NAIC Notes

Therese M. Vaughan, 2009-3-5:

As has been well documented, large complex financial institutions with insurance operations – like AIG – have produced systemic risks within the economy. The insurance businesses in these holding companies have thus far been adequately protected by state insurance regulations.

Florida Senate, Interim Project Report 2002-204:

According to the NAIC, the “…RBC formula produces a regulatory minimum amount of capital that is tailored to each specific company.” [Mike Barth, “Ranking Insurers by RBC Results: Still Not Such A Smart Move,” NAIC Research Quarterly, April 1995, p. 46.] The RBC formula is not meant to be used as a tool to compare or rank insurers. The risk-based capital system is just one of many tools a regulator uses for evaluating the solvency of an insurer. Insurers are prohibited from advertising the results of these calculations, and the department is prohibited from using the information in rate making. The department is authorized to use the reports solely for monitoring the solvency of insurers and assessing the need for corrective action with respect to insurers.

The annual statement submitted to the department includes some of the results of the risk-based formula, such as the authorized control level risk-based capital and a company’s total adjusted capital. The National Association of Insurance Commissioners has stated “…that public disclosure of the results of the formulas…is an appropriate means of providing consumers with valuable information about the capital adequacy of insurance companies.” [ibid]

Key results of the risk-based capital formula are included in an insurer’s annual statement, which is a public record.

NAIC Research Quarterly and Index

Mike Barth, in NAIC Research Quarterly, 1995:

The risk-based capital requirements for insurers, as embodied in the life/health and property/casualty formulas, as well as the Risk-Based Capital for Insurers Model Act, were developed by the NAIC to distinguish adequately capitalized companies from inadequately capitalized companies. The NAIC believes that public disclosure of the results of the formulas, as indicated by the Authorized Control Level RBC and a company’s Total Adjusted Capital, is an appropriate means of providing consumers with valuable information about the capital adequacy of insurance companies.

There is, however, no formula available that says how much capital in excess of the RBC minimums is “good,” how much is “better,” or how much is “best.”

Table 1 presents the most compelling reason for disallowing the practice of making RBC comparisons between adequately capitalized companies. The first five companies listed on the table are among the largest life insurance companies in terms of asset size. Their RBC results from 1993 and 1994 were taken from the Five Year History page of the 1994 annual statement filing. The second set of five companies were selected for comparison for two reasons: (a) each of these companies had a higher 1993 RBC ratio than the first five companies, and (b) each of these companies had a much worse ratio in 1994. In fact, three of the companies in the second group would trigger one of the regulatory intervention levels in 1994 and the other two would trigger the trend test. Those that have advocated using RBC ratios to rank insurers, to make loan decisions, to make underwriting decisions on whether to extend reinsurance, or to make a recommendation on selecting one insurer’s products over another’s should examine these results closely and then ask themselves if the use of RBC ratios for those purposes is really such a smart decision.

NAIC Annual Filings

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