An Existential Time for Risk-Based Capital (RBC): Highlights from NAIC Summer National Meeting

Lara Devieux, CFA Managing Director, Capital Solutions

Key Takeaways of the Important Regulatory Proposals Impacting Insurance Investment Portfolios:

• Risk-Based Capital Model Governance (EX) Task Force released preliminary RBC principles to ensure a consistent approach to future revisions, prompting varying responses within 16 comment letters.
  
  There is industry agreement that the 30+ year old Risk-Based Capital (RBC) framework has supported the most robust insurance market in the world and should not evolve to a comprehensive economic capital standard like other global regimes. Yet, there was disagreement about the purpose of RBC, and whether it should continue to solely be used to identify potentially weakly capitalized companies or if RBC should secondarily acknowledge its impact on product availability and consumer needs. Given regulators’ intensifying focus on insurers’ investments, it is imperative that these principles are developed in a timely manner (target by year-end 2025) and provide direction to ensure future RBC changes are enhancements developed through a transparent and analytically rigorous process.
   
• CLO RBC factors delayed until 2026 at the earliest as Valuation of Securities (E) Task Force (VOSTF) defers CLO modeling until 12/31/26.
  
  Concurrently, the American Academy of Actuaries’ (AAA’s) CLO project is progressing, albeit slowly, toward its 12/31/26 target implementation date, with an update slated during the Risk-Based Capital Investment Risk & Evaluation (E) Working Group (RBC IRE WG) on 9/8/25. If this implementation date holds, RBC factors for other types of asset-backed securities (ABS), including residual tranches, will not be updated until at least 2027, barring any new RBC proposals.
   
• Restructuring of VOSTF in 2026, with two new working groups, will intensify focus on insurers’ invested assets and credit rating providers (CRPs).
  
  The Investment Analysis (E) Working Group will be a new small group that will meet primarily in regulator-only sessions and be responsible for monitoring insurers’ invested assets, developing new portfolio analysis tools and advising state regulators on potential risks, while the Credit Rating Provider (E) Working Group will implement the to-be-developed due diligence framework which includes a qualitative and quantitative assessment of CRPs for use by the NAIC in its designation process.
   
• Potential covariance revisions introduced by the Life Risk-Based Capital (E) Working Group could increase required capital for life insurers, particularly ones with higher concentrations of equity risk.
  
  The covariance proposal based on updated correlations between risks has not yet been exposed for comments but will be discussed during the interim meeting on 9/11/25. Given the potential meaningful industry impacts and the fact that principles governing future RBC changes have not yet been finalized, this proposal is likely to be widely discussed by regulators and interested parties in the coming months.

Additional details on these investment-related regulatory initiatives are discussed below.

New RBC Principles Being Developed by Risk-Based Capital Model Governance (EX) Task Force

The first priority of the Risk-Based Capital (RBC) Model Governance (EX) Task Force is to devise foundational principles that will serve as a north star for future RBC revisions. As outlined in the Task Force’s initial memo in February 2025, future RBC changes should reflect insurers’ evolving investment trends, with a focus on greater RBC precision within asset risk and alignment with the concept of ‘equal capital for equal risk.’ Recall the creation of this Task Force was largely in response to the controversial regulatory process of updating the RBC charge for residuals of asset-backed securities in 2024, which involved conflicting views of risk and data among regulators and interested parties and ultimately led to the 45% interim residual charge for life insurers, which stands today.

In July 2025, the Task Force released six preliminary key RBC principles with associated discussions related to: 1) use of RBC calculations, 2) objectivity, 3) consistency with statutory accounting, 4) evaluation of emerging risks, 5) changes to RBC calculations, and 6) governance. The RBC principles prompted 16 comment letters in response, with varying perspectives from state regulators, companies, trade groups, consulting firms and individuals.

The main disagreement involved the use of RBC, which historically has been defined in the Preamble to the RBC instructions. It states that RBC’s sole purpose is to identify potentially weakly capitalized companies, allowing regulators to step in at various RBC levels to prevent insurer insolvency. The preliminary principles secondarily acknowledged RBC’s impact on product availability to meet consumer needs, while also being utilized to assess capital adequacy at the group level in the global regulatory arena. Approximately 60% of commenters had concerns over secondary mandates like product availability and global competitiveness being incorporated in the principles as they are outcomes of a well-designed framework, a view shared by NAIC President Jon Godfread during the General Session. While likely not expressed directly in the refined principles, there is recognition by participants that insurers utilize RBC in business matters like capital planning, product pricing, asset allocation, and reinsurance design, while other stakeholders rely on RBC as a continuous gauge of capital strength.

Importantly, some key areas of consensus and agreement among parties included:

• The RBC framework in the U.S. has worked well for 30+ years, protecting policyholders and creating the largest and most robust insurance market in the world. Further, it should not evolve to be a comprehensive economic capital standard like other global regimes that have dampened markets for long-term insurance products.
• RBC charges should be derived from statutory annual statement values, where practical, which are audited and inherently conservative. Yet, participants noted that there are off-balance sheet items that are not captured in statutory accounting, while differing accounting bases could create incentives that are at odds with the principle of ‘equal capital for equal risk.’
• Changes to RBC should be made in a transparent, iterative and robust data-driven process.
• Recognition that risk profiles and business models differ by insurance type, requiring tailored RBC formulas for life and P&C insurers. While not explicitly stated, there could be less impetus for aligning RBC practices across life and P&C insurers, including RBC factors for residuals and look through treatment for bond funds which have been discussed by regulators and interested parties in the recent past.

Updated RBC principles incorporating stakeholder feedback will be posted soon by the Task Force for another round of comments and discussion. The Task Force has an aggressive work plan to complete by year-end 2025, which includes finalizing the principles, developing quantitative guidelines/benchmarks, completing a gap analysis to identify inconsistencies (for life RBC initially), and creating an education and public message campaign of the strength of the RBC regulatory system.

The End Is Near for the VOSTF

In its second to last meeting in its current form, the VOSTF provided an update on CLO modeling. While the Structured Securities Group (SSG) within the VOSTF is operationally and technically ready to model CLOs, regulators plan to defer implementation for another year to 12/31/26 (via an amendment to the P&P Manual), to allow for progress and alignment with the CLO RBC project that is in process by the AAA under the RBC IRE WG. The RBC IRE WG did not meet at the Summer National Meeting (it will meet virtually on 9/8/25) but provided a verbal update that the AAA has a functional CLO model that can estimate risk across tranches, ultimately translating into RBC factors. At the same time, the working group is preparing for potential structural changes to the statutory blanks to be ready for year-end 2026 implementation. While the project is intended to develop RBC factors for all tranches of CLOs only, regulators want to apply the model and process to other types of asset-backed securities (ABS), which have been rapidly growing in insurers’ portfolios. One indirect implication of this lengthy process is that unless a new RBC proposal emerges, the current interim 45% RBC charge for residual tranches of ABS (for life insurers) will remain in place for some time.

Starting in 2026, the VOSTF will be restructured pursuant to the Financial Condition (E) Committee’s charges under the holistic investment framework introduced in 2023. Adopted on 7/28/25, and effective 1/1/26, the VOSTF will be renamed the Invested Assets (E) Task Force, which will be a commissioner-level group tasked with overseeing three sub-groups, studying new investment products that may pose a risk to individual insurers and the industry and coordinating with other NAIC groups to make policy changes to address such risks. The three sub-groups under the Task Force include: 1) Investment Analysis (E) Working Group, a small and new group that will monitor insurers’ invested assets to evaluate trends and new investment structures/characteristics, develop new portfolio analysis tools and advise state regulators on potential risks, 2) Securities Valuation Office (SVO) and Structured Securities (E) Working Group, which will be similar to the current VOSTF and responsible for the credit filing, NAIC designation and securities modeling processes, and 3) Credit Rating Provider (E) Working Group, which is a new group that will implement the due diligence framework of rating agencies that is in process of being developed with guidance from PWC, as well as the new discretion policy over NAIC designations in the filing exempt process.

Acknowledging these major changes, regulators recommended that they solicit feedback from all parties after one year to assess if adjustments to the groups’ charges and ownership are warranted. As we enter 2026 with several new investment-centric regulatory groups, several considerations and key question marks remain, notably:

• The Investment Analysis (E) Working Group will predominantly meet in regulator-only sessions to allow for discussions about specific companies and sensitive information. While closed door meetings will reduce transparency to the public, which has historically been a hallmark of the NAIC regulatory regime, the potential focus on outlier company-specific risks could lead to targeted, and not broad-based, major regulatory changes that impact the entire industry.
• The Securities Valuation Office (SVO) and Structured Securities (E) Working Group is charged with making recommendations on the scope of securities that should be modeled and/or filed with the SSG, potentially expanding beyond the current RMBS and CMBS (and potentially CLOs). Notably, collateralized fund obligations (CFOs) were listed in the exposure document, though there is no proposal for inclusion at the present time.
• The due diligence and evaluation of CRPs through both a qualitative and quantitative assessment is a high priority for the Credit Rating Provider (E) Working Group given the widespread use of ratings in the filing exempt process for assigning NAIC designations and the historical concern by regulators of differing ratings methodologies across CRPs. Further, a robust due diligence process of CRPs will mitigate the need for NAIC designation overrides via the discretion policy, making them used only in rare cases. As discussed during the VOSTF meeting, the first step in the due diligence process was taken by requesting extensive ratings history data from each CRP. While it is uncertain whether any existing CRPs will be “disqualified” for NAIC designation purposes in the future, the extensive due diligence being undertaken by the NAIC could level the playing field among the rating agencies at the conclusion of the evaluation process.

Potential Covariance Changes Could Impact Life Insurers’ RBC Ratios

The Life Risk-Based Capital (E) Working Group (Life RBC WG) is meeting on 9/11/25, in place of the Summer National Meeting, to receive updates on a potential proposal to update covariance calculations within the RBC formula for life insurers. This has been a relatively high priority for regulators given the simplicity of the current structure, having either 0 or 100% correlation between all risks, except for longevity and mortality which were previously updated. The Life RBC WG directed AAA to recommend a correlation approach between major C-risk categories (credit, equity, interest rate and insurance), which was presented during the Life RBC WG meeting in June 2025. Based on historical public data from 1982-2019 to proxy Crisks (for example, corporate bond defaults for credit and S&P total return for equity) calibrated for consistent statistical safety levels of the individual risk factors, AAA recommended correlations for market risks of 1) 50% between credit and equity, 2) 25% between interest rate and credit, 3) 50% between interest rate and equity, with additional nested correlations within credit and equity risks. As highlighted during the meeting, the potential impact to insurers’ RBC via an increase in required capital would vary by company depending on the mix of risks, but could be meaningful, particularly for life insurers with a higher concentration of equity (C1-cs, common stock) risk. The covariance proposal has not yet been exposed for comments; given the potential meaningful industry impacts and the fact that principles governing future RBC changes have not yet been finalized, this proposal is likely to be widely discussed by regulators and interested parties in the coming months.

IMR, Residential Mortgages, Private Securities in Focus at SAPWG

Reflecting its wide remit in statutory accounting practices and with the large principles-based bond definition now in practice effective 1/1/25, regulators in SAPWG took actions on a number of diverse initiatives, a few of which include:

• Adoption of the one-year extension of the effective date of net negative interest maintenance reserve (IMR) to 12/31/26, which allows negative IMR to be admitted for up to 10% of adjusted capital and surplus (C&S) as of the most recent financial statement date, capped at 10% of current unadjusted C&S. Regulators and interested parties continue to work on elements for a long-term IMR solution, including an updated definition of IMR, removal of hypothetical IMR and discussions on proof of fixed income reinvestment and reinsurance impacts.
• Exposure of revised guidance that would allow qualifying investment trusts holding residential mortgage loans to be reported on Schedule B—Mortgage Loans, providing favorable capital treatment in an operationally efficient vehicle. Previously, these statutory trusts were held on the investment subsidiaries reporting line on Sch. D-6-1, a concept that regulators are seeking to eliminate through edits to the statutory statement and RBC instructions.
• Initial proposal exposed for comment of new disclosure and reporting requirements for private securities (144A, Reg. D and 4(a)(2) securities), with new fields on statutory schedules including book adjusted carrying values, fair values (including level 2 and level 3 totals), deferred interest and paid-in-kind interest. The target effective date of these new disclosures is 12/31/26.
   

Conclusion

Going forward, with new investment-centric working groups, enhanced portfolio tools and increased reporting disclosures, the focus on insurers’ invested assets by regulators will only intensify. Furthermore, year-end 2025 annual statutory reporting will shed light into differing insurers’ interpretations of the newly implemented principles-based bond definition. Current RBC initiatives seek to update factors for structured securities, a growing asset class for insurers, first for CLOs by year-end 2026, with other asset-backed securities thereafter. With this increased focus on insurers’ investment portfolios, it will be imperative that RBC principles provide direction to regulators to ensure future revisions are enhancements to the framework developed through a transparent and analytically rigorous process.

Read More From General Atlantic

Important Disclosures

The views expressed in this piece are solely those of the author and are provided for informational purposes only. They should not be construed as investment, financial, legal, or other professional advice. This is an opinion article and does not constitute a recommendation or endorsement of any particular strategy, security, or investment. Readers should conduct their own research and consult with qualified professionals before making any financial decisions. GA does not accept or assume responsibility to you or any other person in connection with the provision of the Information. You acknowledge that you have made, and will continue to make, your own investment decisions without reliance on any representation or warranty of, or advice from, GA or its representatives.

GA makes no representation or warranty, either expressed or implied, to you as to the accuracy or completeness of the Information or the data derived therefrom and we shall not have any liability whatsoever (whether direct or indirect, in contract, tort or otherwise) to you with respect to the accuracy or completeness of the Information. GA has no responsibility to you for the contents of the Information, and you hereby expressly waive, and shall cause each person to whom you give or make available Information to waive, any and all claims of any kind or nature whatsoever against GA that may arise out of or in connection with your use and disclosure of the Information. You will indemnify and hold harmless GA and its Representatives from any claims brought by you (or anyone to whom you directly or indirectly disclose Information or information derived from the Information) related to or arising from the Information or information derived from the Information.