NAMIC Urges NAIC Not to Increase Risk-Based Capital Levels

August 26, 2003

The National Association of Mutual Insurance Companies (NAMIC) has asked the National Association of Insurance Commissioners (NAIC) not to increase the Risk Based Capital (RBC) risk factor for property/casualty companies.

RBC requirements calculate the amount of capital an insurer should hold as a function of the types of risks it has assumed. Insurers whose capital falls below pre-specified percentages of its RBC requirement are subject to various actions intended to mitigate insolvency.

An ad hoc subcommittee of the NAIC’s Risk-Based Capital Task Force had requested comments on its proposal to increase the RBC risk factor from the current 50 percent to 75 percent.

“Promulgation would likely require significant additions of capital to
the industry, resulting in greater expense to policyholders or causing companies to exit the market,” said William Boyd, NAMIC financial regulation manager. “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.”

“The ad hoc subcommittee must very carefully deliberate the proposed tightening of RBC standards and does not now appear to have enough information to do so fully,” continued Boyd.

Boyd recommended integration of some of the following into a program
intended toward intervention before occurrence of insolvency:

* Trend tests of variables associated with viability, including
RBC (economists know this as time-series analysis) may be useful in prediction.
* Audits of actuarial data underlying reserves and pricing, and
greater weight on actuarial opinions.
* Risk assessment as developed by the Risk Assessment Working
Group.
* Financial examinations.

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