NAIC Aiming at Expanding RBC C-1 Bond Factor Rating System – The Basics

The NAIC Investment Risk-Based Capital Working Group (IRBC-WG), in conjunction with the American Academy of Actuaries, has been carefully waging a proposal to assess the current RBC levels to expand the detail levels of the current NAIC RBC C-1 assessment factors for the life insurance formula. This article does not delve into the many background details and history behind the process, but we will address the what, why, who and when conundrum for your future planning and discussion with your investment advisors.  A note to the Property/Casualty/Health industries – it is expected these industries will likewise follow similar RBC changes shortly after the life industry becomes finalized.

The What…the current life insurance industry NAIC RBC levels would be increased from six to a proposed twenty.  Further, each company would be subject to a secondary adjustment called the portfolio adjustment factor.

The Why…with the growth in sophistication and number of available investment securities over the years, coupled with the fact that credit arbitrage incentives currently exist in the 6-level RBC structure, the IRBC-WG sought to more fittingly reflect the underlying default risk of the securities being held by the entities as they align with actual rating agency bond ratings. The portfolio adjustment factor rationale attempts to reconcile and adjust company-specific portfolio diversification to the representative portfolio used to model the proposed RBC factors.  Further, it is intended to scale the base factors with the objective of assuring a specific confidence level is achieved across all entity portfolios.  The benchmark portfolio developed in determining the base RBC factors utilized 824 bonds designated as NAIC 1 or 2.  The proposed factors as of the September 2017 IRBC-WG discussions are presented comparatively in the table that follows this discussion.

The Who…though the initial roll-out will apply specifically to life insurance company portfolios, property casualty and health entities are clearly on the IRBC-WG radar for the same 20 factor treatment.  Further consideration will certainly be required to compensate for the nuances between the shorter term nature of the property casualty business (for the most part) and its portfolio valuation methodology differences compared to the life institutions.

The When…hard to say, as no promises have been made; however, considering the amount of time incurred in meeting discussions held on the current life insurance project, it would not be premature to expect something effective for the 2018 reporting period on the life project.  With the heavy lifting having already occurred to establish the base for the life side, the P&C and health factors could well fall in line to be effective in 2019.

Currently Proposed IRBC-WG Life Factors