The National Association of Insurance Commissioners (NAIC) met for its Summer National Meeting in Louisville, Kentucky, August 14-19. International regulatory standards were a prime focus of the meeting, as the International Association of Insurance Supervisors (IAIS) works toward developing group-wide global capital standards. Additionally, the Financial (E) Committee’s adoption of the Corporate Governance Annual Disclosure Model Act and Regulation marked a major milestone. Other important state regulatory initiatives regarding reinsurance, mortgage guaranty insurance, PBR implementation, and contingent deferred annuities received ample discussion and continued to progress at a noteworthy rate.
The following are notable highlights of the meeting:
A. General Interest
1. International Regulatory Standards
International issues received significant discussion in Louisville, as regulators and industry representatives expressed considerable concern over actions taken by the IAIS to develop the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). ComFrame is a set of international supervisory requirements focusing on the effective group-wide supervision of internationally active insurance groups (IAIGs). The IAIS is moving towards the creation of group-wide global capital standards as part of ComFrame.
As a first step in creating group-wide global capital standards, the IAIS is accepting public comments on proposed basic capital requirements (BCR) for global systemically important insurers (G-SIIs). The second step in creating group-wide global capital standards is the development of higher loss absorbency (HLA) requirements to apply to G-SIIs, while the third and final step is the development of a risk-based, group-wide global insurance capital standard (ICS) to be applied to IAIGs.
In a special NAIC International Capital Standards Forum that occurred on August 15, major U.S. insurance companies and trade groups met to discuss potential international capital standards with state regulators and representatives from the Federal Insurance Office (FIO) and the Federal Reserve. The companies and trade groups questioned the need for ICS and voiced concern that the standard may be too restrictive. The companies explained that any global standard needs to be flexible, and one company proposed that a U.S. national standard be developed as an alternative to ICS.
The ComFrame Development and Analysis (G) Working Group (C-DAWG) provided updates on IAIS’s timeline for adopting group capital requirements and the status of the IAIS Field Testing Task Force (FTTF). Development of BCR is currently IAIS’s top priority, and the comment period on IAIS’s latest BCR consultation document closed on August 8. A proposal on BCR (which would initially only apply to G-SIIs) is expected to be presented for approval by the Financial Stability Board (FSB) and the G20 this Fall. G-SIIs would then be expected to begin submitting confidential reports on BCR to their group-wide supervisors in 2015. Initial consultation documents on HLA and ICS are expected to be released this Fall, with development of these requirements expected to be completed in 2015 and 2016, respectively. Commissioner Kevin McCarty (Florida) expressed serious concern during the C-DAWG meeting that the IAIS timeline for adopting group capital requirements is too aggressive, but noted that the IAIS is committed to following the established timeline.
The FTTF continues its work on ComFrame field testing, which began in March 2014 and is expected to be completed in 2017. The 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 be conducted for each of the three ComFrame 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). Currently, the FTTF is reviewing participant responses to a quantitative testing questionnaire relating to Module 2. Qualitative field testing of Module 2 is expected to begin later this year, with Module 3 to follow. Thirty-three IAIGs are currently participating in the field testing process.
2. IAIS Restructuring and Reorganization
On July 7, the IAIS released a request for comment on draft revised IAIS procedures for meeting participation and consultation with stakeholders ("Notice of Request for Comment on Draft Procedures on Meeting Participation and the Development of Supervisory and Supporting Material and Draft Policy for Consultation of Stakeholders"). The Draft Procedures are the result of work the IAIS began in 2013 to review its strategic goals, financial outlook and resources with the goal of developing proposals to improve its structures, operations and the allocation of resources. Most notably, the Draft Procedures, as currently proposed, would discontinue IAIS Observer status effective January 1, 2015. Comments on the Draft Procedures are due by September 2, 2014, and the IAIS Executive Committee is scheduled to adopt the new procedures in October 2014.
Currently, industry representatives (including trade associations), consumer representatives and industry advisors wishing to attend IAIS meetings and participate in the official IAIS consultation process (including development of new supervisory standards, principles and guidance papers) may do so by obtaining “Observer” status. The Observer application process only requires that a simple form be completed, but does require that the applicant pay an annual fee (approximately $23,000 in 2014). While some have characterized the Observer program as “pay to play,” Observers have played a critical role in a number of IAIS initiatives, including the development of ComFrame. If the Draft Procedures are adopted in their current form, Observers would no longer be invited to participate in IAIS meetings, but the IAIS would instead invite industry and consumer representatives to attend IAIS meetings “when necessary to provide targeted, technical input.” In addition, the IAIS would commit to:
Publicly consult on the development of all supervisory and supporting material;
Hold at least one public session annually of the IAIS Executive Committee;
Conduct public dialogues and/or hearings at the committee level with qualified experts on specific topics related to policy development, when needed; and
Provide timely public information on IAIS activities.
The Draft Procedures were met with strong opposition by both regulators and industry representatives during a meeting of the International Insurance Relations (G) Committee. Representatives from the American Council of Life Insurers (ACLI), the Reinsurance Association of America (RAA), the American Insurance Association (AIA), and the Property Casualty Insurers Association of America (PCI) all expressed concern with the discontinuation of Observer status and asked the NAIC to oppose the move as well. Birny Birnbaum, on behalf of the Center for Economic Justice, asked that the NAIC continue to push for open meetings at the IAIS and, alternatively, request that the IAIS provide specific details on how invitees to IAIS meetings will be selected going forward.
Commissioners Michael Consedine (Pennsylvania), Thomas Leonardi (Connecticut) and Karen Weldin Stewart (Delaware) also spoke out against the proposed changes at IAIS, noting the importance of transparency and industry participation in the NAIC process. In response to comments provided by interested parties, Commissioner Consedine noted that state insurance regulators will ultimately determine how IAIS requirements (such as global capital standards) will be implemented by the states, and that the lack of transparency in the IAIS process could impact how those requirements are implemented.
3. Holding Company Act Amendments
The Group Solvency Issues (E) Working Group is considering whether changes to the NAIC Model Insurance Holding Company Systems Regulatory Act and Regulation (Holding Company Act and Regulation) are necessary to address potential shortcomings in the states’ authority to regulate large insurance groups. The Working Group’s mandate is to make changes to the Holding Company Act and Regulation to: (i) provide the states clear legal authority and delineated powers to act as the group-wide supervisor for IAIGs and other large insurance groups; (ii) provide direct legal authority over the insurance holding company, including the authority to set group capital requirements; (iii) provide group-wide financial reporting for large insurance groups; and (iv) consider resolution plans for IAIGs and other larger insurance groups.
In Louisville, the Working Group directed NAIC staff to develop a first draft of changes to the Holding Company Act that would provide states with the authority to act as group-wide supervisor for IAIGs and other large insurance groups. Interested parties have been asked to submit any objections they may have regarding Pennsylvania’s version of the Holding Company Act definition of “group-wide supervisor,” so it is expected that, at least initially, the draft changes to the Holding Company Act will be based on the Pennsylvania language. A final proposal is expected to be ready for adoption at the 2014 Fall National Meeting in Washington, D.C. This would enable states to enact the changes in the 2015 legislative session.
The NAIC last 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. To date, 38 states (Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont, Virginia, West Virginia, Wisconsin and Wyoming) have enacted legislation adopting the 2010 amendments in some form.
The meeting of the Reinsurance (E) Task Force began with Commissioner John Huff (Missouri), chair of the Task Force, providing a status report on state implementation of the revised Credit for Reinsurance Model Law and Regulation (Reinsurance Models). The Reinsurance Models allow highly rated non-U.S. reinsurers to reinsure U.S. domestic cedents with reduced collateral requirements. According to Commissioner Huff’s report, 23 states representing more than 60% of direct insurance premiums have adopted the revised Reinsurance Models, and five additional states are expected to adopt the revised Reinsurance Models in 2014 and 2015, bringing the total direct insurance premiums of adopting states to more than 80% of the U.S. total. Commissioner Huff stated that more than 30 reinsurers have become certified under the Reinsurance Models.
Currently, the Qualified Jurisdiction (E) Working Group has conditionally approved Bermuda, Germany, Switzerland and the United Kingdom as Qualified Jurisdictions. Commissioner Huff noted that three additional jurisdictions (France, Ireland and Japan) have recently agreed to participate in the process to become Qualified Jurisdictions.
Deputy Commissioner John Finston (California) provided the report of the Qualified Jurisdiction (E) Working Group and discussed an exposed memorandum regarding information-sharing and confidentiality agreements with Qualified Jurisdictions. Deputy Commissioner Finston explained that the memorandum was drafted with Deputy Commissioner Steve Johnson (Pennsylvania) following a meeting with the Reinsurance Financial Analysis (E) Working Group. The memorandum explains that the Reinsurance Models require that “a Qualified Jurisdiction must agree to share information and cooperate with the commissioner with respect to all certified reinsurers domiciled within that jurisdiction.” However, the memorandum also notes that jurisdictions strongly prefer to use the IAIS Multilateral Memorandum of Understanding (MMoU) as a global framework for cooperation and information sharing between insurance supervisors. The memorandum therefore provides that it is the consensus position of both the Qualified Jurisdiction (E) Working Group and the Reinsurance Financial Analysis (E) Working Group that the IAIS MMoU is the preferred method of sharing information and cooperation with Qualified Jurisdictions. The memorandum acknowledges, however, that some interim solution is necessary while waiting for states to be approved for the MMoU and for “passporting” of reinsurers that have been certified by a “Lead State.” Therefore, the memorandum provides that, as an interim solution until all states that are certifying reinsurers have been approved under the IAIS MMoU application process, only the Lead State should be required to have a memorandum of understanding with the Qualified Jurisdiction. Following Deputy Commissioner Finston’s report, the Reinsurance (E) Task Force voted to unanimously adopt the memorandum.
Deputy Commissioner Johnson next provided the report of the Reinsurance Financial Analysis (E) Working Group. According to the report, the Working Group has recommended passporting for 25 certified reinsurers, while turning down six certified reinsurers. One application is pending for renewal, and the Working Group is also considering one new application. Deputy Commissioner Johnson also provided an update on the status of the Uniform Application Checklist for Certified Reinsurers. The Reinsurance Financial Analysis (E) Working Group received four comment letters, each of which made substantive comments. Therefore, the Reinsurance (E) Task Force adopted a motion sending the draft application checklist back to the Reinsurance Financial Analysis (E) Working Group for further consideration.
5. Accreditation Committee “Reinsurer” Proposal
During the 2013 Fall National Meeting, the Financial Regulation Standards and Accreditation (F) Committee considered a letter from Superintendent Joseph Torti III (Rhode Island) to Director John Huff (Missouri), Chair of the Committee, requesting that captive reinsurers be included within the definition of a “multi-state insurer” in the Part A and Part B standards for state accreditation purposes. Currently, multi-state reinsurers, including captive reinsurers, are excluded from the definition of a multi-state insurer in the Part A and Part B Preambles. However, during the 2014 Spring National Meeting, the (F) Committee exposed proposed amendments that would remove the exclusion for reinsurers that are licensed in a single state, but assume business written outside of that state, and include “multi-state reinsurers” in the definition of a multi-state insurer. Industry participants have warned that captive transactions may move to offshore jurisdictions if the NAIC subjects captive reinsurers to its accreditation standards.
In Louisville, Commissioner Huff began the (F) Committee’s meeting by noting that of the 34 comment letters on the exposed amendments received by the (F) Committee, approximately 30 opposed the amendments. Many of the comment letters asserted that the definition of a “multi-state insurer” is too broad and captures captive insurers that do not engage in life insurance reserve financing transactions. Commissioner Huff stressed that the exposed amendments were only meant to be a straw-man, and he assured everyone that the (F) Committee will not be taking any action on the exposed amendments.
Superintendent Torti also stressed that there may be a misunderstanding and that it is not his intention to incorporate all types of captives within the definition of “multi-state insurer.” The (F) Committee will evaluate each of the comment letters, and a decision about how to proceed will be made at the 2014 Fall National Meeting. Commissioner Huff explained that, if action is ever taken by the (F) Committee, the definition of “multi-state insurer” will look much different than it does in the exposed amendments.
The (F) Committee concluded the meeting by opening the floor for comments that were not already included in the comment letters. Steve Kinion, Director of Delaware’s Captive Bureau, was the only interested party to comment. Mr. Kinion expressed concern that the (F) Committee will attempt to resolve this issue in a compressed time frame. He asked that any future exposed amendments be left open for a one-year comment period.
6. NAIC Governance
The Governance Review (EX) Task Force met on August 18. This meeting focused on the process by which an outside consultant will be selected to investigate the NAIC’s governance structure. Last year, Commissioner Thomas Leonardi (Connecticut) proposed in a letter to the NAIC leadership that an outside consultant be hired. In response, the Task Force was created and charged with reviewing the NAIC governing documents and considering Commissioner Leonardi’s recommendation. Ultimately, the Task Force recommended that the process of selecting an outside consultant be started.
The Executive Committee accepted the Task Force’s request that an outside consultant be hired and issued a request for proposal (RFP) on July 21. The deadline to respond to the RFP was August 15. The Executive Committee appointed a subcommittee made up of five Executive Committee members to interview potential vendors and make a recommendation to the Executive Committee on which vendor to choose. The subcommittee is chaired by Wisconsin Insurance Commissioner Ted Nickel, and also includes NAIC President-elect Monica Lindeen, NAIC Vice President Michael Consedine and past presidents Roger Sevigny of Vermont and Jim Donelon of Louisiana.
At the meeting of the Governance Review (EX) Task Force in Louisville, Commissioner Leonardi expressed his disappointment that a subcommittee comprised solely of Executive Committee members will select the outside consultant rather than the Task Force. Commissioner Leonardi explained that four of the five members of the subcommittee are current or former officers, and four of the five members also voted against his initial proposal to hire an outside consultant. Commissioner Leonardi’s concerns were echoed by Commissioner Wayne Goodwin (North Carolina), who is a member of the Task Force, as well as Director Andrew Boron (Illinois) and Commissioner John Doak (Oklahoma), who are not currently on the Task Force.
NAIC President-elect Lindeen defended the Executive Committee’s process for selecting an outside consultant and stated that she wants to dismiss any perception that the NAIC officers do not want to include certain people in the process. She also explained that the officers are looking forward to the review process, because everyone wants the organization to be successful.
Commissioner Goodwin made a motion to request that the Executive Committee rescind its motion creating a new subcommittee and, instead, return the process for selecting the outside consultant back to the Governance Review (EX) Task Force. The motion failed by a vote of 6-3, with Connecticut, Louisiana and North Carolina voting in favor, and Missouri, Montana, Nevada, Tennessee, Wisconsin and Wyoming voting against.
7. Private Equity Issues (E) Working Group
The Private Equity Issues (E) Working Group continues to consider development of procedures that regulators can use to mitigate or monitor risks associated with private equity and hedge fund ownership or control of insurance company assets. The Working Group is currently compiling and reviewing data on private equity investments in the insurance industry, and is also considering changes to the Financial Analysis Handbook to incorporate considerations for states when reviewing Form A (change of control) applications. In Louisville, the Working Group heard a presentation from A.M. Best regarding its observations on private equity owned insurers, including challenges and concerns facing startups and rated groups. A.M. Best also reported on a recent industry survey which found that the increased flow of private equity funds into the insurance industry has had no impact on individual company strategies. The Working Group continues to invite private equity firms active in the insurance industry to present before them. Notably, the Working Group has extended an invitation to representatives of the U.S. Securities and Exchange Commission (SEC) to discuss recent audits of private equity firms at the NAIC’s upcoming 2014 Fall National Meeting in Washington, D.C.
8. Corporate Governance
In a major milestone intended to address shortcomings identified in the 2010 FSAP review of the U.S. state-based insurance regulatory system, the NAIC’s Financial Condition (E) Committee adopted the Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation (Corporate Governance Models) on August 18. The Corporate Governance Models had been approved by the Corporate Governance (E) Working Group one day earlier over the dissent of Florida. The Corporate Governance Models require that, on each June 1, beginning in 2016, every insurer, or the insurance group of which the insurer is a member, submit a Corporate Governance Annual Disclosure (CGAD) to its lead state or domestic regulator.
In the CGAD, insurers must document, in narrative form, highly confidential information about their corporate governance framework, including the structure and policies of their boards of directors and key committees, the frequency of their meetings, and procedures for the oversight of critical risk areas and appointment practices, among other things. Insurers must also disclose the policies and practices used by their board of directors for directing senior management on critical areas, including a description of codes of business conduct and ethics, and processes for performance evaluation, compensation practices, corrective action, succession planning, and suitability standards. With regard to compensation, the description must include sufficient detail to enable the commissioner to understand how the organization ensures that compensation programs do not encourage excessive risk-taking.
The Corporate Governance Models have been highly controversial in large part due to industry concern over whether insurance regulators and their consultants will be required to keep the disclosed sensitive information strictly confidential. To this end, the final Corporate Governance Annual Disclosure Model Act contains the same confidentiality language used in other model laws, including the Model Insurance Holding Company System Regulatory Act, that requires the prior written consent of the insurer before any disclosed information is made public, but does not require insurer consent for a commissioner to share disclosed information with other regulators in the performance of the commissioner’s regulatory duties. Nonetheless, Florida dissented from the adoption of the Corporate Governance Models, claiming the confidentiality language was too broad. Other regulators urged industry representatives to work with state legislators and their insurance commissioners to prevent any erosion in the Model’s confidentiality language at the state level.
The insurance industry also voiced concerns that possible redundancies in reporting, attestations, interviews, and information requests may be created by the adoption of the CGAD. A letter submitted by major industry trade groups to the chair of the Corporate Governance (E) Working Group on industry concerns about redundancies resulted in referrals to the Blanks (E) Working Group and the Financial Examiners Handbook (E) Technical Group to remove possible redundancies. The Financial Condition (E) Committee also adopted a specific charge to address regulatory redundancy concerns.
The Financial Regulation Standards and Accreditation (F) Committee also adopted a corporate governance requirement as an element of the Corrective Action Part A accreditation standard. Effective January 1, 2017, states must have adopted Section 4B(10) of the Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to Be in Hazardous Financial Condition, Model 385, that permits the commissioner to issue an order requiring an insurer to correct corporate governance practice deficiencies which, if not corrected, could place the insurer in a hazardous financial condition.
9. Resolution Plans for Large Insurance Groups
In March 2014, the Receivership and Insolvency (E) Task Force (RITF) was charged with evaluating the costs and benefits of requiring resolution plans for large insurance groups. Comments from regulators, receivers and industry unanimously opposed any requirement for resolution plans by large insurers on grounds that preparing these plans would be cost prohibitive, would yield uncertain benefits, and may be unnecessary for insurers not deemed systemically important financial institutions. After receiving these comments, the RITF concluded in Louisville that it was premature to propose requiring such plans and recommended that the charge be tabled. The RITF did recommend the preparation of a template checklist of information that a commissioner could request from a holding company or insurer when the commissioner believes the risk of insolvency has risen to a level that requires planning for liquidation or rehabilitation. It is expected that this guidance document will be developed in one of the (E) Committee’s working groups over the next year.
10. Market Conduct Accreditation Standards
The joint meeting of the Executive (EX) Committee and Plenary adopted a new charge for the Market Regulation and Consumer Affairs (D) Committee, authorizing it to develop a formal market conduct accreditation standard that would be considered by the NAIC. A new (D) Committee working group will be chaired by Commissioner Therese Goldsmith (Maryland) and charged with developing accreditation standards for the NAIC to adopt that would, among other things, set uniform standards for market conduct examiner qualifications, training, and the systems used to track exams conducted by other states. The new working group will also develop recommendations for how states should implement and measure compliance with the accreditation standards.
B. Issues of Particular Interest to Life Insurers
1. Unclaimed Life Insurance Benefits
The Unclaimed Life Insurance Benefits (A) Working Group held a contentious meeting in Louisville that demonstrated yet again the wide rift existing between certain regulators and the life insurance industry on this issue. The meeting began with a presentation by the ACLI renewing its appeal for the development of a coherent framework on unclaimed life insurance benefits in light of recent court cases in West Virginia, Florida and Kentucky that have been favorable to the industry. The ACLI urged insurance regulators to protect the integrity of insurance contracts and operations and exert their sovereign responsibilities as regulators of insurance, while protecting the integrity of the unclaimed property process.
California responded that the current NAIC Task Force investigating unclaimed life insurance benefits would not disband or stop its work in pressing for market conduct exam settlements from the largest 40 life insurers, arguing that the focus of the market conduct exams was asymmetrically use of the Death Master File (DMF) that violated states’ unfair claims practices statutes. In California’s view, none of the court cases to date have dealt with unfair claims practices.
The Working Group then focused on its charge to develop recommendations on unclaimed life insurance benefits for the Life Insurance and Annuities (A) Committee, and discussed whether to proceed with developing a model law on the issue. Florida noted that developing a model law should be approached in a way that does not undermine any of the existing market conduct settlements on unclaimed life benefits. Several regulators suggested reaching out to the National Conference of Insurance Legislators (NCOIL), the Uniform Law Commission, and state Unclaimed Property Administrators to ask them to share what they are doing on this issue and to get their views on the development of a model law by the NAIC.
Representative George Keiser (North Dakota) from NCOIL asked the NAIC for assistance in drafting the revised NCOIL model law on unclaimed life insurance benefits. A representative from smaller insurance companies noted that not all companies use the DMF asymmetrically and that they should not be subject to the terms of the settlement agreements nor should requirements be imposed retroactively. Both Director Bruce Ramge (Nebraska) and Commissioner Jim Donelon (Louisiana) suggested that the Working Group move forward with developing a model law. Commissioner Julie Mix McPeak (Tennessee), Chair of the Unclaimed Life Insurance Benefits (A) Working Group, moved that the Working Group hold a conference call within the next month to continue discussions and consider the adoption of one or more recommendations to be submitted to the (A) Committee for its consideration.
2. Contingent Deferred Annuities
Significant discussions and actions were taken with respect to finalizing a state regulatory framework for contingent deferred annuities (CDAs). Among other developments, the Producer Licensing (EX) Task Force adopted a recommendation that states require a variable line of authority license for producers selling contingent deferred annuities. The Receivership and Insolvency (E) Task Force (RITF) heard a presentation from the National Organization of Life and Health Guaranty Associations (NOLHGA) on CDA coverage under Model Act 520, the Life and Health Insurance Guaranty Association Model Act. The RITF also exposed for a two-week comment period a draft letter to the Life Insurance (A) Committee, stating that CDAs fall within the definition of “annuity” in Model 520 and would be subject to the same provisions for coverage, as well as the same limitations and broad exclusions, as other annuities.
The Contingent Deferred Annuities (A) Working Group considered revisions to four model regulations to accommodate CDAs, including Model 245 on annuity disclosure, Model 275 on annuity suitability, Model 570 on advertising, and Model 613 on replacements. The Working Group extended the comment period on the revised models until September 5. The Working Group also discussed a Guidance Document it had prepared that explains which consumer protection and financial solvency model laws should be applied to CDAs, and which should not apply to CDAs. Additionally, in an apparent reversal of its earlier position that CDAs were exempt from the Standard Nonforfeiture Law, the Working Group asked for comment by September 30 on whether a nonforfeiture or other benefit should apply to CDAs and, if so, what such a benefit would look like and how it would be calculated. It is expected that the Working Group will have additional calls after September 30 to discuss comments received. Work on the regulatory framework for financial reporting, reserving and risk management review for CDAs is ongoing.
3. Separate Accounts
The Financial Condition (E) Committee adopted the report of the Separate Account Risk (E) Working Group (SARWG) that contains three initial recommendations regarding the insulation of separate accounts. The first recommendation includes a list of principles for insulating separate account assets for non-variable products. The second and third recommendations suggest revisions to SSAP No. 56 and Model 255 regarding modified guaranteed annuities and to Model 200 regarding group contracts, respectively. SARWG is still considering recommendations to be made regarding bank-owned and company-owned life insurance separate account products, as well as individual non-variable products funded by insulated separate accounts.
4. Indexed Universal Life Illustrations
The Life Actuarial (A) Task Force (LATF) discussed a draft actuarial guideline for applying the Life Insurance Illustrations Model Regulation (Model 582) to illustrations for indexed universal life policies that had been prepared by the ACLI. The ACLI draft guideline defines standards to be used by the Illustration Actuary and requires the use of a maximum illustrated rate of the disciplined current scale based on a standardized look-back period of 25 years. When several companies objected to the ACLI draft guideline, LATF agreed to delay exposure of the ACLI guideline in response to a request from those companies to present an alternative proposal by September 5.
5. Principle-Based Reserving
The meeting of the Principle-Based Reserving Implementation (EX) Task Force began with a report on state legislative activity from Commissioner Julie Mix McPeak (Tennessee), Co-Chair of the Task Force. As background, in 2009, the NAIC adopted a revised Model Standard Valuation Law, which authorizes principle-based reserving (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 California and New York). 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 premiums written in the United States. As reported in Louisville, 18 states, reflecting 28% of total life insurance premiums written in the United States, have adopted the amended Standard Valuation Law. Legislation adopting the amended Standard Valuation Law is expected to be adopted in 2014 or 2015 in an additional 12 states, bringing the total to 30 states representing 60.3% of total life insurance premiums. According to Commissioner McPeak, the earliest possible operative date for the Valuation Manual is likely January 1, 2017.
On a June 30 conference call, the Principle-Based Reserving Implementation (EX) Task Force voted to adopt “in concept” a framework for life insurance reserve financing (the Framework) for purposes of allowing the technical working groups to begin their analyses to be brought back to the Task Force. The Framework was then submitted to the Executive (EX) Committee for approval.
In Louisville, Superintendent Joseph Torti III (Rhode Island), Co-Chair of the Task Force, discussed actions taken during the meeting of the Executive (EX) Committee on August 17. In this meeting, the Committee voted to adopt the Framework. The Framework is meant to provide a temporary solution to life insurance reserve financing transactions, and Superintendent Torti explained that he believes that life insurance reserve financing transactions will no longer be necessary following the implementation of PBR.
Additionally, on August 14, the Life Actuarial (A) Task Force voted to expose the ACLI’s latest version of a proposal to exempt small companies from PBR requirements. The comment period will last only 21 days. The proposal includes an exemption threshold of $300 million in ordinary life insurance premiums for small individual companies and $600 million for insurance groups. According to the ACLI, the proposal would exempt approximately 10% of the life insurance market from having to comply with PBR.
6. SEC Considerations Guidance Document for Receivers
In Louisville, the NAIC’s Receivership and Insolvency (E) Task Force officially adopted a revised chapter in the Receivers Handbook for Insurance Company Insolvencies prepared by the SEC Considerations (E) Subgroup. The revised chapter provides guidance to receivers of insurers with separate accounts and insurance products registered with the SEC. Many groups participated in preparing the revised chapter, including the Committee of Annuity Insurers with Sutherland as federal securities law counsel, the ACLI, NOLHGA, and the SEC. The chapter provides a primer to receivers on how the ongoing registration and substantive requirements of the federal securities laws apply to various life insurance and annuity products. The chapter also gives receivers a checklist to follow to assist them in spotting issues and identifying areas where receivers should be in communication with the SEC.
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, is set to expire on December 31, 2014, unless extended by Congress. The Senate has passed a bill (S 2244) that would reauthorize TRIA through 2021. The Senate bill would also gradually increase the insurer co-share from 15% to 20% (with 1% increases per year over the next five years), and gradually increase the mandatory federal recoupment amount from $27.5 billion to $37.5 billion (with $2 billion increases per year over the next five years). The House, however, has passed a bill (HR 4871) that differs in several respects from the Senate bill. Specifically, the House bill would (i) reauthorize TRIA only through 2019, (ii) increase the program’s trigger from $100 million to $500 million; (iii) create a new program bifurcation for nuclear, biological, chemical or radiological types of attacks; and (iv) add a small insurer opt-out.
Congress will return to session in September for only a few weeks before adjourning for the November elections. Due to the significant differences between the Senate and House bills, it is unlikely that TRIA will be reauthorized before December. The NAIC is not taking a formal position on which bill it supports, but the NAIC is encouraging prompt attention on the reauthorization of TRIA before it expires.
During the Terrorism Risk Insurance Implementation (C) Working Group meeting in Louisville, it was noted that the current situation is similar to 2007, when TRIA was not reauthorized by Congress until December 18 and not signed by the President until December 26. The Working Group explained that several documents, including the Model Bulletin on Filing Procedures, and the Expedited Filing Form and Policyholder Disclosures will likely need to be revised following the reauthorization of TRIA. These materials cannot be revised until the Working Group has an understanding of what the final bill will look like. Members of the Working Group were urged to be on alert in late December so that these materials may be promptly revised following the reauthorization of TRIA.
2. Mortgage Insurance Modifications to Model Act
The Mortgage Guaranty Insurance (E) Working Group continues to work on amendments to the Mortgage Guaranty Insurance Model Act. Prior to the 2014 Spring National Meeting, the Working Group exposed a “conceptual draft” of amendments to the Mortgage Guaranty Insurance Model Act, which expanded the geographic concentration, investment limitations, reinsurance, underwriting standards, capital standards, and reserve sections. At the 2014 Spring National Meeting, the Working Group considered an interested party draft, and Commissioner Ted Nickel (Wisconsin), Chair of the Working Group, indicated that the Working Group would proceed with revisions to the Working Group’s conceptual draft in light of the comments received.
In an August 5 conference call, the Mortgage Guaranty Insurance (E) Working Group introduced a second version of the revised Mortgage Guaranty Insurance Model Act. During this conference call, the Working Group considered initial comments from interested parties. The RAA commented on the reinsurance section, and specifically noted that the Model Act should encourage non-affiliated, third-party reinsurance. The RAA recommended that the Model Act specifically mention that reinsurance of mortgage guaranty insurance may be written by a multi-line reinsurance company. Additionally, the RAA noted that the reinsurance section of the Mortgage Guaranty Insurance Model Act should more closely parallel the Credit for Reinsurance Model Act.
During the meeting of the Mortgage Guaranty Insurance (E) Working Group at the 2014 Summer National Meeting in Louisville, the Working Group noted that, before a determination is made about proposed revisions to the reinsurance section of the Model Act, the Working Group will need to dig deeper into the capital model. The majority of the meeting consisted of a presentation on the status of the Oliver Wyman Capital Modeling Project. The Working Group’s next meeting on the Capital Modeling Project will be closed to interested parties because company-specific data will be used to test the models.
D. Briefly Noted
1. FSAP Review
The Financial Sector Assessment Program (FSAP) review of the U.S. financial sector is currently underway and is expected to be completed in 2015. The FSAP Program, which was jointly established by the International Monetary Fund (IMF) and the World Bank in 1999, is a comprehensive and in-depth analysis of a country's financial regulatory sector. The last U.S. assessment in 2010 noted a number of shortcomings in U.S. insurance regulation that U.S. regulators have been working hard to remedy over the last four years through new model laws and regulations (including amendments to the Holding Company Act and Regulation, implementation of the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act, and the development of the Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation).
2. Ridesharing and Potential Gaps in Insurance Coverage
A potential gap in insurance coverage for ridesharing services was a hot topic at the 2014 Summer National Meeting. Ridesharing is the practice of driving for hire using an online-enabled platform to connect drivers, who are using their personal vehicles, with potential passengers. Ridesharing services have become increasingly popular across the country. These services are provided by transportation network companies (TNCs), the most popular of which are Lyft, Sidecar and UberX. The primary issue with ridesharing is a potential gap in insurance coverage between the driver’s personal automobile insurance policy and the TNC’s commercial policy. This issue came up in several meetings, including meetings of the NAIC/State Government Liaison Committee, the Anti-Fraud (D) Task Force, and the Auto Insurance (C/D) Study Group. At the meeting of the Property and Casualty Insurance (C) Committee, a working group was created to focus on this issue. The working group will be chaired by Commissioner Dave Jones (California).
3. Catastrophe Response Working Group
The Property and Casualty Insurance (C) Committee also created the Catastrophe Response Working Group, which will be chaired by Commissioner John Doak (Oklahoma). One issue that the Working Group will consider is fraud being committed by those purporting to be licensed adjusters following a natural disaster.