NAIC Issues Draft Guidance on Group Capital Calculation

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Controlling persons of insurance companies would be required to file an annual group capital calculation (GCC) with state insurance regulators, and such information would be subject to confidentiality protections, under new proposed guidance from the National Association of Insurance Commissioners (NAIC).

Insurers should be carefully analyzing whether they would be subject to these requirements and, if so, what the effects of the NAIC’s GCC requirements and methodologies will be on them.

On June 16, the NAIC’s GCC Working Group exposed for public comment draft amendments to the NAIC’s model Insurance Holding Company Systems Regulatory Act (the Holding Company Act), the states’ principal tool for regulating controlled insurance companies. The amendments would incorporate the use of a GCC, which has been developed over the past several years as an additional tool that allows regulators to oversee an insurance group’s financial health. Comments on the NAIC draft are due on or before July 15. These developments come at a time when the International Association of Insurance Supervisors is introducing its own group capital standard, ICS 2.0, for internationally active insurance groups, adopted by the IAIS last November for a five-year monitoring period.

Under the new NAIC draft amendments, each ultimate controlling person of every insurer must file an annual GCC in accordance with instructions published by the NAIC. The report would be filed with the “lead state” commissioner of the insurance holding company system as determined in accordance with prior NAIC guidance.

The following holding company groups would be exempt from the GCC filing requirement:

  • An insurance holding company that does not conduct business outside of the United States and either
    • is an insurer classified as either a county mutual insurance company, a town mutual insurance company or a farmers’ mutual insurance company; or
    • has premiums of less than $1 million in any calendar year and less than 1,000 policyholders or certificate holders of direct written policies nationwide at the end of the calendar year.
  • An insurance holding company whose non-U.S. groupwide supervisor is the U.S. Federal Reserve, which instead would be permitted to file a copy of the calculation required by the Fed with the lead state commissioner.
  • An insurance holding company whose non-U.S. groupwide supervisor is located within a “reciprocal jurisdiction” (under applicable credit-for-reinsurance law).[1]
  • An insurance holding company[2]
    • that has provided information to the accredited lead state, either directly or indirectly through the groupwide supervisor, where the lead state has determined such information is satisfactory to allow the lead state to comply with NAIC guidance, and
    • whose non-U.S. groupwide supervisor either
      • recognizes and accepts the GCC for U.S. insurance groups that operate in that jurisdiction; or
      • for jurisdictions where any U.S. insurance groups do not operate, recognizes the GCC as an acceptable international capital standard.

The insurance commissioner may exempt an ultimate controlling person from filing the annual GCC if the insurance holding company system has previously filed the annual GCC and the commissioner determines that the insurance holding company system meets all the following criteria:

  • Has annual premiums under $1 million.
  • Has no insurers domiciled outside of the United States or one of its territories.
  • Has no banking, depository or other financial entity that is subject to a specified regulatory capital framework within its holding company structure.
  • Has de minimis material affiliated transactions between any of the insurers and the non-insurers "that do not impart any risk associated with these transactions."
  • Has de minimis “materially risky non-insurers” (as defined in the draft amendments) within its holding company structure.

In some instances, the commissioner may alternatively accept, in lieu of a complete GCC filing, an abbreviated annual filing that lists all the entities within the group as well as corresponding key financial figures from those entities and any other specified information from the GCC template. This abbreviated filing may be accepted if either (i) the ultimate controlling person is a U.S.-regulated insurer that files annual Risk-Based Capital (RBC) calculations, and the commissioner has determined that there are de minimis materially risky non-insurers; or (ii) the insurance holding company system has annual premiums under $1 million, and the following additional criteria are met:

  • The insurance holding company system has no insurers domiciled outside the United States.
  • The holding company includes no banking, depository or other financial entity that is subject to a specified regulatory capital framework.
  • The commissioner has not determined that the holding company structure has de minimis material affiliated transactions between any of the insurers and the non-insurers or has not determined that the holding company structure has de minimis "materially risky insurers" (apparently "non-insurers" was meant here), but believes the filing of the abbreviated filing is sufficient to meet the needs of the commissioner.

Notwithstanding an available exemption, the commissioner may require that the ultimate controlling person file an annual GCC, if any of the following criteria are met:

  • A material transaction has occurred since the last filing of the annual GCC or the abbreviated filing described above.
  • Any insurer within the insurance holding company system is in an RBC action-level event or similar non-U.S. condition.
  • Any insurer within the insurance holding company system meets one or more of the standards of an insurer deemed to be in “hazardous financial condition” (as defined).
  • An insurer otherwise “exhibits qualities of a troubled insurer as determined by the commissioner based on unique circumstances,” such as the type and volume of business written and ownership and organizational structure.

The commissioner must maintain the confidentiality of the GCC, the group capital ratio and any group capital information received from an insurance holding company supervised by the Fed and non-U.S. groupwide supervisors. With respect to all other group capital-related information required to be filed with the commissioner, the commissioner may not make such information public without the prior written consent of the insurer unless the commissioner, after notice and a hearing, determines that the interest of policyholders, shareholders or the public will be served by the publication thereof. The commissioner may not be permitted or required to testify in any private civil action concerning any such confidential materials.

The commissioner may share materials with other regulators and the NAIC, third-party consultants, and law enforcement bodies where (i) such recipients agree to maintain confidentiality and (ii) in the case of other jurisdictions, the jurisdiction has similar laws. The commissioner must enter into written agreements with the NAIC and any third-party consultant governing sharing and use of such information. Such agreements must specify procedures and protocols regarding the confidentiality and security of information shared. The agreement must also provide that ownership of information remains with the commissioner, and that the NAIC’s or the third-party consultant’s use of the information is subject to the direction of the commissioner.

In addition, such agreements must prohibit the NAIC or third-party consultant from storing the shared information in a permanent database after the underlying analysis is completed. Prompt notice must be given to an insurer whenever the NAIC or third-party consultant receives a request or subpoena for that insurer’s confidential information. The NAIC and the third-party consultant must be required to consent to intervention by an insurer in any judicial or administrative action in which the NAIC or a third-party consultant may be required to disclose such confidential information. In the case of an agreement involving a third-party consultant, the agreement must provide for the insurer’s written consent.

The amendments specify that the sharing of information by the commissioner does not constitute “a delegation of regulatory authority or rulemaking” and make the commissioner “solely responsible” for the enforcement of the provisions of the Holding Company Act. Disclosing information to the commissioner does not constitute a waiver of any privilege or other claim of confidentiality. Information in the possession or control of the NAIC is confidential and privileged and is not subject to open-records statutes. Such information, moreover, is not subject to subpoena or discovery or admissible in evidence in any private civil action. In addition, to discourage the use of GCC data to rank insurers in the marketplace or as an advertising tool, the amendments prohibit anyone engaged in the insurance business from making, publishing or disseminating statements with regard to the GCC or group capital ratio of any insurer or any insurer group.


[1] This exemption does not apply to the U.S. operations of a non-U.S. insurance holding company if its groupwide supervisor does not recognize the GCC for any U.S. insurance group’s operations in that groupwide supervisor’s jurisdiction.

[2] This exemption also does not apply in the case described in footnote 1.

[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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