NAIC adopts change to better monitor life insurer investments

Written by Adam Cadle

17/08/2023

Members of the National Association of Insurance Commissioners (NAIC) have voted to adopt a change to the Life Risk-Based Capital (RBC) formula under RBC Blanks proposals 2023-09-IRE and 2023-10-IRE at the 2023 NAIC Summer National Meeting.

The change will require residual tranches, and only residual tranches, of structured securities to receive a 30% factor for year-end 2023 RBC filings and a 45% factor for year-end 2024 RBC filings. Furthermore, the change will apply sector-wide to any firm with such investments—large and small alike. In the future, the Risk-Based Capital Investment Risk and Evaluation (E) Working Group could consider increasing or decreasing the 2024 factor based on receipt of subsequent information that would support a revised factor.

The estimated change in the RBC ratio of the life insurers owning these residual investments is very small, the NAIC said. The change follows approval by the Capital Adequacy Task Force on 30 June and the Financial Condition (E) Committee on 19 July.

The Capital Adequacy Task Force's work is consistent with the NAIC members' regulatory priority to better protect policyholders by improving oversight of the increasingly opaque investment structures favoured by some insurers.

Regulating for insurer solvency and marketplace stability is core to the mission of state insurance commissioners in protecting policyholders. A key aspect of solvency supervision, as highlighted by the recent banking sector turmoil, is assessing the risk financial institutions take on in their investment portfolios. In the wake of the persistent low interest rates over the decade-plus ending in 2022, the NAIC has observed a growing trend toward insurers, particularly life insurers, owning more structured securities, including private debt securities.

State insurance commissioners, working through the NAIC, continue to evolve the risk-based capital framework to keep pace with advancements in financial engineering and industry investment practices.

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