Regulatory Update: NAIC Spring 2021 National Meeting

In December 2020, the NAIC adopted revisions to the Insurance Holding Company System Regulatory Act (#440) (Model 440) to implement (i) the GCC, for the purpose of group solvency supervision for U.S. insurance groups, and (ii) the LST, for macroprudential surveillance of certain large life insurance companies that meet the in-scope criteria outlined in Model 440. The GCC is intended to comply with the requirements under the bilateral agreements between the United States and the European Union and the United States and the United Kingdom (the Covered Agreements), which require that states have a “worldwide group capital calculation” in place by November 7, 2022. If this deadline is not met for adoption by any state, a U.S. insurance group operating in such state could be subject to the imposition of Solvency II (Directive 2009/138/EC) requirements by the group’s supervisors in the European Union or United Kingdom. Due to these timing requirements under the Covered Agreements, the referral requested that the Financial Regulation and Accreditation Standards (F) Committee use an expedited process for adoption of the GCC accreditation standard for those states that are a groupwide supervisor of a U.S. insurance group with operations in the European Union or the United Kingdom. For groups not subject to the Covered Agreements, the referral recommends following the normal accreditation timeline for adoption of the GCC and the LST.  

However, certain regulators have continued to voice concerns regarding the GCC’s application and whether the GCC should become an accreditation standard for all U.S. insurance groups. Chief Deputy Commissioner Doug Slape (Texas) noted that while Texas does support the GCC, it does not agree with a broad application of the GCC to all U.S. insurance groups and instead favors a more limited application to just those groups that have international operations. Texas also raised concerns regarding the revisions to Model 440 that require that a group file an initial GCC before it is able to seek an exemption from further filings. This position was supported by Kentucky, North Carolina, South Dakota, and Wyoming, which also joined Texas in voting against the exposure. In response, other members of the committee that supported the exposure reiterated their support for the GCC as an accreditation standard for all groups, noting that the GCC is a logical extension for regulatory group oversight and an important tool to understand how capital is distributed within an insurance group.    

Following the initial 30-day exposure period, it is expected that the Financial Regulation Standards and Accreditation (F) Committee will follow the normal timeline for adoption, which would result in an effective date for the new accreditation standards of January 1, 2026. However, the committee will strongly encourage all states with a group affected by the Covered Agreements to adopt the GCC revisions to Model 440 by the November 7, 2022, deadline. In addition, for those states with a group affected by the LST, the committee will recommend adoption of the relevant revisions to Model 440 as soon as possible.  

Further, in regard to compliance with the Covered Agreements, during its March 8, 2021, meeting, the Financial Condition (E) Committee also adopted a proposed new charge for the Qualified Jurisdiction (E) Working Group, which was renamed the Mutual Recognition of Jurisdictions (E) Working Group. Under its new name, the working group will continue to fulfill its existing charges related to maintaining the qualified and reciprocal jurisdiction lists, but it will also develop and maintain a new list of jurisdictions that “recognize and accept” the GCC as the “worldwide group capital calculation” for U.S. insurance groups that operate in such jurisdictions. With respect to its work related to qualified and reciprocal jurisdictions, the working group will continue to report to the Reinsurance (E) Task Force, but with respect to its work related to the GCC “recognize and accept” jurisdictions, the working group will report to the Financial Condition (E) Committee.  

The amendment to require the rating rationale report came out of the VOS Task Force’s work regarding bespoke securities and reliance on credit rating provider ratings to assess investment risk. In October 2020, the Financial Condition (E) Committee directed the VOS Task Force to include a new charge to “implement policies to oversee the NAIC’s staff administration of rating agency ratings used in NAIC processes, including, staff’s discretion over the applicability of their use in its administration of filing exemption.” In furtherance of the proposed new charge, the SVO proposed increasing SVO scrutiny of private letter securities, many of which are bespoke securities.

Since November 2020, the SVO has been working with industry representatives to amend the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to require the filing of private rating letter rationale reports with the SVO. The SVO and industry members have been working to resolve certain operational issues raised by industry members during the VOS Task Force’s February 18, 2021, meeting. In response to that discussion, the amendment now provides an alternate option when the ratings rationale cannot be provided due to confidentiality or contractual reasons. In such cases, the securities will instead be reported on a general interrogatory that will be developed. In addition, new language was added to provide that if the SVO deems a security ineligible to receive an NAIC designation under the instructions in the P&P Manual because either (i) the security is ineligible for filing exemption according to “Specific Populations of Securities Not Eligible for Filing Exemption” or (ii) the security is of a type outside the scope of SSAP No. 26R — Bonds, SSAP No. 32 — Preferred Stock or SSAP No. 43R — Loan Backed and Structured Securities, then, for such a security, the SVO will provide a brief explanation of why the security will not be provided an NAIC designation.

As certain other revisions discussed with industry members and the task force have not yet been reflected in the draft amendment, the SVO requested the permission of the VOS Task Force to continue working with industry on the changes. Once the amendment is finalized, the VOS Task Force will expose the amendment for a 30-day public comment period.

a. NAIC Considers Disclosure Requirements for Pension Risk Transfer and Registered Indexed Linked Annuity Products

Following the recent growth of pension risk transfer (PRT) and registered indexed linked annuity (RILA) products, during the Spring Meeting the SAP Working Group discussed a proposal to increase reporting granularity in the separate account general interrogatories for these products, which are generally held in insulated separate accounts. 

Regulators requested this additional reporting to more readily identify and review the products captured in the separate account after identifying that most entities grouped their separate account products in three to four broad categories. Due to this aggregate grouping, regulators expressed difficulty in assessing risk with each associated product. 

Initially the SAP Working Group requested comments from state insurance regulators and industry regarding the degree of product identifying details needed to adequately assess the product features and reserve liabilities in connection with SSAP No. 56 — Separate Accounts. In response to this exposure, interested parties suggested general interrogatory reporting of PRTs and RILAs. Based on these comments, the Blanks (E) Working Group developed a proposal to add PRT and RILA reporting categories and modify the general interrogatory instructions to require disaggregated product reporting, using unique product identifiers for each product represented. Aggregation in reporting will still be permitted if the products are under the same product filing or policy form; otherwise, the instructions will require disaggregation in reporting. The SAP Working Group determined to pursue the proposal to the Blanks (E) Working Group, as annual statement instruction modifications and changes are not being made at this time to SSAP No. 56. The Blanks (E) Working Group exposed these proposed revisions for a 30-day comment period that ended April 27, 2021.

b. NAIC Adopts Revisions to SSAP No. 25 — Affiliates and Other Related Parties — to Clarify Reporting Requirements 

The SAP Working Group voted to adopt revisions to SSAP No. 25 — Affiliates and Other Related Parties that incorporate new disclosures regarding the identification of related parties and affiliates. The revisions to SSAP No. 25 were originally exposed at the 2019 Fall National Meeting and are largely aimed at aligning related party and affiliate reporting under 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). The revisions were subsequently adopted at the Spring Meeting by the Financial Condition (E) Committee and the Executive (EX) Committee and Plenary through the Financial Condition (E) Committee’s technical changes report process. 

The revisions make the following clarifications: 

• Any related party identified under U.S. generally accepted accounting principles or SEC reporting requirements would be considered a related party under statutory accounting principles.
• Noncontrolling ownership over 10% results in a related party classification regardless of any Disclaimer.
• A Disclaimer may affect holding company group allocation and reporting as a subsidiary, controlled, or affiliated entity under SSAP No. 97 — Investments in Subsidiary, Controlled, and Affiliated Entities but does not eliminate the classification as a “related party” and the disclosure of material transactions as required under SSAP No. 25.

Since the SAP Working Group’s last exposure of the revisions, the SAP Working Group made minor modifications to the proposed revisions to SSAP No. 25 to clarify that “ownership,” as referred to in SSAP No. 25, includes both direct and indirect ownership. In addition, the Blanks (E) Working Group adopted a new Schedule Y, Part 3, to reflect the disclosure addition for SSAP No. 25 as adopted by the SAP Working Group and to capture data items, such as owners with more than 10% and identification of an insurer’s ultimate controlling party. Reporting on the new Schedule Y, Part 3, will be required starting next year with the filing of the 2021 annual statement.

c. NAIC Progresses on Adoption of Revisions to SSAP No. 71 — Policy Acquisition Costs and Commissions Amid Continuing Opposition From Industry and Regulators Regarding Timing for Implementation

The SAP Working Group adopted revisions to SSAP No. 71 — Policy Acquisition Costs and Commissions, which are intended to clarify existing guidance regarding levelized commissions to require full recognition of liabilities incurred under funding arrangements for commission expenses at the time an insurance policy is written.

Specifically, the proposed revisions, which the SAP Working Group classified as “non-substantive,” 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 commissions must be accrued proportionately over the policy period to which the commissions relate and cannot be deferred until fully earned. The SAP Working Group had initially exposed changes at the 2019 Fall National Meeting, and the Spring Meeting marked the sixth public discussion of the proposed revisions. As approved by the SAP Working Group, the revisions have a December 31, 2021, effective date. 

In connection with its adoption of the revisions, the SAP Working Group exposed for a 30-day comment period a new annual statement general interrogatory to identify the use of a third party for the payment of commission expenses, which is being concurrently exposed by the Blanks (E) Working Group. The SAP Working Group will continue to finalize the issue paper documenting discussion on this matter, which will be considered for exposure at a later date.

Industry members and other regulators continued to voice concerns over the classification of the revisions as “non-substantive,” noting that the revisions, as applied, would result in substantial changes for companies that have historically used levelized commission arrangements in reliance on existing guidance. In addition, while not typically required for “non-substantive” changes, due to the nature of the revisions and the continued debate by industry and members of the SAP Working Group, the revisions to SSAP No. 71 require approval by the Accounting Practices and Procedures (E) Task Force, the Financial Condition (E) Committee, and the Executive (EX) Committee and Plenary. Industry members and certain regulators opposed the stated timing for implementation of the revisions, noting that the December 31, 2021, effective date would be difficult for affected companies to comply with given the short turnaround time for the expected final adoption of the revisions by the Executive (EX) Committee and Plenary. While the Accounting Practices and Procedures (E) Task Force and Financial Condition (E) Committee adopted the revisions during the Spring Meeting, it is expected that final adoption of the revisions by Executive (EX) Committee and Plenary will not be complete until the 2021 Summer National Meeting. 

d. NAIC Continues the Development of its Issue Paper Providing Guidance on Proposed Revisions to SSAP No. 43R — Loan-Backed and Structured Securities

While not discussed in substance during the Spring Meeting, the SAP Working Group noted its continuing work on the issue paper regarding SSAP No. 43R — Loan-backed and Structured Securities (the SSAP 43R Issue Paper), which is being developed to document discussions on proposals to determine whether an investment is within the scope of SSAP No. 43R.

Proposed revisions to SSAP No. 43R were initially exposed during the 2019 Summer National Meeting and classified as “non-substantive” changes intended to clarify that collateralized fund obligations (CFOs) and similar structures that reflect underlying equity interests but are issued in the form of debt instruments are not within the scope of SSAP No. 43R and/or are bonds created specifically to lower the associated investment risk-based capital charge without any reduction of risk (i.e., principal-protected securities).

After discussing initial comments received to the exposed revisions, the SAP Working Group reclassified the project as substantive and directed NAIC staff to develop the SSAP 43R Issue Paper to document the rationale for all investments covered by the proposed revisions to SSAP No. 43R. The preliminary draft of the SSAP 43R Issue Paper was exposed for comment during the 2020 Spring National Meeting. In response to that exposure, interested parties submitted a 67-page comment letter to NAIC staff outlining numerous concerns regarding the categorization process outlined in the SSAP 43R Issue Paper. 

In October 2020, the SAP Working Group discussed a proposal submitted by the Iowa Insurance Division that suggested the project proceed with first identifying principles of investments that should be captured as “bonds” on Schedule D-1 (the Iowa Proposal). The Iowa Proposal suggested that thereafter, the project proceed with identifying those characteristics that, while not impairing classification as a bond, may warrant separate identification on Schedule D-1, with secondary phases to include clarification of the classifications under SSAP No. 26R — Bonds and SSAP No. 43R. The SAP Working Group exposed the Iowa Proposal for comment until December 4, 2020. Since that time, Iowa state insurance regulators, NAIC staff, and a small subset of interested parties have been meeting weekly to draft a definition of what should be a bond reported in Schedule D-1, focusing on principal concepts to differentiate between issuer credit obligations and asset-backed securities. An initial exposure is anticipated in May 2021, potentially to allow comments prior to the 2021 Summer National Meeting. 

e. NAIC to Evaluate Treatment of Cryptocurrencies as an Admitted Asset

The SAP Working Group voted to expose interpretive guidance INT 21-01T: Statutory Accounting Treatment for Cryptocurrencies, which would clarify that cryptocurrencies do not meet the definition of cash in SSAP No. 2R — Cash, Cash Equivalents, Drafts, and Short-Term Investments and are nonadmitted assets for statutory accounting purposes. The exposed agenda item was drafted in response to inquiries received on the statutory accounting treatment for cryptocurrencies and specifically whether Bitcoin can be treated as an admitted asset within the definition of SSAP No. 2R. To date, no committees or groups at the NAIC, including the SVO, have taken any action or established a position on cryptocurrencies.

The exposure includes a request for information from interested parties and insurance company trade groups regarding the current ownership and potential future acquisition of cryptocurrencies. Specifically, the SAP Working Group has requested information on

• the extent to which companies currently hold cryptocurrencies
• how the acquisition in cryptocurrency is held (held directly by the insurer or indirectly)
• which cryptocurrencies have been acquired (Bitcoin, Ethereum, Litecoin, etc.)
• the general level of interest for future investment by companies that do and do not own cryptocurrencies

Following this exposure, further discussion is expected as the SAP Working Group continues to monitor the evolution of cryptocurrencies and interest by insurance companies in holding cryptocurrencies as assets.

a. NAIC Adopts Regulatory Review of Predictive Models White Paper

The Executive (EX) and Plenary Committee adopted the Regulatory Review of Predictive Models white paper (the White Paper), which the Property and Casualty Insurance (C) Committee adopted at the 2020 Fall National Meeting. 

The White Paper identifies best practices for state insurance regulators in their review of predictive models and analytics filed by insurers to justify rates. The four best practices for regulatory review described in the White Paper are to

• ensure that the selected rating factors, based on the model or other analysis, produce rates that are not excessive, inadequate, or unfairly discriminatory
• obtain a clear understanding of the data used to build and validate the model and thoroughly review all aspects of the model, including assumptions, adjustments, variables, and submodels used as input, and resulting output
• evaluate how the model interacts with and improves the rating plan
• enable competition and innovation to promote the growth, financial stability, and efficiency of the insurance marketplace 

The White Paper also provides guidance for regulators’ review of rate filings based on predictive models by identifying specific “information elements” a regulator may need to consider. The “information elements” are set forth in Appendix B of the White Paper and organized in three categories: (i) selecting model input, (ii) building the model, and (iii) the filed rating plan. Although Appendix B focuses on generalized linear models for personal automobile and home insurance, the White Paper notes that many of the “information elements” may be transferable to other types of models, other lines of business, and other applications beyond rating.

While the confidentiality of predictive models has been an area of industry concern, the White Paper merely notes that whether or not rate filings, including any predictive models and supplemental information furnished to a regulator, are accorded confidential treatment is determined by state confidentiality laws.

b. NAIC Adopts Amendments to Model Unfair Trade Practices Act 

The Executive (EX) and Plenary Committee adopted amendments to the antirebating provisions in the Model Unfair Trade Practices Act (#880) that address concerns raised by interested parties that perceive the existing antirebating laws to be an obstacle to innovative insurance solutions. The Executive (EX) Committee adopted these amendments at the 2020 Fall National Meeting.  

The amendments permit insurers and insurance producers to provide “value added” products and services to policyholders at no or reduced cost. Value-added products and services include those designed to reduce claim costs, reduce risk, or induce behavioral changes that will reduce risk. Additionally, the amendments include a broad de minimis exception permitting insurers and insurance producers to offer or give noncash gifts, items, or services in connection with the marketing, sale, purchase, or retention of contracts of insurance as long as the cost does not exceed an amount determined to be reasonable by the commissioner and as long as the customer is not required to purchase, continue to purchase, or renew a policy in exchange for the gift, item, or service.

At the Executive (EX) and Plenary Committee meeting, Kentucky, Louisiana, Mississippi, Nevada, New York, and Washington voted against the amendments, citing concerns that as amended, the antirebating provisions would be ambiguous and increase the opportunity for consumer abuse, and California abstained. Nonetheless, a supermajority of the committee voted in favor of the amendments.

c. NAIC Establishes Working Group to Examine E-Commerce Laws and Regulations

The Innovation and Technology (EX) Task Force formed a new working group to examine e-commerce laws and regulations, survey states regarding U.S. federal Uniform Electronic Transactions Act exceptions, and work toward recommendations on any laws and regulations that may need to be changed in connection with any issues identified. The new working group will also examine whether a model bulletin would be appropriate for addressing some of the identified issues where legislation changes are not needed and will draft a proposed bulletin if determined appropriate.

The working group was formed in response to industry comments related to a request for information on continuing “regulatory accommodations” currently offered by states related to the COVID-19 pandemic. Comments focused on continuing a move toward e-commerce, including allowing for e-signatures, e-delivery of documentation and information, e-notary, and changing the paradigm from what is mostly an “opt-in” scenario today to an “opt-out,” where getting and exchanging information electronically or digitally would be the default, with consumers having the ability to opt out of that option.

Currently, Model 245 prohibits annuity issuers from illustrating the performance of an index that is less than 10 years old. Based on industry proposals, in June 2018, the ADWG exposed for comment draft revisions to Model 245 that would permit illustrations of indexed returns for an index that has not been in existence for 10 calendar years, subject to certain conditions.  In response to concerns raised by the Center for Economic Justice, in March 2019, the ADWG proposed revisions to Model 245 that would prohibit annuity issuers from illustrating the performance of an index that is less than 20 years old unless certain criteria are met. In July 2019, in response to industry concerns, the ADWG proposed a “compromise” version of the revisions to Model 245, which would prohibit annuity issuers from illustrating the performance of an index that is less than 15 years old unless certain criteria are met.  

Ultimately, the ADWG was unable to reach consensus on these proposed revisions to Model 245, and the NAIC determined to cease efforts on such revisions. Accordingly, any additional restrictions on indices used in annuity illustrations will be determined by individual states to the extent that they decide to amend existing state law to address the issue. 

The proposed amendments would, among other changes, (i) allow regulators to require that an insurer in a hazardous financial condition secure and maintain either a deposit or a bond in connection with agreements with affiliates, as protection for the insurer; and (ii) require that an affiliate of an insurer that is party to a management agreement, service contract, tax allocation agreement, guarantee, or cost-sharing arrangement with such insurer submit to the jurisdiction of any supervision or receivership proceedings against such insurer and to the authority of the supervisor or receiver. These amendments are intended to ensure that an insurer continues to receive essential services from an affiliate that it has contracted with to provide such services when the insurer is in a hazardous financial condition and during any supervision or receivership proceedings.

The Receivership Law (E) Working Group initially exposed the proposed amendments in December 2020. In response to industry comments, the working group exposed a revised draft of the amendments in February 2021, with a second exposure following shortly thereafter in March 2021. The Receivership Law (E) Working Group adopted the final amendments in May 2021, following the Spring Meeting.

The sections exposed for comment are the operational sections, including (i) the composition, qualifications, duties, and commitment expectations for participation of MSA team members as well as the authority and confidentiality of team members; (ii) the scope and size limits on rate proposals to be reviewed as well as the process for how an insurer would make a request for a review of a rate proposal; and (iii) the MSA review process, which will use the infrastructure and support staff of the Interstate Insurance Product Regulation Commission. The sections exposed also include appendices providing a template for the MSA Advisory Report and a list of information that the insurer would provide for a complete rate proposal request.

The task force will continue work on the actuarial portion of the framework, which is anticipated to be exposed for public comment by June 1, 2021.

The PBM Model establishes standards and criteria for the licensing and regulation of pharmacy benefit managers (PBMs) providing claims processing services or other prescription drug or device services for health benefit plans.

Given the lack of national consensus on issues related to PBM business practices, including pricing and cost transparency, the PBM Model is primarily a licensing model. To address issues on which there was not a national consensus, the model includes a drafting note with state statutory citations for 15 topic areas involving certain PBM business practices that states may consider when developing legislation regulating PBMs. Certain regulators have expressed concern with the appropriateness of including such options in an NAIC model, given the potential for the lack of uniform adoption by the states. The (B) Committee ultimately deferred adoption of the draft PBM Model until it could further discuss the issues related to the drafting note. The (B) Committee plans to meet after the Spring Meeting to continue its discussion on the PBM Model.

The LPI Model Act specifically covers, among other matters, (a) the duration of LPI coverage and required evidence of coverage, (b) the calculation of coverage and premium amounts, (c) certain prohibited practices, including prohibitions on insurers’ and producers’ payments of compensation to lenders and servicers in connection with the placement of LPI, and (d) rate and form filings and other regulatory reporting requirements. Certain issues of contention included whether the LPI Model Act should prohibit inclusion of (a) the lender’s monitoring costs in LPI rates and premium charges and (b) single-interest LPI covering only the lender and not the borrower. It was ultimately determined that the LPI Model Act should not contain such prohibitions.