NAIC Summer 2017 National 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 corporate bond factors for life insurance companies and consider similar changes to the corporate bond factors for P&C companies.

Revised Corporate Bond Base Factors for Life Insurers

During the Summer 2017 meeting, the IRBCWG continued work on a project to implement the revised corporate bond base factors for life insurers (C-1 factors). The overall structure of the update was agreed upon by both regulators and Industry. However, there is still debate regarding specific inputs and assumptions that will affect what the actual factors will be, as well as the portfolio adjustments that will be applied by each life insurance company.

In order to expedite the project and get the entire proposal passed for year-end 2018, the IRBCWG will work with the other RBC working groups — the Financial Condition (E) Committee and the Capital Adequacy Task Force — to adopt the overall structure of 20 designation classes instead of 6 before the actual factors are finalized.

The AAA proposed a new set of factors and portfolio adjustments. Industry provided several comment letters on the new factors and models. In the coming months, the AAA will be making additional adjustments, as well as discussing key assumptions in its model that interested parties have concerns with. Interested parties think the new factors may be higher than necessary and outlined their reasoning in their comment letters (available on the IRBCWG website).

The currently proposed factors are available here, and are subject to change.

Changes to Corporate Bond Factors for P&C Companies

It is likely that additional granularity will be added to 20 factors for P&C and health companies, just as there will be in the life RBC calculation. However, the AAA and Industry would like a thorough review of the appropriate factors for non-AVR companies, rather than simply use the life factors, or the life factors with one or two high-level adjustments. Documentation of the reasoning behind the current differences is lacking, so it’s difficult to project what the end-factors for non-AVR filers will be. Expected adjustments for consideration are:

  • The differences in carrying value for NAIC 3-5 bonds
  • The tax adjustment that is only in the life RBC formula
  • The fact that a typical P&C company will have a shorter portfolio duration, which should mean less risk

Upcoming Adjustments to RBC Charge for Real Estate

The American Council on Life Insurance (ACLI) requested several adjustments to the current charge. These include three primary changes:

  1. Reducing the base charge
  2. Applying a market value adjustment to the charge
  3. Allowing real estate held on Schedule BA to have the same charge as real estate held on Schedule A.

The AAA reviewed the ACLI’s proposal and posed several of its questions and concerns. The ACLI representatives stated they will respond to questions in the coming weeks. Kevin Frye, chair of the IRBCWG, noted that it will consider the proposal, but that the C-1 factor project is its priority. For that reason, this item may be pushed out until the C-1 Factor proposals are finalized.

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Robert has deep domain knowledge of insurers' accounting and reporting issues. He attends NAIC meetings and helps ensure the Clearwater solution proactively addresses regulatory changes. Robert has a master's degree in accountancy, and bachelor's degree in accounting from the University of Idaho.