The National Association of Insurance Commissioners (NAIC) held its Fall 2018 National Meeting (Fall Meeting) in San Francisco, California, from November 15 to 18, 2018. The Fall Meeting was highlighted by the following activities:
1. NAIC Continues its Evaluation of Insurers’ Use of Big Data
The NAIC is continuing its review of property and casualty insurers’ use of predictive modeling in rate filings and is developing related guidance materials for states to use in reviewing predictive models. The Casualty Actuarial and Statistical (C) Task Force exposed for public comment (until January 15, 2019) a draft white paper regarding insurers’ use of predictive modeling, which addresses: (a) the sources of data used by companies; (b) data points selected by companies as inputs for predictive modeling; (c) how the predictive models were developed and the results that they produce; and (d) final rate filings with states. The white paper identifies best practices currently used in a number of states and provides guidance for regulators in implementing those best practices.
2. NAIC Exposes Group Capital Calculation Field Testing Template For Public Comment
The Group Capital Calculation (E) Working Group (GCC Working Group) exposed the group capital calculation (GCC) field testing template and related instructions (Template) for a public comment period ending January 30, 2019. The Template is in furtherance of the NAIC’s efforts to develop an analytical tool for regulators to evaluate the financial condition of an insurance group through a U.S. GCC using a risk-based capital aggregation methodology. The initial round of field testing is anticipated to begin on March 1, 2019, and participation will be voluntary. The GCC Working Group emphasized that the Template is a preliminary draft that will be revised following its analysis of issues emerging from the field testing results.
3. IAIS Activities Update, Including Release of Draft Holistic Framework for Systemic Risk in the Insurance Sector for Public Consultation
On November 14, 2018, the International Association of Insurance Supervisors (IAIS) published its proposed Holistic Framework for Systemic Risk in the Insurance Sector (Holistic Framework) for a public consultation period ending January 25, 2019. The Holistic Framework seeks to assess and mitigate systemic risk in the insurance sector by focusing on an “activities” based approach. It recognizes that systemic risk may arise from not only the impairment of individual insurers but also the collective activities and exposures of insurers at a sector-wide level. Subject to any further refinements by the IAIS based on public comments, the Holistic Framework is slated for adoption in late 2019, with implementation beginning in 2020.
4. NAIC Seeks to Better Understand “Best Interest” Standard Proposed by Federal Regulators Before Finalizing Related Amendments to Suitability in Annuity Transactions Model Regulation
The Life Insurance and Annuities (A) Committee ((A) Committee) voted to expose for comment (until February 15, 2019) draft amendments to the NAIC’s Suitability in Annuity Transactions Model Regulation (SAT). Such vote occurred over objections made by both California and New York that consideration of the amendments by the (A) Committee was inappropriate in light of the fact that the Annuity Suitability (A) Working Group (ASWG), which was charged with drafting the amendments, had not officially voted to adopt the proposed amendments. During discussion, the Chair of the ASWG and the Chair of the (A) Committee explained that further federal regulation (from both the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Labor) is expected in 2019 with respect to the “best interest” standard and, in the interest of “harmonization between regulatory enforcers,” it might be necessary to pause the development of the amendments until the NAIC has further clarity around the proposed federal rules.
5. NAIC Considering Circumstances Where the Use of Indexes with Limited Lifespans Should be Allowed to Illustrate Fixed Index Annuities
The Annuity Disclosure (A) Working Group (ADWG) is working on revisions to the Annuity Disclosure Model Regulation (#245) to allow for the use of indexes that have been in existence for less than 10 years in fixed index annuity illustrations. Such use is currently prohibited in states that have adopted the relevant portion of the current version of Model 245. In June 2018, the ADWG exposed for comment draft revisions to Model 245, which would allow illustrations to use an index in existence for less than 10 years, provided that: (a) the index satisfies certain other criteria (e.g., the index is comprised entirely of components that have been in existence for at least 10 years, the index value is calculated according to an algorithm that is not subject to discretion, and if the insurance company is affiliated with the index provider, indexes published by that index provider are also used by entities unaffiliated with the insurance company); and (b) certain disclosures accompany the illustration. Despite working on the issue for over a year, the ADWG has been unable to reach consensus regarding appropriate revisions. The ADWG has agreed to form a small drafting group to develop additional language for review and discussion. In light of this, the (A) Committee granted an extension of the model law development request to the Spring 2019 National Meeting.
6. NAIC Preparing Regulatory Guidance Regarding Changes to Life Risk-Based Capital Following Federal Tax Reform
The Capital Adequacy (E) Task Force approved changes to the life risk-based capital (RBC) formula in June 2018 to account for the effects of the 2017 Tax Cuts and Jobs Act, specifically focusing on changes to the RBC ratio denominator in order to reflect the corporate tax rate decrease from 35% to 21%. Such changes were subsequently adopted by the Financial Condition (E) Committee and Plenary. With the assistance of the American Academy of Actuaries, the Life Risk-Based Capital (E) Working Group (Life RBC WG) is preparing a guidance document for state regulators to use in evaluating companies’ year-end 2018 RBC ratios in light of tax reform and these recently adopted changes to the RBC factors and instructions. The purpose of the document is to serve as a starting point for future communications from the Life RBC WG to a broader group of state regulators in order to assist state regulators in interpreting the results of year-end 2018 life RBC calculations in light of tax reform.
7. NAIC Expected to Adopt Amendments to Credit for Reinsurance Model Law and Model Regulation
The Reinsurance (E) Task Force (Task Force) and the Financial Condition (E) Committee ((E) Committee) voted to adopt amendments to the NAIC’s Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (together, the CFR Model Laws) to implement reinsurance collateral reforms for reinsurers that meet certain conditions, as required in connection with the Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement), which was signed by the U.S. and the EU in September 2017. The amendments are expected to be officially adopted by the NAIC during an upcoming meeting of the Executive Committee and Plenary on December 19, 2018.
8. Receivership and Insolvency (E) Task Force to Consider Application of Warrantech Decision to Long-Term Care Products
The Receivership and Insolvency (E) Task Force (RITF) heard comments from interested parties regarding pending litigation in Pennsylvania related to whether the assets of the insolvent estates in the Penn Treaty/American Network liquidations can be used to pay benefit claims that accrued more than 30 days after the liquidation date and that exceed the applicable guaranty association coverage limits. At issue is the applicability of the Supreme Court of Pennsylvania’s decision in the case of Warrantech Consumer Products Services, Inc. v. Reliance Insurance Company in Liquidation (Warrantech), which held that the estate of an insolvent property and casualty insurer was not liable for service contract claims that arose 30 days after the order of liquidation of such insurer.
9. NAIC Considering Insurance Regulatory Issues Related to Legalized Cannabis Business
The recently formed Cannabis Insurance (C) Working Group (Cannabis WG) met in person for the first time at the Fall Meeting to hear reports and presentations regarding the cannabis insurance industry. The Cannabis WG heard: (a) a panel discussion examining California as a case study in cannabis insurance; (b) an overview of the supply chain and architecture of the cannabis industry; and (c) a panel discussion on insurance coverage availability and gaps in coverage for cannabis businesses. Among other things, these presentations raised as issues the need for clarity between state and federal laws regarding the legality of cannabis and the regulation of cannabis and the cannabis insurance industry, as well as a need by the cannabis industry for greater access to the services of financial institutions and insurers. The Cannabis WG is in the process of drafting a white paper outlining issues and making recommendations for the development of related regulatory guidance. The Cannabis WG expects to have a draft of this white paper available for review during the NAIC’s Spring 2019 National Meeting.
10. NAIC Continues its Evaluation of Pet Insurance
The NAIC is evaluating the need for additional regulation with respect to pet insurance. At the Fall Meeting, the Property and Casualty Insurance (C) Committee ((C) Committee) exposed for comment a white paper, titled “A Regulator’s Guide to Pet Insurance,” which provides an overview of current regulations governing the pet insurance industry.
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