NAIC Adopts Change to Better Monitor Life Insurer Investments

Members of the National Association of Insurance Commissioners (NAIC) today voted to 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.