North America

Moody’s questions use of RBC ratios

A new report by rating agency Moody’s on the US life insurance sector has controversially called into question the use by the industry of risk based capital ratios to assess companies’ solvency. The report argues that that the economic capital adequacy of the US life insurance industry actually declined at the same time as companies reported significant increases in their risk based capital ratios. Economic capital, according to Moody’s, is the actual capital available to a company and thus the true determinant of its financial flexibility. The practice of risk-based capital (RBC) assessment was introduced under the auspices of the National Association of Insurance Commissioners’ (NAIC). Moody’s said that the increases in companies’ RBC ratios was due to changes in the formulas and factors used to calculate the ratios. “We believe that the favourable improvement in the reported RBC actually masks the industry’s relatively more fragile capital position,” Moody’s analyst, and the author of the report, Robert Blanchard said. Moody’s attributes the industry’s weakened position to a reduced operating income, higher credit losses on investments and the increased dividends paid to holding companies, at the same times as the industry’s liabilities have increased by almost 10%. The agency fears that falling stock markets and, in particular, companies’ management attempts to increase returns to shareholders could further reduce the industry’s capital base.