The NAIC’s 2016 Annual Report is titled, “Inspiring Innovation” and the themes of innovation and the new capabilities that technology offers were evident throughout the weekend. In March, the NAIC announced the creation of a new Innovation and Technology (EX) Task Force that is intended to help regulators stay on top of technological developments impacting the insurance industry.
The following are some highlights from the Spring National Meeting. We do not cover every meeting in this report; rather, we comment on select noteworthy developments and matters of interest to our clients.
4. Schedule F Reporting Instructions A. NAIC Innovation and Technology Task Force
The Innovation and Technology (EX) Task Force held its first meeting at the Spring National Meeting. Formed by the Executive Committee in March, the Innovation and Technology Task Force is charged with providing a forum for regulator education and discussion of innovation and technology in the insurance sector, monitoring technology developments that impact the state insurance regulatory framework, and developing regulatory guidance, as appropriate. The new Task Force will oversee the Big Data Working Group, the Cybersecurity Working Group, and the Speed-to-Market Working Group.
1. Insurance Data Security Model Law & NY Cybersecurity Regulation
Work on the development of an Insurance Data Security Model Law (Model Law) continues. The NAIC originally intended to finalize the Model Law by the end of 2016, but failed to meet that deadline due to opposition from all sides to various sections of the first and second drafts, prompting the formation of an ad hoc drafting group to more expeditiously move the drafting process. This ad hoc group, which is chaired by Superintendent Elizabeth Dwyer (Rhode Island), released a third version of the Model Law on February 27, with comments due April 17.
At the Spring meeting, New York Superintendent of Financial Services Maria Vullo addressed the Cybersecurity (EX) Working Group and urged it to adopt New York’s cybersecurity regulation as its model. The New York Department of Financial Services (DFS) issued a final regulation that took effect on March 1 that applies new requirements for a cybersecurity risk assessment and a cybersecurity program to DFS-licensed individuals and entities including insurance companies, insurance agents, and brokers. For more information regarding the DFS cybersecurity regulation, see Legal Alert: NY DFS Publishes Final Cybersecurity Rules for Financial Services Companies.
On cyber risks, Superintendent Vullo expressed the view that the “time is long past to wish away the problem.” She detailed the process that New York followed to draft and finalize its regulation, emphasizing the level of DFS engagement with stakeholders and adjustments it made to its proposal to have a regulation that is “workable in practice.” She described the principal features of the New York regulation, explaining why New York felt each is appropriate, and then urged regulators in other states to work together to launch a state-by-state response to cyber threats for the insurance industry.
Working Group Chair Ray Farmer (South Carolina) concurred with the Superintendent’s call for prompt action and although he views New York’s regulation as “a good regulation to consider,” he said he is not sure the Model Law will be exactly the New York regulation. Director Farmer and others noted that the differences among stakeholders in relation to the various drafts of the Model Law relate to breach notification requirements, not to the need for preventive measures. Superintendent Dwyer, in providing an update from the ad hoc drafting subgroup, commented that one area where there was more consensus was on a risk-based approach.
Director Farmer invited interested parties to comment on whether the New York Regulation should be used for the Model. One suggestion put forward was to bifurcate the regulation so that loss prevention can be addressed separately from breach response in order to get it done more quickly. The Working Group next meets by conference call on May 9.
2. Big Data
The Big Data (EX) Working Group held its first meeting as a newly reconstituted working group of the Innovation and Technology (EX) Task Force. The Working Group is chaired by Oregon Insurance Commissioner Laura Robison, who brings to the job her training as a casualty actuary. The Working Group is tasked with gathering information to assist state insurance regulators in obtaining a clear understanding of what data is collected, how it is collected, and how it is used by insurers and third parties. More specifically, it is charged with reviewing the current regulatory frameworks used to oversee insurers’ use of consumer and non-insurance data and to make recommendations for model law changes as appropriate. It is also tasked with proposing a mechanism to allow states to share resources for conducting technical analysis of data collection related to review of complex models used by insurers. Last, it is charged with assessing data needs and required tools for regulators to monitor the marketplace and evaluate underwriting, rating, claims and marketing practices.
Professor Lawrence Powell, Director of the Alabama Center for Insurance Information and Research of the University of Alabama, presented the results of a study titled, “Big Data and Regulation in the Insurance Industry.” Professor Powell described various benefits to consumers from insurers’ use of Big Data and concluded that the current regulatory system is well-suited to address Big Data. In response, Birny Birnbaum, on behalf of the Center for Economic Justice, critiqued Dr. Powell’s presentation as based on “fact free generalizations” and urged regulators to take a more proactive position on monitoring and restricting how data is used by insurers.
As with its predecessor task force, the Working Group was beguiled by differing views about what its mission should be, with differences focused on its work plan for the year. An industry trade association took issue with aspects of the work plan that it believes potentially stray into regulation of insurers’ use of data that is not supported by the current legal standards, namely, that insurance rates not be excessive, inadequate or unfairly discriminatory. A particular annoyance was the work plan’s call for discussion of disparate impact from insurers’ use of data. Consumer representatives who were present expressed the view that this is an important issue; the industry’s position is that it is not the applicable legal standard. Commissioner Robison indicated she would look at how disparate impact was addressed in the work plan, but expressed the view—perhaps showing her actuary’s stripes—that what interests her is the correlation or risk to rating factors, not just whether there’s a disparate impact. A revised work plan is to be circulated by the Chair before the Working Group next meets.
B. Update on FSOC and Systemic Risk
During the meeting of the Financial Stability (EX) Task Force, Director Peter Hartt (New Jersey), Chair of the Task Force, provided an update on activity of the Financial Stability Oversight Council (FSOC). In August 2016, Director Hartt was elected to a two-year term as the state insurance commissioner representative on FSOC, where he is tasked with representing the interests of the state insurance regulators.
Director Hartt reported that on March 2, 2017, the FSOC had a meeting with the Treasury Secretary, as well as the acting chiefs of the Securities and Exchange Commission and the Federal Trade Commission. Director Hartt explained that the Trump Administration will likely have a new approach to FSOC, and expressed that he continues to have serious concerns with the designation of AIG and Prudential systemically important financial institutions (SIFI). Director Hartt explained that he aims to educate FSOC members on the serious flaws in the non-bank SIFI designation process.
On February 3, 2017, President Trump issued an executive order to scale back Dodd-Frank. The executive order lists seven Core Principles of regulation and directs the Treasury Secretary, in consultation with other federal financial regulators, to report to the President within 120 days (and periodically thereafter) on the extent to which existing laws, treaties, regulations, requirements or governmental policies promote, or are inconsistent with, the Core Principles. These reports are expected to facilitate the Trump Administration’s plan to revise rules that Dodd-Frank put into place. The Trump Administration has indicated that its goal is to pave the way for additional orders that would impact the post-crisis FSOC and the way the federal government supervises large financial companies that are not traditional banks.
Additionally, Federal legislation has been introduced in the U.S. House of Representatives that would significantly amend Dodd-Frank, including by removing FSOC’s ability to designate non-bank SIFIs. On March 28, 2017, just over a week before the Spring National Meeting, the House Financial Services Subcommittee on Oversight and Investigations held a hearing titled, “The Arbitrary and Inconsistent Non-Bank SIFI Designation Process.” A common theme throughout the hearing was the lack of transparency at the FSOC and the need to revamp the SIFI designation process.
In Denver, the Task Force adopted a new charge: “Analyze existing post-financial crisis regulatory reforms for their application in identifying macroeconomic trends, including identifying possible areas of improvement or gaps, and propose to the Financial Condition (E) Committee or other relevant committee enhancements and/or additions to further improve the ability of state insurance regulators and industry to address macro-prudential impacts; consult with such committees on implementation as needed.” Speaking in support of this new charge, representatives from Prudential, MetLife, and Allianz presented separately on how their organizations approach systemic risk and macro-prudential regulatory issues. A common theme in each of these presentations was the importance of Own Risk and Solvency Assessment (ORSA) and the importance of strong micro-prudential regulation as a first step to macro-prudential regulation.
C. Proposed Form F Guidance Manual
The Group Solvency Issues (E) Working Group discussed the draft Enterprise Risk Report (Form F) Implementation Guide, which was last updated in February 2017. The Implementation Guide was initially proposed after a Working Group survey of state insurance regulators revealed uncertainty about the effectiveness and value of the Form F. The purpose of the Implementation Guide is to assist insurers and regulators in maximizing the usefulness of Form F by effectively communicating its intent and related regulator expectations.
Although Delaware made a motion to approve the updated Implementation Guide, the motion did not receive any support. John Bauer, staff at the NAIC, explained that he reviewed the Implementation Guide against the requirements of the NAIC Model Insurance Holding Company System Regulatory Act and the Insurance Holding Company System Model Regulation (Model Holding Company Act and Regulation), and that he had concluded that the Implementation Guide sets forth requirements that exceed the models.
In response to Mr. Bauer’s report, Kathryn Belfi, Director, Financial Regulation, Connecticut Insurance Department, expressed her belief that the Implementation Guide should complement, rather than add to, the Model Holding Company Act and Regulation. Mr. Bauer noted that the models could be amended to be consistent with the Implementation Guide or, alternatively, the Implementation Guide could be further revised to be consistent with the models.
There was support for revising the Implementation Guide rather than amending the Model Holding Company Act and Regulation, and ultimately, the Working Group agreed to create a subgroup to analyze the issue and consider next steps. The subgroup will also look into creating a chart that compares the filing requirements of the NAIC Risk Management and Own Risk and Solvency Assessment Model Act against the Form F reporting requirement.
D. International Issues
1. International Reinsurance
For the latest on the proposed covered agreement between the United States and the European Union (EU), its timetable for implementation and the road ahead, see Legal Alert: US-EU Covered Agreement: An Overview. Substantive discussion of the covered agreement was noticeably absent from the Spring National Meeting in light of the uncertainty surrounding its implementation.
During the Reinsurance (E) Task Force meeting, John Finston, General Counsel, California Department of Insurance, acting as Task Force Chair, reported that the NAIC needs clarification on the terms of the covered agreement and that it is premature to discuss how to address the covered agreement until it becomes clear that the covered agreement will be adopted. Mr. Finston noted that the NAIC will need to do a lot of work to conform state credit for reinsurance rules if the covered agreement is adopted. Mr. Finston also noted that state insurance regulators would need to ensure that the covered agreement does not result in a competitive advantage for EU reinsurers doing business in the United States, and would need to ensure that adequate protections still exist for policyholders. This last comment appears to be a reference to a relatively new charge for the Financial Condition (E) Committee to “consider and develop contingency regulatory plans to continue to protect U.S. insurance consumers and U.S. ceding insurance companies from potential adverse impact resulting from covered agreement negotiation.” In September 2016, the NAIC released an initial outline of options for regulating reinsurance as alternatives to the current approach of relying on collateral for unauthorized reinsurers.
In light of the uncertainty surrounding the U.S.-EU covered agreement, the Reinsurance Task Force also refrained from adopting a final recommendation on EU member state implementation of Solvency II and the potential impact on their applicable qualified jurisdiction status. Under the NAIC Credit for Reinsurance Model Law and Regulation, an unauthorized reinsurer may be certified to provide credit for reinsurance with reduced collateral if it is domiciled and licensed in a “qualified jurisdiction.” In determining whether the domiciliary jurisdiction is eligible to be recognized as a qualified jurisdiction, the commissioner must consider, among other things, whether there is reciprocal recognition of U.S. reinsurers. The issue is that some EU jurisdictions have implemented regulatory standards under Solvency II that result in additional requirements for U.S. reinsurers seeking to do business in those jurisdictions. In December 2016, the Qualified Jurisdiction (E) Working Group issued a report outlining the new requirements being imposed in EU qualified jurisdictions (France, Germany, Ireland and the UK) and potential consequences if one of these jurisdictions were found to be out of compliance with the qualified jurisdiction requirements. Notably, the report does not make a recommendation on whether these EU jurisdictions should be disqualified, but the Reinsurance Task Force was expected to issue its recommendation in Denver.
2. Group Capital Calculation
International. The International Insurance Relations (G) Committee met and discussed a report from the ComFrame Development and Analysis (G) Working Group (CDAWG) addressing the current status of the International Association of Insurance Supervisors’ (IAIS) development of its global insurance capital standard (ICS). ICS version 1 is scheduled to be adopted in June 2017, followed by enhanced field testing, in which Internationally Active Insurance Groups (IAIGs) will be encouraged to participate. The IAIS plans to adopt ICS version 2 in 2019 for ultimate adoption by jurisdictions in 2020 as part of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). G Committee also discussed the IAIS’s commencement of the fifth assessment of global systemically important insurers (G SIIs). Responses from the firms being assessed are due to the IAIS in early May 2017. It was also reported that the IAIS has formed a new task force called the Systemic Risk Assessment Task Force, which is tasked with developing an activities-based approach to systemic risk assessment.
NAIC. While engaging with the IAIS on the development of an international capital standard, the NAIC formed the Group Capital Calculation (E) Working Group (GCCWG) in 2015 to construct a U.S. group capital calculation using a risk-based capital (RBC) aggregation methodology. Commissioner David Altmaier (Florida), Chair of the GCCWG, stated that the focus of the GCCWG’s meeting in Denver would be on how to treat non-insurance entities in the group capital calculation. Acknowledging that the GCCWG had received a lot of feedback on the previous staff recommendation to apply a flat equity charge of 22.5% to non-insurance entities’ book/adjusted carrying value (BACV), Commissioner Altmaier said they were open to hearing other ideas.
On behalf of the American Council of Life Insurers (ACLI), industry representatives gave a presentation on the treatment of non-insurance/non-regulated entities within the proposed group capital calculation. Stating that the 22.5% charge to equity is insensitive to risk, penalizes well-capitalized companies, and discourages robust capitalization, they offered three possible alternative approaches. The first is largely consistent (captives are not included) with the “Aggregation & Calibration” approach developed for the Federal Reserve. The second is more simplistic, less risk-sensitive and closer to the staff recommendation to apply a 22.5% charge to the BACV of all non-insurance entities not currently subject to a capital requirement. The third is similar to the first, but simplified. It does not differentiate between non-insurance entities covered by a parent regime and those not so covered, but rather it imposes a materiality test that differs depending on whether the entity is financial or non-financial. The ACLI withheld its endorsement of one of these approaches because the scope and purpose of the group capital calculation is not yet clear. The ACLI recommended that the three approaches be field tested, which will guide regulators in choosing the appropriate approach.
Commissioner Altmaier asked NAIC staff to consult with the ACLI on the three approaches and coordinate with those engaged in the “Baseline Exercise” involving at least six insurance groups. That exercise will identify all entities within each group and treat them as stand-alone entities. The capital treatment assigned to each entity will be based on applicable RBC treatment for the entity, except where replaced by an alternative that has been agreed upon by the Working Group.
The GCCWG also briefly discussed a March 22, 2017, NAIC staff memo that addresses possible approaches in the group capital calculation for U.S. insurers that do not file RBC, as well as permitted and prescribed practices (i.e., adjustment for determining the valuation used for U.S. captives; and on top adjustment for prescribed and permitted practices that totals the impact of all such adjustments on capital). The GCCWG voted to expose the memo for a public comment period of 45 days with a comment period ending May 26, 2017.
Federal. In the background of the GCCWG’s work is the Federal Reserve Board’s approval in June 2016 of an advance notice of proposed rulemaking, which solicited comments on two conceptual frameworks for capital standards that could apply to systemically important financial institutions (SIFIs) and to savings and loan holding companies (SLHCs). The Fed proposed a so-called consolidated approach for SIFIs, which would categorize an entire insurance firm’s assets and insurance liabilities into risk segments, apply certain risk factors to each segment at the consolidated level, and then set a minimum ratio of required capital. Additionally, the Fed proposed a so-called “building block” approach for SLHCs, which would aggregate existing capital requirements across all of a firm’s affiliated legal entities to arrive at a combined, group-level capital requirement, subject to certain adjustments. It is unclear how the Fed’s proposed capital standards will be impacted by the new Trump Administration (if at all), which has indicated a desire to significantly change post-Dodd-Frank financial regulation.
3. Corporate Governance
As noted above, the International Insurance Relations (G) Committee heard a report at its meeting from the CDAWG with an update on the activities of the IAIS, several of which touch on corporate governance. In March 2017 the IAIS released proposed revisions to its Insurance Core Principles, which include certain revisions relating to corporate governance. The CDAWG is reviewing the exposure draft of the Insurance Core Principles, comments to which are due June 1, 2017. The IAIS also released in March 2017 its draft Application Paper on Group Corporate Governance, which aims to provide good supervisory practices and examples to address challenges specific to the governance of insurance groups and to create a common understanding among supervisors on how to assess or evaluate the governance frameworks of insurance groups. Comments on the application paper are due May 1, 2017.
E. Issues of Particular Interest to Life Insurers
1. Life Insurance and Annuities (A) Committee
The Life Insurance and Annuities (A) Committee discussed key NAIC initiatives, including annuity disclosure, annuity suitability, the Life Insurance Buyer’s Guide, addressing life insurance illustration issues, promoting appropriate sales practices, and unclaimed life insurance benefits. The Committee heard the following reports from its Working Groups and Task Forces addressing these topics:
Annuity Disclosure. The Annuity Disclosure Working Group, which held its organizational meeting in November 2016 and its most recent call on March 9, 2017, is considering enhancements to Section 6 (Standards for Annuity Illustrations) of the Annuity Disclosure Model Regulation. These enhancements would account for new innovative products currently in the marketplace. Section 6 of the model currently prohibits insurers from using indices on fixed indexed annuities that have not been in existence for the previous 10 years.
Annuity Suitability. The Annuity Suitability Working Group held its organizational meeting on April 8 during the Spring National Meeting. Chair of the Working Group, Director Dean Cameron (Idaho), reported that the group discussed the proposed charge to consider revisions to the Suitability in Annuity Transactions Model Regulation’s current suitability standards related to the best interest standard. The Working Group heard a presentation on the current provisions in the model regulation, and it also discussed the U.S. Department of Labor (DOL) Fiduciary Rule and its current status. For the latest on the DOL Fiduciary Rule, visit our website.
Life Insurance Buyer’s Guide. Life Insurance Buyer’s Guide Working Group Chair, Mary Mealer, Manager, Life and Health, Missouri Department of Insurance, reported that the Working Group has agreed to recommend to the A Committee a Model Law Review request to remove the Buyer’s Guide from the Life Insurance Disclosure Model Regulation and instead make it a stand-alone document, thus making it easier to amend in the future without having to re-open the model regulation. This Model Law Review request was approved with the understanding that the Working Group will continue to work on revisions to the Buyer’s Guide and bring a consensus product to the Committee for approval. Ms. Mealer also reported that the Working Group has discussed, but has not yet reached an agreement on, possible outlines for the Buyer’s Guide, including an electronic/web-based resource.
Life Insurance Illustrations Issues. The Life Insurance Illustrations Issues Working Group continues to discuss creating a one to two-page consumer-oriented policy overview document to improve the understandability of life insurance policy summaries required by Section 7B of the Life Insurance Illustrations Model Regulation and Section 5A(2) of the Life Insurance Disclosure Model Regulation. The Working Group has agreed to recommend to the Life A Committee a Model Law Review request to incorporate the policy overview requirement into the models.
Promoting Appropriate Sales Practices in Life Insurance and Annuities. The Promoting Appropriate Sales Practices in Life Insurance and Annuities Working Group has agreed to develop a survey for distribution to state insurance departments to gauge why states that have adopted the Model Regulation on the Use of Senior-Specific Certifications and Professionals Designations in the Sale of Life Insurance and Annuities did so and why the remaining jurisdictions have not, so that it can be determined whether the model regulation should be revised. In addition, the Consumer Alert “Preventing Abusive Practices: The Misuse of Senior Designations and ‘Free Lunch’ Seminars” will be revised and reissued.
Unclaimed Life Insurance Benefits. The Unclaimed Life Insurance Benefits Working Group adopted a motion to suspend work on the Unclaimed Life and Annuities Model Act because of a recurring lack of consensus within the group on the model law’s applicability to existing and future policies, contracts and retained asset accounts. The Committee adopted a motion requesting that the Working Group develop a concise list of key controversial issues in the draft proposed Unclaimed Life Insurance and Annuities Model Act for review by the Committee.
2. State Implementation of PBR
The Financial Regulation Standards and Accreditation (F) Committee adopted as state accreditation standards the 2009 revisions to the Model Standard Valuation Law regarding principle-based reserving (PBR) effective January 1, 2020 (the date that PBR generally becomes applicable to all companies after a three-year phase-in). As a result, states will now be required to enact “significant elements” of the amendments to the Standard Valuation Law to maintain accreditation by the NAIC. The Financial Regulation Standards and Accreditation (F) Committee previously exposed the proposed significant elements of the amendments to the Standard Valuation Law for a 60-day public comment period that ended February 8.
The PBR Implementation (EX) Task Force discussed the results from the 2016 PBR Company Pilot Project, which are further described in a final report issued by the PBR Review (EX) Working Group. Eleven companies from nine states participated in the Pilot Project, and over 1.2 million policies were tested with a total face amount of over $828 billion and a reported reserve over $3.6 billion.
The final report presents numerous findings and observations, including (among others):
- There was a fairly wide range in the level of detail provided in the PBR Actuarial Report. Regulators felt that no single report was fully complete and the reports with less detail generated a great deal more regulator follow-up questions.
- A number of questions were raised including those related to mortality and how credibility was established and applied. Regulators have formed a Valuation Manual (VM) Review Drafting Group consisting of NAIC staff, regulators, industry representatives and several American Academy of Actuary members to address these questions and interpretations. Any resulting revisions to the Valuation Manual will be submitted to the Life Actuarial (A) Task Force for consideration.
- Companies were consistent in their preparation of the VM-31 reports. Regulators had some discussion on whether to modify VM-31 at some future point to eliminate some duplication of requirements in VM-31 and make it a requirement that a company’s report follow the order of the requirements in VM-31.
- The regulatory challenge will be to determine that the Principle-Based Reserve as reported in the VM-20 Reserve Supplement is in compliance with all the requirements of the Standard Valuation Law as detailed in the Valuation Manual. Regulators will need the ability, and the NAIC is working on developing this capability, to collect and track actual individual company experience to assist in an evaluation and validation of individual company experience assumptions used in the reserving process. In addition, regulators will need the assistance of the NAIC staff in reproducing individual company modeling results on a smaller block of business scale.
- Seven of the eleven participating companies indicated they would not value any business issued in 2017 under PBR. Combined with results from a separate 2016 survey reported by the Society of Actuaries (SOA), as many as 16 companies are planning to value products in 2017 under PBR. (However, the actual number of companies going live with PBR on January 1, 2017, could vary due in part to low survey response rates.)
Finally, the PBR Review (EX) Working Group disclosed the 16 members (of 20 possible members) of the new Valuation Analysis (E) Working Group (VAWG), as approved by the Financial Condition (E) Committee. Peer and quality reviews of PBR will be conducted by the VAWG, which will operate in a manner similar to the Financial Analysis (E) Working Group. Chair of the PBR Review (EX) Working Group, Mike Boerner, Director, Solvency Examinations, Texas Department of Insurance, previously noted that the history of the VAWG has included the development and adoption of procedures by the PBR Review (EX) Working Group (including procedures for membership).
3. XXX/AXXX Model Regulation
The Financial Regulation Standards and Accreditation (F) Committee exposed for a 30-day comment period a recommendation from the Reinsurance (E) Task Force to adopt the Term and Universal Life Insurance Reserve Financing Model Regulation (commonly referred to as the XXX/AXXX Credit for Reinsurance Model Regulation) and the 2016 revisions to the Credit for Reinsurance Model Law as state accreditation standards. In addition, the Committee adopted the Task Force’s recommendation to waive the normal timeline for adoption of these models as an accreditation standard. The Task Force recommended that the accreditation standards become effective January 1, 2020.
As previously reported, the XXX/AXXX Model Regulation is intended to establish uniform national standards governing reserve financing arrangements pertaining to XXX and AXXX policies. Subject to certain exemptions, the Model Regulation and Actuarial Guideline XLVIII (AG 48) prescribe a required actuarial analysis on each non-exempt reinsurance agreement to determine whether: (1) funds consisting of “Primary Security” are held by or on behalf of the ceding insurer as security under the reinsurance contract in an amount at least equal to the “Required Level of Primary Security;” and (2) funds consisting of “Other Security” are held by or on behalf of the ceding insurer in an amount at least equal to the portion of the statutory reserves in excess of the Required Level of Primary Security. The XXX/AXXX Model Regulation, together with the 2016 revisions to the Credit for Reinsurance Model Law, would replace AG 48.
4. Guaranty Association Assessments & Long Term Care Insurance
The Receivership Model Law (E) Working Group discussed guaranty association assessment issues in the context of long-term care insurance. This has become a pressing matter in the wake of the Penn Treaty insolvency, which is the second largest life and health insurance insolvency in U.S. history. Specifically, there has been a significant push to realign the way in which assessments are imposed for long-term care insurance.
Long term care insurance is currently grouped with traditional health insurance under the Life and Health Guaranty Association Model Act. As a result, health insurers that do not write long-term care insurance business may be assessed disproportionately in the event of an insolvency of a long-term care insurance company, such as Penn Treaty, despite the fact that long-term care insurance policies are primarily sold by life insurers.
There was significant discussion regarding a proposal in Colorado called the “$1 Fix,” which would create an account funded through the imposition of a $1 mandatory monthly policyholder surcharge on life, annuity and health policies to be used to pay covered claims in any future insolvency of a long-term care insurance company. ACLI has made a counterproposal under which life and annuity writers would continue to be assessed on a post-event basis and health writers and HMOs on a $1 per month, pre-funded basis in return for life insurers assuming a 50% share of the assessments and health and HMO carriers assuming the other 50% share of the assessments in the event of an insolvency of a long-term care insurer.
There was also discussion concerning a proposed law in Florida that would assess life insurers for insolvencies of long-term care insurers, including Penn Treaty. The industry has expressed some concern that, if such a state law is enacted, it may go in a different direction than the Life and Health Guaranty Association Model Act, thus creating confusion in what is currently a relatively uniform state guaranty association system.
The Working Group plans to schedule a conference call to hear further discussion from representatives of Colorado and Florida regarding their proposed legislation. The Working Group will also prioritize and discuss issues related to assessments and coverage for long-term care insurance on future conference calls. Peter Gallanis of the National Organization of Life & Health Insurance Guaranty Associations, expressed his agreement in prioritizing these issues, especially in light of the proposed state laws and upcoming Penn Treaty assessments.
F. Issues of Particular Interest to Property and Casualty Insurers
1. National Flood Insurance Program
The NAIC’s Center for Insurance Policy & Research’s (CIPR) spring event centered on the National Flood Insurance Program (NFIP). Congress is in the process of examining the reauthorization of the NFIP, which expires on September 30, 2017, and has incurred a debt of $23 billion. The NAIC has engaged with Congress on NFIP reauthorization. In December 2016, the House Financial Services Subcommittee on Housing and Insurance released a draft “Principles for Flood Insurance Reauthorization and Reform” document, which enjoys support from various property and casualty insurance trade associations, and the NAIC separately approved its own document, “Principles for National Flood Insurance Program Reauthorization.” The two “principles” documents are aligned insofar as they both urge long-term reauthorization of NFIP and encourage growth of the private flood insurance market.
The CIPR program addressed the motivations and challenges in enhancing the role of the private sector in flood insurance. In September 2016, the Federal Emergency Management Agency (FEMA) for the first time purchased private reinsurance coverage for the NFIP to help ease the burden on the federal government. In January 2017, FEMA expanded the September 2016 placement and transferred $1.042 billion of risk from the NFIP to 25 reinsurance carriers through January 1, 2018. FEMA has indicated that this placement is the foundation for a multi-year reinsurance program.
The CIPR program also included a panel discussion on the roles of the private and public sectors in reforming flood insurance. This discussion included a wide range of panelists from regulators (state and federal) and the industry, and the topics addressed included insurers’ ability and appetite to write flood insurance and considerations and proposals relating to NFIP reauthorization.
2. NAIC to Review NCOIL Travel Insurance Model Act
The Travel Insurance (C) Working Group has agreed to review the National Conference of Insurance Legislators (NCOIL) Travel Insurance Model Act as it considers adopting new regulatory standards for the travel insurance industry. The NCOIL Model Act would clarify the rules applicable to various widespread practices in the sale of travel insurance, including:
- Limited lines producer licensing
- Premium taxes
- Classification of travel insurance as inland marine insurance and clarifying policy form and insurance certificate filing requirements
- A declaration that rates in a competitive market cannot be “excessive” and that rates averaged broadly among persons insured under a single insurance plan cannot be “unfairly discriminatory”
- Defining “eligible groups” for group policies
- Allowing bundling of insurance and non-insurance benefits in a single product
- Sales practices rules, including a ban on opt-outs and declaring it not to be an unfair trade practice to include Blanket Travel Insurance coverage with the purchase of a trip, provided the coverage is not marketed as free
- Licensing and oversight of travel administrators
During the Spring National Meeting, Tom Considine, CEO of NCOIL, provided an update on the most recent revisions to the NCOIL Model Act and a number of interested parties shared their views on whether the Working Group should use the NCOIL Model Act as the basis for its deliberations. A number of travel insurance trade associations have expressed support for the NCOIL Model Act, including the United States Travel Insurance Association (UStiA), the American Insurance Association (AIA), the Tourism & Travel Industry Consumer Coalition (TTICC) and the United States Tour Operators Association (USTOA). Representatives of the travel insurance trade associations noted the benefits of allowing insurance and non-insurance travel benefits to be bundled and sold together, as well as the significant regulatory requirements already applicable to tour operators.
Birny Birnbaum, on behalf of the Center for Economic Justice, strongly urged the Working Group not to adopt the NCOIL Model Act, and questioned the trade associations’ arguments regarding the competitive nature of the travel insurance market. Mr. Birnbaum also criticized the trade associations for not providing market data in support of their arguments on the basis that the data is confidential and commercially sensitive. Mr. Birnbaum also alleged that NCOIL employed “bait and switch” tactics by advising the NAIC that they would work closely with the NAIC on developing a model law, and then drafting their own model law without consulting with the NAIC.
The Working Group agreed to consider all of the issues raised by the interested parties as they review the NCOIL Model Act, and will be holding bi-weekly calls as they work through these issues.
3. NAIC Considering Updates to IID Plan of Operation
NAIC staff are working to update the International Insurers Department (IID) Plan of Operation, with an aim toward adopting the revisions at the NAIC’s Fall National Meeting in December 2017. Under the Nonadmitted and Reinsurance Reform Act (NRRA) that was adopted as part of Dodd-Frank in 2010, the IID is the primary gatekeeper for alien insurers seeking to become eligible to write surplus lines insurance in the United States. The NRRA provides that a state may not prohibit a surplus lines broker from placing nonadmitted insurance with a nonadmitted insurer domiciled outside the United States if that insurer is listed on the Quarterly Listing of Alien Insurers (IID List) maintained by the IID. The IID Plan of Operations provides the standards that alien insurers must satisfy for inclusion on the IID List, as well as ongoing compliance requirements and the NAIC’s procedures for reviewing applications for IID Listing.
Under the current IID Plan of Operations, an alien insurer seeking to be IID Listed must reasonably demonstrate that it meets standards with respect to: (1) capital and surplus; (2) a U.S. trust account; and (3) character, trustworthiness and integrity. Specifically, the IID currently requires that an insurer maintain: (1) capital and/or surplus “adequate to meet its obligations,” but in no event less than $45 million; and (2) a U.S. trust account in a qualified U.S. financial institution on behalf of U.S. policyholders, funded according to a sliding scale formula, starting at 30% of gross direct U.S. surplus lines liabilities up to $200 million, with the percentage reducing for liabilities above that amount, up to a funding cap of $150 million. The NAIC last amended the IID Plan of Operation in 2012.
It is unclear exactly what changes the NAIC is planning to make to the IID Plan of Operation this time around. IID staff are expected to present a draft of the revised IID Plan of Operation to the Surplus Lines Working Group in June.
4. 2017 TRIA Reporting Deadlines Approaching
The Terrorism Insurance Implementation (C) Working Group received an update on federal and state activities related to terrorism insurance, including the Federal Insurance Office’s (FIO) 2017 data call that is underway.
Section 111 of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) (which reauthorized the Terrorism Risk Insurance Act (TRIA) through 2020) requires the U.S. Treasury Department to collect data and provide an annual report to Congress on the state of the terrorism insurance market and the effectiveness of the TRIA Program. The FIO issued its first TRIA data call in 2016, but it was voluntary. In December 2016, the FIO released a TRIA data call for 2017 (reflecting calendar-year 2016 data) that is mandatory for all insurers participating in the TRIA Program. The 2017 TRIA data call requires insurers to provide information on one of four templates, based on the nature and size of the insurer’s operations: (1) “small insurers” (as defined under TRIPRA); (2) larger insurers that are not within the small insurer definition; (3) alien surplus lines insurers; and (4) captive insurers. Participating insurers are required to report certain data elements no later than May 15, 2017, with the balance of any remaining information to be provided no later than October 1, 2017. Additional information regarding FIO’s 2017 TRIA data call is available on Treasury’s data collection portal.
Separately, state insurance departments are preparing to issue their own 2017 terrorism insurance market data call. Speaking at the Terrorism Insurance Implementation (C) Working Group meeting, Stephen Doody, Deputy Superintendent for Property & Casualty Insurance at NY DFS, reported that states are targeting July 1 for issuing their data call. Responses would be due by November 2017. Mr. Doody also reported that the Working Group is considering holding a webinar on how to properly complete the data call, noting that a number of insurers provided data in response to the 2016 data call that was found to be unworkable or unreliable. During the Working Group meeting, several industry representatives noted how burdensome it is for insurers to have to complete separate federal and state terrorism risk data calls each year. NAIC representatives responded by emphasizing their hope that, in the future, the FIO would rely on market data compiled by the states to satisfy its requirements under TRIPRA.
G. Briefly Noted
1. New NAIC Members and CEO
The Spring National Meeting was the first for a number of NAIC members, with a new state insurance commissioner or director having been recently appointed or elected in the following twelve states and territories: Delaware, Illinois, Iowa (Interim Commissioner), Massachusetts (Acting Commissioner), Missouri (Acting Director), Montana, North Carolina, North Dakota, Ohio, West Virginia, American Samoa and Puerto Rico. It was also the first national meeting since Michael Consedine (formerly Pennsylvania Insurance Commissioner) was appointed as the NAIC’s Chief Executive Officer (CEO).
2. NAIC to Consider Updates to State Accreditation Standards
This summer, the NAIC will consider adopting the Corporate Governance Annual Disclosure Model Law and Model Regulation (Corporate Governance Models) as a state accreditation standard, as well the 2014 revisions to the Annual Financial Reporting Model Regulation (Model Audit Rule) and the Model Holding Company Act. The Corporate Governance Models require an insurer (or group of insurers) to provide a confidential disclosure regarding its corporate governance practices to the lead state and/or domestic regulator annually by June 1. The insurer (or group of insurers) may choose to provide information on governance activities that occur at the ultimate controlling parent level, an intermediate holding company level and/or the individual legal entity level, based on its determination of the level at which decisions are made, oversight is provided, and governance accountability is assessed in relation to the insurance activities of the insurer. The NAIC reports that, as of March 2017, only 6 states have adopted both Corporate Governance Models (with 14 states having adopted the Corporate Governance Model Act).
In 2014, the Model Audit Rule was revised to incorporate an internal audit function requirement for “large insurers.” The revisions require individual insurers writing more than $500 million or insurance groups writing more than $1 billion in annual premium to maintain an internal audit function providing independent, objective and reasonable assurance to the audit committee and insurer management regarding the insurer’s governance, risk management, and internal controls. The function is required to be organizationally independent from management and required to report at least annually to the audit committee on the results of internal audit activities. The NAIC reports that, as of March 2017, only 9 states have adopted this requirement.
The 2014 changes to the Model Holding Company Act provide authority to a designated state to act as a group-wide supervisor for an internationally active insurance group. Such groups are defined as U.S.-based groups with: (1) premiums written in at least three countries; (2) the percentage of gross premiums written outside the United States is at least 10% of the insurance holding company system’s total gross written premiums; and (3) groups with total assets of the insurance holding company system are at least $50 billion or total gross written premiums of the insurance holding company of at least $10 billion. The NAIC reports that, as of March 2017, only 15 states have adopted this requirement.
3. New NAIC Working Group to Revisit Commercial Lines Modernization
The Property and Casualty Insurance (C) Committee will form a new working group to evaluate potential modernization of commercial lines regulation. The new working group will pick up where the disbanded Commercial Lines (EX) Working Group left off in 2015. In 2015, the Commercial Lines Working Group issued six recommendations, which the new working group will now revisit: (1) states should ensure that individual consumers are protected when they are charged for commercial lines coverage; (2) the NAIC should revise the definition of exempt commercial policyholder; (3) states should consider allowing manuscript policies to be used without prior approval; (4) states should consider establishing conditions for exempting policies for multistate risks from form and rate filings; (5) each state should review its existing authority to improve the efficiency and effectiveness of rate and form review for commercial lines; and (6) the NAIC should not pursue the development of an interstate compact for commercial lines at this time.
4. Schedule F Reporting Instructions
The NAIC has adopted amendments to the Annual Statement Instructions for all insurers that combine current Schedule F, Parts 3, 4, 5, 6, 7, and 8 into a single new Schedule F “Part 3 – Ceded Reinsurance” and makes conforming changes to other sections of the Annual Statement. The changes are intended to eliminate duplication, promote consistency of the reported ceded transactions, provide for greater automation, and reduce filing errors. The changes are effective for the 2018 reporting year.
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