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Portfolio > Asset Managers

RBC charge may increase for insurers with restricted or pledged assets

By Elizabeth D. Festa

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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. 

Several unidentified insurers even had over 90 percent of their assets pledged/restricted. This assessment is according to FAWG’s year-end 2011 collected data. 

On the life insurance side, according to a NAIC color-coded chart about 31 percent of companies had a percentage of pledged assets as of year-end 2011, higher than the other insurance sectors of P&C (about 20 percent), health (about 10 percent), title (about 10 percent) and fraternal a small universe of 14 companies where 10 had no assets pledged. 

Of the life insurers with pledged assets, most were 5 percent or lower of all assets, although 14 companies were in the red category and had pledged assets of 25 percent or more of total assets while 16 life insurance companies had pledged assets of between 10 percent and 25 percent. 

Thirty-one life (5.3 percent) insurers fell into the yellow category of 5 percent to 10 percent of pledged assets to total assets among the life companies evaluated.

If the Task Force adopts this change to the RBC formula, “one would expect that some insurers would reduce the amount of pledged/restricted assets, or increase their capital to assure that they meet their target RBC objectives with this new charge,” wrote Peter Medley of the NAIC to the Capital Adequacy Task Force late last month in a memo discussing potential formula changes for RBC in 2013.

The mission of the Capital Adequacy Task Force is to evaluate and recommend appropriate refinements to capital requirements for all types of insurers. Medley also attached a list of companies designated by numbers–only regulators can see their names–listing pledged asset RBC requirements.

Comments are due by the beginning of business, December 3. Capital Adequacy reports to the NAIC Financial Condition (E) Committee. The American Council of Life Insurers is reviewing the proposal, it said. 

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