According to a new report by rating agency AM Best, the U.S. life/health industry improved its risk-adjusted capitalisation in 2017-2019 due to strong growth in available capital, particularly in 2019.
The rating agency’s Best’s Capital Adequacy Ratio (BCAR) model was retooled to measure required capital at multiple value-at-risk (VaR) levels to determine capital adequacy at more extreme levels.
BCAR now measures the excess of available capital over required capital.
The report states that the life/health industry composite’s BCAR score as of 2019 was 28.0% at the 99.6% VaR level.
A score over 25% at this VaR level is deemed strongest for a beginning BCAR balance sheet strength assessment.
However, as the report notes, several other attributes are used to assess balance sheet strength, which, along with operating performance, business profile and enterprise risk management, are used to determine the final rating.
Preliminary results for 2020 year-end data show that the aggregate BCAR at the 99.6% VaR level for the life/health industry will decline to 25.9%.
The report showed that available capital increased by $20.4 billion, reflecting life/health insurers’ continued capital and surplus growth; however, required capital is expected to increase by $25.9 billion.
Increases in fixed-income required capital are being driven by increases in allocations of NAIC Class 2 bonds, while increases in BA equity and real estate assets are driving increases in required capital for alternative investments.
AM Best discussed how risk-based capital (RBC) ratios specified by the National Association of Insurance Commissioners (NAIC) have tracked with AM Best’s BCAR in recent years. AM Best’s BCAR is similar to the NAIC’s RBC requirements in certain aspects.
However, while AM Best’s BCAR assessment is an initial measure of balance sheet strength, with an emphasis on available capital levels in excess of required capital at extreme tail levels, RBC is a solvency tool used by regulators to take various actions.
The report makes BCAR-RBC comparisons on risk charges in various categories, including asset risk, mortality/morbidity risk and interest and market risks.
