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

The Investment Risk-Based Capital Working Group (IRBCWG) held a conference call on October 23 in lieu of meeting at the Fall 2017 National Meeting to discuss updating the corporate bond factors for life companies and changes to corporate bond factors for P&C and health companies.

Revised Corporate Bond Base Factors for Life Insurers

The American Academy of Actuaries (AAA) exposed new C-1 factors on October 10 and discussed the reasons for the differences on the call. The new proposed factors are higher than previously proposed.

The AAA also proposed a significant change to portfolio adjustment factors that will resemble what they previously exposed, providing a similar end result to the average life insurer’s portfolio. The table below details the updated C-1 factors and the proposed portfolio adjustment factors.

UPDATED C-1 FACTORS

PROPOSED PORTFOLIO ADJUSTMENT FACTORS

Changes to Corporate Bond Factors for P&C and Health Companies

The AAA exposed a possible starting point for P&C and Health factors. The factors were developed by applying several adjustments to the AAA’s Life model that do not include any adjustment for the shorter duration of an average P&C portfolio, nor for the carrying value difference in NAIC 3-5 bonds. Because of the imprecise nature of these factors, adjustments are expected.

The current health RBC formula does not include a portfolio adjustment factor, and the IRBCWG also discussed whether one should apply. The updated academy report was exposed for a comment period ending January 22, 2018.

RBC Charge for SVO-Identified Funds

The IRBCWG proposed three ideas for how RBC charges on SVO-identified funds should be calculated:

1. Each fund would count as one issuer. This is how the investments are currently treated, but this method undersells the diversification benefit of investing in a bond fund and may provide a disincentive for companies to invest in these assets. If the AAA’s current proposal of increased-based factors and lower portfolio adjustments are adopted, this will be especially true.
2. SVO-identified funds would have separate factors reflective of the risk that each designation class proposes. These would likely be significantly lower than the base factor for a single bond with the same rating.
3. The fund would receive credit on the number of issuers based on the size of the insurer’s investment in the fund. For example, if an insurer had 2% of their portfolio in a particular fund and that fund had 1,000 issuers, the insurer could count 20 issuers in their portfolio adjustment calculation.

Regulators did not express a strong preference for which method they prefer, but Industry will most likely advocate for the second or third options.

Proposal to Modify Factor for Real Estate Assets

A proposal by the American Council on Life Insurance (ACLI) to modify the factor for real estate assets for life and fraternal companies was also discussed. There are four parts to the ACLI’s proposal:

1. Revise the factor on Schedule A to be 10%
2. Revise the factor for encumbrances to be consistent with the commercial mortgage loan framework adopted in 2013
3. Add an adjustment to reflect unrealized gain/loss in real estate assets
4. Revise the factor on Schedule BA – Real Estate to be 10% on a look-through basis, equivalent to the factor on Schedule A

The AAA has reviewed the ACLI’s proposal and raised some concerns around some of the data and conclusions in the proposal. Regulators also had questions about certain aspects of the proposal but noted they might consider lowering the factor on either schedule and adding additional adjustments. The IRBCWG agreed to have additional calls on this topic so the AAA can have an in-depth discussion on the ACLI’s proposal.