Regulatory Update: NAIC Summer 2019 National Meeting
To determine whether proposed amendments to the NAIC’s Suitability in Annuity Transactions Model Regulation (SAT) should impose a “best interest” standard, the Annuity Suitability (A) Working Group (ASWG) first is evaluating how “best interest” should be defined in order to provide an objective standard for compliance by industry and for regulatory oversight.
2. NAIC Considers Next Steps to Implement Revised Credit for Reinsurance Model Law and Regulation
Following the recent adoption of the revised Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (together, the Revised CFR Model Laws), which incorporate reinsurance collateral reduction reforms in accordance with the bilateral agreements between the United States and the European Union (EU) and the United States and the United Kingdom (UK) (together, the Covered Agreements), the NAIC turned its focus to the process of implementation of the Revised CFR Model Laws by state legislatures. U.S. state regulators risk federal preemption of state law unless they adopt the reinsurance collateral reforms included in the Revised CFR Model Laws by September 2022 (which is the date 60 months after signing the EU Covered Agreement). With that in mind, a number of efforts are under way at the NAIC to ensure that all necessary steps are taken to pave the way for state adoption.
3. Long-Term Care Insurance (EX) Task Force Organizes Six Work Streams Relevant to Its Charges
A total of 36 states have joined the newly formed Long-Term Care Insurance (EX) Task Force (LTCTF) after the NAIC identified long-term care insurance as a key initiative earlier this year. As part of its initial planning, the LTCTF has decided to organize the following six work streams (each led by the state identified in parentheses) that are relevant to its charge to develop a consistent national approach for reviewing long-term care insurance rates that result in actuarially appropriate increases being granted by the states in a timely manner and eliminates cross-state rate subsidization: (a) multistate rate review practices (Colorado); (b) restructuring techniques (Texas); (c) reduced benefit options and consumer notices (Pennsylvania); (d) valuation of long-term care insurance reserves (Minnesota); (e) nonactuarial variance among the states with respect to rate decisions (Washington); and (f) data call design and oversight (Virginia). The LTCTF explained that it expects to conduct certain work streams publicly, while others will be transacted in closed session due to anticipated discussions regarding specific companies. The LTCTF is charged with delivering a report on these issues to the Executive (EX) Committee by the NAIC’s Fall 2020 National Meeting.
4. Annuity Disclosure (A) Working Group Compromises on Age Restriction on Indices Used in Annuity Illustrations
Although the Annuity Disclosure (A) Working Group (ADWG) did not meet at the Summer Meeting, on July 15, 2019, the ADWG exposed for comment proposed revisions to the Annuity Disclosure Model Regulation (Model 245), which represent a “compromise” version when compared to the prior proposed revisions to Model 245. Currently, Model 245 prohibits annuity issuers from illustrating the performance of an index that is less than 10 years old. Previously, the ADWG proposed revisions to Model 245 (March Draft) 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 contrast, the newly proposed revisions to Model 245 (July Draft) would prohibit annuity issuers from illustrating the performance of an index that is less than 15 years old unless certain criteria are met.
5. NAIC Continues Dialogue With Industry on Key Projects of the International Association of Insurance Supervisors
The International Insurance Relations (G) Committee ((G) Committee) continued its conversation with industry representatives on the key projects of the International Association of Insurance Supervisors (IAIS). Discussions once again centered around the Holistic Framework on Systemic Risk (Holistic Framework) and the Insurance Capital Standard (ICS), which are both scheduled for adoption by the IAIS in November 2019. In particular, with the expected start of the ICS monitoring period in 2020, U.S. regulators continue to voice support for the evaluation of the U.S. Group Capital Calculation (GCC) (which is currently undergoing field testing) as being “outcome equivalent” to the ICS.
6. NAIC Exposes Proposed Revisions to Statements of Statutory Accounting Principles (SSAPs) Related to the Treatment of Collateralized Fund Obligations
At the Summer Meeting, the Statutory Accounting Principles (E) Working Group (SAP Working Group) voted to expose for comment revisions to SSAP No. 43R — Loan-Backed and Structured Securities 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.
7. NAIC Exposes Proposed Revisions to SSAPs Related to the Payment of Levelized and Persistency Commissions
The SAP Working Group voted to expose for comment proposed revisions to SSAP No. 71 — Policy Acquisition Costs and Commissions to recommend (a) clarifications to existing guidance to explain that levelized commission arrangements (whether linked to traditional or nontraditional elements) require the establishment of a liability for the full amount of the unpaid principal and accrued interest payable to a third party at the time the policy is issued and (b) the addition of new guidance noting that persistency commission is accrued proportionately over the policy period to which the commission relates and is not deferred until fully earned.
8. NAIC Adopts Revisions to SSAPs to Clarify Reporting of Affiliate Transactions
The SAP Working Group voted to adopt revisions to SSAP No. 25 — Affiliates and Other Related Parties to clarify that a transaction that involves an affiliate, or risks of an affiliate, is required be reported as a related-party transaction or an investment in an affiliate for purposes of statutory accounting, even if the transaction also involves a nonrelated intermediary. In addition, revisions were made to SSAP No. 26R — Bonds, SSAP No. 32 — Preferred Stock, SSAP No. 43R — Loan-Backed and Structured Securities and SSAP No. 48 — Joint Ventures, Partnerships and Limited Liability Companies to identify that investment transactions are subject to the principles of related parties identified in SSAP No. 25.
9. NAIC Continues Efforts Related to Anti-Rebating Laws and Its Review of Predictive Analytics and the Use of Certain Data in Rating and Underwriting
The NAIC is continuing its work related to anti-rebating laws and the use of external data and predictive analytics in rating and underwriting.
The Valuation of Securities (E) Task Force (VOS Task Force) discussed updates with respect to structured notes, principal-protected notes and “bespoke” securities.
11. NAIC Adopts White Paper on Understanding the Market for Cannabis Insurance
The Property and Casualty (C) Committee adopted the white paper titled Regulatory Guide —Understanding the Market for Cannabis Insurance, which is intended to provide information to state insurance regulators, insurers and the broader public about the architecture of the cannabis business supply chain, types of insurance needed by the cannabis industry, the availability of cannabis business insurance in state insurance markets and the extent of insurance gaps, and best practices that state insurance regulators can adopt to encourage insurers to write insurance for the cannabis industry.
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