1. Proposed Revisions to Suitability in Annuity Transactions Model Regulation Include “Best Interest” Standard
The Life Insurance and Annuities (A) Committee approved revisions to the NAIC’s Suitability in Annuity Transactions Model Regulation, subject to additional discussion regarding the template Producer Relationship Disclosure Form and the Consumer Refusal to Disclose All or Partial Consumer Profile Information Form, which are proposed as appendices to the revised model. The draft revisions include a requirement for producers to act in the “best interest” of a retail customer when making a recommendation of an annuity. Under the proposed revisions, a producer has acted in the best interest of the customer if they have satisfied certain prescribed obligations regarding care, disclosure, conflict of interest and documentation. Regulators stated that the proposed revisions are not intended to establish a fiduciary relationship between the producer and the customer. The Annuity Suitability (A) Working Group and the Life Insurance and Annuities (A) Committee are expected to meet before the end of 2019 to finalize the proposed revisions in their entirety.
2. NAIC Advances Accreditation Standard Process for Revised Credit for Reinsurance Model Law and Regulation, and Term and Universal Life Insurance Reserve Financing Model Regulation
The Financial Regulation Standards and Accreditation (F) Committee adopted the following as accreditation standards: (a) the 2019 revisions to the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (the CFR Model Laws) and (b) the Term and Universal Life Insurance Reserve Financing Model Regulation and the 2016 revisions to the CFR Model Laws. The accreditation standards, as approved by the (F) Committee, are expected to be adopted by Executive/Plenary at or before the NAIC’s Spring 2020 National Meeting and effective September 1, 2022.
3. NAIC Continues Efforts to Address Innovation and Technology in the Insurance Sector
The Accelerated Underwriting (A) Working Group (Accelerated Underwriting Working Group), the Artificial Intelligence (EX) Working Group (AI Working Group) and the Privacy Protections (D) Working Group (Privacy Protections Working Group) were recently formed and are beginning to address innovation and technology in the insurance sector. In addition, the Innovation and Technology (EX) Task Force (IT Task Force) received approval to begin the process of revising the antirebating provisions of the NAIC’s Unfair Trade Practices Act.
4. NAIC Considers Next Steps in the Regulation of Internationally Active Insurance Groups in Light of Recently Adopted Reforms by the International Association of Insurance Supervisors
On November 14, 2019, the International Association of Insurance Supervisors (IAIS) adopted a comprehensive set of reforms designed to enable effective cross-border supervision of internationally active insurance groups and contribute to global financial stability. The adopted reforms include (a) the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), (b) the Insurance Capital Standard (ICS) and (c) the holistic framework for the assessment and mitigation of systemic risk in the insurance sector (Holistic Framework).
NAIC and industry discussions at the Fall Meeting focused primarily on the ICS, the five-year monitoring period (commencing January 2020) prior to the ICS’ implementation as a groupwide prescribed capital requirement (PCR) and the Aggregation Method (AM) to a group capital calculation. The U.S. and other interested jurisdictions are developing the AM to provide “comparable outcomes” to the ICS. If the IAIS determines by the end of the monitoring period that the AM provides comparable (i.e., substantially the same) outcomes to the ICS, the AM will be considered an outcome-equivalent approach for implementation as a PCR in lieu of the ICS.
5. NAIC Exposes Proposed Revisions to Statements of Statutory Accounting Principles to Clarify Identification of Related Parties and Affiliates
The Statutory Accounting Principles (E) Working Group (SAP Working Group) exposed for comment revisions to Statement of Statutory Accounting Principles (SSAP) No. 25 — Affiliates and Other Related Parties to clarify and incorporate new disclosures regarding the identification of related parties and affiliates. The proposed revisions are largely aimed at aligning related party and affiliate reporting under Statutory Accounting Principles (SAP) with U.S. Securities and Exchange Commission (SEC) reporting requirements, the latter of which focus on beneficial ownership and do not include the concept of a disclaimer of control or affiliation (Disclaimer). Of particular note, the proposed revisions would subject to SSAP No. 25 requirements and reporting any material transaction between an insurer and a counterparty that is greater than 10 percent owned by either the insurer or a related party or affiliate of the insurer, even if a Disclaimer has been allowed with respect to such counterparty.
6. NAIC Exposes Modifications to Proposed Revisions to SSAPs Related to Levelized and Persistency Commission Arrangements in Response to Industry Comments
The SAP Working Group exposed for comment modifications to the previously exposed revisions to SSAP No. 71 — Policy Acquisition Costs and Commissions regarding levelized commission arrangements, including modifications in response to industry comments regarding persistency and funding, to facilitate further discussion. The previously exposed revisions generally seek to clarify that (a) a levelized commission arrangement (whether linked to traditional or nontraditional elements) requires the establishment of a liability for the full amount of the unpaid principal and accrued interest payable to a third party, such as a funding agent, at the time the policy is issued and (b) persistency commission must be accrued proportionately over the policy period in which the commission relates and cannot be deferred until fully earned. Industry comments asserted that although the NAIC characterized the proposed revisions as nonsubstantive, they would result in substantive changes as further discussed below.
7. NAIC to Evaluate Comments Received in Response to Exposure of Proposed Revisions to SSAPs Related to the Treatment of Collateralized Fund Obligations (CFOs)
The SAP Working Group previously exposed for comment proposed revisions to SSAP No. 43R — Loan-Backed and Structured Securities to clarify that CFOs and similar structures that reflect underlying equity interests, but that are issued in the form of debt instruments, are not within the scope of SSAP No. 43R. The SAP Working Group did not engage in any substantive discussion of the proposed revisions at the Fall Meeting and has scheduled a conference call for January 8, 2020, to consider comments received in response to the exposure. The comment letters are not yet available for public review but are expected to be posted on the NAIC website approximately a week in advance of the call.
8. Life Risk-Based Capital (E) Working Group Exposes Alternative Proposals to Incorporate Longevity Risk
The Life Risk-Based Capital (E) Working Group (Life RBC Working Group) continues to consider changes to the life risk-based capital formula to incorporate longevity risk and has exposed for comment alternative proposals from the Longevity Risk (A/E) Subgroup and the American Academy of Actuaries (Academy).
9. NAIC Continues to Evaluate Principal-Protected Notes and NAIC Designations for Residential Mortgage-Backed Securities and Commercial Mortgage-Backed Securities
The Valuation of Securities (E) Task Force (VOS Task Force) discussed updates with respect to principal-protected notes and exposed for comment proposed amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) related to NAIC Designations for Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities (CMBS).
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. In addition, this information was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any U.S. federal, state or local tax penalties that may be imposed on such person.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.
© Sidley Austin LLP