Accounting rule to increase demand for fixed income ETFs among US insurers, finds Cerulli

Jul 23rd, 2018 | By | Category: ETF and Index News

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US-based insurance companies are expected to show greater adoption of ETFs following regulatory changes to accounting guidelines by the National Association of Insurance Commissioners (NAIC), according to a study from research and consulting firm Cerulli Associates.

James Tamposi, research analyst at Cerulli

James Tamposi, research analyst at Cerulli.

The firm notes that the recent changes by the NAIC allow insurers to record fixed income ETFs as fixed income securities, rather than as common stock holdings.

This subtle change is important, explains James Tamposi, research analyst at Cerulli.

“Insurers can assign a more favorable risk-based capital charge to these investments, providing more flexibility elsewhere in the portfolio than would otherwise be the case had they been required to account for them as common stock holdings,” said Tamposi.

He continued, “Another, more recent change in the NAIC’s guidelines permits insurers to use systematic value accounting, which allows them to calculate the value of bond ETFs by the cash flow of the fund’s underlying holdings. This change helps insurers meet risk and capital requirements, further reducing barriers to investing in fixed income ETFs.”

With insurance general accounts looking particularly ripe for new allocations, Alexi Maravel, a director at Cerulli, addsed, “ETF issuers should look to get ahead of this potential wave of new allocations.”

The Cerulli report, which examined expected demand for ETFs across a range of institutional investors, also recommends that issuers focus on nonprofits as well as pension funds for future demand growth.

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