NAIC Spring 2017 Meeting Update – Investment Risk-Based Capital Working Group

The Investment Risk-Based Capital Working Group (IRBCWG) met to hear updates on the American Academy of Actuaries’ (AAA) work on the corporate bond factors for Life Insurance companies and consider similar changes to the corporate bond factors for P&C companies. In addition, the American Council on Life Insurance (ACLI) discussed the treatment of real estate in the Life RBC formula and recommended a decrease to the RBC factors on real estate, including certain assets backed by real estate held on the Schedule B – Part A.

Update to Corporate Bond RBC Factors for Life Insurance Companies from the AAA

In a February 2016 conference call, the AAA indicated they were considering the comments made about their August 2015 proposal that recommended new bond factors and assumptions used in the modeling process. The AAA is also considering other comment letters received from Industry to determine the ways the model can be refined. The ACLI has recommended a proposal for bond factors that differs from the original report presented by the AAA at the NAIC Fall 2016 National Meeting. The AAA is considering two primary changes:

  • Updates to the recovery rates
  • Updates to the composition of the representative portfolio used in its model

If implemented, these updates would be expected to decrease the RBC charges for investment grade bonds with no effect to the proposed factors for below-investment grade bonds.

The AAA announced their continued work on the appropriate updates to the model and should be able to report their findings to the IRBCWG around June 1. The anticipated effective date for the changes to corporate bond factors is currently year-end 2018.

RBC Structure Consistency Across Statement Types

The IRBCWG discussed the application of the Life RBC structure to other statement types. Industry seems to agree that the granularity in bond factors should stay consistent across statement types, which would increase the six designation system to 20 designations for RBC purposes only. Industry has also reached the consensus that the model needs to be rerun to consider tax differences, risk premium offset, and the differences in carrying value treatment for various insurers. AVR filers hold the lower of cost or market value for six designation bonds, while non AVR filers hold at the lower of cost or market for three to six designation bonds.

The IRBCWG exposed the bond granularity for P&C and Health RBC for a 45-day public comment period ending May 29. The exposure includes an increase in the six to 20 designation system, but the factor recommendations will come at a later date. The anticipated effective date for the changes to corporate bond factors is currently year-end 2018.

Presentation from the ACLI on Real Estate Factors for Life RBC

The ACLI presented a proposal that would allow a decrease in the RBC charge for certain real estate investments, including some investments found on Schedule BA. This issue was previously put on hold to allow the IRBCWG to focus on the development of the Life factors for RBC but will now be reviewed again by the working group.

The ACLI recommended decreasing the factor on real estate from the current 15% to 8.5% due to a study which provides rationale based on the NCREIF Property index. The index reflects the industry’s actual experience and reported real estate losses.

The recommendation also reflects the following changes:

  • A revision of RBC factors for real estate encumbrances so that they are consistent with the commercial mortgage RBC framework adopted in 2013
  • Implementation of an adjustment within RBC to reflect the impact of unrealized gains/losses on the potential for loss of statutory surplus
  • Proposal to retain the relationship between factors for Schedules A and BA for real estate where the BA is 50% higher than that for the Schedule A

The IRBCWG agreed to expose the ACLI proposal for a 90-day comment period ending July 14.

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Diana helps insurers improve and streamline their investment accounting and reporting. Diana specializes in ensuring accurate and proactive communication of NAIC investment-related updates internally, and to Clearwater clients. She has a bachelor's in accounting and finance from Boise State University.