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Life Health > Life Insurance

Fitch Says RBC Ratios Improved in 2001

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Risk-based capital ratios of U.S. life insurers improved in 2001, according to Fitch Ratings, Ltd., New York.

The ratios improved to 366% at year-end 2001 from 277% at year-end 2000. Risk-based capital formulas were created by regulators to establish minimum capital requirements to ensure solvency. For the most part, companies have been carrying RBC well in excess of required minimums that would cause regulators to intervene and take action to ensure solvency.

Julie Burke, a managing director for life insurance ratings at Fitchs Chicago office, says that even though RBC requirements have increased, Fitch is assuming companies will maintain ample RBC. “We think that they will manage to higher RBC levels.”

The RBC tool is an important enough measure of a companys strength to prompt Fitch to develop its own RBC model, she says. The model will be tested this year and is scheduled to be released in early 2003, Burke adds.

The increase in life insurers RBC is attributable to two things, according to Fitch: regulatory codification of statutory accounting procedures and a year-end 2001 modification of the RBC formula.

The codification change raised the RBC ratio, calculated on a dollar-weighted basis, by 22%, according to Fitch. In dollars, surplus for the industry increased by $8.8 billion, or a 4.5% increase, to the industrys year-end 2000 capital and surplus figure.

The major reason that codification impacted RBC, according to Fitch, is because the effects of accounting changes were excluded from the RBC formula.

Other codification changes affected companies but may have varied impact because of state specific decisions on whether to adopt changes enacted by the National Association of Insurance Commissioners, Kansas City, Mo. For example, recognition of deferred tax assets/liabilities and goodwill, according to the report, were not adopted by New York. Consequently, it continues, codification had less of an impact on New York insurers.

The second change that helped boost RBC levels, according to Fitch, is a result of formula changes. One change Fitch cites is an alteration of the factor for holdings in unaffiliated common stock. The 30% factor that had been used can be adjusted between 22.5% and 45% based on beta, or the sensitivity to market volatility, of the holding.

Potential negative impact was offset by other factors such as adjusting for covariance and changes in tax factors, Fitch says. For all asset classes, except for some real estate investments, the tax adjustment either reduced the RBC charge or resulted in it staying the same.

The impact would also be reduced by the fact that common stocks represent only about 4% of U.S. life insurers total invested assets at year-end 2001.

The full report can be accessed by going to

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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