In March 2010, the National Association of Insurance Commissioners (NAIC) proposed a substantial increase to the benchmark risk-based capital (RBC) reserve requirement applicable to insurance companies holding commercial and farm mortgage loans.
Under the NAIC’s existing RBC guidelines, insurance companies must establish a benchmark reserve equal to 2.6% of the face value of their commercial and farm mortgage portfolios. The NAIC’s newest proposal would boost the benchmark reserve to 4% of portfolio face value. If adopted, the proposal is likely to curtail mortgage lending activity by insurance companies, as the companies are forced to set aside capital that would otherwise be bound for new mortgage loans.
The NAIC also proposed a year-long renewal of the Mortgage Experience Adjustment Factor (MEAF) that was established on an interim basis for RBC calculations in 2009. The MEAF, which represents the moving average of an insurance company’s normalized mortgage loss ratio divided by the moving average of the mortgage loss ratio of the insurance industry as a whole, has historically had a floor of 50% and a cap of 350%. For 2009, the NAIC adjusted the MEAF floor to 75% and the cap to 125%. The actual RBC reserve required to be set aside by an insurance company is calculated by multiplying the benchmark RBC reserve by the company’s MEAF.
On June 14, 2010, at 12:30 p.m. (ET), the NAIC will host a public conference call to discuss comments to the foregoing proposals that are scheduled to be adopted by the end of June 2010. Interested parties should visit www.naic.org/meetings_calendar.htm for information on how to participate on the call.
The NAIC plans a more thorough overhaul of the RBC reserve requirements for 2011. McGuireWoods will continue monitoring developments in this area. If you would like additional information on this topic, please contact