The National Association of Insurance Commissioners (NAIC) held its Fall 2014 National Meeting in Washington, D.C., from November 14–19, 2014. The meetings were highlighted by the following activities:
- NAIC Continues Its Work to Implement the New XXX/AXXX Framework, Including Developing Actuarial Guideline 48
The Principle-Based Reserving Implementation (EX) Task Force (PBRI Task Force) adopted Actuarial Guideline XLVIII (AG 48), which is a key item needed to implement the XXX/AXXX Framework (Framework) adopted by the NAIC on August 17, 2014. The Framework sets forth an action plan for creating interim regulations specific to life insurance reserve financing transactions pending the full implementation of principle-based reserving. Additional information available here.
- NAIC Adopts Corporate Governance Annual Disclosure Model Act and Model Regulation
The NAIC adopted the Corporate Governance Annual Disclosure Model Act and Model Regulation (Corporate Governance Models), which require an insurer to provide an annual disclosure regarding its corporate governance practices to its lead state and/or domestic regulator. The requirements of the Corporate Governance Models are intended to be effective January 1, 2016, with the first annual disclosure scheduled to be due by June 1, 2016. Additional information available here.
- NAIC Nears Adoption of Amendments to Insurance Holding Company System Regulatory Act Regarding Group-Wide Supervisors for Internationally Active Insurance Groups
The NAIC is nearing adoption of amendments to the Insurance Holding Company System Regulatory Act (Proposed HCA Amendments) that address the authority of an insurance commissioner to act as group-wide supervisor for an Internationally Active Insurance Group (IAIG) or to acknowledge another regulatory official to so act. Additional information available here.
- NAIC Considers Development of Group Capital Standards for IAIGs
Through its ComFrame Development and Analysis (G) Working Group, the NAIC is exploring group capital standards for U.S.-based IAIGs. Regulators intend for these group capital standards to act as an indicator of the financial strength of a consolidated insurance group and to enhance existing regulatory assessment of group risks and capital adequacy. Additional information available here.
- Sharing Economy (C) Working Group to Develop White Paper Relating to Ridesharing
At its first meeting, the newly formed Sharing Economy (C) Working Group discussed an action plan for its 2015 proposed charges. The working group will begin by developing a white paper entitled “Transportation Network Company Insurance Principles for Legislators and Regulators” by the Spring 2015 National Meeting to identify regulatory concerns and principles for legislation. At the Spring 2015 National Meeting, the working group expects to take comments on the white paper, as well as discuss workers’ compensation issues relating to transportation network companies. A white paper on home sharing is expected to follow, after which a regulatory guideline may be developed.
- NAIC Recognizes Importance of Cyber Security to Insurance Companies
In the aftermath of several recent, high-profile data breaches affecting large corporations, the NAIC will consider the threat that cyber security issues pose to insurance companies. Through its newly appointed Cyber Security (EX) Task Force, the NAIC will monitor developments in the area of cyber security and advise, report and make recommendations on cyber security issues affecting insurance companies. In light of the extensive consumer personal information stored in insurance company databases, we expect regulators to use their existing examination and investigation powers to scrutinize insurers’ cyber security practices, and new requirements governing insurers’ cyber security practices are likely to be developed as a result of the NAIC’s efforts.
- NAIC Considers Development of Unclaimed Life Insurance Benefits Model Law
The NAIC is considering a request to develop a new NAIC model to address the issue of unclaimed life insurance proceeds. The Executive Committee will vote on this request either during an open conference call prior to, or during an in-person meeting at, the Spring 2015 National Meeting. If approved, the relevant NAIC groups will have one year to develop the model. If the NAIC does not pursue the requested model, it may instead develop a regulatory guideline. A number of states have already enacted laws to expressly require insurance companies to make comparisons of their in-force business to the Social Security Administration’s Death Master File to potentially identify deceased insureds whose beneficiaries have not filed a claim. Most of such states have enacted, and others are considering enacting, legislation based on the Unclaimed Life Insurance Benefits Model Act prepared by the National Conference of Insurance Legislators.
- NAIC Considers Catastrophe Bond Proposal
The Valuation of Securities (E) Task Force and certain other NAIC groups received a proposal to change the regulatory treatment of catastrophe-linked bonds (CAT Bonds) to investing insurance companies, such that CAT Bonds would be considered insurance for purposes of accounting and capital requirements. Historically, investors that acquire CAT Bonds have not been considered to be engaged in transacting insurance, and accordingly, CAT Bonds have not been considered insurance for purposes of accounting and capital requirements. At this juncture, the proposal has been referred to the NAIC’s Capital Adequacy (E) Task Force because it would affect the calculation of risk-based capital.
- Recommendation to Add Countries to NAIC’s List of Qualified Jurisdictions
The Reinsurance (E) Task Force has recommended that the insurance regulatory authorities in the following countries be placed on the NAIC’s List of Qualified Jurisdictions, subject to re-evaluation every five years: Bermuda, France, Germany, Ireland, Japan, Switzerland and UK. Adoption of this list is expected by the NAIC’s Executive/Plenary Committees before December 31, 2014. To be approved as a “Certified Reinsurer” (with the ability to post reduced collateral on reinsurance agreements with U.S. cedents), an unauthorized reinsurer must be domiciled in a “Qualified Jurisdiction” (one that is considered by the NAIC as “effectively” regulating reinsurance).
- NAIC Continues Its Work to Implement the New XXX/AXXX Framework, Including Developing Actuarial Guideline 48 (Continued)
AG 48 will be considered by the NAIC’s Executive/Plenary Committees during an open conference call on December 16, 2014. If passed, AG 48 will apply to policies issued on or after January 1, 2015 but will not apply to policies that were both issued prior to January 1, 2015 and ceded as part of a reinsurance arrangement in existence as of December 31, 2014.
AG 48 provides guidance regarding the NAIC’s Actuarial Opinion Memorandum Regulation, Section 3 of which gives state insurance commissioners authority to specify methods of actuarial analysis and assumptions necessary for an acceptable opinion to be rendered concerning adequacy of reserves. AG 48 requires, among other things, that a cedent’s opining actuary: (i) follow the methods and assumptions developed as individual components of the Framework to determine whether the cedent’s net reserves are appropriate; and (ii) issue a qualified actuarial opinion if the cedent has entered into a reserve financing transaction that does not adhere to the Framework. The Framework specifies that economic reserves must be backed by assets that qualify as “Primary Security” (also referred to as “hard assets”), while redundant reserves can be collateralized by “Other Security.”
After considerable debate, the definition of “Primary Security” in the version of AG 48 adopted by the PBRI Task Force is limited to cash and securities listed with the Securities Valuation Office of the NAIC and specifically excludes synthetic letters of credit, contingent notes, credit-linked notes or other securities that operate in a manner similar to a letter of credit. For security held in connection with funds withheld and modified coinsurance reinsurance arrangements, AG 48 defines “Primary Security” as also including: (i) commercial loans in good standing (of CM3 quality and higher); (ii) policy loans; and (iii) derivatives acquired in the normal course and used to support and hedge liabilities pertaining to the actual risks in the policies ceded pursuant to the reinsurance arrangement. AG 48 defines the term “Other Security” as any asset (including one meeting the definition of “Primary Security”) acceptable to the commissioner of the ceding insurer’s domiciliary state. AG 48 also provides for an advisory group’s review of captive transactions to determine whether the transaction should be exempt from AG 48.
The PBRI Task Force also discussed (and exposed for comment for 60 days) a proposal by the American Council of Life Insurers to include an exemption (Small Company Exemption) to the requirements set forth in VM-20 (Standard Valuation Manual VM-20 Requirements for Principle-Based Reserves for Life Products) relating to exclusion tests. VM-20 currently allows less risky products to be exempt from additional reserve calculations. However, the tests that insurers must perform in order to qualify for that exemption (Exclusion Tests) involve substantial work and documentation in order to demonstrate the relative absence of risk. The proposed Small Company Exemption would make the Exclusion Tests less burdensome for companies by incorporating an assessment of company risk, rather than product risk. The Small Company Exemption would be subject to a review by the NAIC’s Life Actuarial (A) Task Force within five years after the operative date of the Standard Valuation Manual to determine the impact of the exemption and whether its continuation is necessary. The applicable premium threshold for qualifying as a “small company” has yet to be determined. Under the current version of the Small Company Exemption, the proposed ordinary life insurance premium threshold is, with respect to an individual company, $300 million or, with respect to a group of insurers of which the relevant company is a part, $600 million combined. However, following a regulator-only call on December 10, 2014, the PBRI Task Force has requested feedback by January 15, 2015 regarding whether the relevant premium thresholds should be modified to $50 million (individual) and $300 million (group).
In addition to the initiatives summarized above, implementing the Framework still requires, among other things, development of a risk-based capital (RBC) “cushion” for policies subject to XXX/AXXX reserving when the assuming reinsurer does not file an RBC report using the applicable RBC formula and instructions.
- NAIC Adopts Corporate Governance Annual Disclosure Model Act and Model Regulation (Continued)
The Corporate Governance Models permit an insurer to report on corporate governance at the level of the ultimate controlling parent, an intermediate holding company and/or the individual insurance company, depending on the level at which corporate governance decisions, oversight and accountability occur with respect to the insurer’s insurance activities.
The Corporate Governance Models were adopted by the Corporate Governance Working Group and the Financial Condition (E) Committee during the NAIC’s Summer 2014 National Meeting in August 2014, but were not placed on the agenda for the Executive/Plenary Committees meeting at that time.
One of the key issues raised during the development of the Corporate Governance Models was the scope of the confidentiality protection afforded to the annual disclosure. Some state insurance regulators (Florida, in particular) expressed concern that the confidentiality language included in the Corporate Governance Models is too broad and that some states may be legally required to deviate from adopting a confidentiality provision of such breadth. However, the insurance industry argued in favor of the broad confidentiality language, which has also been included in other models (e.g., the Insurance Holding Company System Regulatory Act and the Risk Management and Own Risk and Solvency Assessment Model Act). As adopted by the NAIC, the Corporate Governance Annual Disclosure Model Act does not include the alternative confidentiality language for which Florida advocated. Moreover, the recommendation for Part A Accreditation Standards and Guidelines for the Corporate Governance Models requires state adoption of the Corporate Governance Models to provide confidentiality protection for the Corporate Governance Annual Disclosure, including provisions maintaining confidentiality for information shared with state, federal and international regulators, “similar to” Section 6 (Confidentiality) of the Corporate Governance Annual Disclosure Model Act.
- NAIC Nears Adoption of Amendments to Insurance Holding Company System Regulatory Act Regarding Group-Wide Supervisors for Internationally Active Insurance Groups (Continued)
The Financial Condition (E) Committee adopted the Proposed HCA Amendments on December 4, 2014, and the Executive/Plenary Committees will consider the Proposed HCA Amendments during an open conference call on December 16, 2014. If adopted, the Proposed HCA Amendments will require the insurance commissioner to consider five enumerated factors, which are generally consistent with the lead state factors from the NAIC’s Financial Analysis Handbook, in determining a single regulatory authority that is appropriate to act as group-wide supervisor for an IAIG. Under the Proposed HCA Amendments, the designated group-wide supervisor would have the authority to, among other things, take certain actions to assess enterprise risks within an IAIG and to coordinate and share information about members within the IAIG with other relevant state, federal and international regulatory officials. Although the Proposed HCA Amendments include a definition of IAIG that matches the international activity and size criteria included in the current version of the International Association of Insurance Supervisors’ (IAIS) Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), the Group Solvency Issues (E) Working Group charged with drafting the Proposed HCA Amendments has asserted that the Proposed HCA Amendments are not intended to adopt ComFrame. Therefore, in the event that the NAIC adopts (and states enact) the Proposed HCA Amendments and the NAIC later chooses to adopt portions of ComFrame, it is possible that insurers may find themselves navigating different standards under different sets of laws and related regulatory guidance.
- NAIC Considers Development of Group Capital Standards for IAIGs (Continued)
The NAIC’s suggested methodologies for the group capital standards, as set forth in a discussion paper, include: (i) an RBC plus methodology, (ii) a cash flow methodology and (iii) a hybrid of the RBC plus and cash flow methodologies. The RBC plus standard would utilize the current RBC framework, starting with RBC-type risk factors for asset and liability segments, with adjustments to recognize risks not currently reflected in the RBC formulas. The cash flow approach would be “accounting independent,” making it applicable in any jurisdiction and avoiding issues related to marking assets at either market or book value. Cash flows would be projected on an annual basis, and all risks would be taken into consideration for both assets and liabilities. While the hybrid approach has not yet been formally proposed, a combination of both the cash flow and RBC plus methodologies could be developed. Such approach would likely consist of a factor-based approach (RBC plus) as the minimum group capital requirement, together with a cash flow approach that would supplement the minimum group capital requirement. In considering the advantages and disadvantages of the three methodologies, interested parties commented that it would be difficult for property and casualty companies to use the cash flow methodology. An interested party also suggested that there is an advantage to using an RBC-based methodology due to industry’s and regulators’ years of experience interpreting the results and understanding the impact of regulatory changes on RBC (noting the absence of such experience in connection with the cash flow methodology). At this juncture, the methodology for group capital standards remains subject to further discussion at the NAIC.
This update includes contributions from Sidley counsel and associates including Sara N. Africano, Deborah L. Cotton, Stephanie H. Dobecki and Charlene McHugh.
If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work or any of the following:
Michael P. Goldman
Perry J. Shwachman
Andrew R. Holland
Michael L. Rosenfield
Sidley Insurance and Financial Services Practice
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