Regulatory Update: National Association of Insurance Commissioners Fall 2022 National Meeting

a. SAP Working Group Exposes Further Revisions to SSAPs, Reporting Schedules, and Issue Paper in Connection With Bond Project

The SAP Working Group continues to make progress on the proposed revisions to the SSAPs as well as the reporting requirements in connection with its Bond Project. The SAP Working Group has exposed, until February 10, 2023, revisions to (i) SSAP No. 26R and SSAP No. 43R as well as certain other identified SSAPs and guidance that will be affected by the revisions to be made under the Bond Project, (ii) reporting changes to Schedule D-1 as well as other identified schedules and instructions relating to bond reporting, and (iii) the revised issue paper, which details the discussions and decisions on the Bond Project to date. The SAP Working Group is currently targeting a January 1, 2025, effective date for the proposed changes to be adopted as part of the Bond Project.

The SAP Working Group began its work on the Bond Project in October 2020 through the development of a principle-based bond definition to be used for all securities in determining whether they qualify for reporting on Schedule D-1. Within the bond definition, bonds are classified as an “issuer credit obligation” or an “asset backed security.” An “issuer credit obligation” is defined as a bond where repayment is supported by the general creditworthiness of an operating entity, and an “asset backed security” is defined as a bond issued by an entity created for the primary purpose of raising debt capital backed by financial assets. The exposed revisions to SSAP No. 26R and SSAP No. 43R incorporate these concepts into the SSAPs. The most recent exposed revisions to these SSAPs incorporate comments received from industry representatives as well as structural changes to include the entire bond definition in SSAP No. 26R and the description of securities that qualify as an asset-backed security under the bond definition in SSAP No. 43R.

With respect to the proposed reporting changes, in addition to the revisions made to the general instructions and Schedule D-1-1 and Schedule D-1-2 in response to industry comments from the prior exposure, NAIC staff also reviewed the full schedule and annual statement instructions and identified all areas that may require revision to reflect the more granular reporting under the Bond Project. The exposure includes a list of all such additional schedules and instructions where additional edits may be required for consideration. The SAP Working Group will sponsor a proposal to the Blanks (E) Working Group to incorporate the proposed reporting changes.

As previously noted by the SAP Working Group, investments that do not qualify as bonds after such revisions are adopted will not be permitted to be reported as bonds on Schedule D-1 thereafter as there will be no grandfathering for existing investments that do not qualify under the revised SSAPs. However, certain accommodations may be made to prevent undue hardship for reporting entities complying with the new guidance.

b. SAP Working Group Requests Industry Comments on Interest Maintenance Reserve Guidance

The SAP Working Group exposed a request for comment from industry on potential guardrails and considerations related to the existing statutory accounting guidance on interest maintenance reserve (IMR), with a specific focus on the treatment of negative IMR in response to the recent rising interest rate environment and resulting decreases in insurers’ IMR balances.

This agenda item was brought to the attention of the SAP Working Group through a letter received from the American Council of Life Insurers (ACLI) raising concerns regarding negative IMR. The ACLI’s letter was sent in connection with discussions among the Life Actuarial (A) Task Force (Life Actuarial Task Force) on recommended guidance for year-end 2022 on the allocation of IMR for asset adequacy testing and principle-based reserving purposes in response to concerns that, given the rising interest rate environment over the last year, insurers selling fixed income assets for a loss would see their IMR balances decrease or become negative. A negative IMR occurs when net realized interest-related losses are greater than net realized interest-related gains, both of which are amortized in the IMR calculation.

The current statutory accounting guidance regarding IMR is limited but generally provides that a negative IMR is a nonadmitted asset. The ACLI’s letter noted that, with the inclusion of a negative IMR balance in asset adequacy testing, the disallowance of a negative IMR can result in double counting of losses (i.e., through the disallowance on the balance sheet and the potential asset adequacy testing-related reserve deficiency). The ACLI argues that such treatment is contrary to the original intent of IMR, which recognized that both interest-related gains and losses are both transitory without any true economic substance as the proceeds would be reinvested at offsetting lower or higher interest rates, respectively, and therefore proposed the allowance of a negative IMR balance in statutory accounting in order to fulfill its original purpose.

In response to these concerns, as well as the discussions by the Life Actuarial Task Force, the SAP Working Group has undertaken this review to evaluate the existing statutory guidance and determine whether the changes proposed by the ACLI should be implemented. As such, the SAP Working Group has requested that industry provide comments on potential guardrails and other considerations in respect of such proposal. Comments on this exposure are due by February 10, 2023. In addition, the SAP Working Group directed NAIC staff to coordinate with the Life Actuarial Task Force and request regulator-only sessions with industry to receive specific company information on the current treatment of IMR. In the meantime, the SAP Working Group encouraged companies to discuss the issue with their domiciliary regulators regarding any permitted practices that would need to be implemented with respect to year-end 2022 reporting.

c. NAIC Exposes Further Clarifications to SSAP No. 25 Related to Reporting of Affiliated Investments

The SAP Working Group exposed for comment revisions to SSAP No. 25 to clarify that any invested asset held by a reporting entity, which is issued by an affiliated entity, or which includes the obligations of an affiliated entity, should be treated as an affiliated investment.

At its May 24, 2022, meeting, the SAP Working Group adopted revisions to SSAP No. 25 to clarify the reporting of affiliate transactions and incorporate new disclosure requirements for investments acquired through, or in, related parties, regardless of whether they meet the “affiliate” definition under the Insurance Holding Company Model Act (#440). In connection with such adoption, the SAP Working Group identified the need to further clarify when an investment is considered an affiliated investment and reported on the “parent, subsidiaries and affiliates” reporting lines (referred to as the “affiliated” lines) in the investment schedules.

As such, NAIC staff proposed that further revisions to SSAP No. 25 are needed to clarify that any invested asset held by a reporting entity that is (i) is issued by an affiliated entity or (ii) includes the obligations of an affiliated entity should be categorized as an “affiliated investment” for purposes of SSAP No. 25. Specifically, SSAP No. 25 would be revised to add language to specifically state that “[a]ny invested asset held by a reporting entity which is issued by an affiliated entity, or which includes the obligations of any affiliated entity is an affiliate investment.” The SAP Working Group will also direct the Blanks (E) Working Group to modify the annual statement instructions where the “Parent, Subsidiaries and Affiliates” header appears to include the same clarifying language.

Comments to these additional revisions are due to the SAP Working Group by February 10, 2023.

The List of PE Considerations was developed in connection with the NAIC’s review of PE ownership in the insurance industry after the topic of PE ownership in the insurance industry gained attention internationally as well as at the state and federal levels in the U.S. The Macroprudential Working Group developed the List of PE Considerations to address, among other things, any gaps with respect to the increase in PE ownership of insurers, the role of asset managers more generally in insurance, and the increase in private investments in insurers’ portfolios. The List of PE Considerations was adopted by the NAIC in August 2022, after which various NAIC groups received referrals from the Macroprudential Working Group for further assessment. A copy of the List of PE Considerations as adopted by the NAIC is available here.

At the Fall Meeting, the Macroprudential Working Group provided updates from the following NAIC working groups on their review of the relevant considerations:

• The Group Solvency Issues (E) Working Group (GSI Working Group) received and discussed its referral relating to Item 1 (Holding Company Structures) and Item 2 (Ownership and Control) from the List of PE Considerations. During discussion, the GSI Working Group considered potential action items that might address these concerns, such as (a) developing an advanced regulator training to better prepare regulators to tackle complex transaction and legal entity structures and (b) increasing coordination across states in transactions involving multiple Form A filings. After discussion, the GSI Working Group agreed to form a drafting group to develop a work plan to address these issues.
• The Risk-Focused Surveillance (E) Working Group discussed its referral relating to Item 3 (Investment Management Agreements) and Item 4 (Ownership of Insurers with Short-Term Focus and/or Unwilling to Support a Troubled Insurer) and decided to defer its review of such items until the completion of its ongoing project to update general guidance to the NAIC handbooks related to affiliated service agreements (which is expected to be completed in early 2023).
• The Life Actuarial Task Force discussed its referral relating to Item 4 (Ownership of Insurers with Short-Term Focus and/or Unwilling to Support a Troubled Insurer) noting that existing asset adequacy analysis requirements in the NAIC Standard Valuation Law (#820) and VM-30 (Actuarial Opinion and Memorandum Requirements) require that company-appointed actuaries perform testing to ensure that the reserves held for the company’s liabilities are adequate in light of the assets supporting the business and that regulators already review associated company Statements of Actuarial Opinion with respect thereto periodically. In addition, with respect to Item 10 (Privately Structured Securities) and Item 12 (Pension Risk Transfer Business Supported by Complex Investments), the Life Actuarial Task Force noted that it recently adopted Actuarial Guideline LIII — Application of the Valuation Manual for Testing the Adequacy of Life Insurer Reserves (AG 53), effective for year-end 2022 reporting, which requires disclosure of additional documentation and analysis related to complex assets supporting businesses including annuities, pension risk transfers, and other life insurer business.
• The Examination Oversight (E) Task Force delegated work on its referral relating to Item 8 (Identifying Underlying Affiliated/Related Party Investments and/or Collateral in Structured Securities) to its Financial Analysis Solvency Tools (E) Working Group and its Financial Examiners Handbook (E) Technical Group. Both groups developed new guidance for inclusion in 2023 NAIC handbooks related to the new related party investment disclosures developed by the SAP Working Group and AG 53 standards developed by the Life Actuarial Task Force that will be in place for year-end 2022 reporting. The groups may develop additional guidance for NAIC handbooks, as well as supporting regulatory reports and tools, as work proceeds in this area.
• The SAP Working Group has completed, or is in the process of reviewing, various SSAP revisions that would address Item 7 (Identifying Related Party-Originated Investments (Including Structured Securities)), Item 8 (Identifying Underlying Affiliated/Related Party Investments and/or Collateral in Structured Securities), and Item 9 (Asset Manager Affiliates and Disclaimers of Affiliation), including the recently adopted changes to SSAP No. 25 and SSAP No. 43R related to the guidance for related party reporting requirements and the Bond Project, which are described above.

Finally, with respect to Item 14 (Offshore/Complex Reinsurance), members of the Macroprudential Working Group have been focused on this issue and are in the process of completing confidential discussions with industry participants and other jurisdictions regarding the use of offshore reinsurers and complex affiliated reinsurance vehicles. As a next step, the Macroprudential Working Group plans to develop a template for regulators to use in reviewing these transactions in order to better understand their economic impact. The Macroprudential Working Group will consider further work and/or referrals once it has concluded these discussions.

In 2019, the IAIS adopted the Holistic Framework, which comprises three key elements: (a) a risk assessment through the annual Global Monitoring Exercise (GME) to detect key risks and trends and buildup of systemic risk in the global insurance sector, (b) an enhanced set of supervisory measures to help prevent vulnerabilities and exposures in the insurance sector, and (c) a robust assessment of the comprehensive and consistent implementation of such supervisory measures across jurisdictions. The FSB will use assessments available through the Holistic Framework to inform its considerations of systemic risk in the insurance sector and will receive an annual update of the outcomes of the GME, including the IAIS assessment of systemic risk in the global insurance sector, possible concentration of systemic risks at an individual insurer level, and the supervisory response to identified risks.

The IAIS also continues its evaluation of the comparability of the Aggregation Method (AM) to the Insurance Capital Standard (ICS). In November 2019, the IAIS adopted the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) and the ICS, which is the group-capital component of ComFrame, as part of a set of reforms designed to enable effective cross-border supervision of internationally active insurance groups and contribute to global financial stability. The ICS is being implemented in two phases, the first of which is a five-year monitoring period (which commenced in January 2020) that will be followed by full implementation of the ICS as a groupwide prescribed capital requirement (PCR).

The U.S. and other jurisdictions have developed the AM as an alternative to the ICS to avoid the application of multiple capital standards to groups domiciled in the U.S. and such other jurisdictions. The AM will be used as a PCR under ComFrame only if the AM is determined 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, then the AM will be considered an outcome-equivalent approach for implementation as a PCR in lieu of the ICS.

In November 2019, the IAIS agreed on a process and timeline for developing criteria to assess whether the AM provides comparable outcomes to the ICS. The IAIS developed draft high-level principles (HLPs) from which detailed criteria were developed for each HLP. The NAIC previously collected comments to the IAIS’s consultation of the draft criteria, which were generally critical, noting that, as drafted, the criteria could preclude comparability of the AM with the ICS, as the criteria did not take into account fundamental differences between the two approaches.

Following this initial consultation, the IAIS determined to delay the approval of the comparability criteria until March 2023 to allow additional time to consider scenarios and sensitivity analysis that will be workable for the assessment process. During the Fall Meeting, interested parties met to discuss further comments to the criteria, and work at the NAIC on this issue remains ongoing.

While amendments to the MGI Model Act have been part of the MGI Working Group’s charges for the past few years, the MGI Working Group had been focused on other charges related to the development and implementation of the Mortgage Guaranty Insurance Supplement (MGI Supplement) to the statutory financial statement and work on the mortgage guaranty capital model. Data is now being collected on the new MGI Supplement, which data will inform the future development and implementation of the capital model. The MGI Working Group has also tabled work on the Mortgage Guaranty Insurance Standards Manual (which was referenced in previous versions of amendments to the MGI Model Act).

The MGI Working Group’s immediate goal is to complete and adopt the amendments to the MGI Model Act by the Spring 2023 Meeting. The October 2022 exposure draft of the amendments to the MGI Model Act included (among other changes) updated capital and surplus requirements and new sections on risk concentration, reinsurance, sound underwriting practices, quality assurance, rescission, and records retention. Industry comments focused on the effect of reinsurance on contingency reserves, overly restrictive investment limitations, rescission rights, requirements to file underwriting guidelines, and the Commissioner’s authority to waive a breach of the risk-to-capital ratio.

a. NAIC to Develop Principle-Based Regulatory Framework for Use of Artificial Intelligence by the Insurance Industry

In furtherance of the work of the NAIC’s Collaboration Forum on Algorithmic Bias, which seeks to address the issue of unintentional bias in insurance program algorithms, the (H) Committee intends to begin drafting an interpretive bulletin outlining a regulatory framework for the use of AI by the insurance industry (AI Model Bulletin).

Among other things, the AI Model Bulletin is expected to describe regulatory expectations for the use of AI by insurers (including both governance and enterprise risk management standards) as well as provide standards for insurance regulators to oversee and examine the use of AI by insurance carriers. The AI Model Bulletin is expected to articulate standards at a high level and to apply to the use of AI-supported decision making in general.

The (H) Committee considers AI to be a means by which the insurance industry engages in conduct that is already subject to regulatory standards (including, among others, regulations relating to underwriting, rating, and unfair trade practices). As a result, the (H) Committee believes that a model bulletin is the appropriate form for this guidance.

While the (H) Committee has not yet set a timeline for drafting the AI Model Bulletin, it expects to provide an update on the process at the Spring 2023 Meeting.

b. NAIC Continues Development of Privacy Protections Model Act

The Privacy Protections (H) Working Group (Privacy Working Group) continued its work drafting the new Privacy Protections Model Act (#674) (New Privacy Model Act) to enhance consumer privacy protections. The New Privacy Model Act is expected to include elements of the existing Privacy Model Act and Privacy Model Regulation as well as other state, federal, and international privacy protections. Although the Privacy Working Group had previously intended to expose a draft of the New Privacy Model Act for comment in December 2022, the working group now intends to expose the New Privacy Model Act by the end of January 2023 for a two-month comment period.

At the Fall Meeting, the Privacy Working Group heard presentations from interested parties, including consumer and industry representatives, regarding the use of personal information during the insurance lifecycle. These presentations and the resulting discussions are intended to aid the Privacy Working Group in its understanding of how the needs of the marketplace can be addressed as part of the drafting of the New Privacy Model Act.

In parallel with the development of the New Privacy Model Act, the Privacy Working Group is continuing to draft a “reference document” on data ownership and use rights, which was previously referred to as a “white paper.” The purpose of the reference document will be to explain how and why certain changes to the existing regulatory framework will be made under the New Privacy Model Act.

c. NAIC Proposes Model and Data Regulatory Questions

The Big Data and Artificial Intelligence (H) Working Group (Big Data Working Group) exposed draft Model and Data Regulatory Questions for a public comment period ending February 13, 2023. The document contains questions that regulators can use when investigating any model or data used by insurance companies, whether developed internally or obtained from external sources. The document includes both general questions and detailed technical questions, which can be used as appropriate depending on the underlying reason for the investigation. Ultimately, the questions are not required to be used by regulators and can be supplemented, modified, or omitted as appropriate given the regulatory purpose for the investigation. The document also includes a “Definitions” section to provide clarification regarding some key terms used.

The Model and Data Regulatory Questions are intended to work in concert with similar questions developed by other NAIC working groups and task forces, including questions relating to property and casualty rate modeling and data and questions relating to accelerated underwriting.

Initial comments from industry representatives focused on the potential hardships that may be imposed by requiring smaller insurance enterprises to answer the proposed detailed questions. In addition, industry representatives expressed concern that the questions assume legal standards that have not necessarily been adopted by state legislatures (e.g., European-style consumer privacy protections and disparate impact analysis). Consumer representatives, on the other hand, focused on the need for regulators to ensure that unregulated entities are not engaged in anticompetitive behavior by, for example, supplying the same data to multiple insurance carriers and facilitating, in practice, coordinated underwriting decision-making across various companies. Consumer representatives also suggested that regulators should use data scientists to examine models and their outputs directly and to make this data available to the public (subject to trade secret and other confidentiality concerns).

Certain states, including Texas and Ohio, expressed concerns with the approach outlined in the Request for NAIC Model Law Development, indicating that the current proposal may not provide all state insurance departments with greater regulatory oversight over health insurance lead generators than they already have. These states advocated for a more comprehensive approach under which the NAIC would consider input from various stakeholders before proceeding with the proposed changes. Despite these objections, the (D) Committee ultimately adopted the Request For NAIC Model Law Development, with proponents of the request noting that it was only an initial step in the process and that further revisions to the model (or other NAIC model laws or guidelines) may be considered outside of what has initially been proposed.

The VOS Task Force previously exposed an issue paper (Issue Paper) prepared by the NAIC’s Investment Analysis Office regarding the risk assessment of structured securities, including CLOs. The Issue Paper identified risk-based capital (RBC) arbitrage concerns with respect to CLOs and proposed remedial recommendations. The Issue Paper asserted that an insurer that purchases every tranche of a CLO holds the exact same investment risk as an insurer that 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 any lesser factor would constitute RBC arbitrage. The proposed amendment was exposed for comment until February 13, 2023.

An informational referral was also sent to the Risk-Based Capital Investment Risk and Evaluation (E) Working Group (Investment RBC Working Group) to continue discussions on the RBC charges for CLOs and develop a potential interim approach to address the concern regarding potential RBC arbitrage in the structuring of assets through CLOs and other similar assets. 

At the request of the Investment RBC Working Group, the C1 Work Group of the American Academy of Actuaries (Academy) has been investigating CLOs to understand the risk they pose to life insurers’ statutory capital and considerations for establishing capital requirements. During the Fall Meeting, the Academy presented a report to the Investment RBC Working Group regarding the status of the Academy’s work on this topic, including commentary on the Investment Analysis Office letter proposing a new approach to CLO C-1, including modeling by the SSG and the introduction of new subcategories of NAIC-6 having 30%, 75%, and 100% factors.

The main conclusions of the Academy’s report were (a) CLOs do not currently present a material risk to the aggregate solvency of the life insurance industry; (b) it is not appropriate to use existing C-1 factors for CLOs due to a lack of equivalence between the risk models for corporate bonds, equities, and structured securities; and (c) capturing the risks that CLOs pose to an insurer’s surplus requires complex models, and regulators should balance the need for measurement of complex risks with the cost of measuring those risks.

The Investment RBC Working Group exposed the Academy’s presentation for a public comment period ending January 27, 2023, noting that discussions will continue throughout the exposure period.

The adopted amendments are the result of a referral from the SAP Working Group following the SAP Working Group’s recent adoption of revisions to SSAP No. 25 and SSAP No. 43R, which require new reporting information for investments that involve a related party as sponsor, originator, manager, or other similar transaction party, regardless of whether the investment is captured on the affiliate reporting line, as described above.

The Subsidiary, Controlled and Affiliated Debt or Preferred Stock Investments section of the P&P Manual previously only required insurers to file with the NAIC’s Securities Valuation Office (SVO) bonds or preferred stock issued by an SCA entity and therefore, a transaction with an affiliate or related party originator, sponsor, manager, or underlying obligor, as opposed to issuer, did not constitute an SCA investment. In its referral, the SAP Working Group noted that because the definition of “affiliate” is determined by an evaluation of control of the issuer, for structured securities, the issuer is typically a special purpose entity (SPE) and therefore it is possible for an investment that involves an affiliate or related party issuer to not be considered affiliated because the insurer has no control over the issuing SPE.

The amendments to the P&P Manual adopted as a result of the SAP Working Group referral include the following:

• renaming the Subsidiary, Controlled and Affiliated Debt or Preferred Stock Investments section of the P&P Manual to Subsidiary, Controlled and Affiliated and Related Party Debt or Preferred Stock Investments in order to clarify that the section includes related party noncontrol relationships, which is further clarified by amendments to the definitions of “SCA investment,” “SCA debt” and “SCA preferred stock” to include related parties
• expanding the definition of “SCA and related party debt,” to include structures in which the nonissuer underlying credit exposure would qualify as a related party pursuant to SSAP No. 43R 
• creating a new category of SCA and related party investment called “SCA and Related Party Filing Exempt Investments” that provides that any investment issued either by an affiliate or related party SPE, which itself is not an obligor or ultimate source of the investment repayment, or as part of a structure in which the originator, sponsor, manager, servicer, or other influential transaction party is an affiliate or related party of the reporting insurance company would be eligible for filing exemption unless otherwise determined to be ineligible
• clarifying that state insurance regulators are permitted to require an insurance company to file what would otherwise be an SCA and Related Party Filing Exempt Investment (as described above) for analysis by the SVO, thereby making it ineligible for filing exemption in the future

The SVO proposed the amendments in response to its recent review of several private letter rating filings for investments in notes issued by, and of equity or limited partnership interests in, a special purpose vehicle, trust, limited liability company, limited partnership, or other legal entity that operates as a feeder fund that itself invests, directly or indirectly, in one or more funds or other equity investments.

The SVO cited a number of concerns with respect to such investments, including (a) the potential to circumvent regulatory guidance established by the VOS Task Force, SAP Working Group, and Capital Adequacy (E) Task Force with respect to the reporting of equity investments, (b) the reporting of such investments as bonds in order to receive favorable RBC treatment, and (c) the lack of transparency regarding the true underlying risks, credit exposure, and nature of the investment.

The proposed amendment defines “Structured Equity and Fund” as “a note issued by, or equity or limited partnership interest in, a special purpose vehicle, trust, limited liability company, limited partnership, or other legal entity type, as issuer, the contractually promised payments of which are wholly dependent, directly or indirectly, upon payments or distributions from one or more underlying equity or fund investments.” The SVO noted that any structure that circumvents the definition (including through the inclusion of an intervening legal entity (or entities) between the Structured Equity and Fund investment issuer and the underlying equity or fund(s)), which in substance achieves the same ends or poses the same risk, will be deemed a Structured Equity and Fund.

Any investment meeting the criteria of a Structured Equity and Fund would be ineligible for filing exemption, and an insurance company investing in a Structured Equity and Fund issuance would be required to provide information sufficient for the SVO to conduct a look-through assessment and credit risk assessment. The proposed amendment was exposed for a 60-day public comment period ending on February 13, 2023.

Under the existing regulatory framework, “contracts that provide for annuity benefits that vary according to the investment experience of a separate account” are exempt from the Standard Nonforfeiture Law and instead are subject to requirements for nonforfeiture benefits under the Variable Annuity Model Regulation (#250) (VA Model Regulation). Thus, traditional variable annuities with unit-linked values are subject to the VA Model Regulation, and the market values of the separate account assets are the basis for contract benefits, including surrender values. 

The Index-Linked Variable Annuity (A) Subgroup was charged with evaluating how this framework should apply to “hybrid” annuity products, commonly referred to as index-linked variable annuities, which provide periodic credits based on the performance of a specified portfolio of assets (e.g., an index), which typically are not unit-linked and do not invest in the assets whose performance forms the basis for the periodic credits.

In the form adopted by the Life Actuarial Task Force, Actuarial Guideline ILVA sets forth principles and requirements for determining interim values (including death benefit, withdrawal amount, annuitization amount, or surrender values) such that an ILVA is considered a variable annuity and thereby exempt from the Standard Nonforfeiture Law. In particular, a basic principle of Actuarial Guideline ILVA is that an ILVA must provide for interim values that are consistent with the market value of a hypothetical portfolio (composed of a fixed income asset proxy and a derivative asset proxy) supporting the ILVA. The market value of the assets may be determined by a fair value methodology or by applying a market value adjustment to the book value. While the current version of Actuarial Guideline ILVA does not codify alternative methods of determining interim values that had been suggested by industry commenters, this version does allow a contract to provide for a different methodology for determining interim values, provided that the insurer demonstrates that the interim values determined using such methodology will be “materially consistent” over the crediting period with the interim values that would be produced using the hypothetical portfolio methodology.

In its current form, Actuarial Guideline ILVA also would require an insurer to provide an actuarial memorandum with each ILVA product filing that includes actuarial certifications that:

• the interim values defined in the contract provide equity between the contract holder and the insurance company
• the assumptions used to determine the market value of the derivative asset proxy are consistent with the observable market prices of derivative assets, whenever possible
• contractually defined interim values are “materially consistent” with the interim values that would be produced using the hypothetical portfolio methodology (less a provision for the trading costs at the time the interim value is calculated)
• any trading costs represent reasonably expected or actual costs at the time the interim value is calculated

It is expected that the Life Insurance and Annuities (A) Committee will consider adopting Actuarial Guideline ILVA before the Spring 2023 Meeting. If adopted by the Life Insurance and Annuities (A) Committee, Actuarial Guideline ILVA would be considered for adoption by the NAIC’s Executive (EX) Committee and Plenary at the Spring 2023 Meeting. If adopted in its current form, Actuarial Guideline ILVA will apply to all contracts issued on or after July 1, 2024. After such time, if an ILVA does not comply with the principles and requirements of Actuarial Guideline ILVA, such ILVA will not be considered a variable annuity and therefore will be subject to Standard Nonforfeiture Law.