By Alton Cogert | firstname.lastname@example.org
On March 30, 2017, SAA’s Insurer Investment Forum XVII presented a very unique investment session, where Ed Toy, Managing Director, NAIC Capital Markets Bureau and Stefan Holzberger, Chief Rating Officer, AM Best, answered several different questions.
Here are a few of the highlights:
On Enterprise Risk Management:
AM Best has put ERM in a more prominent place in their new BCRM (rating methodology). ERM can move an initial rating assessment up 1 or down 4 notches, so it is easier to be hurt by poor ERM than helped by good ERM. One of Best’s important reasons for this: they expect companies to use ERM as a way of not being adversely selected against.
Meanwhile, the NAIC’s ORSA requirement is more holistic and not prescriptive (thou shalt do this or not do that). There exists the real probability that ORSA will migrate to companies below the current size thresholds.
On Risk Based Capital:
Best will begin with their existing credit risk factors, but those factors will be impacted by results from a new economic scenario generator. In other words, conceptually it is a similar BCAR model, but enhanced with advanced modeling capabilities.
Meanwhile, the NAIC is considering a more granular set of credit risk factors. Where AM Best might use RBC to compare different companies, the NAIC’s formula is not designed for that purpose. It is designed to alert regulators of situations where additional scrutiny is needed.
On the inconsistency in RBC formulas between P&C and Life insurers, where additional investment risk barely moves the RBC needle for P&C companies:
This is a very sensitive issue for the NAIC, but the general feeling seems to be that P&C companies don’t go out of business from investment risk. So, this inconsistency is less of an immediate issue for most insurers. Nonetheless, it continues to be an issue for further potential discussions at the NAIC.
AM Best on industry capital levels:
The industry is currently over capitalized, so more equity or alternative risk could be taken without a problematic RBC issue for the overall industry. However, this is a company by company issue where investment and underwriting related risks are reviewed, including their potential volatility and impact on RBC.
On investment management agreements:
The NAIC is spending more time on this since we have seen some rather abusive agreements that fail to recognize fiduciary responsibility and have many other provisions that should be in a fair agreement. And this seems to happen more often with smaller companies. You have seen the beginning of our focus on this with the new disclosure requirement of who the investment manager is, are they non-affiliated, etc.
AM Best is focused on the importance of governance and ERM. So, it is essential to have well defined investment risk guidelines and proper vetting of the asset manager and advisor.
What about regulatory arbitrage?
When you hear an investment manager tell you that a given investment produces improved yield or returns on required NAIC RBC, they are not using the RBC as it was intended. Beware. The RBC instructions specifically say, “This is a regulatory tool. Do not use it for any other purpose.”
What sage advice would you give in working with AM Best and their regulators?
From the NAIC’s perspective, work with your state department. Don’t surprise them and let them know of anything out of the ordinary. They are very willing to work with you, understand and be accommodating.
From AM Best’s perspective, if you have a bad year or an investment blows up, be proactive. Don’t wait for a call from us, give us a call and say, “we’ve got some bad news, we’re managing it, we’re getting through it and here are the implications.” Be transparent and communicate with us, instead of hoping we don’t notice it.
This brief summary does not do justice to the interaction between the panel members and the attendees. So, if you were not at the Forum, you missed a very unique and valuable session.
We’ve got even more interesting plans for Insurer Investment Forum XVIII, March 20-23, 2018 at the Grand Floridian at Disney World. Stay tuned for more details.