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Following the Global Financial Crisis (GFC), insurers faced a low-yield environment, prompting a significant shift towards higher-yielding alternative assets. This transition encompassed various strategies, such as private debt and equity placements, structured products, and cost-effective investment vehicles, including custom-designed, non-SEC registered funds tailored to their specific requirements. Up to the present, regulations have been tactically modified to evolving market dynamics. An August 2023 memo from the Financial Condition (E) Committee proposes a comprehensive reassessment of the regulatory framework for insurers' investments. This initiative acknowledges the imperative to modernize the existing structure to better align with contemporary needs. This report builds on the memo’s aspirational vision to modernize the NAIC’s oversight of investment risk and to use available resources cost-effectively, aiming to achieve the principle of “Equal Capital for Equal Risk.”Given the complexities involved with the needed depth and breadth of tools with considerations for the broad set of capital markets, statutory accounting, RBC, etc., this report introduces candidate core principles for investment risk oversight:

  1. Clarity–ensuring each component of the framework has a well-articulated objective and definition.

  2. Consistency–ensuring different types of investments are handled objectively and consistently across the framework.

  3. Governance–ensuring ongoing governance across the framework, including a model risk management framework with defined standards.

This report also introduced supervisory roles and responsibilities for insurers, NAIC staff, regulators, and external consultants, with deliberate considerations for potential conflicts of interest that tie back to the core principles. By deliberately leveraging resources efficiently and approaching the redesign to balance prudence and cost-efficiency while incorporating lessons learned from initiatives such as CCAR and Solvency II, we are confident that the U.S. insurance regulatory framework can be adapted to benefit policyholders and insurers

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The post-Global Financial Crisis (GFC) low-yield environment had insurers move more heavily toward higher-yielding alternative assets. These included strategies using private placements of debt and equity, structured products, and lower-cost, efficient investment vehicles, often bespoke private, non-SEC registered funds designed to address insurers’ unique needs. To date, the changes to investment guidelines have tactically responded to changing market conditions. The Financial Condition (E) Committee August 2023 memo outlines a holistic rethink of how insurers' investments are regulated, recognizing the need to modernize the framework.

This report addresses one aspect of the proposal by outlining candidate principles along with roles and responsibilities for overseeing designations, a mechanism that would allow for the prudent use of rating agencies – without mechanist reliance on such ratings or wholesale outsourcing of risk analysis to the NAIC. The mechanisms we propose to oversee designations deliberately consider the efficient use of resources, including NAIC staff, rating agencies, and other external solution providers. They also deliberately address challenges in credit risk measures and assessing their performance, including:

  • Measures of default risk, an inherently remote event, cannot be assessed robustly given the dearth of default data.

  • Level-setting risk across asset classes is challenging because different risk factors impact different credit segments (e.g., corporate vs. municipal).

  • Controlling for variation in methods and standards across Credit Assessment Providers whose methods necessarily involve subjectivity.

  • Avoiding conflicts of interest driven by rating agencies’ commercial incentives.

Statutory Accounting Principles are designed to provide transparency over solvency by separately reporting the value of reserves and surplus that are part of admitted assets. Reserves represent the value of assets required to support financial risks, benefits, and guarantees associated with the policies, with the remaining value of admitted assets reported as surplus, sometimes referred to as 'Capital and Surplus,' and used in to provide an adequate margin of safety. Life insurance policies and fixed-income assets are largely accounted for symmetrically at cost and insulated from interest rate fluctuations. Interest Maintenance Reserve (IMR) is an accounting construct designed to safeguard against the potential misrepresentation of surplus due to asset sales and keep the anticipated investment yield consistent with that needed to support the policies.

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In a declining interest rate environment, an insurer could sell fixed-income assets, recognize gains, and increase surplus. In reality, the sale and reinvestment would be in lower-yield assets with insufficient interest payments to support policies. This shortfall highlights the ongoing need for the gains to support the policy block rather than, say, be paid off as a dividend. To align the balance sheet with the economic reality, IMR defers interest rate-related gains from fixed-income asset sales and requires them to be amortized through income over their remaining life. Without the IMR offset (i.e., through the deferral of the gains), the surplus would inappropriately portray a false representation of financial strength.

Similarly, fixed-income portfolio sales in rising interest rate environments could result in a misleading reduction of surplus. The economics mirror those above, with the company reinvesting in higher-yielding assets with interest payments that exceed those needed to support policies that directionally offset the realized loss. The NAIC only recently adopted admittance of negative IMR as an asset in surplus and capital, with qualifications on an interim basis; amortized negative IMR had already been incorporated into earnings. Prior to allowing for admittance of IMR offset (i.e., through the deferral of the losses), the surplus was inappropriately showing decreased financial strength, which was increasingly constrained in the context of the recent dramatic rise in interest rates. The perverse incentives had insurers focus on managing statutory financial outcomes, limiting fixed-income transactions, and deviating from long-standing investment practices, including prudent asset-liability management (ALM) and risk management behaviors related to portfolio rebalancing. This seemingly obscure piece of accounting is impacting a broad set of investment strategies and business models, including the likes of pension risk transfer (PRT).

Life insurers' balance sheets in the United States are robust, and solvency is not under question, with insurance policies experiencing directionally equivalent movements in valuation as fixed-income assets. Nevertheless, the stakes are high, with life insurers facing close to an estimated $700 billion of unrealized losses on fixed-income investments reported on Schedule D alone, coupled with our empirical analysis of insurers’ fixed-income trading activity that suggests qualifications for admittance possibility resulting in life insurers facing continued constraints with managing their fixed income portfolios prudently.  Acknowledging the need for a more thoughtful long-term solution, an ad hoc group is likely to be formed to explore long-term solutions reflecting the 2025 sunset of the temporary guidelines.

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The rate of change to the regulatory landscape governing US insurance investments is only accelerating, with broad implications for investment strategy. This report explores developments from the National Association of Insurance Commissioners (NAIC) 2023 Summer National Meeting with possible changes to the treatment of investments. Several initiatives have the potential to result in far-reaching implications for insurers’ investment strategies and capital markets:
• Classification of investment vehicles, including bonds and residual interest of structured products.
• Revisions to the definition and oversight of ratings-based designations.
• Revisions to the capital framework to potentially differentiate Collateral Loan Obligations (CLOs) and structured assets more broadly.
In addition, the investment community closely watched the Financial (E) Committee (E-Committee) meeting to deliberate on its memo that proposes a holistic framework for investment guidelines. The memo could lead to significant implications for the path and outcome of how investment guidelines will be revised. While potential long-term implications are noteworthy, the E-Committee Chair clarified that they "do plan to hear from all interested parties as we finalize this document, but we do not plan to stop any of the work that is currently ongoing," citing three current initiatives (i.e., those related to CLO model-based designations, differentiation of C-1 capital for structured assets, and SVO discretion over designations). However, it was noted that these are deliberative processes that will continue with no commitment to adoption in their current form.
This report reviews recent developments with efforts to revise NAIC investment guidelines, their potential implications for investment strategy, and what might happen next.


What’s next for the rules that govern insurers’ investments: An update from the 2023 NAIC Summer National Meeting


The NAIC Summer National Meeting is having the investment community focused on the announcement by regulators for an evaluation of the overall framework that governs insurers’ investments. Noticeable shifts in the investment strategies toward private assets, along with structured and complex assets, had the NAIC embark on significant multi-year updates to the RBC and STAT frameworks ranging from asset classification (i.e., proposed definitions for bonds and residual interests), designations (e.g., proposed definition), cashflow testing (AG 53) to capital assignment (e.g., CLOs and ABS).  Join Chair of the Valuation of Securities (E) Task Force and Iowa's Chief Investment Specialist Carrie Mears and Bridgeway Analytics' Amnon Levy on Stewart Foley's August 23 live webinar (register here). The three will unpack developments from the 2023 NAIC Summer National Meeting and provide insights into potential implications of the changing landscape that governs insurers’ investments, including: 

  • Designations, and the use of rating agencies

  • Revisions to the treatment of structured assets and investment vehicles

  • Potential implications from a proposed revision to modernize investment governance

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The changing rules governing US insurers’ investments: Capital requirements and the role of agency ratings


In response to shifting investment strategies, insurance regulators and the National Association of Insurance Commissioners (NAIC) have embarked on a multi-pronged revision to investment guidelines that will better align with the new landscape, including the following: 

  • Classification of assets, with principles-based approaches which will impact the likes of debt issued by investment vehicles and structured assets, as well as their equity and residual interests

  • Designation process which relies on agency ratings, with NAIC staff and regulators vocalizing concerns of rating agencies lacking consistent standards, notably private ratings that, by their private nature, are not subject to market oversight

  • Capital allocation across assets, with an initial focus on addressing potential capital arbitrage for structured assets and investment vehicles, and broader aspirations of aligning capital requirements across investments with their economic risks to avoid perverse incentives


With trillions of dollars in insurers' investments likely impacted, the multi-year effort will have broad implications.

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Trends in the Ownership Structure of US Insurers and the Evolving Regulatory Landscape, Q2 2023 Insurance AUM Journal 


The United States insurance regulatory landscape is experiencing broad changes in reaction to noticeable shifts in ownership structure that have resulted in changing conditions in investment markets and the financial services industry. This report explores insurance industry trends and evolving NAIC guidelines designed to support the new landscape. The report includes a review of how the new rules help address possible concerns with conflicts of interest associated with forms of ownership and control. 

About the Authors

Amnon Levy founded Bridgeway Analytics which supports the investment and regulatory community in navigating complex capital markets. Amnon has led the development of award-winning quantitative solutions actively used by 200+ financial institutions and their regulators, including 2021 redesigned NAIC C1 bond factors.


Bill Poutsiaka is a senior financial services executive with considerable experience and accomplishments, including successful strategic and operational transformation as CEO, Chief Investment Officer, and board member for global insurance and asset management businesses.


Scott White is the Virginia Commissioner of Insurance and Secretary-Treasurer of the National Association of Insurance Commissioners (NAIC).  He is also a member of the International Association of Insurance Supervisors (IAIS) Macroprudential Committee. He served as Chair of the NAIC’s Financial Condition (E) Committee from 2020-2022.

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Efforts to Reform NAIC Investment Guidelines: Lessons Learned from History

Shifts in insurers’ investment strategy over the last decade have motivated state regulators to embark on broad reforms to govern the new landscape better. Given the scope of change, possible unintended consequences are top of mind. Our latest report explores the lessons learned from past revisions to guidelines and unintended consequences for investment strategy and capital markets more broadly. Importantly, we relate those lessons to current efforts to revise guidelines, including:

  • Proposals related to designations and limiting the use of agency ratings

  • The proposed interim increase in capital to 45% for residual tranches of structured assets


We do this through two case studies:

  • The 2009 Mortgage-Backed Securities (MBS) reform introduced model-based designations to replace agency ratings. The change was partly to provide capital relief for insurers holding MBS tranches that were downgraded due to deteriorated real estate values that came with the Great Financial Crisis (GFC). However, the change also incentivized insurers to hold on to and invest in new sub-investment grade MBS. In their study, Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class, Becker, Opp and Saidi, show that by 2015, insurers’ sub-investment grade MBS comprised over one-third of their overall MBS holdings, dwarfing the 5% observed for other asset classes (figure 1 from their study reproduced)

  • The so-called C1 bond factor cliff associated with the punitive pre-2021 NAIC 3 designation, is roughly equivalent to the S&P BB credit rating. In a separate study, Regulatory Pressure and Fire Sales in the Corporate Bond Market, Ellul, Jotikasthira, and Lundblad explore patterns related to insurers selling bonds when downgraded below investment grade. With insurers being the most significant single bond market participant, often holding one-third of all outstanding investment-grade corporate bonds, the collective divesting of downgraded issues resulted in a ‘fire sale’ with transaction prices deviating from fundamental values by a substantial median of 11%. Unfortunately, insurance companies that faced capital structure constraints were more likely to sell downgraded bonds, putting further strain on their solvency.

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