A panel at the National Association of Insurance Commissioners wants a sister panel to help it review the methods used to calculate risk-based capital r(RBC) atios and set RBC requirements.
Christina Urias, chair of the Solvency Modernization Initiative Task Force at the NAIC, Kansas City, Mo., has written about the need for work on the RBC ratio system in a memo to Lou Felice, chair of the Capital Adequacy Task Force at the NAIC.
Regulators use the RBC ratio system to adjust the value of an insurer’s holdings to reflect the estimated level of risk and, after the adjustments are made, to determine whether the insurer has enough capital to meet its obligations. Regulators may step in when an insurer’s RBC ratio falls sharply or falls below a “regulatory intervention” level.
The SMI Task Force and its working groups have been looking at the U.S. financial regulatory system, and “we have agreed that our risk-based capital requirements should continue to be a component in the legal framework of U.S. solvency regulation in order to maintain a floor for triggering regulatory intervention,” Urias has written to Felice.
The NAIC has not conducted an overall review of the RBC system since the 1990s, Urias writes.
“While we have made updates over the years, it is time for a holistic evaluation of the RBC formulas, factors, and methodology,” Urias says.
The SMI Task Force wants the Capital Adequacy Task Force to give it advice on the scope of changes for RBC within the SMI and a proposed timeline for implementation, Urias says.
One issue of concern is the selection of the calibration, or “safety,” level and time horizon for the RBC, in recognition of the fact that the RBC is designed more to identify weakly capitalized companies rather than to mirror a company’s economic target capital calculations, Urias writes.
Urias suggests the RBC system review also should reflect identification of missing risks, any modifications to the formula that might be needed, and recalibration of the RBC ratio system.