U.S. life insurance bond factor changes
- Proposed changes to RBC bond factors will increase required capital and decrease RBC ratios for U.S. life insurers.
- The impact of the proposed changes is uneven, as some asset classes are targeted for much greater RBC charge increases than others, while some even have RBC charge decreases.
- The proposed RBC changes will result in much more flexibility in what constitutes an RBC efficient portfolio and RBC focused insurers should consider changing their strategic allocation and increasing tactical flexibility.
- The fixed income that will become more capital efficient includes very high quality investment grade (AA- to AAA), high quality below investment grade (BB+/BB) and various commercial mortgage loan strategies (CMLs) including mezzanine debt.
- Since RBC charges will increase on most fixed income, many types of alternative assets will look relatively more attractive and life insurers should consider them—furthermore, RBC covariance changes will result in a 10%–20% decrease in post-diversification capital charges on equity-like alternatives for many life insurers.
- We expect the median RBC ratio for life insurers to fall by about 36 points, but the impact will vary widely and ultimately depend on implementation details.
- In a future paper, we will address how insurers that are constrained by both RBC and rating agency capital models should respond to the changes in RBC factors.