Regulatory Update: National Association of Insurance Commissioners Spring 2023 National Meeting
1. NAIC Progresses Revisions to Statements of Statutory Accounting Principles Relating to Investments
At the Spring Meeting, the Statutory Accounting Principles (E) Working Group (SAP Working Group) continued its work on the principle-based bond definition (Bond Project) with the exposure of proposed revisions to Statement of Statutory Accounting Principles (SSAP) No. 26R — Bonds, SSAP No. 43R — Loan-Backed and Structured Securities, SSAP No. 21R — Other Admitted Assets, and other related SSAPs and on the treatment of negative interest maintenance reserve under SSAP No. 7 — Asset Valuation Reserve and Interest Maintenance Reserve. The SAP Working Group also adopted revisions to SSAP No. 25 — Affiliates and Other Related Parties with respect to the reporting of affiliated investments.
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 exposed revisions to SSAP No. 26R, SSAP No. 43R, SSAP No. 21R, and other affected SSAPs to refine guidance for the Bond Project. Comments on the exposed SAP Working Group revisions are due on June 9, 2023. The issue paper for the Bond Project was not updated for the Spring Meeting and will be considered for a subsequent exposure.
At the Spring Meeting, the SAP Working Group directed NAIC staff on a number of proposals for consideration to find both a short-term and long-term solution related to the treatment of negative interest maintenance reserve (IMR), including developing guidance for future consideration by the SAP Working Group that would allow the admission of negative IMR up to a specified percentage of surplus, initially proposed to be up to 5%.
The SAP Working Group adopted revisions to SSAP No. 25 that clarify that any invested asset held by a reporting entity, that is issued by an affiliated entity, or that includes the obligations of an affiliated entity should be treated as an affiliated investment. This agenda item was exposed at the 2022 Fall Meeting, and interested parties did not submit any comments in response to the exposure.
At the Spring Meeting, the Valuation of Securities (E) Task Force (VOS Task Force) continued discussion on its review of the applicability of the filing exempt process for certain structured investments, the collateralized loan obligation (CLO) modeling project (CLO Modeling Project) and upcoming discussions with credit rating providers (CRPs) on the role of CRPs in financial solvency regulation of insurance companies. In addition, the Risk-Based Capital Investment Risk and Evaluation (E) Working Group (Investment RBC Working Group) continued work on the following two projects: (i) updating the C-1 factors for CLOs and (ii) developing an interim solution to address Residual Tranches.
a. VOS Task Force Defers Adoption of Amendment for Structured Equity and Feeder Funds
The VOS Task Force deferred adoption of a proposed amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) that would add instructions to require transactions meeting the criteria of “Structured Equity and Funds” (as specified in the proposed amendment to the P&P Manual) to be ineligible for filing exemption and thereby be subject to assessment by the Securities Valuation Office (SVO). While the VOS Task Force was expected to vote on the amendment at the Spring Meeting, the VOS Task Force instead directed SVO staff to send a referral to the SAP Working Group to request that it consider the definition of Structured Equity and Funds in its guidance on Residual Tranches (described above) and also directed SVO staff to draft an amendment outlining the recommended steps for reviewing filing exempt investments.
During the Spring Meeting, the VOS Task Force discussed next steps for the CLO modeling project, which will include review by an ad hoc group composed of VOS Task Force members and certain interested parties of the proposed CLO modeling process to resolve and clarify technical and modeling issues.
During the Spring Meeting, the VOS Task Force discussed a list of proposed questions that it developed to aid in conversations with CRPs regarding issues raised with respect to CRPs’ role in financial regulation of insurance companies. Following its review of these questions and initial conversations with the CRPs, the VOS Task Force intends to undergo a more formal due diligence process of CRPs and the NAIC’s reliance on CRP ratings.
The Financial Stability (E) Task Force and its Macroprudential (E) Working Group (Macroprudential Working Group) met in a joint session during the Spring Meeting, during which the Macroprudential Working Group provided an update on its review of PE ownership in the insurance industry and on the status of the Regulatory Considerations for Private Equity Owned Insurers (List of PE Considerations) and exposed a draft reinsurance comparison worksheet designed for state insurance regulators to assess cross-border reinsurance treaties (Reinsurance Comparison Worksheet) for a 30-day comment period ending on April 28, 2023.
During the Spring Meeting, the NAIC discussed updates with respect to the International Association of Insurance Supervisors (IAIS) evaluation of the comparability of the Aggregation Method (AM) to the Insurance Capital Standard (ICS). In March 2023, the IAIS approved the final criteria to assess whether the AM provides comparable outcomes to the ICS, which equips the IAIS to begin the comparability assessment in the third quarter of 2023.
During the Spring Meeting, the Mortgage Guaranty Insurance (E) Working Group (MGI Working Group) discussed comments received on a revised exposure draft of amendments to the Mortgage Guaranty Insurance Model Act (MGI Model Act). Discussion focused on (i) the interaction between the contingency reserve requirement and reinsurance and (ii) whether a private right of action should be permitted to enforce the MGI Model Act.
At the Spring Meeting, the Privacy Protections (H) Working Group (Privacy Working Group) received oral comments on the new Privacy Protections Model Act (No. 674) (New Privacy Model Act), an initial draft of which was exposed on January 31, 2023, for a comment period ending April 3, 2023. The New Privacy Model Act is intended to enhance consumer privacy protections and includes elements of the existing NAIC Insurance Information and Privacy Protection Model Act (No. 670) and the Privacy of Consumer Financial and Health Information Regulation (No. 672) as well as other state, federal, and international privacy protections.
The Executive Committee approved the advancement of proposed amendments to each of the Property and Casualty Insurance Guaranty Association Model Act (No. 540) (Guaranty Association Model Act) to address guaranty fund coverage of cybersecurity insurance and Unfair Trade Practices Act (No. 880) to address concerns regarding lead generators for health insurance products.
At the Spring Meeting, the Big Data and Artificial Intelligence (H) Working Group provided an update on its artificial intelligence (AI)/machine learning (ML) life survey (AI/ML Life Survey), which is intended to allow regulators to gain a better understanding of (i) how life insurance companies are deploying AI/ML technologies in pricing and underwriting, marketing, and loss prevention and (ii) the current level of risk and exposure associated with the industry’s use of AI and ML and how the industry is managing or mitigating that risk. An informational letter regarding the AI/ML Life Survey was expected to be issued on March 31, 2023, to insurers in 14 requesting states (Colorado, Connecticut, Illinois, Iowa, Louisiana, Minnesota, Nebraska, North Dakota, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Wisconsin).
At the Spring Meeting, the Property and Casualty Insurance (C) Committee ((C) Committee) heard presentations from the Nonprofits Insurance Alliance and the National Association of Mutual Insurance Companies on the Nonprofit Property Protection Act, a proposed federal law that if enacted would expand the scope of the federal Liability Risk Retention Act of 1986 (LRRA) to allow certain risk retention groups that write liability insurance for nonprofit organizations to write commercial property insurance coverage. Although the NAIC has previously opposed expanding the LRRA, viewing the bill as undermining critical insurance consumer protections for nonprofit organizations, one of the (C) Committee’s priority objectives for 2023 is to study and report on the availability and affordability of liability and property coverage for nonprofit organizations. This study is intended to respond to concerns raised by certain members of Congress and market participants with respect to nonprofit policyholders’ access to necessary insurance products.
The Blanks (E) Working Group has exposed for a comment period ending April 28, 2023, proposed revisions to annual statement blanks regarding pet insurance due to, among other reasons, the continuing high growth of the pet insurance industry and the lack of regulators’ visibility into the pet insurance market. Pet insurance currently is reported under the “Inland Marine” line of business on an insurer’s statutory financial statements. The proposed revisions include separating pet insurance from the Inland Marine line of business, adding “pet insurance plans” as a new line of business, and certain additional revisions.
The Risk-Focused Surveillance (E) Working Group has proposed revisions to the NAIC’s Financial Analysis Handbook and the Financial Condition Examiners Handbook that are intended to provide guidance to regulators in reviewing the fairness and reasonableness of affiliated service contracts and to incorporate the 2021 revisions to the NAIC’s Insurance Holding Company System Regulatory Act (related to continuity of affiliate services during a receivership).
At the Spring Meeting, the NAIC adopted (i) revisions to Actuarial Guideline XLIX-A — The Application of the Life Illustrations Model Regulation to Policies With Index-Based Interest to Policies Sold on or After December 14, 2020 (Actuarial Guideline 49-A) and (ii) Actuarial Guideline LIV — Nonforfeiture Requirements for Index-Linked Variable Annuity Products (Actuarial Guideline 54).
The Cannabis Insurance (C) Working Group has exposed for a comment period ending May 26, 2023, an updated NAIC white paper, Regulatory Guide Understanding the Market for Cannabis Insurance: 2023 Update (2023 White Paper). The 2023 White Paper provides an update on activities, trends, and emerging insurance issues in certain areas of the cannabis industry since the adoption in 2019 of the prior NAIC white paper, Regulatory Guide Understanding the Market for Cannabis Insurance.
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