NAIC continues to examine cat bonds as investment for life insurers

The NAIC will continue to assess whether it should change the capital treatment of catastrophe bonds for life insurers investing in them, with next steps being to develop statutory accounting guidance for cat bonds and to canvass life insurers interest in them as assets.

At a meeting held on Sunday the U.S. National Association of Insurance Commissioners Valuation of Securities (E) Task Force discussed the proposal, which Artemis covered here last year, that had originally been put before them by U.S. primary insurer Nationwide and the North American CRO Council.

The proposal seeks to amend the capital treatment of catastrophe bonds for life insurance companies, which could result in greater investment in the catastrophe insurance-linked securities (ILS) asset class and more capital flowing into ILS as a result.

Currently the capital treatment makes investing in cat bonds less favourable for U.S. life insurers. The proposal seeks to have the capital charge assigned to catastrophe bonds through a credit rating placed under the C-2 insurance risk component, which could increase the ability of life companies to invest in catastrophe bonds.

At the meeting the NAIC’s Task Force decided that the issue needs to be referred to the Statutory Accounting Principles (E) Working Group, who will be tasked with developing statutory accounting guidance for catastrophe bonds.

At the same time the Task Force has instructed the American Council of Life Insurers (ACLI) to evaluate interest in investing in cat bonds as an asset class among its members, which it has agreed to do.

Once the information is back with the Task Force, on the accounting guidance and life insurers interests in cat bonds as assets, the relevant regulator groups at the NAIC will evaluate whether the demand for this investment warrants putting in the effort to conduct a detailed evaluation of the proposal.

As we wrote previously, the amount of assets within the U.S. life insurance industry is enormous and the clear benefit to life insurers that cat bonds as assets could provide make a compelling case for the proposal.

If life insurers do indeed appreciate the diversification benefits and low correlation that catastrophe bonds offer, and the capital treatment was more favourable, we could potentially see a huge amount of additional interest in cat bonds as an asset class.

We’ll keep you updated as this issue progresses.