State insurance regulators may change the way they take the temperature of indexed annuity issuers.
Members of the Life Risk-Based Capital Working Group — an arm of the National Association of Insurance Commissioners (NAIC) — are talking about the idea of easing up on their current approach to calculating risk-based capital (RBC) ratios for indexed annuities that are regulated as fixed-rate insurance products, rather than as variable-rate securities.
Working group members talked about RBC treatment of indexed annuities Sunday, during a session in Orlando, Florida, at the NAIC’s spring national meeting.
The NAIC is a group for state insurance regulators.
State regulators are in charge of setting most rules for the business of insurance, but they often use NAIC models when developing their own insurance laws and regulations.
Regulators have developed RBC ratios to serve as a simple-to-use, standardized indicator of insurer health.
An RBC ratio is supposed to show whether an insurer looks as if it should have enough capital to meet its insurance and annuity obligations, after taking the apparent riskiness of its investments and other factors into account.
Indexed Annuities and RBC Ratios
The NAIC created the current formula for calculating RBC levels for fixed annuities and single-premium life insurance in C-3 Phase I, which was adopted in 2000. Regulators thought about applying the C-3 Phase I formula to indexed annuities but ended up keeping indexed annuities out of that formula.
Regulators and insurers have been using a different approach for calculating RBC ratios for indexed annuities.
Great American has now asked the working group to apply the C-3 Phase I RBC calculation strategy to indexed annuities, according to a conference call meeting summary included in the working group’s spring meeting document packet.
Yan Fridman, an actuary with Great American, has told members of the working group that regulators originally kept indexed annuities out of the C-3 Phase I rules because of a belief that the big problem with indexed annuities would be the volatility of investment indexes linked to the performance of the stock market.