Regulators Defer Action On Capital Requirement

Their proposal would raise the factor used to calculate the "authorized control level" of the RBC calculation to 75 percent from the current 50 percent. But trade associations contend this increase could force p-c insurers to come up with more than $35 billion in additional capital and raise premium rates to compensate.

(When an insurers surplus is at the authorized control level, regulatory action is discretionary, but an insurance commissioner is "authorized" to take control of a company.)

For now, regulators appear willing to examine alternatives. Mike Boerner, a Texas insurance regulator and the chairman of the ad hoc subgroup, said he plans to hold a teleconference among his subcommittee members several weeks before the winter NAIC meeting to further discuss the matter.

Roger Kenney, associate vice president for the Downers Grove, Ill.-based Alliance of American Insurers, said his group, and the rest of the industry associations, have opposed the idea that the RBC levels should be raised to try to identify potentially problematic companies.

RBC requirements, he explained, calculate the minimum capital amount insurers need for the economic risks they are assuming, and companies whose capital drops below RBC percentages are subject to various regulatory actions designed to mitigate insolvency.

"Obviously, with Legion and some other big companies that went under, some regulators are feeling that the current RBC risk factor has not worked. This proposal was the result of regulatory concerns that the current formula did not subject companies that have become insolvent to action levels in the RBC formula," he observed.

But Mr. Kenney stressed there are other existing tools that can help evaluate solvency. And he argued that boosting the RBC risk factor could create "increased premiums for policyholders and greater motivation for companies to change lines of business."

There are lots of ramifications to this proposal, he pointed out. "And NAIC has not produced any analytical study which would show, had this been in place over the last four, five years, that it would have caught any of these large companies that went insolvent rather quickly."

One ratings analyst agreed with Mr. Kenneys assessment, commenting that its difficult to say whether higher RBC levels could have made it easier for regulators to spot troubled companies in recent years. "I mean, companies that have gone under recently, they have gone down pretty quickly," observed James Auden, analyst at New York-based Fitch Ratings.

"And right now, there are companies that are below the RBC threshold, and for one reason or another, you dont think they are going to go under, possibly because they have a strong parent," Mr. Auden said. A company with access to capital from a stronger parent is at a different level of solvency risk than a standalone entity. "I dont think thats captured in the formula," he said.

Mr. Kenney argued that a better approach would be to focus on other tools–such as statutory audits, targeted financial examinations and trend tests of factors associated with viability–that are already available to regulators for identifying insolvency problems. "A comprehensive application of these tools, including RBC, is more likely to identify potential solvency issues than the arbitrary silver bullet approach of this proposal," he said.

"I dont see any reason why regulators need to change factors," he added. "Until we see some data that indicates that changing factors is going to increase the effectiveness of regulators oversight, then there is no reason to change it."

This is also an important issue for mutual companies because, "of course, mutual companies have more difficulties getting capital," said William Boyd, financial regulation manager at the Indianapolis-based National Association of Mutual Insurance Companies, who testified at the NAIC meeting.

According to NAMIC, the RBC level increase from 50 percent to 75 percent would encompass about 7.4 percent more p-c insurance companies than the 4.3 percent now at a regulatory capital level, which allows regulators to intervene.

"It must be fully understood that additional capital in service to property-casualty risk brings additional cost, and insurance companies will make every effort to recover those additional costs from policyholders," Mr. Boyd said.

He recalled that participants at the subcommittee meeting for the NAIC Risk-Based Capital Task Force told regulators that "they just need to refine the existing techniques for identifying companies that are potentially headed for insolvency."

"RBC alone is probably not an adequate tool," he said. "RBC alone was never intended to be a predictor of insolvency. RBC might better be used in combination with other measures to assess companies proximity to failure."

Mr. Boyd pointed out that, at the moment, regulators have not yet abandoned the existing proposal, but "they signaled their willingness to slow down and examine other tools that can identify troubled companies." He noted that Mr. Boerner had asked the industry last week to prepare estimates of how much the proposal might raise rates and also to submit data on ways to do trend tests.

"So clearly the subcommittee is now open to other ideas," Mr. Boyd said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.