Regulators hear pushback on proposal to hide RBC data

A public comment period ended on Thursday, with insurance regulators no closer to a final decision on a controversial proposal to limit the publication of risk-based capital (RBC) data.

More than 300 people participated in a joint conference call between the Capital Adequacy Task Force and the Risk-Based Capital Model Governance Task Force. Regulators spent an hour discussing comment letters and hearing from those authors.

“I think everyone recognizes that industry and many others have used RBC for purposes beyond [what it is intended for],” said Mike Yanacheak, chief actuary at the Iowa Insurance Division. “It is an indicator that is used for other items, whether that is for capital sufficiency to support dividend pay up to a holding company and on to shareholders, or if it is used in other manners, to be just one element at looking at the strength of a company.”

RBC numbers are a regular feature of public companies’ financial reports and earnings calls with Wall Street analysts. RBC requirements provide for a ratio to assess the level of risk associated with an insurance company’s assets.

The concern is that the wide dissemination of RBC figures is leading to a misunderstanding of insurance companies’ financial strength, Ohio regulators have claimed. A proposal prohibits any insurer from putting its RBC ratio in its earnings releases, press releases, webcast materials, or presentations.

“Because the [National Association of Insurance Commissioners] formula develops threshold levels of capitalization rather than a target level, it is neither useful nor appropriate to use the RBC formula to compare the RBC ratio developed by one insurance company to the RBC ratio developed by another,” the proposal reads. “Comparisons of amounts that exceed the threshold standards do not provide a reliable assessment of their relative financial strength.”

What RBC confusion?

The RBC debate has industry trade groups and consumer representatives on the same side, a rare occurrence. Scott Harrison is a former regulator and current CEO of the National Alliance of Life Companies.

“I’m trying to identify in my own mind, going back to the early days of RBC, when there’s ever been confusion around what a representation or statement of a particular company’s RBC meant,” Harrison said. “[I]f you go in the direction suggested to eliminate or prevent or prohibit the use of RBC, people are going to find alternatives.”

Peter Gould is an annuity owner from Indiana who frequently joins the calls to provide a consumer voice. He suggested a wider dissemination of RBC, up to five past years’ worth, readily available for consumers to read.

“The only way I can find it is to dig into annual reports, and that’s not very consumer-friendly,” Gould said. “While I understand that RBC is just a metric, it’s not a be-all, end-all means of ranking companies; it’s an important metric, and it ought to be out there where we can find it.”

‘Not actually weaker’

Yanacheak offered a simple example of how RBC can be misinterpreted: Two identically situated companies, but Company A opts to be more conservative and sets up additional reserves in support of its policyholder obligations. Company A is going to show less capital and have a lower RBC ratio.

“[T]he company is not actually weaker,” Yanacheak explained. “In fact, they’ve shown responsibility, and I think regulators would prefer to encourage that. But their RBC ratio has come down by setting up the additional reserves.”

Regulators plan to meet one more time to discuss comment letters before the NAIC fall meeting, December 8-11.

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