NAIC 2021 Summer National Meeting – Investment Risk-Based Capital
Global Insurance Solutions
08/17/2021
Wheatley Garner
Bond RBC – New, expanded factors have been adopted by life, P&C and health regulators
After years of work by the NAIC’s life, P&C and health RBC working groups and their industry partners, regulators have formally adopted new bond RBC factors, which will increase the granularity of the bond charges from 6 to 20, while also eliminating the existing ratings cliffs between each NAIC Designation. For life insurers, regulators ultimately chose to adopt the bond factors developed by Moody’s Analytics (Exhibit 1), which have lower capital charges for most investment-grade ratings, as opposed to competing factors developed by the American Academy of Actuaries (Academy). The bond size factors (Exhibit 2) for life insurers have also been revised, in an attempt to make them less punitive to smaller insurers.
The new bond factors for P&C and health insurers, which were both developed by the Academy, will no longer be identical, as separate factors (Exhibit 3) have been adopted for each industry. Additionally, the bond size factors for P&C insurers (Exhibit 4) have also been revised, which, in combination with the RBC factors, will result in a larger increase in investment RBC for companies with a small number of issuers (companies with a larger number of issuers should see smaller increases in their investment RBC).
All of the aforementioned RBC revisions will be effective for year-end 2021.
Exhibit 1: Life insurers – New bond RBC factors
| Life Insurers – New Bond RBC Factors | |||
| NRSRO Rating | NAIC Designation | Pre-tax | Post-tax |
| AAA | 1.A | 0.16% | 0.13% |
| AA+ | 1.B | 0.27% | 0.23% |
| AA | 1.C | 0.42% | 0.35% |
| AA- | 1.D | 0.52% | 0.44% |
| A+ | 1.E | 0.66% | 0.55% |
| A | 1.F | 0.82% | 0.68% |
| A- | 1.G | 1.02% | 0.85% |
| BBB+ | 2.A | 1.26% | 1.05% |
| BBB | 2.B | 1.52% | 1.27% |
| BBB- | 2.C | 2.17% | 1.80% |
| BB+ | 3.A | 3.15% | 2.62% |
| BB | 3.B | 4.54% | 3.78% |
| BB- | 3.C | 6.02% | 5.01% |
| B+ | 4.A | 7.39% | 6.15% |
| B | 4.B | 9.54% | 7.93% |
| B- | 4.C | 12.43% | 10.34% |
| CCC+ | 5.A | 16.94% | 14.10% |
| CCC | 5.B | 23.80% | 19.80% |
| CCC- | 5.C | 30.00% | 24.96% |
| D | 6 | 30.00% | 23.70% |
Exhibit 2: Life insurers – New bond size factors
| Life Insurers – New Size Factors | |
| Threshold (Issuers) | Bond Factor |
| (Up to) 50 | 2.4 |
| (Next) 50 | 1.53 |
| (Next) 100 | 0.85 |
| (Next) 300 | 0.85 |
| (Above) 500 | 0.82 |
Exhibit 3: P&C / health insurers – New bond RBC factors
| P&C / Health - New Bond RBC Factors | |||
| NRSRO Rating | NAIC Designation | P&C | Health |
| AAA | 1.A | 0.20% | 0.30% |
| AA+ | 1.B | 0.40% | 0.50% |
| AA | 1.C | 0.60% | 0.80% |
| AA- | 1.D | 0.80% | 1.10% |
| A+ | 1.E | 1.00% | 1.40% |
| A | 1.F | 1.30% | 1.60% |
| A- | 1.G | 1.50% | 1.90% |
| BBB+ | 2.A | 1.80% | 2.20% |
| BBB | 2.B | 2.10% | 2.50% |
| BBB- | 2.C | 2.50% | 3.10% |
| BB+ | 3.A | 5.50% | 6.90% |
| BB | 3.B | 6.00% | 7.60% |
| BB- | 3.C | 6.60% | 8.30% |
| B+ | 4.A | 7.10% | 8.90% |
| B | 4.B | 7.70% | 9.70% |
| B- | 4.C | 8.70% | 11.00% |
| CCC+ | 5.A | 9.80% | 12.30% |
| CCC | 5.B | 10.90% | 13.70% |
| CCC- | 5.C | 12.00% | 15.10% |
| D | 6 | 30.00% | 30.00% |
Exhibit 4: P&C insurers – New bond size factors
| P&C – New Size Factors | |
| Threshold (Issuers) | Bond Factor |
| (Up to) 10 | 7.8 |
| (Next) 90 | 1.75 |
| (Next) 100 | 1 |
| (Next) 300 | 0.8 |
| (Above) 500 | 0.75 |
Real estate equity – Regulators have adopted reductions in RBC for Schedule A and Schedule BA real estate for life insurers
Life insurance regulators have adopted reductions in RBC for real estate equity, which will be effective for year-end 2021. The base capital charges for Schedule A real estate (or direct real estate holdings) were reduced from 15% pre-tax, down to 11%, while Schedule BA real estate’s capital charges were reduced from 23% pre-tax, down to 13% (Exhibit 5). There have been discussions for years around the premise that the current capital charges for real estate were too high, particularly when analyzing its performance data, which wasn’t available when the original capital charges were implemented. Regulators have also acknowledged that capital charges that were overly punitive may have affected the attractiveness of the asset class.
There are also slight revisions to the encumbrance charge1 and calculation, which will make the impact of a mortgage or leverage more visible within the RBC calculation.
One part of the original proposal that was left out of the final adoption was the previously introduced concept known as the unrealized gain adjustment2, which could have further reduced the required RBC on real estate holdings. The unrealized adjustment remains a work in progress, as regulators continue to have concerns over its potential application, particularly as it relates to the fair values and appraisals that would be needed to calculate unrealized gains on properties held.
Exhibit 5: New real estate RBC factors for life insurers
| Real Estate (Life) | RBC Pre-tax | RBC Post-tax |
| Schedule A | 11.00% | 8.69% |
| Schedule BA | 13.00% | 10.27% |
1 The RBC for real estate will be assessed by estimating the risk on the total property, and then the value of the encumbrance will be applied as a credit based on the average commercial mortgage loan factor, which is currently 1.75% pre-tax.
2 The most recent proposal for the unrealized gain adjustment would have reduced the base RBC charge by recognizing 1/2 of any excess of fair value over the depreciated cost (or statutory carrying value), with a minimum floor capital charge of 1.3%.