Insurers will likely have to up RBC for their MBS holdings

The “most conservative” housing price projection is a further 30 percent decline from peak levels, translating to a 43 percent decline in current home prices. When benchmarked to the 103 Wall Street housing economist models, NAIC’s most conservative housing price decline is six times worse than the average of the five most pessimistic housing economists. The “conservative” scenario, even if unchanged from previous years, is still a depression-like scenario where nominal home prices do not change for 10 years and inflation-adjusted prices would likely be substantially lower, a cadre of life insurers told the VOS Task Force. 

“As the housing market recovers and delinquency numbers improve, we would expect a lower capital charge for this segment of investments rather than a higher one,” stated the American Council of Life Insurers in a letter to Kevin Fry, chair of the NAIC VOS Task Force Oct. 23. 

Yet the NAIC is now projecting a 40 percent chance of either no nominal change in housing prices over the next 10 years or projecting a further drop in nationwide home price appreciation, according to a report.

“The NAIC presentation anticipates an increase from 2.7 percent to 3.2 percent in capital for the universe of bonds. Instead of focusing on the overall number, having more granular information on changes, as well as a better understanding of the potential impacts on individual insurance companies, would help ACLI in assessing the impact and reasonability of the proposal,” stated the ACLI letter signed by Michael Monahan, senior director of accounting policy for the association.

Regulators from Iowa and Oklahoma voted against today’s proposal. Some regulators were concerned that there was no formal methodology to support the changes made in the assumptions.

The VOS Task Force formulates policy recommendations and administrative instructions to regulate investments and investment risk. The Task Force also formulates NAIC policy that governs how analytical tools— for example, credit assessment, valuation and classification of insurer-owned securities—is employed and how analytical insight into investment risk is applied for regulation. The Task Force is supported by the NAIC Securities Valuation Office.

As Fitch Ratings once explained, in 1993, NAIC introduced its RBC ratio as a way to help identify insurance companies with potentially weak capital positions requiring some form of closer regulatory scrutiny or corrective action. For risks related to the insurers’ fixed income investment portfolios, capital charges are based on the application of a risk factor against the book value of each fixed income security held by the insurer, with the risk charge increasing at each successive NAIC rating category.