Regulatory Update: NAIC Spring 2019 National Meeting
1. Reinsurance (E) Task Force Considers Additional Revisions to the Credit for Reinsurance Model Law and Regulation to Implement Covered Agreements
At the Spring Meeting, the Reinsurance (E) Task Force (Reinsurance Task Force) discussed comments to the latest exposed drafts of the revised Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) (together, the CFR Model Laws) in an effort to implement the collateral reduction requirements set forth in the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance as well as the Bilateral Agreement Between the United Kingdom and the United States of America on Prudential Measures Regarding Insurance and Reinsurance (together, the Covered Agreements). U.S. state regulators risk federal preemption of state law unless they adopt such reinsurance collateral reforms within 60 months from September 2017 – the date the Covered Agreement with the European Union (EU) was signed.
2. NAIC Prepares Group Capital Calculation Template and Instructions for Field Testing
The Group Capital Calculation (E) Working Group (GCC Working Group) continued to make progress in developing a U.S. Group Capital Calculation (GCC), with voluntary field testing expected to begin in early May 2019. During the Spring Meeting, the GCC Working Group discussed comments to the field-testing template and related instructions (Template), which were previously exposed for comment. To date, approximately 30 insurance groups, representing 15 lead states, have volunteered to participate in field testing. Volunteers will have 90 days to complete and submit the Template to their lead state, and lead states will have 60 days to review the results and make recommendations to the GCC Working Group. It is expected that aggregated information will be made available to other regulators and interested parties to assist in making final recommendations regarding the GCC once field testing is completed. Subject to the results of the field-testing process, the GCC Working Group intends to adopt the GCC by year’s end.
3. NAIC Continues to Consider the Use of Big Data and Blockchain Technology in the Insurance Industry
The NAIC is continuing to consider the use of (a) big data for predictive modeling in rate filings by property and casualty insurers and (b) blockchain technology in the insurance industry. Additionally, the NAIC plans to expand the scope of its examination of big data usage by reviewing such use in connection with accelerated underwriting for life insurance and insurer claims practices.
4. NAIC Resumes Efforts to Finalize Proposed Amendments to Suitability in Annuity Transactions Model Regulation
The Life Insurance and Annuities (A) Committee has instructed the Annuity Suitability (A) Working Group (ASWG) to resume efforts to finalize proposed amendments to the NAIC’s Suitability in Annuity Transactions Model Regulation (SAT). The proposed amendments are intended to better align the state standards governing the standard of care of insurance producers with the federal standards governing the standard of care of investment advisers. The November 2018 draft of the proposed amendments was exposed for comment until February 15, 2019, and 19 comment letters were received from regulators and interested parties. Comments were not discussed during the Spring Meeting; rather, it is expected that the ASWG will hold an in-person interim meeting in May or June to make further revisions to the proposed amendments in light of such comments. The ASWG was instructed to complete its work on the proposed amendments as soon as possible in anticipation of the U.S. Securities and Exchange Commission’s expected adoption of “Regulation Best Interest” in September 2019.
5. NAIC Continues Discussions Related to the Regulation of Pharmacy Benefit Managers
The Health Insurance and Managed Care (B) Committee approved a request to develop a new NAIC model law establishing a licensing or registration process for pharmacy benefit managers (PBMs). The approval of the Executive (EX) Committee is required before resources can be devoted to the actual development or drafting of the proposed new model. In the interim, however, the Pharmacy Benefit Manager Regulatory Issues (B) Subgroup of the Regulatory Framework (B) Task Force may proceed with discussions related to the proposed new model.
The intended scope of the proposed new model is unclear, as the request was limited to establishing a licensing or registration process for PBMs, but by its charges, the subgroup responsible for drafting the proposed new model is authorized to consider including provisions on PBM prescription drug pricing and cost transparency. During discussion at (B) Committee, regulators expressed an interest in using the model law development process as a means to consider a broader scope of issues related to the regulation of PBMs and to discuss further whether the proposed new model or some other mechanism would be appropriate to address such issues.
6. Surplus Lines (C) Task Force Prepares Best Practices Guidance Related to Final Federal Flood Insurance Rule
At the Spring Meeting, the Surplus Lines (C) Task Force noted that the final rule released by federal banking agencies implementing the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) will become effective July 1, 2019. The NAIC provided the federal banking agencies with input and feedback throughout the course of drafting the final rule. The Surplus Lines (C) Task Force is in the process of drafting a best practices document that will identify aspects of the final rule that may conflict with state law and other related items. The Surplus Lines (C) Task Force expects to adopt the best practices document by year-end 2019.
7. NAIC Discusses Mechanisms for Voluntary Restructuring of Solvent Insurers
At the Spring Meeting, the new Restructuring Mechanisms (E) Working Group (the Restructuring Working Group) heard presentations from interested parties on mechanisms for voluntary restructuring of solvent insurers, including insurance business transfers (IBTs) and corporate divisions. The Restructuring Working Group is charged with preparing a white paper that, among other things, addresses the need for, and issues related to, such restructuring statutes.
8. NAIC Discusses Updates to the Life Risk-Based Capital Formula to Incorporate Longevity Risk
The Life Risk-Based Capital (E) Working Group (Life RBC Working Group) is considering changes to the life risk-based capital formula to incorporate longevity risk. At the Spring Meeting, the Life RBC Working Group heard a presentation by the American Academy of Actuaries (Academy). The Academy is recommending that a capital structure with longevity C-2 factors be applied to base statutory reserves. The Academy is also working to develop and further consider an approach to incorporate a covariance adjustment within C-2 to reflect the correlation between mortality and longevity risk. While there generally is consensus that a covariance adjustment is necessary, regulators and interested parties have yet to reach consensus around the appropriate amount of such adjustment.
9. NAIC Establishes Long-Term Care Insurance (EX) Task Force
Recognizing the importance of bringing stability to the long-term care insurance market, the NAIC membership voted unanimously to form the Long-Term Care Insurance (EX) Task Force (LTC Task Force), which will report to the Executive (EX) Committee. Virginia Insurance Commissioner Scott A. White and Colorado Insurance Commissioner Michael Conway will serve as Chair and Vice Chair, respectively, of the LTC Task Force. Other members of the LTC Task Force are still being determined. The charges of the LTC Task Force include, among others, “developing a consistent national approach for reviewing long-term care insurance rates that result in actuarially appropriate increases being granted by the states in a timely manner, and eliminates cross-state rate subsidization.” The LTC Task Force is charged with delivering its proposal to the Executive (EX) Committee by the NAIC’s Fall 2020 National Meeting. Unless otherwise affirmatively extended or modified by the Executive (EX) Committee, the LTC Task Force and its charges will expire on January 31, 2021.
10. NAIC Continues to Evaluate the Exposed Revisions to SSAP No. 41R — Surplus Notes
The Statutory Accounting Principles (E) Working Group (the SAP Working Group) is continuing to consider the August 4, 2018, exposed revisions to SSAP No. 41R — Surplus Notes (SSAP No. 41R) and the potential unintended consequences such revisions could have on existing transactions as raised in two comment letters submitted for the comment period ending November 30, 2018.
11. NAIC Adopts an Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office to Expand Fixed-Income Treatment to Certain Qualifying Funds
The Valuation of Securities (E) Task Force (VOS Task Force) adopted an amendment to the Purposes and Procedures Manual (P&P Manual) of the NAIC Investment Analysis Office to extend fixed-income treatment to certain qualifying funds. The amendment will be reflected in the 2019 P&P Manual; the proposed draft of which was also approved by the VOS Task Force at the Spring Meeting.
The amendment expands the existing framework so that certain investment companies organized as closed-end management companies and unit investment trusts regulated by the U.S. Securities and Exchange Commission can be submitted for analysis by the Securities Valuation Office (SVO) to determine whether the fund can be characterized as a “fixed-income-like” asset eligible to receive an NAIC designation.
The Statutory Accounting Principles (E) Working Group (SAP Working Group) voted to expose for comment revisions to SSAP No. 25 — Affiliates and Other Related Parties to clarify that a transaction that involves an affiliate, or risks of an affiliate, is required be reported as a related-party transaction or an investment in an affiliate for purposes of statutory accounting, even if the transaction also involves a nonrelated intermediary. In addition, revisions will be made to SSAP No. 26R — Bonds, SSAP No. 32 — Preferred Stock, SSAP No. 43R — Loan-backed and Structured Securities and SSAP No. 48 — Joint Ventures, Partnerships and Limited Liability Companies, to identify that investment transactions are subject to the principles of related parties identified in SSAP No. 25. The deadline for comments is June 12, 2019.
13. NAIC Continues to Consider Increasing Age Restriction on Indices Used in Annuity Illustrations
Although the Annuity Disclosure (A) Working Group (ADWG) did not meet at the Spring Meeting, in early March, the ADWG exposed for comment through April 26, 2019, proposed revisions to the Annuity Disclosure Model Regulation (Model 245). Currently, Model 245 prohibits annuity issuers from illustrating the performance of an index that is less than 10 years old. As further described below, the proposed revisions to Model 245 would expand the scope of the illustration prohibition to apply to indices less than 20 years old.
14. NAIC Considers Industry Comments on Key Projects of the International Association of Insurance Supervisors for 2019
The International Insurance Relations (G) Committee (G Committee) dedicated the majority of its time at the Spring Meeting to hosting a high-level discussion with a panel of interested parties on key 2019 projects of the International Association of Insurance Supervisors (IAIS). The discussion was focused on the development of the Insurance Capital Standard (ICS) and the Holistic Framework on Systemic Risk (Holistic Framework) and concerns regarding the direction and potential effect of such projects on U.S. insurers. The Chair of the G Committee noted that the views expressed by the panel will be taken into consideration internally by the G Committee and also shared with the IAIS.
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