The National Association of Insurance Commissioners (NAIC) met for its Spring National Meeting in Orlando, Florida from March 29 through April 1. Typical for the first national meeting of the year, much activity was focused on clarifying the agenda for the year, particularly for those working groups meeting for the first time. One notable new initiative was the Governance Review (EX) Task Force, which arose out of an unusual display of disunity among insurance commissioners on internal NAIC governance at the end of last year. International standards and the use of captive insurance vehicles for life reserve financing (an issue closely related to principles-based reserving (PBR) implementation) continued to gain top billing.
The following are notable highlights of the meeting.
A. Issues of General Interest
Federal Insurance Office Recommendations
C-DAWG: A New Working Group Focused on International Issues
Accreditation Committee “Reinsurer” Proposal
Cyber Liability Risk
Holding Company Act Amendments
B. Issues of Particular Interest to Life Insurers
PBR Implementation Task Force/Captive and SPV Issues
Contingent Deferred Annuities
Unclaimed Insurance Benefits
Index-Linked Variable Annuities
C. Issues of Particular Interest to Property and Casualty Insurers
Mortgage Insurance Modifications to Model Act
D. Briefly Noted
A. Issues of General Interest
1. NAIC Governance
The first public meeting of the Governance Review (EX) Task Force was held on March 31, led by Director John Huff (Missouri). The Task Force’s charges include a review of the NAIC governing documents and consideration of a recommendation regarding whether to engage an outside consultant to assist with the review. This recommendation was initially proposed last year by Commissioner Thomas Leonardi (Connecticut) in a letter to the NAIC leadership that became public after debate was closed on a similar motion in Executive Committee. Director Huff indicated that there is no specific timeline for completion of the Task Force’s charges, although he noted that they are a priority which will assist the NAIC to respond to certain federal and international critiques of the state-based system of regulation.
The Task Force also reviewed the NAIC’s new open meetings policy, which was approved unanimously by the full NAIC membership on April 1, 2014. The new open meetings policy requires the NAIC to begin issuing public notices of all meetings, including regulator-only sessions, and specifies when committees, subgroups and task forces are to hold regulator-only sessions, such as during market conduct examinations, discussion of internal or administrative issues, receipt of NAIC staff technical advice or consideration of confidential matters.
2. Federal Insurance Office Recommendations
The 2013 Fall National Meeting began just 48 hours after the release of the Federal Insurance Office’s long-awaited report on how to modernize and improve the system of insurance regulation in the United States (FIO Report). At the Spring National Meeting, the materials for both the Property and Casualty Insurance (C) Committee and the Financial Condition (E) Committee included a letter from the NAIC officers to NAIC committee chairs and vice-chairs concerning consideration of the FIO Report’s recommendations. The letters noted that “[a]lthough FIO cannot impose or otherwise implement these recommendations without state action, any credible recommendation on how to improve our system deserves thoughtful consideration.”
While stating that the request “is in no way an endorsement of any of the recommendations or agreement on a particular course of action,” the NAIC officers asked the NAIC committee leadership for their assistance in discussing and considering the recommendations relevant to each committee and determining whether any additional action by the NAIC or the states is warranted. They then gave a description of particular FIO recommendations and the committee within the NAIC that seems best equipped to initially consider the recommendation. At the meetings of the Property and Casualty Insurance (C) Committee and the Financial Condition (E) Committee, the NAIC officers’ letter was summarized, and the committee chairs asked the members to begin considering what task forces and working groups should be tasked with review of particular recommendations.
3. C-DAWG: A New Working Group Focused on International Issues
International issues continue to be a focal point on the NAIC agenda. Orlando marked the inaugural meeting of the NAIC’s ComFrame Development and Analysis (G) Working Group (C-DAWG). The Working Group is a technical working group tasked with reviewing and providing input on the International Association of Insurance Supervisors (IAIS) Common Framework (ComFrame) for the Supervision of Internationally Active Insurance Groups (IAIGs) and international group capital requirements, as well as communicating ComFrame and related issues with other parties (including the Federal Reserve and the U.S. Treasury Department). ComFrame is a set of international supervisory requirements focusing on the effective group-wide supervision of IAIGs. ComFrame is built and expands upon the high-level requirements and guidance currently set forth in the IAIS Insurance Core Principles (ICPs), which generally apply on both a legal entity and a group-wide level.
C-DAWG’s inaugural meeting provided updates on the activities of the IAIS Field Testing Task Force (FTTF) and IAIS’s timeline for adopting group capital requirements. FTTF is tasked with (i) performing impact studies to test whether ComFrame promotes effective group-wide supervision of IAIGs and whether the elements lead to practical benefits without undue burden, and (ii) assessing the results of such field testing to determine any changes that are necessary to the draft ComFrame. Field testing will include three modules: identification of IAIGs, scope of supervision and identification of group-wide supervisors (Module 1), qualitative and quantitative requirements for IAIGs (Module 2), and requirements for supervisors and the use of supervisory colleges (Module 3). It was reported that FTTF began qualitative and quantitative field testing in March 2014, with 30 IAIGs agreeing to participate in the first round of testing. Qualitative field testing will focus on governance and enterprise risk issues, and quantitative testing will focus on capital and solvency requirements.
ComFrame’s group capital requirements are expected to include a basic capital requirement (BCR), higher loss absorbency (HLA), and a risk-based group-wide global insurance capital standard (ICS). Development of BCR is scheduled to be completed by August 2014, with a second consultation paper expected in July. HLA and ICS, in turn, are scheduled to be completed by 2015 and 2016, respectively, with consultation papers on both targeted by the end of 2014. Some interested parties have expressed concern about whether this aggressive timeline (particularly with respect to BCR) is feasible and will provide sufficient time for public comment.
4. Corporate Governance
The Corporate Governance (E) Working Group has been working to develop a model law that will require licensed insurers to file an annual report describing their corporate governance practices, with a final version expected to be adopted at the 2013 Summer National Meeting. A draft Corporate Governance Annual Filing Model Act and draft Corporate Governance Annual Filing Guidance Manual were exposed for public comment on December 18, 2013. Those drafts were developed by NAIC legal staff with assistance from several member states utilizing an initial draft submitted by interested parties with a number of differences, most notably the inclusion of the Guidance Manual to house the detailed annual filing instructions. Industry representatives were consistently opposed to the use of a guidance manual, and the Working Group ultimately recast the Guidance Manual as a draft Corporate Governance Annual Filing Model Regulation. In Orlando, the comment periods for both the draft Model Act and the draft Model Regulation were synchronized to continue through April 21, 2014.
Under the proposed drafts, each insurer, or the insurance group of which the insurer is a member, would be required to submit an annual filing that contains: (1) a description of the insurer’s corporate governance framework; (2) a description of the insurer’s board of directors and committee policies and practices; (3) a description of management policies and practices; and (4) a description of management and oversight of critical risk areas. The insurer is specifically permitted to provide information regarding corporate governance at the ultimate controlling parent level, an intermediate holding company level or the individual legal entity level, depending upon how the insurer or insurance group has structured its system of corporate governance. Finally, the draft regulation states that in recognition of the fact that an insurer’s corporate governance framework and practices may not vary significantly from year to year, and to facilitate regulatory review of the annual filings, insurers are encouraged to file a redline version of the filing each year to track those items that have changed from the previous year.
An industry mark-up of the draft Model Act received during the comment period attempted to carve out smaller companies from the filing requirement and to address perceived redundancies with financial examination requests and annual and quarterly statutory statement filings. At the Spring National Meeting, Commissioner Susan Donegan (Vermont), Chair of the Working Group, stated that the regulators felt that all companies, and in some cases particularly smaller companies, would benefit from the corporate governance filing requirement. Commissioner Donegan also noted that while the initial draft had neglected to specifically include fraternal benefit societies (which are generally exempt from the provisions of state insurance codes unless otherwise specified), the intent was to capture all insurance carriers and that the draft Model Act would be reviewed to ensure that it captures fraternal benefit societies, health maintenance organizations, risk retention groups and other entities that may fall outside the ambit of general state insurance laws. With regard to redundancies, Commissioner Donegan indicated that she understood the industry’s concern and that she would be following up with other committees and NAIC leadership to evaluate how to best address redundant filing requirements.
The Working Group also adopted final revisions to the Annual Financial Reporting Model Regulation (known as the “model audit rule”) requiring larger insurers to have an internal audit function, which revisions were also adopted by the Financial Condition (E) Committee. The revisions will become effective upon adoption by the NAIC Executive/Plenary.
Director Huff opened the meeting of the Reinsurance (E) Task Force with a discussion of the group’s priorities for 2014, which include state implementation of the revised Credit for Reinsurance Model Law and Regulation (Reinsurance Models) that allow highly rated non-U.S. reinsurers from qualified jurisdictions to reinsure U.S. domestic cedents with reduced collateral requirements, re-examination of the reduced collateral amounts, development of Part B accreditation standards regarding the states’ certification of reinsurers and determination of qualified jurisdictions and insurers’ use of captive affiliates and special purpose vehicles. According to Director Huff’s report to the Task Force, 19 states representing more than 50% of direct insurance premiums in all lines of business have adopted the revised Reinsurance Models,1 and nine additional states are expected to adopt the models in 2014 and 2015, bringing the total direct insurance premiums of adopting states to more than 80% of the U.S. total. Currently, the Qualified Jurisdiction (E) Working Group has conditionally approved Bermuda, Germany, Switzerland and the United Kingdom as qualified jurisdictions, and the states of California, Connecticut, Florida, Missouri, New Hampshire, New Jersey and New York have certified reinsurers for reduced collateral.
The Task Force also received a report of the Reinsurance Financial Analysis Working Group (R-FAWG), which meets in closed, regulator-only sessions due to the company-specific nature of its work. Specifically, R-FAWG is tasked with providing advisory support and assistance to states in their review of reinsurance collateral reduction applications, determinations of “qualified jurisdiction” and “certified reinsurer” status, and coordinating multistate recognition of “certified reinsurers.” Deputy Commissioner Steve Johnson (Pennsylvania), Chair of R-FAWG, reported that R-FAWG has completed its peer review of reinsurers that had been designated as “certified reinsurers” by states, including all reinsurers certified by Florida and New York, to determine whether the Working Group agrees with the states’ determinations. R-FAWG has completed its peer review and cleared 24 of these reinsurers for “passporting” in the various states based on their “certified reinsurer” designations in the respective lead states. The applications of two reinsurers are still pending with issues for follow-up, and passport status was not recommended on seven applications.
Deputy Commissioner Johnson also introduced the Uniform Application Checklist for Certified Reinsurers, which R-FAWG proposes be used in all initial applications for certified reinsurer status in order to facilitate the review of the initial state’s determination by R-FAWG for passport status. The Uniform Application was exposed by the Task Force for a public comment period ending May 2, 2014. Deputy Commissioner Johnson also spent some time discussing a requirement for certified reinsurer status that some industry participants, including regulators, may have failed to fully appreciate in the discussion of passport status, specifically that a state have in place a memorandum of understanding with a reinsurer’s jurisdiction of domicile prior to certifying the reinsurer for reduced collateral. Deputy Commissioner Johnson voiced his hope that the processes for various states entering into memoranda of understanding with qualified jurisdictions (whether on a one-off basis or through the IAIS Multilateral Memorandum of Understanding) would be but a momentary “hiccup.”
6. Accreditation Committee “Reinsurer” Proposal
Superintendent Joseph Torti’s (Rhode Island) proposal to include “multistate reinsurers,” including captive reinsurers, special purpose vehicles and other entities, in the definition of a “multi-state insurer” in the Part A and Part B standards for state accreditation continued to be a hot-button issue for the Financial Regulation Standards and Accreditation (F) Committee. Currently, multistate reinsurers, including captive reinsurers, are excluded from the definition of a multistate insurer in the Part A and Part B Preambles. The (F) Committee is now considering amendments to the Part A and Part B Preambles to remove the exclusion for reinsurers that are licensed in a single state, but assume business written outside of that state, and include “multistate reinsurers” in the definition of a multi-state insurer. The proposed amendments do not extend to traditional captives owned by non-insurers and would only apply to multistate reinsurance transactions closed on or after July 1, 2014, and to reinsurance agreements entered into before July 1, 2014, on business written on or after January 1, 2015. Finally, the proposed amendments recognized that the NAIC is currently considering financial solvency mechanisms for life reserves in other forums, and it may be necessary to revisit this issue in the future.
Subjecting captive transactions to the NAIC accreditation standards would impose uniform rules on all captive transactions. Some industry participants have cautioned that captive transactions may move to offshore jurisdictions if the NAIC subjects captive reinsurers to its accreditation standards. Proponents of captive reinsurance transactions emphasize that such transactions allow insurers to free-up excess reserves and are a source of low-cost financing for insurers, while critics have suggested that captive reinsurance transactions allow insurers to shift risky liabilities off their balance sheets.
The proposed amendments triggered a vigorous debate at the (F) Committee meeting. Director Huff, Chair of the (F) Committee, said that there was a “great deal of consensus” among (F) Committee members to bring uniformity and transparency to captive reinsurance transactions and that he was committed to moving forward on the issue. Superintendent Torti and Superintendent Benjamin Lawsky (New York) offered remarks supporting the proposed amendments, while regulators from Connecticut, Delaware, North Carolina, Texas, Utah and Vermont, in contrast, highlighted a variety of concerns with the proposed amendments. After considering these remarks, the (F) Committee voted to expose the proposed amendments for a 45-day public comment period ending May 19, 2014. It is expected that this sharply divisive issue could have far-reaching implications, particularly in light of the ongoing work of the Captive and Special Purpose Vehicle Use (E) Subgroup and of the NAIC generally in developing PBR standards (see Section B.1 below).
7. Cyber Liability Risk
The NAIC’s Center for Insurance Policy and Research (CIPR) held an informational event in Orlando on insuring cyber liability risk. The event provided an update on the evolving cyber liability landscape, including current cyber risk trends, regulatory initiatives related to cyber risks, the benefits of cyber liability policies, and the barriers insurers face in offering cyber liability products.
Kenn Kern, Deputy Chief of Cyber Crime at the New York District Attorney’s Office, discussed the current trends in cybercrime. Mr. Kern reported that the top four cyber threats today are (i) denial of service attacks (designed to make a machine or network resource unavailable to its intended users), (ii) hacking, (iii) theft of personal identifying information, and (iv) intellectual property theft. The increased severity and frequency of these threats is prompting many insureds to reevaluate whether their current insurance programs provide sufficient protection. Many insurers are also struggling to update their product offerings in light of the evolving legal framework (there is often uncertainty about liability following a cyber event) and the lack of relevant actuarial data (which makes it difficult to set accurate premium levels).
Adam Sedgewick, Senior Information Technology Policy Advisor at the National Institute of Standards and Technology (NIST), and Tom Finan, Senior Cybersecurity Strategist and Counsel at the Department of Homeland Security (DHS) National Protection and Programs Directorate, provided an overview of the Cybersecurity Framework that was issued by the White House in February 2014. The Framework, which is the result of a year-long initiative led by NIST in coordination with DHS, provides guidance to companies on how to manage the growing cybersecurity threat. Though the adoption of the Framework is voluntary, it may give rise to a new standard of care for corporate management. DHS has established the Critical Infrastructure Cyber Community (C3) Voluntary Program as a public-private partnership to increase awareness and use of the Framework.
8. Holding Company Act Amendments
At its March 30, 2014, meeting, the Executive (EX) Committee adopted a model law amendment request submitted by Superintendent Torti to amend the Insurance Holding Company System Regulatory Model Act and Model Regulation (Holding Company Act and Regulation) to provide states with more explicit group-wide supervisory authority. The NAIC recently adopted amendments to the Holding Company Act and Regulation in 2010 to address certain weaknesses in the regulation of insurance holding company systems (particularly with respect to enterprise risk) that were highlighted during the 2008 economic crisis. These 2010 amendments were adopted as a state accreditation standard effective January 1, 2016. Many anticipate that the revisions will include a provision similar to that enacted in Pennsylvania’s version of the 2010 amendments defining “group-wide supervisor,” although statements by Superintendent Torti to the effect that the changes may include granting group-wide supervisors direct regulatory power over holding companies indicate that the amendments may be even farther-reaching than the Pennsylvania paradigm. The model law amendment request does, however, acknowledge that final proposed amendments are not likely to be drafted in under a year as “the specific changes that may or may not be necessary to address the areas of interest will require considerable discussion and may be highly debated.”
B. Issues of Particular Interest to Life Insurers
1. PBR Implementation Task Force/Captive and SPV Issues
As expected, the much anticipated discussion of a report commissioned by the Principles Based Reserving Implementation (EX) Task Force involving the use of captive affiliates by life insurance companies attracted a standing-room only crowd. Commissioner Julie Mix McPeak (Tennessee), Co-Chair of the Task Force, moved quickly through the first agenda items, including a report on current state adoption of PBR. As background, in 2009, the NAIC adopted a revised Model Standard Valuation Law, which authorizes PBR and a Valuation Manual that sets forth the minimum reserve and related requirements for certain products under PBR. In 2012, the NAIC adopted the Valuation Manual, despite strong opposition from several key states (including New York and California). PBR will not be implemented until the amended Standard Valuation Law is adopted by 42 states and state adoption reflects 75% of total life insurance premium written in the United States. More recently, the NAIC has been considering whether states have the resources necessary to implement PBR. As reported at the Task Force meeting, nine states—accounting for 9.2% of total life insurance premium written in the United States—have adopted the amended Standard Valuation Law. Legislation adopting the amended Standard Valuation Law has passed in an additional four states and is awaiting execution by the states’ governors, legislation is pending in an additional nine states, and seven states are expected to propose legislation in 2015, bringing the total to 30 states representing 60.3% of total life premiums.
The remainder of the meeting was devoted to receiving comments on the Report of Rector & Associates, Inc. (Rector Report) assessing the solvency implications of life insurer-owned captive insurers and alternative mechanisms. Superintendent Torti identified four key recommendations relating to reserve financing transactions identified by the Rector Report, including (1) a requirement for the ceding insurer to hold hard assets equal to what the statutory reserve would be under PBR, (2) approval of the quality of the remaining assets used to support the credit for reinsurance, (3) public disclosure of key information about the use of financing transactions and assets supporting such transactions, and (4) performance of full risk-based capital calculations by at least one party to the financing transaction. The proposed timetable includes a July 1, 2014, effective date for newly created financing structures, a December 31, 2014, effective date for the new disclosure requirements, full implementation to existing financing structures by January 1, 2015, and the new RBC rules to become effective by December 31, 2015.
Regulator comment on the Rector Report was divided among regulators such as California and New York that would prefer a complete moratorium on reserve financing transactions, in California’s case at least until implementation of PBR is settled, and regulators such as Rhode Island and Texas that would move forward with the recommendations immediately in order to achieve some level of uniformity. Iowa and others questioned the presumption of financially hazardous condition for insurers not meeting the requirements, and Vermont and others noted the aggressive nature of the proposed timeline. Mark Birdsall, Chief Actuary for the Kansas Department of Insurance, opined that reliance on VM-20 as a basis for calculating PBR reserves was misplaced at this time and proposed a two-stage approach to first implement the transparency requirements pending review of the actuarial method for calculating reserves until there have been adequate revisions to VM-20.
As interested party comments ran out the clock on the Task Force meeting, the American Council of Life Insurers (ACLI) proposed an interim meeting prior to the 2014 Summer National Meeting in order to fully address all regulatory and interested party concerns on the Rector Report and to develop a proposal that could be considered for adoption in Louisville, Kentucky. Superintendent Torti indicated that there will be a conference call on April 14, 2014, to continue to receive comments from interested parties.
In what many saw as an effort to undercut industry arguments for the continued use of reserve financing transactions, the New York Department of Financial Services (DFS) issued a letter to state insurance commissioners on March 27, 2014, indicating that it has worked to develop a revised formula for level term products and intends to issue a regulation that will update the reserving formulas for term life insurance policies for new business written after January 1, 2015. The DFS estimates that the changes will result in a 30%-35% reduction in reserves for level term life products, and it is expected that similar changes will be made to universal life products with secondary guarantees.
2. Contingent Deferred Annuities
The Contingent Deferred Annuity (A) Working Group (CDA WG) voted to expose proposals to amend four model regulations (Annuity Disclosure, Suitability in Annuity Transactions, Advertisements of Life Insurance and Annuities, and Life Insurance and Annuities Replacement) for a three-week comment period. The CDA WG proposals would amend these four regulations to explicitly reference CDAs.
Remarks from CDA WG members at the meeting make clear that addressing CDAs in an NAIC Bulletin remains an alternative to the model regulation amendments. The CDA WG again considered whether to study the merits of imposing a minimum nonforfeiture benefit requirement on CDAs, but ultimately deferred the issue. When the issue was raised by consumer advocates at the (A) Committee, the issue was also deferred. The CDA WG expects to present its recommendations on how to adapt existing NAIC standards to accommodate CDAs to the (A) Committee at the Fall 2014 NAIC meeting.
The Life Actuarial (A) Task Force (LATF) also considered CDA issues. LATF received a report from the LATF CDA (A) Subgroup regarding its activities and a proposal from ACLI to amend Actuarial Guideline 43 to provide guidance on how to treat contracts for which the insurer does not own the investments that form the basis for the guarantee. After considering the LATF CDA (A) Subgroup’s report and the ACLI proposal, LATF instructed the LATF CDA (A) Subgroup to expose the ACLI proposal for 45 days and to meet during that time.
3. Unclaimed Insurance Benefits
The 13-member Unclaimed Life Insurance Benefits (A) Working Group (ULIB WG), chaired by (A) Committee Chair, Commissioner McPeak, met for the first time and considered its charge from the (A) Committee to “undertake a study to determine if recommendations should be made to address unclaimed death benefits.”
Members of the ULIB WG noted that 60% of the industry has settled market conduct exams that had investigated the asymmetrical use of the Social Security Administration Death Master File (SSDMF). According to these regulators, settlements have resulted in the return of more than $1.0 billion to beneficiaries and $1.3 billion in unclaimed death benefits escheated to the states participating in the exams.
The ULIB WG did not take any definitive steps toward developing a recommendation at the open meeting. In developing its recommendation to the (A) Committee, the debate at the meeting indicated that ULIB WG will likely grapple with two key issues: (i) whether companies that have not historically used the SSDMF asymmetrically should be subject to future requirements to use the SSDMF to identify unclaimed life insurance death benefits; and (ii) whether the National Conference of Insurance Legislators Model Unclaimed Life Insurance Benefits Act (NCOIL Model), which has been adopted in some form by nine states and is pending is several others, adequately addresses the unclaimed insurance benefits issue.
Several ULIB WG members indicated support for recommendations that would distinguish between companies that have used the SSDMF asymmetrically and those that have not. In particular, several ULIB WG members indicated that the cost of compliance with the SSDMF guidance would be overly burdensome for small and mid-size insurance companies.
The ULIB WG’s view on whether the NAIC should develop a regulatory standard and, if so, what that standard should be, was less clear. One proposal was to recommend rules-based standards similar to those in the Regulatory Settlement Agreements that the states have entered into with some life insurers. A competing proposal recommends principles-based standards similar to those in the NCOIL Model.
After discussion, Commissioner McPeak indicated that the ULIB WG would continue to review its charge and that it would be important to act before the NAIC’s next meeting in August 2014. The ULIB WG moved into a regulator-to-regulator closed session immediately after the open meeting adjourned.
4. Index-Linked Variable Annuities
Blaine Shepherd (Minnesota), Chair of the Index-Linked Variable Annuities (A) Subgroup (ILVA Subgroup) of LATF, reported to LATF on the ILVA Subgroup’s work. Mr. Shepherd summarized the proceedings of a January 10, 2014, regulator-only conference call, during which the ILVA Subgroup amended and finalized an ILVA “Discussion Points” document on the regulation of ILVAs, as well as the proceedings of the February 6, 2014, February 26, 2014, and March 17, 2014, open conference calls in which the Subgroup considered the “Discussion Points” document. Mr. Shepherd reported that the discussions focused on whether to recommend modifications to the Variable Annuity Model Regulation (Model 250) or the Modified Guaranteed Annuity Model Regulation (Model 255) to accommodate ILVAs, or whether to recommend development of a new, ILVA-specific regulation. Both the Committee of Annuity Insurers and the ACLI submitted comments and made presentations to the ILVA Subgroup on these issues. Mr. Shepherd noted that the ILVA Subgroup would schedule additional open calls upon receipt of additional comments by interested parties on the January 15 “Discussion Points” document.
C. Issues of Particular Interest to Property and Casualty Insurers
1. TRIA Reauthorization
The Terrorism Risk Insurance Act (TRIA), which was last reauthorized in 2007, remains set to expire on December 31, 2014, unless extended by Congress. The industry has been eagerly awaiting federal legislation reauthorizing TRIA. With Congress recently completing its work on flood insurance reform, significant developments on this issue are expected over the next few months.
On April 10, just before legislators left the capitol for Easter break, the Senate introduced legislation (S 2244) that would reauthorize TRIA through 2021 and make the following notable changes to the program:
Increase the insurer co-share (currently 15%) to 20% (with 1% increases per year over the next five years; and
Increase the mandatory federal recoupment amount (currently $27.5 billion) to $37.5 billion (with $2 billion increases per year over the next five years).
A separate TRIA authorization bill is also expected from the House, which may include more significant changes to the program.
During the Terrorism Risk Insurance Implementation (C) Working Group meeting, Tom Glassic and Bob Woody of the Property Casualty Insurers Association of America (PCI) gave a presentation from the industry’s perspective on potential changes to TRIA if it is reauthorized. Messrs. Glassic and Woody reported that, if reauthorized, TRIA will likely be changed in ways that increase private participation in the terrorism coverage marketplace. PCI reported that the industry is generally on board with a straight reauthorization of TRIA without any changes. PCI noted, however, that there will likely be some technical changes to the program and encouraged state regulators to begin considering how any technical changes would specifically impact insurers in their state. It was noted that even an incremental increase in program triggers could limit the number of insurers that can participate in the program. .
The Reinsurance Association of America (RAA) also gave a presentation on a new software tool they have developed that analyzes the impact of potential changes to TRIA on the insurance industry. The tool provides state and company level detail of the impact of adjusting various TRIA triggers (e.g., the federal backstop trigger, the insurer deductible) based on another 9/11 type event. RAA reported that the Government Accountability Office is using the program as it considers potential changes to TRIA.
2. Mortgage Insurance Modifications to Model Act
In 2013, the NAIC’s Mortgage Guaranty Insurance (E) Working Group began working on amendments to the Mortgage Guaranty Insurance Model Act to address regulator concerns regarding the regulation of private mortgage insurers and issues facing the private mortgage guaranty insurance market. The Working Group proposed a “conceptual draft” of amendments to the Mortgage Guaranty Insurance Model Act, which contained extensive expansions to the geographic concentration, investment limitations, reinsurance, underwriting standards, capital standards and reserves sections; introduced new sections relating to quality assurance and rescission; and proposed the development and adoption of a Mortgage Guaranty Insurance Standards Manual by the NAIC. The conceptual draft was exposed for public comment until February 15, 2014. Interested parties have been actively following and participating in the activities of the Working Group, including providing comprehensive comments and presentations and submitting an alternative draft Model Act.
At the Spring National Meeting, Commissioner Ted Nickel (Wisconsin), Chair of the Working Group, opened consideration of the interested party draft by noting that rather than working off of the conceptual draft, the interested party draft appeared to merely update and expand upon the existing model while neglecting to incorporate much of the expanded and new sections of the conceptual draft. Deputy Commissioner Johnson and Matti Peltonen (New York) were especially concerned with what they characterized as inadequate contingency reserve requirements in the interested party proposal. Deputy Commissioner Johnson challenged the interested parties to show how the private mortgage guaranty industry would have been more capitalized in 2006 under their proposal than what occurred leading up to the mortgage crisis. Commissioner Nickel indicated that staff would proceed with revisions to the conceptual draft in light of some of the comments received.
D. Briefly Noted
Private Equity – In 2013, the NAIC formed the Private Equity Issues (E) Working Group (the Private Equity Working Group) to develop procedures to mitigate or monitor risks associated with private equity/hedge fund ownership. After first receiving public comments, the Working Group is now proceeding to conduct its own analysis of private equity/hedge fund ownership in order to begin drafting such procedures and developing regulatory best practices.
Flood Insurance – Multiple NAIC groups heard updates regarding recent federal legislation forestalling major rate increases resulting from the 2012 Biggert-Waters Act.
Lender-Placed Insurance Study – The Property & Casualty Insurance (C) Committee adopted a data call regarding lender-placed residential property insurance and agreed that Mississippi would issue the data call on behalf of all states and the District of Columbia, and use Mississippi confidentiality laws.
Disaster Savings Accounts Act – An update was given on H.R. 3989 that would amend the Internal Revenue Code to allow individuals a deduction for amounts contributed to disaster savings accounts to help defray the cost of preparing their homes to withstand a disaster and to repair or replace property damaged or destroyed in a disaster.