State Regulators Might Make Annuity Issuers' Risk Scores Secret

The Capital Adequacy Task Force plans to consider the proposal March 25 in Indianapolis, during a session at an in-person NAIC meeting.

The task force included the proposal and related materials in a meeting materials packet posted on its section of the NAIC's website.

What it means: If the NAIC ends up adopting the RBC ratio proposal, consumers and their advisors could eventually lose access to one indicator of life and annuity issuers' financial strength.

The NAIC: U.S. federal law leaves regulation of the business of insurance to the states.

The NAIC is a Kansas City, Missouri-based trade group that helps state insurance regulators share ideas and resources. It does not set state insurance company financial rules itself, but many states adopt NAIC financial rule updates through automatic or semiautomatic mechanisms.

RBC ratios: An RBC ratio shows how much capital an insurer has to meet obligations to policyholders and annuity contract owners, after taking the nature of the insurer's investments into account.

NAIC rules let life and annuity issuers include the full value of U.S. government bonds in their capital calculations, and they require issuers to reduce the value of the riskiest assets that can be included in the calculations by 30%. The RBC "charges," or asset value cuts, for other types of assets included in the RBC ratio calculations range from 0.4% to 23%.

Ohio regulators' view: The Ohio regulators who proposed the RBC ratio preamble change note that the NAIC developed the RBC ratio rules with regulatory needs in mind.

"Except where prescribed, RBC requirements would not be appropriate to rely on in other contexts such as reserve setting or risk management or evaluating the risk of investments," according to additions Ohio regulators want to put in the preamble. "For example, an insurer voluntarily strengthening assumptions used for reserving would generally reduce an insurer's RBC ratio but does not indicate a weaker position than a similarly situated insurer who did not elect to strengthen assumptions used for reserving."

In some cases, Ohio officials say, disclosing RBC ratios of healthy insurers may create incentives for insurers to act in ways that will hurt their finances.

Other perspectives: The Capital Adequacy Task Force meeting packet includes comment letters from life insurance company executives who have concerns about the RBC ratio preamble change proposal.

William Schwegler, a senior director at Transamerica, wrote in a comment letter that his company believes the preamble change proposal would lead to removing RBC information from insurers' public statutory annual statements, or official annual reports prepared using insurance regulators' accounting rules.

Transamerica is part of Aegon, a public company. The U.S. Securities and Exchange Commission requires public companies to publish extensive information about their finances.

Many U.S. insurers are either mutual companies — companies owned by the policyholders — or private companies. Private companies are owned by individuals or small groups of investors. Both insurers that are part of public companies and privately held insurers must send regulators financial statements based on "statutory accounting principles," or insurance regulators' accounting rules.

At Aegon, "it is important for our investors to have accurate information about Aegon's ability to return invested capital," Schwegler writes. "Transamerica's RBC constrains its generation of free capital, and Transamerica has historically generated a significant percentage of Aegon's free capital. Eliminating RBC transparency would introduce uncertainty among investors, making Aegon's shares less attractive for investment."

Three members of the American Council of Life Insurers staff defended the value of RBC ratio transparency.

Limiting RBC ratio disclosures "could lead to a significant lack of transparency into an insurer's financial health for consumers and policyholders," the ACLI reps wrote.

"The ability of companies to share their RBC ratio in public forums has significantly strengthened public perceptions of the U.S. state-based regulatory system of insurance companies, e.g., during and after the financial crisis of 2008 and 2009," the ACLI reps said.

The ACLI reps have suggested that regulators could address the Ohio regulators' concerns by adding notes about the limitations of RBC ratios to the RBC ratio model rules preamble and requiring insurers that give RBC ratio information to include disclaimers about how to interpret RBC ratios.

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