From tracking every Life RBC Working Group exposure since the collateral loan charge was first proposed in late 2024, we have watched the calibration debate evolve from a blunt punitive charge to a granular look-through framework that finally reflects the structural diversity of these instruments. The journey from Proposal 2025-16-L through MOD Version 3 reveals a regulator-industry negotiation over first principles: should capital charges for secured lending reflect the underlying collateral quality, or should the structural complexity of the vehicle itself demand a conservatism premium?

At the Spring 2026 National Meeting in San Diego on March 22, the Life RBC Working Group moved the proposal into its third iteration with alternative options from the American Council of Life Insurers (ACLI). A straw poll confirmed what the comment letters had telegraphed: 11 members supported a 2027 effective date, three pushed for 2026, and one abstained. The May 2026 re-exposure with a comment deadline of May 21 narrows the remaining calibration questions while deferring the most contentious structural debates to the comment period.

This analysis unpacks the mechanics of the look-through framework, compares the ACLI's banded proposal against the regulators' preferred alternative, models the capital impact on PE-backed portfolios where collateral loans represent 41% of Schedule BA holdings, and connects this initiative to the parallel CLO capital overhaul that together reshape the investment risk landscape for life companies.

The Current Framework and Why It Fails

Under the existing life RBC formula, collateral loans carry a uniform base factor of 6.8% regardless of what secures them. A collateral loan backed by a diversified portfolio of investment-grade bonds receives the same capital treatment as one backed by concentrated equity interests in a single joint venture. The framework also doubles the charge for collateral loans through the asset concentration factor, subject to a 45% cap.

This one-size-fits-all approach made practical sense when collateral loans were a minor balance sheet item. It no longer holds. U.S. insurers reported $27.8 billion in collateral loans at year-end 2024, with only $65 million classified as nonadmitted. Of the total, 42.7% (approximately $10.6 billion) is backed by affiliated joint venture, LLC, or partnership investments. Collateral loans backed by affiliated ICO bonds, unaffiliated mortgage loans, and affiliated investments in joint ventures, LLCs, and partnerships comprise more than 70% of the industry total.

The problem is directional. A direct holding of equity interests in a JV/LP/LLC carries a 30% RBC factor. A direct holding of residual interests carries 45%. Yet a collateral loan backed by those same assets gets charged only 6.8%, creating a structural arbitrage: wrap the asset in a lending structure and the capital requirement drops by 77% to 85%. Prior to 2025, some reporting entities were recording these instruments on Schedule BA as "Private Equity Funds" to obtain even more favorable RBC treatment, a classification practice the NAIC eliminated by introducing new subcategories for 2024 reporting.

The regulatory concern is straightforward. When the borrower defaults and the lender seizes collateral, the insurer holds the underlying asset. If that asset would command a 30% or 45% RBC charge as a direct holding, the 6.8% charge on the collateral loan structure understates the economic risk by a factor of four to seven.

The ACLI's Look-Through Proposal: Five Bands, Two Base Factors

The ACLI proposed a framework that calculates new RBC factors as the product of two components: a base factor reflecting the inherent risk of the underlying collateral, and an adjustment factor recognizing the protective value of overcollateralization.

The base factors map directly to the RBC charges that would apply if the insurer held the underlying assets outright:

  • Equity interests (JV/LP/LLC): 30% base factor
  • Residual interests: 45% base factor

The adjustment factor uses five bands tied to loan-to-value (LTV) ratios, reflecting that higher overcollateralization provides greater loss absorption before the lender suffers impairment:

LTV Ratio Adjustment Factor Resulting Charge (Equity Interest) Resulting Charge (Residual Interest)
>80% 90% 27.0% 40.5%
>60% to 80% 70% 21.0% 31.5%
>40% to 60% 50% 15.0% 22.5%
>20% to 40% 30% 9.0% 13.5%
≤20% 10% 3.0% 4.5%

A collateral loan backed by JV/LP/LLC interests with an LTV of 55% receives a 15% RBC charge (30% base multiplied by the 50% adjustment factor for the 40%-60% LTV band). That represents a 121% increase over the current 6.8% uniform factor, but it is 50% below the 30% charge that would apply to a direct holding of the same interests.

The ACLI further recommended requiring independent verification of fair values as a prerequisite to using the banded framework. Without such verification, the full base look-through factor (30% or 45%) would apply without any overcollateralization adjustment. This verification requirement addresses what the ACLI acknowledged as a practical challenge: the underlying collateral in these structures often consists of illiquid, hard-to-value interests where fair value estimates carry material uncertainty.

The Regulator Alternative: Fewer Bands, Higher Floors

Not all working group members accept the ACLI's calibration. NAIC staff recommended a simpler alternative: a flat RBC factor of 24% for collateral loans backed by equity interests and 36% for those backed by residual interests. These figures represent 80% of the direct-holding RBC factor, effectively granting a 20% credit for the lending structure's overcollateralization without the complexity of LTV-based banding.

A second regulator-preferred alternative (Option 2) preserves the banded structure but recalibrates it with several key differences from the ACLI proposal:

  • No haircut for LTVs above 90%, meaning the most thinly collateralized loans receive the full base factor
  • The 80% LTV serves as the midpoint of a band rather than the top, shifting the effective threshold where meaningful relief begins
  • Four bands instead of five, eliminating the lowest-charge tier
  • A floor of 50% of the base RBC factor, meaning no collateral loan can receive a charge below 15% (equity interests) or 22.5% (residual interests) regardless of overcollateralization

The floor provision is the most consequential difference. Under the ACLI's proposal, a heavily overcollateralized loan (LTV at or below 20%) would carry only a 3% charge on equity interests, below the current 6.8% uniform factor. The regulator alternative ensures that the new framework never produces a lower charge than the status quo for any collateral loan category, addressing the concern that look-through analysis should increase, not decrease, overall capital requirements for these structures.

The Verification Challenge

Both proposals hinge on the ability to measure and validate LTV ratios for collateral loans backed by illiquid interests. Regulators have repeatedly questioned whether they and auditors will have access to the information needed to verify overcollateralization levels. This concern is not abstract: the collateral backing these loans often consists of interests in joint ventures, private equity funds, or special purpose vehicles where fair value depends on cascading layers of valuation assumptions.

The ACLI acknowledged this challenge by building a verification requirement into its framework. Without independent validation of fair values, the adjustment factor defaults to 100% (meaning the full base factor applies). This creates a practical incentive for carriers to invest in valuation infrastructure, but it also means the framework's capital relief is conditional on a verification standard that has not yet been defined.

The working group has noted that regulators should have more complete data beginning with 2026 annual statement filings, following the Schedule BA subcategory reforms that took effect for 2024 reporting. The new reporting categories separate collateral loans by underlying collateral type, providing the granular data foundation that the look-through framework requires. Whether that reporting data is sufficient for LTV verification remains an open question that the comment period is expected to address.

Capital Impact on PE-Backed Life Insurers

The proposal's impact falls disproportionately on private equity-affiliated life insurers, where collateral loan structures serve as a cornerstone of alternative asset strategies. At year-end 2023, collateral loans represented 41% of total Schedule BA holdings for PE-owned insurers, totaling approximately $15 billion, up from $12.9 billion (38%) at year-end 2022. For all U.S. insurers, collateral loans comprised only about 4% of total Schedule BA investments.

This concentration creates an outsized capital impact. Consider a PE-backed life insurer with $10 billion in collateral loans backed by equity interests, carrying a weighted-average LTV of 50%:

Scenario RBC Factor Required Capital Change vs. Current
Current uniform charge 6.8% $680M Baseline
ACLI proposal (50% LTV band) 15.0% $1,500M +$820M (+121%)
Regulator flat alternative 24.0% $2,400M +$1,720M (+253%)
Regulator banded (with 50% floor) 15.0% $1,500M +$820M (+121%)
Direct holding (no loan structure) 30.0% $3,000M +$2,320M (+341%)

The range of outcomes spans $820 million to $1.72 billion in additional required capital for a single $10 billion portfolio. For the largest PE-backed platforms, where total invested assets under management reach $200 billion to $400 billion and collateral loan exposures may extend well beyond the reported Schedule BA figures, the aggregate capital impact could run into the low billions.

Carrier-Specific Exposure

Apollo's Athene platform manages over $400 billion in assets and has deployed approximately 25% of cash and investments into CLOs and other asset-backed structures. The platform's Schedule BA for Athene Annuity and Life Company alone carries roughly $7.6 billion in other invested assets. Collateral loans serve as the structural mechanism connecting Athene's balance sheet to Apollo's private credit origination capabilities.

KKR's Global Atlantic, which completed its transition to full KKR ownership in 2024, manages $219 billion in insurance assets within KKR's total $744 billion AUM. KKR has increasingly used the Global Atlantic balance sheet for collateral-based lending across aircraft leasing, residential mortgages, and corporate direct lending, with the platform contributing over $1.2 billion in annual operating earnings.

Brookfield's insurance platform, anchored by American Equity Investment Life following the 2024 closing, operates a pro forma investment portfolio in the $60-80 billion range. The firm's broader strategy of originating private credit through affiliated vehicles and deploying it through insurance balance sheets via collateral loan structures mirrors the Apollo and KKR playbooks.

Insurance-linked capital platforms collectively deployed an estimated $180 billion into private credit strategies in 2025, up from $120 billion in 2023. The collateral loan RBC reform targets the structural mechanism that connects these platforms to their parent firms' asset origination capabilities.

Connection to the CLO Capital Overhaul

The collateral loan proposal operates in parallel with a separate but related initiative to recalibrate C-1 factors for collateralized loan obligations. While distinct working groups handle each track (the Life RBC Working Group manages collateral loans; the RBC Investment Risk and Evaluation Working Group oversees CLOs), both address the same regulatory concern: ensuring capital charges reflect actual underlying risk rather than allowing structures to achieve favorable treatment through classification arbitrage.

The CLO proposal, built on American Academy of Actuaries modeling of over 2,600 broadly syndicated loan deals, would raise below-investment-grade CLO tranche charges from current bond factors of 2.73% to as high as 70.82%. Investment-grade tranches would see modest reductions (Aaa positions dropping from 0.40% to 0.03%), reflecting the structural protections at the top of CLO capital stacks.

For PE-backed life insurers, these proposals create compounding capital pressure. A carrier with both significant CLO positions (subject to new C-1 factors) and collateral loan exposure (subject to look-through charges) faces dual recalibration. The combined effect is not simply additive because the RBC formula's covariance adjustment partially offsets the compounding, but the directional impact is clear: the regulatory framework is systematically repricing the capital cost of the investment strategies that differentiate PE-backed platforms from traditional life writers.

The NAIC's Structured Securities Group has also expanded the Securities Valuation Office's authority to require look-through analysis for structured equity and fund investments, ensuring that in-substance equity or fund investments do not receive more favorable RBC treatment than direct holdings. This broader transparency initiative, detailed by Clifford Chance in March 2026, signals that look-through is becoming a governing principle across multiple asset classes, not just an isolated reform for collateral loans.

The Implementation Timeline: Why 2027 and What It Means

The 11-3 straw poll in favor of a 2027 effective date settled the immediate timeline question. To land on year-end 2026 filings, the proposal needed Capital Adequacy Task Force approval by May 15, 2026, a deadline that was never realistic given the ongoing calibration disputes. The May 21 comment deadline on Version 3 makes even a Summer 2026 National Meeting adoption unlikely for the current year.

Five factors drove the delay:

  1. Data availability. Regulators need complete 2024 and 2025 annual statement data under the new Schedule BA subcategories to validate the proposed calibration. The ACLI has indicated that regulators should have more complete data beginning with 2026 annual statement filings.
  2. Verification standards. No agreed framework exists for independently verifying fair values of underlying JV/LP/LLC interests. Without that standard, the banded approach lacks an enforceable prerequisite.
  3. Calibration disagreement. The spread between the ACLI's 10%-90% bands and the regulator flat 80% alternative remains wide enough to require additional comment rounds.
  4. Interaction effects. The collateral loan proposal intersects with the CLO factor reform, the investment subsidiary RBC elimination (adopted April 2026), and the SSAP 52 FABN disclosure requirements. Regulators want to assess cumulative impact.
  5. Industry preparation. Carriers need time to build valuation infrastructure, establish verification procedures, and potentially restructure portfolios before the new charges take effect.

The 18-month window between now and year-end 2027 creates both a preparation opportunity and a strategic decision point for affected carriers. Those 18 months will reveal whether carriers choose to restructure collateral loan portfolios to achieve lower LTV ratios (and correspondingly lower charges under the banded approach), divest out of collateral loan structures entirely in favor of direct holdings at 30% factors, or build the valuation and verification infrastructure needed to qualify for the overcollateralization adjustment.

Actuarial Implications

For appointed actuaries at PE-backed life insurers, the proposal creates several immediate workstreams even before formal adoption:

Asset adequacy testing. Cash flow testing under Actuarial Guideline XLIII and VM-30 must contemplate the capital impact of the new charges. Even before adoption, the proposal signals regulatory intent that appointed actuaries should consider in their asset adequacy analysis. The interaction with AG 55's guardrails on affiliated reinsurance further complicates the modeling for carriers that use both collateral loan structures and offshore ceding vehicles.

Capital planning. The range of outcomes (from 15% under the ACLI's banded approach to 24% under the flat alternative) means capital planning scenarios must bracket multiple final calibrations. For a $10 billion collateral loan portfolio, the difference between scenarios represents $900 million in required capital, a spread too wide to ignore in surplus projections.

Product pricing. Higher capital charges flow through to required returns and, ultimately, to credited rates on annuity products and pricing on institutional funding agreements. Life actuaries pricing new business in 2026 need to build in assumptions about the 2027 charge level, given that the assets backing those liabilities will be subject to the new framework within months of issue.

Investment strategy. The look-through framework creates differentiated pricing power for collateral loans with lower LTV ratios. Investment teams will seek to improve overcollateralization ratios on existing structures and may shift new origination toward asset types with lower base factors. Life actuaries involved in ALM and investment policy need to understand how these incentives reshape the investable universe.

RBC ratio monitoring. Companies operating near regulatory action levels (200% RBC ratio for company action, 150% for regulatory action) must model the proposal's impact on their total adjusted capital position. The transition from 6.8% to a charge potentially exceeding 20% can compress RBC ratios significantly for carriers with concentrated collateral loan exposure.

What Happens Next

The May 21 comment deadline will generate responses from the ACLI, individual carriers, and PE sponsor-affiliated firms. Based on the pattern of previous comment rounds, expect continued debate on three fronts: the number of bands (four versus five), the floor level (whether the 50% floor or a lower threshold prevails), and the verification standard (what constitutes "independent" fair value validation for illiquid interests).

If the working group resolves these questions by the Summer 2026 National Meeting in August, the proposal could advance to the Capital Adequacy Task Force for adoption in the fall, landing on year-end 2027 RBC filings as planned. A more protracted calibration debate could push adoption to the 2026 Fall National Meeting in December, still consistent with a 2027 effective date but compressing the carrier preparation window.

The broader trajectory is unmistakable. The collateral loan reform, combined with the CLO factor overhaul, the investment subsidiary elimination, the private letter rating filing scrutiny, and the SSAP 52 FABN disclosures, represents the NAIC's coordinated effort to close capital arbitrage opportunities that PE-backed life insurers have exploited through structural complexity. The 6.8% uniform factor was an artifact of a simpler time when collateral loans were straightforward instruments backed by readily valued assets. The look-through framework acknowledges what the industry's evolution has made obvious: structure does not eliminate risk; it redistributes it.

Further Reading

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