Minimizing your risk-based capital reserving maximizes the amount of capital invested in your portfolio.
A common way in which insurance carriers reduce their risk-based capital reserving is by wrapping a portion of their on-balance sheet investments in institutional life insurance.
Is this really a commonly used strategy? Yes. For example, Met Life has +$2.7B of their investments wrapped, Mass Mutual wrapped +$2.2B of their portfolio, Nationwide, John Hancock, Liberty Mutual, and Midland National have wrapped more than +$1B of their investment portfolios.
One of many reasons investment committees move to wrap their equities in institutional life insurance is because doing so carries lower capital costs when compared to the same unwrapped equity investment. The result is that the investment committee can free up some reserve capital to deploy back into the carrier’s investment portfolio.
The NAIC recommends that investments held within institutional life insurance have a risk-based capital charge of 0% for life & health carriers and 5% for P&C carriers – regardless of the type of investment that is wrapped. Very importantly, ratings agencies also closely align with this risk-based capital charge recommendation.
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