Proposed NAIC Bond Factors to Increase Capital Requirements
via A.M. Best
A.M. Best says new NAIC bond factors will increase capital requirements for life insurers, saying many insurers are engaging in credit rating arbitrage.
"The proposal notes that as the low interest rate environment has persisted, insurers have taken advantage of credit arbitrage opportunities within NAIC bond designations in order to get the highest yield relative to required capital.
The NAIC Investment Risk-Based Capital (RBC) Working Group and the American Academy of Actuaries have recommended increasing the number of bond factors in their latest proposal to eliminate the incentive to invest in lower quality bonds. A.M. Best has analyzed the most recent RBC bond factor proposal and estimates that total U.S. life insurance industry capital charges could increase by $6 billion and Authorized Control Level (ACL) RBC percentage could decrease by 55.9 percentage points if implemented."