The National Association of Insurance Commissioners (NAIC) held its 2019 Spring National Meeting from April 5 through 9 in Orlando, Florida. This meeting was distinguished by a very large class of new commissioners (15 in total) and by the announcement of eight strategic priorities for 2019:
- Annuity Suitability & Best Interest Standard
- Climate/Natural Catastrophe Risks & Resiliency
- Data, Innovation & Cyber
- Group Capital Calculation
- Health Insurance
- Long-Term Care Insurance
- Macroprudential Initiative
- International Capital Standards
Work on these priorities involved regulators pushing forward on existing initiatives as well as taking up new projects. The NAIC pushed ahead with marquee initiatives related to the US-EU/UK Covered Agreements, international capital standard-setting at the IAIS, innovation- and technology-related issues, developing a US group capital calculation tool, enhancing annuity suitability requirements to provide a higher standard of care, and addressing issues around long-term care. Regulators also launched some notable new initiatives, including addressing state insurance business transfer and division laws. The year ahead looks to be a busy one for the NAIC, with regulators hoping to bring many of these initiatives to a close by year end.
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.
A. Issues of General Interest
1. NAIC Continues Work to Implement Reinsurance Collateral Provisions of Covered Agreements
The Reinsurance (E) Task Force provided an update on its continuing efforts to implement the reinsurance collateral provisions of the covered agreement between the US and the EU (and more recently, the covered agreement between the US and the UK). For background on the EU/UK covered agreements, their reinsurance collateral provisions and their genesis, see this Eversheds Sutherland Legal Alert.
The Task Force received comments from interested parties on updated proposed revisions to the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (Credit for Reinsurance Models) that were exposed for comment on March 7, 2019. Revisions necessary to implement the covered agreements were originally expected to be adopted by the NAIC in December 2018, but adoption was deferred to address concerns raised by the US Department of the Treasury (Treasury). Treasury’s concerns relate to inconsistencies with the covered agreements, including provisions that give state insurance regulators discretion that could result in reinsurance collateral requirements inconsistent with the EU/UK covered agreements or similar agreements that might be negotiated in the future.
A number of commenters—including the American Council of Life Insurers (ACLI), the Reinsurance Association of America (RAA), the National Association of Mutual Insurance Companies (NAMIC), and American Property Casualty Insurance Association (APCIA)—urged the Task Force to eliminate provisions in the proposed amendment that would grant state insurance commissioners discretion to impose additional requirements and consider additional unspecified factors for non-EU/UK jurisdictions to be designated “Reciprocal Jurisdictions.” In contrast, EU/UK jurisdictions that have entered into a covered agreement with the United States qualify as Reciprocal Jurisdictions if they comply with all material terms of the covered agreement, and US jurisdictions qualify as Reciprocal Jurisdictions if they meet NAIC accreditation standards. Bermuda, Japan and Switzerland are the only non-EU/UK jurisdictions that are currently NAIC qualified jurisdictions, and a joint comment letter submitted by the Association of Bermuda Insurers & Reinsurers, the General Insurance Association of Japan, and the Swiss Insurance Association states that more than 86% of certified reinsurers that have been approved by the Reinsurance Financial Analysis (E) Working Group for passporting are domiciled in Bermuda, Japan or Switzerland.
The Reinsurance (E) Task Force is expected to release updated proposed revisions to the Credit for Reinsurance Models in mid-May, but because the changes are expected to be limited and technical in nature, a formal comment period is not expected. Instead, the Reinsurance (E) Task Force is expected to hold a public conference call, where interested parties will have an opportunity to provide final comments before the proposed revisions are adopted by the NAIC in June.
2. New Working Group Begins Work on White Paper Addressing Insurance Business Transfer and Division Laws
This was the first national meeting for the Restructuring Mechanisms (E) Working Group, which was recently formed by the Financial Condition (E) Committee amid the current trend of states adopting insurance business transfer laws (IBT Laws) or insurance company division laws (Division Laws). The Working Group’s charges include evaluating and preparing a white paper that summarizes the existing state restructuring statutes and addresses the perceived need for these statutes, the issues the statutes are designed to remedy, the legal issues around state reciprocity, and alternatives insurers are currently employing to achieve similar results. The Working Group is also charged with: (i) reviewing and proposing changes to the Guaranty Association Model Act to ensure that policyholders that had guaranty fund protection before a restructuring continue to have it after the restructuring; (ii) reviewing and proposing changes to the Protected Cell Companies Model Act to allow for restructuring mechanisms; and (iii) developing financial solvency and reporting requirements for companies in runoff.
In general terms, IBT Laws and Division Laws are different ways of achieving the same result: a transfer/allocation of an insurance portfolio to an assuming/resulting insurer without policyholder consent through a regulator and/or court-approved process. IBT Laws can be similar to non-US laws like Part VII of the UK Financial Services and Markets Act 2000, and have been adopted in Oklahoma, Rhode Island and Vermont. Under IBT Laws, an insurer transfers all or a portion of its insurance liabilities to an assuming insurer and the assuming insurer becomes directly liable to the policyholders. Under Division Laws—which have been adopted in Connecticut, Illinois, Iowa and Michigan (and are similar to an older Pennsylvania law applicable to business corporations generally)—an insurer divides into one or more separate insurers, with the assets and liabilities of the original insurer allocated among the resulting insurers. A resulting insurer can then be merged into the assuming insurer. At least two other states, Georgia and Nebraska, are currently considering legislation to enact a Division Law.
At the Spring National Meeting, the Working Group heard presentations from the ACLI, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and two insurance companies, Swiss Re and ProTucket. The representatives from ACLI discussed the similarities and differences between IBT Laws and Division Laws, and noted that ACLI has not yet taken an official position on whether they support these laws, but ACLI is working on a list of principles and guidelines that it will use in evaluating these types of laws and determining whether to support any state’s proposed laws. The guidelines, which are expected to be available in June 2019, are expected to address the following key issues: the need for a robust regulatory review process, the importance of policyholders and other stakeholders having access to the process, the use of external experts in some or all cases, and the role of court approval. ACLI has also been discussing the impact of IBT Laws and Division Laws on state guaranty funds with NOLHGA. NOLHGA has not taken a position, pro or con, on any of the statutes but raised some obvious solvency issues. The NOLHGA presentation addressed the importance of ensuring that policyholders retain guaranty fund protection following a transfer pursuant to a state IBT Law or Division Law where the “assuming” insurer is not licensed in a policyholder’s state of residence (resulting in the policyholder becoming a guaranty fund “orphan”). It was noted that state life and health guaranty funds typically provide coverage for “orphaned” policyholders through the guaranty fund in the insurer’s state of domicile, but that the “orphan” exception was never intended to wipe out the principle that individuals should be covered by the guaranty fund in their state of residence. In contrast, state property/casualty guaranty funds do not typically provide coverage for orphaned policyholders.
Representatives from both Swiss Re and ProTucket spoke in favor of state IBT Laws, with the representative from Swiss Re reporting that Swiss Re has been involved in a number of insurance business transfers outside the United States, and that there is a very real and growing need in the industry for IBT Laws and Division Laws. In this regard, the Swiss Re representative noted that IBT Laws are preferable to indemnity reinsurance transactions (which typically are the first step in an IBT Law transfer) because of the finality of the process, and IBT Laws provide an efficient way for incumbent insurers to restructure their operations to move away from inefficient legacy operating systems and infrastructure. He also noted that many international insurance groups, including US groups, have completed business transfers outside the United States and that he is not aware of any instance where an assuming insurer ultimately was unable to pay its assumed liabilities.
The representative from ProTucket, a Rhode Island run-off carrier formed in 2017, similarly spoke in favor of state IBT Laws and provided background on the policyholder protections provided under the Rhode Island IBT Law. Some of those include review and approval by the state insurance department, review by independent experts retained by the assuming insurer and the state insurance department, notice requirements for policyholders and other affected parties, approval by the transferring insurer’s state of domicile, and court approval in Rhode Island.
3. IAIS Continues Work to Update ComFrame Materials, the Holistic Framework and Other International Standards
The International Insurance Relations (G) Committee continued its work to engage with the International Association of Insurance Supervisors (IAIS) regarding the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), the insurance capital standard (ICS) version 2.0, and the holistic framework to assess and mitigate systemic risk, as well as related international regulatory initiatives.
Regarding ComFrame, the IAIS held a stakeholder meeting in early April, which provided a forum for interested parties to provide feedback on ICS version 2.0. ICS is a risk-based group-wide global insurance capital standard for internationally active insurance groups (IAIG) that is expected to be included in ComFrame. The IAIS reasserted at the stakeholders meeting that implementation of ICS version 2.0 would be conducted in two phases: (i) a five-year “monitoring period” beginning in January 2020, during which ICS will be used for confidential reporting to the group-wide supervisor and discussion in supervisory colleges; and (ii) implementation of ICS as a group-wide prescribed capital requirement. It was also noted during the stakeholder meeting that 2019 field testing of ICS version 2.0 will launch on April 30, with field testing data due on July 31, the field testing package being made available to the public in August, and ICS version 2.0 expected to be adopted for the monitoring period in November 2019.
Regarding the holistic framework, in November 2018, the IAIS released for public comment a consultation paper on a proposed holistic framework for the assessment and mitigation of systemic risk in the insurance sector. The proposed framework is intended to assess and mitigate systemic risk in the insurance sector through a sector-wide, activities-based approach, rather than through the entity-based approach that results in additional policy measures only being imposed on a relatively small group of insurers (those identified as global systemically important insurers (G-SII)). The holistic framework consists of five key elements: (i) an enhanced set of supervisory policy measures; (ii) a global monitoring exercise by the IAIS; (iii) supervisory powers of intervention; (iv) mechanisms that help ensure the global consistent application of the framework; and (v) an assessment by the IAIS of the consistent implementation. The IAIS intends to finalize the holistic framework in 2019 and implement it in 2020. As a result of this new approach to systemic risk, the Financial Stability Board (FSB), in consultation with the IAIS and national authorities, opted to not identify G-SIIs in 2018. Once the holistic framework has been finalized in 2019, the FSB plans to assess whether to suspend G-SII identification for 2020. Additionally, in 2022, based on a review of the initial implementation of the holistic framework, the FSB intends to decide whether to discontinue or reestablish identifying G-SIIs annually.
The NAIC has welcomed the IAIS work on the holistic framework as its focus on systemic risk intersects with the work the NAIC is doing through its Macro Prudential Initiative. The NAIC will, as part of Team USA, continue to be actively engaged as the holistic framework is further refined at the IAIS to help ensure new policy measures and their scope are appropriate for assessing systemic risk in the insurance sector. The NAIC submitted comments on the proposed holistic framework consultation paper in January. In addition, earlier this year, the NAIC also submitted comments on the IAIS draft Application Paper on Recovery Planning and the IAIS draft Application Paper on Proactive Supervision of Corporate Governance.
4. Development of US Group Capital Calculation Tool Continues
The Group Capital Calculation (E) Working Group met and finalized discussions on its previously exposed group capital calculation (GCC) testing template and instructions. In March, the Working Group held three conference calls to discuss comments received related to the testing template and instructions. At this point, the Working Group expects to make the following two modifications to the GCC testing template and instructions before testing begins: (i) adding an additional line to the XXX/AXXX Test 3 to capture, for information purposes only, the differences between statutory accounting principle (SAP) assets used in the calculation and primary security as defined in Actuarial Guideline XLVIII—Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (AG 48); and (ii) a separate test of grouping entities being developed by Cigna. After making these modifications, the Working Group expects that it may be possible to begin GCC field testing by May 1, 2019 with approximately 30 volunteer firms. Field test volunteers will have 90 days to complete and submit the template to their lead states who will then have 60 days to review the data. NAIC staff is working on setting up a weekly Q&A facility, the distribution of which may be restricted to testing volunteers.
5. Reporting of Affiliate Investments on Annual Statements
The Statutory Account Principles (E) Working Group discussed proposed revisions to statutory accounting principles to clarify financial statement reporting when underlying investments continue to reflect “affiliate” transactions. Specifically, the Working Group discussed a hypothetical example where a reporting entity holds affiliated securities and transfers such securities to an “independent” trustee. In this example, the reporting entity would acquire securities issued from the trust, backed by the affiliated securities. With this design, instead of reporting affiliated investments, the reporting entity would attempt to report an investment in an “independent” issuer, although the reporting entity continues to only have direct recourse against the affiliated assets held in trust.
The Working Group exposed for comment revisions to SSAP No. 25 – Affiliates and Other Related Parties that clarify the continued application of the SSAP, as well as an “affiliated” classification, when a transaction is in substance a related party transaction, even if there is a non-related intermediary. The proposed revisions explicitly indicate that, in determining whether a transaction is a related party transaction, consideration shall be given to the substance of the agreement and the parties whose actions or performance materially impact the reporting entity under the transaction. The proposed revisions further indicate that, as a general principle, it is erroneous to conclude that the mere inclusion of a non-related intermediary eliminates the requirement to assess and identity the related party transaction in accordance with the provisions of SSAP No. 25. The comment period for the proposed revisions ends June 12, 2019.
It is important to mention that the NAIC has not proposed amendments to the Model Holding Compact Act to address this issue. In an effort to have guidance on the issue adopted as soon as possible, the NAIC appears to have concluded that amendments to SSAP No. 25 would be adopted more quickly than amendments to the Model Holding Compact Act.
6. NAIC Exposes Revised Accreditation Standards on Change of Control Review
The Financial Regulation Standards and Accreditation (F) Committee met at the Spring National Meeting and exposed two sets of revisions to the accreditation standards for public comment. Of particular note, the Committee exposed revisions to Part D of the standards, which addresses the Organization, Licensing and Change of Control of Domestic Insurers. The proposed revisions came out of a referral from the National Treatment and Coordination (E) Working Group. The Working Group recommended changes to the state accreditation standards to include a new section on the scope and performance of state procedures for redomestications. The proposed changes would also include several new standards for the review of Form A filings, and adjust the guidelines on timing for the regulatory review of Form A filings to shift away from a specified timeline (currently 30 days) to a more general statement that departments should have a policy that establishes timing requirements for Form A review. The Committee also exposed for comment revisions to the preamble to Part A: Laws and Regulations. The proposed revisions are intended to ensure that the Principle-Based Reserving (PBR) standards apply to fraternal benefit societies. This is characterized as a technical change in relation to the PBR standards that have already been adopted. Comments on both exposures are due by May 8, 2019.
The Committee also adopted several revisions made during 2018 to NAIC publications that are required for accreditation purpose and that were deemed to be insignificant.
B. NAIC Continues Focus on Innovation and Technology
1. Regulators Continue Work to Facilitate Review of Predictive Models
The NAIC continued its work to aid regulatory reviews of complex predictive models for insurance rate filings. The Big Data (EX) Working Group pushed forward with its discussions on the challenges faced and tools needed to allow states to review predictive models used in accelerated and non-traditional underwriting. While the Working Group’s initial activities focused exclusively on personal auto and homeowners insurance, the Working Group has begun discussing these issues in the context of life insurance.
The Working Group’s work has been driven by the concern of regulators that the tools needed to assess accelerated or non-traditional insurance underwriting models don’t exist internally in many states. Regulators have also expressed concern about whether they have the tools necessary to review models and predictive elements being developed and provided by third-party entities that are not directly regulated by state insurance departments. Because these third parties are not regulated, it is unclear whether state regulators have the examination authority and other tools necessary to be able to understand a proprietary model they developed.
Meanwhile, consumer advocates have raised certain concerns regarding accelerated underwriting, including whether:
- The underlying data provides a reliable basis for underwriting decisions;
- Models inadvertently perpetuate historical discrimination and unequal treatment;
- Market conduct examiners have the skills, resources, and regulatory authority necessary to examine accelerated underwriting models and practices; and
- Factors used in accelerated underwriting could serve as proxies for other prohibited factors that propagate historical inequities.
Industry groups have generally expressed their willingness to work with regulators on these issues, noting that they tend to view accelerated underwriting as having the potential to provide benefits to consumers and an opportunity to broaden the markets served by the industry. They also encouraged the Working Group to consider the extent to which existing regulatory frameworks already adequately address issues of potential concern around accelerated underwriting, including through the Fair Credit Reporting Act and current insurance standards prohibiting the use of excessive, inadequate, or unfairly discriminatory factors.
In seeking to address these issues, the Working Group referred two charges to other groups in 2018. First, the Working Group referred a charge to the Casualty Actuarial and Statistical (C) Task Force to develop a white paper that will address best practices and provide guidance regarding the review of predictive models and analytics filed by insurers to justify rates. Seven states are working on determining what information regulators would want to receive as part of the review process. In doing so, the Task Force is limiting the scope of its work to only personal auto and homeowners insurance, and only to the types of models most commonly used by property and casualty insurers. As reported to the Working Group during the Spring Meeting, the Task Force has developed a draft of the paper that identifies 16 best practices for reviewing these complex predictive models and 92 information items that might be collected by regulators to fulfill those best practices. The Task Force noted that the 92 information items are intended as a list of things that may be useful to a regulator depending on the circumstances, and is not intended to create a one-size-fits-all approach to gathering information about complex predictive models. Rather, the Task Force indicated that its hope was to promote some uniformity across states on how to review these models and to provide information that would allow insurers to proactively submit relevant information to state regulators in connection with the review of predictive models.
The draft white paper was exposed for comment during the 2018 Fall National Meeting. Ten organizations, including eight states, submitted comments on the draft. The Task Force has now mapped those comments to the draft white paper, and will now begin the process of reviewing the comments to determine what revisions should be made to the draft white paper.
The Task Force identified several key concerns that have arisen through this process:
- Confidentiality – Commenters expressed the importance of ensuring that proprietary information regarding predictive models is not shared or exposed.
- Over-Generalization – Commenters expressed concern that regulators should not generalize the considerations and decisions made in the context of auto and homeowner’s insurance to apply to all other types of insurance.
- Causality vs. Correlation – Commenters also expressed that, in the context of actuarial standards, many believe that if a strong correlation is associated with certain factors, there is no need to have a strong understanding of why that correlation occurs. However, others are of the view that there should be a “common sense understanding” of why a certain factor is actually causally related to incurring a loss. The Task Force noted that they were debating this issue.
- Premium – Commenters also noted that the complexity of predictive models may make it difficult for consumers and agents to understand what factors are driving the premium that consumers are paying for products that are priced using those models. Accordingly, the factors affecting premium could end up being less transparent than state regulators may like.
The second referral made by the Working Group in 2018 was to the Executive (EX) Committee, requesting it to conduct research into the skills and resources needed to assist NAIC members in reviewing predictive models and to develop a tool for confidentially sharing information and resources to support states in their review of predictive models. To this end, NAIC Staff, on behalf of the Committee, previously conducted a survey of states regarding the appropriate skills and resources NAIC members may need. The survey included questions regarding the kind of support states were interested in receiving from the NAIC as well as questions around the legal mechanisms available to states for sharing confidential information related to model review with one another and with the NAIC directly.
Following on the results of this survey, during the Spring National Meeting, NAIC management reported that its recommendations based on its research were to:
- Hire one technical staff resource to provide technical support for insurance regulators in the review of actuarial models;
- Develop a training and education program for actuaries and state staff; and
- Develop a tool for state insurance departments to share information on model reviews.
The training and education program is already underway, with training sessions being offered as part of the upcoming Global Insurance Symposium and at the NAIC Insurance Summit. The NAIC legal division is still working to prepare a memo analyzing methods and procedures to be followed in sharing information on predictive model review to maintain confidentiality protections. Their report is expected to be presented to the Working Group once completed.
In addition to pushing forward these existing work streams, the Big Data (EX) Working Group also began to expand its work beyond its focus to date on predictive models used for personal auto and homeowners insurance. Most significantly, the Working Group began shifting focus to the use of big data in life insurance underwriting by adopting a motion to request the Life Insurance and Annuities (A) Committee to study the use of external data and data analytics in accelerated life underwriting and draft and propose appropriate state guidance and best practices. The Working Group also agreed to begin considering the use of big data in insurer claims handling such as claim valuation and antifraud efforts. More concrete actions on this issue are expected to be taken at future meetings.
2. NAIC Re-Evaluating Anti-Rebating Laws
During the Innovation and Technology (EX) Task Force meeting, Commissioner Jon Godfread (ND) provided an update on the Task Force’s activities related to anti-rebating, cancelation/ renewal, and e-signature issues. It was reported that a small group of Task Force members has been working since the 2018 Summer National Meeting to study issues that were potential impediments to innovation and the use of technology in insurance. Anti-rebating, cancelation/renewal, and e-signatures were the issues identified by the group that could act as such an impediment, with anti-rebating being a particular focus.
The Task Force previously requested NAIC legal staff to gather information on state anti-rebating laws, and a group of Task Force members met in January to discuss with companies that are offering wearable devices in connection with loss mitigation how anti-rebating laws have posed challenges to their efforts. The Task Force plans to meet again on June 4 at the NAIC-NIPR Insurance Summit in Kansas City, Missouri, to hear presentations from regulators and interested parties regarding the continued need for and purpose of anti-rebating laws, or lack thereof. Interested parties and regulators have been invited to submit written comments on the issue by April 30.
3. Regulators Keeping Tabs on Uses of Blockchain in Insurance
The Innovation and Technology (EX) Task Force received an update from Director Keith Schraad (AZ) on the Task Force’s activity related to blockchain. Director Schraad noted that the Task Force has been working to try to understand blockchain technology and identify possible use cases for the technology in the context of insurance, noting that states are currently discussing the possibility of using blockchain-based solutions for premium tax collection. He noted that Arizona and Vermont are also independently looking into potential use cases for the technology. The Task Force’s activities have also included engaging with technology incubators and hearing presentations from groups actively working on bringing blockchain solutions to the insurance market.
The Center for Insurance Policy & Research’s event at the Spring National Meeting also focused on blockchain on insurance. The event, titled How Blockchain is Transforming the Insurance Industry, featured a presentation on understanding blockchain and a panel discussion on how blockchain is being used in insurance. Commissioner Michael S. Pieciak (VT) headlined the panel, along with representatives of the Institute’s RiskBlock Alliance, American Association of Insurance Services (AAIS), and Adjoint. As part of the Panel discussion, Commissioner Pieciak highlighted the findings of a study that Vermont conducted into current uses by insurers of insurance, with most insurers indicating that they were largely still in a “wait and see” mode. The panel separately discussed potential use cases for blockchain-based solutions that are currently under development for the insurance sector, including uses around parametric insurance, proof of insurance, first notice of loss, and subrogation.
C. Issues of Particular Interest to Life Insurers
1. Annuity Suitability Regulation Sent Back to Working Group
The Life Insurance and Annuities (A) Committee had previously exposed revisions to the Suitability in Annuity Transactions Model Regulation for comment during the 2018 Fall National Meeting. As background, the revisions to the Model Regulation are intended to provide an enhanced standard of care, and specifically add a requirement for the producer to act in the consumer’s interest, without placing the producer’s financial interest ahead of the consumer’s. The proposed revisions to the Model Regulation intentionally refrain from using the term “Best Interest” because the NAIC is awaiting further clarification, if any, from the SEC regarding the meaning of such term. Notably, the SECs proposed Regulation Best Interest did not provide a definition of the term “Best Interest.” For a detailed analysis of the SEC’s proposed Regulation Best Interest, see this Eversheds Sutherland Legal Alert.
In Orlando, there was a joint meeting of the A Committee and the Annuity Suitability (A) Working Group, during which there was discussion regarding the 19 comment letters that the A Committee received on the exposure draft. Commissioner Doug Ommen (IA), Chair of the A Committee, noted that, in the comment letters, a significant number of interested parties suggested that the NAIC should enhance the standard of care in the Model Regulation. Consequently, Commissioner Ommen sought advice from outside counsel regarding how the standard of care proposed by the NAIC compares with the standard of care proposed by the SEC for broker-dealers. At the conclusion of the meeting, Commissioner Ommen explained that much more work needed to be done by the Working Group and, accordingly, he made a motion for the A Committee to resubmit the proposed draft of the Model Regulation to the Working Group for continued work and revisions with the goal for a completed draft by the Summer National Meeting in August. An amended motion, removing the August deadline, was approved. Director Jillian Froment (OH), Chair of the Working Group, anticipates having an interim meeting to address this issue in May or June.
Additionally, during the Opening Session of the NAIC Meeting, NAIC President Superintendent Eric Cioppa (ME) announced that amending the Model Regulation to provide for a higher standard of care is one of the eight NAIC priorities for 2019.
2. Long-Term Care Insurance Task Force Reports Progress on Its Charges to Address Issues in the Long-Term Care Insurance Market
The Long-Term Care Insurance (B/E) Task Force, which coordinates all aspects of the NAIC’s work regarding long-term care insurance (LTCI), received updates on work that has been done to address product innovation and identify potential state and federal solutions for stabilizing the LTCI market. The Long-Term Care Innovation (B) Subgroup has adopted a document that provides regulators, policymakers, consumers, and other stakeholders an overview of the landscape of LTCI financing mechanisms currently available in the private market. In addition to LTCI, the overview notes the following financing options: single premium permanent (whole or universal) life insurance policies with a long-term care acceleration rider and a long-term care extension rider, single premium deferred annuities that allow penalty-free withdrawals from the account value for qualified long-term care services, impaired risk single premium immediate annuities, and life settlements. In addition to private market solutions, the Subgroup has identified ten potential federal policy changes that could help to increase private LTCI financing options for consumers. They include: (i) permit retirement plan participants to make a distribution from 401(k), 403(b) or Individual Retirement Account (IRA) to purchase LTCI with no early withdrawal tax penalty; (ii) allow creation of LTCI Savings Accounts, similar to Health Savings Accounts (HSAs) and/or enhance use of HSAs for LTC expenses and premiums; (iii) remove the HIPAA requirement to offer 5% compound inflation with LTCI policies and remove the requirement that DRA Partnership policies include inflation protection and allow the states to determine the percentage of inflation protection; (iv) allow flexible premium structures and/or cash value beyond return of premium (HIPAA and DRA); (v) allow products that combine LTCI coverage with various insurance products (including products that “morph” into LTCI); (vi) support innovation by improving alignment between federal law and NAIC models (HIPAA and DRA); (vii) create a more appropriate regulatory environment for Group LTCI and worksite coverage (HIPAA and DRA); (viii) establish more generous federal tax incentives; (ix) explore adding a home care benefit to Medicare or Medicare Supplement and/or Medicare Advantage plans; and (x) federal education campaign around retirement security and the importance of planning for potential LTC needs.
Product innovation is just one of three charges that the Task Force is scheduled to complete in 2019. The second, evaluating the sufficiency of actuarial valuation standards for LTCI, was addressed by adoption of Actuarial Guideline LI, The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves. The third, evaluating the sufficiency of current financial reporting, is scheduled to be completed by the Fall National Meeting. In adopting the Task Force’s report at the Financial Condition (E) Committee meeting, Committee Chair Commissioner David Altmaier (FL) (who is also co-Chair of the Task Force) noted that addressing problems in the LTCI market is the NAIC’s highest priority for 2019.
3. New Task Force Established to Address Long-Term Care Insurance Rate Reform
The NAIC has established a Long-Term Care Insurance (EX) Task Force that is charged with: (i) “developing a consistent national approach for reviewing long-term care insurance rates that result in actuarially appropriate increases being granted by the states in a timely manner, and eliminates cross-state rate subsidization”; and (ii) identifying “options to provide consumers choice regarding modifications to [LTCI] contract benefits where policies are no longer affordable due to rate increases.” The Task Force is expected to deliver a proposal on these charges by the 2020 Fall National Meeting.
4. Annuity Disclosure Working Group Granted an Extension to Continue Work
The Annuity Disclosure Working Group reported to the Life Insurance and Annuities (A) Committee that it had exposed a draft of proposed revisions to the Annuity Disclosure Model Regulation. The revisions would allow illustration of fixed indexed annuities that have been in existence for at least 20 years, which is an increase from the current model language that requires indices to be in existence at least 10 years to be illustrated. The report was adopted and the extension granted to allow the Working Group to continue its consideration of these proposed revisions. Comments on the exposure draft are due on April 26, 2019.
D. Issues of Particular Interest to Property/Casualty Insurers
1. Guidelines for Nonadmitted Accident and Health Coverage Adopted
The NAIC adopted the Guidelines on Nonadmitted Accident and Health Coverages that the Surplus Lines (C) Task Force has been working on since 2016. The Guidelines provide assistance to states seeking to update their laws and establish procedures for allowing accident and health coverage to be procured in the nonadmitted market, either independently or through surplus lines brokers. Currently, many states’ laws prohibit the export of accident and health insurance coverage to the nonadmitted market, or include restrictive definitions with a similar effect (e.g., defining “nonadmitted insurance” to include only property and casualty insurance). The Guidelines note that the types of accident and health coverage that some states are permitting in their nonadmitted market include, but are not limited to: short-term medical, international major medical, excess disability, high-risk disability and other similar coverages. The Guidelines also note that comprehensive health plans, Medicare supplement insurance and standard disability insurance coverage are not suitable for the nonadmitted market.
On a separate but related issue, the Producer Licensing (D) Task Force is considering a referral from the Surplus Lines (C) Task Force as to whether the regulatory requirement that a producer hold an underlying property/casualty license to qualify for a surplus lines license should also allow a producer to satisfy the requirement by holding an accident and health license. Currently, the NAIC Uniform Licensing Standards for surplus lines provide that “[s]tates shall require an underlying property/casualty license prior to the issuance of a resident surplus lines license.” The Task Force is seeking feedback from interested parties on the proposed expansion, and an interim conference call is expected to be scheduled, with the goal of making a final decision before the Summer National Meeting.
2. Working Group Discusses Reauthorization of TRIA
The Terrorism Insurance Implementation (C) Working Group heard updates on federal and state activities related to terrorism insurance, including reauthorization of the US Treasury Department’s Terrorism Risk Insurance Program and the terrorism risk insurance data call for 2019. The Program, which was last reauthorized in 2015, is set to expire on December 31, 2020.
During the Working Group’s meeting, NAIC representatives, as well as representatives from several trade organizations, spoke in favor of reauthorizing the Terrorism Risk Insurance Program. The NAIC supports a long-term reauthorization of the Program of 7 to 10 years because the NAIC does not believe that the private insurance marketplace is capable of voluntarily taking on a substantial portion of US terrorism risks. APCIA tentatively supports a long-term reauthorization that limits structural changes to the Program, but believes Congress should consider how the program applies to cyber coverage and whether any definitional or procedural changes are needed to ensure that the Program responds to cyber threats. NAMIC and the RAA also support reauthorization.
Both APCIA and NAMIC expressed optimism that the Program will be reauthorized, but voiced some concerns regarding whether Program triggers, deductibles and co-share percentages could be increased. In contrast, RAA believes that Program figures should be updated to reflect inflation. When the Program was last reauthorized in 2015, the Program trigger was increased from $100 million to $200 million, the insurer co-share was increased from 15% to 20%, and the market aggregate retention was increased from $27.5 billion to $37.5 billion (each incrementally over a 5-year period).
The Working Group also heard an update on the 2019 terrorism risk insurance data call. Section 111 of TRIPRA requires the US 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. For 2019 (as was the case in 2018), data will be collected through a joint state insurance regulator/US Department of the Treasury reporting template. The deadline for completing the Joint Reporting Template is May 15, 2019. However, the Working Group is still considering whether to continue (or delay) the State Property Supplement. Last year, the Property Supplement was used to collect Zip Code-level property coverage data and was due on September 30. The Working Group has indicated that a decision on this issue will be announced soon.
E. Briefly Noted
1. FSOC Proposes Activities-Based Approach for Non-Bank SIFI Designations
The Financial Stability (EX) Task Force heard an update on developments at the federal Financial Stability Oversight Counsel (FSOC), which recently released proposed changes to its standards for designating non-bank financial institutions as Systemically Important Financial Institutions (SIFI). The proposed changes to the FSOC’s designation process come after the FSOC previously designated several insurers as non-bank SIFIs, subjecting them to a rigorous set of additional regulatory and compliance constraints and obligations. The FSOC has since rescinded all such designations, and stated that it would be revising its approach to SIFI designations. As proposed, the revised standards shift the criteria for determining what entities should qualify as SIFIs to an activities-based approach, places an increased emphasis on cooperation by the FSOC with an entity’s primary regulators (including state insurance departments), and provides for increased transparency into the designation process. The proposed process also includes mechanisms that would allow entities that are of concern to the FSOC to address those concerns through informal processes without having to be designated a SIFI (a pre-designation off ramp). The proposed guidance would replace the FSOC’s existing 2012 guidance, which does not incorporate an activities-based approach. Comments on the proposed changes are due to the FSOC by May 13, 2019.
2. Update on Cybersecurity Model Law Adoption
Commissioner Raymond G. Farmer (SC) provided an update on adoption of the NAIC’s Insurance Data Security Model Law during the Innovation and Technology (EX) Task Force. Four states have now adopted the Insurance Data Security Model Law in some form: South Carolina, Ohio, Michigan, and Mississippi. This is in addition to New York, which adopted its own Cybersecurity Requirements for Financial Services Companies in 2017, and which informed the development of the Insurance Data Security Model Law. Commissioner Farmer noted that at least four other states are also considering adopting versions of the Insurance Data Security Model Law during the current legislative session.
3. NAIC’s Work on Cannabis White Paper Continues
The Cannabis Insurance (C) Working Group did not meet in Orlando, but its work continues on a white paper outlining the insurance regulatory issues surrounding the legalized cannabis business, including availability and scope of coverage, workers’ compensation issues, and consumer information and protection. The white paper is expected to include recommendations for the development of regulatory guidance on these issues and a state-by-state comparison of insurance availability across various commercial property/casualty lines of business. The Working Group originally planned to release a draft of the white paper in time for the Spring National Meeting, but that has been delayed until later in 2019.
4. Pet Insurance Working Group Established
The Property and Casualty Insurance (C) Committee established the Pet Insurance (C) Working Group, which is charged with reviewing the NAIC’s white paper on pet insurance and considering whether a model law or guideline is needed to establish appropriate regulatory standards for the pet insurance industry. The white paper, titled A Regulator’s Guide to Pet Insurance, provides a history of the pet insurance market in the United States, different approaches states have taken with respect to regulation of pet insurance, and notes “a number of concerns that might be served by development of a model act.” These concerns include: insurers conducting business in a name other than their legal name, use of unlicensed producers to market and sell pet insurance, regulatory review and oversight of pet insurance form and rate filings, lack of data related to pet insurance (both as to premium and consumer complaints), and reciprocal producer licensing.
5. Two Working Groups to Study Operational Risk
The Group Solvency Issues (E) Working Group and Risk-Focused Surveillance (E) Working Group each received a referral from the Operational Risk (E) Subgroup to study operational risk and improve regulators’ understanding of how operational risk is measured, quantified and mitigated by insurers. The referral encourages the working groups to share the information they learn with the Capital Adequacy (E) Task Force and other NAIC groups to the extent it “could inform further development or refinement of the RBC operational risk charge, or improve the overall evaluation of operational risk in solvency monitoring.” The referral follows the NAIC’s work on operational risk in 2018, which resulted in a fixed 3% add-on for operational risk being included in all RBC formulas. During the Risk-Focused Surveillance (E) Working Group meeting in Orlando, in response to an industry comment, the Working Group Chair stated that the Working Group has no intent to reevaluate the 3% RBC operational risk charge, and that any information that might indicate a change is necessary would be publicly discussed and referred to the Casualty Actuarial (E) Task Force.
6. Capital Adequacy (E) Task Force to consider RBC Treatment for Investments in Bond Mutual Funds
The Capital Adequacy (E) Task Force accepted a referral from the Valuation of Securities (E) Task Force concerning the risk-based capital (RBC) treatment of investments in bond mutual funds. The Valuation of Securities (E) Task Force recommended that the Capital Adequacy (E) Task Force conduct a comprehensive review of all funds that can be assigned NAIC Designations by the SVO and consider how those NAIC Designations should be included in the calculation of RBC; specifically, to consider what RBC changes to make once NAIC Designations are added to Schedule D-2-2. At present, bond exchange-traded funds (ETFs) and private funds receive different RBC treatment than other similarly structured funds.