State insurance regulators resumed discussions on Tuesday regarding a controversial proposal that could make a critical measure of insurance companies’ financial health confidential. The proposal, put forth by the Capital Adequacy Task Force (CATF), would discourage insurers from publicly releasing their risk-based capital (RBC) figures.
Background: RBC and Its Role
RBC numbers are a standard component of public companies’ financial reports and earnings calls with analysts. These figures provide a ratio to assess the level of risk associated with an insurance company’s assets. Insurers generally aim to maintain an RBC ratio between 400% and 450%. Brighthouse Financial is one insurer that has experienced challenges with its RBC ratio in recent quarters.
This proposal has garnered unusual opposition, uniting life insurers and consumer advocates against it. The regulators paused the RBC proposal for several months before bringing it back during a CATF session held at the spring meeting of the National Association of Insurance Commissioners (NAIC).
Ohio originally proposed the measure, which would prohibit the publication of RBC figures in various communication channels, including press releases, earnings releases, and webcasts. According to Ohio regulators, the concern is that widespread access to RBC figures leads to misunderstandings about an insurance company’s true financial strength.
“Because the NAIC formula develops threshold levels of capitalization rather than a target level, it is neither useful nor appropriate to use the RBC formula to compare the RBC ratio developed by one insurance company to the RBC ratio developed by another,” the proposal states. “Comparisons of amounts that exceed the threshold standards do not provide a reliable assessment of their relative financial strength.”
After receiving comments, including opposition letters from Transamerica and the American Council of Life Insurers, the CATF delayed the RBC proposal. Due to this delay, the task force adopted a new 45-day comment period, as suggested by chairman Mike Yanacheak, the chair actuary for the Iowa Insurance Division.
RBC: A Key Financial Tool
The NAIC adopted the life RBC formula in 1993 “for specific regulatory needs,” according to a CATF information sheet. The life formula identifies four major risk categories: asset risk, insurance risk, interest rate risk, and all other business risk. The property/casualty and health formulas were later implemented in 1994 and 1998, respectively.
Brendan Bridgeland, director of the Center for Insurance Research and an NAIC-designated consumer liaison, highlighted the value of RBC. “The RBC is incredibly helpful in the five-year historical for tracking trends so a consumer group can look and see if there’s been radical changes that drive the need for a merger or something else,” he said on Tuesday.
However, Rachel Hemphill, chief actuary at the Texas Department of Insurance, offered a counterpoint, stating, “By the time companies are well above any thresholds of concern, whether one is a little bit higher or a little bit lower than the other in RBC, should not be used as a way to compare or evaluate strength of those companies.”
CATF also released the 2024 comment letters. The American Council of Life Insurers (ACLI) suggested a disclaimer “around the intended purpose of RBC data.” The ACLI letter further warned that the RBC proposal, “could lead to a significant lack of transparency into an insurer’s financial health for consumers and policyholders. It could complicate validation of RBC-related information for rating agencies, investment analysts, and reinsurance and other arrangements.”
The American Academy of Actuaries (AAA) also opposed the RBC change in a comment letter. The AAA noted that removing RBC data could open the door for alternative solvency calculations. Tricia Matson, chairperson of the Prudential Regulation Committee of the AAA, wrote, “We believe that RBC has served its purpose well in that it has assisted regulators in identifying weakly capitalized companies… It has also provided a general and consistent way for other stakeholders to obtain a high-level understanding of a company’s solvency position, which promotes public confidence.”
