The National Association of Insurance Commissioners (NAIC) held its Summer 2022 National Meeting (Summer Meeting) August 9–13, 2022. This Sidley Update summarizes the highlights from this meeting in addition to interim meetings held in lieu of taking place during the Summer Meeting. Highlights include a proposal for a new consumer privacy protections model law, continued discussion of considerations related to private equity ownership of insurers, continued development of accounting principles and investment limitations related to certain types of bonds and structured securities, and initiatives to address climate risks in the insurance sector.
Regulatory Update: NAIC Summer 2022 National Meeting
1. NAIC to Develop New Privacy Model Law
The NAIC approved the request of the Privacy Protections (H) Working Group (Privacy Working Group) to draft a new model law to enhance consumer protections and specify the corresponding obligations of licensed entities.
2. NAIC Progresses Revisions to Statements of Statutory Accounting Principles
The Statutory Accounting Principles (E) Working Group (SAP Working Group) continued its ongoing work on a principle-based bond definition, including revisions to the following Statements of Statutory Accounting Principles (SSAPs): SSAP No. 26R — Bonds (SSAP No. 26R) and SSAP No. 43R — Loan-Backed and Structured Securities (SSAP No. 43R). The SAP Working Group also adopted or considered changes to other SSAPs, including SSAP No. 4 — Assets and Nonadmitted Assets (SSAP No. 4) and SSAP No. 5R — Liabilities, Contingencies, and Impairments of Assets (SSAP No. 5R) — to address new concepts included in the Financial Accounting Standards Board (FASB) revisions to the definition of an “asset” and a “liability.” The Financial Condition (E) Committee ((E) Committee) and the Accounting Practices and Procedures (E) Task Force (Accounting Task Force) also adopted changes to SSAP No. 25 — Affiliates and Other Related Parties (SSAP No. 25) and SSAP No. 43R to clarify related party reporting requirements that the SAP Working Group recently adopted.
3. NAIC Continues its Review of Private Equity Ownership in the Insurance Industry
The NAIC continued its review of private equity ownership in the insurance industry as the NAIC Executive (EX) Committee and Plenary adopted the Regulatory Considerations for Private Equity (PE) Owned Insurers (List of PE Considerations) and various NAIC working groups received referrals from the Macroprudential (E) Working Group for further assessment of the considerations described in the list. A copy of the final List of PE Considerations can be found here.
4. NAIC Discusses Comments to International Association of Insurance Supervisors Consultation on Draft Criteria to Assess the Aggregation Method Comparability to the Insurance Capital Standard
On July 21, 2022, the International Insurance Relations (G) Committee ((G) Committee) heard comments from interested parties on the International Association of Insurance Supervisors (IAIS) public consultation on the draft criteria that will be used to assess whether the aggregation method (AM) provides comparable outcomes to the insurance capital standard (ICS). The IAIS approved release of this consultation at its meetings in June, and comments were requested by August 15, 2022. While interested parties were still in the process of assessing the draft criteria at the time of the (G) Committee meeting, interested parties provided initial general comments to the consultation, which generally centered around concerns that the draft criteria would be precluded at the outset as an outcome equivalent approach to the ICS.
5. NAIC Reopens the Property and Casualty Insurance Guaranty Association Model Act to Address Restructuring Mechanisms
The NAIC approved a model law development request to amend the Property and Casualty Insurance Guaranty Association Model Act (#540) (Guaranty Association Model Act) to address the effect of certain restructuring mechanisms on the availability of guaranty association coverage. The amendments were prompted by the Restructuring Mechanisms White Paper, which discusses new statutory processes that certain states have adopted to govern insurance business transfer (IBT) and corporate division (CD) transactions. The white paper includes a recommendation that the Guaranty Association Model Act should be amended to address issues related to guaranty association coverage following IBT and CD transactions. Many in the industry consider national uniformity on guaranty association coverage following IBT and CD transactions to be a gating issue to such transactions being used more widely.
6. NAIC Continues Efforts to Encourage Uniformity in the Implementation of the Revisions to the Suitability in Annuity Transactions Model Regulation
The Annuity Suitability (A) Working Group is drafting a frequently asked question (FAQ) document to address the comparable standards safe harbor included in the 2020 revisions to the Suitability in Annuity Transactions Model Regulation (SAT).
7. NAIC Considers Enhancements to Financial Solvency Regulation Manuals to Address Climate Risk
Climate-related risk and resiliency issues continued to be areas of NAIC interest during the Summer Meeting. In furtherance of its charge to evaluate financial regulatory approaches to climate risk and resiliency, the Climate and Resiliency (EX) Task Force made a series of referrals to various task forces and working groups under the (E) Committee intended to explore potential enhancements to existing solvency monitoring processes with respect to climate risk and resiliency.
8. NAIC Adopts Amendment to Definition of Principal Protected Securities to Expand Securities Ineligible for “Filing Exempt” Process
The Valuation of Securities (E) Task Force (VOS Task Force) adopted an amendment to the definition of principal protected securities (PPS) in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to include alternate securities (Alternate PPS) that pose many of the same investment risks as PPS but are structured in a manner that does not fit squarely within the P&P Manual’s current PPS definition as further described below. As PPS are ineligible for the “filing exempt” process of the NAIC’s Securities Valuation Office (SVO), the rationale for the amendment is to include Alternate PPS within the PPS definition, such that Alternate PPS also will be ineligible for the SVO’s “filing exempt” process.
9. NAIC Proposes to Eliminate Risk-Based Capital Arbitrage Regarding Collateralized Loan Obligations
On June 9, 2022, the VOS Task Force exposed for comment an issue paper (Issue Paper) prepared by the NAIC’s Investment Analysis Office regarding the risk assessment of structured securities, including collateralized loan obligations (CLOs). The Issue Paper identified risk-based capital (RBC) arbitrage concerns with respect to CLOs and proposed remedial recommendations as described below. Notably, the Issue Paper asserted that an insurer that purchases every tranche of a CLO holds the exact same investment risk as if the insurer had directly purchased the entire pool of loans backing the CLO; therefore, the aggregate RBC factor for owning all of the CLO tranches should be the same as the required factor for owning all of the underlying loan collateral, and a lesser factor would constitute RBC arbitrage. In response to comments received from interested parties regarding the Issue Paper, the NAIC’s Structured Securities Group (SSG) prepared a presentation deck, Staff Discussion of Responses to CLO, which is available here (SSG Deck). The VOS Task Force has exposed the SSG Deck along with the NAIC CLO Stress Tests Methodology (Year-End 2020 Update), which is available here, for comments that are due by September 12, 2022.
10. NAIC Proposes Alternatives for Reporting Additional Market Data Fields for Bond Investments on Statutory Financial Statements
Prompted by the desire to reduce the SVO’s reliance on CRPs with respect to the assessment of bond investment risks, the VOS Task Force previously exposed for comment a proposed referral to the Blanks (E) Working Group to add certain fixed income analytical risk measures to bond investments reported on Schedule D, Part 1, of an insurer’s statutory financial statements pursuant to the SVO’s recommendation. Industry comments expressed concerns that the proposal would be operationally burdensome and suggested that the NAIC produce the additional market data fields for the bond investments. The SVO is considering the pros and cons of the SVO’s taking responsibility for producing the analytical data elements or having insurers produce the analytical data elements. To that end, the VOS Task Force has exposed for comment an SVO memorandum, which is available here, discussing these items. Comments are due by September 12, 2022.
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