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August 16, 2023 at 04:20 PM
What You Need to Know
- The rule changes will affect how life insurers calculate their RBC ratio risk summary statistics for 2023 and 2024.
- The changes apply to investments in relatively high-risk slices of asset-backed securities.
- Some big life insurers say the changes are necessary because the slices could lose all value in a bad market.
- Some state regulators suggested that the issue appears to be a minor issue and that they would like to have more information before the rule changes.
State insurance regulators want life and annuity issuers to think twice before trying to increase their returns by investing in riskier slices of asset-backed securities.
The National Association of Insurance Commissioners today approved two measures that will cut how much of those assets’ value life insurers can include when calculating their “risk-based capital” ratios, or financial health summary statistics. The vote tally was not immediately available.
The NAIC measures will affect RBC math involving life insurers’ holdings of the “residual tranches” of asset-backed securities. Insurers will have to cut the value of ABS residual tranche investments 30% in their 2023 RBC calculations and 45% in their 2024 RBC calculations.
Members of the NAIC adopted the changes in Seattle, at the NAIC’s summer meeting.
What It Means
The NAIC wants life and annuity issuers to be more conscious of risk when investing the capital used to support your clients life insurance policies and annuity contracts.
Asset-Backed Securities
Traditionally, to reduce exposure to investment market risk, meet regulatory requirements and maximize the value of their freedom from having to pay federal income taxes on investment returns, U.S. life insurers have focused on investments in high-grade corporate securities and related investments, such as shares of preferred stock issued by companies with very high credit ratings.
In recent years, because interest rates on high-grade corporate loans have been below 5%, life insurers have tried to get extra income by investing in fixed-rate but somewhat riskier or longer-duration classes of assets, such as asset-backed securities.
Asset-backed securities help buyers invest in arrangements such as pools of student loans, pools of credit card accounts and “collateralized loan obligations.”
A CLO may hold a bundle of relatively risky small business loans or a bundle of the loans private equity firms use to pay for “leveraged buyouts” of small and midsize businesses.
ABS creators often carve the issues into “tranches,” or slices, based on how much risk holders of slices will face. Holders of many slices are supposed to have the equivalent of investment-grade-bond access to payments.
Buyers who take an ABS residual tranche must accept the risk that they will get paid only if the holders of the high-priority slices get paid in full.
