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Our latest highlights - with much more to be found in News & In Print
A Bridgeway Analytics NAIC Brief: NAIC Shifts from Aspiration to Execution of Revising Investment Oversight
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In his latest Insurance Asset Risk article, Amnon explores the NAIC's commitment to overhauling its investment regulatory framework and the scale of the changes underway. Significant updates have already reshaped investment classification guidelines, and broader reforms to investment oversight are on the horizon.
In the article, Amnon explores the now-live principles-based bond definition and its potential significance. While the vast majority of debt investments will continue to qualify as bonds, avoiding the complications of non-bond debt classification, revisions to the RBC framework may result in different bonds receiving significantly different treatment.
The new classification under the bond project is coupled with significant potential changes to the Designation process and risk-based capital (RBC). Intrinsic Price Designations for collateralized loan obligations and proposed heightened governance over privately rated debt can have downstream implications for investment strategies. In addition, efforts to differentiate RBC of structured assets can result in potential incentives to redirect investment flows.
Beyond the existing workstreams, the NAIC has taken on significant parallel long-term initiatives to develop a due diligence program for the use of agency ratings in Designations and introduce RBC governance with aspirations of equal capital for equal risk.
Investment guidelines are poised for sweeping revisions over the next several years. As the landscape evolves, the investment community will seek to assess the implications and identify practical transition tools.
NAIC 2025 Spring National Meeting Update
Shifting from Conceptual Groundwork to Practical Execution
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Aspirations of RBC Consistency, Agency Ratings, the Bond Project, and So Much More
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The 2025 Spring National Meeting highlighted the NAIC’s commitment to overhauling its investment regulatory framework and underscored the scale of the changes underway. Significant updates are already reshaping investment classification guidelines through a phased implementation approach, with broader reforms to investment oversight also on the horizon. As the landscape evolves, the investment community seeks to assess the implications and identify practical transition tools. Key developments included:
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Classification of investments. The principles-based bond definition, which is now effective, has been central to revising the classification of investments, including investment funds, across varying characteristics.
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Designations. To address concerns over the blind reliance on agency ratings in NAIC Designations, which provide risk assessments of insurers’ debt portfolios valued in the trillions, the NAIC recently adopted procedures extending staff discretion over Designations. NAIC staff have also been developing a CLO Designation Model.
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Capital differentiation. The NAIC has initiated several efforts to differentiate capital requirements for asset classes, including investment funds and asset-backed securities, to align with their economic risks more closely.
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Modernizing investment oversight. The Financial Condition (E) Committee has taken on the long-term goal of modernizing the NAIC’s investment oversight framework and is planning to hire a third party to assist with designing a due diligence process for overseeing the use of agency ratings.
Beyond reviewing recent developments and what might happen next, this report explores the potential implications of the changes in investment strategy and effective ways to navigate the evolving landscape.
We hope you find this resource helpful
It is consistent with our goal of bringing value to our community
About the Authors
Amnon Levy is the CEO of Bridgeway Analytics and led the redesign of the C-1 factors on behalf of the NAIC and ACLI in 2021
Brett Manning is a Senior Predictive Analytics Specialist at Bridgeway Analytics
Nitsa Einan is Bridgeway Analytics’ Chief Legal and Product officer
LIVE WEBINAR
NAIC's Investment Risk Oversight is Evolving at an Accelerated Pace
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Date: Tuesday, April 8th, 2025
Time: Noon ET
📌 Register Now
Join Wisconsin Insurance Commissioner and Chair of the NAIC Financial Condition (E) Committee, Nathan Houdek, alongside Bridgeway Analytics CEO and AIF Institute Fellow Amnon Levy, as they provide an in-depth update following the NAIC Spring National Meeting.
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The AIF Institute Center for Insurance Investing, in collaboration with Bridgeway Analytics, is hosting an exclusive live webinar to keep the community informed. The NAIC is rapidly advancing its investment risk oversight framework, aiming to modernize regulatory approaches in response to evolving market dynamics. These developments have significant implications for insurance investors, particularly concerning asset classifications, the use of agency ratings, and RBC requirements.
We look forward to your participation!
Bridgeway Analytics Comments on the Risk-Based Capital Model Governance (EX) Task Force, 2025 Goals and Proposed Charges
(Access the report here)
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In a significant move, the newly formed Risk-Based Capital (RBC) Model Governance (EX) Task Force (RBC-MG-TF) is requesting public comment on a posted Memorandum describing its 2025 goals and proposed charges (i.e., its mandate).
The Memo explains that Insurers' investment strategies have changed significantly, potentially limiting the degree to which regulators can use RBC to quantify risk exposure and identify weakly capitalized insurers. The Memo acknowledges the lack of consistency across the underlying methodologies, specifically flagging those that underpin the Life RBC framework, which the RBC-MG-TF will assess and develop guiding principles for updating. The focus will be on increased RBC precision for investments, ensuring capital requirements maintain their current strength, and appropriately balancing solvency with the availability of products to meet consumer needs.
The initiative is significant and dovetails with efforts to develop a due diligence framework to oversee the use of agency ratings in Designations, aligning with the Framework for Regulation of Insurer Investments – A Holistic Review. We are encouraged by and optimistic about the NAIC’s efforts to initiate and sequence the steps needed to achieve its aspirational vision of Equal Capital for Equal Risk. Bridgeway Analytics is committed to supporting these initiatives and looks forward to continued engagement with the RBC-MG-TF and the NAIC.
The Bond Definition Is Live & The Times They Are A-Changin'
(Access the report here)
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In his latest Insurance Asset Risk article, The Bond Definition Is Live & The Times They Are A-Changin', Amnon Levy of Bridgeway Analytics explores how insurers' shifting investment strategies have prompted revisions to investment guidelines and the resulting feedback loop.
Updated guidelines under the NAIC’s bond project, which went into effect on January 1, 2025, marked a significant milestone in the evolution of investment risk oversight. In the coming years, there are plans for broader changes, including further refinement to classification, governance over the use of agency ratings in Designations, NAIC model-based Designations for CLOs, and revisions to the Risk-Based Capital (RBC) to more closely align with differentiated economic risks across investments.
In the article, Amnon highlights the close attention regulators have given to the shifts in life companies’ investment strategies over the last several years. The income generated from these shifts has played a critical role in helping address the insurance crisis, benefiting life and property & casualty insurers and policyholders. In the case of property & casualty companies, shifting investment strategies have generated additional income, equating to an estimated 40% of industry net income in 2023!
Shifts of this magnitude are naturally flagged by regulators, who must assess the degree to which the rules are appropriate under the new landscape and revise them accordingly.
A Silver ART-IC Lining
The bond definition and surrounding guidance are nuanced, and the broader set of interdependent revisions magnifies the challenges of navigating the rules (e.g., changes in classification triggering changes to RBC). Tools to overcome the silo expertise needed to assess the implications of changes to accounting and capital for investment strategy are critical. Insurers must adapt their processes to reduce administrative burden, automate and streamline their classification, and avoid costly missteps. To address these challenges, we developed ART Investment Classification (ART-IC) Tools, designed to educate users and streamline classification under NAIC Statutory guidelines, including the principal-based bond definition. ART-IC Tools analyze prospectuses and memorandums, assessing each security and providing guidance on bond qualification, NAIC Schedule reporting, and treatment, enabling insurers to adapt to regulatory demands and reduce administrative burdens.
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Want to learn more about the bond definition and its implications? Check out the full Insurance Asst Risk article, The Bond Definition Is Live & The Times They Are A-Changin'!
Effectively Navigating the Evolving Landscape Governing Insurers’ Investments:
A Post-NAIC 2024 Fall National Meeting Update
(Access the report here)
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In 2025, significant changes to investment classification guidelines will be rolled out, with plans underway for broader changes to investment oversight in the coming years. The investment community is looking for ways to assess the implications and effective tools to navigate the evolving landscape. The 2024 Fall National Meeting highlighted the scale of the changes, with key developments that included:
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Classification of investments. The principles-based bond definition, effective 2025, has been central to revising the classification of investments, including investment funds, across varying characteristics.
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Designations. To address concerns over the 'blind reliance' on agency ratings in NAIC Designations, which provide risk assessments of insurers’ debt portfolios valued in the trillions, the NAIC recently adopted procedures extending staff discretion over Designations. NAIC staff have also been developing a CLO Designation Model.
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Capital differentiation. The NAIC has initiated several efforts to differentiate capital requirements for asset classes, including investment funds and asset-backed securities, to align with their economic risks more closely.
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Modernizing investment oversight. The Financial Condition (E) Committee has taken on the long-term goal of modernizing the NAIC’s investment oversight framework and is planning to hire a third party to assist with designing a due diligence process for overseeing the use of agency ratings.
Beyond reviewing recent developments and what might happen next, this report explores the potential implications of the changes in investment strategy and effective ways to navigate the evolving landscape.​
​We hope you find this resource helpful
It is consistent with our goal of bringing value to our community
About the Authors
Amnon Levy is the CEO of Bridgeway Analytics and led the redesign of the C-1 factors on behalf of the NAIC and ACLI in 2021
Brett Manning is a Senior Predictive Analytics Specialist at Bridgeway Analytics
Nitsa Einan is Bridgeway Analytics’ Chief Legal and Product officer
The Shifting Investment Strategies Helping Address The P&C Insurance Crisis: Implications for Investment Risk Oversight
(Access the report here)
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Certain sectors of the property & casualty insurance market are facing significant challenges, if not in a state of crisis, struggling to meet commercial objectives, with regulators attempting to revise guidelines to achieve societal needs for insurance. Climate hazards and other emerging risks have driven increases in loss frequency and severity, while high post-pandemic inflation has driven up the cost of claims, resulting in headlines warning of a Possible Collapse of the U.S. Home Insurance System with policies and the regulatory framework not calibrated to today’s realities. An often-overlooked factor is the income generated from investments, particularly the significant shifts in investment strategies toward common stock, as well as illiquid, higher-yielding, and complex credit. As Warren Buffet describes, the collect-premiums-now, pay-claims-later model leaves property & casualty companies holding large sums of cash float. Policies generating underwriting losses can, depending on the magnitude of the loss, be part of a viable business model if the float can generate sufficient yield. Loss-generating underwriting blocks become viable business models if the float can generate sufficient yield. Sufficient yield limits the degree to which insurers must raise premiums or withdraw from loss-generating lines and markets. The extended period of low yields in the wake of the Global Financial Crisis had downstream implications for loss-generating underwriting blocks and the degree to which they can fit into a viable business model.
We estimate that shifting investment strategies have generated additional income, equating to roughly 40% of industry net income in 2023, benefiting insurers and policyholders.
However, these shifting strategies compound the complexities as the industry navigates the unchartered waters of underwriting and policy pricing in the face of climate hazards and other emerging risks, all of which introduce balance sheet and liquidity risks specifically. Meanwhile, regulators must assess the degree to which current guidelines are appropriate for the new landscape, dovetailing with the National Association of Insurance Commissioners (NAIC) formative efforts to modernize its Investment Risk Oversight Framework, which we support wholeheartedly. This report analyzes the role of investment income in sustaining the industry and explores the significant shifts in investment strategies employed by property & casualty insurers.
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We hope you find this resource helpful
It is consistent with our goal of bringing value to our community
About the Authors
Amnon Levy is the CEO of Bridgeway Analytics and led the redesign of the C-1 factors on behalf of the NAIC and ACLI in 2021
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
Brett Manning is a Senior Predictive Analytics Specialist at Bridgeway Analytics
Alex Olteanu is a Data Analyst at Bridgeway Analytics
Bridgeway Analytics Comments on the Draft RFP for the Development of a
Due Diligence Program for the Prudent Use of CRPs
(Access the report here)
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In our comment letter to the E-Committee, we share our strong support for the initiative to reduce the passive (i.e., "blind") reliance on agency ratings while utilizing their output within a robust and transparent due diligence framework. Bridgeway Analytics has previously pointed out that U.S. insurers’ investment oversight is somewhat unique compared to other jurisdictions. European bank and insurance guidelines, for example, generally discourage using agency ratings and instead encourage internal models that monitor investment risk when assessing creditworthiness and determining capital requirements. The cost of maintaining these frameworks is significant. For context, the annual cost of running stress tests can exceed $100 million at some banks, with investment risk monitoring, generally using internal ratings, consuming a significant portion of the cost. Instead, prudent use of agency ratings, carefully balancing enhanced oversight and associated costs, can provide significant savings for insurers, and the NAIC/regulators, who would otherwise need to assess insurers’ internal models, can provide valuable downstream savings to policyholders.
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Our letter focuses on CRP Due Diligence and Objectives, the first of three points on which the posted draft RFP requests feedback, particularly its second and third sub-points: (2) Are there additional objectives we should consider that are not included here? (3) Are there objectives that interested parties feel should be excluded, and why? As our letter explains, we encourage the E-Committee to consider a targeted and smaller-scoped, but still significant, proof of concept (POC) exploring the degree to which comparisons of agency rating to corresponding NAIC Designation mappings (i.e., the relative prudence of agency ratings) and SVO’s own Designations can be quantitatively measured. In our view, assessing the dimensions and degree to which differences across agencies can be quantitatively measured is needed to guide the more significant effort of designing and implementing the oversight framework. This step will ensure that the design of a robust governance structure for due diligence is built on a robust quantitative foundation.
The Implications of CLO Intrinsic Price Designations for Investment Strategies & Capital Markets
(Access the report here)
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This report explores the properties of CLO Intrinsic Price Designations, the ways they depart from the existing RBC framework, and the capital-favorable investment strategy incentives they generate. Critical to the discussion, we provide guidance on aligning Intrinsic Price Designations with the RBC framework. The hope is for the analysis to serve as a starting point in assessing the materiality of various modeling features that can possibly improve the RBC framework.
In spirit, the Intrinsic Price Designations are assigned to equate expected discounted lifetime loss with capital. While the final CLO model has not yet been released, our best estimates suggest the economic incentives it generates will depart significantly from the current framework:
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Shorter-dated, disproportionately low-credit quality tranches receive more favorable Intrinsic Price Designations. Discounting aside, if the Intrinsic Price method were based on Moody’s structured finance methodologies, an A2-Moody’s rated 5-year bond would receive over 40 times the capital of a 1-year A2-rated bond.
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The Intrinsic Price framework relies on rates at origination to discount future losses, and investing in assets that originated when interest rates were elevated can allow for 10-20% capital relief.
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A shift away from Aaa-rated tranches toward lower-rated, higher-yielding Aa and A-rated tranches receiving a favorable Designated 1A, which can otherwise receive more than 500% higher capital.
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Insurers will likely attempt to avoid a possible cliff for some tranches in the A to Baa rating range, where Designations may swing with small changes to the economic scenario model.
Historically, regulatory changes of this significance have resulted in noticeable shifts in insurers’ investment strategies and capital markets. In addition, the regulatory guidelines can have downstream implications for policy affordability, with Intrinsic Price Designations disincentivizing longer-dated investments, resulting in longer-dated policies being otherwise more expensive.
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We hope you find this resource helpful
It is consistent with our goal of bringing value to our community
About the Authors
Amnon Levy is the CEO of Bridgeway Analytics and led the redesign of the C-1 factors on behalf of the NAIC and ACLI in 2021
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
Brett Manning is a Senior Predictive Analytics Specialist at Bridgeway Analytics
What’s Next for the Rules that Govern Insurers’ Investments:
Developments from the NAIC’s 2024 Summer National Meeting
(Access the report here)
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At the NAIC 2024 Summer National Meeting in Chicago, regulators advanced their initiatives to refine investment guidelines in response to insurers’ evolving strategies. Central to these efforts is better aligning the rules with the underlying differentiated economic risks across asset classes—a complex challenge given the significant variation in their risk characteristics and the intricate relationship between the statutory and risk-based capital frameworks. Key developments included:
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Classification of investments. The principles-based bond definition has been central to revising the classification of investments across varying characteristics, such as the debt of or direct investments in funds (e.g., private or SEC-registered funds).
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Assigning Designations. Significant concerns have been raised over the 'blind reliance' on agency ratings in NAIC Designations, which monitor insurers’ debt portfolios valued in the trillions. These concerns have led to the NAIC designing procedures extending staff discretion over Designations. The challenge lies in ensuring consistent credit risk rankings despite differing methodologies and standards used by rating agencies and the increasing use of private ratings, which lack market oversight due to their confidential nature.
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Capital differentiation. Differentiating capital requirements for asset classes that exhibit differentiated risks, including investment vehicles and the debt and residual interest of asset-backed securities.
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Modernizing investment oversight. Progressing with the Financial Condition (E) Committee’s long-term goal of modernizing the NAIC’s investment oversight framework
This report reviews these recent developments, their potential implications for investment strategy, and what might happen next.
We hope you find this resource helpful
It is consistent with our goal of bringing value to our community
About the Authors
Amnon Levy is the CEO of Bridgeway Analytics and led the redesign of the C-1 factors on behalf of the NAIC and ACLI in 2021
Brett Manning is a Senior Predictive Analytics Specialist at Bridgeway Analytics
Nitsa Einan is Bridgeway Analytics’ Chief Legal and Product officer
Explore What’s Next for the Rules That Govern Insurers’ Investments: Developments from the NAIC’s 2024 Summer National Meeting
(listen to the podcast here)​
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Carrie Mears, Chief Investment Specialist at Iowa's DFS, who Chairs VOSTF and the Investment Framework Drafting Group, Bridgeway Analytics' Amnon Levy, and InsuranceAUM.com's Stewart Foley, explore several key initiatives, including:
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The classification of asset-backed securities and non-SEC registered funds.
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Extending NAIC staff discretion over agency rating-based Designations.
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Designations and capital of CLOs and ABS.
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The Investment Framework Work Plan to revise investment risk oversight.
Modernizing the NAIC’s Investment Risk Oversight Framework - InsuranceAUM Podcast
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Wisconsin Commissioner and Financial Condition (E) Committee Chair Nathan Houdek, Amnon Levy, and InsuranceAUM.com's Stewart Foley explore efforts to modernize the NAIC’s investment risk oversight framework and prudent use of agency ratings. Join them in breaking down the impetus for needed revisions, primary and trending concerns, the long-term vision, and stop-gap measures.
A New Dawn in Investment Oversight:
An Update from the 2024 NAIC Summer Meeting
(Access the report here)
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In his latest collaboration with Insurance Asset Risk, Bridgeway Analytics' Amnon Levy explores the unique nature of U.S. insurers’ investment oversight in its reliance on agency ratings. European bank and insurance guidelines, for example, generally discourage the use of agency ratings and instead encourage internal models that monitor investment risk, which comes at a cost. While the U.S. framework has the potential for significant cost savings, it requires appropriate governance, given the nature of agency ratings. The NAIC has initiated a Work Plan and Framework to modernize the very foundation of how insurer investments are regulated. This shift is not merely an incremental adjustment—it is intended to revisit the rules that have long underpinned the industry, and its implications can be profound.
The Inflation Management Opportunities In The Insurance Industry Today
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Inflation has become a major focus for insurance companies and many others interested in the industry. We've designed a new approach to exploiting the opportunities, combining new analytical tools with long-standing risk management principles for financial intermediaries.
The Authors
Bill Poutsiaka, Enterprise Driven Investing, LLC
Michael Ashton, Enduring Investments
Amnon Levy, Bridgeway Analytics
Bridgeway Analytics RBC-IRE-WG Comment Letter Re: Oliver Wyman Residual Tranche Report
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The NAIC adopted interim 45% capital charges for residual interests of Asset-Backed Securities held by life companies; the charges previously aligned with the 30% equity charge assigned to operating companies. The adoption was a compromise with strong and differing views. The capital charges are interim in that they are expected to be overridden as the Academy progresses with a long-term solution for the treatment of structured assets. Oliver Wyman conducted an empirical assessment of the 45% interim ABS residual tranche C-1 capital charge on behalf of the Alternative Credit Council (“ACC”), the private credit affiliate of the Alternative Investment Management Association Ltd (“AIMA”), to which the Risk-Based Capital Investment Risk and Evaluation (E) Working Group (RBC-IRE-WG) requested comment.
Our comment letter to the Risk-Based Capital Investment Risk and Evaluation (E) Working Group on the Oliver Wyman Residual Tranche Report explores:
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The Oliver Wyman study in the context of the C-1 framework. We focus entirely on the technical aspects of the approach. While we do not dismiss valuable lessons from the study, the methods depart from those used to estimate C-1 charges for bonds, equity, and other assets in several dimensions, including a lack of consideration for portfolio concentration and diversification effects. In addition, the study takes on the significant effort of assessing past experience and estimating baseline and stress loss scenarios across different markets, which is no easy task and requires a heavy dose of professional judgment. We conclude that differences in approaches can result in significant differences in risk assessments.
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Our own analysis of data to differentiate the risks of CLO residuals and those of other asset classes. We draw two conclusions from our analysis:
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Not all corporate equity or CLO residual interests exhibit the same risks, and ‘comparable attributes,’ defined by the American Academy of Actuaries in their Principles for Structured Securities RBC presentation in Attachment C, can help identify those risks.
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The patterns are consistent across different lenses, suggesting differentiated tail risks of CLO residuals can be estimated for C-1.
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In our opinion, a more thorough analysis is needed to assess an appropriate capital charge for residual interests of ABS.
Modernizing the NAIC’s Investment Risk Oversight Framework
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Efforts to revise the NAIC investment risk oversight framework are moving forward on several fronts. The Financial Condition (E) Committee (E-Committee) formed a Drafting Group of regulators, which has mapped out a Workplan. The Workplan includes an assessment of a significant expansion of the NAIC’s analytical capabilities through centralized investment expertise (CIE). The effort acknowledges that the SVO currently limits its focus on credit risk, highlights regulators’ needed understanding of macroprudential and emerging risks, as well as needed guidance on policy design. In addition, the E-Committee is petitioning for the development of a request for proposal to engage a consultant who would help the NAIC develop a due diligence program over the ongoing use of agency ratings.
This report reviews these developments and relates them to workstreams at the NAIC, which continue in parallel.
We hope you find this resource helpful It is consistent with our goal of bringing value to our community About the
Authors
Amnon Levy is the CEO of Bridgeway Analytics.
Brett Manning is a Senior Predictive Analytics Specialist at Bridgeway Analytics.
Investment vehicles: An update from the 2024 Spring National Meeting
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In his Insurance Asset Risk article, Amnon explores possible changes to the treatment of direct investments in vehicles, with delineations determined by how the vehicle’s debt is classified under the principles based bond definition. A critical implication is the capital treatment that can either align with the 30% corporate equity charge if held by life insurers or be classified as residual interests of asset-backed securities and receive 45%. Aspects of classification that continue to be deliberated over include whether or not the vehicle is SEC-registered and the degree to which the vehicle is leveraged.
Join Amnon Levy, InsuranceAUM.com's Stewart Foley, and special guest Washington DC Associate Director of Insurance Philip Barlow to explore developments from the NAIC 2024 Spring National Meeting in a replay of their March 28, 2024 discussion:
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The classification of asset-backed securities and feeder funds
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Overseeing the use of agency ratings: Extending NAIC staff discretion and the E-Committee Workplan
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Designations and capital for CLOs and asset-backed securities
With $trillions of investments possibly impacted, the implications are broad for insurers and capital markets.
What’s next for the rules that govern insurers’ investments:
Developments from the NAIC’s 2024 Spring National Meeting
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Regulators continued their efforts to refine the rules to align with insurers’ shifting investment strategies more closely at the NAIC 2024 Spring National Meeting in Phoenix. At its core is an aspiration of achieving “equal capital for equal risk,” which is no easy task considering the interconnected components of the framework that governs insurers’ investments. There were significant developments on multiple fronts, including:
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Changing the classification and valuation across categories of insurers’ investments whose risk characteristics can vary significantly. This includes the debt and residual interests of asset-backed securities (ABS).
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Addressing concerns over ‘blind reliance’ on agency ratings in NAIC Designations, which help oversee hundreds of thousands of debt instruments worth $trillions of insurers' debt investments. Designations aspire to consistently rank order credit risk which is argued to be challenged by agencies using different methodologies and standards.
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Differentiating capital for structured assets and residual interests of ABS, which include investment vehicles. While structured products are argued to provide attractive risk-adjusted returns, the products are complex, and establishing the appropriate capital requirements for such products requires a deep understanding of their nuanced risk-mitigating features and performance.
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Moving forward with the Financial Condition (E) Committee’s long-term aspirations of modernizing the NAIC’s investment oversight framework.
This report reviews these recent developments, their potential implications for investment strategy, and what might happen next.
Join Amnon Levy, InsuranceAUM.com's Stewart Foley, and SSNC's Scott Kurland and Samuel Jones to explore tips for ensuring a smooth year-end filing process. The typical investment portfolio of an insurance carrier today is far more diverse and complex than it was ten years ago, and the need for data management and controls couldn't be more critical. This challenge is magnified by the significant changes to the NAIC's classification of debt, equity, and residual interests. The principles-based approach that will be rolled out in 2025 will, by its nature, take time for regulators in the industry to converge on how different types of assets will ultimately be classified and the sort of justification that is expected of insurers when they choose to classify an asset one way or another. With significant implications of classification on capital treatment, there could be broad implications for investment strategies and capital markets.
In his latest Insurance Asset Risk article, Amnon Levy explores a fundamental challenge all capital market participants face with assessing risks across assets and the role rating agencies play in addressing those challenges.
In the context of U.S. insurers, agency ratings can be used in obtaining NAIC designations that feed into the regulatory oversight process, creating an inherent conflict of interest driven by rating agencies' commercial incentives and insurers' desire to, all else equal, minimize regulatory capital. The NAIC has long been concerned with relying on agency ratings and continues to refine the designation process to ensure greater consistency, uniformity, and appropriateness to achieve the NAIC's financial solvency objectives. The 2023 NAIC Fall Meeting brought several advancements to revise the designation process, including a proposal that would extend staff discretion over rating agency-based designations in an effort to move away from 'blind reliance' on agency ratings and an update on NAIC model based designations for CLO that will be effective in 2024.
The report breaks down the fundamental challenges of overseeing credit risk that transcends agency ratings, which need to be deliberately considered when designing mechanisms for investment risk oversight, whether in the context of using agency ratings or NAIC model-based designations. The report also explores how other jurisdictions have approached overseeing agency ratings, along with other mechanisms outlined in another recent Bridgeway Analytics report, Overseeing Designations and the Prudent Use of Agency Ratings.
Join Virginia Commissioner and NAIC Secretary-Treasurer Scott White, Bridgeway Analytics' Amnon Levy, and InsuranceAUM.com's Stewart Foley to explore the What's Next for the Rules that Govern Insurer's Investments: An Update from the 2023 NAIC Fall National Meeting. Significant developments to the landscape include modernizing the investment risk framework, designations and oversight of agency ratings, revisions to the treatment of structured assets and investment vehicles, and the treatment of asset concentration risk.
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Register here for the live webinar on Friday, December 15, 2023 @ noon ET.
This report reviews the 2023 NAIC Summer Meeting, which brought progress on several initiatives to revise guidelines with potentially far-reaching implications for insurers’ investment strategy and capital markets:
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Classification of investment vehicles, including debt and residual interest of structured products.
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Potential revisions to the designation process, which determines capital for debt instruments.
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Efforts to revise the capital framework to differentiate structured assets.
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In addition, the Financial (E) Committee (E-Committee), whose working group’s mandate includes overseeing many of these initiatives, met to explore the Committee’s Framework for Regulation of Insurers Investments further. As a reminder, the Framework proposes a modernization of investment risk oversight, which is significant.
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:
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Clarity–ensuring each component of the framework has a well-articulated objective and definition.
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Consistency–ensuring different types of investments are handled objectively and consistently across the framework.
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Governance–ensuring ongoing governance across the framework, including a model risk management framework with defined standards.
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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
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:
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Measures of default risk, an inherently remote event, cannot be assessed robustly given the dearth of default data.
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Level-setting risk across asset classes is challenging because different risk factors impact different credit segments (e.g., corporate vs. municipal).
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Controlling for variation in methods and standards across Credit Assessment Providers whose methods necessarily involve subjectivity.
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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.
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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).
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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.
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 InsuranceAUM.com 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:
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Designations, and the use of rating agencies
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Revisions to the treatment of structured assets and investment vehicles
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Potential implications from a proposed revision to modernize investment governance
The changing rules governing US insurers’ investments: Capital requirements and the role of agency ratings
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Synopsis:
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: ï‚·
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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
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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
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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.
Trends in the Ownership Structure of US Insurers and the Evolving Regulatory Landscape, Q2 2023 Insurance AUM Journal
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SYNOPSIS
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.
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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.
Efforts to Reform NAIC Investment Guidelines: Lessons Learned from History
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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:
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Proposals related to designations and limiting the use of agency ratings
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The proposed interim increase in capital to 45% for residual tranches of structured assets
We do this through two case studies:
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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)
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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.