Insurers should be ready to begin six months of work to comply with new guidelines for their bond investments taking effect at the start of 2025.
The Principles Based Bond Project guidance from the National Association of Insurance Commissioners (NAIC) shifts away from prescriptive regulation of bond accounting and reporting. This principles-based approach accounts for credit worthiness, interest rate risk, liquidity and other other aspects of these bond investments, explained Ivan Matviak, executive vice president of Clearwater Analytics, which is advising its clients on completing this change.
"There's about six months of development work to do on the systems," he said. "It will take about six months of work for clients to actually make the change. We're planning on really engaging deeply with the client starting around June to help them get this done through the end of the year. We're working to do the assessments of what is the scope, and how big a task is this for each of our more than 500 insurance clients, and then scheduling out the work of when we can get this done."
NAIC's update of the bond guidance is a response to a shift in insurance carriers' investment strategies, Matviak said. More than 10 years ago, carriers started to move away from mainly investing in secure and stable U.S. Treasury bonds, because interest rates dropped and stayed near zero, erasing profits on those bonds.
"So they moved much more toward alternative investments, limited partnerships, other types of credit and private credit type investments," Matviak said.
More subtlety is needed to determine valuation and assess risk for these types of investments, he added. The project guidance allows insurance company investors to categorize these investments separately as credit obligations and asset-backed securities, rather than reporting all such investments together.
"This is a process of the NAIC really wanting to help better understand those factors like risk and liquidity in the portfolio and make sure that they're allowing the insurance companies to classify the bonds in a much more nuanced way," Matviak said.
The change in guidance requires insurers to collect more data on the securities than before, including security master files and the correct schedule for reporting. This needs big data aggregation and analysis work, as well as general ledger changes, he added.
The overall effect of the new guidance will be to get insurers to better understand their investments, according to Matviak. "It gives a lot more latitude to the insurance companies to assess the best way to report and categorize these assets based on a number of factors," he said, adding liquidity and creditworthiness as two of those factors. "That puts appropriately more onus on the insurance companies, the asset owners, to classify and assess these things as opposed to saying, 'Well, [the regulator] told me to put it here or here.'"
