March 24, 2025 - The NAIC’s Risk-Based Capital (RBC) Investment Risk and Evaluation Working Group convened this morning at the NAIC’s Spring National Meeting in Indianapolis. The agenda included an update from the American Academy of Actuaries (AAA) on the Structured Securities RBC project and oral comments on the American Council of Life Insurers’ (ACLI) RBC Principles for Bond Funds presentation and the NAIC’s Memorandum of Bond Funds reported in 2023 Annual Statement filings.
The AAA noted that although the collateral model, CLO dynamics and C-1 methodology components of the RBC project are in process, the CLO cash flows, CUSIP-level risk quantification and comparable attributes and C-1 factors analysis remain pipelined because certain prerequisites, including obtaining the model for bond C-1 factors, have not been completed. The NAIC aims to employ this model to maintain consistency with bonds in the RBC framework. The model is used by Moody’s and owned by ACLI and the NAIC is working with both parties to secure it. Additionally, the NAIC has a three-way agreement with Moody’s and AAA to use Moody’s software CDOnet, which will enable modeling of cash flows through the CLO waterfall structure.
As it waits for the collateral model, the NAIC is focusing on the C-1 methodology (i.e., tying credit default assumptions to the cash flows of CLO tranches), which it expects will facilitate the conversion of cash flows into C-1 factors. This process includes reconciling that tranche impairment and deterioration of underlying credits do not occur simultaneously.
Commenters on the ACLI’s RBC Principles for Bonds Funds Presentation argued for harmonization of RBC treatment of bond mutual funds and bond ETFs given they carry equivalent economic risk. (Currently, bond ETFs are treated as bonds while bond mutual funds are treated as equity, with a 30% RBC charge.) Specifically, commenters recommended adoption of the weighted-average weighting factor (WARF) approach to RBC that is used today for ETFs. Further, they requested treatment for health and property and casualty insurance companies that is consistent with life insurance companies.
The NAIC solicited feedback from WG members on developing an RBC model for bond funds for life insurers that, if warranted, could be applied to health and property and casualty insurers. Given consensus, the NAIC will ask staff to work on an RBC proposal, with the understanding that it will not be a priority for 2025.
