The National Association of Insurance Commissioners (NAIC) held its 2023 Summer National Meeting from August 12 to 16 in Seattle, Washington.

As has become the norm, a number of relevant NAIC working groups and task forces met virtually in the weeks prior to the National Meeting. Consequently, in this report, we offer highlights from both the Summer National Meeting and meetings that preceded the National Meeting. Notable developments include the following:

• The Privacy Protections (H) Working Group discussed comments on the draft Insurance Consumer Privacy Protection Model Law (#674). During the meeting, industry representatives continued to express significant concern over the breadth and rigidity of the proposed model, while NAIC consumer representatives expressed broad support. Multiple Working Group members also expressed concern. Kansas, in particular, recommended that the model law workstream be terminated. The Working Group appears to be moving ahead, notwithstanding these concerns.
• The Innovation, Cybersecurity and Technology (H) Committee received feedback on the draft Model Bulletin Regarding the Use of Algorithms, Predictive Models, and Artificial Intelligence Systems by Insurers (the AI Bulletin). Ten interested parties – including trade associations representing insurers and agents, and consumer representatives – provided feedback to the H Committee on the AI Bulletin during the August 13 meeting. 
• The Big Data and Artificial Intelligence (H) Working Group received a report on the Home Insurance Artificial Intelligence (AI)/Machine Learning (ML) Survey Results (the Home AI/ML Report) that was published by NAIC staff just prior to the Summer National Meeting. The Home AI/ML Report and its corresponding memo summarize the second of four AI/ML surveys, one for each of private passenger auto insurance, homeowners’ insurance, life insurance and health insurance. NAIC staff and the Working Group continue to work on a Life Insurance AI/ML Survey report and are in the early stages of the fourth and final AI/ML survey for health insurance. 
• The Property and Casualty Insurance (C) Committee announced the development of a new data call that will help regulators better understand property markets and coverages and protection gaps, especially with respect to the availability and affordability of insurance. Regulators of at least 30 states have begun preliminary scoping work to identify regulatory issues and considerations related to affordability and availability for which regulators lack data. The group intends to develop a data call template to meet the specific needs of state regulators.
• The Financial Condition (E) Committee discussed a five-page document, Framework for Regulation of Insurer Investments – A Holistic Review (Investment Framework Memo), that identifies areas where the insurance regulatory framework for insurer investments could be enhanced, including the potential for a “modernized” Securities Valuation Office (SVO) and the establishment of high-level guidelines for considering consistency of capital across asset classes as numerous risk-based capital (RBC) investment initiatives move forward. Although the Investment Framework Memo appears to acknowledge shortcomings in the NAIC’s rulemaking process for RBC and the valuation of securities, E Committee Chair Superintendent Beth Dwyer (RI) made it clear that the multiple investment-related workstreams underway would not be paused. 
• The Financial Condition (E) Committee adopted new RBC factors for residual tranches of asset-backed securities. The action maintains the RBC factor for residual investments at 30% for 2023, with the expectation that the RBC factor would increase to 45% in 2024 and beyond. E Committee also adopted an associated 15% RBC sensitivity test for residual investments for 2023.
• The Financial Condition (E) Committee adopted a reinsurance worksheet that is responsive to Consideration 13 of the Regulatory Considerations Applicable (But Not Exclusive) to Private Equity Owned Insurers (regarding offshore and complex reinsurance transactions) and regulators’ desire to understand the true economic impact of offshore reinsurance transactions. Although initially envisioned for life reinsurance transactions, the worksheet is general in scope and can be used by a cedent’s domestic state to obtain additional information on life or property & casualty reinsurance transactions. 
• The Valuation of Securities (E) Task Force discussed comments on a proposed NAIC Investment Analysis Office (IAO) Purposes and Procedures (P&P) Manual amendment that would permit the SVO discretion over NAIC Designations assigned through the filing exempt (FE) process. The SVO proposal prompted the submission of a joint letter from eight congressional Republicans that notes, among other concerns, that the SVO proposal “appears to lack any formal methodology, [and] if enacted, would deviate significantly from the NAIC’s proper role within insurance regulation.” A response letter from NAIC Executive Committee members implies that the NAIC expects to move forward with delegating certain discretionary authority to the SVO.

We do not cover every meeting in this report; rather, we comment on select noteworthy developments and matters of interest to our clients.

1. Technology, Cybersecurity and Privacy
   1. ​Draft Privacy Protection Model Law Development Continues Despite Suggestion to Terminate the Workstream
   2. Innovation, Cybersecurity and Technology (H) Committee Receives Feedback on Model Artificial Intelligence Model Bulletin
   3. Big Data and Artificial Intelligence (H) Working Group Continues Analysis of Insurer Use of Artificial Intelligence and Machine Learning
2. Environmental, Social and Corporate Governance (ESG)
   1. ​Property and Casualty Insurance (C) Committee Announces Data Call to Help Regulators Better Understand Property Markets
   2. Climate and Resiliency (EX) Task Force Hears Update on Solvency Workstream Referrals
   3. Financial Analysis Solvency Tools (E) Working Group Exposes Climate Risk-Related Revisions to Financial Analysis Handbook
3. Financial Issues of Particular Interest
   1. ​Financial Issues of Particular Interest
      1. Framework for Regulation of Insurer Investments – A Holistic Review Memo
      2. Adoption of New RBC Factors for Residual Tranches of Asset-Backed Securities
      3. Adoption of Reinsurance Worksheet
      4. Additional PE Considerations List Updates
   2. Valuation of Securities (E) Task Force Developments
      1. SVO Discretionary Authority Over NAIC Designations Prompts Congressional Letter 
      2. IAO P&P Manual Definition of NAIC Designation
   3. Risk-Based Capital Investment Risk and Evaluation (RBCIRE) (E) Working Group Developments
      1. American Academy of Actuaries Presents Structured Securities RBC Principles
   4. Statutory Accounting Principles (E) Working Group (SAPWG) Developments
      1. Adoption of Principles-Based Bond Project Amendments
      2. Adoption of Negative Interest Maintenance Reserve (IMR) Interim Guidance
      3. Exposure of Statements of Statutory Accounting Principles (SSAP) No. 21R (Other Admitted Assets) to Assess Collateral Valuation
      4. Exposure of Proposed Revisions to SSAP No. 43R (Asset Backed Securities) regarding Residual Tranches
4. Property and Casualty Insurance Items of Particular Interest
   1. ​NAIC Adopts Amendments to the Nonadmitted Insurance Model Act
   2. NAIC Adopts Amendments to the Mortgage Guaranty Insurance Model Act
   3. NAIC Adopts Cannabis White Paper 2.0
5. Life Insurance Items of Particular Interest
   1. ​Group Capital Calculation (E) Working Group (GCCWG) Reassesses GCC Scalar Methodology for Life Insurers
   2. Financial Stability (E) Task Force Considers Updates to Actuarial Guideline 53
6. Other Items of Particular Interest
   1. ​Financial Regulation Standards and Accreditation (F) Committee Adopts 2020 Amendments to Holding Company Models as Accreditation Standards
   2. International Insurance Relations (G) Committee Exposes Comprehensive Aggregation Method Document for Use in AM/ICS Comparability Assessment
   3. Market Regulation and Consumer Affairs (D) Committee Adopts New Pet Insurance Market Conduct Annual Statement Data Call and Definitions; Votes to Re-Open Public Adjuster Licensing Model Act
   4. Reinsurance Financial Analysis (E) Working Group (ReFAWG) Has Approved 61 Reciprocal Jurisdiction Reinsurers for Passporting 
   5. Mutual Recognition of Jurisdictions (E) Working Group Monitoring Bermuda Monetary Authority (BMA) Updates to Insurance Regulatory Consultation Paper
   6. Market Regulation and Consumer Affairs (D) Committee Adopts the Voluntary Market Regulation Certification Program

1. Technology, Cybersecurity and Privacy
   1. ​Draft Privacy Protection Model Law Development Continues Despite Suggestion to Terminate the Workstream

The Privacy Protections (H) Working Group met on August 13 to discuss comments on the draft Insurance Consumer Privacy Protection Model Law (#674) (Proposed Model). The current iteration of the Proposed Model, referred to by the Working Group as Version 1.2, was published on July 11, with a comment period ending on July 28. During the August 13 meeting, industry continued to express significant concerns over its breadth and rigidity, while at least six NAIC consumer representatives expressed broad support. 

As drafted, the Proposed Model takes a novel approach to regulating privacy and would fundamentally change the manner in which insurance-regulated entities conduct business. Common concerns include:

1. the proposed limitations on data processing will severely limit the ability of regulated entities to compete in the financial services marketplace and prevent innovation
2. the 90-day automatic deletion of customer data is overly restrictive and would require costly upgrades to insurers’ systems 
3. increased notice requirements are impractical and would create more confusion for consumers than they would resolve
4. the requirement for covered entities to replace within ten years any legacy systems that cannot delete or de-identify consumers’ personal information in response to consumer requests is overly burdensome

Working Group members also expressed concern about the Proposed Model during the August 13 meeting. Kansas, in particular, expressed deep concern about the Proposed Model, noting, among other things, that (i) the Proposed Model is “very flawed,” (ii) Kansas and other states’ legislatures would not pass the Proposed Model, (iii) the Proposed Model would add cost and create a complex framework for insurers, and (iv) the Proposed Model could ultimately harm consumers. On that basis, Kansas recommended that the Working Group terminate its work on the Proposed Model and focus its efforts elsewhere. 

In response, Chair Katie Johnson (VA) stated that the Working Group recognized there are still substantial issues to work through and that the Working Group intended to keep working with all stakeholders to draft a workable model. 

Although the Working Group initially intended to adopt a final model for submission to the Innovation, Cybersecurity and Technology (H) Committee prior to the 2023 Fall National Meeting, Chair Johnson stated that the Working Group would request additional time from H Committee to continue its work. It is expected that the next iteration of the Proposed Model will be annotated to include rationales for why the Working Group chose to accept or reject stakeholder edits and that it will be exposed for public comment for four to six weeks. The Working Group did not provide additional details regarding timing.

2. Innovation, Cybersecurity, and Technology (H) Committee Receives Feedback on Model Artificial Intelligence Model Bulletin

The Innovation, Cybersecurity and Technology (H) Committee met on August 13 to receive interested party feedback on the draft Model Bulletin Regarding the Use of Algorithms, Predictive Models, and Artificial Intelligence Systems by Insurers (Model Bulletin) that was exposed for public comment on July 17. The Model Bulletin encourages insurers to implement and maintain a board-approved written AI Systems (AIS) Program that addresses governance, risk management controls, internal audit functions and third-party AIS. The goal of the AIS Program is to mitigate the risks of harm to consumers through decisions made or supported by AIS, including third-party AIS, that are arbitrary or capricious or unfairly discriminatory, that otherwise violate unfair trade practice laws or other legal standards, or that include data vulnerabilities. The Model Bulletin also advises insurers of the information and documentation that insurance regulators may request during exams and investigations of the insurer’s AIS, including third-party AIS. Ten interested parties – including trade associations representing insurers and agents, and consumer representatives – provided feedback on the Model Bulletin. 

The current draft of the Model Bulletin will be exposed for public comment until September 5, 2023. For more information, see our client alert. 

3. Big Data and Artificial Intelligence (H) Working Group Continues Analysis of Insurer Use of Artificial Intelligence and Machine Learning

The Big Data and Artificial Intelligence (H) Working Group (Working Group) met on August 13 to receive a report on the Home Insurance Artificial Intelligence (AI)/Machine Learning (ML) Survey Results (Home AI/ML Report) that was published by the NAIC just prior to the Summer National Meeting. The Home AI/ML Report and its corresponding memo summarize the second of four AI/ML surveys, one for each of private passenger auto insurance, homeowners’ insurance, life insurance and health insurance. The AI/ML surveys have the following three objectives:

1. better understand the insurance industry’s use and governance of AI/ML and big data 
2. seek information to aid the development of regulatory frameworks for insurance AI use 
3. inform regulators of the current and planned practices of companies

In a separate Home Insurance AI/ML Survey Definitions Document, AI//ML is defined as “an automated process in which a system begins recognizing patterns without being specifically programmed to achieve a pre-determined result.” The purpose of the Home AI/ML Survey, in particular, was to assess how home insurance consumers are notified of insurers’ use of AI and ML data, consumers’ ability to correct such data, and the extent to which AI and ML are contemplated by insurers’ corporate governance frameworks. The Home AI/ML Survey also asked respondents to provide the names of third-party vendors that provide data or external models on behalf of the respondents. 
 
Of the 194 Home AI/ML Survey respondents, 136 noted that they use, plan to use or intend to explore using AI/ML in certain operations. In addition: 

• 54% of respondents indicated that they use AI and/or ML in claims handling
• 47% of respondents indicated that they use AI and/or ML in underwriting and marketing
• 42% of respondents indicated that they use AI and/or ML in fraud detection
• 35% of respondents indicated that they use AI and/or ML in rating
• 14% of respondents indicated that they use AI and/or ML in loss prevention

Notably, the Home AI/ML Survey and the Private Passenger Auto AI/ML Survey (Auto AI/ML Survey) and associated memo (discussed during the 2023 Spring National Meeting) indicate that AI models are typically developed in-house except for those used to evaluate images, which are typically handled externally. In addition, the Home AI/ML Survey and the Auto AI/ML Survey indicate that insurers use AI to assess whether claims should be flagged for further investigation. The Home AI/ML Survey and the Auto AI/ML Survey also indicate that home and auto insurers use AI and/or ML to assist with the placement of targeted online ads. 

The Home AI/ML Survey was conducted under the respective market conduct authorities of Connecticut, Illinois, Iowa, Louisiana, Nevada, North Dakota, Pennsylvania, Rhode Island, Vermont and Wisconsin. Responses submitted in conjunction with the Home AI/ML Survey were afforded confidential treatment, and regulators provided assurances to respondents that responses would not be used to assess their compliance with applicable insurance law.

NAIC staff and the Working Group continue to work on a Life Insurance AI/ML Survey report and are in the early stages of the fourth and final AI/ML survey for health insurance. Upon completion of the AI/ML reports, the Working Group expects to evaluate the use of third-party models and determine whether one or more white papers on the topic would be beneficial to insurance regulators.

2. Environmental, Social and Corporate Governance (ESG)
   1. ​Property and Casualty Insurance (C) Committee Announces Data Call to Help Regulators Better Understand Property Markets

During the final minutes of the August 15 Property and Casualty Insurance (C) Committee Meeting, C Committee Chair Commissioner Alan McClain (AR) announced that the Committee would oversee the development of a new data call that will permit regulators to better understand property markets and coverages and protection gaps, especially with respect to the availability and affordability of insurance (NAIC Data Call). A press release that was issued by the NAIC to coincide with Commissioner McClain’s announcement indicates that insurance regulators for at least 30 states have begun preliminary scoping work to identify regulatory issues and considerations related to affordability and availability for which regulators lack data. The goal will be to develop a long-term, robust data collection strategy to help regulators more nimbly respond to inquiries related to their property markets versus a one-time data call. The press release also states that state insurance regulators have robust financial data to understand the impact that increasingly frequent and severe weather events, rising reinsurance costs and inflationary pressures on insurers’ solvency and investments, Regulators can assess the strength and resilience of the industry, but concede that “many states lack granular data on how this translates to availability and affordability of coverage for consumers in some areas.” 

The announcement of the NAIC Data Call comes roughly nine months after the NAIC’s response to an October 2022 proposal by the Federal Insurance Office (FIO) to issue a data call to assess climate-related financial risk across the United States and inform FIO’s work regarding the availability and affordability of insurance more broadly. The NAIC response was critical of the FIO proposal, citing, among other items, an apparent failure by FIO “to demonstrate a good faith effort to engage with state regulators” and indicating that “there are other data available in the public domain or with state insurance regulators that more specifically speaks to the risks faced in their market and the cost of catastrophic events.” It is not known whether the NAIC Data Call is in response to the data call proposed by FIO, or whether there could be opportunities for FIO and the NAIC to develop a data call jointly, as was ultimately the case with the joint data call on terrorism risk insurance. 

Neither the NAIC nor FIO have announced a timeline for completion. We will continue to monitor these developments.

2. Climate and Resiliency (EX) Task Force Hears Update on Solvency Workstream Referrals

The Climate and Resiliency (EX) Task Force met on August 15 and received an update from Solvency Workstream Commissioner Kathleen Birrane (MD) on all three climate-related referrals that the Solvency Workstream sent to their respective working groups in 2022. These include referrals to the Financial Analysis Solvency Tools (E) Working Group (available here), the Financial Examiners Handbook (E) Technical Group (available here), and the Own Risk and Solvency Assessment (ORSA) Implementation (E) Subgroup (available here) of the Group Solvency Issues (E) Working Group. The referrals provide high-level climate-risk principles for relevant groups to consider and develop as appropriate for inclusion in relevant financial solvency regulation materials (i.e., the NAIC Financial Analysis Handbook, the NAIC Financial Condition Examiners Handbook and the NAIC ORSA Guidance Manual). The Financial Analysis Solvency Tools (E) Working Group and the Financial Examiners Handbook (E) Technical Group have each taken up the referrals from the Solvency Workstream and anticipate having finalized guidance for inclusion in their respective 2024 handbooks. The ORSA Implementation (E) Subgroup has not yet taken up the referral.

The Solvency Workstream is also considering how Climate Scenario Analysis, a process of planning for plausible future large-scale climate change scenarios, could be a potential financial oversight tool for regulators. Since the Spring National Meeting, the Workstream has been holding regulator-only meetings and currently plans to release a draft referral for public comment in September.

3. Financial Analysis Solvency Tools (E) Working Group Exposes Climate Risk-Related Revisions to Financial Analysis Handbook

The Financial Analysis Solvency Tools (E) Working Group met on August 9, 2023, and voted to expose a series of revisions to the NAIC Financial Analysis Handbook. In general, the exposed revisions would expand the scope of investment risk exposure tools focused on climate-related risks. Specifically, if adopted, the proposed revisions would provide for an assessment of the potential impact of climate change and asset devaluation risk on insurers’ investment portfolios. The proposed analysis will include a review of an insurer’s response to the NAIC’s Climate Risk and Disclosure Survey, ORSA Summary Report, and SEC 10k or 10Q filings, in each case related to the insurer’s exposure to climate change and energy transition risk. The proposed revisions would apply to the Credit, Liquidity and Market Risk Repositories for all three statement types (i.e., property and casualty, life and health, and health). There are also property and casualty-specific underwriting risk repository items to analyze insurer exposure to climate-related physical risks and catastrophic events. 

The revisions are based on numerous referrals received by the Working Group, including from the Climate Resiliency (EX) Task Force, Risk Retention Group (E) Task Force, Ad Hoc (E/F) Group on Efficiencies & Resources, Risk-Focused Surveillance (E) Working Group and the Receivership Law (E) Working Group. In particular, the Climate Resiliency (EX) Task Force referral recommends that the Working Group “consider modifications to incorporate procedures for utilizing the Property Casualty RBC Cat reporting data, any investment stress scenario results available from the NAIC Capital Markets Bureau, and Climate Risk Exposure Survey results (if available) in conducting ongoing financial analysis.” 

The Working Group voted to expose the handbook revisions for a 30-day comment period ending September 8, 2023. After the comment period, the Working Group expects to review any comments received and vote on inclusion of the revisions in the handbook.

3. Financial Issues of Particular Interest
   1. ​Financial Condition (E) Committee Developments
      1. Framework for Regulation of Insurer Investments – A Holistic Review Memo

During its August 15 meeting, Financial Condition (E) Committee Chair Superintendent Dwyer briefly discussed a five-page document titled Framework for Regulation of Insurer Investments – A Holistic Review (Investment Framework Memo) that identifies areas “where the insurance regulatory framework [for insurer investments] could be enhanced,” including the potential for a “modernized” SVO and the establishment of high-level guidelines for considering consistency of capital across assets as numerous RBC investment initiatives move forward. 

Specifically, the Investment Framework Memo proposes to: 

• reduce/eliminate blind reliance on credit rating providers (CRPs) but retain overall utilization of CRPs with the implementation of a strong due diligence framework designed and implemented by an external consultant
• allow the SVO to perform individualized credit assessment and utilize regulatory discretion when needed, under well-documented and -governed parameters
• enhance the SVO’s portfolio risk analysis capabilities with investment in a risk analytics tool and corresponding personnel
• review/increase staffing to include analysts with investment actuarial and risk management backgrounds who can provide dedicated investment-related support to RBC and reserving teams
• provide additional resources to the Structured Securities Group to enhance structured asset modeling capabilities
• build out a broad policy function at the SVO and keep key external consultants on retainer to provide guidance
• consider establishing a broad investment working group under the E Committee to act in an advisory capacity to various investment processes
• reduce the size of the Valuation of Securities Task Force (VOSTF) and rename it – and the SVO – to better reflect the responsibilities of the groups beyond securities valuation

The proposed changes are intended to (i) enhance investment risk assessment, (ii) review RBC for investments and consider market impacts and consistency across asset classes, and (iii) implement a more intensive level of coordination among NAIC working groups addressing accounting, risk assessment and capital.

Although the Investment Framework Memo appears to acknowledge shortcomings in the NAIC’s rulemaking process for RBC and the valuation of securities, Superintendent Dwyer made it clear during the August 15 meeting that the multiple investment-related workstreams underway (e.g., VOSTF’s work on financially modeling collateralized loan obligations (CLOs), see Section C(2)(a), and the RBCIRE (E) Working Group’s interim and long-term proposals on RBC charges for residual tranches of asset-backed securities, see Section C(1)(b), would not pause or otherwise be delayed as a result. Superintendent Dwyer also did not address what impact the Investment Framework Memo might have on those workstreams going forward. 

The Committee voted to expose the Investment Framework Memo for a 45-day comment period ending October 2, 2023.

2. Adoption of New RBC Factors for Residual Tranches of Asset Backed Securities

The Financial Condition (E) Committee also received a proposal from RBCIRE (E) Working Group Chair Philip Barlow (DC) regarding the adoption of two “compromise” proposals (Proposals) pertaining to the “interim” RBC charges for residual tranches of asset-backed securities that were proposed by the Texas Department of Insurance and adopted by the Working Group. As adopted, the Proposals will keep the RBC factor for residual investments at 30% (with a 15% sensitivity test) for 2023, with the expectation that the RBC factor will increase to 45% (with no sensitivity test) in 2024 and beyond unless (i) an alternative proposal is submitted to the Working Group and (ii) the Working Group concludes that the alternative proposal supports a higher or lower RBC factor. Mr. Barlow previously noted that the Working Group expects any such proposal to come from one or more interested parties rather than from regulators or NAIC staff. The Proposals were unanimously adopted by E Committee.

3. Adoption of Reinsurance Worksheet

The Financial Condition (E) Committee also adopted a Cross-Border Affiliated Reinsurance Comparison Worksheet (Worksheet) that is responsive to Consideration 13 on the list of 13 Regulatory Considerations Applicable (But Not Exclusive) to Private Equity Owned Insurers (PE Considerations List). Consideration 13 pertains to offshore and complex reinsurance transactions and regulators’ desire to understand the true economic impact of offshore reinsurance transactions. Although initially envisioned for life reinsurance transactions, the Worksheet is general in scope and can be used by a cedent’s domestic state to obtain additional information on life or P&C reinsurance transactions. In addition, and although the Worksheet was designed with affiliated reinsurance transactions in mind, regulators have the ability to use the Worksheet for unaffiliated transactions. 
Regulators and NAIC staff reiterated the following clarifying points during the Summer National Meeting:

• the Worksheet is an optional tool for regulators and is not a requirement
• the Worksheet will not be an ongoing filing requirement but rather can be used as an educational tool for regulators to assess certain reinsurance transactions
• the Worksheet is not intended to be used for every reinsurance transaction or when regulators already have access to the requested information
• the Worksheet should not be viewed as a fixed template; that is, states should accept relevant materials from insurers in their original format rather than requiring insurers to use the Excel-based Worksheet
• the Worksheet is expected to receive confidential treatment

4. Additional PE Considerations List Updates

The Macroprudential (E) Working Group provided an updated status report on developments related to the PE Considerations List during its August 13 meeting. In addition to the developments highlighted above and below, notable developments include that the Risk-Focused Surveillance (E) Working Group is establishing a new group to provide guidance regarding Considerations 3 and 4 of the Considerations List. Consideration 3 states that certain insurer ultimate control persons may be focused on short-term results that are not in alignment with the long-term nature of insurers’ long-term liabilities. Consideration 4 pertains to affiliated investment management agreements (IMAs) and raises the issue of whether IMAs are arm’s-length transactions (e.g., whether a particular IMA includes one-sided termination provisions or impedes an insurer’s ability to maintain discretion and control over the investment manager). 

The Risk-Focused Surveillance (E) Working Group also discussed proposed changes to the Financial Analysis Handbook and the Financial Condition Examiners Handbook that would provide additional guidance for examiners who review affiliate service agreements. In particular, the proposed handbook changes include (i) a directive for examiners to assess service agreements that incorporate market-based reimbursement methods, and (ii) a directive to assess and determine whether cost-plus fee arrangements – whereby the rate charged under the agreement is based upon the cost to perform the service plus a negotiated fee – are fair and reasonable. With respect to both items, the Working Group agreed to refer the proposed updates to additional working groups for consideration.

2. Valuation of Securities (E) Task Force (VOSTF) Developments
   1. ​SVO Discretionary Authority Over NAIC Designations Prompts Congressional Letter

During its August 13 meeting, the VOSTF received comments on a proposed amendment (SVO Proposal) to the IAO P&P Manual that would permit the SVO discretion over NAIC Designations assigned through the FE process. During the public exposure period leading up to the Summer National Meeting, the VOSTF (and the NAIC more broadly) received a number of letters expressing concern about the SVO Proposal, including a joint trades letter signed jointly by the American Council of Life Insurers (ACLI), Private Placement Investors Association, North American Securities Valuation Association (NASVA), the Structured Finance Association, CRE Finance Council, the Mortgage Bankers Association, the Lease-Backed Securities Working Group, Group 1001, the National Association of Mutual Insurance Companies, Genworth, TIAA, Piper Sandler, BMO, and others. 

The SVO Proposal also prompted the submission of a joint letter from eight congressional Republicans dated July 13, 2023 (Congressional Letter), which notes, among other concerns, that the proposal “appears to lack any formal methodology, [and] if enacted, would deviate significantly from the NAIC’s proper role within insurance regulation. We fear that such discretion would make NAIC regulated entities susceptible to staff-driven agendas.” The Congressional Letter prompted a response from NAIC Executive Leadership dated July 25, 2023, which notes, among other items, that “when adopted by [NAIC membership, the SVO Proposal] is an appropriate approach to ensure that insurers are holding sufficient capital based on the risk they are taking with their investments and ultimately will leave policyholders better protected[, that there is no anticipated] competitive imbalance for NRSROs [i.e., nationally recognized statistical rating organizations, and that the] materiality thresholds we have put in place ensure that challenging a CRP will only commence when a significant red flag occurs, and even then, the notice and appeal process ensures fair treatment for all parties.”

VOSTF Chair Carrie Mears (IA) opened the SVO Proposal discussion by reminding the audience that regulators discussed the possibility of SVO discretion several years ago but decided against such a route because of opposition. Instead, VOSTF asked the SVO to bring thematic issues back to the Task Force in order for it to look at the FE status of any impacted asset classes. More recently, however, regulators have encountered issues as they observe new and novel investment structures. For example, at the 2023 Spring National Meeting, VOSTF deferred adoption of a February 2, 2023 proposal from the SVO that would have amended the IAO P&P Manual to include a definition for “Structured Equity and Fund” investments and remove those investments from being eligible to use CRP ratings to assign an NAIC designation (i.e., the FE process). Among other items, Chair Mears emphasized that designations are used solely within the insurance regulatory framework (i.e., they are not equivalent CRP ratings) and that the FE process is, by definition, an exemption from a filing that would otherwise be required. 

Despite Chair Mears’ statements that the SVO Proposal was meant to be limited in scope, every commenter expressed concern that the proposal was overly-broad. Commenters also expressed concern over lack of transparency and due process. One commenter noted that the mere consideration of the SVO Proposal has had a chilling effect on certain markets. Notably, Nebraska and Connecticut agreed with many of the concerns raised with respect to transparency and the appeals process. Task Force members also noted that any discretion needed to rest with state insurance departments rather than with the SVO. Mears agreed in principle and noted that it might make sense to engage an independent third party to review the operations, analysis and systems of the NAIC IAO and SVO, and that such an engagement is potentially contemplated by the Framework Document discussed in Section C(1)(a), above.

2. IAO P&P Manual Definition of NAIC Designation

The VOSTF also discussed comments on a proposed amendment to update the definition of an NAIC Designation (Proposed Definition) in the IAO P&P Manual. The Proposed Definition was put forward by SVO staff, who indicated to the VOSTF that past amendments “have led to the interpretation that there are two meanings of an NAIC Designation: one meaning, found in Part One, applicable to all securities, whether assigned NAIC Designations pursuant to the Filing Exemption process or by the SVO and a second meaning, found in Part Two, applicable only to securities assigned NAIC Designations by the SVO. To that end, the revisions proposed in this amendment have consolidated the instructions that define an NAIC Designation to make a single uniform definition and includes updates to the definition to address questions and concerns raised about the purpose of NAIC Designations versus credit rating provider ratings.” The SVO proposal also recommends that the current NAIC Designation Subscript S section in Part Two of the IAO P&P Manual be incorporated into the revised NAIC Designation section in Part One. 

Industry commenters expressed confusion and concern as to the intent, scope and impact of the Proposed Definition, particularly with respect to the “commingling” of the definition of an NAIC Designation and Subscript S Non-Payment Risk “without any significant, robust documented rationale or transparency of the potential impact.” VOSTF Chair Mears directed SVO staff to continue to work with the industry on refinements to the Proposed Definition.

3. Risk-Based Capital Investment Risk and Evaluation (RBCIRE) (E) Working Group Developments
   1. American Academy of Actuaries Presents Structured Securities RBC Principles

The RBCIRE (E) Working Group met on August 13, 2023, and received a presentation from the American Academy of Actuaries (Academy) C-1 Subcommittee Chairman, Steve Smith, on the letter Principles for Structured Securities RBC (Principles Document). Chair Smith explained that the initial focus and the original purpose of the Principles Document were CLOs and RBC arbitrage. However, the Academy quickly realized that there are higher-level concepts that apply to all structured securities more generally and decided that guiding principles were in order. The Principles Document includes two sections: (i) a C-1 Asset Modeling Flowchart that could be used to determine whether to separately model a new asset class (or individual assets within an asset class) and (ii) a discussion of seven “Candidate Principles” to govern structured securities RBC. The seven Candidate Principles are:

1. The RBC Formula Is a Blunt Filtering Tool
2. RBC Is Based on Statutory Accounting
3. C-1 Is Established for Underlying Collateral
4. Intentions Don’t Matter for C-1 Requirements
5. C-1 Requirements Reflect Likely Future Trading Activity
6. C-1 Requirement for Each Tranche Is Independent
7. There Are Different Risk Measures 

The Principles Document provides additional context for each Candidate Principle. The Academy’s purpose in presenting the Candidate Principles, all of which the Academy supports, is to receive feedback from the RBCIRE Working Group and other interested regulators regarding regulators’ overarching principles for determining whether to separately model an asset. 

Chair Smith noted that the Academy would be able to develop a framework once there is agreement on principles. The RBCIRE Working Group plans to schedule a follow-up call for regulators and interested parties to discuss the seven principles (and perhaps others) to determine which are acceptable, not acceptable or missing. The Academy’s presentation will then be exposed to public comment. A timeline for completion was not provided. 

4. Statutory Accounting Principles (E) Working Group (SAPWG) Developments
   1. Adoption of Principles-Based Bond Project Amendments 

During the 2023 Summer National Meeting, the SAPWG took action to advance its project to define what types of debt securities should be considered bonds and reported by insurers on Annual Financial Statement Schedule D-1: Long Term Bonds. With an effective date of January 1, 2025, SAPWG adopted changes to SSAP No. 26R: Bonds and SSAP No. 43R: Asset-Backed Securities to adopt the principles-based bond definition and the accounting for bonds (issuer credit obligation and asset-backed securities), as well as revisions to the various SSAPs that were updated to reflect the revised definition and/or SSAP references. 

SAPWG also voted to expose for public comment an updated issue paper and a revised SSAP No. 21R: Other Admitted Assets to provide guidance for the accounting of debt securities that do not qualify as bonds. Finally, SAPWG sponsored a Blanks (E) Working Group proposal to revise Schedule BA: Other Long-Term Assets reporting lines and columns to clarify reporting for debt securities that do not qualify as bonds. It is expected that a referral will be sent to the Valuation of Securities (E) Task Force and the Capital Adequacy (E) Task Force for a determination as to whether debt securities that do not qualify as bonds will be permitted to retain an FE or private letter rating capability and the impact of such designations on RBC. 

2. Adoption of Negative Interest Maintenance Reserve (IMR) Interim Guidance

In October 2022, the ACLI asked SAPWG to reassess the guidance for net negative (disallowed) IMR, with a request to permit admittance of those amounts because non-admittance of disallowed negative IMR can have adverse negative ramifications for insurers. While there was no change in statutory accounting guidance for year-end 2022, SAPWG discussed the topic of negative IMR during the 2023 Spring National Meeting and directed NAIC staff to proceed with drafting guidance for a 2023 solution and begin work on a long-term solution. The 2023 interim solution, INT 23-01, was adopted by SAPWG prior to the Summer National Meeting. This short-term Interpretation applies through year-end 2025. 

The interim solution reflects the following:

1. RBC must be over 300% of the authorized control level after adjustment 
2. an allowance to admit up to 10% of adjusted capital and surplus
3. no exclusions for derivatives losses included in negative IMR if the company can demonstrate historical practice in which realized gains from derivatives were also reversed to IMR and amortized
4. inclusion of a new reporting entity attestation

SAPWG will form an ad hoc technical working group, including the Life Actuarial (A) Task Force, industry stakeholders and the Academy, to work on a long-term solution. 

3. Exposure of Statements of Statutory Accounting Principles (SSAP) No. 21R (Other Admitted Assets) to Assess Collateral Valuation

During the Spring National Meeting, SAPWG re-exposed revisions to SSAP No. 21R: Other Admitted Assets (Exposure) to clarify that assets pledged as collateral must qualify for admitted asset treatment in order for collateral loans to qualify as admitted assets. The revisions specify that for any collateral loans secured by SSAP No. 48 investments (Joint Ventures, Partnerships and Limited Liability Companies) and SSAP No. 97 investments (Subsidiary, Controlled and Affiliated Entities) to be considered admitted assets, they must be audited based on the book value of the equity investments rather than their fair value (FV). SAPWG received two comment letters by the June 9 comment deadline, one in support and one in opposition to a number of provisions. As a result of the objections, SAPWG extended the Exposure period to September 12 to allow industry and SAPWG to further consider whether FV is the proper basis for testing the sufficiency of collateral for these types of collateral loans. Certain SAPWG members spoke of the need for accounting consistency and raised concerns about the “optionality” caused by granting an accounting policy election. Questions also arose about the use of FV, but neither SAPWG members nor the industry were opposed to extending the comment period to allow for further consideration of whether and how FV would work for related party loans. 

4. Exposure of Proposed Revisions to SSAP No. 43R (Asset Backed Securities) regarding Residual Tranches

NAIC staff and SAPWG have also been working on proposed revisions to SSAP No. 43R (Asset Backed Securities) to ensure consistent reporting classification for residuals based on certain regulators’ concerns that insurers’ interest in residual tranches of structured securities is underreported. As a result, updated revisions were exposed for a public comment period ending on September 12, 2023. 

4. Property and Casualty Insurance Items of Particular Interest
   1. ​NAIC Adopts Amendments to the Nonadmitted Insurance Model Act

During its August 16 meeting, the NAIC (EX) Executive and Plenary voted to adopt amendments to the Nonadmitted Insurance Model Act (#870) (Nonadmitted Model Act Amendments). The Nonadmitted Model Act Amendments generally align Model #870 with the federal Nonadmitted and Reinsurance Reform Act (NRRA), which was passed into law in 2010 as part of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. However, the Nonadmitted Model Act Amendments go further than the NRRA in some respects. For example, the amended Model #870 defines certain terms that are not defined by the NRRA (e.g., “principal place of business” and “principal residence”). The Nonadmitted Model Act Amendments also contemplate a domestic surplus line insurer regime and add a drafting note to clarify that the NRRA does not preempt state laws restricting the placement of workers’ compensation business with nonadmitted insurers. The Model Act Amendments passed unanimously, with New York abstaining.

2. NAIC Adopts Amendments to the Mortgage Guaranty Insurance Model Act

The NAIC Executive and Plenary also voted to adopt amendments to the Mortgage Guaranty Insurance Model Act (#630) (Mortgage Guaranty Act Amendments). The Mortgage Guaranty Act Amendments come after a decade of deliberation by insurance regulators and interested parties as to the proper approach to regulating mortgage guaranty insurers: Model Act #630 was reopened by the NAIC for amendment in 2013 and was last updated in 1976. Prior to its adoption at the Summer National Meeting, interested party comments focused on Section 10 of the Model Act regarding treatment of contingency reserves (i.e., the additional premium reserve established to protect policyholders against adverse economic cycles) and specifically whether separately held collateral in a trust or segregated account by a reinsurer provides reinsurance credit. Another topic of discussion was whether the Model Act should expressly state that it does not provide for a private right of action. As adopted, the Model Act does not reference a private right of action. The Mortgage Guaranty Act Amendments passed unanimously, with New York abstaining. 

3. NAIC Adopts Cannabis White Paper 2.0

The NAIC Executive and Plenary also voted to adopt the white paper from the Cannabis Insurance (C) Working Group titled Understanding the Market for Cannabis Insurance 2.0 White Paper (Cannabis White Paper). The Cannabis White Paper details emerging issues that have become more prominent with the maturation and expansion of the cannabis market since the original white paper was published in 2019. Specifically, the Cannabis White Paper outlines the current state of cannabis regulation in the United States; different designs of cannabis businesses, including jurisdictional variations; current insurance types and offerings; differences presented by insuring hemp versus cannabis; and potential future insurance products, among other issues. The Cannabis White Paper incorporates revisions that were proposed by regulators and industry representatives during the comment period. Revisions include adding claims adjusters to the list of occupations required to maintain currency in and receive specialized training for cannabis-related claims. The Cannabis White Paper was adopted unanimously by the Working Group, adopted by the Property and Casualty Insurance (C) Committee on August 15, and adopted by the Executive and Plenary on August 16. The Cannabis White Paper was adopted unanimously, with Idaho, Louisiana, Nebraska and New York abstaining.

5. Life Insurance Items of Particular Interest
   1. ​Group Capital Calculation (E) Working Group (GCCWG) Reassesses GCC Scalar Methodology for Life Insurers

The GCCWG met on July 27 to discuss comments received on an ACLI GCC proposal on scalars (Proposal), which the GCCWG exposed on June 13 for a 30-day comment period. Scalars convert non-US capital ratios into equivalent US RBC ratios. Currently, the GCC relies on “1.0 placeholder scalars.” ACLI and other industry representatives pointed out significant shortcomings of placeholder scalars and proposed that “Excess Relative Ratio” (ERR) scalars would generate GCC figures that are fit for the NAIC’s intended purpose. While a scalar methodology that is fit for purpose has been a priority for US life insurers with international operations, it has become even more of a focus now because some jurisdictions plan to change their solvency regimes in the near future (e.g., Bermuda has proposed significant changes and Japan will adopt the Insurance Capital Standard (ICS) by the end of 2025), which will have a major impact on the GCCs of companies operating in these jurisdictions if scalars are not implemented. 

The Working Group adopted a motion to move forward with the Proposal for life insurers and to provide an additional two-week period for property and casualty, as well as health insurers to opine as to the applicability of the Proposal to those lines of business.

2. Financial Stability (E) Task Force Considers Updates to Actuarial Guideline 53

During its August 13 meeting, Chair of the Financial Stability (E) Task Force Nathan Houdek (WI) introduced Fred Andersen (MN) to present an update on Actuarial Guideline 53 (AG 53), titled Application of the Valuation Manual for Testing the Adequacy of Life Insurer Reserves. Mr. Anderson reminded colleagues that Items 4, 8 and 10 of the PE Considerations List (discussed in Section C(1)(c), above) referrals are addressed in whole or in part by AG 53. 

AG 53 was adopted by the NAIC in 2022 to help ensure companies’ claims-paying ability even if complex assets do not perform as expected. It requires disclosures and asset-related information from most life insurers. The first filing submission under AG 53 was due in April. Upon receipt of those filings, the AG 53 Review Group (Review Group) of the Valuation Analysis (E) Working Group began identifying outliers by prioritizing companies with higher investment net yield assumptions. The groups found more widespread assumption of high yields for Schedule BA assets and equities than for assets like asset-backed securities, other private bonds, non-agency commercial mortgage-backed securities/residential mortgage-backed securities and CLOs. They also found that there is a wide variety of views about how various asset categories are going to perform, according to companies’ own analyses. To that end, the Review Group has proposed encouraging additional conservatism to net yield assumptions as a preliminary solution and contemplate the use of a regulatory mandate if issues remain. 

Mr. Andersen also outlined next steps as respects AG 53, including:

1. assessing reinsurance collectability risk, that is, whether there are enough quality assets at the reinsurer to pay reinsurance claims in moderately adverse conditions 
2. developing a guidance document for year-end 2023 to clarify/fill in gaps identified during the year-end 2022 filing review
3. transitioning to focusing on incomplete documentation and narrative answers, that is, identifying best practices and outlying practices

6. Other Items of Particular Interest
   1. Financial Regulation Standards and Accreditation (F) Committee Adopts 2020 Amendments to Holding Company Models as Accreditation Standards

The Financial Regulation Standards and Accreditation (F) Committee met on August 13, where it adopted the 2020 Amendments to the Insurance Holding Company System Regulatory Act (#440) and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450) as significant elements of Part A accreditation standards. The revisions are recommended for all states effective January 1, 2026, and they implement a GCC for the purpose of group solvency supervision and a liquidity stress test for macroprudential surveillance. The revisions include provisions allowing the commissioner to grant exemptions to GCC for groups meeting standards set forth in 21A and 21B of Model #450 without the requirement to file at least once. This exemption applies primarily to risk retention groups. 

2. International Insurance Relations (G) Committee Exposes Comprehensive AM Document for Use in AM/ICS Comparability Assessment

The International Relations (G) Committee met on August 13 and received an update from Chair Commissioner Gary Anderson (MA), who noted that the IAIS has released a Candidate ICS as a Prescribed Capital Requirement ahead of its adoption for Internationally Active Insurance Groups in late 2024. The consultation also solicits input from stakeholders to support an economic impact assessment of the ICS. The IAIS is entering the fourth year of the five-year monitoring period for the ICS, and specifications for both the ICS and NAIC’s preferred AM data collections will be released at the end of April, with data due to the IAIS by August 31, 2024. 

Commissioner Anderson also noted that, in order to provide more detailed information about the AM beyond what is already available, the US IAIS members (i.e., representatives from the Federal Reserve, FIO and the NAIC) committed to producing a document describing the Provisional AM that is being used in the AM/ICS comparability assessment. The document includes an explanation of how the AM will be used in the comparability assessment and includes a comprehensive summary of AM-related information, including AM principles, the provisional AM, scalars and a description of the finalization of AM and its implementation. The document is currently exposed for public consideration, with comments due September 1, 2023. A final version will be submitted to the IAIS in September.

3. Market Regulation and Consumer Affairs (D) Committee Adopts New Pet Insurance Market Conduct Annual Statement Data Call and Definitions; Votes to Reopen Public Adjuster Licensing Model Act

The Market Regulation and Consumer Affairs (D) Committee met on July 27, 2023. The Committee adopted the Pet Insurance Market Conduct Annual Statement (MCAS) data call and definitions, which was developed by the Market Conduct Annual Statement Blanks (D) Working Group at the request of the Committee and the Market Analysis Procedures (D) Working Group. The Market Analysis Procedures (D) Working Group selected pet insurance to receive the updated data call and definitions because state regulators lack the information to know which insurers are writing pet insurance in their jurisdictions and have been relying on ad hoc investigations of consumer complaints while lacking standardized data that is reported annually by insurers. The pet insurance data call will collect data for underwriting, claims, marketing and sales, lawsuits, and complaints on an annual basis, due for the first time on April 30, 2025.

The Committee also adopted charges for the Producer Licensing (D) Task Force that direct the Task Force to review and potentially amend the Public Adjuster Licensing Model Act (#228) to enhance consumer protections in the property and casualty claims process. The proposal was requested by the National Association of Public Insurance Adjusters to address licensing and other issues that arise when building contractors and certain other unlicensed persons adjust claims on behalf of policyholders. Antifraud (D) Task Force Chair Commissioner Trinidad Navarro (DE) will lead the workstream based on Delaware’s recent consideration of the scope of public adjuster’s activities and the likelihood that the workstream will address fraudulent activities.

4. Reinsurance Financial Analysis (E) Working Group (ReFAWG) Has Approved 61 Reciprocal Jurisdiction Reinsurers for Passporting

Prior to the Summer National Meeting, the ReFAWG noted that it has approved 61 reciprocal jurisdiction reinsurers and 41 certified reinsurers for passporting, and 41 states have passported a reciprocal jurisdiction reinsurer. The ReFAWG expects to hold additional meetings in 2023 to approve additional certified and reciprocal jurisdiction reinsurers for passporting.

5. Mutual Recognition of Jurisdictions (E) Working Group Monitoring Bermuda Monetary Authority (BMA) Updates to Insurance Regulatory Consultation Paper

On February 24, 2023, the BMA issued a consultation paper (updated May 1, 2023) on planned enhancements to its regulatory process. During the Summer National Meeting, the Recognition of Jurisdictions (E) Working Group Chair Bob Wake (ME) added that the BMA will issue another draft later in August or September, with expected changes to its regulatory regime. Wake noted that the United Kingdom is also working on regulatory regime changes that move away from the EU’s Solvency II regulatory scheme to a new “Solvency UK” scheme. The BMA changes and Solvency UK are both expected to be adopted in 2024. Changes to Japan’s solvency regime are expected to take effect on April 1, 2025. Bermuda, the United Kingdom and Japan are each included on the NAIC’s lists of certified and reciprocal jurisdictions (the UK is a party to the Bilateral Agreement Between the United States of America and the United Kingdom on Prudential Measures Regarding Insurance and Reinsurance as respects reciprocal jurisdiction status and, therefore, is not subject to Working Group authorization for reciprocal jurisdiction status).

6. Market Regulation and Consumer Affairs (D) Committee Adopts the Voluntary Market Regulation Certification Program

The Market Regulation and Consumer Affairs (D) Committee met on August 15, 2023, and unanimously adopted the Voluntary Market Regulation Certification Program. Developed in response to federal government critiques of states’ patchwork oversight of insurers’ market behavior, the new program is designed to create a uniform, collaborative system of market regulation. It is a voluntary program consisting of a series of requirements and a companion scoring matrix that provides states a way to self-certify the ability to conduct market conduct examinations, market analysis and related continuum activity functions performed for insurance consumer protection. Using the scoring matrix, states can calculate their score based on 11 standards over five broad categories, including insurance department staffing and statutory authority to use the Market Regulation Handbook.

________

[View source.]