New NAIC task force urged to update RBC to avoid more insurer failures

The Risk-Based Capital Model Governance Task Force formed this spring with a mandate to tackle the crucial, but some say outdated, RBC framework.

That effort officially launched July 3 with a task force memo requesting comments on a “proposed preliminary [RBC] principles and questions.”

RBC is a method used by regulators to ensure that insurance companies hold enough capital to support the risks they take on. It helps protect policyholders by reducing the likelihood of insurer insolvency.

Executives, as well as Wall Street analysts, prefer to operate insurance companies with an RBC ratio of 400% to 450%. But the original RBC concept dates to the 1990s and does not account for 2025 realities, said Larry Rybka in a comment letter submitted Tuesday.

“The entrance of private-equity sponsors into the insurance marketplace, combined with sophisticated reinsurance structures, has created new and material solvency risks that the current formula does not adequately capture,” wrote Rybka, chairman and CEO of Valmark Financial Group.

"This needs to be fixed because NAIC ineptitude is on full display in letting PHVL burn to the ground, and policyholders will only get the minimum state guarantee," Rybka said in a follow-up interview.

Connecticut insurance regulators are overseeing PHL Variable following the discovery of significant financial difficulties. Insurance Commissioner Andrew Mais recently asked the court to loosen a moratorium on policyholder benefits while regulators court buyers for PHL blocks.

By the beginning of 2024, private equity firms owned approximately $700 billion in insurance assets, or 7.1% of the insurance industry, according to the National Association of Insurance Commissioners. That figure is up from 5% in 2019.

Meanwhile, U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 billion to $1.3 trillion in 2023, Fitch Ratings noted in a recent report. During the same period, reserves ceded to offshore jurisdictions nearly quadrupled, exceeding $450 billion.

"Far from dispersing risks, some of these transactions concentrate it in thinly-capitalized entities that are opaque to U.S. stakeholders," Rybka wrote. "Current RBC rules afford full credit for reinsurance recoverables irrespective of the reinsurer's financial strength, thereby permitting capital arbitrage and the upstreaming of hard capital even as risk increases."

'Signalizes the priority'

The RBC task force was established in February by the NAIC. It immediately garnered attention as a serious effort.

"The fact that the [task force] has been established by the NAIC Executive Committee signalizes the priority that is being given to the risk-based capital system at the highest levels of the NAIC," the law firm Mayer Brown wrote. "Also significant is the fact that state insurance commissioners (and not just their staff) are participating directly in the work of the task force."

A pair of influential commissioners lead the task force: co-chairs Ohio Director of Insurance Judith French, who also chairs the influential Life Insurance and Annuities Committee, and Wisconsin Commissioner of Insurance Nathan Houdek, who also chairs the Financial Condition Committee.

Comments are being accepted through July 24 on the task force's RBC principles and a list of 10 questions. The questions cover the gamut of risk, capital, and level of analysis.

Meanwhile, the Capital Adequacy Task Force recently considered a proposal to discourage insurers from releasing RBC figures.

Four-point plan

Rybka offers some pointed suggestions in his letter, four of them:

Stricter capital requirements for reinsured liabilities. Require higher RBC charges for liabilities ceded to reinsurers that fall into one of three categories: Not licensed in the United States, not subject to equivalent regulatory oversight, or not fully collateralized.

Enhanced transparency of reinsurance arrangements. Mandate detailed public disclosure of reinsurance counterparties, contractual terms, or any parental guarantees or side agreements.

Limits on the use of reinsurance for capital arbitrage. Adopt a clear substance-over-form test for risk transfer and deny RBC credit where that test is not met.

Appropriate capital treatment for complex credit structures. Assign higher RBC factors, or explicit capital add-ons, for exposures to below-investment-grade corporate debt held via CLOs, BDCs, and other unconsolidated vehicles.

Rybka said he does not expect the task force to adopt any of his suggestions.

"I want to be on the record pointing to the NAIC’s inaction before the next larger carrier fails," he said. "Who knows, this letter may end up as something referenced if a crisis finally forces the federal government to intervene."

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.