Changes to Investments Risk-Based Capital for U.S. Insurers: A Potential Positive for Public Structured Products

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Changes to Investments Risk-Based Capital for U.S. Insurers: A Potential Positive for Public Structured Products

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Francisco Paez, CFA
JUN 29, 2021

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Introduction

The insurance industry is expecting significant changes in investments risk-based capital (RBC) this year, and for structured products portfolios these changes could amount to a paradigm shift. The National Association of Insurance Commissioners (NAIC) is planning two main changes in determining investments RBC that will specifically affect structured products: the elimination of price breakpoints to determine NAIC designations for modeled RMBS and CMBS issued after 2012, and for CMBS a move from a pro-cyclical modeling approach to a through-the-cycle approach. These changes will likely be implemented in 2021 and 2022.

The NAIC is also working on the adoption of a new set of RBC factors for all bonds (including structured products) held by life insurance companies that will differentiate capital requirements based on more granular measures of credit quality – mostly ratings notching. All these changes have the potential to alter the way some insurance companies approach capital efficiency when investing in bonds. For structured products these changes could: resolve some recent RBC distortions, better align RBC with the credit risk of high-quality securities, and significantly enhance the relative capital efficiency of higher credit-quality structured products versus other asset classes. The sections below analyze the expected changes and their potential implications for insurers.