Regulators Could Help Life Insurers Buy More Stock

An RBC ratio is supposed to show, roughly, how much capital an insurer will have to meet its obligations, in light of the possibility that factors such as changes in interest rates or stock prices could change the value of certain types of assets.

Regulators use RBC calculation “charges,” or value cuts, to account for the possibility that the prices of some kinds of investments are likely to change more than the prices of other investments. Regulators impose no charges or low charges on investments that appear to be very safe, such as investments in government bonds, and high charges on investments that look much riskier, such as the bonds of companies that appear to be bad financial health.

The Proposal

Allstate told regulators that interest rates on high-quality bonds are now very low.

Investment theory has shown that, “over the long term, equities have both higher returns and lower tail risk than bonds,” according to the executive summary of the Allstate proposal.

The current RBC framework fails to reflect the value of putting stocks in the portfolio of a life insurer that happens to have a long investment horizon, Allstate says.

Allstate says regulators ought to give favorable treatment to a life insurer’s stock holdings if the life insurer has enough cash, and assets that are easy to convert into cash, and if it’s using stock to fund policyholder obligations that will arise at least seven years in the future.

— Read Lower Interest Rates Hurt: Annuity Issuers, on ThinkAdvisor.

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