The National Association of Insurance Commissioners (the “NAIC”) held its Summer 2012 National Meeting (the “Summer Meeting”) from 10-14 August 2012 in Atlanta, Georgia. The following are selected highlights from the Summer Meeting.

Captive insurance companies

The Captives & Special Purpose Vehicle Use Subgroup of the Financial Condition (E) Committee (the “Captives Subgroup”) was established to study the use of captives and special purpose vehicles (“SPVs”) by insurers and to recommend regulatory changes as appropriate. Following a series of teleconferences, members of the Captives Subgroup prepared a draft white paper Captives and Special Purpose Vehicles, and the meeting of the subgroup at the Summer Meeting was primarily devoted to a discussion of that draft white paper.

The draft white paper provides an overview of the existing regulation and use of captives and special purpose vehicles. The focus is on captives and SPVs that reinsure their affiliates’ obligations under insurance policies issued by them (often as a way of dealing with Regulation XXX and AXXX reserve requirements) – rather than traditional, pure captives or risk retention groups that are used by businesses to self-insure their own risks. The white paper reflects a concern by some members of the Captive Subgroup about the lack of consistent requirements for the use of captives and SPVs, particularly with respect to financial reporting and capital requirements.

The Captives Subgroup’s recommendations in the draft white paper include:

  • pursuing alternative accounting treatment of XXX and AXXX reserves to eliminate the need for separate transactions outside of the commercial insurer;
  • developing NAIC guidance to assist states in reviewing captives transactions, including minimum analysis to be performed as well as ongoing monitoring of the ceding insurer, the captive and the holding company, with such guidance possibly to be added to NAIC accreditation standards to ensure uniformity and consistency among states with respect to regulation and oversight of captives transactions;
  • encouraging states to adopt the NAIC’s Special Purpose Reinsurance Vehicle Model Act (#789) and possibly re-evaluating and updating the model;
  • supporting the International Association of Insurance Supervisors’ Guidance Paper on the Regulation and Supervision of Captive Insurers, which advocates regulating as commercial insurers any insurer or reinsurer owned or common controlled captives or SPVs that are not self-insurance;
  • considering ways to limit the variability in qualified letters of credit or any other security that may not provide the intended protections provided in the NAIC Credit for Reinsurance Model Law;
  • enhancing disclosure in ceding company financial statements regarding the impact of captives and SPV transactions on the financial position of the ceding insurer; and
  • increasing the ability of a state or other functional regulator of a group to obtain additional information from the captive regulator on a confidential basis to understand the details of captive and SPV transactions.

The white paper is expected to be released formally for comments in the next few weeks and is likely to undergo further revisions. The Captives Subgroup hopes to adopt the white paper including the recommendations and send it to the Financial Condition (E) Committee by year end.

Own Risk Solvency Assessment

The establishment of an Own Risk Solvency Assessment (“ORSA”) requirement is a key component of risk management under the NAIC Solvency Modernization Initiative. The purpose of ORSA is to ensure that a company develops a risk management policy that identifies the types and amounts of its material risk and also monitors and manages such risk. Preserving the confidentiality of information and documents gathered and disclosed during the ORSA process has been an important issue throughout the development of the ORSA requirement.

At the Summer Meeting, the Group Solvency Issues (E) Working Group discussed and adopted changes to the proposed Risk Management and Own Risk And Solvency Assessment Model Act (the “Proposed Model Act”) to strengthen its confidentiality provisions. Under the Proposed Model Act, in order to carry out a commissioner’s regulatory duties, a commissioner may share ORSA-related materials and information with the NAIC or third-party consultants but only if there is a written agreement regarding the sharing and use of such information. In accordance with the new revisions to the Proposed Model Act, the agreement governing the sharing and use of ORSA-related information must provide that the recipient agrees in writing to maintain the confidentiality and privileged status of the materials, documents and information received and has verified in writing the legal authority to maintain confidentiality. The revisions to the Proposed Model Act will prohibit the NAIC or third-party consultants from storing such data after the underlying analysis is completed. The Proposed Model Act will next be considered during a joint Group Solvency Issues (E) Working Group and Financial Condition (E) Committee conference call scheduled for 6 September 2012.

The ORSA (E) Subgroup (the “ORSA Subgroup”) also met during the Summer Meeting. The ORSA Subgroup adopted the ORSA Guidance Manual without making any additional revisions but left open the possibility for revisions that may be offered by state regulators and interested parties at a future date. In connection with the Feedback Pilot Project, the ORSA Subgroup reviewed ORSA reports received from thirteen volunteer insurance groups. As a result of the pilot project, the ORSA Subgroup will take the following steps: draft revisions to the ORSA Guidance Manual; draft recommendations to the Financial (E) Committee related to ORSA implementation; provide general feedback to the insurance industry regarding specific items indentified in the review; and draft referrals to the Financial Analysis Handbook (E) Working Group and the Financial Examiner’s Handbook (E) Technical Group regarding guidance for analysis and examination of the ORSA Summary Report, analyst and examiner coordination and multi-state coordination expectations.

Reinsurance task force

At the Summer Meeting, the NAIC’s Reinsurance Task Force (“RTF”) continued its consideration of matters relating to states’ implementation of the NAIC’s amended credit for reinsurance model law and regulation that were adopted last year as well as other developments. The RTF’s Qualified Jurisdiction Drafting Group is developing criteria and processes for identifying non-US jurisdictions as “qualified jurisdictions” under the NAIC’s amended model law and regulation and will determine jurisdictions to be reviewed initially along with an implementation timeline. The RTF’s Reinsurance Financial Analysis Working Group will provide advice and assistance to states in reviewing reinsurance collateral reduction applications as well as monitoring the financial condition of reinsurers; this working group expects to circulate a procedures manual later this year. Finally, the RTF has formed another new subgroup to consider a referral from the Financial Analysis (E) Working Group regarding quota share reinsurance agreements (specifically whether certain quota share reinsurance agreements transfer sufficient risk – especially if they contain features such as loss corridors, loss caps and sliding scale commissions).

Lender-placed insurance

The NAIC’s Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee held a public hearing on 9 August 2012 regarding the use of lender-placed insurance and the effect on consumers. Lenderplaced (sometimes called “force-placed”) insurance is insurance placed by a bank or mortgage servicer on a property when the owner/borrower’s insurance may have lapsed or is insufficient. If a borrower fails to maintain adequate insurance as required under the terms of the mortgage, the lender typically is entitled to purchase insurance for the property and charge the premiums to the borrower. In addition to the NAIC’s hearing, regulators in states such as California, Florida, New York and Texas have recently held public hearings and have otherwise been reviewing lenderplaced insurance, with particular reference to the premiums charged for such coverage and the financial arrangements between the insurers and lenders. Separately, the federal Consumer Financial Protection Bureau is considering rules regarding lender-placed insurance including rules about when and how lenders must notify borrowers that lender-place insurance will be placed.