Why the Insurance Industry’s Risk-Based Capital System Is Headed for a Reckoning

The insurance industry’s foundation is showing cracks and regulators know it. The Risk-Based Capital (RBC) Model Governance Task Force just kicked off a full-scale review of the decades-old capital framework meant to protect policyholders from insurer insolvency. With private equity rewriting the rules and offshore reinsurance deals piling up at record speed, critics argue the current system is outdated and dangerously blind to modern risks.

If nothing changes, it's policyholders who may be left holding the bag.

A 1990s Framework in a 2025 World

The RBC system was designed in the 1990s, during an era of fax machines and floppy disks. Its core purpose? Ensure insurers hold enough capital to protect policyholders from going under. Most state regulators target RBC ratios of 400%–450%.

But the insurance world it once governed has completely transformed:

• Private Equity's Rapid Rise: PE firms now manage $700 billion in insurance assets, accounting for 7.1% of the industry. Just five years ago, that figure was 5%. Their investment-first mindset often prioritizes yield over long-term solvency.
  
  

• Offshore Reinsurance Surge: According to Fitch Ratings, insurers have quadrupled the reserves they cede offshore since 2019, now totaling over $450 billion. These reinsurance deals are often complex, opaque, and executed with non-U.S. entities.
  
  

Despite this, the RBC formula continues to operate as if the industry's biggest risk is a simple portfolio mismatch, not global financial engineering.

A CEO’s Stark Warning

Larry Rybka, CEO of Valmark Financial Group, has become one of the RBC reform’s loudest voices. In a blunt public letter, he argued that today's RBC formula ignores “new and material solvency risks” from private equity-backed insurers and non-transparent reinsurance deals.

As a case study, Rybka pointed to PHL Variable, an insurer that collapsed and is now under state oversight in Connecticut. His takeaway: the system failed, and policyholders are stuck with only the minimum guarantee coverage from the state.

“Policyholders will only get the minimum state guarantee,” Rybka wrote. “I want to be on the record pointing to the NAIC’s inaction before the next larger carrier fails.”

Regulatory Heavyweights Step In

The National Association of Insurance Commissioners (NAIC) isn’t treating this like a routine audit. Ohio’s Judith French and Wisconsin’s Nathan Houdek, two influential insurance regulators, are leading the task force. According to Mayer Brown, their involvement shows how seriously the NAIC is taking the need for change.

Meanwhile, the Capital Adequacy Task Force is exploring whether to limit public disclosure of RBC figures altogether, underscoring just how politically charged the issue has become.

The RBC task force is currently collecting public comments on its proposed reforms and 10 open questions on capital levels, risk aggregation, and insurer analysis.

This isn’t just another comment cycle. It’s a real-time redesign of the insurance capital system.

Rybka’s 4-Point Reform Plan

Rybka doesn’t expect regulators to implement his plan wholesale, but his proposals are gaining attention from insurers, analysts, and policymakers:

1. Tighter Reinsurance Requirements: Require higher RBC charges for risks ceded to reinsurers that aren’t U.S.-licensed, equally regulated, or fully collateralized. No more using foreign entities to make liabilities disappear on paper.
   
   

2. Total Transparency: Mandate public disclosure of reinsurance counterparties, contract terms, and side deals so everyone knows who’s actually taking on the risk.
   
   

3. End Risk Transfer Games: Implement substance-over-form tests. If a deal doesn't truly transfer risk, it shouldn’t qualify for RBC credit regardless of how it’s structured.
   
   

4. Realistic Credit Risk Factors: Increase RBC charges on below-investment-grade debt exposures, especially when held via CLOs or business development companies. Complexity shouldn't mask exposure.
   
   

Rybka’s message is clear: act now or risk federal regulators stepping in when the next carrier collapses.

What It Means for Marketing and Brand Strategy

RBC reform isn’t just a back-office compliance issue. It’s poised to shake up how insurers market their strength and reliability.

• Winners: Well-capitalized, transparent insurers will have a huge opportunity to differentiate themselves. A simple message “We don’t need exotic deals to stay solvent” could become a powerful brand asset.
  
  

• Losers: PE-owned insurers and those with complex offshore structures may find themselves under a harsh spotlight. Messaging that once emphasized growth and yield may need to pivot toward transparency and safety.
  
  

• Shift in Messaging: If the new rules call out reinsurance risks or PE-related concerns directly, insurers will need to adjust not only investor communications but also agent training and consumer-facing marketing.
  
  

Think of it as a marketing earthquake waiting to happen and only the most adaptive carriers will come out stronger.

Policyholder Protection Is the Bottom Line

For all the technical language, the heart of the matter is simple: people depend on insurance companies to pay claims during the worst moments of their lives. If the system propping up those promises is broken, it’s not just a financial failure, it’s a societal one.

The RBC framework was built for a different era. Today’s insurers operate across jurisdictions, rely on increasingly complex investment strategies, and are often controlled by private equity firms with very different risk appetites.

The industry and its regulators must update the RBC system before the next major insurer collapses, leaving regulators scrambling and policyholders unprotected.