The National Association of Insurance Commissioners (NAIC) held its 2015 Fall National Meeting from November 17 through November 22 at National Harbor, Maryland. Notwithstanding the gigantic size of the Gaylord National Resort and Convention Center, the theme of this meeting might well have been that it’s a small world after all.

On Friday, on the other side of the Potomac, the U.S. Department of the Treasury and the U.S. Trade Representative notified Congress of their intent to initiate negotiations to enter into a “covered agreement” with the European Union (EU) on issues including U.S. equivalence under Solvency II and reinsurance collateral. Conveniently, the notices were issued three days before a public forum on the EU-U.S. Insurance Project hosted by the NAIC and the European Insurance and Occupational Pensions Authority (EIOPA). For additional details, see Sutherland’s Legal Alert: Treasury and U.S. Trade Representative Notify Congress of Intent to Initiate Negotiations on Covered Agreement With EU Regarding U.S. Equivalence.

The following are some highlights from the Fall National Meeting. We do not cover every meeting in this report, but comment on select noteworthy developments and matters of interest to our clients.

A. Issues of Particular Interest to Property and Casualty Insurers

1. Terrorism Insurance Market Data Calls

2. The Sharing Economy

3. Price Optimization

B. Issues of Particular Interest to Life Insurers

1. XXX/AXXX Reinsurance and Financing Transaction Issues

2. PBR Update

3. Contingent Deferred Annuity (A) Working Group

4. Variable Annuities Issues (E) Working Group

C. International Issues

1. Update on Development of International Capital Standards

2. Update on ComFrame Field Testing

3. IAIS Update of G-SII List

D. Cybersecurity

E. Briefly Noted

1. Public Hearing on Use of Big Data in Auto Insurance Rates

2. CIPR Event on Regulation of Captives

3. Certified Reinsurer Passporting Process

4. Bond Base Factors for Life Companies

5. New Travel Insurance Working Group

6. Large Deductible Workers’ Compensation White Paper

7. NAIC Internal Governance

8. Additional Commissioner and Staff Changes

 
A. Issues of Particular Interest to Property and Casualty Insurers

1. Terrorism Insurance Market Data Calls

Under the pall of recent terrorist attacks in Paris and Mali, the Terrorism Insurance Implementation (C) Working Group provided an update on efforts at the Federal Insurance Office (FIO) and on the state level to collect market data on the terrorism insurance market in the United States. The Working Group also provided updates on ongoing work at Treasury to implement the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) (which reauthorized the Terrorism Risk Insurance Act (TRIA) through 2020).

Section 111 of TRIPRA requires Treasury to collect data beginning in 2016 and provide an annual report to Congress on the state of the terrorism insurance market and the effectiveness of the TRIA program. In August, work on a 2015 annual statement supplement to capture terrorism insurance market data was halted after, according to press reports, FIO Director Michael McRaith advised state insurance commissioners during a closed-door session that FIO plans to proceed with data collection measures on its own. In September, the NAIC sent Director McRaith a letter stating that state insurance regulators plan to issue data calls to gather information on the terrorism insurance market, but indicating a willingness to share this information with FIO to reduce duplication of effort and cost for the industry.

TRIPRA provides that annually, beginning January 1, 2016, Treasury shall require insurers participating in the TRIA program to submit such information regarding insurance coverage for terrorism losses as Treasury considers “appropriate to analyze the effectiveness of the Program,” including:

• lines of insurance with exposure to terrorism losses;
• premiums earned on such coverage;
• geographical location of exposures;
• pricing of such coverage;
• the take-up rate for such coverage;
• the amount of private reinsurance for acts of terrorism purchased; and
• “such other matters as the [Secretary of the Treasury] considers appropriate.”

Treasury is also required to issue an annual report (by June 30 of each year), beginning in 2016, to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs that includes:

• an analysis of the overall effectiveness of the TRIA program;
• an evaluation of any changes or trends in the data collected on the terrorism insurance market;
• an evaluation of whether any aspects of the program have the effect of discouraging or impeding insurers from providing commercial property and casualty insurance coverage or coverage for acts of terrorism;
• an evaluation of the impact of the TRIA program on workers’ compensation insurers; and
• an updated estimate of the total amount of premium earned on lines of insurance with exposure to terrorism losses since January 1, 2003.

FIO has held several meetings since August with industry representatives to discuss these requirements. The meetings have focused on the data elements explicitly and implicitly required under TRIPRA and practical considerations insurers might face in providing the information. During the Terrorism Insurance Implementation (C) Working Group meeting, NAIC staff reported that Treasury expects to issue regulations before year-end that will set forth the rules for reporting the required data. When issued, these regulations would cap off what has been a very busy few months for the TRIA Program, which saw Treasury appoint nine insurance executives to the Federal Advisory Committee on Risk-Sharing Mechanisms¹ and issue a study on the process for certifying an “act of terrorism,” as required under Section 107 of TRIPRA.²

On the state level, a group of eleven states, led by New York, are preparing to issue data calls to obtain much of the same market information required under TRIPRA. On Friday, the Terrorism Insurance Implementation Working Group presented a draft template outlining the data elements that would be included in the data calls, including a description of each element and the rationale for its inclusion, with separate exhibits provided for commercial property lines, commercial liability lines, inland and ocean marine lines, and workers’ compensation. The Working Group requested feedback from industry and other interested parties regarding timing considerations for when the data calls should be issued, what data elements should be requested (based, in part, on what elements are readily available to insurers), and what can be done to avoid duplication of efforts and streamline the process. With respect to timing, the Working Group indicated that it would like to issue the data calls early enough that the data can be used by FIO to prepare its June report to Congress, but recognized that this may not be possible. Alternatively, the data calls could be delayed until after insurers’ 2015 annual statements are filed, which would mean that the data might not be available until August or September of 2016. Representatives from the Property Casualty Insurers Association of America (PCI) and the American Insurance Association (AIA) commented that this extended timeline may be more realistic. The data call template is not subject to the NAIC committee review and approval process and has not been released for a formal comment period, but Working Group members have committed to continuing discussions with industry and other interested parties.

2. The Sharing Economy

The Sharing Economy Working Group continues to study regulatory issues presented by the increasingly popular sharing economy, including transportation network companies (TNCs) such as Uber and Lyft and home-sharing services such as Airbnb and HomeAway. At the Fall National Meeting, the Working Group focused on TNC insurance issues, receiving updates on state-enacted TNC legislation and hearing a presentation on insurance products designed for TNC Services. An area of focus for regulators has been potential gaps in insurance coverage between TNC drivers’ personal automobile insurance policies and the TNCs’ commercial policies.

27 states and the District of Columbia have enacted TNC insurance legislation, with all but one (California) doing so during the last twelve months. The TNC legislation that has been enacted to date generally addresses the following topics:

1. Coverage Amounts and Types.

• TNCs and their drivers are required to maintain minimum coverage. The required minimum coverage generally varies based on the TNC Coverage Period: Period 1, which covers the time before a TNC driver has been matched with a passenger; Period 2, which covers the time in which the TNC driver has been matched with a passenger and is driving to pick up the passenger; and Period 3, which covers the time in which a passenger is occupying the TNC driver’s vehicle. Eighteen jurisdictions have adopted Period 1 minimum coverage requirements and most jurisdictions that have enacted TNC legislation have adopted minimum coverage requirements for Periods 2 and 3.
• Required coverage types under TNC insurance legislation can include liability coverage to protect passengers and third parties injured by TNC drivers; uninsured/underinsured motorist coverage maintained by TNCs to protect consumers from inadequately insured drivers; comprehensive and collision coverage to protect TNC drivers’ cars; and first-party medical payment coverage for TNC drivers and their passengers to pay for medical expenses related to an accident, without allocating fault.

2. TNC Insurance Placement. Placement is typically permitted by an authorized insurer or eligible surplus lines insurer.
3. Coordination of Coverage. Most TNC laws require a TNC at least to provide coverage if the TNC driver’s coverage has lapsed or fails to provide coverage, and many states have additional requirements, such as prohibiting TNC coverage from being dependent upon the TNC driver’s insurance first having denied coverage.
4. Disclosures. TNC laws typically require: (1) the TNC to disclose to TNC drivers the coverage and limits carried by the TNC on behalf of drivers; and (2) the TNC driver to carry proof of insurance in the TNC vehicle.
5. Exclusions. TNC laws generally provide certain exclusions under which auto insurers may exclude coverage, such as permitting a driver’s personal auto insurance to exclude coverage while the owner or driver is logged into the TNC network or engaged in a prearranged ride.

The NAIC has compiled and has committed to maintaining a compendium of state-enacted TNC legislation. While NAIC compendiums are typically updated every two years, at the request of Commissioner Dave Jones (CA), this compendium will be updated annually to track this rapidly developing area of law.

3. Price Optimization

The Casualty Actuarial and Statistical (C) Task Force met on November 19 and adopted the Price Optimization White Paper after making minor modifications to the recommendations and the appendices.

The purpose of the White Paper is to aid state regulators’ decisions about actions to take regarding any use of price optimization by personal lines property and casualty insurers. It provides background on what price optimization is and how it compares to traditional ratemaking. It identifies potential benefits and drawbacks to the use of price optimization and makes recommendations to regulators.

The White Paper defines price optimization very broadly for purposes of the paper to refer to the process of maximizing or minimizing a business metric using sophisticated tools and models to quantify business considerations, citing as examples of business metrics marketing goals, profitability and policyholder retention. It prefaces this definition by noting that in recent years, insurers have been using data mining of insurance and non-insurance databases of personal consumer information, advanced statistical modeling or both to select prices that differ from indicated rates at a very detailed or granular level, and that formalized and mechanized adjustments can be made to indicated rates for many risk classifications and, ultimately, for individual insureds. It notes that critics object that this can result with drivers with the same risk profile being charged different rates, which is unfairly discriminatory.

The White Paper recommends that regulators address price optimization through state laws prohibiting rates that are excessive, inadequate or unfairly discriminatory. It further recommends that rating plans should be derived from sound actuarial analysis and be cost-based. It further notes that proposed rates developed from an actuarial analysis must comply with state laws and should be consistent with the actuarial principles derived from a professional actuarial body, and the actuarial standards of practice established by the Actuarial Standards Board. It recommends that two insurance customers having the same risk profile should be charged the same premium for the same coverage (though temporary deviations in premiums might exist between new and renewal customers with the same risk profile because of capping or premium transition rules). The White Paper broadly accepts rating adjustments that result in rates that deviate from actuarial indications based on projected loss costs and expenses, but makes specific recommendations regarding the acceptance of such deviations, including that deviations should be allowed if based on reasonable considerations adhering to state law and consistent with actuarial principles reflecting insurance loss and expense costs, and that capping and transitional rules are appropriate and in the public’s best interest in some circumstances.

As has been the case throughout the drafting process, particular focus during the discussions at the Fall National Meeting was whether requirements for cost-based rating allow non-cost-based pricing adjustments to reflect price elasticity. There has been a clear consensus that it should not be allowed at an individual level and a consensus emerged that it should be allowed for broad classes of insureds, but there was no consensus that the level of granularity that could be used for the rate adjustments based on non-cost-based factors could be defined. Notwithstanding differences among regulators, industry and consumer representatives, the Task Force did adopt language requiring that rating classes have statistical or actuarial reliability. Precise language for the relevant recommendation was agreed through line-by-line drafting during the meeting. The result is not exactly cogent and was not included in the report that was presented to and accepted by the Task Force’s parent committee. As revised and adopted, the White Paper now recommends:

The Task Force recommends that under the requirement ‘rates shall not be . . . unfairly discriminatory,’ insurance rating practices that adjust the current or actuarially indicated rates or the premiums, whether included or not included in the insurer’s rating plan, should not be allowed when the practice cannot be shown to be cost-based or comply with the state’s rating law. With due consideration as to whether practices are cost-based or in compliance with state rating law, the Task Force believes the following practices at a minimum are inconsistent with the statutory requirement that rates shall not be unfairly discriminatory:

a. price elasticity of demand;
b. propensity to shop for insurance;
c. retention adjustments at an individual level; and
d. a policyholder’s propensity to ask questions of complaints.

The task force recommends that rating plans in which insureds are grouped into homogeneous rating classes should not be so granular that resulting classes have little actuarial or statistical reliability. The use of sophisticated data analysis to develop finely tuned methodologies with a multiplicity of possible rating cells is not, in and of itself, a violation of rating laws as longs as the rating classes and rating factors are cost-based.

The White Paper appendices include: (1) a compendium of state actions on price optimization; (2) a prototype state insurance department bulletin to personal lines property and casualty insurers issuing personal lines policies in the state; (3) a listing of potential requirements for rate filings; and (4) potential questions for regulators to ask regarding the use of models in rate filings. The exposure draft of the White Paper included a prototype ratemaking disclosure form to be submitted with personal lines rate filings. Industry representatives and some regulators on the Task Force expressed concern that the ratemaking disclosure form was too prescriptive and would end up being a required checklist for every rate filing, whether relevant or not. The Task Force agreed to eliminate this appendix and to integrate the various questions on the checklist into the lists of requirements and questions for rate filings.

B. Issues of Particular Interest to Life Insurers

1. XXX/AXXX Reinsurance and Financing Transaction Issues

Credit for Reinsurance Model Law and Regulation Amendments
During the Reinsurance Task Force (E) Meeting, regulators and interested parties engaged in a spirited discussion regarding alternative options for changes to the Credit for Reinsurance Model Law that would provide state insurance commissioners with authority to adopt future amendments to the Credit for Reinsurance Model Regulation to incorporate Actuarial Guideline XL VIII (AG 48) and potentially much broader authority to adopt other future amendments to the Model Regulation regarding certain types of captive transactions. The current proposed amendments to the Credit for Reinsurance Model Regulation are based on AG 48 and are intended to establish uniform national standards governing reserve financing arrangements pertaining to non-exempt and non-grandfathered XXX and AXXX policies. AG 48 prescribes a required actuarial analysis on non-exempt reinsurance agreements covering non-grandfathered policies to determine whether: (1) funds consisting of “Primary Security” are held by or on behalf of the ceding insurer as security under the reinsurance contract in an amount at least equal to the “Required Level of Primary Security”; and (2) funds consisting of “Other Security” are held by or on behalf of the ceding insurer in an amount at least equal to the portion of the statutory reserves in excess of the Required Level of Primary Security.

The Task Force devoted the majority of its session at the Fall National Meeting to discussing the potential changes to the Credit for Reinsurance Model Law and expressed hope that revisions to the Model Law could be completed and adopted by the NAIC Executive Committee and Plenary before year-end 2015. The Task Force currently anticipates needing until the 2016 Spring National Meeting to complete drafting of the XXX/AXXX amendments to the Model Regulation, with final adoption anticipated for the first half of 2016.

The Task Force previously exposed three options for the changes to the Credit for Reinsurance Model Law:

1. “Option 1” limits a commissioner’s discretion to adopt regulations related only to reinsurance of non-universal and universal life insurance with secondary guarantees;
2. “Option 2” gives a commissioner discretion to adopt regulations related to reinsurance of variable annuities or long-term care insurance in addition to reinsurance of non-universal or universal life insurance with secondary guarantees; and
3. “Option 3” provides a commissioner with broader discretion to specify by regulation requirements for reserve credit with respect to any particular types of reinsurance arrangements.

The Task Force has received numerous comment letters, many in opposition of Option 3 due to its broad reach. During the Fall National Meeting, the Task Force was not able to adopt any of the options presented and decided to expose two additional options along with changes to the previously exposed options, with a December 6 comment deadline. Currently, the five options exposed for comment are as follows:

1. Options 1, 2 and 3 described above with edits suggested by NAIC staff;
2. A new option proposed by New York Life that is essentially Option 2 Plus, which provides a commissioner with discretion to adopt regulations related to insurance products covered by Option 2 and “other insurance and annuity products” as to which the NAIC may adopt model regulatory requirements making reference to the NAIC’s Credit for Reinsurance Model Law;
3. An option proposed by the American Council of Life Insurers (ACLI) based on Option 2 but incorporating an exemption for professional reinsurers. The exemption would exclude reinsurance transactions with certain professional reinsurers from being covered by the AG 48 amendments to the Model Regulation. Such professional reinsurers must meet certain criteria, including: (1) maintaining at least $250 million in capital and surplus determined in accordance with statutory accounting principles, without deviation; and (2) (a) being licensed in at least 26 states or (b) being licensed or accredited in at least 35 states with a minimum of ten licenses.

Public discussions during the Fall National Meeting centered on the degree of discretion that should be afforded to commissioners under the Model Law when it comes to adopting specific rules under credit for reinsurance regulations. Connecticut expressed surprise at the degree of concern over Option 3, noting that the flexibility given to commissioners under this option would alleviate the need of going back to their legislatures for approval of further changes to the Model Law to address future needs. While Option 3 provides such convenience, it has the potential of introducing different shades of state credit for reinsurance rules, thus causing uncertainty in reinsurance transactions. Several other states noted that given the importance of the credit for reinsurance rules, states should take the time to make sure that changes are done right. Many interested parties registered concerns with Option 3, noting that uniformity and certainty in the credit for reinsurance rules is a cornerstone of countless reinsurance transactions. Allowing each state broad discretion in adopting its credit for reinsurance regulations could disrupt the reinsurance market due to the potential regulatory risk down the road. Our insurance company clients should all be very interested in the development of the changes to Credit for Reinsurance Model Law and Model Regulation. We will be working closely with our clients and the ACLI on these issues in the coming weeks and we welcome any comments or discussion on the topic.

XXX/AXXX Captives
The NAIC Executive Committee and Plenary approved changes to the NAIC’s State Accreditation Standards to include within the scope of the Accreditation Program, effective January 1, 2016, those captive reinsurers that reinsure business covering risks residing in at least two states with respect to XXX and AXXX policies. The standard requires states to regulate such captives in the same way they regulate multistate insurers under the various NAIC model laws, regulations and examination procedures that are required for a state to be accredited by the NAIC. Under the standard, a state will be deemed to be in compliance if the applicable reinsurance transaction satisfies the XXX/AXXX Reinsurance Framework adopted by the NAIC (embodied in AG 48). The Committee left for future action application of the standard to captives that reinsure variable annuities and long-term care policies.

In 2016, the NAIC will begin the process of assessing state compliance with the new Accreditation requirements applicable to XXX/AXXX captive reinsurers. The review process will include the following steps, and will be primarily directed to the domiciliary state regulator of the ceding insurer in a XXX/AXXX reinsurance transaction:

• The Supplemental XXX/AXXX Reinsurance Exhibit, Part 2B will be used to compile a complete listing of XXX/AXXX cessions to captive reinsurers. This Exhibit is to be filed with the NAIC on April 1, 2016, and it includes only those transactions that have not been grandfathered in accordance with AG 48. NAIC Staff will contact the domestic state of its ceding insurer(s) to ensure that all XXX/AXXX cessions by its domestic life insurers to captive reinsurers are included in the listing.
• Once the listing of all non-grandfathered XXX/AXXX cessions to captive reinsurers is complete, NAIC staff will review the information in the Part 2B of the Exhibit to determine, for each transaction, whether there is a Primary Security shortfall or an Other Security shortfall. For those transactions where there is not a Primary Security shortfall or an Other Security shortfall, no further work will be considered necessary as the transaction complies with XXX/AXXX Reinsurance Framework.
• For those transactions in which there is a Primary Security shortfall or an Other Security shortfall, NAIC staff will review the Annual Statement and Supplements to ascertain whether the shortfall has been remediated by the input of additional assets prior to March 1 or by establishing a corresponding liability for the shortfall.
• For those transactions in which there is a Primary Security shortfall or an Other Security shortfall, and the shortfall was not remediated or a corresponding liability was not established, NAIC staff will confirm whether all three of the resulting requirements from the XXX/AXXX Reinsurance Framework have been met as follows:
  • NAIC staff will review the ceding insurer’s December 31, 2015, actuarial opinion to ensure that the appointed actuary issued a qualified actuarial opinion related to the Primary Security or Other Security shortfall.
  • NAIC staff will review the ceding insurer’s December 31, 2015, RBC filing to ensure that an adjustment was made to the ceding insurer’s Authorized Control Level RBC related to the Primary Security shortfall.
  • NAIC staff will review the ceding insurer’s December 31, 2015, annual audited financial report to ensure that proper disclosure has been included in the Notes section related to the Primary Security or Other Security shortfall.
• For those transactions in which there is a Primary Security shortfall or an Other Security shortfall, and NAIC staff has confirmed that the proper disclosures/adjustments have been made, no further work will be considered necessary as the transaction will be considered to comply with the XXX/AXXX Reinsurance Framework. For those transactions in which there is a Primary Security shortfall or an Other Security shortfall, and NAIC staff has confirmed that any of the three requirements were not met, the transaction will be considered not to comply with the XXX/AXXX Reinsurance Framework; in such cases, NAIC staff will contact the domestic state of the captive reinsurer to assess whether the state has been applying the appropriate standards to the captive reinsurer.

The findings from this review will be reported at the NAIC’s 2016 Summer National Meeting.

2. PBR Update

Implement of principle-based reserving (PBR) by the states continues to move forward; indeed, it has progressed surprisingly rapidly. At the Fall National Meeting, the NAIC adopted a proposal for evaluating whether the PBR implementation threshold has been met and heard updates on the PBR Pilot Program and the PBR Experience Reporting Framework.

In 2009, the NAIC adopted a revised Model Standard Valuation Law authorizing PBR and a Valuation Manual that sets forth the minimum reserve and related requirements for certain products under PBR. The Valuation Manual was subsequently adopted by the NAIC in 2012, over strong objections 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. During the Principle-Based Reserving Implementation (EX) Task Force meeting, it was reported that 39 states, representing 71% of total life insurance premiums written in the United States, have adopted the amended Standard Valuation Law, making a January 1, 2017, effective date actually seem achievable.

The amended Standard Valuation Law provides that adoption by a state will count toward the PBR implementation threshold only if the law uses “substantially similar terms and provisions” as the NAIC model. At the Fall National Meeting, the NAIC Executive Committee and Plenary approved a plan for evaluating whether the requisite number of states have adopted laws that are “substantially similar” to the amended Standard Valuation Law, including recent changes that clarify guidance on how a “Small Company Exception” implemented by a state should be evaluated. In general, the plan recommends the following process for determining whether a state’s laws can be counted toward the implementation requirement:

1. State Survey: States will complete a survey to document their conformance to, as well as any deviations from, the amended Standard Valuation Law.
2. Validation of Deviations: A designated small group (potentially comprised of NAIC staff and regulators) will validate completion of the surveys and document conformance to and substantive deviations from the model.
3. Task Force Evaluation: The Task Force will review conformances and deviations and determine whether a state’s laws are considered “substantially similar terms and provisions” for purposes of determining the Valuation Manual Operative Date.
4. Task Force Proposal: The Task Force will recommend a list of states counting toward the threshold to determine the Valuation Manual Operative Date. Any disagreements with the list could be submitted in writing to the Plenary Committee.
5. Plenary Final Decision: The Plenary Committee will consider any disagreements with the list and will determine the NAIC’s final view of which states will count toward the threshold.

Regulators also heard an update at the Fall National Meeting on plans for the 2016 PBR Pilot Program that the Task Force previously charged the PBR Review (EX) Working Group with planning and conducting. The goal of the Pilot Program is to test out and evaluate the PBR regulatory processes as defined in the Standard Valuation Law and Valuation Manual to determine if any changes need to be made to the regulatory processes, requirements defined in the Valuation Manual and reporting requirements as defined in the VM-20 Supplement to the annual statement blanks and the VM-31 reporting requirements. In November and December, the Pilot Program will seek volunteers of up to ten companies who are currently planning on valuing business under VM-20 once the operative date is triggered, and their domiciliary states, to participate in the Pilot. As part of the Pilot, companies will complete VM-20 calculations as of December 31, 2015, as well as VM-20 Supplements for blanks and VM-31 Actuarial Reports, and reports will be submitted to the states of domicile and the NAIC by June 30, 2016. Regulators will complete reviews of the VM-20 Calculations, VM-20 Supplement Reports and VM-31 Actuarial Reports from July through November 2016, and a Final Report on the Pilot Project will be presented to the PBR Implementation (EX) Task Force by the PBR Review (EX) Working Group in December 2016.

The Task Force also heard a presentation from NAIC staff on the PBR Experience Reporting Framework. The NAIC is exploring the possibility of serving as an experience data reporting entity for PBR purposes and is considering the technical, operational and procedural aspects of performing in such a role. Under the current thinking, the NAIC (or an affiliate) would collect confidential information on an annual basis from approximately 100 companies using a uniform template to ensure that data is consistent and uniform. The NAIC would be responsible for most of the operational and technical aspects of the collection, but it would be subject to oversight by regulators and the typical interested party comment process. The NAIC intends to propose a formal plan regarding performing in this capacity in January, which would then be presented at the commissioners’ conference in February.

3. Contingent Deferred Annuity (A) Working Group

During the Fall National Meeting, the Contingent Deferred Annuity (A) Working Group discussed the comment letters it received to the guidance document Guidance for the Financial Solvency and Market Conduct Regulation of Insurers Who Offer Contingent Deferred Annuities, which is intended to assist state regulators in modifying their annuity laws to clarify their applicability to contingent deferred annuities (CDAs).

The Working Group heard arguments from a representative of a consumer advocacy group in favor of: (1) a consumer disclosure document for CDAs; (2) more robust suitability standards in the sale of CDAs; (3) stricter guidelines regarding cancellation benefits; and (4) the inclusion of nonforfeiture benefits in CDAs. Commissioner Ted Nickel (WI), chair of the Working Group, responded that consumer concerns had been considered by the Working Group during the long process of developing and drafting the guidance document. Commissioner Nickel emphasized the need for the Working Group to adopt the guidance document, after which there could be a renewed focus on consumer disclosure.

The Working Group agreed to make the technical revisions to the guidance document raised in the industry comment letters it received, and to adopt the guidance document, as revised.

4. Variable Annuities Issues (E) Working Group

The Variable Annuities Issues (E) Working Group was created by the Financial Condition (E) Committee at the 2015 Spring National Meeting to oversee the NAIC’s efforts to study and address regulatory issues resulting in variable annuity captive reinsurance transactions. Over the past few months, the Working Group has developed and adopted the Variable Annuities Framework for Change (the “Framework”), a high-level summary of potential non-exclusive changes to the variable annuities (VA) statutory accounting framework aimed at eliminating the need for insurers to reinsure VA risks to captive reinsurers. The Framework is based on the findings in a report issued by Oliver Wyman that was presented to the Working Group at a September 10 meeting.

Pursuant to meetings held on October 20 and November 6, the Executive (EX) Committee approved funding for the “Variable Annuity Captive Project,” and a quantitative impact study (QIS) involving industry participants will be now undertaken. Based on the results of the QIS, the Framework will be revisited and necessary changes will be included. During the Working Group’s meeting at the Fall National Meeting, it was announced that Oliver Wyman would be engaged as a consultant to work on the QIS and that approximately 14 volunteer companies would be participating in the QIS. The implementation of any changes to the statutory accounting framework based on the results of the QIS is not expected to occur before January 1, 2017.

During the Fall National Meeting, this Working Group also discussed a preliminary draft blanks proposal that sets forth new disclosure requirements with respect to variable and fixed annuities. The proposed disclosures would require insurers to disclose a wide variety of information about their variable and fixed annuity contractual obligations (including liability balances, average discount rates, average assumed lapse rates, benefit utilization periods, and the market and book value of related hedges), as well as the impact of changes in certain factors (including changes in interest rates, lapse rates, utilization rates and volatility assumptions for equities) on variable and fixed annuity liabilities and income. The disclosure requirements are being exposed for a 60-day comment period with all comments due by January 29, 2016. The anticipated effective date for the requirements is December 31, 2016.

C. International Issues

1. Update on Development of International Capital Standards

Since 2013, the IAIS, at the direction of the Financial Stability Board (FSB), has been developing group capital standards applicable to global systemically important insurers (G-SIIs), including: (1) a Basic Capital Requirement (BCR); (2) Higher Loss Absorbency (HLA) requirements; and (3) risk-based, group-wide global insurance capital requirements (ICS). In 2014, the IAIS adopted, and in 2015 the G20 endorsed, BCR, which provides a method to measure capital within an insurance group across jurisdictions. BCR is scheduled for implementation in 2019 in conjunction with ComFrame.
 
At its Annual Meeting this November, the IAIS adopted its initial methodology for HLA, which addresses additional capital requirements for G-SIIs. The HLA required capital formula places each G-SII into one of three “buckets” based on a risk analysis. A G-SII’s HLA capital charge increases as the bucket level increases. HLA currently builds on BCR, but the IAIS intends to make ICS the foundation for HLA once ICS has been fully developed. HLA is expected to be endorsed by the G20 later this month and implemented by 2019.
 
Prompted by concerns that international standards being developed fail to account for the U.S. approach to financial solvency regulation, the NAIC has been separately developing a group capital assessment tool. In connection with this effort, at the NAIC Fall National Meeting, the International Insurance Relations (G) Committee adopted the NAIC Group Capital Calculation Recommendation that was approved by the ComFrame Development and Analysis (G) Working Group on October 30. The recommendation, which will be sent to the NAIC Executive Committee and Plenary in the future, proposes tasking the Financial Condition (E) Committee with developing a group capital calculation under the following charge:

Construct a U.S. group capital calculation using [a risk-based capital (RBC)] aggregation methodology; liaise as necessary with the ComFrame Development and Analysis (G) Working Group on international capital developments and consider group capital developments by the Federal Reserve Board, both of which may help inform the construction of a U.S. group capital calculation.

This proposed RBC aggregation approach to group capital calculation would build upon existing legal entity capital requirements rather than developing replacement or additional standards. Key issues expected to be addressed by the Financial Condition (E) Committee include: (1) scope and scalability; (2) the method for including non-RBC filers and non-insurance entities; (3) whether the calculation should take a “going” versus a “gone” concern view; (4) treatment of subordinated debt; (5) eliminations to avoid double counting and other adjustments; and (6) stress testing.
 
At the meeting of the International Insurance Relations (G) Committee, it was noted that the group capital calculation is intended to serve as a useful solvency tool (as opposed to a capital requirement) that will complement work on the entity level. It was also noted that, although it is not being driven by international group capital efforts (such as the Federal Reserve Board’s work to develop group capital requirements), it has to some extent been influenced by such efforts.

2. Update on ComFrame Field Testing

The ComFrame Development and Analysis (G) Working Group (CDAWG) received an update at the Fall National Meeting on the International Association of Insurance Supervisors (IAIS) project of field testing the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame).

ComFrame is a set of international supervisory requirements focusing on group-wide supervision of internationally active insurance groups (IAIGs). ComFrame is built and expands upon the high-level requirements and guidance currently set forth in the IAIS Insurance Core Principles (ICPs). The IAIS’s Field Testing Task Force is currently engaged in a field-testing process that involves a review and assessment of qualitative and quantitative questionnaires being sent out to IAIG volunteers and their group supervisors to assess whether ComFrame promotes effective group-wide supervision of IAIGs and whether it leads to practical benefits without undue burden.

The IAIS recently completed the second phase of quantitative field testing for 2015, which included various elements of the international capital standards that will be implemented as part of ComFrame. As reported at the Fall National Meeting, the IAIS field testing analysis team is nearing the end of its “data scrubbing” phase. Field test findings for governance requirements have been submitted to the IAIS Governance Working Group for resolution, while field testing of ComFrame’s enterprise risk management requirements is in process. During the CDAWG meeting, Ramon Calderon of the NAIC noted that, while it is too early to draw conclusions from the data, key issues identified during field testing include: (1) valuation; (2) capital resources; (3) the design of risk charges; and (4) the aggregation of risk charges. ComFrame is currently scheduled for implementation in 2019.

3. IAIS Update of G-SII List

On November 3, the Financial Stability Board (FSB) published an updated list of globally systemically important insurers (G-SIIs). The updated list includes a total of nine insurers: Aegon N.V.; Allianz; AIG; Aviva P.L.C.; Axa S.A.; MetLife, Inc.; Ping An Insurance (Group) Co. of China Ltd.; Prudential Financial Inc.; and Prudential P.L.C. – this reflects the addition of Aegon and the removal of Generali from the 2014 list of GSIIs. Over the next week, the IAIS is expected to publish a consultation paper reflecting a refined methodology for assessing G-SIIs, which will be applied when the G-SII list is updated in 2016.

D. Cybersecurity

Despite two major developments in cybersecurity in the run-up to the Fall National Meeting, no significant action was taken at the meeting. Instead, the Cybersecurity Task Force used its time during the Fall National Meeting to receive a report on Federal legislative activity and a presentation on information sharing by representatives from the U.S. Treasury Department and the Financial Services Information Sharing and Analysis Center (FS-ISAC).

Prior to the Fall National Meeting, the Task Force adopted a “Cybersecurity Bill of Rights” that purports to outline the rights insurance consumers can expect when insurers, agents and other businesses collect personal consumer information and experience data breaches. The Bill of Rights was adopted in October over objections from industry groups that the document was confusing and misleading (see Law360 Article: What Industry Thinks of the Cybersecurity Bill of Rights), and it has been sent to the Executive Committee for approval. However, despite efforts to tee up the Bill of Rights for final adoption by the NAIC by year-end, the Bill of Rights was removed from the Executive Committee’s agenda and was not addressed by the Executive Committee at the Fall National Meeting. Nor was there any discussion of revisions to any model laws to implement some of the measures called for in the Bill of Rights. Certain revisions were contemplated during the discussions during the drafting of the Bill of Rights and included in the Task Force’s 2016 charges.

The second major development prior to the Fall National Meeting was the letter that Anthony Albanese, Acting Superintendent of the New York Department of Financial Services (NYDFS), sent on November 9 to the 18 members of the Financial and Banking Information Infrastructure Committee (FBIIC) that outlines key regulatory proposals that NYDFS is considering as new regulations to increase financial sector cybersecurity defenses. The letter is written to “help spark additional dialogue, collaboration and, ultimately, regulatory convergence among [the NYDFS and FBIIC members] on new, strong cybersecurity standards for financial institutions.” See Sutherland’s Legal Alert: The New York Department of Financial Services Releases Potential New Cybersecurity Rules. The NAIC is a member of the FBIIC and the letter shows NYDFS’s intention to take a leadership role in, or at least influence, the development of cybersecurity policy for financial institutions, including insurance companies. Neither the NYDFS letter nor its contents were discussed during the Cybersecurity Task Force nor any other NAIC public forum.

E.  Briefly Noted

1.  Public Hearing on Use of Big Data in Auto Insurance Rates

The Auto Insurance (C/D) Study Group held a public hearing on the pricing of automobile insurance and the use of big data in ratemaking. Representatives from several consumer groups, including the Consumers Union, the Consumer Federation of America and the Center for Economic Justice, made presentations on the disproportionately negative impact that the use of factors such as credit score, marital status, level of education and occupation can have on low and moderate-income Americans. Consumer representatives noted that these factors often result in a policyholder paying a higher premium than would result from a similarly situated policyholder with a poor driving record, including a DUI conviction. The question for regulators is whether these factors result in rates that are excessive or unfairly discriminatory, in violation of state insurance laws. Representatives for the industry, including PCI, AIA, Trans Union Corporation and the American Academy of Actuaries, argued that these factors are actuarially sound and have a direct correlation to losses, noting also that the use of big data helps carriers to achieve more accurate insurance rates that ultimately benefit the majority of consumers. In an increasingly digital world, this is an area of increased focus for both regulators and the industry.

2. CIPR Event on Regulation of Captives

On Wednesday, November 18, the NAIC’s Center for Insurance Policy and Research (CIPR) hosted a heavily attended four-hour event comprised of three sessions on the regulation of captive insurers, including a historical overview tracing the evolution of captives and two panel discussions addressing Regulatory and Market Development in Captives, moderated by Commissioner Ted Nickel (WI), and Remaining Challenges and Concerns, moderated by Rhode Island Superintendent Joseph Torti (RI). Panelists discussed many of the hot topics facing life insurance captives today, including development of the XXX/AXXX Reinsurance Framework and AG 48 and the implementation of PBR.

3. Certified Reinsurer Passporting Process

At the beginning of the Reinsurance Task Force (E) Meeting, the members adopted a report of the Reinsurance Financial Analysis (E) Working Group (RFAWG) that included the adoption of: (1) exposed revisions to the Uniform Application Checklist for Certified Reinsurers relating to an applicant’s disclosure requirements with respect to disputed and/or overdue reinsurance claims; and (2) the exposed Certified Reinsurers and Passporting Public Memorandum, which sets forth RFAWG’s mission, the passporting process and the ongoing renewal process for certified reinsurer status.

During the meeting, RFAWG chair Steven Johnson (PA) addressed an issue presented to the Reinsurance Task Force in several comment letters. The issue relates to whether UK P&C insurers must file an actuarial opinion, a document not required of a UK P&C insurer, in connection with its certified reinsurer application. In the UK, reserve adequacy of a P&C insurer is addressed through the annual report and management discussion process rather than an actuarial opinion. As such, Mr. Johnson noted that the current UK process is sufficient and the Working Group would not be requiring an actuarial opinion for a UK P&C insurer and would accept a certification as to its reserve adequacy. However, it was not clear from the discussion whether additional changes to the Checklist will be made to reflect this view. The Task Force will be holding future conference calls to discuss annual renewal requirements for certified reinsurers, a topic that was also the subject of comment letters received by the Task Force.

4. Bond Base Factors for Life Companies

At the Fall National Meeting, the Investment Risk-Based Capital (E) Working Group discussed proposed measures to increase the granularity of bond base factors for life insurers. As part of these changes, the number of bond classes could be increased from the current six to 14 or even 19 classes. At the conclusion of the discussion, the Working Group took an informal poll of regulators to gauge their current thinking on whether these changes should be pursued. A majority of the members indicated that they were in support, although a few of them noted that any changes should be implemented gradually. A few other members indicated that they were still considering the issue. The Working Group also discussed the concept of having a different RBC factor for non-corporate fixed-income assets such as municipal and sovereign bonds.

5. New Travel Insurance Working Group

Following a presentation from the U.S. Travel Insurance Association and the Tourism and Travel Industry Consumer Coalition, the Property and Casualty Insurance (C) Committee has agreed to appoint a Travel Insurance (C) Working Group to examine the possibility of creating a model law or guideline related to the tourism and travel insurance industry. Travel insurance, which can include elements of both accident & health coverage and property coverage, often does not fit within the construct of state insurance laws. Commissioner Chaney (MS), chair of C Committee, noted that the Market Action Working Group (MAWG), which is tasked with coordinating reviews of multistate market conduct issues, may be interested in this topic but that it was important that it remain with C Committee.

6. Large Deductible Workers’ Compensation White Paper

The Workers’ Compensation (C) Task Force received a report from the joint NAIC/IAIABC (International Association of Industrial Accident Boards and Commissions) Working Group on its recent efforts to update to the 2006 Workers’ Compensation Large Deductible Study. The update was prompted when, after the Nevada Insurance Department observed a trend in late 2014 toward the use of very large deductibles by employers in its state, the NAIC conducted a brief survey of states and determined that very few states maintained detailed records of accounts written with large deductibles. The objectives of the study are: (1) to compare the market for large deductible workers’ compensation insurance in 2015 versus 2006; (2) to identify whether the use of “mega-deductibles” by large employers is a significant trend; (3) to identify causes of recent insurance company insolvencies and the role large deductibles played in these insolvencies; and (4) to understand special concerns related to the use of large deductibles by professional employer organizations (PEOs).

The White Paper is expected to include seven modules: (1) current buying trends; (2) special considerations for underwriters; (3) state filing requirements; (4) data reporting concerns; (5) solvency concerns; (6) claims challenges arising from large deductible policies; and (7) unique professional employment organization (PEO) concerns. It was reported that 180 people asked to be involved in the calls for the study, including NAIC and IAIABC members, interested regulators and interested parties. The study group conducted calls from June through September, and on September 20 module leaders met in Indianapolis to lay out the final paper structure. The paper is now in the hands of NAIC staff for final proofing and editing, and is expected to be released in December for comments.

7. NAIC Internal Governance

During the Fall National Meeting, the NAIC elected a new slate of officers for 2016: Director John M. Huff (MO), President; Commissioner Sharon P. Clark (KY), President-elect; Commissioner Ted Nickel (WI), Vice President; and Commissioner Julie Mix McPeak (TN), Secretary-Treasurer. Senator Ben Nelson will end his current term as NAIC Chief Executive Officer on January 31, 2016 – his successor has not yet been named.

The Governance Review (EX) Task Force is in the process of implementing changes to the NAIC’s internal governance processes and procedures to address recommendations reflected in a June 2015 report from the National Association of Corporate Directors (NACD), an outside consultant hired to conduct an independent review of NAIC governance. The review was first requested by former Connecticut Insurance Commissioner Thomas Leonardi during the NAIC’s 2013 Fall National Meeting.

The Task Force reported that NACD’s recommendations encompass four general subject areas: (1) NAIC Bylaws and the roles of the officers, Executive Committee, and senior management; (2) transparency in communications and process; (3) committee leadership, structure, and inclusion; and (4) Commissioner onboarding and continuing education. During the Fall National Meeting, the NAIC adopted a number of changes to its Bylaws to address some of these changes, notably including: (1) formalizing the NAIC’s requirement that NAIC members are subject to a conflict of interest policy (adopted in 2008) and requiring members to complete a conflict of interest disclosure form; (2) reducing the size of the Executive Committee by having only the most immediate past NAIC President serve as a voting member (as opposed to all past Presidents); and (3) increasing the size of NAIC letter committees from 13 to 15 members. The Task Force is expected to consider additional NACD recommendations during 2016.

8. Additional Commissioner and Staff Changes

In addition to the NAIC leadership changes reported above, the Fall National Meeting was the last National Meeting for Commissioner Joseph Torti (RI) and Deputy Commissioner Steve Johnson (PA), who both played integral roles in the NAIC’s Solvency Modernization Initiative, which led to significant advancements in U.S. insurance regulation, including adoption of the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act and amendments to the Credit for Reinsurance Model Law and Model Insurance Holding Company System Regulatory Act. This was also the first National Meeting for two new members of the New York Department of Financial Services: James Regalbuto (Life Bureau) and Stephen Doody (Property Bureau).

                                                     

¹ The Committee is intended to provide advice and recommendations to Treasury through FIO with respect to the creation and development of nongovernmental, private market risk-sharing mechanisms for protection against losses arising from acts of terrorism.  The nine appointees, who serve terms of up to two years, include: Jonathan Clark, Guy Carpenter & Co. LLC; William Donnell, Swiss Re; Kean Driscoll, Validus Reinsurance Ltd.; Gregory Hendrick, XL Catlin; Sean McGovern, Lloyd’s of London; W. Erik Nikodem, AIG; Wendy Peters, Willis North America; Michael Sapnar, Transatlantic Holdings Inc.; John Seo, Fermat Capital Management LLC.

² In October, Treasury issued a report of its findings entitled “The Process for Certifying an 'Act of Terrorism' under the Terrorism Risk Insurance Act of 2002.”  The Report finds that “any certification decision by [Treasury] must be informed by and, to a certain extent, based on relevant loss data,” and recommends establishing a “protocol for Treasury to work with state insurance regulators and data aggregators, where appropriate, to identify potentially affected insurers from which loss data will be collected for a given act, and to establish a system for collecting, storing, and analyzing the loss data.”  Notably, the Report rejects implementing a “rigid timeline” for Treasury’s certification of an “act of terrorism,” but includes a recommendation that Treasury provide public notice as to whether an act is (or continues to be) under consideration for certification as an “act of terrorism” (together with updates on the status of the certification process relating to that act).