Life Insurance

Risk-Adjusted Capitalization Continues To Increase For U.S. Life/Health Industry

Life/health industry composite’s BCAR score as of 2019 was 28.0% at the 99.6% VaR level

New report titled “Risk-Adjusted Capitalization Continues to Increase for Life/Health Industry,” was conducted and provided by Am Best. To access the full copy of this special report, please visit here.

OLDWICK, N.J., September 3, 2021—The U.S. life/health industry improved its risk-adjusted capitalization in 2017-2019 due to strong growth in available capital, particularly in 2019, according to a new AM Best report.

AM Best updated its rating methodology in October 2017 for greater transparency. Additionally, its Best’s Capital Adequacy Ratio (BCAR) model was retooled to measure required capital at multiple value-at-risk (VaR) levels to determine capital adequacy at more extreme levels. BCAR now measures the excess of available capital over required capital.

The Best’s Special Report, titled, “Risk-Adjusted Capitalization Continues to Increase for Life/Health Industry,” states that the life/health industry composite’s BCAR score as of 2019 was 28.0% at the 99.6% VaR level. A score over 25% at this VaR level is deemed strongest for a beginning BCAR balance sheet strength assessment. However, as the report notes, several other attributes are used to assess balance sheet strength, which, along with operating performance, business profile and enterprise risk management, are used to determine the final rating.

Business Risk & Available Capital

The BCAR and the RBC both include risk charges applied to life and health premiums, net of variable premiums. Both include risk charges for separate accounts. The BCAR applies a charge to separate account assets, while the RBC applies a charge to separate account liabilities. The BCAR includes small risk charges for non-controlled assets, including assets pledged as collateral and contingent commitments. The BCAR also includes unrecognized pension and other post-retirement obligations. Most companies have fully recognized unfunded obligations on their balance sheets as part of accounting changes back in 2013. The RBC business risk includes amounts for administrative expenses for certain health coverages. Business risk is not included in the covariance formula in either approach.

The growth in risk-adjusted capitalization is due to the strong growth in available capital, particularly in 2019...

Available capital for BCAR and RBC includes reported capital and surplus, asset valuation reserves, and a 50% credit for dividends apportioned. The BCAR includes a credit on the unearned premium reserve and the interest maintenance reserve expected to be amortized the following year. Operating losses go against capital in the BCAR if they are recurring, subject to analyst adjustment. RBC generally allows full credit for surplus notes, while the BCAR allows for 90% credit for unaffiliated notes (95% credit for affiliated notes). Credit is reduced when the notes are within five years of maturity and begin to lose their permanence benefit. The BCAR also reduces available capital for 10% of off-balance sheet derivative exposures.

Preliminary Results

Preliminary results for 2020 year-end data show that the aggregate BCAR at the 99.6% VaR level for the life/health industry will decline to 25.9%. Available capital increased by $20.4 billion, reflecting life/health insurers’ continued capital and surplus growth; however, required capital is expected to increase by $25.9 billion. Increases in fixed-income required capital are being driven by increases in allocations of NAIC Class 2 bonds, while increases in BA equity and real estate assets are driving increases in required capital for alternative investments.

The report also discusses how risk-based capital (RBC) ratios specified by the National Association of Insurance Commissioners (NAIC) have tracked with AM Best’s BCAR in recent years. AM Best’s BCAR is similar to the NAIC’s RBC requirements in certain aspects. However, while AM Best’s BCAR assessment is an initial measure of balance sheet strength, with an emphasis on available capital levels in excess of required capital at extreme tail levels, RBC is a solvency tool used by regulators to take various actions. The report makes BCAR-RBC comparisons on risk charges in various categories, including asset risk, mortality/morbidity risk and interest and market risks.




AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit
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