Regulatory Update: NAIC Adopts New Risk-Based Capital Charges for Collateral Loans and Collateralized Loan Obligations

In June 2026, the National Association of Insurance Commissioners (NAIC) took significant action on the risk-based capital (RBC) treatment of structured and collateral-backed investments. This Sidley Update summarizes (i) the Life Risk-Based Capital (E) Working Group’s adoption of a new overcollateralization-based framework for collateral loans and (ii) the Risk-Based Capital Investment Risk and Evaluation (E) Working Group’s adoption of new C-1 RBC factors for collateralized loan obligations (CLOs).

 

1. Life RBC Working Group Adopts Revised RBC Framework for Collateral Loans

On a June 11, 2026, conference call, the Life Risk-Based Capital (E) Working Group (Life RBC Working Group) adopted revisions to the RBC charges for collateral loans that replace the existing uniform 6.8% RBC charge on all collateral loans with a framework that bases the applicable RBC charge on the collateral underlying such collateral loan, effective for RBC reported as of year-end December 31, 2027.

 

As we have previously reported, the original proposal for these changes would have applied a uniform 20% haircut to RBC factors for collateral loans backed by LP/LLC/JV interests (base RBC charge of 30%) or residual interests (base RBC charge of 45%). After considering industry input, including a proposal from the American Council of Life Insurers, the Life RBC Working Group considered an alternative proposal that adjusts the applicable haircut based on the level of overcollateralization. The approved framework applies the following haircuts based on the level of overcollateralization:

Overcollateralization Level	LTV Band	Midpoint	Haircut	RBC Charge (LP/LLC/JV Interests)	RBC Charge (Residual Tranches)
OC < 111%	>90% or no independent verification	N/A	0%	30%	45%
OC ≥ 111% and < 143%	>70% – 90%	80%	20%	24%	36%
OC ≥ 143% and < 200%	>50% – 70%	60%	40%	18%	27%
OC ≥ 200%	50% or below	25%	50%	15%	22.5%

Key features of the adopted framework include the following:

• Independent verification. Reduced charges based on overcollateralization require independent verification of fair value (e.g., compliance certifications from unaffiliated third parties, independent third-party valuations of the collateral, and/or independent reasonableness checks).
• No haircut for LTV above 90%. Loans with an LTV above 90% (or for which no independent verification has been obtained) will not receive a haircut and will instead bear the full base charge (30% for LP/LLC/JV interests; 45% for residual tranches).
• 50% floor on haircuts. The overcollateralization haircut is capped at 50%, so the minimum charge for any collateral loan is no lower than half the base charge for the underlying asset type.

2. RBC IRE Working Group Adopts New C-1 RBC Factors for CLOs

On a June 23, 2026, conference call, the Risk-Based Capital Investment Risk and Evaluation (E) Working Group (RBC IRE Working Group) adopted Proposal 2026-12-IRE, which introduces new RBC factors for CLOs effective for RBC reporting as of December 31, 2026.

The RBC IRE Working Group has been reviewing CLO RBC treatment as part of a broader recalibration of capital charges for structured securities. The RBC IRE Working Group previously exposed a “comparable attributes” framework, developed by the American Academy of Actuaries (the Academy) with the NAIC Structured Securities Group, that calibrates CLO charges on tranche-level characteristics with ratings retained as the primary consideration and tranche thickness (the percentage of the capital structure a tranche represents) added as a secondary factor.

Features of the adopted CLO C-1 factor framework:

• Scope. The factors apply broadly to CLOs, both broadly syndicated loan (BSL) and middle-market CLOs, as well as collateralized bond obligations (CBOs) and collateralized debt obligations (CDOs), rather than only to BSL CLOs (the sole market used by the Academy to develop the modeled factors).
• Residual tranches. The existing 45% pretax charge for CLO residual tranches is retained.
• Surcharge for BSL CLO thin tranches. C-1 factors turn on ratings plus tranche thickness rather than ratings alone. An 11.77% pretax surcharge will apply to below-investment-grade tranches (NAIC Designation Category 2.C or below) of only BSL CLOs (not middle market CLOs) with a thickness of 4% or less.
  • Timing of measurement. Tranche thickness is measured on a current basis, using the most recent trustee report available as of the investment reporting date rather than as of origination.
  • No floor. CLO factors will not be floored at the current bond C-1 factors.
• Portfolio adjustment factor. On an interim basis, the CLO portfolio adjustment factor defaults to 1.0, while CLO issuer vehicles may be counted toward the issuer count for the non-CLO bond portfolio adjustment factor — subject to further review in 2027.