NAIC Releases Updated CMBS Results [Review]
November 2, 2022.
The market was wading through results from the National Association of Insurance Commissioners (NAIC), released on November 3, of CMBS capital requirements under its updated methodology. The new approach increases the number of economic scenarios from four to eight and assigns risk based capital (RBC) requirements using 20 designation categories (versus six previously).
Until this year, the NAIC considered the following economic scenarios: Optimistic, Base, Conservative, and Stress. The updated methodology inserts a new scenario between the existing scenarios and adds an extreme “tail” scenario. According to the NAIC, the eight economic scenarios are meant to be “through-the-cycle.”
By increasing the number of NAIC designations from six to 20, capital requirements are more granular. For example, as shown in the table above, securities rated AAA through A- all had an NAIC designation of 1 with an RBC requirement of 0.40%. Under its updated approach, each credit rating carries a new designation with its own RBC requirement.
Market participants have expressed concern that the additional macro scenarios and, in particular, the addition of a tail risk scenario could make mezzanine tranches of CMBS more vulnerable to lower designations and therefore increase the amount of regulatory capital insurance companies need to hold.