This month, the NAIC set forth a variety of proposals relating to changes risk-based capital (“RBC”) requirements, as well as treatment of investment affiliates.  In particular, the NAIC seeks to require life insurers to actively disclosure how the use of captives to manage their A-XXX risks would impact the insurer’s RBC.  While traditionally rigid reserving standards in the life insurance industry have been partially alleviated by the utilization of principle-based reserving in numerous states, life companies continue to cede risk to captives to achieve capital relief.  The new proposal would require life insurers to disclose the impact of the cession of risk to its captives on its overall Total Adjusted Capital.

In addition, the NAIC proposes that P&C insurers hold additional capital should the insurer invest through its affiliates.   In particular, the NAIC wishes to abandon the “look through” approach whereby the insurer does not incur a capital charge if it holds an equity interest in its affiliate and instead the RBC charge in an investment affiliate is based on the RBC of the underlying assets.  Under the new proposed standard, the RBC charge would be based on a certain percentage multiplied by the carrying value of the preferred stocks and bonds of the affiliate.  This standard is currently being applied by the NAIC to health insurers and the NAIC is strongly considering expanding this approach to all major lines.