Close Close

Life Health > Annuities

Proposal Could Make Life Insurers Bigger Real Estate Owners

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • The NAIC set the current commercial real estate “charge” levels in the early 1990s, before insurers had much data on real estate risk.
  • U.S. life insurers ended 2019 with about $63 billion in real estate investments.
  • The ACLI says real estate losses have been low, even during the Great Recession.

State insurance regulators are working on a change in the rules for counting life insurers’ assets.

In theory, the change could lead life insurers to spend billions of dollars more on buying office buildings, apartment complexes, industrial properties and other types of commercial real estate.

The American Council of Life Insurers wants the National Association of Insurance Commissioners to cut the charge life insurers now must apply to the value of the real estate they own to 11%, from 15%.

U.S. life insurers and other U.S. insurers use risk-based capital (RBC) ratios to show how much capital they retain to support the benefits they have promised, after adjusting for the risk level of the investment vehicles they have used to manage store their assets.

If a life insurer owns an office building or other commercial real estate, the ACLI’s proposal would increase the amount of building value the insurer could include in RBC ratio calculations.

The Possible Impact

The ACLI itself has suggested, in a proposal it sent to the NAIC in April 2017, that a real estate RBC charge reduction would probably not lead to big increases in life insurers’ real estate investment holdings.

“While the recommended decrease in RBC charge is material, we believe it is unlikely that insurance companies will make large changes to their commercial real estate (CRE) allocations in response to changes in the RBC factor, as allocation decisions are based on a number of factors, including asset-liability management, taxation, sector investment expertise and experience,” according to the ACLI.

The National Association of Real Estate Investment Trusts says the U.S. commercial real estate market had a total value of about $16 trillion in 2018.

Life insurers ended 2019 with only about $63 billion of their $4.6 trillion in cash and invested assets invested directly in real estate, according to the NAIC’s Capital Markets Bureau.

The value of life insurers’ commercial real estate holdings amounted to only about 0.4% of the U.S. commercial real estate market’s total value.

But annual U.S. commercial real estate deal volume has been averaging between $400 billion to $500 billion per year, according to CBRE Research.

If implementation of the ACLI proposal led life insurers to increase their commercial real estate holdings 10%, the $6 billion in new deals would amount to just 0.04% of U.S. commercial real estate market value but about 1.2% to 1.5% of annual deal volume.

NAIC’s Spring Meeting

Members of the Life Risk-Based Capital Working Group, an arm of the National Association of Insurance Commissioners (NAIC), talked about the ACLI’s proposal for reducing the RBC charge for insurer-owned real estate last month, during an online meeting.

The working group and other NAIC teams have put documents related to the RBC rule change proposal in document packets for the NAIC’s spring national meeting.

The NAIC is holding the spring meeting online. The official opening session will start at 10 a.m. Central Daylight Time Monday.

The History

The NAIC has developed a detailed investment RBC charges table to help insurers calculate their RBC ratios. The group assumes that U.S. government bonds are free from risk. An insurer can put the assets in U.S. government bonds in its risk-adjusted capital total without subtracting any value to reflect risk.

The risk charge for an insured residential mortgage that’s in good standing is just 0.14%.

The current 15% charge for insurer-owned real estate is almost as high as the 18% charge that the NAIC imposes on life insurers’ investments in farm mortgages that are 90-days overdue but not yet in the process of foreclosure.

The ACLI has been trying to persuade the NAIC to reduce the 15% charge for insurer-owned real estate since 2012. It says the regulator first set the charge at 15% because they had little data on commercial real estate market performance.

New analyses, which include data from the 2007-2009 Great Recession and the current COVID-19 pandemic-related downturn, suggest that regulators could safely cut the charge for insurer-owned real estate to as little as 8%, according to the ACLI.

(Photo: Nate Hovee/Adobe Stock)