The NAIC’s Capital Adequacy Task Force (Task Force) has proposed an upwards adjustment for the risk-based capital (RBC) factor for insurers’ restricted assets, using a graduated scale. According to the charts drawn up by the NAIC, life insurers appear to have the highest percentage of companies with pledged or restricted assets.
The NAIC’s Financial Analysis Working Group (FAWG) had recommended that the task force research the issue after it had noted that insurance companies filing on all statement types report restricted assets in their financial statements. For a number of insurers, these restricted assets represent material amounts of total assets.
The Task Force regulatory proposal would modify the RBC formula for life and fraternal life insurers, property & casualty and health insurers to add a charge for insurers with a large proportion of restricted assets on their balance sheets.
The Task Force suggested adopting the proposed changes to the formula for year-end 2013 at the Winter National Meeting last November 30, with the specific factors adopted in June.
Assigning these charges to the RBC formula is appropriate, because the restricted assets would not be available to a receiver to pay claims, regulators reason.
The Task Force proposal would assign a capital charge of a tiered percentage for insurers depending on the companies’ percentage of restricted or pledged assets. This would be applied as RBC factors to apply to the total of pledged assets, and look to be .02, .05 and .1.
Specific types of restricted or pledged assets include those subject to repurchase and reverse purchase agreements, those pledged as collateral are placed under option agreements and letter stock or securities restricted as to sale (deposits with States are excluded).
Although about 80 percent of insurers analyzed by FAWG using data from Annual Statement footnotes had zero percent pledged or restricted assets, and 12 percent had less than 5 percent, the NAIC staff did find that about 3.5 percent of insurers had pledged/restricted assets of 5 percent to 10 percent of total assets. Slightly over 2 percent of insurers had over 25 percent of assets pledged/restricted and some of these were over 50 percent of assets.