ACI Urges Reconsideration of Proposed Increase in RBC Charges for Life Insurance Companies

ARLINGTON, Virginia, April 9 -- The American Consumer Institute Center for Citizen Research issued the following news:

The American Consumer Institute (ACI) has formally expressed its concerns to the National Association of Insurance Commissioners (NAIC) regarding the proposed increase in risk-based capital (RBC) charges for residual tranches and interests of asset-backed securities from 30 percent to 45 percent for life insurance companies. In a detailed letter addressed to Philip Barlow, Chair of the NAIC's Risk-Based Capital and Investment Risk and Evaluation Working Group, ACI highlights the potential negative impacts on the availability and affordability of life insurance for policyholders.

Key Takeaways from the Letter:

* ACI warns that the proposed RBC charge increase could limit financial options for life insurance policyholders, impacting their financial security and the peace of mind these policies provide.

* The Oliver Wyman study cited by ACI indicates that a 30 percent RBC charge is sufficient to meet risk requirements, making the proposed 45 percent charge unjustifiable.

* Increased RBC charges would likely result in higher costs for life insurance and annuities, impacting consumers at a time when retirement insecurity is a growing concern.

* The proposal could also affect the origination of consumer loans by making securitization structures less attractive, potentially leading to higher costs for consumer loans.

ACI urges the NAIC to reconsider the proposed rule change, recommending that the association either postpone the implementation to conduct further risk-based testing or adjust the charge to 30 percent as supported by the Oliver Wyman report. The Institute emphasizes the importance of ensuring that policyholders maintain access to essential financial tools without undue limitations. By aligning regulations with evidence-based findings and the realities of market dynamics, stakeholders can safeguard the financial wellbeing of millions of American families relying on life insurance. ACI remains committed to advocating for policy decisions that support consumer interests and foster a healthy insurance market.

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The American Consumer Institute is a nonprofit education and research organization.

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April 8, 2024

To: Philip Barlow, Chair, Risk-Based Capital and Investment Risk and Evaluation Working Group, National Association of Insurance Commissioners

Re: Oliver Wyman Study on Residual Tranches and Interest

Dear Mr. Barlow:

The American Consumer Institute is honored to present the National Association of Insurance Commissioners (NAIC) with comments on its proposal to raise the risk-based capital (RBC) charge for residual tranches and interests of asset-backed securities (ABS) from 30 percent to 45 percent for life insurance companies. The effects of limiting financial options on life insurance policyholders are of great concern to us, particularly because the proposal will limit the availability and affordability of such a vital resource.

Life insurance provides financial solace for those who hold these policies and can be integral in supporting families after the passing of a household's primary breadwinner. The difference in feelings of financial security between those with and without life insurance is stark. 1 While nearly 70 percent of those with life insurance feel financially secure, less than half of those without insurance can say the same.

Furthermore, after just six months, nearly half of Americans say they feel the financial burden of losing their household's primary wage earner. Life insurance helps to provide families with the cushion they need to stave off the inevitable financial burdens of a loss. Even if a policy is never used, the peace of mind that it grants is still immeasurable to working families.

There is little debate that life insurance policies are beneficial. However, rules that limit investment opportunities for life insurance policyholders threaten to limit availability and affordability. Similar to the proposal from the Federal Reserve to impose "Basel Endgame"2 requirements on banks, this sharp increase in RBC charges would

There is little debate that life insurance policies are beneficial. However, rules that limit investment opportunities for life insurance policyholders threaten to limit availability and affordability. Similar to the proposal from the Federal Reserve to impose "Basel Endgame"2 requirements on banks, this sharp increase in RBC charges would

The report by Oliver Wyman on the risk of losses to residual tranches and interest of ABS under various stress tests does not lend support for a 45 percent RBC charge.4 Instead, the Wyman report indicates that a 30 percent RBC charge would best satisfy risk, making the proposed 45 percent charge unsubstantiated by testing. For the NAIC to continue implementing the current proposal would essentially create an arbitrary RBC charge that would unnecessarily limit life insurance policyholders' access to financial options.

The NAIC should not implement this rule change. At a minimum, the NAIC should hold off on rule implementation for at least a year and conduct further risk-based testing to substantiate the increase in RBC charges to 45 percent, or the charge should be set at 30 percent as the Wyman report concludes. Anything else would endanger Americans' access to valuable financial tools which could be the difference between having or not having access to health insurance.

Based on our analysis of the proposal, we conclude that consumers would be harmed in two major ways. First, the increase in RBC charges would drive the costs of life insurance and annuities up because the charge would artificially reduce insurer investment returns. As a result, insurers would have to pass this cost on to consumers. This is happening at the very time that more Americans are facing retirement insecurity and need to protect their families.

Second, the increase in RBC charges would hinder the origination of lending to consumers, because many originators of consumer loans require securitization to finance such lending. Thus, making these securitization structures/investments less attractive by jacking up the risk charge would significantly reduce demand and make consumer loans more expensive.

Considering life insurance provides benefits both in peace of mind and financial ease following losses, it is incumbent upon policymakers to not unnecessarily limit its availability through the implementation of RBC charges that are higher than what is supported through stress testing.

If you have any questions, we can be reached on Steve Pociask, President/CEO, American Consumer Institute, [email protected]; Isaac Schick, Policy Analyst, American Consumer Institute, [email protected]

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Original text here: https://www.theamericanconsumer.org/2024/04/aci-urges-reconsideration-of-proposed-increase-in-rbc-charges-for-life-insurance-companies/