NAIC Flags an RBC Formula That Undercharges $150B in Loans

Life insurers now hold roughly $150 billion in residential mortgage loans against a 68 basis-point risk-based capital charge that its own regulator calls not empirical-based, unchanged since holdings were $18 billion in 2018.

It is one line on a longer list of formula gaps the NAIC's Risk-Based Capital Model Governance (EX) Task Force just put a number on, exposed for comment on August 13, 2026 with responses due by close of business September 29.

Key Takeaways

• Fifteen distinct components across the Life, P&C and Health formulas, each tagged with a 2025 materiality benchmark and an internal effort rating of moderate or significant.
• A 62-point RBC ratio swing in the task force's own worked example: 446% to 384% for an insurer with 3% of its portfolio in common stock, if a 50% stock-bond correlation replaced the current treatment.
• $2.85 trillion of life reserve credit and modified coinsurance, roughly $135 billion of it tied to non-reciprocal jurisdictions, is the largest figure on the list.
• The operational risk charge, a flat 3%, "is not based on an empirical study" by the task force's own account, and totals about $14 billion for P&C RBC against $0.6 billion for Life.

A Gap List With Its Own Materiality Column

Every prior RBC governance effort proceeded case by case: a working group noticed a factor looked stale, commissioned a study, and adjusted it years later, one asset class at a time. The task force that Ohio Insurance Director Judith French and Wisconsin Insurance Commissioner Nathan Houdek co-chair was built to replace that pattern with something closer to a standing audit function, with French describing the goal as building "a more coherent framework for governing changes and modifications to the RBC formulas".

The sequencing is principles first, gaps second, calibration third. The task force adopted nine guiding principles on September 23, 2025, among them Materiality, Equal Capital for Equal Risk and Objectivity (Dechert, October 2025), then turned to naming the specific formula components those principles would apply to first (framework adoption).

The August 13 exposure is that naming exercise, produced with outside consultant Bridgeway Analytics after a multi-month comment process the American Academy of Actuaries' cross-practice RBC group joined with a March 16, 2026 letter.

The Two Items That Actually Move a Capital Number

No item pairs a starker growth curve with a flatter charge than residential mortgage loans. Life insurers reported approximately $150 billion in 2025, growth the materiality table calls "significant, over 30%" in that year alone, up from $18 billion in 2018. The 68 basis-point C-1 charge sits near the cheapest end of the entire Life investment grid, close to the 0.82% charge for A-rated corporate bonds and well below the 1.52% charge for BBB (SS&C Technologies, 2026).

It got cheaper along the way. A 2024 Schedule BA line item first extended the factor to affiliated mortgage funds, and the Life RBC Working Group extended the same treatment this spring to unaffiliated joint ventures, partnerships and LLCs, cutting the applicable factor from 1.75% to 0.68%. A December 2025 amendment to SSAP No. 37 added a look-through reporting option for qualifying statutory trusts, effective 2027.

None of that touched the question the gap list now poses. Whether 68 basis points still prices a $150 billion book the document itself says ranges "from a few hundred thousand to a several hundred million dollar townhouse development" is a calibration question, and a charge built for a starter book of $18 billion and left unchanged through an eightfold expansion is exactly the drift the Materiality principle was written to catch.

The covariance structure moves more capital than any single factor. Life RBC covariance assumptions are "coarse, generally set at 100% or 0%," a binary that cannot recognize partial diversification across asset classes carrying genuinely different risks. The task force's worked example: an insurer with 3% of its portfolio in common stock sees its RBC ratio drop from 446% to 384% if a 50% stock-bond correlation is applied instead, the same assumption Solvency II already uses. A 62-point movement on a 3% equity allocation reorders a board-level capital conversation, and carriers holding more than 3% in correlated risk assets would see a larger effect.

Where the Formula Prices the Same Risk Two Ways

The structural gaps are a different problem from the stale ones. Fixed-income assets on Schedule BA are charged against a coarse pre-2021 six-class grid layered with the 2021 portfolio adjustment factor, while the same credit quality reported on Schedule D-1 draws from a granular 20-class C-1 grid built for bonds. Most Schedule BA Designation 1 holdings, $27 billion, and Designation 2 holdings, $11 billion, therefore draw a charge the task force says "can be less than 50%" of what the identical exposure would draw on Schedule D-1.

A valuation-basis mismatch compounds it. Schedule BA commercial mortgage funds carry a $32 billion balance, 32% of it valued below cost at an average markdown of negative 20%, yet the formula applies bond and mortgage factors built for assets carried at amortized cost under Schedule B, ignoring that these funds are measured under the equity method. One accounting and reporting convention, applied unchanged to assets that now flow through several.

Two charges are flagged for never having been grounded at all. The operational risk charge, a flat 3% applied against RBC before the operational add-on, "is not based on an empirical study," and totals roughly $0.6 billion for Life RBC net of the C-4a component, $14 billion for P&C RBC and $2.7 billion for Health RBC in 2025. The task force judged the risk "not obviously material," a call the P&C figure, fourteen times the Life one, makes worth revisiting.

The largest number on the list runs into a supervisory track already moving. Life reserve credit and modified coinsurance reached $2.85 trillion in 2025 with roughly $135 billion in non-reciprocal jurisdictions, and the current treatment "includes a reserve credit and recoverables charge, but they are coarse." Actuarial Guideline 55 already tightens asset-adequacy and collateral controls on the same offshore book, so moving both in the same direction compounds rather than offsets for carriers with concentrated modco programs.