Insurance holding companies should be closely following the accelerating efforts by state insurance regulators to impose oversight over group (in addition to legal entity) financial resources. Key questions are coming to the fore in the development of such measures — such as the scope of such requirements, how to ascribe capital ratios to non-insurance companies in the group and how to evaluate non-U.S. entities.
On a Sept. 2, 2020 conference call, the Group Capital Calculation Working Group (GCCWG) of the National Association of Insurance Commissioners (NAIC) continued its discussion of a prospective GCC template and instructions. Picking up from its July 29 meeting at the all-virtual NAIC Summer National Meeting, the working group continued walking through comments of various insurers and industry groups. Some of the highlights are summarized below.
The call followed a Sept. 1 videoconference of two other NAIC working groups on Own Risk & Solvency Assessment (ORSA) guidance. ORSA and GCC are two of the principal NAIC efforts designed to implement regulation of group financial position. The Sept. 1 meeting, a joint meeting of the Risk-Focused Surveillance Working Group and the ORSA Implementation Subgroup, addressed prospective changes to NAIC handbooks involving ORSA concepts. The two working groups discussed moving certain aspects of ORSA guidance into the Financial Condition Examiners’ Handbook (the FCEH) for more efficient and meaningful oversight of group risk. A key item discussed was the proposed removal of the “risk maturity model” (a quantitative measure) in favor of narrative and subjective assessments. The working groups exposed for public comment proposed revisions in the FCEH and the Financial Analysis Handbook reflecting this revised ORSA guidance. Comments on these revisions are due on or before Sept. 30; the proposed changes then would also be subject to review by two other NAIC groups, the Financial Examiners Handbook (E) Technical Group and the Financial Analysis Solvency Tools (E) Working Group.
Among the key issues raised by commenters and discussed on the Sept. 2 GCC call were the ones listed below. The earlier July 29 call had addressed related topics, including treatment of financial entities and the “calibration” level of GCC as compared with Risk-Based Capital (RBC).
- Whether to apply an equity-based capital charge for nonfinancial affiliates to all affiliates that are not subject to regulatory capital requirements. On this item, some commenters suggested a methodology that most closely aligns with how the International Association of Insurance Supervisors’ ICS 2.0 (the capital standard for international insurance groups announced in November 2019 by the IAIS and currently in a monitoring period).
- Treatment of nonfinancial entities.
- Allowance of debt as additional capital.
- Requirements for tracking the contribution of debt issuance proceeds to downstream regulated entities. A related issue is whether prescriptive rules or case-by-case regulatory discretion should govern down-streamed debt proceeds.
- Harmonizing treatment of debt with ICS 2.0. Some commenters had approvingly cited the Federal Reserve’s “building block approach” in this regard.
- Defining “hybrid debt.”
- The use of scalars in aligning non-U.S. capital ratios to RBC.
- The relevance of intangible assets such as deferred acquisition costs, provider contracts, customer lists and goodwill.