The National Association of Insurance Commissioners (NAIC) held its 2021 Spring National Meeting from April 7 to April 14, 2021. The meeting was held in an all-virtual format due to the ongoing COVID-19 pandemic.
Unlike in-person National Meetings where most NAIC committees, working groups and task forces meet, the virtual Spring National Meeting primarily featured the letter committees, with many of the other meetings occurring prior to the event. Consequently, we offer highlights from both the Spring National Meeting and the committee, working group and task force meetings that took place during the preceding months. Notable developments include the following:
- The Special (EX) Committee on Race and Insurance heard updates from the NAIC Workstreams that are tasked with evaluating issues of diversity and inclusion (D&I) in insurance. The NAIC’s update on D&I follows a circular letter issued by the New York Department of Financial Services (NYDFS) in March detailing the benefits of D&I in the insurance sector and announcing NYDFS’ plans to collect certain D&I information from New York-regulated insurers (domestic and foreign) this summer.
- The Innovation and Technology (EX) Task Force will establish a working group to develop best practices for engaging in the kinds of e-commerce activities that increased during the COVID-19 pandemic, including the use of electronic signatures and electronic notarizations.
- The NAIC released, for a 30-day comment period, a proposal to add as a state accreditation standard the amendments to the Insurance Holding Company System Regulatory Act and Model Regulation that would give legal effect to the Group Capital Calculation (GCC). If the proposal is approved, the amendments are expected to be added as an accreditation standard effective January 1, 2026, but the NAIC is also “strongly encouraging” states that are group-wide supervisors of US groups with activities in the European Union or the United Kingdom to adopt the amendments by the end of 2022 (when the group supervision provisions of the US-EU and US-UK Covered Agreements take full effect).
We do not cover every meeting in this report; rather, we comment on select noteworthy developments and matters of interest to our clients.
- Innovation and Technology (EX) Task Force Establishing E-Commerce Working Group
- Big Data and Artificial Intelligence (EX) Working Group Developing an Industry Survey on Use of Artificial Intelligence
- Privacy Protections (D) Working Group Continues Review of Model #672; Is Closely Monitoring Privacy Legislation
- Property and Casualty Insurance (C) Committee Monitoring the Cyber Insurance Marketplace
1. Special (EX) Committee on Race and Insurance
- Workstream One (Diversity and Inclusion)
- Workstream Three (Property and Casualty Insurance)
- Workstream Four (Life Insurance)
- 2021 Proposed Charges
2. Additional Developments Related to Race and Insurance
- Consumer Liaison Committee Receives Proxy Discrimination Presentation
- National Council of Insurance Legislators Defines Proxy Discrimination
3. Climate Risk and Resiliency (EX) Task Force Retains Both Climate Survey Forms for 2021 Reporting Year; Will Consider Federal, International Developments
- After Debate, Statutory Accounting Principles (E) Working Group Makes “Non-Substantive” Amendments to SSAP No. 71
- Group Capital Calculation: A Tool to Measure Insurance Group Solvency
- Financial Regulation Standards and Accreditation (F) Committee Considers Waiving Public Exposure Period for 2019 Model Holding Company Act Revisions
- Scalars: The Missing Link in the Group Capital Calculation
- IAIS Supervision of Control Function Application Paper
- IAIS Developments Related to Environmental, Social and Corporate Governance
- International Organizations Publish COVID-19 and Digitalization Report
- Executive (EX) Committee and Plenary Adopts Amendments to Unfair Trade Practices Act, Lender-Placed Insurance Model Act and CASTF Regulatory Review of Predictive Models White Paper
- Life Insurance and Annuities (A) Committee Disbands Certain Working Groups
- Pet Insurance (C) Working Group Discusses Preexisting Conditions
- Receivership Law (E) Working Group Exposes Model Holding Company Act Amendments to Ensure Provision of Essential Services by Affiliates
- Reinsurance (E) Task Force Receives Updates on Reciprocal Jurisdiction Reinsurer Approval Process and Ongoing Implementation of Revised Credit for Reinsurance Laws
- Statutory Accounting Principles (E) and Blanks (E) Working Groups Amend SSAP, Add New Annual Schedule Y, Part 3 Exhibit for Affiliated Entities
- Casualty Actuarial and Statistical (C) Task Force Contemplates How to Handle Rescission of Casualty Actuarial Society Statement of Principles on Ratemaking
1. Innovation and Technology (EX) Task Force Establishing E-Commerce Working Group
The Innovation and Technology (EX) Task Force announced that it will establish a working group to make recommendations on best practices for engaging in the kinds of e-commerce activities that increased greatly during the COVID-19 pandemic, including the use of electronic signatures and electronic notarizations. The Task Force plans to survey insurance companies on best practices and ultimately provide uniform guidance on e-commerce activities. The Task Force will also examine whether a model bulletin would be appropriate for addressing some of the identified issues and will draft a proposed bulletin if that is determined to be appropriate. Commissioner Jon Godfread (ND) advised that the Task Force should move quickly to maintain the momentum on the use of e-commerce forced by the pandemic.
2. Big Data and Artificial Intelligence (EX) Working Group Developing an Industry Survey on Use of Artificial Intelligence
During its meeting on March 29, 2021, the Big Data and Artificial Intelligence (EX) Working Group discussed various approaches to developing an industry survey on how insurers are using big data, algorithms and artificial intelligence (AI). Industry has expressed some support for the survey while also expressing concerns about the lack of protection for trade secrets and intellectual property as part of the process. Superintendent Beth Dwyer (RI), Co-Vice Chair of the Working Group, indicated that the group would coordinate with other regulators to develop a survey in a way that will address these concerns.
Superintendent Dwyer further explained that the Working Group is considering using an anonymized survey of participants that would initially focus only on a narrow line of business, likely private passenger automobile insurance. The goal would be to use this method to gain an understanding of how AI and related technologies are being used by the industry. This would then inform the Working Group’s broader charge to study, and possibly develop best practices around, governance structures for the development, risk management and use of AI.
Commissioner Doug Ommen (IA) then opened up the meeting for a general discussion on what participants would like to see addressed in this survey. Commenters used the opportunity to note that the survey should address third-party vendors and that reporting the information in the aggregate would be most helpful. Others commented on which line of business they thought should be addressed first, with most agreeing that private passenger auto was the place to start. Based on these comments, Superintendent Dwyer agreed that the Working Group would start there before moving on to other lines, including life insurance.
3. Privacy Protections (D) Working Group Continues Review of Model #672; Is Closely Monitoring Privacy Legislation
In its meeting on March 29, 2021, the Privacy Protections (D) Working Group discussed next steps in its ongoing review of the NAIC Model Privacy of Consumer Financial and Health Information Regulation (#672). Chair Cynthia Amman (MO) noted that the Working Group had largely completed the first two steps in its strategic plan by (1) summarizing consumer protections found in existing NAIC models, and (2) identifying privacy notice requirements under major existing regulatory regimes, including state law (including the California Consumer Privacy Act) and the European General Data Protection Regulation (GDPR). Chair Amman indicated that the Working Group’s next step was to identify corresponding consumer rights that attach to privacy notice requirements under existing privacy regimes and how insurers may be subject to such requirements, such as the right to opt out of data sharing, the right to correct or delete information, the right of data portability, and the right to restrict the use of data.
The Working Group also heard an update from NAIC staff on both state and federal privacy legislation. Staff reported that a number of members of Congress have acknowledged a need for action in the realm of creating federal legislation and that the NAIC has expressed its desire to have a seat at the table and engage in conversation about relevant issues.
Most prominently, discussions have revolved around the possible inclusion of federal preemption and private rights of action in any eventual law. Staff noted that the NAIC opposes federal preemption and that state protections should not be limited by federal legislation.
Staff also reported that they are seeing a number of issues trending in proposed state legislation, including risk assessment requirements, private rights of action, aspects of the GDPR, and data-level (as opposed to entity-level) exemptions for Gramm–Leach–Bliley Act (GLBA) data and Health Insurance Portability and Accountability Act (HIPAA) data.
4. Property and Casualty Insurance (C) Committee Monitoring the Cyber Insurance Marketplace
As part of its 2021 charges, the Property and Casualty Insurance (C) Committee has been tasked with reporting on the cyber insurance market, including data reported within the Cybersecurity Insurance and Identity Theft Coverage Supplement. To that end, during its April 13 meeting, the Committee heard a report from My Chi To (NY) and Justin Herring (NY) on the recent NYDFS efforts in this area. In particular, they discussed guidance issued on February 4, 2021, in which NYDFS established what it refers to as a “Cyber Insurance Risk Framework.” Mr. Herring, who serves as Executive Deputy Superintendent for Cybersecurity, noted that while the cyber insurance industry is rapidly growing, growth actually slowed in 2019. This slowdown was driven by increasing costs associated with cyber attacks, which is a direct result of the precipitous rise of ransomware attacks.
The stated goal of the framework is to foster the growth of a robust cyber insurance market that maintains the financial stability of insurers and protects insureds. The framework notes that while cyber risks have increased in the past few years, so too has the risk in underwriting cyber insurance. To help address this risk, the framework defines seven practices that all New York-authorized property and casualty insurers should employ: (1) establish a formal cyber insurance risk strategy; (2) manage and eliminate exposure to silent cyber insurance risk; (3) evaluate systemic risk; (4) rigorously measure insured risk; (5) educate insureds and insurance producers; (6) obtain cybersecurity expertise; and (7) require notice to law enforcement.
1. Special (EX) Committee on Race and Insurance
The Special (EX) Committee on Race and Insurance met on April 12 to discuss its 2021 proposed charges and the progress of its five Workstream groups, each of which is chaired by two insurance commissioners (or, in the case of New York, by the Executive Deputy Superintendent for Insurance). Updates on Workstream One (regarding industry diversity and inclusion), Workstream Three (regarding access to insurance in the property/casualty insurance market) and Workstream Four (regarding access to insurance in the life market market) are detailed below. Although updates on Workstream Two (regarding D&I within state insurance departments and the NAIC) and Workstream Five (regarding access to insurance in the health insurance market) were not a point of focus during the Spring National Meeting, it should be noted that Workstream Two is in the process of developing NAIC zone-specific survey methods to collect D&I information within insurance departments and develop best practices for the same. Workstream Five has also recommended to the Special Committee that the NAIC conduct research regarding the cost of healthcare of various vulnerable communities and that it examine whether there is equitable access to culturally competent healthcare.
i. Workstream One (Diversity and Inclusion)
Workstream One, which is charged with analyzing diversity and inclusion (D&I) within the insurance industry, reported that there is positive correlation between diversity and insurer profitability and made an overarching recommendation that insurer D&I efforts should be improved at all levels of employment, from entry-level positions to the C-suite. Workstream One also noted that it intends to develop appropriate metrics to measure D&I progress.
The findings and the Workstream’s commitment to developing tools to measure D&I progress appear to mirror recent efforts by NYDFS on the same. Last month, NYDFS issued Insurance Circular Letter No. 5 (2021) which details, among other things, the benefits of D&I in the insurance sector and announces NYDFS’ plan to collect certain D&I information from New York-regulated insurers (domestic and foreign) this summer. NYDFS expects to publish aggregate findings in the fall. For more information on NYDFS Insurance Circular Letter No. 5 (2021), see our Legal Alert: New York Department of Financial Services to collect data from insurers relating to gender, racial, and ethnic composition of leadership.
ii. Workstream Three (Property and Casualty Insurance)
Workstream Three, which is charged with examining and determining which practices or barriers exist in the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups in the property and casualty industry, reported that it was examining the use of socioeconomic variables, proxy variables for race, disparate impact considerations, external databases and the appropriateness of data such as criminal history. See Section B(2) or additional developments related to disparate impact and proxy discrimination.
The Workstream also recommended that the Special Committee conduct further study on the affordability of auto and homeowners insurance and the availability of producer licensing exams in foreign languages in order to mitigate cultural bias. Past studies related to the availability and affordability of personal lines products have attracted significant scrutiny from industry and/or consumer representatives, and there is likely to be a considerable focus from industry stakeholders on any potential study undertaken by the NAIC as this project continues.
iii. Workstream Four (Life Insurance)
Workstream Four, which is charged with examining and determining which practices and barriers exist in the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups in the life insurance industry, reported that it was focusing efforts on examining disparities in the number of cancellations and rescissions among minority policyholders. During a meeting of the Life Insurance (A) Committee, Commissioner Mark Afable (WI), Co-Chair of Workstream Four, also reported that the Workstream will continue to research and formulate specific recommendations to address:
- The marketing distribution and access to life insurance products in the minority community, including the role that financial literacy plays;
- The impact of traditional life insurance underwriting on minority populations considering the relationship between mortality risk and disparate impact; and
- Whether there are other unresolved issues surrounding race in the life insurance industry (such as the impact of accelerated underwriting on minority populations) that the Workstream should consider addressing.
iv. 2021 Proposed Charges
The Special Committee voted to expose proposed charges for a 30‐day public comment period ending May 14. Among other items, the 2021 Proposed Charges instruct the Special Committee to continue research and analysis of insurance, legal, and regulatory approaches to addressing unfair discrimination, specifically proxy discrimination and disparate impact, by defining the terms and determining appropriate steps to address, including the following:
- (Workstream Four) The impact of traditional life insurance underwriting on minority populations, considering the relationship between mortality risk and disparate impact
- (Workstream Three) Developing analytical and regulatory tools to assist state insurance regulators in determining unfair discrimination, including issues related to: a. The use of socioeconomic variables b. Identifying proxy variables for race c. Correlation vs. causation d. Disparate impact considerations e. Use of third-party data f. Appropriateness of data such as criminal history
2. Additional Developments Related to Race and Insurance
i. Consumer Liaison Committee Receives Proxy Discrimination Presentation
The NAIC/Consumer Liaison Committee received a presentation from Birny Birnbaum (Center for Economic Justice) on systemic racism in insurance. Mr. Birnbaum’s presentation focused on disparate impact and proxy discrimination in the context of a multivariate analysis and requested that insurance regulators require insurers to (1) develop standards to minimize disparate impact, (2) test for disparate impact and proxy discrimination, (3) eliminate proxy discrimination, (4) minimize disparate impact, and (5) report test results.
Mr. Birnbaum presented his own definition of “proxy discrimination” in response to the recent action taken by the National Council of Insurance Legislators (NCOIL) (discussed below). Specifically, Mr. Birnbaum offered the following:
Proxy Discrimination: Use of a non-prohibited factor that, due in whole or in part to a significant correlation with a prohibited class characteristic, causes unnecessary, disproportionate outcomes on the basis of prohibited class membership. (Emphasis in original.)
Mr. Birnbaum’s definition of “proxy discrimination” comes as insurance regulators and legislators consider whether it is necessary to define the term and, if so, how it should be defined. See Section b(1)(iv) for additional details.
ii. National Council of Insurance Legislators Defines Proxy Discrimination
Although additional developments are expected, to date there is no well-accepted definition of “proxy discrimination” in the context of insurance. However, on March 8, 2021, the NCOIL Special Committee on Race in Insurance Underwriting adopted a draft definition of “proxy discrimination” as an amendment to the existing NCOIL Property/Casualty Insurance Modernization Model Act. The amended Model Act defines “proxy discrimination” as:
the intentional substitution of a neutral factor for a factor based on race, color, creed, national origin, or sexual orientation for the purpose of discriminating against a consumer to prevent that consumer from obtaining insurance or obtaining a preferred or more advantageous rate due to that consumer’s race, color, creed, national origin, or sexual orientation.
3. Climate Risk and Resiliency (EX) Task Force Retains Both Climate Survey Forms for 2021 Reporting Year; Will Consider Federal, International Developments
During last year’s Fall National Meeting, the Climate Risk and Resiliency (EX) Task Force charged its Climate Risk Disclosure Workstream with providing recommendations to the Task Force on how to consolidate or otherwise harmonize two climate risk disclosure surveys – the NAIC Climate Risk Disclosure Survey (NAIC Disclosure Survey) and the Task Force on Climate-Related Financial Disclosures Survey (TCFD Survey) – both of which are available for use in six states (California, Connecticut, Minnesota, New Mexico, New York and Washington). Although it was speculated that the Workstream might provide the Task Force with recommendations for how to address the competing disclosure surveys and for how one or both surveys could be amended to capture additional climate-related information, a Memorandum to the Task Force from the Workstream concluded that more time was necessary to develop recommendations.
Specifically, the March 10 memo recommends “maintaining the present disclosure reporting timeline for the 2021 reporting year, including which companies choose to submit either the NAIC Climate Risk Disclosure or the TCFD.” The memo notes that the process of revising the current disclosure reporting process is “a multifaceted and complex project requiring sufficient depth of research and feedback from all parties affected or involved” and that the current July reporting date simply provides “insufficient time to make substantive changes to the questions.” The Workstream will instead use the additional time to gather input from interested parties in the hope of developing recommendations that can be implemented in time for the 2022 reporting period.
The Workstream will likely take the additional time to track the many initiatives underway at the state, federal, and international levels relative to climate risk and climate-related disclosures. For example, at the state level, NYDFS recently released proposed guidance for New York insurers on managing climate risk. For more information on the NYDFS guidance, see our Legal Alert: New York State Department of Financial Services releases proposed guidance for New York insurers on managing climate risks.
1. After Debate, Statutory Accounting Principles (E) Working Group Makes “Non-Substantive” Amendments to SSAP No. 71
On March 15, 2021, the Statutory Accounting Principles (E) Working Group voted to amend Statement on Statutory Accounting Principles (SSAP) Number 71 – Policy Acquisition Costs and Commissions as it pertains to levelized commissions that are made to a third party and then distributed to agents as non-levelized commissions. The revised guidance clarifies the scope of SSAP No. 71 to ensure that insurers recognize and report such commissions as loans during the first year of the contract. Specifically, the amendments provide that insurers cannot recharacterize or delay recognition of liabilities to third parties for initial sales commissions owed.
Multiple commissioners – including Commissioner Mike Chaney (MS) and Commissioner Glen Mulready (OK) – objected to the amendments on the basis that they were substantive in nature and would serve to undermine commission reporting arrangements that have been in place for decades. NCOIL CEO Tom Considine echoed those concerns on behalf of his members and proposed a four-to-five-year phase-in period in the event that the amendment was deemed necessary. However, other insurance regulators – including Working Group members representing Virginia and Texas – asserted that such a practice has never been permitted in their respective states and that, at a minimum, disclosure of such a practice is necessary to properly assess an insurer’s financial condition.
Ultimately, the Working Group voted to classify the amendments as “non-substantive” on the basis that they clarify – rather than revise – the original intent of SSAP No. 71. However, in recognition of the controversial nature of the amendments, the Working Group agreed to (1) submit the amendments to the full Financial Condition (E) Committee for approval and (2) delay the effective date to December 31, 2021.
The full Financial Condition (E) Committee took up the issue on April 13 and also had a rigorous debate about SSAP No. 71 before adopting the amendments. The amendments were introduced by Accounting Practices and Procedures (E) Task Force (APPTF) Chair Jaime Walker (TX) and were also supported by Commissioner Scott White (VA), Chair of the Committee, who noted that a small minority of companies would experience a negative financial impact from the revisions. Commissioner Scott also explained that in lieu of a grandfathering provision, the NAIC is recommending that affected companies consult their domiciliary state about a permitted practice waiver. In response, several current and former commissioners argued that the number of adversely impacted companies could be significant and that a multiyear phase-in is appropriate. APPTF Chair Walker responded that the December 31, 2021, effective date is already a delay in the adoption of a non-substantive change. The amendments were ultimately adopted by an 11-3 vote, with New Mexico, South Carolina and Mississippi voting against. The issue will now move to the Executive (EX) Committee and Plenary for consideration either at the 2021 Summer National Meeting or during an interim meeting.
2. Group Capital Calculation: A Tool to Measure Insurance Group Solvency
The Group Capital Calculation (E) Working Group discussed considerations for conducting a 2021 Trial Implementation of the GCC that was adopted on December 9, 2020. There were varying views among Working Group members about how the 2021 Trial Implementation should be launched. Some felt that the individual lead states, not the NAIC, should solicit volunteer companies. Others felt that the NAIC should do the initial outreach so that there is a proper mix of companies and to ensure both adequate support for the states that are leads for Internationally Active Insurance Groups (IAIGs) and consistency in how the NAIC works with the International Association of Insurance Supervisors (IAIS) on the insurance capital standard (ICS).
Ultimately, the Working Group decided to direct the NAIC to draft a template letter that will be provided to the individual lead states (and to a suggested list of potential volunteer companies), which the individual states can then use to select those companies which they will invite to participate. The number of participating companies will be determined by each lead state based on its resource capacity but generally will not exceed two to four in any of the individual lead states. The NAIC will provide support, and due to the NAIC’s own resource constraints, staff noted that the number of volunteer companies participating will likely be close to the same number (approximately 30) as had participated in the first field test when the GCC was being developed.
The companies that will be participating in the 2021 Trial Implementation will be required to submit their data by July 31, 2021, which is one month earlier than the submission date for the companies that are participating in the IAIS Aggregation Method field test. The Working Group would like to complete this data collection effort by October 31, 2021.
The Working Group also recommended to the Financial Condition (E) Committee that the amendments to the NAIC Insurance Holding Company System Regulatory Act (#440) and Insurance Holding Company System Model Regulation (#450), which will give effect to the GCC, be adopted as an accreditation standard on an expedited basis that becomes effective by November 7, 2022. See Section C(3) for additional details.
3. Financial Regulation Standards and Accreditation (F) Committee Considers Waiving Public Exposure Period for 2019 Model Holding Company Act Revisions
By a vote of eight states in favor to five states opposed, the Financial Regulation Standards and Accreditation (F) Committee agreed to expose, for a 30-day comment period, the latest GCC and Liquidity Stress Test amendments to the Insurance Holding Company System Regulatory Act (#440) and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450) for consideration as accreditation standards. As noted immediately above, the Committee was encouraged to waive the standard accreditation timeline for certain states by the Financial Condition (E) Committee, which also recommended that the 2020 amendments become an accreditation standard effective (1) November 7, 2022 (i.e., when the group supervision provisions of the US-EU and US-UK Covered Agreements take full effect) for states that are group-wide supervisors of US groups with activities in the European Union or the United Kingdom, and (2) January 1, 2026 (i.e., the normal accreditation timeline) for all other states. Notwithstanding the (E) Committee’s recommendation, the (F) Committee opted to retain the standard accreditation timeline for all states – including for lead states of US groups with business in the EU and the UK – and to simply “strongly encourage” those states to adopt the GCC by the end of 2022. The vote itself, which was also controversial, was opposed by five states on grounds that the new requirements should apply only to those states that are the state of domicile for US insurance groups with international business.
1. Scalars: The Missing Link in the Group Capital Calculation
Because of the complexity of developing a scalar methodology, the NAIC chose to use a temporary placeholder for scalars when it adopted the GCC and sought the assistance of the American Academy of Actuaries (Academy) to analyze the theoretical and practical considerations of aggregating regulatory capital requirements across jurisdictions.
Scaling translates an insurance group’s capital position under one capital framework to its equivalent capital position under another framework. As part of the NAIC’s GCC work, and as part of the effort to build an Aggregation Method to compare to the ICS, a decision has to be made about how to translate available and required capital from entities in non-US jurisdictions into values that can be added meaningfully to those of US entities to assess group capital adequacy.
The International Insurance Relations (G) Committee heard a presentation on scalar methodologies from the Academy. Five methodologies for estimating scalars were assessed by introducing four independent criteria: validity, reliability, ease of implementation and stability of parameters. The assessments suggested that any scalar methodology will be imperfect but the best scalar methods would be very simple and highly valid. Unfortunately, none of the methods the Academy assessed fit that description. Consequently, the Academy did not make any specific recommendations in favor of or against any particular methodology. However, based on its analysis, the Academy offered three conclusions:
- methodologies based on observable data are preferable to methodologies based on assumptions;
- because regulatory regimes may change in a manner affecting capital adequacy standards after scalars have been estimated, it may be advisable to make a periodic recalculation as an intrinsic element of any methodology adopted; and
- the only reliable way in which to balance the validity of methodologies against their complexity is through the application of sensitivity testing.
2. IAIS Supervision of Control Function Application Paper
The International Insurance Relations (G) Committee received an update on the IAIS draft Application Paper on Supervision of Control Functions from Committee Chair and Commissioner Gary Anderson (MA). The Application Paper, which was issued for public consultation on January 25, purports to help supervisors address issues related to the supervision of control functions as described in the IAIS Insurance Core Principles (ICPs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). Through the International Insurance Relations (G) Committee, the NAIC will submit a number of edits to the draft, most of which are non-substantive.
3. IAIS Developments Related to Environmental, Social and Corporate Governance
Interested parties were able to hear from the outgoing IAIS Head of Implementation, Conor Donaldson, who provided brief remarks on the IAIS’ ESG-related efforts. With respect to D&I, Mr. Donaldson remarked that the IAIS is in the early stages of considering whether insurance regulators are accounting for D&I actions as they concern maintaining safe, stable and fair insurance markets.
The IAIS is also in the process of drafting a corporate culture issues paper that is scheduled to be published in the third quarter of 2021. Birny Birnbaum (Center for Economic Justice) urged the IAIS to practice restraint and to focus on consumer-facing outcomes as it begins drafting the corporate culture paper. Mr. Birnbaum contended that there is no reason to meddle with an insurer’s corporate culture when there is neither a consumer-facing problem nor a consumer-driven outcome. Although Mr. Donaldson noted both the importance of an insurer’s “tone from the top” and the ability of supervisors to understand an insurer’s corporate culture, it was also noted that the IAIS corporate culture paper is an “issues paper” that is designed to raise considerations rather than prescribe requirements.
4. International Organizations Publish COVID-19 and Digitalization Report
The IAIS, the Financial Stability Institute (FSI) and the Bank for International Settlements (BIS) published a report titled Redefining Insurance Supervision for the New Normal that “explores the experiences and challenges of insurance supervisors as they were forced to adapt to prolonged remote working conditions during the COVID-19 pandemic.” The report also highlights key considerations to help supervisors in their ongoing efforts to adjust to the new normal of digitalization accelerated by the pandemic, as well as to ensure an increased level of preparedness for similar large-scale disruptions in the future. The report explores a number of issues that may prompt additional consideration from the IAIS, including remote supervision, regulatory accessibility to (digital) data and data transfer/storage.
1. Executive (EX) Committee and Plenary Adopts Amendments to Unfair Trade Practices Act, Lender-Placed Insurance Model Act and CASTF Regulatory Review of Predictive Models White Paper
The Executive (EX) Committee and Plenary met on April 14, 2021, and adopted amendments to the Model Unfair Trade Practices Act (#880) pertaining to anti-rebating. The amendments exempt from state rebating restrictions value-added products or services that are offered or provided at no or reduced cost when those products or services are not specified in the policy and when they:
- relate to the insurance coverage;
- are primarily designed to satisfy one of the following: (1) provide loss mitigation or loss control; (2) reduce claim costs or claim settlement costs; (3) provide education about liability risks or risk of loss to persons or property; (4) monitor or assess risk, identify sources of risk, or develop strategies for eliminating or reducing risk; (5) enhance health; (6) enhance financial wellness through items such as education or financial planning services; (7) provide post-loss services; (8) incent behavioral changes to improve the health or reduce the risk of death or disability of a customer (defined as policyholder, potential policyholder, certificate holder, potential certificate holder, insured, potential insured or applicant); or (9) assist in the administration of the employee or retiree benefit insurance coverage;
- are reasonable in comparison to that customer’s premiums or insurance coverage for the policy class; and
- are based on documented objective evidence and offered in a manner that is not unfairly discriminatory.
The amendments also permit non-cash gifts or services, including meals and charitable donations on behalf of a customer, in connection with the marketing, sale, purchase, or retention of contracts of insurance as long as the cost of the gift or service is reasonable in comparison to the premium (and is not included in any amounts charged to another person or entity), the offer is not made in a manner that is unfairly discriminatory, and the offer is not conditioned on the purchase of insurance.
New York, Nevada, Louisiana, Washington, Kentucky and Mississippi voted against the amendment, while California (which repealed its anti-rebating more than 30 years ago) abstained. My Chi To, NYDFS Executive Deputy Superintendent for Insurance, stated that New York was voting against the amendment due to unclear and contradictory language and to a potential loophole where the value-added products only have to be “offered” in a non-discriminatory manner, but no provision was made for how the items are actually provided. Nevada echoed these concerns and added that the amendments created an unfair playing field, putting extra burdens on independent brokers.
The Executive (EX) Committee and Plenary also approved the Lender-Placed Insurance Model Act written by the Lender-Placed Insurance Model Act (C) Working Group, chaired by Florida Commissioner and 2021 NAIC President David Altmaier. The Model Act creates a legal framework within which lender-placed insurance on real property may be written; maintains the separation between lenders/servicers and insurers/insurance producers; and minimizes unfair competitive practices in the sale, placement, solicitation and negotiation of lender-placed insurance. The Committee adopted the Act, with California abstaining. Finally, the Committee unanimously adopted the Casualty Actuarial and Statistical (C) Task Force (CASTF) Regulatory Review of Predictive Models White Paper, which identifies best practices for the regulatory review of predictive models and analytics filed by insurers to justify rates.
2. Life Insurance and Annuities (A) Committee Disbands Certain Working Groups
The Life and Annuities (A) Committee met on April 12, 2021, and received an update on Workstream Four of the Special (EX) Committee on Race and Insurance, charged with examining and determining which practices or barriers exist that potentially disadvantage people of color and/or historically underrepresented groups in the life insurance and annuities lines of business (see Section B(1) for a discussion of Workstream Four).
Commissioner Glen Mulready (OK), Vice Chair of the Committee, noted that the 2021 Committee charges had not changed from the previous year but that some modifications may be warranted. Birny Birnbaum (Center for Economic Justice) presented a case for significantly revising the charges by establishing a new Life and Annuity Illustration Reengineering (A) Working Group to take a fresh look at life insurance and annuity illustrations and advertising and to roll the work of the Annuity Disclosure (A) Working Group into that effort. No action was taken on Mr. Birnbaum’s recommendations. Rather, Commissioner Doug Ommen (IA), former Chairman of the Committee, was asked to review the charges for possible modifications by the Committee. He made following motions to disband two Committee Working Groups, both of which were unanimously approved by the Committee:
- Upon final adoption by NAIC Executive (EX) Committee and Plenary of the amendments to the Annuity Disclosure Model Regulation (#245) to address the illustration of participating income annuities (e.g., the appropriate dividend scale to be used in these illustrations) adopted by the Annuity Disclosure (A) Working Group on March 2, 2018, and by the (A) Committee on August 5, 2018, disband the Working Group. Chaired by Mike Yanacheak (IA) for the past four years, the Working Group has been unable to reach agreement on draft language to allow the illustration of indices that have been in existence for less than ten years. It was noted that the prohibition in Section 6 of Model #245 was intended to prevent “gaming” in the creation of combination indices for purposes of creating favorable illustrations. However, only four states adopted the version of Model #245 prohibiting such illustrations. Because the vast majority of the states do not restrict these illustrations, there has not been enough regulator support to achieve consensus on revisions to Model #245.
- Disband the Retirement Security (A) Working Group because it has fulfilled its charge to “explore” ways to promote retirement security. The issue of retirement security permeates all that is done at the NAIC and is encompassed in the charges of the new Special (EX) Committee on Race and Insurance.
3. Pet Insurance (C) Working Group Discusses Preexisting Conditions
The Pet Insurance (C) Working Group continued its development of a draft Pet Insurance Model Act concerning pet insurance during the course of two meetings that were held in March. Both meetings focused on the proposed definition of “preexisting condition,” particularly as it relates to the method for determining whether an insured pet has one or more preexisting conditions at the time a policy is written. The Working Group heard proposals from both the American Veterinary Medical Association (AVMA) and the North American Pet Health Insurance Association (NAPHIA) on how to revise the definition so that it is easier for a typical consumer to understand.
After receiving proposals from AVMA and NAPHIA, the Working Group voted to adopt a revised definition as proposed by the AVMA so as to define “preexisting condition” to mean any “condition for which any of the following are true prior to the effective date of a pet insurance policy or during any waiting period: (1) a veterinarian provided medical advice; (2) the pet received previous treatment; or (3) based on information from verifiable sources, the pet had signs or symptoms.” The Working Group also voted to amend the draft Model Act to place the burden of proving a preexisting condition on insurers and to clarify that a condition covered while a policy is in force cannot be treated as a preexisting condition upon policy renewal. The Working Group intends to continue meeting every other week and anticipates being able to present a final draft of the Model Act to the Property and Casualty Insurance (C) Committee during the 2021 Summer National Meeting.
4. Receivership Law (E) Working Group Exposes Model Holding Company Act Amendments to Ensure Provision of Essential Services by Affiliates
The Receivership Law (E) Working Group voted to expose draft amendments to the Insurance Holding Company System Regulatory Act (#440) and the Insurance Holding Company System Model Regulation (#450) that address the continuation of essential services through affiliated intercompany agreements in a receivership. The proposed amendments bring affiliate service providers deemed “integral” or “essential” to an insurer’s operations under the jurisdiction of a rehabilitator, conservator, or liquidator for purposes of interpreting, enforcing, and overseeing the affiliate’s obligations under the service agreement; the proposed amendments also give the commissioner authority to require that “integral” or “essential” affiliate service providers consent to such jurisdiction. The Working Group voted to expose the amendments for a 42-day public comment period ending January 29. After comments were received, revisions to the amendments were exposed for an additional 14-day public comment period ending February 26, and once again for a 30-day public comment period ending April 9.
5. Reinsurance (E) Task Force Receives Updates on Reciprocal Jurisdiction Reinsurer Approval Process and Ongoing Implementation of Revised Credit for Reinsurance Laws
The Reinsurance (E) Task Force received a report from the Reinsurance Financial Analysis (E) Working Group (ReFAWG) indicating that ReFAWG intends to update the Reinsurance Financial Analysis (E) Working Group Procedures Manual (ReFAWG Manual) to include procedures for the review and approval of reciprocal jurisdiction reinsurers and to implement a passporting process for reciprocal jurisdiction reinsurers that is similar to the current process used for certified reinsurers.
The Task Force also received a report from the Qualified Jurisdiction (E) Working Group (now referred to as the Mutual Recognition of Jurisdictions (E) Working Group to account for its new charge related to developing a process for evaluating jurisdictions that meet the NAIC requirements for recognizing and accepting the GCC). The Working Group discussed revisions to the Process for Evaluating Qualified and Reciprocal Jurisdictions during its March 17 meeting, which would prescribe the process for terminating the status of a qualified or reciprocal jurisdiction and create a passporting process for reciprocal jurisdiction reinsurers. In response to industry questions, the Working Group confirmed that it was in the process of considering how to streamline the certified reinsurer and reciprocal jurisdiction reinsurer application and approval processes, and that the issue would be discussed further as the Working Group begins updating the ReFAWG Manual.
Task Force Chair and Missouri regulator John Rehagen also provided a status update on states that have adopted the 2019 amendments to the NAIC Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). As of March 18, 2021, 23 US jurisdictions had adopted the 2019 revisions to the NAIC Credit for Reinsurance Model Law (#785) and 21 US jurisdictions have action under consideration. In addition, eight states have adopted the 2019 revisions to the NAIC Credit for Reinsurance Model Regulation (#786), and six jurisdictions currently have action under consideration. The 2019 amendments to the Credit for Reinsurance Models were adopted as NAIC state accreditation standards effective September 1, 2022, with enforcement expected to begin January 1, 2023. The revised models were adopted as state accreditation standards on an expedited basis in an attempt to avoid federal preemption of any state reinsurance collateral requirements that are inconsistent with the US-EU/US-UK Covered Agreements.
6. Statutory Accounting Principles (E) and Blanks (E) Working Groups Amend SSAP, Add New Annual Schedule Y, Part 3 Exhibit for Affiliated Entities
The Statutory Accounting Principles (E) and Blanks (E) Working Groups adopted non-substantive revisions to SSAP No. 25 – Affiliates and Other Related Parties and added a new annual statement Schedule Y, Part 3 exhibit. The SSAP No. 25 revisions clarify (1) the definition of “related parties”; (2) that a non-controlling ownership over 10% results in a related party classification, regardless of any disclaimer of control or affiliation; and (3) that a disclaimer of control or affiliation does not eliminate the classification as a related party for the disclosure of material transactions, as is required under SSAP No. 25. Similarly, the Schedule Y, Part 3 exhibit requires companies to (1) identify those with an ownership percentage greater than 10%; (2) identify whether any owners have a disclaimer of control or affiliation; and (3) identify the controlling parties.
7. Casualty Actuarial and Statistical (C) Task Force Contemplates How to Handle Rescission of Casualty Actuarial Society Statement of Principles on Ratemaking
The Property and Casualty Insurance (C) Committee received a report from the CASTF that included a discussion of a letter submitted by CASTF to the Casualty Actuarial Society (CAS) regarding CAS’ December 22, 2020, decision to rescind its longstanding Statement of Principles (SOPs) on ratemaking. As justification, the CAS board cited overlap between information in the SOPs and a later set of guidelines developed by the Actuarial Standards Board. Specifically, CAS voted to rescind:
- statement of Principles regarding Property and Casualty Insurance Ratemaking (May 1988);
- statement of Principles regarding Property and Casualty Valuations (September 1989); and
- statement of Principles regarding Property and Casualty Unpaid Claims Estimates (November 2014).
The CASTF letter expresses disappointment in the rescindment and, citing the “concise” and “accessible” nature of the SOPs, requests the reinstatement of the SOPs regarding property and casualty insurance ratemaking. While the CASTF letter acknowledged the potential opportunities to modernize the SOPs for recent developments in ratemaking such as price optimization, artificial intelligence and predictive models, it suggested that those developments could be addressed with amendments rather than with a wholesale rescindment. Based on the feedback it received, CAS noted that it opened a formal comment period (that is now closed), and affirmed that the CAS board will take the CASTF letter under advisement as it considers how to move forward.