The NAIC's Capital Adequacy (E) Task Force adopted proposal 2025-21-P on June 30, 2026, raising the maximum diversification credit in the property and casualty risk-based capital formula from 30% to 45% for premium risk and 65% for reserve risk. It is effective for the 2026 formula, so the first reports to carry it are the year-end 2026 filings due March 1, 2027.
Proposal 2025-21-P implements the American Academy of Actuaries' November 7, 2025 report to the P&C RBC (E) Working Group. The 30% cap came from a February 1993 Actuarial Advisory Committee report and "has not been revised since," the Academy's P&C Risk-Based Capital Committee wrote. On its figures, from NAIC staff reruns of 2022 filings, authorized control level capital falls 6.9% industry-wide and 13.4% for commercial-lines writers, and no company's requirement rises (Academy report, Tables 2-1 and 2-2).
Adoption comes as the NAIC's Risk-Based Capital Model Governance (EX) Task Force lists the R4 and R5 concentration factors among its continuing P&C priorities and the Health RBC (E) Working Group asks the Academy for a credit of its own (task force materials, October 8, 2026; Forvis Mazars, July 2026).
Key Takeaways
- Required capital at the authorized control level falls 6.9% industry-wide and 13.4% for commercial-lines writers on 2022 filing data, with no company's requirement rising.
- The largest single-company reduction is 29%; 46 companies lose more than a quarter of their requirement and 393 see no change.
- NAIC staff found three companies on 2025 filings changing action level: one rises from regulatory action level to company action level and two leave the trend test for no action.
- A company with 25% of premium in its largest line now gets a 33.75% credit on premium risk and 48.75% on reserve risk, against 22.5% before.
- With surplus unchanged, a 13.4% cut in required capital lifts a commercial writer's RBC ratio about 15.5%, taking a 400% ratio to about 462%.
How the Concentration Factors Work
Both factors sit on Line 14 of RBC pages PR018 and PR017 and multiply the sum of the RBC charges across the formula's 19 lines of business. A company's concentration, which the Academy calls CoMaxLine%, is its largest line's share of total net written premium or of total reserves. Its factor is one minus the maximum diversification credit, plus the maximum credit times CoMaxLine% (Academy report, Section 1).
Under the 1993 formula that was 0.7 plus 0.3 times CoMaxLine%. Under the adopted factors it is 0.55 plus 0.45 times CoMaxLine% for premium and 0.35 plus 0.65 times CoMaxLine% for reserves (Academy report, Section 2). A monoline company has a CoMaxLine% of 100%, a factor of 1.0 and no credit under either version.
The Academy's own example is a company with 25% of its premium in its largest line. Its old factor was 0.775, a credit of 22.5% on the summed premium charges. Through the new formula the same company has a premium factor of 0.6625, a credit of 33.75%, and a reserve factor of 0.5125, a credit of 48.75%.
| Largest line as a share of premium or reserves | Credit at the 30% cap (1993 formula) | Premium credit at the 45% cap | Reserve credit at the 65% cap |
|---|---|---|---|
| 100% (monoline) | 0% | 0% | 0% |
| 50% | 15.0% | 22.5% | 32.5% |
| 25% | 22.5% | 33.75% | 48.75% |
| 5% (spread evenly across 19 lines) | 28.5% | 42.75% | 61.75% |
Sources: credit = (1 minus the largest line's share) times the maximum diversification credit, the formula in Section 1 of the Academy report. The 25% row is the report's footnote 9 example and the 5% row its footnote 8 case at the old cap; the other cells are actuary.info arithmetic on that formula.
Calibration used about 50,000 company-years each of premium and reserve data for accident years 1988 to 2017, sorted into five size bands and six diversification bands. In each of the 30 cells the committee compared the 87.5th percentile observed all-lines loss ratio, or reserve runoff ratio, with the formula's modelled risk before diversification. The 45% and 65% figures are weighted averages over nine cells of mid-sized to large diversified companies holding 84% of premium and 74% of reserves (Academy report, Section 3).
Who Gets the Relief
Table 2-1 of the report, from NAIC staff's rerun of every 2022 RBC filing with non-zero premium plus reserves, puts the aggregate reduction at 20% of the reserve risk charge, 10% of the premium risk charge and 6.9% of ACL. Commercial-lines writers, holding $84.4 billion of the industry's $205.3 billion of ACL, lose 13.4% of their requirement. Personal-lines writers, holding $100.2 billion, lose 2.1%, because more of their RBC sits in categories the factors do not touch.
| Type of company | ACL, $ billions (2022) | Change in reserve risk charge | Change in premium risk charge | Change in ACL |
|---|---|---|---|---|
| Commercial | 84.4 | -21.6% | -11.7% | -13.4% |
| Medical professional liability | 2.9 | -8.0% | -3.4% | -1.9% |
| Not otherwise classified | 0.7 | -6.5% | -3.1% | -2.2% |
| Personal | 100.2 | -18.2% | -9.2% | -2.1% |
| Reinsurance | 9.5 | -22.3% | -11.4% | -2.4% |
| Workers compensation | 7.5 | -10.0% | -4.5% | -5.7% |
| Total | 205.3 | -20.0% | -10.0% | -6.9% |
Sources: American Academy of Actuaries, Property and Casualty Risk-Based Capital Premium and Loss Concentration Factors, November 7, 2025, Table 2-1: NAIC staff analysis of 2022 RBC filings on the 2022 formula with 2025 Line 4 and investment income factors.
The distribution runs one way. Of 1,817 companies, 393 see no change, 676 see a cut of up to 5%, 500 a cut of 5% to 15%, 202 a cut of 15% to 25% and 46 a cut of 25% to 35%; the largest single reduction is 29% (Academy report, Table 2-2). Monolines get nothing because their CoMaxLine% is 100%, and larger companies tend to be more diversified, so the relief rises with size (Tables 2-3 to 2-5).
An RBC ratio is total adjusted capital divided by authorized control level RBC (NAIC, Risk-Based Capital). With surplus unchanged, a 13.4% cut in ACL multiplies the ratio by one over 0.866, a rise of about 15.5%; the industry-wide 6.9% cut multiplies it by one over 0.931, about 7.4%. Those are actuary.info's arithmetic on the Academy's averages. A commercial writer at 400% on the old formula reports about 462% on the new one with the same balance sheet.
Three Companies Change Action Level
NAIC staff ran the new factors against 2024 and 2025 filings and put the comparison before the May 12, 2026 joint meeting of the working group and the Catastrophe Risk (E) Subgroup, which exposed the proposal for comment through June 11 (joint meeting materials; Forvis Mazars, May 2026).
On the 2025 filings of 2,455 companies, the current formula places 12 at mandatory control level, 5 at authorized control level, 7 at regulatory action level, 11 at company action level, 12 in the trend test and 2,408 at no action. With the 45% and 65% factors, one regulatory-action-level company moves to company action level and two trend-test companies move to no action. The other 2,452 stay where they are.
Those levels are fixed multiples of ACL under the NAIC's Risk-Based Capital for Insurers Model Act: company action level RBC is 2.0 times ACL, regulatory action level 1.5 times and mandatory control level 0.70 times. For a P&C insurer a company action level event also occurs when total adjusted capital is at or above company action level RBC but below 3.0 times ACL and the filing "triggers the trend test determined in accordance with the trend test calculation included in the Property and Casualty RBC instructions" (NAIC Model #312, Sections 1K and 3A).
At a ratio of 300% or more no intervention is needed; between 200% and 300% the company is subject to the trend test (NAIC, Risk-Based Capital). The working group and subgroup adopted the proposal on June 17 and the Capital Adequacy (E) Task Force on June 30, the last date for factor changes to the 2026 formula (Forvis Mazars, June 2026). Tom Botsko of the Ohio Department of Insurance, the working group's chair, signed the proposal form.
A Larger Credit Moves More From Year to Year
The credit is a straight line in the largest line's share, and the slope of that line is the maximum credit. The formula implies that every point of movement in CoMaxLine% now moves the premium credit by 0.45 points and the reserve credit by 0.65 points, against 0.30 under the old cap. A company whose largest line grows from 25% to 40% of premium gave up 4.5 points of credit under the old formula; under the new one it gives up 6.75 points on premium risk and 9.75 points on reserve risk.
CoMaxLine% moves for ordinary reasons. Net premium is the base, so a new quota share on one line moves it. Growth concentrated in one line moves it. A discontinued book in runoff moves the reserve measure for years. Each of those changes the credit, now a larger one, without any change in how the company's lines move together.
A second exposure is the year the lines move together. Reserve risk on PR017 starts from an industry factor by line, adjusted at half weight by the company's own development (joint meeting materials, PR017 Lines 1 to 5). When general liability, umbrella and commercial auto reserves strengthen in the same year, that line-by-line charge rises and surplus falls, while the concentration factor applied on top stays wherever the mix puts it. On these figures the credit does not respond to whether diversification held in that year.
Sensitivity tests in the report show the calibration moving with the period measured: indicated maximums of 42% and 58% on 1988 to 2002 data alone and 64% and 85% on 2003 to 2017 alone, against 45% and 65% on the full span (Academy report, Table 3-1, rows 8 and 9). Every alternative the committee tested came out above 30%.
On safety level the report is explicit. "Adopting the indicated MDC in the RBC Formula reduces the safety level for R4 and R5, and therefore CAL," it says, and in the next paragraph: "We do not measure the impact of adopting the indicated MDCs on R4, R5, or CAL safety levels, nor do we determine whether the total ACL is appropriate for regulatory purposes" (Academy report, Section 3).
Any significant change to one element of the formula should come with an assessment, "possibly on a judgment basis," of the overall safety level, the same section says.
How Other Regimes Credit Diversification
The adopted change keeps the structure the formula has had since 1993 and raises its cap. Other regimes aggregate with correlation parameters. In 2012 the CAS RBC Dependencies and Calibration Working Party set out the difference: RBC "has a line of business diversification credit (dependency relationship) expressed by the 70% rule," while the Solvency II standard formula "specifies a covariance relationship between each pair of lines of business," and RBC "does not have a specific credit for geographic diversification" where the standard formula applies a 75% rule to its volume measure (CAS DCWP Report 3, Fall 2012).
The Academy's committee looked at the correlation route and stepped back. Applied to the 19 RBC lines it "would require 171 parameters," against which CoMaxLine% "is simpler--perhaps overly so--and perhaps somewhat ad hoc." Solvency II in 2010 set each of its 66 non-life pairwise factors "to be either 0.25 or 0.50, based on expert judgment," and calibrating such factors from experience is "perhaps beyond the limits of available data" (Academy report, Appendix 3).
| Regime | Structure of the credit | Where the explicit credit sits | Key parameters |
|---|---|---|---|
| NAIC P&C RBC (2026 formula) | Linear in the largest line's share of volume | Across the 19 lines within reserve risk (R4) and premium risk (R5) | Maximum credit 45% premium, 65% reserves; 30% from 1993 to 2025 |
| Solvency II standard formula, listed in the PRA's Solvency UK rulebook | Pairwise correlation matrices | Between non-life segments, between premium and reserve risk, and a 75% geographic rule | 66 segment pairs each set at 0.25 or 0.50 in the 2010 calibration |
| Bermuda BSCR, Class 4, 3B and 3A | Correlation matrices at two levels | Between premium, reserve and catastrophe risk, then between market, credit and P&C risk | Premium-reserve 0.25, premium-catastrophe 0.125, reserve-catastrophe 0; market-P&C 0.125, credit-P&C 0.50 |
| APRA GPS 110, general insurers | Aggregation benefit formula | Between the asset risk charge and the sum of insurance and insurance concentration risk | Correlation 20%; 50% for lenders mortgage insurers |
Sources: Academy report, Sections 1 and 2 and Appendix 3; CAS DCWP Report 3, Fall 2012; Bank of England, Correlation Matrices, updated December 10, 2024; Bermuda Monetary Authority, 2023 Instruction Handbook for Class 4, 3B and 3A insurers, D1.3 to D1.6; APRA Prudential Standard GPS 110, January 2015, paragraphs 31 to 33.
Europe's supervisors have found the standard formula's credit conservative against internal models. EIOPA's comparative study of non-life underwriting risk, dated January 4, 2024, found "generally higher diversification benefits when compared to the levels prescribed in the standard formula" between premium and reserve risk, and higher diversification between lines of business within premium risk, with the benefits stable from 2018 to 2020 (EIOPA-BoS-23/494). The PRA's rulebook lists the Annex IV correlation matrix for non-life premium and reserve risk among its standard formula rules (Bank of England, Correlation Matrices).
Bermuda's handbook says its matrices give "a linear diversification benefit when combining the risk charges" (BMA 2023 handbook, D1.6). APRA's explicit credit sits between asset risk and insurance risk, at a 20% correlation, 50% for lenders mortgage insurers (GPS 110, paragraphs 31 to 33).
On these documents the US move runs in the same direction as the European finding, inside a simpler structure: the maximum credit rose and the shape of the credit stayed. Whether the formula ever moves to pairwise correlations is the research question the report's Finding 3 leaves open.
What the Higher Ratio Can Fund
A higher ratio from a formula change leaves surplus where it was. Total adjusted capital is statutory capital and surplus plus whatever items the RBC instructions add (NAIC Model #312, Section 1N); the adopted factors change only the denominator.
Dividend capacity is set under holding company law. Ohio's statute, which follows the NAIC model act, defines an extraordinary dividend as one that with other distributions in the preceding twelve months "exceeds the greater of ten per cent of the insurer's surplus as regards policyholders as of the thirty-first day of December next preceding or the net income of the insurer for the twelve-month period ending the thirty-first day of December next preceding" (Ohio Revised Code 3901.34(C)).
Such a dividend is conditional "until thirty days after the superintendent has received notice of the declaration thereof" and has not disapproved it, or has approved it within that period. RBC enters neither limb. A company whose ratio rose 15% on the new factors has the same ordinary-dividend limit as before unless its surplus or net income changed.
Other capital measures keep their own bases. The NAIC's ORSA Guidance Manual lists "RBC components, Economic Capital risks, BCAR risks, Solvency II components" as example bases for a prospective solvency assessment, as the site's ORSA explainer reports. A rating agency's capital model is one of those bases, with its own diversification treatment, and a change to the NAIC's factors passes nothing through to it.
On these figures the ratio lift is the value of an assumption about how a company's lines move together, measured on 1988 to 2017 data and set at a level the Academy says carries a lower safety margin by an amount it did not quantify. A carrier that pays the headroom up to a parent on the strength of the new ratio is distributing that assumption.
The Life and Health Formulas, and the Next Dates
The task force's October 8 materials list "RBC Covariance" first among the Life RBC initiatives regulators have prioritised (task force materials, Attachment D). Its gaps table describes Life RBC covariance assumptions as "coarse, generally set at 100% or 0%," and gives a case: a hypothetical insurer with 3% of its portfolio in common stock would see its RBC ratio fall from 446% to 384% if a 50% stock-bond correlation were used, "as is the case with Solvency II."
Comment letters dated September 29, 2026 split on timing. Roman Gabriel, senior vice president and head of government relations at Lincoln Financial, asked the task force to "acknowledge Life RBC covariance as an issue warranting a holistic review and eventual updating," and wrote that the scale of the work "should not be a reason to defer the issue."
Athene recommended "that the Task Force defer work on revising Life RBC covariance at this time," because the portfolio adjustment factor and the C-1 charges the covariance layer aggregates should be settled first. The ACLI "does not recommend prioritizing Life RBC covariance at this time," noting that the 30% C-1 factor on unaffiliated common stock "was influenced by covariance assumptions" (task force materials, Attachments B and E).
On that side the gap is wider than in P&C: Solvency II, Bermuda's BSCR and Canada's LICAT each carry seven insurance-risk components with correlations from -50% to +75%, while Life RBC carries only mortality and longevity, at -25% (Academy, Correlation in Capital Frameworks, 2024).
Health has no such credit yet. On July 22, 2026 the Health RBC (E) Working Group exposed a draft memorandum asking the Academy to develop a diversification credit for the lines reported on page XR013, which would also apply to page LR020 in the Life formula and page PR020 in the P&C formula, with comments due August 21 (Forvis Mazars, July 2026).
The NAIC's Fall National Meeting runs November 14 to 17, 2026 in Dallas (NAIC events). The first RBC reports on the 45% and 65% factors are due March 1, 2027.