S&P’s revised proposal on insurer risk-based capital adequacy

July 3, 2023
  • BlackRock


On May 9, 2023, S&P published a revised Request for Comment (RFC) which supersedes its initial RFC published in December 2021. The revised RFC incorporates changes to the 2021 RFC in response to external feedback received. S&P is requesting that interested market participants submit their written comments on the proposed criteria by July 14, 2023. S&P’s updated proposal simplifies its framework and will supersede ten previously released criteria articles. S&P estimates that the proposed criteria could lead to credit rating actions on about 10% of ratings in the insurance sector with the majority of rating changes estimated to be by one notch, with more upgrades than downgrades.

BlackRock’s Insurance Solutions team has reviewed S&P’s proposal and summarized some of the key takeaways below.

  • Overall, the proposed capital charges on most risks have increased, mostly because the confidence levels that S&P Global uses to calibrate risk charges have increased to 99.5% (moderate stress), 99.8% (substantial stress), 99.95% (severe stress), and 99.99% (extreme stress) from 97.2%, 99.4%, 99.7%, and 99.9%, respectively.
  • However, greater diversification allowances under the new model have been provided that in many cases will allow companies to hold lower capital levels, in aggregate.
  • Credit risk charges for bonds and loans will add a new dimension. In addition to being based on rating and tenor, the proposed methodology adds an additional level of granularity where bonds will have further categorization into four asset classes, from the riskiest asset type of structured assets to the least risky of government and secured bonds.
  • The new five-step decision tree to determine the rating input of bonds and loans first introduced in the December 2021 proposal remains. However, the updated proposal significantly revises the treatment for assets not rated by S&P, allowing for the use of other Credit Rating Agencies (CRAs) ratings using CRA mapping tables and without applying a downward notching adjustment for non-S&P ratings.
  • Updated correlation factors within both life technical risks and market risks provide for greater diversification benefits, allowing insurers to reap back some of the impacts seen from increased individual capital charges. In addition, a new layer of Level 3 diversification between risk categories will provide even larger benefits for insurers with a more diversified portfolio.
  • The updated methodology for determining the Net Change in Market Value (NCMV), and therefore the interest rate risk capital requirements, includes a three-step decision tree. The S&P applies either company-specific assumptions or standard assumptions, in all cases using their defined yield stresses which assume permanent parallel shifts in yields that vary by country.

Investment RBC updates (IG & HY bonds and loans)

BBB-rated and High Yield (HY) debt charges tend to be treated more favorably than current in S&P’s updated capital framework, leading to enhanced capital efficiency and capital-adjusted returns relative to AA/A-rated paper. This could potentially lead some insurers to pursue down-in-quality rotations given the better capital-adjusted relative value.

IG bonds and loans
S&P IG Level (99.80% Confidence)
IG bonds and loans
S&P HY Level (99.80% Confidence)

Investment RBC updates (multi-asset)

Broadly equity charges (public and private) increase modestly while fixed income charges decrease.

Within fixed income, the most notable changes are Commercial Mortgage-Backed Securities (CMBS) charges, which benefit from the up-in-quality tilt of the index and removal of the uncertainty and dispersion of results from the current model, and infrastructure debt, which benefits from being classified as a Category 1 asset (senior secured).

IG fixed income

Within risk assets, HY bonds and leveraged loans (senior secured) benefit under the proposed model’s lower capital charges. In addition, direct lending benefits largely due to its senior secured ranking while infrastructure equity charges are lower due to the revised proposal’s new stand-alone charge and differentiation from broader equity market investments.

Risk assets


Ann Bryant
Head of Insurance Solutions for North America at BlackRock
Ann Bryant is the Head of Insurance Solutions, North America. Most recently, Ann served in a similar role at Barings Asset Management. Ann is a Fellow of the Society of Actuaries and has a degree in mathematics from the University of Wyoming.

Sign up to receive BlackRock's institutional insights

Please click here to opt-in to receiving insight emails from BlackRock. Any data collected will be processed according to BlackRock's privacy policy. You may unsubscribe at any time.

*Required information | Read our Privacy policy

Thank you for reaching out!

A BlackRock representative will reach out shortly. In the meantime, explore our website to read insights on the markets, portfolio design and more.

Explore our insights hub