The National Association of Insurance Commissioners brought regulators from across the country together to discuss industry and economic challenges during their summer national meeting in Seattle, NAIC noted in the statement.
Members of the NAIC will 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.
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 change follows approval by the Capital Adequacy Task Force on June 30 and the Financial Condition (E) Committee on July 19.
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 favored 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.
In January 2022, the Financial Condition (E) Committee tasked the Risk-Based Capital Investment Risk and Evaluation (E) Working Group (RBC-IRE) with developing a new RBC factor on residual tranche investments.
Residual tranche investments are the lowest tranche of cash flows in a structured security and therefore only receive recoupment once all other debtholders are paid, meaning they are typically the riskiest segment of such investments.
Residual tranche investments currently represent a small fraction of the investments owned by all life insurers. Specifically, these investments totaled less than $6 billion as of December 31, 2022, while the total life insurance industry general account assets totaled more than $5 trillion.
The Statutory Accounting Principles Working Group adopted Interpretation 23-01, its Net Negative (Disallowed) Interest Maintenance Reserve, which provides optional, limited-time guidance allowing the admittance of net negative interest maintenance reserve up to 10% of adjusted capital and surplus.
The interpretation will be effective until Dec. 31, 2025, and automatically nullified Jan. 1, 2026, although the effective date could be subject to change.
The proportion of US life insurers with negative interest maintenance reserve balances more than doubled in 2022 as interest rates rose.
During a meeting of the Special Committee on Race and Insurance, regulators gave updates on how its workstreams dealing with life insurance, property and casualty insurance, and health insurance are progressing.
Kevin Gaffney, who serves as co-chair of the special committee’s property and casualty workstream, said the committee has been focusing on engaging with a collaboration forum related to algorithmic bias, looking at potential bias in marketing, access to insurance, underwriting, rating, claims handling and fraud detection.
Gaffney shared that the committee has met with several insurers regarding their marketing and advertising and more recently met with insurers to discuss underwriting and rating.
Gaffney’s group has plans to continue investigating additional areas of the product life cycle and has been looking at recent reports and studies concerning the possibility of unfair bias in underwriting and rating.
Judith French gave an update on the life workstream’s efforts, noting that they are zeroing in on marketing, distribution and access to life insurance products, including the role of financial literacy. The group is moving forward with the development of a resource guide to address issues in this area in conjunction with the NAIC’s diversity, equity and inclusion division as well as state diversity leaders.
The health workstream met in a regulator-only session and is focusing on education around benefit design, particularly looking at preventative care and mental health coverage and disparities.
As part of our state-based system of insurance regulation in the United States, the National Association of Insurance Commissioners provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers.
The U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally.
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