US risk-based capital (RBC)

After a series of insurer failures in the late 1980s, the US National Association of Insurance Commissioners developed a risk-based capital formula, adopted by the states in the early 1990s. It calculates a reference capital from the insurer's main risks, assets, credit, underwriting, interest rates, weighted by fixed factors and aggregated with a formula allowing partial diversification. The capital actually held, called total adjusted capital, is compared with this reference level. The resulting ratio triggers graduated levels of action: below twice the reference level, the insurer must submit a recovery plan; lower, the regulator may impose measures; below a certain threshold, it may take control, and it must do so below a lower one still. The system differs from Solvency II on essential points: assets and liabilities remain valued under statutory accounting rules rather than at market value, the factors are fixed rather than calibrated on a one-year shock, and the regime is applied state by state. The two approaches have been brought closer in international discussions on the capital standard, without being unified. For an analyst, a US insurer's published ratio cannot be directly compared with a European insurer's solvency ratio.