2017: Capital Buildup in the Life Industry - Under Pressure, with Limited Deployment Opportunities
Since the 2008 financial crisis, life-annuity insurers have built up statutory capital at a rate not seen in decades. With limited growth prospects, a key result of this rebuilt capital is an increasing amount of “excess” capital. In this study, we analyze the build-up of capital and its drivers, pressures and implications. We examine how the buildup of capital differs among insurers based on their size, product focus, or corporate structure.
2. Executive Summary
3. Drivers of Rebuilt Capital
- A Stronger Capital Base
- Stronger Capital Base Creates Flexibility
- Key Statutory Capital Drivers
4. Comparing Capital Growth by Segment
- Capital Growth by Company Size
- Capital Growth by Product Focus
- Capital Growth by Company Structure
5. Excess Capital: How Much Is Enough?
- Defining Excess Capital
- Excess Capital Developments
- Excess Capital Growth Forecast
6. Excess Capital Gets Squeezed
- Pressure from Above and Below
- Excess Capital Under Pressure
7. BCAR Changes
- BCAR Proposal: A New Paradigm
- BCAR Current Model
- New Paradigm: Looking at Tails
- Focus on Asset Risk Charges
- Proposed Bond Risk Charges
- Impact of Bond Risk Charge Changes in BCAR
- New BCAR May Squeeze Excess Capital
- New Paradigm for Risk Measurement
8. Asset RBC Changes
- Proposed RBC Charges May Squeeze Excess Capital
- Impact of Bond Risk Charge Changes in NAIC RBC
- Differences by Insurer
- Effects on Strategic Asset Allocation
- Differences Among Classifications
- Excess Capital Squeezed Less and More Slowly by RBC Changes
- Regulatory Concern Over Life Insurance Captive Use
- Responding to Regulatory Concerns
- Will Changing Captive Regulations Squeeze Excess Capital?
A. Capital and Surplus Changes
B. Data and Methodology
IntroductionSince the 2008 financial crisis, life-annuity insurers have built up statutory capital at a rate not seen in decades. With limited growth prospects, a key result of this rebuilt capital is an increasing amount of “excess” capital. Excess capital is the amount of capital an insurer holds above minimum regulatory or rating agency requirements.
Insurer management teams need to strike an appropriate balance of the prudent deployment of capital against the need to maintain financial strength and an adequate financial cushion. Insurers have several uses for capital, or excess capital, ranging from investing in organic growth, investing in inorganic growth via acquisition, taking on greater investment risk, to returning capital to stockholders and policyholders.
Increasingly, insurers have resorted to returning capital to stockholders and policyholders as growth opportunities and M&A activity remain low. As interest rates remained low, a stronger capital base enabled some insurers to diversify investments. With higher levels of excess capital, some insurers have reduced their use of reinsurance, retaining more risk to generate higher net operating gains.
While this stronger capital base is apparent at the industry aggregate level, have all insurers benefited? Or, have some types of insurers experienced stronger capital growth than other types of insurers?
Looking ahead, the continued build-up of capital is at risk should several threats to capital emerge. Market conditions could slow total capital growth. New regulatory and rating agency charges may raise the minimum level of capital an insurer may want to retain. Slower capital growth could make insurers more conservative in their deployment of capital, either to fund growth or pay dividends.
In this study, we analyze the build-up of capital and its drivers. We examine how the buildup of capital differed among insurers based on their size, product focus, or corporate structure. We identify key threats to capital growth. This broad analysis of capital growth can provide crucial context as management teams plan the most effective way to deploy their capital.