Defining Issues | July 2021

 

Insight

Adoption of 2021 risk-based capital (RBC) factors

Insurance: NAIC Capital Adequacy Task Force adopts new bond and other RBC factors effective for 2021 filings.

On its June 30, 2021 call, the Capital Adequacy Task Force adopted new Risk-Based Capital (RBC) factors for 2021 filings. These include bond factors for life, health, and property and casualty insurers, real estate factors for life insurers, longevity risk factors for life insurers and underwriting factors to include investment income.

Applicability

  • All insurance companies

Key impacts

On its June 30, 2021 call, the Capital Adequacy Task Force adopted new Risk-Based Capital (RBC) factors for 2021 filings. These include bond factors for life, health and property and casualty insurers, as well as real estate, longevity risk and investment income in underwriting factors.

The factors adopted for the 20 bond designations were developed by Moody’s Analytics (Moody’s). The adoption also includes an updated portfolio adjustment factor to lessen the effect of the factor changes on small insurers.   

The Life RBC Working Group considered factors developed by both Moody’s and the American Academy of Actuaries. Industry supported the factors developed by Moody’s. Regulators considered the differences between the two proposals, including in the models and assumptions used to develop the factors, concluding that the factors proposed by Moody’s better reflect the intention of the regulators.

The factors adopted for the 20 bond designations for property and casualty insurers were developed by the American Academy of Actuaries.

The factors adopted for the 20 bond designations for health insurers are based on a five-year time horizon and include a bond portfolio adjustment.

Previously, the Health RBC Working Group considered factors for both a two-year and a five-year time horizon. The five-year time horizon was chosen based on consideration of the duration of assets for health insurers, consistency with the property and casualty formula, and review of the impact analysis on insurers using factors with a two-year and a five-year duration.

The adopted factors:

  • decrease the current C-1 factor for real estate within Schedule A from 15% to 11%; 
  • decrease the current C-1 factor for real estate within Schedule BA from 23% to 13%; 
  • set the fair value adjustment for year-end 2021 to zero; and 
  • adjust for any encumbrances to reflect the RBC factors for commercial mortgage loans of 1.75%. 

Before adoption, the Life RBC Working Group discussed whether the real estate factors should be adjusted to reflect unrealized capital gains or losses. Based on concerns of regulators and the American Academy of Actuaries, and the Statutory Accounting Principles Working Group’s suggestion to delay the implementation of this adjustment, the fair value adjustment is zero for 2021.

The underwriting factors incorporate an investment income yield of 0.5% for comprehensive medical and health, Medicare supplement, and dental and vision lines of business. These factors apply to life, health, and property and casualty insurers that write this business. 

The adopted factors include the base factors, and correlation and guardrail factors for the longevity risk charge. The guardrail factor is zero and the correlation factor is negative 0.25. 

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