NAIC 2020 Fall National Meeting – Capital Framework
Global Insurance Solutions
- Mortgage loan RBC guidance revised due to COVID-19
- The Financial Condition Committee lays out its priorities for the soon-to-be-implemented bond RBC factors
- Bond ETF-related revisions proposed for the asset concentration factor
- Proposed two- and five-year health bond factors to both be used in the RBC impact analysis
Investment risk-based capital updates
Mortgage loan RBC guidance related to net operating income has been revised due to the effects of COVID-19
In response to COVID-19’s impact on net operating income (NOI) for mortgage loan investments, the LRBCWG1 has agreed to revise its RBC guidance to lessen the negative effects of any temporary decreases in 2020 income. Regulators will allow the use of the greater of (a) 2020 NOI or (b) 85% of 2019 NOI for the rolling average 2020 NOI inputs for 2021, 2022 and 2023 RBC reporting. The change will provide relief to loans that are considered to be performing but suffered a drop in NOI in 2020 that could have punitive RBC effects in future years.
NAIC staff will also work on drafting 2021 instructional changes to the company-generated worksheet to capture the actual 2020 NOI for disclosure and comparison purposes, which will allow regulators to assess the impact of the change.
The Financial Condition Committee lays out its priorities for the soon-to-be-implemented bond RBC factors
The Financial Condition Committee has listed the NAIC’s project to update the RBC bond factors as one of its priorities for 2021 and detailed its expectation that 1) the project should be finalized with 20 new factors put in place for year-end 2021 and 2) input from the ACLI (via its own analysis) should be considered as the final factors are being formulated.
Also of note:
- Some would prefer that changes also be made to the portfolio adjustment component. The work on the factors themselves has the support of many, but the effects of the factor changes could be harsh for smaller companies, so a change to the portfolio adjustment may be warranted.
- Additionally, the factors were developed before the tax law change2, so the factors would need to be updated to reflect the tax effect.
- The LRBCWG will have a short window of time to perform its analysis on the 2020 RBC filings before deciding on final factors. The expectation is that formal exposure of the factors to be considered for 2021 year-end will be released by the end of April 2021, with the factors being finalized in June 2021.
A proposal has been put forth to treat bond ETFs similarly to bond mutual funds, and have bond ETFs excluded from the top 10 exposures within the asset concentration factor. While bond ETFs make up a relatively small percentage of total admitted assets within the industry, there is a sentiment amongst insurers, regulators and asset managers that the asset concentration guidance should align more with the treatment for bond mutual funds as it does within other parts of statutory guidance. The CATF3 has agreed to look into the issue and perform further research prior to exposing the proposal for comments from the broader industry.
Proposed two- and five-year health bond factors to both be used in the RBC impact analysis
The HRBCWG4 will use both the two-year and five-year bond factors (EXHIBIT 1) provided by the American Academy of Actuaries for its 2020 RBC impact analysis. The analysis will be used to assess the effects of implementing new factors. Additionally, the HRBCWG’s work on the new factors will be added to the HRBCWG 2020 working agenda to denote its priority in working towards a conclusion on the new health bond factors.
1 Life Risk-Based Capital Working Group
2 The Tax Cuts and Jobs Act (TCJA), which was passed in December 2017.
3 Capital Adequacy Task Force
4 Health Risk-Based Capital Working Group