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 Risk 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:
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property and casualty insurers would benefit from a larger and more stable source of capital, thereby reducing their cost of capital;
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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;
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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;
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life insurance customers would benefit from improved risk-adjusted returns; and
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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.
