The National Association of Insurance Commissioners (NAIC) held its Spring 2015 National Meeting in Phoenix, Arizona, from March 26–31, 2015. The meetings were highlighted by the following activities:
NAIC Continues Its Work to Implement the New XXX/AXXX Framework Various NAIC task forces and working groups continued their work to implement the XXX/AXXX Framework (Framework), which sets forth an action plan for creating interim regulations specific to life insurance reserve financing transactions pending the full implementation of principle-based reserving. Developments relative to implementation of the Framework include the following: (i) capital adequacy and risk-based capital (RBC) matters; (ii) accreditation matters; and (iii) matters related to variable annuity captive reinsurance transactions. Additional information available here.
- NAIC Nears Adoption of Small Company Exemption from Principle-Based Reserving Requirements The NAIC is nearing adoption of an exemption (Small Company Exemption) to the requirements set forth in VM-20 (Standard Valuation Manual VM-20 Requirements for Principle-Based Reserves for Life Products), pursuant to which certain small insurers would be relieved from performing certain complicated tests that would otherwise determine whether such companies are subject to certain principle-based reserving requirements. Additional information available here.
- In the Wake of Discussions Regarding Covered Agreements, NAIC May Evaluate Revisions to Accreditation Standards Related to Reinsurance Collateral Reform The prospect of federal preemption of state insurance regulation addressing reinsurance collateral matters may result in the NAIC making the recent amendments to the Credit for Reinsurance Model Law and Regulation (Amended CFR Model Law) an accreditation standard. The NAIC may take such action in an effort to promote state uniformity and strengthen the NAIC’s argument against the necessity of international agreements between U.S. and foreign regulators (Covered Agreements) that could preempt state reinsurance collateral laws that are inconsistent with such agreements. Additional information available here.
- NAIC Approves Development of Unclaimed Life Insurance Benefits Model Law The Executive Committee approved a request to develop a new NAIC model law to address the issue of unclaimed life insurance proceeds. The Unclaimed Life Insurance Benefits (A) Working Group is forming a subgroup to draft the new model law. Regulators from California, Florida, Louisiana, Nebraska, New York, Oklahoma and Wisconsin volunteered to participate in the drafting subgroup, but the subgroup is open to regulators from other states as well. Additional information available here.
- NAIC Continues to Monitor Development of International Capital Standards Through its ComFrame Development and Analysis (G) Working Group, the NAIC is monitoring the development of capital standards by the International Association of Insurance Supervisors (IAIS), including the basic capital requirements (BCR), the higher loss absorbency (HLA) requirements and the risk-based group-wide global insurance capital standard (ICS). Additional information available here.
- Private Equity Issues (E) Working Group and Group Solvency Issues (E) Working Group Propose Changes to the Financial Analysis Handbook The following proposed changes to the Financial Analysis Handbook were referred to the Financial Analysis Handbook (E) Working Group for review: (i) new narrative guidance for examiners to consider in reviewing Form A applications (referred from the Private Equity Issues (E) Working Group) and (ii) revisions to the insurance holding company system analysis (lead state) section of the Financial Analysis Handbook (referred from the Group Solvency Issues (E) Working Group). Additional information available here.
- Cybersecurity (EX) Task Force Adopts Principles for Effective Cybersecurity Insurance Regulatory Guidance After debate on its proposed draft Principles of Effective Cybersecurity Insurance Regulatory Guidance (Cybersecurity Guidance Document) during the Spring 2015 National Meeting and during a subsequent conference call on April 16, 2015, the Cybersecurity (EX) Task Force adopted the Cybersecurity Guidance Document. Additional information available here.
- Ridesharing Interested Parties Announce a Compromise Model Bill in Advance of Adoption of the NAIC Transportation Network Companies White Paper Just a few days in advance of the Spring 2015 National Meeting, a group of interested parties, including transportation network companies (TNCs), personal auto insurers and industry trade groups, announced their agreement on a model bill to establish insurance requirements for TNCs. The bill requires either a TNC or TNC driver to maintain primary insurance for all three phases of ridesharing activity, including (albeit at lower coverage amounts) the period during which a TNC driver has logged into the app but has not yet accepted a ride request. All mandatory coverages, such as uninsured/underinsured motorists and personal injury protection, are required to be included. The bill also clarifies the right of personal auto insurers to exclude coverage for TNC-related driving and mandates cooperation among insurers in the event of a claim. Although the Sharing Economy (C) Working Group declined to postpone adoption of its “Transportation Network Company Insurance Principles for Legislators and Regulators” white paper, a drafting note was added to mention the compromise model bill. The white paper was later adopted by both the Property and Casualty Insurance (C) Committee and Executive Committee/Plenary.
- NAIC Continues Review of Its Governance Process The National Association of Corporate Directors (NACD) has commenced a comprehensive review of the NAIC governance process, including governing documents, organizational structure, external engagements, management and decision-making processes and other relevant practices and procedures. Upon completion of its review, it is expected that the NACD will recommend revisions and improvements for governance best practices. The Governance Review (EX) Task Force is also evaluating administrative due process issues presented by the implementation of NAIC work product without action at the state level. The Governance Review (EX) Task Force is comparing NAIC procedural requirements to state administrative procedure law to determine which aspects, if any, of state administrative procedure laws should be incorporated into the NAIC procedural requirements.
- NAIC Evaluating the Effect of Insurers’ Use of Big Data on Consumers To date, regulators have generally allowed insurers to take advantage of emerging technologies that permit insurers to collect increasing amounts of data regarding consumers. Insurers’ use of “big data and analytics” was a topic of discussion across NAIC committees at the Spring 2015 National Meeting. The Property Casualty Insurers Association of America delivered a presentation to the Property and Casualty Insurance (C) Committee titled, “How Insurers’ Use of Data Benefits Consumers.” However, at the Market Regulation and Consumer Affairs (D) Committee, Indiana Commissioner Stephen Robertson, the committee’s Chair, raised concerns regarding the possibility that automobile insurers may use big data to engage in unfair claims settlement practices. The Market Regulation and Consumer Affairs (D) Committee agreed to form a study group, to be led by North Carolina, to investigate these issues and is also considering whether to hold a hearing on the topic.
- NAIC Continues Its Work to Implement the New XXX/AXXX Framework (Continued) Developments relative to implementation of the Framework include the following: Capital Adequacy and RBC Matters The Life Risk-Based Capital (E) Working Group (Life RBC Working Group) is finalizing discussions on the following two RBC proposals related to the Framework. The first proposal relates to the RBC “cushion” required under the Framework (RBC Shortfall Cushion) for an insurer ceding policies subject to Regulation XXX/AXXX reserving when the assuming reinsurer does not file an RBC report using the RBC formula and instructions. The proposal would adjust Authorized Control Level (ACL) RBC to account for a shortfall in an insurer’s Primary Securities under Actuarial Guideline 48 (AG 48). Interested parties such as the American Academy of Actuaries and the American Council of Life Insurers preferred a different proposal to address shortfalls, which would have adjusted Total Adjusted Capital, rather than ACL. However, the Life RBC Working Group previously decided to proceed with the ACL adjustment and will likely adopt the final version of the proposal by the end of April 2015, at which time the proposal will be considered by the Capital Adequacy (E) Task Force. The second proposal relates to the effect on a cedent’s RBC when, as required under AG 48, a cedent’s opining actuary issues a qualified actuarial opinion because the cedent has entered into a reserve financing transaction that does not adhere to the Framework. Under the current RBC formula, such a qualified actuarial opinion would result in a C-3 (interest rate risk) charge to the cedent’s RBC, which would impact all lines of business of the cedent, rather than only business covered by AG 48. The current proposal of the Life RBC Working Group is to eliminate the RBC C-3 charge if the qualified actuarial opinion was issued solely due to directions in AG 48. Instead, failure to meet the requirements of AG 48 would be reflected elsewhere in the RBC Shortfall Cushion and would affect only the lines of business covered by AG 48. The Life RBC Working Group will likely adopt the final version of the proposal by the end of April 2015, at which time the proposal will be considered by the Capital Adequacy (E) Task Force. The Life RBC Working Group also discussed the “Consolidated RBC Shortfall proposal,” which would show a consolidated presentation of all XXX/AXXX reinsurance transactions. The proposal will be discussed in more detail on the Life RBC Working Group’s upcoming conference calls. Also, the Valuation of Securities (E) Task Force will assist the Life RBC Working Group in defining the term “Other Security” for purposes of developing appropriate asset charges for the forms of “Other Security” used by insurers under AG 48 and the Framework. Accreditation Matters The Financial Regulation Standards and Accreditation (F) Committee continued to debate the proposed application of the Part A laws and regulations comprising the accreditation program to captives and special purpose vehicles that assume business written in accordance with Regulation XXX and Regulation AXXX, as well as variable annuities and long-term care insurance. The Part A accreditation standards are the laws and regulations that the NAIC considers necessary to ensure that a state insurance department has sufficient authority to regulate insurers’ solvency in an effective manner. Comments were received from many interested parties that the proposed definition of multistate reinsurer to be included in the Accreditation Program Manual was still unclear. NAIC staff will further revise the wording. Note that captives complying with the Framework and AG 48 will be automatically deemed to meet the Part A accreditation standards. Matters Related to Variable Annuity Captive Reinsurance Transactions The Financial Condition (E) Committee created a Variable Annuities Issues (E) Working Group with the charge to oversee the NAIC’s efforts to study and address regulatory issues relating to variable annuity captive reinsurance transactions. The working group will be chaired by Iowa Commissioner Nick Gerhart and will be comprised of the nine lead domiciliary states of insurance groups known to have entered into these types of transactions. The Financial Analysis (E) Working Group will collect information on a confidential basis from ceding insurers regarding the transactions. The Financial Condition (E) Committee also discussed regulators approving captive reinsurance transactions without consultation with the Financial Condition (E) Committee or one of its subsidiary policymaking groups, as well as the use of permitted practices by states to address one-off issues behind some captive reinsurance transactions.
- NAIC Nears Adoption of Small Company Exemption from Principle-Based Reserving Requirements (Continued) The Life Insurance and Annuities (A) Committee and the Executive Committee adopted the Small Company Exemption for inclusion in the VM-20, and the Executive/Plenary Committees will consider adoption of the Small Company Exemption at the Summer 2015 National Meeting. VM-20 currently allows less risky products to be exempt from additional reserve calculations. However, the tests that insurers must perform in order to qualify for that exemption (Exclusion Tests) involve substantial work and documentation in order to demonstrate the relative absence of risk. If adopted, the Small Company Exemption would make the Exclusion Tests less burdensome for companies by incorporating an assessment of company risk, rather than product risk. In order to qualify for the Small Company Exemption as adopted by the Life Insurance and Annuities (A) Committee and the Executive Committee, a company must have (i) less than $300 million of ordinary life insurance premiums (or, if the company is a member of an NAIC group of insurers, the group must have combined ordinary life insurance premiums of less than $600 million); (ii) reported Total Adjusted Capital of at least 450% of the authorized control level RBC in its most recent RBC report, and the appointed actuary must have provided an unqualified opinion on reserves; and (iii) no material universal life with secondary guaranty business in force.
- In the Wake of Discussions Regarding Covered Agreements, NAIC May Evaluate Revisions to Accreditation Standards Related to Reinsurance Collateral Reform (Continued) The issue of Covered Agreements stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), which authorizes the Federal Insurance Office (FIO) to assist the United States Department of the Treasury (Treasury) in negotiating Covered Agreements to achieve a “level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under State insurance or reinsurance regulation.” Since Dodd-Frank was enacted, the FIO has expressed its belief (in testimony and in its insurance and reinsurance reports to Congress) that direct federal regulation is appropriate for addressing reinsurance collateral matters. In fact, the director of the FIO has stated that discussions are already underway for the FIO, Treasury and the United States Trade Representative (USTR) to seek Congressional approval for beginning negotiations of bilateral agreements with European regulators concerning reinsurance collateral requirements. As support, the FIO points to inconsistencies among states in implementing reinsurance collateral reform. The FIO has also questioned the wisdom of relying on credit rating agency assessments of insurers as opposed to “risk-based empirical factors” to determine applicable reinsurance collateral requirements. At this juncture, the NAIC officially opposes Covered Agreements and has stated that, based on the considerable progress made by the NAIC and states in modernizing credit for reinsurance rules, the NAIC is “neither convinced nor persuaded that a covered agreement for reinsurance collateral is necessary.” However, trade groups representing international reinsurers, such as the Reinsurance Association of America (RAA), urged the Reinsurance (E) Task Force to be “open-minded” and reconsider its opposition to Covered Agreements. Trade groups and individual reinsurers pointed to continuing barriers faced by international insurers in non-U.S. reinsurance markets, particularly in Poland and the Netherlands, and believe that Covered Agreements could help in this regard. Also, although many states have passed collateral reform legislation, states currently are not required to do so and many have not. When adopted, the Amended CFR Model Law providing for reduced collateral was not made an NAIC accreditation standard. Some regulators believe it is enough that states choosing to pass collateral reform are uniform in their approach. Other regulators on the Reinsurance (E) Task Force seem amenable to making collateral reform an accreditation standard (i.e., a state would need to pass a law that is substantially equivalent to the Amended CFR Model Law in order to maintain NAIC accreditation). Some interested parties (including the RAA) believe that Covered Agreements should be pursued no matter how many states pass the Amended CFR Model Law, as European regulators prefer that reinsurance collateral issues be resolved through Covered Agreements. This preference is particularly important as the insurance/reinsurance industry faces the January 1, 2016 effective date of Solvency II, pursuant to which the European Union (EU) will evaluate non-EU jurisdictions to determine if they are “equivalent.” Many parties hope the EU will not subject the U.S. to a unilateral evaluation if the EU and the U.S. continue bilateral discussions and the U.S. can show uniform regulation of certain key issues, such as reinsurance collateral. Not surprisingly, some licensed U.S. reinsurers urged the NAIC to continue opposing Covered Agreements. Some of these reinsurers had previously opposed the NAIC’s effort to reduce collateral required of unauthorized international reinsurers during NAIC proceedings concerning the Amended CFR Model Law. One U.S. insurer stated that although it had fought against collateral reductions and the Amended CFR Model Law, it now “trusts” the Amended CFR Model Law and believes that the NAIC should “stick with the Model Act” and resist Covered Agreements with all its efforts. At this juncture, it is possible that the NAIC may reconsider its prior decision and make the Amended CFR Model Law an accreditation standard in order to promote state uniformity and strengthen its argument against the necessity of Covered Agreements. However, it is not clear whether such an initiative would affect current efforts by the FIO and the USTR to negotiate bilateral reinsurance agreements with European regulators.
- NAIC Approves Development of Unclaimed Life Insurance Benefits Model Law (Continued) The Unclaimed Life Insurance Benefits (A) Working Group heard testimony from various stakeholders regarding the appropriate starting point for developing the new NAIC model law. Florida Insurance Commissioner Kevin McCarty offered testimony in support of using as a starting point the regulatory settlement agreements that state insurance departments have entered into with various insurers in connection with unclaimed life insurance proceeds matters. He suggested that Illinois Senate Bill 3660 (introduced May 19, 2014) embodies the key elements of such regulatory settlement agreements. Interested parties representing life insurance companies, consumers and trade associations offered testimony in support of using the Unclaimed Life Insurance Benefits Model Act prepared by the National Conference of Insurance Legislators (NCOIL Model Act) as a starting point for the new NAIC model law (although many among the various interested parties believe that the NAIC model law should apply only prospectively (i.e., to those policies issued after the effective date of the statute), as any retroactive application would raise serious constitutional issues and would be patently unfair to subject life insurers). A number of states have already enacted laws to expressly require insurance companies to make comparisons of their in-force business to the Social Security Administration’s Death Master File to potentially identify deceased insureds whose beneficiaries have not filed a claim. Most of such states have enacted, and others are considering enacting, legislation based on the NCOIL Model Act, although the potential for retroactive application of such legislation remains a concern for many in the life insurance industry.
- NAIC Continues to Monitor Development of International Capital Standards (Continued) BCR is a factor-based methodology that will apply to globally systemically important insurers (G-SIIs) beginning in 2016. The BCR is the basis for developing the HLA requirements (expected to be finalized in the fall of 2015) that will apply to G-SIIs as well as the risk-based group-wide global ICS (expected to be finalized in 2016) that will apply to internationally active insurance groups. The IAIS received over 1,500 pages of comments from over 50 parties, including from the NAIC, to its ICS Consultation Document, which was released for comment in December 2014. From the comments, notable attention was given to issues surrounding valuation and the use of a GAAP plus adjustments approach (which the NAIC supports) and also qualifying capital resources and the use of classifying such capital resources into two tiers. The NAIC has stated that it generally supports the tiering of capital into two tiers (without further sub-tiers).
- Private Equity Issues (E) Working Group and Group Solvency Issues (E) Working Group Propose Changes to the Financial Analysis Handbook (Continued) The Private Equity Issues (E) Working Group completed its charge by adopting recommended proposed changes to the Financial Analysis Handbook, representing new narrative guidance for examiners to consider in reviewing Form A applications. The adopted version includes a suggestion that examiners review proposed transactions with parties that do not fall within the strict definition of affiliates, but nonetheless seem to be engaging in a manner similar to affiliates, for purposes of reviewing whether charges to the insurer are excessive and to ensure that the entirety of activities within the insurer’s holding company system are properly disclosed. The guidance will now be reviewed by the Financial Analysis Handbook (E) Working Group. The Group Solvency Issues (E) Working Group adopted recommended proposed changes to the Financial Analysis Handbook related to the role of the lead state in conducting the annual holding company analysis and best practices related thereto. The changes will now be reviewed by the Financial Analysis Handbook (E) Working Group. Proposed changes to the Financial Analysis Handbook related to supervisory colleges remain subject to further consideration by the Group Solvency Issues (E) Working Group.
- Cybersecurity (EX) Task Force Adopts Principles for Effective Cybersecurity Insurance Regulatory Guidance (Continued) The Cybersecurity Guidance Document consists of twelve principles for effective insurance regulation of cybersecurity risks and is based on similar regulatory guidance adopted by the Securities Industry and Financial Markets Association. During debate on the draft principles, a significant number of interested parties made comments in two areas: (i) objections to the reference in the draft principles to the National Institute of Standards and Technology (NIST) framework as the only external framework and (ii) the inclusion of multiple principles relating to the sale of cyber risk insurance. The Cybersecurity (EX) Task Force revised the principles in response to these comments, among others. Specifically, as adopted by the Cybersecurity (EX) Task Force, the Cybersecurity Guidance Document (a) requires cybersecurity regulatory guidance to be consistent with nationally recognized efforts “such as” the NIST framework (rather than mandating the use of the NIST framework) and (b) does not include the principles from the original draft relating to the sale of cyber risk insurance. Although several interested parties objected to the principle that would require insurers and insurance producers to use an information sharing and analysis organization (i.e., an organization engaged in information sharing in order to respond to and take precautions against cybersecurity risks and incidents in real time), the Cybersecurity (EX) Task Force did not make changes to that principle. The Cybersecurity Guidance Document would apply to all licensees (not just insurance companies) that possess personally identifiable consumer information.
This update includes contributions from Sidley counsel and associates including Sara N. Africano, Deborah L. Cotton, Stephanie H. Dobecki and Charlene McHugh.