A new bond definition… Are you ready for it

Quick hits from the National Association of Insurance Commissioners (NAIC) Summer Meeting, held in Chicago on August 12-15, 2024.

Here's what you need to know

The Valuation of Securities (E) Task Force adopted the Securities Valuation Office (SVO) discretion proposal, giving regulators a 'backstop' to override NAIC Designations they believe are inappropriate. After a year of industry feedback and regulator collaboration, the current version of the initiative is more palatable to insurers, with increased transparency and greater participation in the process, along with recognition that it will only be used in rare cases. The formal adoption by the Financial Condition (E) Committee is expected to occur in a separate meeting on August 29.

The new principles-based bond definition goes into effect January 1, 2025, necessitating insurers to review their existing structured credit portfolios. The definition was adopted last year and requires insurers to evaluate bond portfolios, in particular public and private asset-backed securities, for continued bond treatment on Schedule D. Given the practical challenges of implementing a principles-based regulation, during the Statutory Accounting Principles (E) Working Group meeting, regulators adopted an issue paper and exposed a working Q&A document for comment which outlines key provisions of the new bond definition and offers implementation guidance.

The 45% risk-based capital (RBC) charge for residuals will be in place for a relatively long "interim period". With the American Academy of Actuaries (AAA) noting a delay in the project to develop RBC factors for asset-backed securities (ABS) during the Risk Based Capital Investment Risk and Evaluation (E) Working Group meeting, the capital charge for residuals will remain in place for the foreseeable future. In what would be a welcome (and overdue) development, the new priority for the working group is to holistically review the RBC treatment of bond funds to ensure consistency across structures.

The Financial Condition (E) Committee has begun to act on its holistic investment framework, with a focus on the use of credit rating providers (CRPs). The group issued a draft request for proposal (RFP) in search of an independent consultant to develop a due diligence framework for the ongoing regulatory use of CRPs. As heavy consumers of ratings, regulators want to develop parameters for CRPs in the NAIC designation process, while also having the ability to perform individualized credit assessments and utilize discretion when needed.

Interested in diving deeper? Download the detailed meeting notes and takeaways on these important investment regulatory proposals.