The National Association of Insurance Commissioners (NAIC) held its Summer 2018 National Meeting (Summer Meeting) in Boston, Massachusetts, from August 4 to 7, 2018. The Summer Meeting was highlighted by the following activities:
1. NAIC Continues its Evaluation of Insurers’ Use of Big Data
The NAIC is continuing its review of property and casualty insurers’ use of predictive modeling in rate filings and is developing related guidance materials for states to use in reviewing predictive models. The NAIC is also considering insurers’ use of big data in underwriting life insurance products.
2. NAIC Continues Working to Develop a Group Capital Calculation
The Group Capital Calculation (E) Working Group continued its development of a group capital calculation (GCC) as an analytical tool for regulators to evaluate the financial condition of an insurance group. While it has been determined that the GCC will utilize a risk-based capital (RBC) aggregation approach in order to leverage existing legal capital requirements, it is not clear which entities within any group will be subject to the GCC or how the GCC will apply to those entities within a group that do not have existing capital requirements. The Working Group discussed comments from interested parties in response to a June 26, 2018 NAIC staff memorandum regarding the scope of application of the GCC. The intent of the draft memorandum is to provide guidance to field testing volunteers and their respective lead state regulators on the scope of the group subject to the GCC.
3. NAIC Continues to Develop “Suitability Plus” Standard that Would Apply to Annuity (But Not Life Insurance) Transactions
Notwithstanding the decision of the Fifth Circuit Court of Appeals, which vacated the U.S. Department of Labor’s regulations expanding the definition of the term “fiduciary” (Fiduciary Rule), the Annuity Suitability (A) Working Group (ASWG) is proceeding with developing proposed amendments to the NAIC’s Suitability in Annuity Transactions Model Regulation (SAT). Among other things, the proposed amendments to the SAT would require producers (or insurers where no producer is involved) to comply with a “suitability plus” (rather than a “best interest”) standard in connection with annuity transactions with consumers. Although New York has encouraged the ASWG to adopt amendments to the SAT that apply to life insurance as well as annuity transactions, the ASWG has determined that it does not have the authority to do so under its existing charge.
4. NAIC Continues to Develop Regulatory Guidance Regarding Changes to Life Risk-Based Capital Following Federal Tax Reform
The Life Risk-Based Capital (E) Working Group adopted a proposal for changes to the life and fraternal RBC factors and instructions during a June 8, 2018 conference call, with such proposal adopted by the Capital Adequacy (E) Task Force during a June 28, 2018 conference call. The proposal addresses changes to the life and fraternal RBC factors and instructions to reflect the current tax environment following U.S. tax reform, specifically focusing on changes to the RBC ratio denominator in order to reflect the corporate tax rate decrease from 35% to 21%. With the assistance of the American Academy of Actuaries, the Working Group is preparing a guidance document for state regulators to use in evaluating companies’ year-end 2018 RBC ratios in light of tax reform and these recently adopted changes to the RBC factors and instructions. The Working Group hopes to consider the adoption of the guidance document at the NAIC’s Fall 2018 National Meeting.
5. NAIC Forms Subgroup to Explore Licensure of Pharmacy Benefit Managers
The Regulatory Framework (B) Task Force established a new subgroup to evaluate the need for additional regulation of pharmacy benefit managers (PBMs). This work is part of a broader discussion occurring at the Health Insurance and Managed Care (B) Committee and within its related working groups regarding healthcare cost drivers, including pharmaceutical costs. PBMs are facing increased scrutiny following President Trump’s recently announced policy proposals to lower prescription drug costs, including the potential elimination of “middlemen” such as PBMs involved in the delivery of prescription drug benefits.
6. NAIC Reviews Revised Drafts of ComFrame and International Capital Standard 2.0
On July 31, 2018, the International Association of Insurance Supervisors (IAIS) released the latest version of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) and International Capital Standard Version 2.0 (ICS 2.0) for a 90-day public consultation period. The ComFrame Development and Analysis (G) Working Group is reviewing the consultation materials and is developing NAIC comments in conjunction with the International Insurance Relations (G) Committee.
7. NAIC Working Group Exposes Reports Regarding Bond Factors
The Investment Risk-Based Capital (E) Working Group heard a presentation from the American Academy of Actuaries (AAA), which continues to recommend the development of a set of bond factors that includes an offset for the level of credit risk reflected in statutory reserves. The Working Group also received a report from the AAA, which recommends that the NAIC consider increasing the granularity in bond factors used in the Property/Casualty RBC Formula and the Health RBC Formula by expanding the number of bond rating classes from six to 20, as well as updating the factors.
8. NAIC Takes Action to Begin Implementing the Covered Agreement
The Reinsurance (E) Task Force has proposed amendments to the NAIC’s Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (together, the CFR Model Laws) to implement reinsurance collateral reforms for reinsurers that meet certain conditions, as required in connection with the Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement), which was signed by the U.S. and the EU in September 2017.
9. Property and Casualty Insurance (C) Committee Adopts Travel Insurance Model Act
The Property and Casualty Insurance (C) Committee adopted the Travel Insurance Model Act (NAIC Travel Model Act), which is intended to provide a uniform, comprehensive framework for regulating the marketing and sale of insurance products related to travel protection. It is expected that the NAIC will adopt the NAIC Travel Model Act during the meeting of the Executive/Plenary Committee at the NAIC’s Fall 2018 National Meeting in November 2018.
10. NAIC Forms Working Group to Consider Insurance Regulatory Issues Related to Legalized Cannabis Business
Notwithstanding that an increasing number of states have legalized the recreational and/or medical use of marijuana, the possession, production, distribution and sale of marijuana remains prohibited under Federal law. As a result, many businesses engaged in activities related to the possession, production, distribution and sale of marijuana in states where such activities are legal under state law often encounter obstacles to obtaining insurance coverage related to such activities. In response to this problem, the NAIC has formed the Cannabis (C) Working Group to “consider the insurance regulatory issues surrounding the legalized cannabis business, including availability and scope of coverage, Workers’ Compensation issues, and consumer information and protection.” The Cannabis (C) Working Group will develop a white paper outlining issues and making recommendations for the development of related regulatory guidance. Such work should be complete by the first quarter of 2020.
11. NAIC Adopts Pre-Dispute Mandatory Arbitration Clauses Bulletin
The Market Regulation and Consumer Affairs (D) Committee adopted the Pre-Dispute Mandatory Arbitration Clauses Bulletin, which prohibits the use of pre-dispute mandatory arbitration clauses and choice-of-venue and choice-of-law provisions in personal lines insurance policies. While not having the force of law, the bulletin is available to any NAIC member state for use in communicating its policy to disallow such provisions.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.