Amnon Levy describes how the US regulator resolved to put best foot forward at annual spring meeting
The March 2025 Spring National Meeting highlighted the NAIC's commitment to overhauling its investment regulatory framework, underscoring the scale of the changes underway. Significant updates have already reshaped investment classification guidelines, with broader reforms to investment oversight on the horizon. As the landscape evolves, the investment community seeks to assess the implications and identify practical transition tools.
The now-effective principles-based bond definition is at the heart of this transformation—a cornerstone of the NAIC's broader bond project. Years in the making, this new framework redefines how insurers must classify investments based on economic substance, resulting in a more accurate reflection of risk across asset-backed securities (ABS), investment funds, and Issuer Credit Obligations (ICOs). With efforts underway to differentiate RBC for Collateralized loan obligations (CLOs) and the broader set of ABS, classification guidelines can have significant downstream implications for investment strategies.
How significant are the changes to classification guidelines? Possibly very. While my January 2025 Insurance Asset Risk article, The Bond Definition Is Live & The Times They Are A-Changin' projects that the vast majority of debt investments will continue to qualify as bonds, avoiding the complications of non-bond debt classification, revisions to the RBC framework will possibly result in different classes of bonds receiving significantly different treatment. For example, equipment trust certificates (ETCs) or Enhanced ETCs were often categorized as structured securities (i.e., an ABS) collateralized by lease transactions. Under the updated reporting guidelines, they are categorized as an ICO and reported as a single-entity-backed obligation ETC or EETC, which may have implications for RBC in the future.
Another important initiative is the march toward the prudent use of agency ratings. Historically, the NAIC has been a passive consumer of ratings in the Designation process, with rating agencies providing their own rating-to-Designation mapping (i.e., it has been blindly reliant on rating agencies). Qualifying agencies choose their own NAIC Designation-to-agency rating mapping, with a mechanical process of assigning a CRP rating Designation to eligible securities.
The NAIC's reliance on rating agencies for monitoring is somewhat unique compared to other jurisdictions. European bank and insurance guidelines, for example, generally discourage using agency ratings and instead encourage internal models that monitor investment risk when assessing creditworthiness and determining capital requirements. The cost of maintaining these frameworks is significant. For context, the annual cost of running stress tests can exceed $100 million at some banks, with investment risk monitoring, generally using internal ratings, consuming a significant portion of the cost.
The NAIC's approach can provide significant savings for insurers and regulators, who would otherwise need to assess insurers' internal models, with downstream savings to policyholders. However, some challenges can result in ratings lacking comparability, possibly limiting whether they are fit for regulatory purposes.
Different methods and standards are employed across asset classes and rating agencies. In addition, rating agencies' commercial incentives and insurers' desire to, all else equal, minimize capital results in potential conflicts of interest that can distort ratings.
To improve consistency across Designations, the NAIC is pursuing several interrelated initiatives, including heightened disclosure requirements for increasingly prevalent privately rated debt and procedures granting NAIC staff discretionary authority to override rating agency-based Designations. In addition, the NAIC's efforts to develop Intrinsic Price Designations for CLOs are advancing. Notably, Intrinsic Price Designations have unique properties that depart from agency ratings, resulting in potential incentives to redirect investment flows, favoring shorter-dated tranches and those issued during periods of high interest rates. In parallel, the NAIC is looking to engage a consultant to help develop a due diligence program for the use of agency ratings in Designations.
The NAIC is refining the capital treatment across a spectrum of asset classes and investment vehicles, aspiring to achieve Equal Capital for Equal Risk. The significant growth in certain complex investment strategies has led the NAIC to refine RBC. Acknowledging inherent inconsistencies in RBC across asset classes, the NAIC is looking to make foundational changes. Ongoing workstreams include the Structured Securities RBC Project, led by the American Academy of Actuaries, which will differentiate capital charges for structured assets, initially focusing on CLOs. In addition, the Risk-Based Capital (RBC) Model Governance (EX) Task Force (RBC-MG-TF) was formed to achieve consistency in RBC. The RBC-MG-TF 2025 goals and charges (i.e., its mandate) are intended to overcome potential limitations with RBC to quantify risk exposure and identify weakly capitalized insurers. The RBC-MG-TF will assess and develop guiding principles for updating RBC, acknowledging the lack of consistency across the underlying methodologies underpinning the framework. The focus will be on increased RBC precision for life investments, ensuring capital requirements maintain their current strength, and appropriately balancing solvency with the availability of products to meet consumer needs.
What to Watch Next? Investment guidelines are poised for sweeping revisions over the next several years, anchored in a recognition that static frameworks cannot govern dynamic markets. The scale and sophistication of these changes could only be achieved through a deeply engaged and vigilant community of regulators, insurers, rating agencies, the Academy, and the broader ecosystem. Looking at the horizon, among the key initiatives to monitor:
2025
- Updated classification under the bond project (Initial filings are now live as of Q1 2025, but it will take time for convergence of views given its principles-based nature)
- Heightened disclosure for Designations based on privately rated credit (proposals are posted for comment)
- CLO Intrinsic Price Designations (currently stated 2025 targeted timeline)
- Guiding principles and assessment of gaps for RBC (2025 RBC-MG-TF goals)
2026 and beyond
- NAIC staff discretion over agency rating-based Designations (currently stated 2026 targeted timeline)
- A due diligence framework over the use of agency ratings
- RBC framework for CLOs
- Alignment of RBC across investment funds
- Broad revisions to RBC, with aspirations of equal capital for equal risk
Each milestone will open new decision points for insurers and regulators. Insurers will need to adjust their portfolio strategies, interpret evolving guidelines, and have foresight to anticipate the regulatory posture of tomorrow. Regulators will undoubtedly focus on ensuring the consistent application of evolving rules, enhancing transparency without overburdening the system, and calibrating oversight to maintain solvency standards while enabling innovation. They must also navigate the operational realities of implementation—building analytical capacity, managing stakeholder input, and iterating frameworks in step with market developments.
Want to learn more? Check out our in-depth report, The NAIC 2025 Spring National Meeting Update - Shifting from Conceptual Groundwork to Practical Execution - Aspirations of RBC Consistency, Agency Ratings, the Bond Project, and So Much More.
* Amnon Levy serves as the CEO of Bridgeway Analytics, which supports insurers and their regulators in navigating capital markets and their regulatory landscapes.
