OLDWICK, N.J.--(BUSINESS WIRE)--A new Best’s Special Report, titled, “Updates to Life RBC and BCAR: Measuring Bond Default Risk,” notes that as the low interest rate environment has persisted, insurers have taken advantage of credit arbitrage opportunities within NAIC bond designations in order to get the highest yield relative to required capital. The NAIC Investment Risk-Based Capital (RBC) Working Group and the American Academy of Actuaries have recommended increasing the number of bond factors in their latest proposal to eliminate the incentive to invest in lower quality bonds. A.M. Best has analyzed the most recent RBC bond factor proposal and estimates that total U.S. life insurance industry capital charges could increase by $6 billion and Authorized Control Level (ACL) RBC percentage could decrease by 55.9 percentage points if implemented.
Although total industry capital charges from the proposed bond factors are expected to increase by 25%, individual insurers will experience different changes in capital charges depending on the credit rating distribution of their bond holdings, as well the number of issuers in their bond portfolios. Due to changes in the portfolio adjustment formula, smaller life insurance companies could see the largest increases in required capital from the most recent proposal. A.M. Best estimates that companies with less than $250 million in invested assets could see their bond capital charges increase by 61.3%.
A.M. Best has also recently updated its Best’s Capital Adequacy Ratio (BCAR) for life/health insurers and compares its bond risk charges to the RBC bond factor proposal. One major difference is that in A.M. Best’s BCAR model each bond rating category has 10 different charges based on maturity, while the RBC proposal has one charge for each bond rating category based on a 10-year maturity.
Overall, A.M. Best believes that increasing the number of RBC bond factors is an improvement that will more accurately measure the amount of required capital needed given an insurer’s bond portfolio’s risk of default. However, some companies could be affected more than others from the proposal.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=267917.
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