adjusted
RBC report pursuant to Section 8 of this administrative regulation and the
challenge is not frivolous, within forty-five (45) days after the notification
to the insurer that the commissioner has, after a hearing, rejected the
insurer's challenge; or
(c) If the
insurer challenges a revised RBC plan pursuant to Section 8 of this
administrative regulation and the challenge is not frivolous, within forty-five
(45) days after the notification to the insurer that the commissioner has,
after a hearing, rejected the insurer's challenge.
(5) The commissioner may retain actuaries and
investment experts and other consultants as may be necessary to:
(a) Review the insurer's RBC plan or revised
RBC plan;
(b) Examine or analyze
the assets, liabilities, and operations of the insurer; and
(c) Formulate the corrective order with
respect to the insurer.
(6) The fees, costs, and expenses relating to
consultants shall be borne by the affected insurer.
Section 6. Authorized Control Level Event.
(1) An authorized control level event shall
be any of the following events:
(a) The
filing of an RBC report by the insurer which indicates that the insurer's total
adjusted capital is greater than or equal to its mandatory control level RBC
but less than its authorized control level RBC;
(b) The notification by the commissioner to
the insurer of an adjusted RBC report that indicates an authorized control
level event, if the insurer does not challenge the adjusted RBC report under
Section 8 of this administrative regulation;
(c) If, pursuant to Section 8 of this
administrative regulation, the insurer challenges an adjusted RBC report that
indicates an authorized control level event, notification by the commissioner
to the insurer that the commissioner has, after a hearing, rejected the
insurer's challenge;
(d) The
failure of the insurer to respond to a corrective order, if the insurer has not
challenged the corrective order under Section 8 of this administrative
regulation; or
(e) If the insurer
has challenged a corrective order under Section 8 of this administrative
regulation and the commissioner has, after a hearing, rejected the challenge or
modified the corrective order, the failure of the insurer to respond to the
corrective order subsequent to rejection of modification by the
commissioner.
(2) If an
authorized control level event occurs with respect to an insurer, the
commissioner shall:
(a) Take actions as are
required under Section 5 of this administrative regulation regarding an insurer
to which a regulatory action level event has occurred; or
(b) Take actions as are necessary to cause
the insurer to be placed under regulatory control pursuant to KRS Chapter 304,
Subtitle 33 if the commissioner determines it to be in the best interest of the
policyholders, creditors of the insurer, and public.
(3) The authorized control level event shall
be sufficient grounds for the commissioner to take action under KRS Chapter
304, Subtitle 33. If the commissioner takes actions under this section pursuant
to an adjusted RBC report, the insurer shall be entitled to the protections
afforded to insurers under the provisions of the section pertaining to summary
proceedings.
Section 7.
Mandatory Control Level Event.
(1) A mandatory
control level event shall be any of the following events:
(a) The filing of an RBC report which
indicates that the insurer's total adjusted capital is less than its mandatory
control level RBC;
(b) Notification
by the commissioner to the insurer of an adjusted RBC report that indicates a
mandatory control level event, if the insurer does not challenge the adjusted
RBC report under Section 8 of this administrative regulation; or
(c) If, pursuant to Section 8 of this
administrative regulation, the insurer challenges an adjusted RBC report that
indicates a mandatory control level event, notification by the commissioner to
the insurer that the commissioner has, after a hearing, rejected the insurer's
challenge.
(2) If a
mandatory control level event occurs for a life insurer or fraternal benefit
society:
(a) The commissioner shall take
actions as are necessary pursuant to KRS Chapter 304, Subtitle 33.
(b) If the commissioner takes actions
pursuant to an adjusted RBC report, the insurer shall be entitled to the
protections of KRS Chapter 304, Subtitle 33 pertaining to summary
proceedings.
(c) The commissioner
may forego action for up to ninety (90) days after the mandatory control level
event if the commissioner finds there is a reasonable expectation that the
mandatory control level event may be eliminated within the ninety (90) day
period.
(3) If a
mandatory control level event occurs for a property and casualty insurer:
(a) The commissioner shall take actions as
are necessary pursuant to KRS Chapter 304, Subtitle 33.
(b) If an insurer is writing no business and
is running-off its existing business, the commissioner may allow the insurer to
continue its run-off under the supervision of the commissioner.
(c) The mandatory control level event shall
be sufficient grounds for the commissioner to take action under KRS Chapter
304, Subtitle 33.
(d) If the
commissioner takes actions pursuant to an adjusted RBC report, the insurer
shall be entitled to the protections of KRS Chapter 304, Subtitle 33 pertaining
to summary proceedings.
(e) The
commissioner may forego action for up to ninety (90) days after the mandatory
control level event if the commissioner finds there is a reasonable expectation
that the mandatory control level event may be eliminated within the ninety (90)
day period.
Section
8. Hearings.
(1) Upon any of the
following notifications, the insurer shall have the right to a confidential
hearing at which the insurer may challenge any determination or action by the
commissioner:
(a) Notification to an insurer
by the commissioner of an adjusted RBC report;
(b) Notification to an insurer by the
commissioner that:
1. The insurer's RBC plan
or revised RBC plan is unsatisfactory; and
2. The notification constitutes a regulatory
action level event with respect to the insurer;
(c) Notification to any insurer by the
commissioner of the following:
1. The insurer
has failed to adhere to its RBC plan or revised RBC plan; and
2. This failure has a substantial adverse
effect on the ability of the insurer to eliminate the company action level
event with respect to the insurer in accordance with its RBC plan or revised
RBC plan; or
(d)
Notification to an insurer by the commissioner of a corrective order.
(2) The insurer shall notify the
commissioner of its request for a hearing within five (5) days after the
notification by the commissioner under subsection (1) of this
section.
(3) Upon receipt of the
insurer's request for a hearing, the commissioner shall set a date for the
hearing, which shall be no less than ten (10) nor more than thirty (30) days
after the date of the insurer's request.
Section 9. Confidentiality; Prohibition on
Announcements, Prohibition on Use in Ratemaking.
(1) The following records shall be
confidentially disclosed pursuant to the requirements of this administrative
regulation and shall be proprietary information that, if disclosed, would
create an unfair competitive advantage to competitors and shall be kept
confidential by the commissioner:
(a) RBC
reports;
(b) RBC plans;
(c) Results or report of an examination or
analysis of an insurer performed pursuant to an RBC plan; and
(d) Corrective order.
(2) Comparison of insurer's total adjusted
capital to any RBC levels shall be a regulatory tool and shall not be used to
rank insurers.
(3) An insurer,
agent, broker, or other person engaged in the insurance business shall not
disseminate orally or in any manner or cause to be disseminated directly or
indirectly to the public an assertion, representation, or statement with regard
to RBC levels of any insurer or any component of the calculation.
(4) If a false statement with regard to a
comparison of an insurer's total adjusted capital to its RBC levels or an
inappropriate comparison is made, and the falsity is substantially proved, an
insurer may issue a statement to rebut the false statement.
(5) RBC instructions, RBC reports, adjusted
RBC reports, RBC plans, and revised RBC plans:
(a) Shall be used solely by the commissioner
in monitoring the solvency of insurers and the need for possible corrective
action with respect to insurers;
(b) Shall not be used in rate making or as
evidence in rate proceedings; and
(c) Shall not be used by the commissioner to
calculate or derive any elements of an appropriate premium level or rate of
return for any line of insurance which an insurer or any affiliate is
authorized to write.
Section 10. Exemption. The commissioner may
exempt from the application of this administrative regulation any domestic
property and casualty insurer which:
(1)
Writes direct business only in this state;
(2) Writes direct annual premiums of
$2,000,000 or less; and
(3) Assumes
no reinsurance in excess of five (5) percent of direct premium
written.
Section 11.
Foreign Insurers.
(1) Any foreign insurer
shall, upon the written request of the commissioner, submit to the commissioner
an RBC report for the calendar year just ended.
(2) The RBC report of a foreign insurer shall
be filed as follows:
(a) On the date an RBC
report would be required to be filed by a domestic insurer under this
administrative regulation; or
(b)
Fifteen (15) days after the request is received by the foreign
insurer.
(3) Any foreign
insurer shall, at the written request of the commissioner, promptly submit to
the commissioner a copy of any RBC plan that is filed with the insurance
commissioner of any other state.
(4) The commissioner may require a foreign
insurer to file an RBC plan if:
(a) A company
action level event, regulatory action level event, or authorized control level
event exists as determined by:
1. RBC law
applicable in the insurer's state of domicile; or
2. This administrative regulation;
and
(b) If the insurance
commissioner of the insurer's state of domicile fails to require the foreign
insurer to file an RBC.
(5) If the commissioner requires the foreign
insurer to file an RBC plan pursuant to subsection (4) of this section, the
failure of the foreign insurer to file an RBC Plan with the commissioner shall
be grounds to order the insurer to cease and desist from writing new insurance
business in this state.
(6) If a
mandatory control level event with respect to any foreign insurer occurs, and
if no domiciliary receiver has been appointed with respect to the foreign
insurer under the rehabilitation and liquidation statute applicable in the
state of domicile of the foreign insurer:
(a)
The commissioner may make application to the Franklin Circuit Court permitted
under KRS Chapter 304, Subtitle 33 with respect to the liquidation of property
of foreign insurers found in this state; and
(b) The occurrence of the mandatory control
level event shall be considered adequate grounds for the application.
Section 12. Notices.
(1) All notices by the commissioner to an
insurer which may result in regulatory action pursuant to this administrative
regulation shall be effective upon dispatch if transmitted by registered or
certified mail.
(2) If notices are
transmitted other than by regular or certified mail, they shall be effective
upon the insurer's receipt of the notice.
Section 13. Incorporation by Reference.
(1) The following material is incorporated by
reference:
(a) "Risk-Based Capital Forecasting
& Instructions, Life" (2011);
(b) "Risk-Based Capital Forecasting &
Instructions, Property/Casualty" (2011); and
(c) "Risk-Based Capital Forecasting &
Instructions, Fraternal" (2011).
(2) This material may be inspected, copied,
or obtained, subject to applicable copyright law, at the Kentucky Department of
Insurance, 215 West Main Street, Frankfort, Kentucky 40601, Monday through
Friday, 8 a.m. to 4:30 p.m.
STATUTORY AUTHORITY:
KRS
304.2-110,
304.3-125