NAIC, Industry Wrangle Over Key Aspects of Insurer Capital, Solvency Regulation

Kramer Levin Naftalis & Frankel LLP
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Insurance carriers will find the following topics, recently discussed at the National Association of Insurance Commissioners (NAIC), relevant to capital management, financial risk, solvency and similar “prudential” issues, and should continue to monitor developments in these areas.

These and other matters were discussed at the NAIC’s Fall 2019 National Meeting in Austin, which was held Dec. 7 – Dec. 10, 2019.

Although few consequential decisions were made at this meeting on such matters, the discussions represented potentially key inflection points in understanding which way regulators are heading. Battle lines between regulators and industry also came into sharper focus.

  • Group capital figured prominently in multiple NAIC sessions, including those of the Group Capital Calculation Working Group (GCCWG) and the International Insurance Relations (G) Committee.
    • Regulators heard the results of field testing on the NAIC’s prospective group capital calculation (GCC), yielding questions on capital and debt instruments, scope, materiality and other key definitional components.
    • The NAIC described the GCC as the way in which ICS 2.0 (the capital standard for international insurance groups recently adopted by the International Association of Insurance Supervisors, or IAIS) will be implemented in the U.S. But the NAIC also stressed, under skeptical questioning from interested parties, that a “jurisdictionally agnostic” aggregation method (AM), and not necessarily the GCC itself, will be the standard ultimately submitted to the IAIS for “comparable outcome” purposes. The AM is to be developed in response to the IAIS’s adoption of ICS 2.0.
  • The Health Risk-Based Capital Working Group considered the proper role of investment income in determining health carrier capital requirements. Additional public comments will be solicited amid disagreements between industry and regulators over bond factors.
  • The Valuation of Securities Task Force continued its deliberations on look-through treatment of principal protected securities, indicating that it expects to expose draft guidance for public comment in 2020. The Capital Adequacy Task Force took up similar issues related to structured notes.
  • Offshore reinsurers providing capacity to the U.S. primary markets continue to see an improving climate on collateral requirements. Specifically, Bermuda, Switzerland and Japan were approved for “reciprocal” jurisdiction status (and reapproved for “qualified” jurisdiction status) by the Reinsurance Task Force.
  • Insurance Business Transfers continue to draw NAIC scrutiny. The Restructuring Mechanisms Working Group engaged in pointed exchanges with representatives of industry on the proper role of third-party experts in evaluating transactions.
  • The Statutory Accounting Principles Working Group adopted new guidance on the following:
    • Derivatives not falling within any of the permitted categories of hedging, income-generation and replication should be reported at fair value and non-admitted.
    • Goodwill resulting from an acquisition by an insurer that is reported on the target’s financials using pushdown accounting was limited to 10 percent of the acquiring insurer’s capital and surplus.
    • Wash sale accounting need be used only for wash sales straddling a reporting period, such as across a quarter-end or year-end.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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