Life Risk-Based Capital (E) Working Group Continues to Discuss RBC Treatment of Collateral Loans

This Legal Update reports on the deliberations of the NAIC Life Risk-Based Capital (E) Working Group (the “Life RBC WG”) during and after the NAIC Spring National Meeting relating to the treatment of collateral loans.

Collateral loans are defined in SSAP No. 21—Other Admitted Assets as “unconditional obligations for the payment of money secured by the pledge of a qualifying investment.” Qualifying investments are investments that would qualify as admitted assets if directly held by an insurer. (State laws governing authorized investments of their domestic insurers may impose additional requirements, such as loan-to-value limitations and restrictions on the categories of permitted collateral.) SSAP No. 21 also provides that a collateral loan does not include investments captured in scope of other statements. So, for example, debt securities need to be analyzed under the SSAP No. 26 PPBD criteria, rather than being treated as collateral loans.

Discussion of Changes to the Life RBC Factors for Collateral Loans at the Spring National Meeting on March 22

The Life RBC WG met at the NAIC Spring National Meeting on Sunday, March 22, chaired by Ben Slutsker of the Minnesota Department of Commerce. At that meeting, the working group discussed written and oral comments on the revised version of Proposal 2025-16-L MOD that had been exposed for comment on February 10. The NAIC staff’s recommendation embodied in that revised proposal was to assign a risk-based capital (“RBC”) factor of 24% to collateral loans backed by equity interests, and an RBC factor of 36% to collateral loans backed by residual interests, calculated in each case as 80% of the RBC factor that would have applied if a life insurer had owned the underlying interests directly.

Written comments on the proposal were submitted by the American Council of Life Insurers (“ACLI”), the American Investment Council (“AIC”), the Utah Insurance Department (“UID”) and the Alternative Credit Council (“ACC”). The comment letters are available in Attachment E to the meeting materials. In addition, representatives of the ACLI, UID and ACC were present at the meeting to give oral summaries of their written comments.

The ACLI offered the following recommendations:

• To continue using the Schedule BA mortgage loan RBC factors for collateral loans backed by mortgage loans, as has been done since 2024.

• To set December 31, 2027, rather than December 31, 2026, as the effective date for any new RBC factors, in order to allow sufficient time to operationalize the new framework, as well as a transition period for insurers to assess impacts and make portfolio adjustments. 

• To calculate the new RBC factors as the product of a “base factor” for each collateral type equal to the RBC factor for holding the underlying asset directly (30% for interests in joint ventures, partnerships and limited liability companies and 45% for residual interests) multiplied by an “adjustment factor” tied to the level of overcollateralization of the collateral loan. The ACLI proposed five adjustment factors, each based on the midpoint of one of five overcollateralization “bands”:
• If the loan-to-value ratio (“LTV”) is greater than 80%, the adjustment factor would be 90%.
• If the LTV is greater than 60% and less than or equal to 80%, the adjustment factor would be 70%.
• If the LTV is greater than 40% and less than or equal to 60%, the adjustment factor would be 50%.
• If the LTV is greater than 20% and less than or equal to 40%, the adjustment factor would be 30%.
• If the LTV is less than or equal to 20%, the adjustment factor would be 10%.

The AIC’s written comments also advocated for an effective date of December 31, 2027, in order to allow for the development of a methodology that incorporates empirical data relating to the specific features and attributes of collateral loans, and in order to allow a reasonable implementation runway for insurers to assess impacts and make portfolio adjustments.

The UID’s comments recommended the use of a “sliding scale” to reflect the level of overcollateralization of the collateral loan. 

The ACC offered the following recommendations:

• To continue using the Schedule BA mortgage loan RBC factors for collateral loans backed by mortgage loans, as has been done since 2024.

• To reflect the level of overcollateralization in the new RBC factors for loans collateralized by interests in joint ventures, partnerships and limited liability companies or by residual interests—but also to consider doing additional empirical analysis to determine the appropriate calibration of the new RBC factors to the LTV.

After the oral summaries, Chair Slutsker invited working group members to comment briefly on whether the RBC changes under discussion should become effective at year-end 2026 versus year-end 2027. He noted that in order to be effective on December 31, 2026, any RBC changes would need to be approved by the Life RBC WG and the Capital Adequacy (E) Task Force by May 15, 2026.

After discussion of the effective date question, the Chair called for a straw poll, in which 11 members supported a 2027 effective date, three members supported a 2026 effective date, and one member abstained. On that basis, the Chair stated that the working group would target an effective date of 2027. It is noteworthy, however, that even among members who favored a 2027 effective date, there was still a sense of urgency to maintain the momentum to work out the details of the new RBC factors sooner rather than later.

The Chair then asked working group members to comment specifically on the ACLI proposal.

The first comment came from the UID, which expressed a preference for a sliding scale adjustment based on LTV, rather than a series of discrete bands or tiers. The concern was that a small adjustment in the LTV that moves a collateral loan one tier lower would have a disproportionate impact on the RBC factor, and that this could potentially be manipulated relatively easily. A discussion of this point ensued.

The Chair then raised a question about the reliability of the valuation of the collateral that would be used to calculate the LTV, and whether that valuation would be an audited figure. It was pointed out that even though the LTV of collateral loans will be disclosed starting with the 2026 annual statements, there is still a concern about the reliability of the “V,” especially when Level 3 unobservable inputs are used to value the underlying investments. A discussion of this point ensued. The Chair asked whether there should be a lower reduction to the look-through approach if the fair value of the collateral cannot be observed in the market.

The Chair then raised a question about the tiering proposed by the ACLI. He pointed out that many state insurance codes impose an 80% LTV limit in order for a collateral loan to be a permissible investment. In light of that fact, he suggested limiting the first tier to collateral loans with LTV’s greater than 90%, and making 80% the midpoint, rather than the top, of the second tier. The ACLI representative responded that the ACLI would be open to considering this suggestion.

Following the discussion, the Chair directed that the ACLI’s proposed revisions to Proposal 2025-16-L MOD be exposed for a comment period ending on April 13, 2026, together with the two questions he had just articulated.

Further Discussion of Changes to Life RBC Factors for Collateral Loans at the April 23 Meeting

On April 23, the Life RBC WG met by videoconference to, among other things, discuss the most recent exposure of agenda item # 2025-16-L MOD (Attachments 6A and 6B to the meeting materials) and comment letters from the ACLI (Attachment 7A) and the ACC (Attachment 7B). The ACLI comment letter addressed the two questions raised by Chair Slutsker at the March 22 meeting as follows:

• The ACLI recommended requiring independent verification of fair values as a prerequisite to using its proposed banded framework to adjust the base look-through factor. Without such independent verification, the full base look-through factor would apply without adjustment.

• With respect to the adjustment bands, the ACLI recommended maintaining the tiered LTV bands as set out in its prior proposal (see above), in which 80% would be the top, rather than the midpoint of the second tier. 

The ACC comment letter addressed the same two questions as follows:

• The ACC recommended relying on state insurance regulators’ existing tools—their regular examination authority and their authority to require an insurer to obtain or produce a recent valuation of specific investments—to address the fair value issue.

• With respect to the adjustment bands, the ACC expressed support for two alternative options: (i) the Chair’s alternative approach in which 80% would be the midpoint, rather than the top, of the second tier; and (ii) a continuous (rolling factor) based on the reported LTV, as had been suggested by the UID at the March 22 meeting.

At the April 23 meeting, the Life RBC WG voted to re-expose both the ACLI tiered approach and the ACC tiered approach for further comment.

Further Discussion of Changes to Life RBC Factors for Collateral Loans at the April 30 Meeting

During the week between the working group’s April 23 and April 30 meetings, a lot happened behind the scenes. The ACC decided to support the ACLI’s proposal whereby an 80% LTV would be the top of a band (60% < LTV < 80%) for which the adjustment factor would be 70%. Additionally, there were discussions among the members of the working group that led the working group to vote to rescind the two proposals exposed on April 23 and to expose two new alternative proposals instead.

One of the features of both new alternative proposals, which was based on a suggestion from the ACLI, is that in order to be entitled to RBC charges based on overcollateralization (“OC”), independent verification of fair value is required. Independent verification approaches may include, individually or in combination:

• Compliance certifications from unaffiliated third parties confirming adherence to stated valuation policies and investment guidelines;
• Independent third-party valuations of the underlying collateral; and/or
• Independent reasonableness checks designed to assess whether reported fair values fall within an appropriate and supportable range.

Another feature of both new alternative proposals is that the terminology of a “haircut” has replaced the terminology of an “adjustment factor,” although the substance is identical, since the haircut is just 100% minus what used to be called the adjustment factor.

The newly exposed Option 1 reflects the ACLI’s suggestions:

The newly exposed Option 2 appears to reflect the preferences of certain regulators: no haircut for LTVs above 90%, the 80% LTV as the midpoint of a band rather than the top of a band, four bands instead of five, and a floor of 50% of the base RBC factor.

The above two alternative proposals have been exposed as agenda item # 2025-16-L MOD version 3 for a 21-day comment period ending May 21, 2026.