At the November 17, 2014 meeting of the Valuation of Securities Task Force of the NAIC’s Financial Condition (E) Committee, a proposal was received from the North American CRO [Chief Rick Officers] Council to modify the capital treatment for catastrophe bonds held by life insurance companies, to encourage life insurance companies to purchase cat bonds.  A slide presentation accompanied the proposal.  The proposal contended that a revised RBC treatment for cat bonds might have the following benefits:

  • property and casualty insurers would benefit from a larger and more stable source of capital, thereby reducing their cost of capital;
  • life insurers would benefit from improved risk-adjusted asset returns as natural catastrophe risk and systemic investment risk are largely uncorrelated and, as a result, can provide a diversification benefit;
  • a lower cost of capital for property and casualty insurers could improve the availability and affordability of insurance products, thereby benefiting property and casualty customers;
  • life insurance customers would benefit from improved risk-adjusted returns; and
  • regulators’ solvency concerns would diminish as greater diversification is introduced into the system.

The task force exposed this proposal for comment for a sixty day period expiring January 16, 2015.  It is not clear whether the Task Force will revisit this proposal at its March meeting.