The National Association of Insurance Commissioners Summer National Meeting, held on August 24 - 28 in San Diego, produced a number of noteworthy developments related to international, financial, and other regulatory matters. Many of these matters are interconnected on both public policy and technical grounds and involve a mixture of domestic and international political issues.
The next several months appear likely to be a dynamic and fluid period of time for US and international regulators as well as for insurers whose business prospects can be deeply affected by regulatory changes − particularly those discussed in this report.
The most significant developments were:
It is well known, by now, that the globalization of the insurance industry has led to the globalization of insurance regulation. The industry is becoming increasingly subject to international regulatory requirements and global regulators are now required to manage important relationships with their counterparts in other countries. This is not always seamless. The importance of international regulatory cooperation and the tension that can arise from it was evident during the meeting.
Most significantly, as the European Union begins to implement Solvency II, the NAIC and a number of US companies view European regulators to be increasingly demanding on US firms doing business in Europe through subsidiaries, branches, or on a cross-border basis. Most of these issues arise because the US has not been deemed an “equivalent” regulatory jurisdiction under Solvency II. As the NAIC President, Director John Huff, stated in his Opening Session speech, “we have seen some key jurisdictions imposing additional, potentially discriminatory, requirements on US insurers.” He added that the NAIC has “worked in good faith and with thoughtful regulatory restraint to roll back collateral requirements for firms from many of these very same EU jurisdictions.”
President Huff went on to express the NAIC’s dissatisfaction with the attempt by the US Department of Treasury and US Trade Representative to address this disparity through a covered agreement, which the NAIC has long opposed both substantively and procedurally. The NAIC objects to what it considers to be a lack of transparency with, and an unwillingness to seek input from, state regulators by the federal officials handling the covered agreement negotiations. These themes from President Huff’s speech resonated in a number of other Committee, Task Force, and Working Group meetings.
The most direct development tied to President Huff’s remarks was a panel consisting of representatives from Chubb, CNA, Liberty Mutual, RGA and Transatlantic Re that the International Insurance Relations (G) Committee convened during its meeting. The panel provided committee members with examples of new requirements and restrictions that European regulators (the UK PRA and German BaFin, in particular) have imposed on them. The industry representatives were unanimous in the view that it is important to resolve pending issues between the EU and the US and, in particular, for the US to be granted equivalence under Solvency II. The committee did not discuss what the NAIC or individual states might do in response to these developments, but as discussed below, activities during other parts of the Summer Meeting indicate that the NAIC leadership and membership are seriously concerned about these developments. For example, the Reinsurance Task Force requested its Qualified Jurisdiction Working Group to study and report on European Union member state implementation of Solvency II and its potential impact on Qualified Jurisdiction status. In addition, the Reinsurance Task Force held its own panel discussion regarding the actions EU regulators have taken that have adversely affected US and other non-EU reinsurers.
A second major international activity is the ongoing effort by the ComFrame Development and Analysis Working Group (affectionately, the CDAWG) to develop the NAIC’s comments in response to the International Association of Insurance Supervisors’ “Global Insurance Capital Standard Version 1.0” (the ICS) consultation document. The Working Group redistributed an outline dated August 15, 2016 of its proposed comments to the consultation. This outline contains several items that are in many respects highly critical of a number of the technical positions currently reflected in the ICS and, on the other hand, very supportive of positions that have previously been expressed by many US stakeholders, such as how subordinated and senior debt should be treated for purposes of qualifying capital. CDAWG is planning an in-person public meeting on September 27, 2016 in Washington, DC to continue working on its comments.
The ICS will ultimately be included in the IAIS’s ComFrame document. At an NAIC & IAIS Secretariat Q & A Session, Peter Windsor from the IAIS explained that the IAIS has decided to rewrite the format of ComFrame, as it currently exists, departing from the current structure of having three elements, several modules within those elements, and parameters and guidelines containing ComFrame’s detailed terms and conditions. In its place, ComFrame will be folded into the existing Insurance Core Principles (ICPs). Ostensibly, this is being done in order to clarify the position of ComFrame proponents that ComFrame is based upon the ICPs and logically extends them to Internationally Active Insurance Groups. Some interested parties (including some US regulators) are not so sure about this intent, expressing concerns that making ComFrame a part of the ICPs will increase the risk that ComFrame will eventually become an FSAP standard.
Regulators and interested parties also discussed briefly a stakeholder session to be held on September 27, 2016 in Basel, to discuss the IAIS plan to have a consultation on new guidance it is developing on the subject of resolution and recovery planning by supervisors and insurers. Materials are being developed for inclusion on this topic in both the ICPs and ComFrame and, based on previous remarks by the IAIS, will apply to all insurers, subject to the principle of proportionality. This could have a significant impact on insurers if the requirements tilt more toward the approach that federal regulators have already taken in connection with the resolution plans for systemically important insurers.
FINANCIAL REGULATORY DEVELOPMENTS
The NAIC’s dissatisfaction with the covered agreement negotiations emerged in a very real way during the Financial Condition (E) Committee meeting, at which the Committee Chair, Superintendent Eric Cioppa, unveiled the NAIC’s intent to engage in “contingency planning” in order to consider alternatives to collateral if the outcome of the covered agreement negotiations is that there must be “zero collateral.” The NAIC is considering three options: 1) expand the certified reinsurer process; 2) develop an RBC charge to be applied if a reinsurer has posted zero collateral; and 3) require all non-US reinsurers to file financial information with the NAIC under the terms of a new model law. During the discussion on this topic, Texas Commissioner David Mattax made the suggestion that perhaps the NAIC needs to reconsider its entire credit for reinsurance system. None of the regulators said anything to disagree with that idea. Interested parties from the RAA and the AIA were quick to point out that any such initiative would require an enormous effort. The upshot of this discussion is that at least some US regulators think the use of collateral and the concept of credit for reinsurance should be replaced with a different system. Next steps were not announced.
The NAIC’s disagreement with actions by foreign regulators is also part of the motivation for the work being done by the Group Capital Calculation Working Group. Launched late last year, the Working Group is in the process of constructing a US group capital calculation tool using an RBC aggregation methodology, which is now being referred to as the Inventory Method. When this goal was introduced, some interested parties saw it as possibly being a valid alternative to the ICS. To the dismay of some interested parties, however, the Working Group is struggling to find the correct balance between simplicity and accuracy in executing its charge. Currently, that struggle is focused on three specific issues: the factor to be used for non-insurance entities that are not subject to other capital requirements; the treatment of non-insurance entities that are subject to capital requirements; and the use of scalars for non-US insurers. During the Summer Meeting, NAIC staff presented a list of eight questions for discussion on these issues (to which a ninth question was added during the meeting). Although some regulators pushed the industry to try to respond quickly to these questions, interested parties who prefer a slower, more deliberate approach were successful in obtaining a sixty day comment period. At this rate, it is doubtful the calculation tool will be ready for at least two or three years.
Four other financial regulatory issues of note occurred during the Summer Meeting.
Local state deposits: During the Receivership and Insolvency Task Force meeting, the members were told the Capital Adequacy Task Force is seeking the input from other NAIC Committees, Task Forces, and Working Groups on whether there should be a new “restricted asset” capital charge for assets that insurers place on deposit with state officials “for the benefit of all policyholders” (i.e., not just those in the state that holds the deposit) in the event of an insolvency. Evidently, some regulators think the charge may be necessary to reflect the fact that the release of these deposits is often delayed.
While access to deposits may be a problem facing insurance receiverships, it is puzzling that regulators are suggesting a capital risk charge as a possible response to the problem rather than directly addressing the causes of the delays in some states in releasing deposits in the first place.
ERM reports: At the Group Solvency Issues Working Group, members discussed a survey in which only three states reported that the information contained in the industry’s enterprise risk management (Form F) reports is “very effective” or “effective.” The Working Group solicited comment from the industry about how to address this problem, but received little feedback. In reaction, the Working Group will now develop more detailed instructions for insurer use in completing Form F filings through a guidance manual that will be reviewed and considered by the Working Group. Interested parties will need to be watchful to ensure that any such new guidance does not establish new substantive requirements beyond the scope of the holding company model act and regulation.
Infrastructure investments: The Valuation of Securities Task Force held a special session to explore the topic of infrastructure investments. The Task Force Chairwoman, Director Anne Melissa Dowling, highlighted the growing need for investing in the nation’s infrastructure and noted that various national and international organizations have identified this growing need as a natural fit for insurance companies (especially life insurers), given the long-term nature of many infrastructure investments and the long duration of life insurer liabilities.
The purpose of the special meeting was to identify and evaluate any potential impediments to insurers participating in infrastructure projects, and then respond with responsible solutions that do not encourage or improperly incentivize insurers to do anything that does not make sense from an investment perspective or is not financially prudent.
The meeting was organized into four panels to discuss the issue from different perspectives: actuarial, insurance industry, rating agencies, and consumer. Panelists expressed a consensus that: (i) infrastructure investments are needed; (ii) various forms of infrastructure projects exist which need private capital investment; (iii) infrastructure investments provide lower default risk than other types of investments; and (iv) insurance companies already find some of these investments attractive, but their ability to make such investments is hindered by having limited access to such investments or by encountering regulatory impediments. Some panelists suggested that the Task Force consider adjusting the RBC charge as a way to stimulate further activity by insurance companies in such infrastructure investments.
Although the agenda of the meeting included a discussion of next steps, the Task Force did not discuss future plans or take any official action, but nevertheless appeared interested in continuing the discussion.
Codification of AG 48: Essentially finishing the NAIC’s efforts to reform the use of life insurance reserve financing methods that many regulators find troubling, the Reinsurance Task Force adopted the Term and Universal Life Insurance Reserve Financing Model Regulation, which, in effect, codifies existing standards governing Triple X and A Triple X captives currently contained in AG 48. Regulators and interested parties (on both sides of the issue) pronounced the Model Regulation to be an acceptable and workable compromise. NAIC staff will prepare a project history memorandum to be submitted along with the Model Regulation for consideration by NAIC members as the new model works its way to formal adoption by the full NAIC. As is the case in all NAIC models, the focus now turns to what the handful of states in which these reserving transactions occur (i.e., the states where insurers that cede the risks, and the captives that reinsure them, are located) will do to adopt and enforce this new regulation.
Finally, one matter that did not involve international or financial condition regulatory issues received considerable attention from many attendees. The Cybersecurity Task Force met to update regulators and interested parties on various cybersecurity topics. The Task Force announced that the Commission on Enhancing National Cybersecurity issued a request for information to gather data from stakeholders on a variety of cybersecurity issues, including on the topic of cybersecurity insurance (due September 9). The highlight of the meeting, though, was a discussion of the revised draft of the Insurance Data Security Model Law (the Model Law), which was released for comment on August 17. The purpose of the Model Law is “establish the exclusive standards in [the] state for data security and investigation and notification of a data breach applicable to licensees.” “Licensee” is defined under the Model Law as “any person or entity licensed, authorized to operate, or registered pursuant to insurance laws of [the] state.”
An updated version of the Model Law, dated as of August 17, was distributed in the meeting materials, after the Task Force had received over 40 comment letters from industry, trade associations, and consumer representatives to a version of the Model released last March. Nevertheless, this updated version did not appear to garner support from those who submitted comments. In fact, so many interested persons wanted to share their objections to the revised Model Law that Chairman Adam Hamm had to limit each commenter to two minutes. Representatives from the ACLI, AIA, PCI, RAA, and the IIABA and other agents/brokers organizations objected to (among other things):
- the potential for lack of uniformity due to the broad grant of authority to insurance commissioners
- the lack of clarity regarding the timing and content of breach notification
- unclear definitions of terms, such as the term “personal information,” and the use of vague, undefined terms such as “state of the art techniques”
These commenters implored the Task Force to spend more time reworking the draft. The common message was that the revised Model Law was not workable and that various industry groups would vigorously oppose the Model Law in the states if the NAIC adopted it as written.
The comment period for the Model Law ends at the close of business on September 16. After the deadline, a conference call will be scheduled. Chairman Hamm invited all interested parties to present their concerns. Chairman Hamm also noted his goal to finalize the Model Law by the December National Meeting. Once the Task Force adopts the Model Law, it will go straight to the Executive Committee for action, then on to the Executive and Plenary Joint Committee for adoption as an official NAIC model law.