A U.S. mutual life insurer takes a big financial hit when a non-U.S. life subsidiary does well.
Joel Steinberg, chief actuary at New York Life Insurance Company, New York, has written about the plight of the parent of a successful non-U.S. life subsidiary in a letter to Louis Felice, chair of the Capital Adequacy Task Force at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo.
Steinberg wrote to Felice to ask for a change in the risk-based capital (RBC) calculation instructions.
Insurance regulators and others use the RBC system to factor in estimates of investment risk when they are assessing an insurer’s reserves.
Current RBC rules require an insurer to put the entire statutory carrying value of “affiliated alien life insurers” in the denominator, or risk-based capital level, in RBC calculations.
“The illogical effect of this requirement is that, for a company with even an average RBC ratio, an increase in the foreign insurance company’ carrying value reduces that company’s RBC ratio,” Steinberg says. “The result is that the RBC ratios of companies like New York that have significant foreign insurance operations are significantly understated in comparison to similar companies whose U.S. operating insurance companies do not have foreign subsidiaries.”
The quirk affects only mutual life insurers, because stock life insurers use non-insurance holding companies to control foreign life affiliates, Steinberg says.
New York Life would like to see regulators change the RBC rules to exclude the statutory carrying value of a non-U.S. affiliate from both the RBC, or denominator, in the RBC ratio and from the numerator — the total adjusted capital.