Regulatory changes to the investment regulatory framework proposed by the National Association of Insurance Commissioners (“NAIC”) will have a significant impact on the ability or willingness of insurers to invest in private credit instruments. The Alternative Credit Council (“ACC”) has been actively engaging with NAIC members to help them better understand private credit investments and advocating for more appropriate policy changes that will not negatively impact insurers' appetite to invest in private credit. ACC has been focusing on a number of the recent proposals, including potential changes regarding the accounting treatment, valuation methodology, use of credit ratings, and capital charges for asset-backed securities (“ABS”).​ These regulatory changes may have a significant impact on the ability or willingness of insurers to invest in private market instruments, and ACC has been actively advocating for more reasonable rule changes that will not negatively impact securitizations in the U.S.​

ACC has taken the following actions:

Holistic Framework: ACC filed a comment letter on the NAIC’s proposed holistic framework for modernizing its insurance investment regulations and requirements.​ Some key ACC concerns include the proposed removal of exempt filing status prior to establishing a governance framework for credit rating providers (“CRPs”) as well as the introduction of a CLO modeling framework before adequate time was given to the American Academy of Actuaries to develop their own framework.

Reliance on Credit Ratings: ACC filed a comment letter expressing concerns about the NAIC’s proposal to authorize its Securities Valuation Office (“SVO”) to review and potentially override private credit letter ratings.​ Key ACC concerns included the effectiveness of the review and appeal process, the negative impact that the extra cost and time of the review process may have on affected investments, and the ramifications of SVO override. Due to these concerns, ACC recommended the creation of a working group including representatives from issuers, CRPs, and insurers, in order to mitigate negative impacts.

CLO Valuation Methodology: Throughout multiple meetings with NAIC officials regarding the holistic framework, ACC has expressed concern about replacing credit ratings as the basis for CLO capital charges with an SVO valuation methodology.​

ABS Capital Charges: ACC sponsored an Oliver Wyman study comparing other commonly held assets with an NAIC capital charge to determine whether the NAIC’s proposed ABS residual tranche 45% capital charge adequately reflects the actual risk. The study found that common stock losses are 30% higher than ABS residuals in the Deep-Tail stress scenario and 35%-50% higher than ABS residuals in the Mid-Tail stress scenarios. ACC believes this study persuasively highlights that the 45% interim risk-based capital charge does not reflect actual risk when compared to the capital charges and losses of other assets. ACC is therefore requesting for the NAIC to reconsider the appropriateness of the pending capital charge on ABS.

In addition to sound and fruitful regulation, one of ACC’s key priorities in all interactions with the NAIC is to maintain the attractiveness of private investments to insurers.

Please contact Joe Engelhard with any questions.

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  Joe Engelhard

  Head of US Private Credit and Asset Management Policy & Regulation