The National Association of Insurance Commissioners (NAIC) held its 2015 Summer National Meeting from August 13 through August 18 in Chicago, Illinois. The meeting was notable for the number of new insurance commissioners (nine since the Spring meeting). As is often the case with mid-year meetings, much of the work was focused on earlier announced initiatives, with few new trends or developments of note.
The following are some meeting highlights. We do not cover every meeting in this report, but comment on noteworthy developments and matters of particular interest to our clients.
Capital Standards
A. Topics of Particular Interest to Property and Casualty Insurers
The Casualty Actuarial and Statistical (C) Task Force met to discuss its ongoing work on a white paper on price-optimization practices for personal lines property/casualty insurance. Richard Piazza (Louisiana), acting for Commissioner Donelon as Task Force Chair, prefaced the discussion by describing the white paper as a vehicle for state insurance department actuaries to comment on price-optimization and to make recommendations to regulators. The comment period was extended after the meeting to end on September 14.
Mr. Piazza described the previously exposed portions of the white paper as near final and likely not to change significantly in substance. A newly drafted recommendations section that was exposed for comment before the meeting included the following recommendations:
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Existing state laws prohibiting rates that are excessive, inadequate or unfairly discriminatory provide adequate tools to address price-optimization practices. The few states without a requirement that rates not be unfairly discriminatory should assess whether applicable state law produces similar results, and to adopt the unfairly discriminatory standard if not.
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Rating practices should not be allowed if rates or premiums are adjusted based on propensity to shop for insurance or ask questions or based on retention analysis, unless the practice can be shown to be directly related to insurance expense, claims or business costs. The Task Force Chair agreed to delete “competitive analysis” from the list of inappropriate bases for premium adjustment based on comments that it is overbroad.
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States should issue a bulletin to communicate practices that are unfairly discriminatory. The white paper includes a model bulletin that declares adjustment of rates or premiums based upon the likelihood of individual consumers to renew their policies to be unfairly discriminatory. The bulletin carves out the practice of capping or transitioning rates or considerations of competition for individuals grouped into credible risk-based classifications.
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States should provide specific guidance for requirements for rate filings and insurer desk filings to improve transparency and disclosure as to models employed, adjustments to output and model variables. The white paper recommends eleven specific questions for regulators to ask.
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States should consider requiring actuarial or other attestations for rates. Possible attestations for consideration include an attestation that rates are within a reasonable range of cost-based indications, that they are cost-based (with specific listing of deviations from cost-based indications), or that they are based on sound actuarial methodology.
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Oversight of price-optimization used in underwriting, marketing or other operations by the Property and Casualty Insurance (C) Committee.
As in prior meetings of the Task Force, there was discussion of the difficulty and advisability of defining “price-optimization” and “unfairly discriminatory.” Not all committee members were persuaded pricing not based purely on loss costs is unfairly discriminatory. Some members and industry trade association representatives expressed concern that efforts to define what is unfairly discriminatory would get bogged down and hinder making a recommendation on the point on which there did not appear to be much disagreement: that price-optimization techniques should not be used to distinguish equally situated policyholders based on price elasticity. There did appear to be a consensus among Task Force members in support of developing uniform guidance to aid rate filing reviews and disclosure of price-optimization practices in rating and pricing. Industry representatives and some Task Force members nonetheless expressed concern that the recommendations were overly broad and too prescriptive.
The funded consumer representative who spoke focused his remarks on risk classifications, noting that price-optimization is qualitatively different from what came before because of the granularity for defining risk classifications. He expressed concern that using competitive factors to cap rate increases at a very granular level results in higher prices somewhere else. He also challenged regulators’ legal authority to allow pricing not based on cost.
The Task Force Chair expressed a desire to finalize the paper at the Fall National meeting in November.
2. The Sharing Economy – NAIC Shifts Focus to Home Sharing
The Sharing Economy Working Group, which was formed at the NAIC’s 2014 Summer National Meeting, continues its work to study the regulatory issues presented by the growing popularity of the sharing economy, including transportation-sharing services (such as Uber and Lyft) and home-sharing services (such as Airbnb and HomeAway). In Chicago, the Working Group heard presentations from the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI) regarding the industry’s stance on home-sharing.
ISO’s presentation addressed potential exposure considerations for home-sharing arrangements from the perspectives of home-sharing hosts, their landlords and travelers. Notable issues include potential ambiguity as to whether property and liability damage incurred during a home-sharing event is a covered loss under standard homeowners’ insurance policies. ISO plans on addressing these issues through updated standard policy language, including updated policy exclusions for insurers that wish to exclude coverage from home-sharing arrangements, updated policy coverage language for insurers that wish to cover such arrangements, and updated policyholder notifications advising consumers to contact their insurers for guidance on the availability of coverage. These updates are expected to be finalized by year-end.
PCI’s presentation addressed common issues raised by home-sharing and transportation-sharing services, which have been a focus of the Working Group’s work during its first year. In March, the Working Group adopted a white paper, titled “
Transportation Network Company Insurance Principles for Legislatures and Regulators,” that describes insurance issues for legislatures and regulators to consider when adopting laws or regulations regarding transportation network companies (TNCs). Topics addressed in the white paper include insurance coverage gaps, coverage amounts and types of coverage. Commissioner Dave Jones (California), Chair of the Working Group, noted that home-sharing services have less potential impact on third-parties – consequently, the Working Group does not intend to issue a white paper on home-sharing at this time; nonetheless, the Working Group will continue to monitor development of legislation and regulatory guidance related to home-sharing. Commissioner Jones also noted that the California Department of Insurance is eager to see new insurance products addressing home-sharing and that new product filings would be moved to the “top of the list” for the Department’s review.
3. Terrorism Insurance Market Data Calls
Section 111 of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) (which reauthorized the Terrorism Risk Insurance Act (TRIA) through 2020) 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. Work on a 2015 annual statement supplement to capture terrorism insurance market data was halted after, according to press reports, FIO Director Michael McRaith indicated to state insurance commissioners during a closed-door session that FIO plans to proceed with data collection measures on its own.
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:
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lines of insurance with exposure to terrorism losses;
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premiums earned on such coverage;
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geographical location of exposures;
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pricing of such coverage;
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the take-up rate for such coverage;
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the amount of private reinsurance for acts of terrorism purchased; and
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“such other matters as the [Secretary of the Treasury] considers appropriate.”
The Treasury Department 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:
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an analysis of the overall effectiveness of the TRIA program;
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an evaluation of any changes or trends in the data collected on the terrorism insurance market;
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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;
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an evaluation of the impact of the TRIA program on workers’ compensation insurers; and
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an updated estimate of the total amount of premium earned on lines of insurance with exposure to terrorism losses since January 1, 2003.
On August 12, FIO held a meeting with representatives from industry to discuss the upcoming data call. The meeting focused on practical considerations insurance companies might face in providing the information to be collected during the data call. Notably, Director McRaith emphasized that where insurers charge no additional premium for terrorism coverage, FIO feels an obligation to determine whether, and under what circumstances, it may be possible to allocate a portion of premium charged to terrorism coverage. Director McRaith also indicated that the initial data call may be high level, with a possible focus on workers’ compensation insurance. Additional details of the 2016 data call are yet to be determined, but Treasury intends to issue a proposed data call for public comment later this year, with the objective of starting data collection in early 2016. FIO is scheduled to host another meeting with industry representatives in early September to further discuss the data call.
Separately, the NAIC Blanks (E) Working Group has been working on a Supplement to the Annual Statement Blank that is intended to collect much of the same data on the terrorism insurance market. In Chicago, the Accounting Practices and Procedures (E) Task Force failed to adopt the proposed Terrorism Risk Insurance Supplement, which will now be taken up again at the Fall National Meeting for possible implementation in 2016 (and initial submissions being due in April 2017). State regulators and industry representatives expressed concern that FIO and the NAIC are not properly coordinating their efforts to collect data on the state of the terrorism insurance market. Speaking during the Financial Condition (E) Committee meeting, Superintendent Joseph Torti (Rhode Island) noted that, with the failed adoption of the Terrorism Risk Insurance Supplement, states will be issuing individual data calls to obtain the necessary data for 2015. Commissioner Mike Chaney (Mississippi) echoed this message during a meeting of the Property and Casualty Insurance (C) Committee and asked states that do issue data calls to use the Terrorism Risk Insurance Supplement as a guide. Speaking during the Terrorism Insurance Implementation (C) Working Group meeting, Director McRaith stated that FIO is looking forward to working with the NAIC to ensure that data collection efforts are coordinated, but noted the express statutory mandate under TRIPRA is imposed on FIO.
4. Large Deductible Workers’ Compensation White Paper
The Workers’ Compensation (C) Task Force heard an update from the joint NAIC/IAIABC (International Association of Industrial Accident Boards and Commissions) Working Group that is working on a white paper on large and “mega” deductible workers’ compensation policies. The formation of the Working Group was prompted by a request from the Receivership and Insolvency Task Force due to some recent insurance company failures involving inadequately secured large deductible policies, as well as reports of an increase in the number of policies with very large deductibles (including a $1 billion per claim deductible—hence “mega”). An NAIC survey determined that very few states maintain detailed records of accounts written with large deductibles, and noted the topic was last studied in 2006. The white paper is expected to include seven modules: (1) current buying trends; (2) underwriting best practices; (3) state filing requirements; (4) data reporting concerns; (5) solvency concerns; (6) unpaid claims; and (7) professional employment organizations (PEOs). The Working Group’s goal is to present a final draft of the white paper at the NAIC’s 2015 Fall National Meeting.
5. Increased Focus on Earthquake Risks
On August 14, the NAIC’s Center for Insurance Policy and Research (CIPR) hosted a special event entitled “All Things Earthquake,” where representatives from the legal, oil and gas and insurance industries discussed their views on hydraulic fracturing and loss mitigation for earthquake exposure. Regulators and interested parties also discussed scientific research on the potential for activities related to hydraulic fracturing and waste disposal to create earthquakes. On August 15, the NAIC’s Earthquake (C) Study Group held its first meeting in several years, where a presentation on “Earthquake Activity in the Contiguous States” was shown and many of the same issues were discussed. A key issue that regulators and insurers are struggling with is whether it is appropriate for insurers to deny claims under earthquake insurance policies on the “unsubstantiated belief” that earthquakes are the result of hydraulic fracturing or injection well activity (and therefore excluded as an earthquake resulting from a “man-made” cause).
B. Topics of Particular Interest to Life Insurers
State regulators continue to make strides toward implementation of principle-based reserving (PBR), and regulators appear increasingly optimistic that PBR will be implemented in 2017. In Chicago, the NAIC adopted an exemption for “small companies” from having to comply with PBR, and introduced proposals for a PBR Pilot Program and for evaluating whether the PBR implementation threshold has been met.
In 2009, the NAIC adopted a revised Model Standard Valuation Law, which authorizes PBR and a Valuation Manual that sets forth the minimum reserve and related requirements for certain products under PBR. In 2012, the NAIC adopted the Valuation Manual, despite strong opposition from several key states (including California and New York). In Chicago, the NAIC adopted a small company exemption for PBR that exempts individual companies that have less than $300 million in ordinary life insurance premiums and, if the company is part of a group of life insurers, the group has combined life insurance premiums less than $600 million. 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 in Chicago, it was reported that 36 states, reflecting 60% of total life insurance premiums written in the U.S., have adopted the amended Standard Valuation Law. Additional states reported to be considering legislation would fall just one state short of the implementation threshold.
The amended Standard Valuation Law provides that adoption by a state will only count toward the PBR implementation threshold if the law uses “substantially similar terms and provisions” as compared to the NAIC model. In Chicago, the Principle-Based Reserving Implementation (EX) Task Force issued for a 30-day public comment period a proposed plan for evaluating whether the requisite number of states have adopted laws that are “substantially similar” to the amended Standard Valuation Law. The general steps in the plan would be:
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State Survey: States will complete a survey to document their conformance to, as well as any deviation from, the amended Standard Valuation Law.
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Validation of Deviations: A designated small group will validate conformance and deviation and document such for the Task Force.
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Task Force Evaluation: The Task Force will create a list of states deemed to be substantially similar to count toward the threshold to determine the Valuation Manual Operative Date.
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Task Force Proposal: The Task Force will send the list of states to the NAIC Plenary Committee.
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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.
It is expected that this proposal will be submitted to the Plenary Committee for its final decision at the NAIC’s 2015 Fall National Meeting.
In 2016, the NAIC is expected to conduct a PBR Pilot Program similar to the 2014 ORSA Pilot Program. The PBR program would solicit participants from among state insurance regulators and companies that would be asked to identify and communicate issues or concerns to the PBR Review (EX) Working Group for evaluation of potential changes to the PBR review process or the Valuation Manual. The PBR Pilot Program Proposal indicates that “it would be most valuable to have companies participate which write term and/or universal life with secondary guarantee business and which would not be excluded via the small company exemption.” The Working Group has been tasked with developing a plan for the PBR Pilot Program and communicating that plan to states.
2. XXX/AXXX Reinsurance and Financing Transaction Issues
Credit for Reinsurance Covering XXX/AXXX Reserves
The Model Regulation, which is based on the requirements of Actuarial Guideline XL VIII (AG48), is intended to establish uniform national standards governing reserve financing arrangements pertaining to XXX and AXXX policies. Subject to certain exemptions, AG48 prescribes a required actuarial analysis on each non-exempt reinsurance agreement 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.
One of the key discussion topics noted in the Memorandum is the amount by which a cedant’s credit for reinsurance should be reduced if there is a shortfall in either component (Primary Security or Other Security). The options include: (1) “all or nothing” (if the Required Level of Primary Security is not maintained, no credit for reinsurance is allowed); (2) “dollar for dollar reduction” (credit for reinsurance is reduced dollar for dollar by the shortfall); (3) “percentage reduction” (credit for reinsurance is reduced by a proportional percentage of the shortfall between Primary Security held and the Required Level of Primary Security); and (4) “primary security limitation” (credit for reinsurance equal to the amount of Primary Security held). Doug Stolte, Deputy Commissioner (Financial Regulation) at the Virginia Bureau of Insurance, reported during the Reinsurance Task Force meeting that the XXX/AXXX Captive Reinsurance Regulation Drafting Group has considered each of these options and has selected the “all or nothing” option.
Separately, the Principle-Based Reserving Implementation (EX) Task Force is considering a recommendation that U.S. ceding life insurers be required to include a disclosure in their annual statutory financial statements of the total adjusted capital and risk-based capital of each of the insurer’s XXX and AXXX captives that engage in XXX/AXXX reserve financing transactions. The disclosure would apply only to those captives engaging in transactions subject to AG48, and no disclosure would be required in relation to captives engaging in transactions that are exempted from AG48. The Task Force has asked interested parties to consider whether it would be possible to adopt this disclosure requirement for the 2015 reporting year.
XXX/AXXX Captives
The Financial Regulation Standards & Accreditation (F) Committee set January 1, 2016 as the effective date for regulation of captive insurance companies that reinsure XXX and AXXX reserves to become an accreditation standard. 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 AG48). In addition, the standard applies prospectively, so that captives will not be subject to regulation if reinsured policies were issued prior to January 1, 2015 and ceded so that they were part of a reinsurance arrangement as of December 31, 2014. The Committee left for future action application of the standard to captives that reinsure variable annuities and long-term care policies.
3. Contingent Deferred Annuity (A) Working Group
The Contingent Deferred Annuity (A) Working Group continues its work to complete the guidance document Guidance for the Financial Solvency and Market Conduct Regulation of Insurers Who Offer Contingent Deferred Annuities by November 2015. At the Chicago Meeting, the Working Group discussed the guidance document, which is intended to assist state regulators in modifying their annuities laws to clarify their applicability to contingent deferred annuities (CDAs). Before the guidance document can be finalized, the remaining charges related to CDAs, which reside with the Life Risk Based Capital (E) Working Group and the Life Actuarial (A) Task Force, need to be resolved. Specifically, the Life Actuarial (A) Task Force has a charge to evaluate Actuarial Guideline XLIII—CARVM for Variable Annuities (AG43) to determine whether the reserve guidance, as applied to variable annuity guarantees, would be deficient when applied to CDAs, and the Life Risk Based Capital (E) Working Group has a charge to develop guidance to be included in the guidance document as to how current RBC requirements should be applied to CDAs.
The Contingent Deferred Annuity (A) Working Group agreed to make minor revisions to the guidance document before finalizing it, and to ask the Life Risk Based Capital (E) Working Group for clarification regarding its outstanding charge.
Additionally, at the Chicago Meeting the Working Group: (1) agreed to review the Life Actuarial (A) Task Force’s recommended revisions to the Standard Nonforfeiture Law for Individual Deferred Annuities; and (2) reviewed and recommended adoption by the Life Insurance and Annuities (A) Committee of draft revisions to the Synthetic Guaranteed Investment Contracts Model Regulation exempting CDAs from the scope of the Model.
4. Variable Annuities Issues (E) Working Group to Hold Meeting September 10
The Variable Annuities Issues (E) Working Group (VAIWG), Chaired by Commissioner Nick Gerhart (Iowa), was created by the Financial Condition (E) Committee at the Spring 2015 National Meeting to oversee the NAIC’s efforts to study and address regulatory issues resulting in variable annuity captive reinsurance transactions.
The VAIWG did not meet at the Chicago Meeting, and instead will hold an all-day meeting in Rosemont, Illinois, on September 10. This meeting will include a regulator-only session for half of the day, during which consultant Oliver Wyman is expected to summarize information collected from individual companies regarding their use of variable annuity captive insurance companies. Although the second half of the meeting will be open to interested parties, the NAIC will not make any part of the meeting available via conference call.
Notice of the VAIWG meeting from the NAIC urged members of the VAIWG to attend, noting that the meeting “is expected to result in decisions that impact the direction of the [VAIWG], which could include proposed changes to the solvency framework for variable annuities.”
5. Unclaimed Life Insurance Benefits Model Act
The Unclaimed Life Insurance Benefits (A) Working Group did not meet at the Chicago National Meeting. The Working Group had planned to discuss a proposed new NAIC unclaimed death benefits model law (Model Act); however, the Model Act is still being drafted by the Unclaimed Benefits Model Drafting (A) Subgroup and is not ready to be discussed by the Working Group. As such, the meeting was canceled.
The Subgroup that is drafting the Model Act plans has been meeting every other week since May and is taking into consideration various unclaimed death benefit state statutes and model laws, including the National Conference of Insurance Regulators (NCOIL) Model Unclaimed Life Insurance Benefits Act, as well as a model act drafted by the Lead States of Regulatory Settlement Agreements with many of the largest U.S. life insurers. Once the Subgroup has readied a draft Model Act, it will be released for exposure.
1. ComFrame Field Testing and Development of International Capital Standards
The ComFrame Development and Analysis (G) Working Group (CDAWG) received updates on the International Association of Insurance Supervisors (IAIS) project of field testing the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), as well as work at IAIS and the NAIC to develop international and group capital standards. CDAWG was formed in 2014 to provide ongoing review and input on ComFrame and developments on international group capital requirements.
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 Field Testing Task Force recently completed its review of IAIG volunteer responses to questions related to ComFrame’s corporate governance requirements. These findings are to be presented to IAIS in mid-September. The Task Force also received IAIG volunteer responses relating to ComFrame’s enterprise risk requirements.
Field testing is currently in the second phase of 2015 quantitative testing of the various elements of the international capital standards that will be implemented as part of ComFrame. Responses to the latest questionnaires are due by September 4. ComFrame is currently scheduled for implementation in 2019.
In July 2013, the Financial Stability Board (FSB) directed the IAIS to develop group capital standards applicable to global systemically important insurers (G-SIIs). These international capital standards are to include: (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 IAIS adopted, and in 2015 the G20 endorsed, BCR, which is the first global group capital standard for the insurance sector and provides a method to measure capital within an insurance group across jurisdictions. BCR is scheduled for implementation in 2019 in conjunction with ComFrame. It will serve as the starting point for both HLA and ICS (the latter of which may ultimately surpass BCR as the starting point for HLA).
An IAIS consultation paper on ICS issued in December 2014 sets out IAIS’s goals for ICS. IAIS’s “ultimate goal” for ICS is that it will “include a common methodology by which ICS achieves comparable … outcomes across jurisdictions,” and its “key elements” will include valuation, capital resources and capital requirements. Version 1.0 of ICS is scheduled for adoption in 2017 and Version 2.0 of ICS is scheduled for adoption in 2019. In June, IAIS issued a
Consultation Paper on HLA that seeks industry feedback on the design, development and calibration of HLA. As currently proposed, HLA would be calculated using a factor-based standard that would separate, and establish required capital amounts for, a G-SII’s insurance and non-insurance activities. Comments on the HLA consultation paper were due by August 21, 2015, and G20 endorsement of HLA is expected in November 2015.
Prompted by a concern that international standards are being developed that don’t take into account the U.S. approach to financial solvency regulation, the NAIC is separately working on its own proposal for a group capital assessment tool. In July, CDAWG circulated a “Discussion Draft on Approaches to a Group Capital Calculation” (this followed an initial draft “concepts” paper that the NAIC issued in December 2014). The July Discussion Draft states that a group capital calculation would be “a baseline quantitative measure to be used by regulators in conjunction with group-specific risks and stresses identified in ORSA filings as well as risks identified in [Enterprise Risk (Form F)] filings that may not be captured in legal entity RBC filings.” The paper sets out three basic approaches and outlines the pros and cons of each. The first is labeled “RBC Aggregation Approach” and would utilize existing regulatory capital calculations for all entities within a holding company structure: RBC for U.S. legal entity insurers, jurisdiction-appropriate calculations for non-U.S. legal entity insurers, Basel for banking entities, etc. The second is labeled “SAP Consolidated Filing for RBC” and requires establishment of consolidated accounting rules for Statutory Accounting Principles and use of consolidated financial statements in the RBC formula. The third is “GAAP Consolidated Filing for RBC-PLUS” and would utilize existing GAAP consolidated financial statement results in an RBC formula that has been adjusted to reflect more going concern confidence levels and time horizons.
The CDAWG did not discuss the three alternative approaches during the Chicago meeting, but Commissioner Kevin McCarty (Florida) did clarify that the group capital calculation tool is not intended to be a requirement, but a tool to be used in evaluating group capital of insurance groups. Commissioner McCarty also clarified that the group capital calculation tool would not be limited to IAIGs, but would apply to all insurance groups. Commissioner McCarty further noted that the group capital calculation tool is in its very early stages, with further discussion needed on how group capital analysis should be structured from a U.S. perspective. Superintendent Joseph Torti III (Rhode Island) noted that the group capital calculation tool is the next evolution in the U.S. solvency assessment framework, which is necessary due to the increased complexity of group structures.
2. Reaction to 2015 FSAP Review of the U.S. Insurance Industry
The meeting of the International Insurance Relations (G) Committee provided an opportunity for regulators and industry representatives to react to the 2015 Financial Sector Assessment Program (FSAP) reports issued by the International Monetary Fund (IMF). In April, the IMF issued its second assessment of insurance regulation in the United States (Insurance Report) and in July the IMF issued a Financial System Stability Assessment on the United States (FSSA Report). Both reports were issued as part of the IMF’s FSAP Program, which was established jointly by the IMF and the World Bank in 1999 in response to the financial crises of the late 1990s.
FSAP and FSSA Reports
A summary of the FSAP Insurance Report can be found at:
Sutherland Legal Alert: Focus on International Standards. The FSSA Report is intended to examine the soundness and resilience of a country’s banking and other financial sectors. The FSSA Report notes that, since the 2010 FSAP, important steps have been taken to restore macroeconomic and financial stability in the United States, but that new vulnerabilities are emerging. For insurance companies, the FSSA Report notes that: (1) insurance companies, hurt by the prolonged period of low interest rates, are taking on greater risks, including through market consolidation and increased investment in private equity, hedge funds, longer duration and lower credit corporate bonds, and real estate related assets; and (2) there are important handicaps to assessing the insurance sector’s health—specifically, capital adequacy at the legal entity level, measured by RBC requirements, is “hard to interpret due to valuation rules, regulatory arbitrage via captives, and lack of regulatory capital adequacy measures at group level.”
The FSSA Report makes a number of key recommendations for the U.S. insurance industry. U.S. insurance regulatory authorities are encouraged to:
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Develop and perform insurance stress tests on a consolidated, group-level basis.
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Develop and implement group supervision and group-level capital requirements for insurance companies.
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Set up an independent insurance regulatory body with nationwide responsibilities and authority to address gaps with international standards (including weaknesses in valuation and solvency requirements) and to ensure consistency in regulation and supervision.
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Implement principle-based valuation standards for life insurers consistently across the states.
During a meeting of the International Insurance Relations (G) Committee, Christy Neighbors, Deputy Director and General Counsel of the Nebraska Department of Insurance, provided an overview of the findings in the Insurance Report and the FSSA Report. She stated that some of the findings in the reports lack a sound rationale and go beyond FSAP’s purview. In particular, Ms. Neighbors took issue with the Insurance Report’s findings with respect to the process for appointment and dismissal of state insurance commissioners. Commissioner Kevin McCarty (Florida) echoed this sentiment stating that some of the reports’ recommendations—including those related to commissioner appointments—were “non-starters.” Commissioner Julie Mix McPeak (Tennessee) also noted that regulators strongly disagree with the FSSA Report’s recommendation to establish a single insurance regulatory body with nationwide responsibility and authority. Industry representatives expressed a general sentiment that the FSAP reports significantly undervalue the effectiveness of the state-based system of regulation in the United States. Commissioner McCarty noted that the NAIC will be assessing the recommendations closely and establishing the necessary work streams to provide feedback to the IMF. Commissioner McCarty also noted that the NAIC will seek input from the industry in this process.
3. Reinsurance – Reduced Collateral and Covered Agreements
During the meeting of the Reinsurance (E) Task Force, Director John Huff (Missouri), Chair of the Task Force, provided a status report on state implementation of the revised Credit for Reinsurance Model Law and Regulation (the Reinsurance Models). The Reinsurance Models allow highly rated non-U.S. reinsurers to reinsure U.S. domestic cedants with reduced collateral requirements. According to Director Huff, 32 states representing more than two-thirds of direct insurance premiums in the U.S. have adopted the revised Reinsurance Models in some form. Deputy Commissioner Steve Johnson (Pennsylvania) provided an update on the work of the Reinsurance Financial Analysis (E) Working Group (ReFAWG) and reported that, to date, a total of 28 certified reinsurers have been approved for passporting. Mr. Johnson also reported that a ReFAWG website that will provide information on the certified reinsurer application and passporting process is expected to “go live” in time for the NAIC’s 2015 Fall National Meeting. A public memorandum setting forth the information that would appear on the website has been issued for a 30-day public comment period.
Noticeably absent in Chicago was substantive public discussion regarding the possibility of a “covered agreement” being entered into between the U.S. and the European Union (EU) that would address reinsurance collateral requirements for non-U.S. reinsurers. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) authorizes the Federal Insurance Office (FIO) and the U.S. Trade Representative to negotiate and enter into agreements with foreign governments regarding prudential measures with respect to the business of insurance (“covered agreements”). In 2014, U.S. Federal and state and EU regulators issued a joint Way Forward document that expresses support for pursuing a covered agreement with respect to state-based reinsurance collateral requirements. The 2014 Way Forward also identifies both group supervision and confidentiality/professional secrecy as areas for which the possibility of a covered agreement should be explored. In addition, FIO Director McRaith reported to Congress earlier this year that the European Commission has been given a negotiating mandate to pursue an agreement with the United States that will “greatly facilitate trade in reinsurance and related activities” and “will enable us…to recognize each other’s prudential rules and help supervisors exchange information.”1 He noted that the mechanics of a covered agreement process remain under development, but that negotiations with the EU are not scheduled. In subsequent public events, if asked if negotiations are underway, he has referred to the Dodd-Frank’s requirement that FIO and the U.S. Trade Representative notify Congress before initiating negotiations to enter into a Covered Agreement.
A number of U.S. insurers are pressing for a covered agreement to address U.S. equivalency under Solvency II before Solvency II is implemented January 1, 2016. During the Reinsurance (E) Task Force meeting, states were urged to adopt the revised Reinsurance Models to head off the risk of a covered agreement preempting state authority over the subject. Director Huff, after commending states on the progress they have made in adopting the revised Reinsurance Models, noted that any discussion of federal preemption of state law via a covered agreement could be an inflection point for state insurance regulation.
Also noticeably absent in Chicago was extensive public discussion of adding adoption of the revised Reinsurance Models as an NAIC state accreditation standard. Although the issue appeared on the agenda for the Financial Regulation Standards and Accreditation (F) Committee meeting, the Committee ran out of time before it could take up the issue. In 2012, the NAIC adopted revised state accreditation standards that permit—but do not require—states to adopt reduced collateral requirements, provided that such requirements are substantially similar to revised Reinsurance Models. The current accreditation standards also permit states to maintain their existing full collateral requirements.
4. IAIS Update of G-SII List Underway
During a meeting of the International Insurance Relations (G) Committee, it was reported that the IAIS is currently updating its list of globally systemically important insurers (G-SIIs), as well as its methodology for identifying G-SIIs. In July 2013, IAIS released a list of nine G-SIIs that included Allianz, AIG, Assicurazioni Generali S.p.A., 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 list was updated in November 2014, but no additional insurers were added. The 2015 updated list of G-SIIs is expected this Fall, and the updated methodology is expected to be implemented in 2016.
The Cybersecurity (EX) Task Force received updates on Federal legislative activity and the Premera and Anthem security breaches. It also briefly discussed the purpose and intended use of the Cybersecurity Bill of Rights, which was exposed for comment prior to the meeting. There was no substantive discussion during the Chicago meeting of the exposure draft and the comment period was extended to August 31. A conference call to discuss comments will be scheduled in September.
1. Cybersecurity Bill of Rights
The Task Force was formed with a charge to advise the NAIC Executive (EX) Committee on cybersecurity issues, coordinate with NAIC standing committees regarding cybersecurity issues, represent the NAIC and communicate with other entities on cybersecurity issues and monitor cybersecurity developments. Earlier this year, the Task Force adopted twelve Principles for Effective Cybersecurity Insurance Regulatory Guidance. The Principles are intended to provide regulators with: (1) effective cybersecurity guidance regarding the protection of the insurance sector’s data security and infrastructure and to emphasize timely notification to consumers of cybersecurity breaches; (2) insurance industry protection of confidential and/or personally identifiable consumer information; (3) risk-based regulatory guidance and risk-based financial examinations; and (4) third-party vendor and service provider controls to protect personally identifiable information. The Bill of Rights is designed to set standards to aid consumers if their personal information is compromised and to provide certain rights to consumers, such as the right to: (1) know what type of personally identifiable information is being collected and how long that personally identifiable information is kept by an insurer; (2) expect that an insurer that holds personally identifiable information is adequately protecting it from disclosure to unauthorized persons; and (3) receive notice from an insurer if personally identifiable information was, or is reasonably believed to have been, acquired by an unauthorized person and could result in identity theft to the consumer. A number of the industry participants commented that the draft identified “rights” that went beyond legal requirements in various states, rendering the document potentially misleading to consumers. Both industry and consumer representatives commented that the document was repetitive and not written in a consumer-oriented way (i.e., easy to read).
The only dialogue that took place in Chicago on the subject was in response to a question from Birny Birnbaum, of the Center for Economic Justice. Mr. Birnbaum asked how the document was intended to be used. Commissioner Adam Hamm (North Dakota), Chair of the Task Force, responded that if adopted, it would be distributed to the various states for them to decide how to distribute and use, whether by consumers or insurers. He noted the principles might find their way into model legislation or regulations, and might also be used to inform Congress in dialogue about Federal legislative activity.
Also in relation to the Cybersecurity Bill of Rights, the NAIC’s Executive Committee approved the Task Force’s request for permission to review and amend the NAIC’s Insurance Information and Privacy Protection Model Act and Privacy of Consumer Financial and Health Information Regulation. The Cybersecurity Bill of Rights will be of particular interest in connection with potential amendments of these NAIC model laws, because Task Force Chair Commissioner Adam Hamm (North Dakota) emphasized that the Bill of Rights would inform the review process.
2. Update on Premera and Anthem Breaches
Representatives from Premera and Anthem provided updates to earlier reports to the NAIC. The Premera representative reported that the company’s forensic consultant, Mandiant, completed its forensic report and found no evidence of exfiltration or removal of information from the Premera network. He also reported that neither Mandiant nor the FBI has found that accessed data has been used. The representative briefly described the company’s experience in sending notices; of particular interest to the Task Force was Premera’s report of the take-up rate for credit monitoring services. Chair Hamm commented that the take-up rate was significantly higher than average take-up rates. The Premera representative replied that eliminating an “activation code” during the enrollment process made it easier for customers to enroll, and that Premera allowed a six-month enrollment period, noting that it continued to receive enrollments week after week. He also noted the role played by employer groups in employee education.
The Anthem representative reported that Mandiant and the FBI completed their investigations. He described the breach as due to an advanced persistent threat believed to involve a nation state, with intelligence gathering, not theft, as the purpose. He also reported that there is no evidence that data has been sold, dumped or disclosed on a public domain. He reported Anthem has refuted assertions by certain current and former customers that the breach was the basis for fraudulent tax returns. In response to the Chair’s question about the take-up rate for identity monitoring, he reported 4%, which was 1% lower than industry average.
1. Reinsurance Collateral – Securities Listed by the SVO
The Reinsurance (E) Task Force adopted a recommendation from the Valuation of Securities (E) Task Force (VOSTF) on amendments to the meaning and intent of the phrase “securities listed by the Securities Valuation Office [SVO],” as used in the Credit for Reinsurance Model Law and Regulation. (The SVO has been subsequently renamed the Capital Markets and Investment Analysis Office.)
Section 3 of the Credit for Reinsurance Model Law (and Section 10(A)(2) of the Model Regulation) provides that a ceding insurer may take credit for reinsurance where the reinsurer has collateralized its obligations under the reinsurance agreement with qualified security, including “securities listed by the [SVO] … and qualifying as admitted assets.” VOSTF has recommended that the SVO Purposes and Procedures Manual be amended to include a definition of “securities listed by the SVO” that includes: (1) the “SVO List of Investment Securities” (a quarterly list of securities compiled by the SVO); and (2) those securities, if any, that the Reinsurance (E) Task Force determines, over time, are eligible for use as collateral in reinsurance arrangements. Specifically, the proposed definition provides that the phrase “securities listed by the SVO,” as used in the Credit for Reinsurance Model Law and Regulation, means securities included in the SVO List of Investment Securities as defined in Part 1 § (k) of the Purposes and Procedures Manual, but shall also include U.S. Treasury Securities and U.S. Government Exempt securities not owned by an insurance company, and such other or additional type or class of securities as the Reinsurance (E) Task Force shall from time to time determine are suitable for use as collateral in reinsurance transactions and are added by the VOSTF at its request.
2. NAIC Signs MOU with Bermuda
During the opening session of the Summer National Meeting, NAIC President Monica J. Lindeen (Montana) signed a Memorandum of Understanding (MOU) with the Bermuda Monetary Authority, represented by Jeremy Cox, Chief Executive Officer of the BMA. The MOU is designed to help insurance supervisors in the United States and Bermuda coordinate on regulatory issues and facilitates the sharing of information with the goal of efficient, fair, safe and stable insurance markets. The NAIC now has MOUs with 15 individual and regional jurisdictions representing 34 countries, including Brazil, Egypt, Hong Kong, Iraq, Korea, Thailand, Russia and Association of Latin American Insurance Supervisors.
1 Testimony of Treasury Federal Insurance Office Director Michael McRaith Before the Senate Committee on Banking, Housing and Urban Affairs, April 28, 2015.
