Robert Lindsay, CPA
Solutions Consultant
Robert has deep domain knowledge of insurers’ accounting and reporting issues. He 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.
At the NAIC Spring 2016 National Meeting, the Investment Risked-Based Capital Working Group’s (IRBCWG) discussions centered around the proposed “A Way Forward” document.
The “A Way Forward” Document
The IRBCWG has been updating the outdated RBC asset factors for years, with no clear end-point in sight. The IRBCWG decided that in order to move forward, they had to agree on some guiding principles and address specific Industry concerns. The “A Way Forward” document is a roadmap for addressing those concerns and providing clear next steps.
The document was exposed for a 45-day comment period ending May 19. The major principles of the document are outlined below.
Fixed-Income Factors
A new framework that does not affect statutory accounting or the book/adjusted carrying value would be created for RBC Designations.
NAIC designations for RBC (and perhaps AVR) purposes would expand from six NAIC designation classes to 20 NAIC designation classes. These designations would be on a new mandatory electronic-only column on the Annual Statement and would continue to be based on credit ratings or on the SVO’s assigned designation.
There are two major changes since these designations were last discussed:
- The increased granularity no longer affects statutory accounting rules for whether a security is held at amortized cost or fair market value, so updating state laws and the IMR to reflect this change is not a concern.
- The proposed NAIC designation has typically been 14, based on the recommendation of the American Academy of Actuaries (AAA). Most likely because of the reduced scope of the change, and to make future recalibrations easier, the IRBCWG is now proposing expansion to 20 NAIC designations.
The factors will primarily be based off the analysis done on corporate bonds by the AAA over the past two years. Depending on discussions with Industry and the AAA, there could be adjustments to these base factors.
These new factors would not affect the RBC method for residential mortgage-backed securities (RMBS) or commercial mortgage-backed securities (CMBS) that are modeled by the NAIC. The IRBCWG does intend to revise their guidance for how non-modeled 43R securities (asset-backed securities) are charged; the “A Way Forward” document suggests they no longer be subject to Modified FE, but whether asset-backed securities will be subject to the same factors as other fixed-income securities was not specified.
The IRBCWG will consider keeping the six NAIC designation system in place for P&C and Health insurers. Given the smaller impact of asset risk on non-AVR companies, this increased granularity might not be worth the implementation costs.
The goal for having these updated bond factors in place is year-end 2017, with all IRBCWG work completed by April 2017. This is an aggressive goal, considering how many details have yet to be specified. Due to the technical nature of RBC, Industry will likely request longer comment periods to review details.
There could be additional adjustments for other non-modeled fixed incomes, such as sovereign debt and municipals. However, those adjustments will not be decided on until after the base factors have been finalized and are in effect.
With these changes to the bond model, the IRBCWG also wants to update the Common Stock Factor by year-end 2017.
Equity Factors
The Life Factor was reviewed several years ago and found to be appropriate at 30%. After the tax adjustment, the corresponding P&C Factor would be 19.5% higher than the current 15%.
Industry wants more information before the P&C Factor is raised. They noted exposure to Common Stock is generally higher for P&C companies (usually comprising 10-15% of invested assets, which is seven to ten times as much as the average life insurer) and want more investigation into the proper factor for P&C Common Stock, rather than just assuming the adjustments made for Life translates with only an additional tax adjustment to P&C companies.
A beta adjustment may be considered for P&C companies, or it could be eliminated for the Life formula. Given discussion from the NAIC’s Property and Casualty Risk-Based Capital Working Group, it seems unlikely that a beta factor will be added on the P&C side. Their reasoning was that the impact of any adjustment was immaterial to the overall factor, and could potentially cause undue worry for companies considering Common Stock investments.
Other Asset Classes
Real Estate may be updated in the next year, but only if it doesn’t slow down the progress of the Bond and Stock updates.
Other asset classes will not be considered until after Bond and Stock updates are complete. This includes referrals from other RBC working groups on Commercial Mortgages and Affiliated Investments.