New NAIC Rule to Hit Some Life and Annuity Issuer Assets

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Congress has given states the authority to regulate the business of insurance.

The NAIC is a Kansas City, Missouri-based group that helps state insurance regulators develop laws and regulations.

In most cases, the NAIC has no direct ability to set laws or regulations, but many states have arranged to implement certain types of changes in NAIC accounting rules automatically.

Typical NAIC RBC charges for investments range from 0%, for government bonds, to 30%, for common stock.

The RBC Formula Change Thinking

The American Council of Life Insurers helped develop the asset-backed securities residual tranche RBC rule change proposal.

In April, a group of insurers that included Equitable, MetLife, New York Life, Northwestern Mutual, Pacific Life, Prudential Financial and Western & Southern wrote to the NAIC to encourage it to set the RBC charge, or value cut, for ABS residual tranche assets at 45%, rather than 30%.

“Residual tranches provide first-loss protection for bond tranches which have the risk of principal loss in stress scenarios used for risk-based capital,” the insurers said in a comment letter. “Therefore, both theoretically and empirically, a portfolio of residual tranches can lose close to their full value in stress scenarios.”

Global Atlantic and regulators from Connecticut and Iowa have argued against the current RBC rule change strategy, arguing that ABS residual slices have performed well; that regulators should get more information about insurers’  ABS residual investments before acting; and that insurers should stick to the ordinary rulemaking process when changing the RBC formula, not use an accelerated process.

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Iowa regulators noted that ABS residual tranche investments account for only $4.7 billion, or 0.06%, of life insurers’ $8.5 trillion in assets.

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