The National Association of Insurance Commissioners (NAIC) held its 2020 Summer National Meeting virtually from July 28 to August 14, 2020. The meeting was originally scheduled to be held in Minneapolis, Minnesota, but was changed to an all-virtual meeting due to the COVID-19 pandemic. The Summer National Meeting was the first national meeting of 2020, with the Spring National Meeting having been cancelled. Notable developments from the Summer National Meeting include:
- The Executive Committee established a special committee focused on race and insurance, and held a special session that examined the history of race in insurance and what state insurance regulators and industry can do to identify and address racially discriminatory practices.
- The NAIC adopted principles for artificial intelligence (AI) in insurance that provide guidance to regulators and businesses regarding the use of AI, while emphasizing the importance of accountability, compliance, transparency and safe, secure, fair and robust outputs.
- The Life Insurance and Annuities (A) Committee and its working groups discussed product illustration issues and state activity to adopt the revised Suitability in Annuity Transactions Model Regulation and related guidance.
- Regulators and industry discussed updates on key regulatory initiatives, including the group capital calculation tool, macroprudential surveillance initiatives and international regulatory developments, including implementation of the insurance capital standard and the Holistic Framework for Systemic Risk.
The following are some highlights from the Summer National Meeting. We do not cover every meeting in this report; rather, we comment on select noteworthy developments and matters of interest to our clients.
- Issues of General Interest
- NAIC Increases Attention to Race and Insurance
A common theme throughout the Summer National Meeting was the need for increased attention to race and equality issues in insurance. The NAIC Executive Committee has established a special committee focused on race and insurance that is tasked with engaging a broad group of stakeholders on issues related to race, equity, diversity and inclusion in the insurance sector. The special committee will conduct research and analysis on the level of diversity and inclusion within the insurance sector, and is expected to report its findings by year-end, including insurance practices that potentially disadvantage minorities and recommend steps that regulators and industry can take to increase diversity and inclusion. The special committee is co-chaired by NAIC President Director Ray Farmer (SC) and NAIC President-Elect Commissioner David Altmaier (FL). Director Dean Cameron (ID) and Director Chlora Lindley-Myers (MO) serve as co-vice chairs of the special committee. The NAIC is also currently recruiting for a Diversity Officer and has formed a Diversity, Equity and Inclusion Council.
During the Summer National Meeting, the NAIC hosted a Special Session on Race and Insurance that examined the history of insurance and what state insurance regulators and industry can do to identify and address any racially discriminatory practices. The session was a listening session to inform further targeted NAIC activity to address ongoing, potential racially discriminatory practices in the design, pricing and sale/access of insurance products, and ways to promote diversity and inclusion within the insurance sector. Key issues that emerged include the need to promote diversity and inclusion in industry hiring practices, access to affordable policies for minority communities and concerns with big data.
The first panel, Historical Context on Racial Discrimination within the Insurance Sector, explored past racial discriminatory practices in insurance underwriting, rating, and sales, including "redlining" and its lasting effects. Panelists discussed how availability and affordability of insurance coverage continues to be an issue for minority communities. The panelists stressed that it is important for minority communities to have equal access to insurance products that are affordable and relevant, and the need for insurance companies and regulators to actively recruit, train and retain diverse candidates.
The second panel, Current Racially Based Challenges within the Insurance Sector, covered current practices that potentially disadvantage minorities, including the use of big-data and algorithmic-based underwriting models. Sonja Larkin-Thorne, a consumer advocate and chairwoman of the Consumer Data Subcommittee of the Connecticut Insurance Department’s Advisory Council on Technology, reported on the Subcommittee’s work in evaluating the use of big data in insurance. She reported that vendors are providing insurance companies with data on human behaviors that include shopping habits, driving patterns and demographics, such as occupation, education, voting history, marital status, salary history and social media contacts. Panelists noted concerns relating to the lack of transparency in insurers’ use of this consumer information, as well as data accuracy. As discussed in more detail below, during the Summer National Meeting, the NAIC adopted principles for the use of AI in insurance that are intended to help address some of these issues.
The third and final panel, Increasing Diversity and Inclusion within the Insurance Sector, focused on steps that both regulators and industry stakeholders can take to improve diversity and inclusion within the insurance sector. The panelists discussed their perceptions of discrimination and current issues of unfair discrimination in the insurance sector.
- Group Capital Calculation Working Group Makes Progress on Template and Instructions
The Group Capital Calculation (E) Working Group discussed comments submitted on the exposure of the proposed GCC template and instructions, which were revised to incorporate findings from the field test of 32 volunteer companies. Commissioner David Altmaier (FL), Chair of the Working Group, noted that the comments received by the July 21, 2020, deadline were extensive and thoughtful and had been consolidated into an NAIC staff “Comment Summary” outlining 13 discreet issues.
During the Working Group meeting, there was only time for the first seven of the 13 issues in the Comment Summary to be discussed. A number of concerns were expressed, including: the need to expose any GCC related changes in the Financial Analysis Handbook for public comment; the advisability of an Authorized Control Level (ACL) calibration level (300%) that is inconsistent with risk-based capital (RBC) reporting and industry’s current reporting of two capital calibration levels (100% ACL and 200% ACL); the application of the GCC to “financial entities” and how they should be defined; the definition of material risk; how affiliates should factor into the GCC; and charges for financial entities not subject to RBC charges.
As a result of the discussion, it appeared there was room for continued dialogue between NAIC staff and interested parties to attempt to resolve matters related to Issues 3 (scope of application), 4 (excluded entities/material risk), 6 (definition of financial entities), and 7 (treatment/charges financial entities) outlined in the staff Comment Summary. Chairman Altmaier asked interested parties to work with staff on a redraft of those issues. The Working Group’s next call is scheduled for September 2, 2020, when they are expected to discuss the remaining issues in the Comment Summary.
- Updates from the Statutory Accounting Principles (E) Working Group
The Statutory Accounting Principles (E) Working Group (SAPWG) exposed a number of proposed revisions to statutory accounting guidance, including a revision to SSAP No. 71 – Policy Acquisition Costs and Commissions to clarify existing levelized commissions guidance, which requires full recognition of the funding liabilities incurred to date for prepaid commission expenses. The revisions also clarify that the recognition of commission expense is based on experience to date. During the discussion, interested parties disputed the NAIC categorization of the revisions as “non-substantive” and made an appeal for additional time and a January 1, 2021, effective date due to the significant change to the guidance as currently applied.
The revisions, exposed for public comment until September 18, 2020, are consistent with the 2019 Fall National Meeting exposure, except that they include guidance to clarify that reporting entities that have not complied with the original intent shall reflect the change as a correction of an error, in accordance with SSAP No. 3—Accounting Changes and Corrections of Errors, in year-end 2020 financial statements.
Other significant exposures include a revision to SSAP No. 25 – Affiliates and Other Related Parties to clarify that a party with a non-controlling ownership interest greater than 10% is a “related party” for statutory accounting purposes
- Updates from the Valuation of Securities (E) Task Force
The Valuation of Securities (E) Task Force adopted its July 1 and May 14 minutes, which included the following action:
Adopted an amendment to the P&P Manual for principal protected securities (PPS), with an updated description, definition and instructions. This amendment removes PPS from filing exemption (FE) eligibility and requires all PPS, including those currently designated under the FE process, to be submitted to the Securities Valuation Office (SVO) for review under their Subscript S authority beginning Jan. 1, 2021, and filed with the SVO by July 1, 2021, if previously owned. This amendment was exposed for a 30-day public comment period ending March 5.
Also during the meeting, Charles Therriault (NAIC Securities Valuation Office (SVO)) reported on a situation he said the SVO is experiencing in which a few insurers were unwilling to provide documents that the SVO requested to analyze the investments they had submitted. He said, “The refusal was accompanied by an unusual challenge asking where, in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual), the requirement for submission of the documents being asked for, appears?” Mr. Therriault said he believes, in the simplification of the Manual, some of the instructions may have inadvertently been omitted. Consequently, he asked for consideration of a proposed amendment to the P&P Manual intended to clarify and fill in the gaps that may exist in the Manual.
Mr. Therriault said the amendment reflects the long-standing expectation by the Task Force that insurers will provide the SVO staff with the materials necessary to analyze investments submitted to it and calls upon insurers to provide that documentation. He described the requested amendment as clarifications of existing guidance requiring insurers to provide items such as the financial statements, internal analysis, and agreements in any applicable form. Without the required information and the ability to request it, he said, the SVO would not be able to fulfill its responsibilities. He closed by stating that he does not think anything in the amendment is new but does clarify the SVO’s expectations of the information they will be looking for. The proposed amendment is exposed for comment until October 6, 2020.
- Updates on Macroprudential Surveillance Initiatives
The NAIC’s work on macroprudential surveillance is overseen by the Financial Stability (EX) Task Force, which received updates on the NAIC’s stress test initiatives and the International Association of Supervisors’ (IAIS) global monitoring exercise (GME).
- Liquidity Stress Testing Framework
Justin Schrader (NE), Chair of the Liquidity Assessment (EX) Subgroup, reminded the Financial Stability Task Force that in April 2020, due to the COVID-19 pandemic, the Task Force agreed to the Subgroup’s request to pause work on the 2019 liquidity stress test and instead address an American Council of Life Insurers (ACLI) proposal to focus on macroprudential information regarding how the insurance sector is navigating the current market conditions due to economic impacts of the current pandemic.
A study group held several conference calls between April and June 2020 to establish a data collection plan for the 23 life insurance groups originally in scope based upon the Subgroup’s revised scope criteria. The data collection plan consists of two phases. Phase 1 is a request for qualitative data based on first quarter financial information and was due to the lead state regulators by July 15, 2020. Phase 2 is a request for qualitative and quantitative data based on second quarter financials and was due to be submitted to the lead state regulators by August 31, 2020. NAIC staff will compile the results of both phases for presentation to the regulators and they will be used to help the Study Group refine its prior work to develop the 2019 liquidity stress test. Mr. Schrader said that while previously not considered, a pandemic in conjunction with economic stress will be considered for a stress scenario for the postponed stress testing.
- Update on NAIC Capital Market Stress Tests
Eric Kolchinsky, Director of Structured Securities and Capital Markets at the SVO, reported on equity and debt performance and the impact on insurance company publicly traded common stock. The SVO found that equity markets continue to stabilize and are far off their lows of March 2020 and that some debt downgrades have occurred, but they have had a minimal impact on insurer portfolios.
Mr. Kolchinsky also reported on the results of insurance company collateralized loan obligation (CLO) investment stress testing that the SVO ran in 2019 and updated through June 2020. Given the financial market stress expected to result from the COVID-19 pandemic, two additional scenarios were run. This testing demonstrated that COVID-19-related scenarios will have a minor impact on the vast bulk of CLO-holding insurers. However, it was reported that significant CLO exposures relative to capital and surplus, and concentrated exposures to “atypical” securities (i.e., those that have unusual payment promises, such as equity tranches) are potential risks (particularly in a stressed environment) for a several medium to small insurers. Based on these findings, the SVO continues to believe that risk from CLOs is highly concentrated and is not a systemic issue for the industry.
- IAIS Global Monitoring Exercise
Tim Nauheimer, a member of NAIC staff, provided an update on the IAIS Macroprudential Monitoring Working Group (MMWG), which oversees many of the IAIS’ holistic initiatives. Included among those initiatives is GME, which includes Individual Insurer Monitoring (IIM) and Sector Wide Monitoring (SWM).
In response to the disruption caused by the pandemic, the IIM exercise was reduced to a targeted COVID-19 IIM data collection at the end of April 2020. The IIM quantitative and qualitative templates must be completed by the 58 participating insurers (including 16 U.S. insurers) on a quarterly basis. The SWM exercise was launched in March 2020, but was also reduced to a limited COVID-19 sector-wide monitoring data collection exercise. The IAIS, in consultation with the Financial Stability Board (FSB), agreed that reporting to the FSB on the outcomes of the 2020 GME will be postponed by one year to October 2021.
The IAIS announced that the special topic for this year’s Global Insurance Market Report will be climate risk. The IAIS will collect data via a jurisdictional survey on climate risk. This aligns with the NAIC’s newly-formed Task Force on Climate and Resiliency (discussed below).
Finally, the IAIS Macroprudential Supervision Working Group (MSWG) recently completed and exposed the Application Paper on Liquidity Risk Management and is preparing for a second public consultation on the paper in November, 2020.
- Updates on International Regulatory Developments
The International Insurance Relations (G) Committee received updates regarding actions taken by the IAIS, including actions related to the insurance capital standard (ICS), the Holistic Framework for Systemic Risk (Holistic Framework) and the IAIS response to COVID-19, as well as updates on other international activities.
- Update on ICS
In November 2019, the IAIS adopted the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), which is a set of international supervisory requirements focusing on the effective group-wide supervision of international active insurance groups (IAIGs). ICS version 2.0, which is included in ComFrame and is a risk-based, group-wide global insurance capital standard for IAIGs, is being conducted in two phases: (1) a five-year “monitoring period”, which began in January 2020 and during which ICS version 2.0 is being used only for confidential reporting to the group-wide supervisor and discussion in supervisory colleges (and not as a basis to trigger supervisory action); and (2) implementation of ICS version 2.0 as a group-wide prescribed capital requirement.
In connection with the ICS five-year monitoring period, the IAIS is collecting data to assess whether the Aggregation Method (AM) (which is being developed by the United States and other jurisdictions and utilizes existing regulatory capital calculations for all entities within the holding company structure) provides comparable outcomes to ICS version 2.0. If the AM does provide comparable outcomes to ICS version 2.0, it will be considered an “outcome-equivalent approach” for purposes of implementation of ICS version 2.0. The IAIS released ICS and AM data collection packages to volunteer groups in April 2020 and has set an October 31, 2020 due date for reporting the data.
Regarding developing an AM that delivers comparable outcomes to the ICS, Committee Chair Gary Anderson (MA) noted the issue of “scalars” (i.e., adjustments that will need to be applied to capital requirements set by different jurisdictions to bring them to a globally comparable level). Scalars will be used in both the NAIC’s GCC and the AM and are of particular importance to IAIGs. The NAIC is seeking the assistance of the American Academy of Actuaries to conduct academic research to inform the NAIC’s consideration of the appropriate scalars methodology to use.
- Update on the Holistic Framework
The IAIS also adopted the Holistic Framework in November 2019, with implementation beginning in January 2020. The Holistic Framework is intended to assess and mitigate systemic risk in the insurance sector through a sector-wide, activities-based approach, rather than through the entity-based approach that results in additional policy measures being imposed on only a relatively small group of insurers identified as global systemically important insurers (G-SII). Implementation of the Holistic Framework is expected to provide an enhanced basis for assessing and mitigating systemic risk in the insurance sector, and to eliminate the need for identification of insurers as G-SIIs.
The Holistic Framework consists of an enhanced set of supervisory policy measures and powers of intervention, an annual GME, and a robust implementation assessment. For the implementation assessment, the IAIS is currently conducting a baseline assessment that focuses on relevant Insurance Core Principles (ICP) and ComFrame standards, which will help the IAIS assess the level and means of implementation by jurisdiction. Once the baseline assessment is finalized, the IAIS is expected to share the outcomes with the broader IAIS membership, the FSB and the general public in March 2021. In particular, the outcomes of this assessment will be reviewed by the FSB when determining whether to discontinue or reestablish an annual identification of G-SIIs.
Finally, upon conclusion of the baseline assessment, the IAIS will undertake targeted jurisdictional assessments in 2021 and 2022 to determine the consistency of implementation of the Holistic Framework. The IAIS is still working through the details of the targeted jurisdictional assessments, including the scope of the assessments, the jurisdictions involved, and how the assessments will be operationalized.
- IAIS Response to COVID-19
IAIS Secretary General Jonathan Dixon reported on the IAIS response to COVID-19. The IAIS has focused on (1) understanding and analyzing the impact of COVID-19 and the risk it poses to the global insurance sector, and (2) providing guidance to member insurance supervisors about how to respond to the risks of COVID-19. Regarding understanding and analyzing the impact of COVID-19 and the risk it poses to the global insurance sector, the Holistic Framework GME was refocused to specifically collect COVID-19-related data. Regarding providing guidance to member insurance supervisors about how to respond to the risks of COVID-19, the IAIS has established a COVID-19 supervisory response information-sharing hub for members. Secretary General Dixon also noted that IAIS-COVID-19-related supervisory measures have focused on: (1) strengthening the operational resilience of insurers and monitoring business continuity plans, (2) providing operational relief to enable insurers to focus on assisting and managing exposures to the pandemic and ensuring uninterrupted services to their customers; (3) monitoring capital and solvency as well as adjustments to insurers’ risk management; and (4) market conduct.
- IMF Report on US Financial Regulatory System
Earlier this month, the International Monetary Fund (IMF) issued a Financial Sector Assessment Program (FSAP) assessment of the US financial regulatory system, including the US state insurance regulatory system. The FSAP report highlights enhancements and strengths of the US state insurance regulatory system since the IMF’s last report in 2015, including: (1) implementation of principles-based reserves in the life insurance industry (which addressed issues found on valuation in the 2015 FSAP); (2) implementation of the risk-focused surveillance and financial analysis; (3) the NAIC’s advanced framework for monitoring individual asset-side risks; and (4) that financial stability risk stemming from the insurance sector currently appears to be contained. However, the FSAP report also recommends certain improvements, including: (1) further development of risk-based supervision; (2) improving consistency of life insurer liability valuation methods; (3) enhancing corporate governance regulatory requirements; and (4) enhancing regulatory responses to the increasing risk and severity of natural catastrophes. Additionally, the IMF recommended developing a consolidated group capital requirement “similar to GAAP-Plus [ICS] for internationally active groups and optionally for domestic groups” as a way to address the current gap in insurance capital standard requirements in the US Justin Schrader (NE) stated that the NAIC is of the opinion that this statement is inconsistent with the current discussions at the IAIS, which has recognized the potential for the AM to provide comparable outcomes to the ICS. Further, the IMF recommended that the NAIC GCC, once adopted, be made a requirement, rather than a tool. Mr. Schrader said that the NAIC questions why utilizing the GCC as a tool is not equally as useful as a requirement.
The NAIC is expected to assign the FSAP recommendations to NAIC Committees and working groups, as appropriate, for consideration.
- Other International Updates
Director Bruce Ramge (NE) reported that the NAIC became a member of the Sustainable Insurance Forum (SIF) in February 2020 and has participated in several virtual meetings this summer on climate risk and sustainability. The SIF has worked jointly with the IAIS on an application paper that addresses the supervision of climate-related risks in the insurance sector, which is expected to be released for public consultation in the fall and published in early 2021. Director Ramge noted that examining issues related to climate, natural catastrophe risk and resiliency is central to insurance regulators’ mission of protecting policyholders and is the focus of the newly-created NAIC Task Force that will help inform the NAIC’s contributions to the SIF.
- NAIC Continues Focus on Innovation and Technology
- Principles for the Use of Artificial Intelligence Adopted
The Innovation and Technology (EX) Task Force unanimously adopted principles for the use of AI in insurance. The principles provide guidance to regulators and businesses regarding the use of AI, while emphasizing the importance of accountability, compliance, transparency, and safe, secure, fair, and robust outputs. For more information about the NAIC’s AI principles, see our Legal Alert: NAIC adopts principles for trustworthy artificial intelligence in insurance that support the avoidance of proxy discrimination against protected classes.
- Regulators Continue Close Look at Accelerated Underwriting and Predictive Modeling
Several different NAIC groups are continuing work focused on the use of accelerated underwriting and predictive modeling. The Big Data (EX) Working Group served as a regulatory town square during the Summer National Meeting, with regulators hearing reports and discussing the full range of these activities. The Working Group first received an update from the Casualty Actuarial and Statistical (C) Task Force (CASTF) on its drafting of a Regulatory Review of Predictive Models white paper. The white paper is intended to identify best practices for the regulatory review of predictive models and analytics filed by insurers to justify rates. In drafting the white paper, CASTF has identified four general best practices:
- Ensure compliance with state rating laws (i.e., that rates are not excessive, inadequate, or unfairly discriminatory);
- Review all aspect of a model including data assumptions, adjustments, variables, input and outputs;
- Evaluate how a model interacts with and improves the rating plan; and
- Enable competition and innovation.
CASTF’s draft white paper includes proposed changes to the NAIC’s Product Filing Review Handbook, as well as proposed statutory guidance. Of particular note, the draft whitepaper includes a list of 79 information elements that regulators should consider obtaining from insurers to support model review, as well as commentary on when and why those information elements may be useful to regulators.
The Chair of the Working Group, Commissioner Doug Ommen (IA), led an extensive discussion regarding the draft white paper’s previous recommendation that insurers could be required to identify a causal relationship between model factors and increased or decreased risk. While CASTF has now removed all references to a “causal” relationship, the white paper still specifies that regulators may require insurers to provide a “rational explanation” as to why a factor is actuarially correlated to risk. A number of regulators expressed support for the “rational explanation” language, noting that requesting this kind of explanation has been a common practice by some state regulators for decades. Rather, the intent is to empower regulators to further investigate factors in rate models where a particular correlation looks potentially spurious or driven by systemic bias and discrimination.
The most recent version of the CASTF white paper was exposed for public comment ending July 27. Nine extensive comment letters were received. CASTF members indicated they believe that the white paper is close to final, and have formed a drafting group to review this final round of comments and propose a white paper for adoption by September of this year.
The Big Data (EX) Working Group also heard an update from the Accelerated Underwriting (A) Working Group, which has largely been gathering information since its formation in October of 2019. The Working Group has met 16 times since then, hearing presentations from a range of industry and consumer representatives on the use of accelerated life insurance underwriting. One issue that has been of particular interest to the Working Group is the use of credit data as an input item. While industry representatives have indicated that the use of credit data is actuarially sound, with individuals with a high credit score having a lower mortality risk profile, regulators are somewhat skeptical of this association. During its own meeting at the Summer National Meeting, Director Robert Muriel (IL) noted that a high credit score does not shield an individual from illness. Accordingly, it is the view of the Working Group that credit scores generally should not be used in isolation, and must have checks to prevent against discrimination. In particular, the Working Group suggests that credit scores be used as a negative check in underwriting, but not a positive check (i.e., a bad credit score could increase the cost of coverage, but a good credit score should not be used to reduce the baseline cost of coverage).
Speaking more broadly, Commissioner Muriel also noted that it is not clear to the Working Group that all insurers appropriately test their accelerated underwriting programs, particularly since developing and implementing accelerated underwriting appropriately requires significant resources. Accordingly, he noted that regulators may consider challenging accelerated underwriting programs in upcoming market conduct examinations.
The Accelerated Underwriting (A) Working Group is now planning to begin drafting guidance for state regulators regarding the use of accelerated underwriting for life insurance with the goal of completing its initial draft by the end of 2020 and completing its work by the 2021 Summer National Meeting.
- Privacy Protection Working Group Gets Back to Work
The Privacy Protections (D) Working Group got back on task during the Summer National Meeting, with Chair Cynthia Amann (MO) acknowledging that the Working Group’s work had been pushed to the back-burner by COVID-19. Chair Amman committed to refocusing on the Working Group’s charge to review and suggest changes to the NAIC’s model privacy acts and regulations. During previous meetings, the Working Group began its task focused on making edits to the NAIC Insurance Information and Privacy Protection Model Act (#670), but consensus amongst industry and regulators quickly formed that the Privacy of Consumer Financial and Health Information Regulation (#672) would make a better base. Model 672 is the newer of the two models, drafted to address the requirements of the federal Gramm-Leach-Bliley Act.
Chair Amman committed to using Model 672 as a base going forward and discussed plans to begin a discussion with regulators, industry representatives, and consumer groups regarding what aspects of recent influential privacy laws, including the California Consumer Privacy Act and European General Data Protection Regulation, are missing from Model 672. Finally, the Working Group heard an update on state and federal privacy legislation, which has also been uneventful as state and federal legislators focus on the ongoing COVID-19 pandemic.
- Issues of Particular Interest to Life Insurers
- Suitability in Annuity Transactions Model Regulation FAQ Being Developed
Following Executive & Plenary (EX) Committee adoption of revisions to the Suitability in Annuity Transactions Model Regulation (#275) earlier this year, the Annuity Suitability (A) Working Group met to hear an update on state activities to adopt the revised Model and to discuss its work for 2020 to develop a frequently asked questions (FAQ) document. The purpose of the FAQ is to provide consistent guidance intended to promote greater uniformity across the states as they move forward with adopting the revised Model and implementing its provisions.
Director Dean Cameron (ID) indicated that his department had submitted legislation to update the state’s annuity suitability law as reflected in the revised Model for the session beginning in January 2021. Commissioner Jillian Froment (OH) said her department expects to file the revised Model through their state process this summer, which starts with an executive branch review before introduction of a legislative proposal. Efforts have also begun in Rhode Island, and Kentucky expects to submit language to the legislature in August. There was general interest among Working Group members in a bulletin being developed by the Iowa Insurance Division to accompany the best interest annuity rule the Division adopted on May 11, 2020.
A draft FAQ distributed with the meeting materials was discussed. With answers to some of the questions left to be determined, the Working Group decided to complete the answers before exposing a new draft for a 30-day public comment period. Comments received on the FAQ will be discussed at the next meeting of the Working Group, which is to be scheduled in mid-September 2020.
- Request to Lower the Minimum Guaranteed Interest Rate for Individual Deferred Annuities
Following the Life Insurance & Annuities (A) Committee’s approval of the Life Actuarial Task Force (LATF) Model Law Development Request to amend the Standard Nonforfeiture Law for Individual Deferred Annuities (#805), LATF conducted a brainstorming session during the first of its Summer National Meeting sessions. The objective was to determine the level of LATF member support for the ACLI’s request to lower the 1.00% minimum guaranteed interest rate for individual deferred annuities to 0% due to the historically low interest rate environment.
The brainstorming session was held in anticipation of the Executive Committee’s approval of the A Committee’s Model Law Development Request (a required step in the process that was completed on the final day of the Summer National Meeting). LATF can now decide to stay with its recommendation for a 0% floor or decide to set the floor at ½% or ¼%. The change to Model #805 will be re-exposed, then considered for LATF adoption around September 30, 2020, after which it will be forwarded to the A Committee for its consideration and adoption prior to the 2020 Fall National Meeting. If adopted by the A Committee, the change would then be considered for adoption by Executive/Plenary at the 2020 Fall National Meeting.
Led by New York, there appeared to be a lack of comfort among LATF members during the brainstorming session for reducing the interest rate to 0%. New York noted concern with high surrender charges, which can tie policyholders up while 0% is being credited. Consequently, New York said they think the rate should be something above 0%.
A representative for the Interstate Insurance Product Regulation Compact (IIPRC) pointed out that individual state adoption of revised Model #805 is not required for filings under the IIPRC. If Model #805 is adopted by the NAIC, it becomes immediately effective for IIPRC filings because Model #805 is incorporated into the uniform standard.
- Working Groups Consider Issues Related to Product Illustrations
The Life Insurance and Annuities (A) Committee granted extensions to two working groups addressing product illustration issues. The first, the Annuity Disclosure Working Group, has been working to finalize revisions to the Annuity Disclosure Model Regulation (#245) addressing illustrations of indices that have been in existence for fewer than 15 years. Regulators are concerned that consumers are being misled by unrealistic indexed annuity illustrations. Working Group Chair, Mike Yanacheak (IA), said the Working Group needs to decide if it wants to make a recommendation to the A Committee related to product approval standards for proprietary indices and also needs to determine whether standards surrounding the relationship between the hedging provider and the index provider are needed.
Second, the Life Insurance Illustration Working Group was granted an extension to continue its work to develop policy summary disclosures across various life insurance products. They are working on policy summary disclosure documents to be delivered with the Life Insurance Buyer's Guide. Working Group Chair, Richard Wicka (WI), said that decisions remain to be made on the timing of delivery.
- NAIC Approves Amendments to Actuarial Guideline 49
The NAIC approved amendments to Actuarial Guideline 49 (AG 49A) with only New York voting against the change. The approved changes to the illustrations of indexed universal life insurance (IUL) products under the Life Insurance Illustration Model Regulation (#582) and Actuarial Guideline XLIX (AG 49) were developed over the past year and a half by the NAIC Indexed Universal Life Illustrations Subgroup of the Life Actuarial Task Force. The changes are designed to bring uniformity to the illustrations of policies tied to an external index or indices by providing a reasonable cap on the illustrated credited rate to help consumers more easily compare the policies of different companies. The NAIC adopted AG 49 on August 16, 2015. Since its adoption, product designs and company interpretations had evolved enough to warrant several changes to AG 49 in order to once again achieve consistency in illustrations for policies with index-based interest.
AG 49A was adopted over the objections of Birny Birnbaum, Executive Director of the Center for Economic Justice, and industry interested parties who had submitted an alternative proposal. When AG 49A was adopted by the A Committee on August 11, Chair Jillian Froment (OH), said that while she believed the IUL Subgroup and LATF had made incredible progress and that AG 49A will have an immediate positive impact on consumers, she recognizes that there may be a need to look closely at the current design and regulatory framework for life insurance and annuity illustrations and determine if any changes or additions are needed. Commissioner Froment is expected to schedule a follow-up call in the near future to discuss a possible charge in more detail, including where that charge belongs.
- Issues of Particular Interest to Property/Casualty Insurers
- Regulatory Activity Related to the COVID-19 Pandemic
A number of NAIC committees and working groups heard updates on recent regulatory activity related to the COVID-19 pandemic, and the NAIC hosted a Special Session on Lessons Learned from the COVID-19 Pandemic. Nearly every state has taken some action to provide relief to policyholders suffering hardship due to the COVID-19 pandemic. These actions include orders and bulletins requiring or requesting that insurers extend grace periods and impose moratoria on the cancellation, non-renewal or termination of insurance policies due to non-payment of premiums (and waive associated late fees), reduce premium payments to reflect a reduction in risk due to business closures and stay-in-place orders, and generally exercise leniency in enforcing deadlines for filing claims notices, proofs of loss, and other documentation. The scope and specific requirements of these orders and bulletins vary across states, with some states simply requesting that insurers provide policyholder relief and other states mandating it. Some of these orders and bulletins have begun to expire, but with transmission rates in a number of states still rising, the orders and bulletins in other states continue to be extended.
During the Special Session, three separate panels presented on the impact of the COVID-19 pandemic on insurance from the perspective of policyholders, industry, and regulators. The policyholder panel generally expressed positive views of industry’s reaction to the pandemic, but some panelists voiced displeasure with claims denials for business interruption (BI) coverage. Other panelists also expressed concern about the uncertainties surrounding workers’ compensation insurance coverage, particularly whether coverage would be dependent on companies implementing and enforcing mask policies.
The industry panelists discussed the impact of COVID-19 on the work environment and the various issues companies faced with the transition to work from home, including the need to protect employee and customer data, testing system capabilities, and quarantine requirements for traveling employees. The regulator panelists discussed a wide range of issues, including the policyholder relief initiatives noted above, the possibility of future rate increases, the inclusion of COVID-19 questions on policy applications, suspending retrospective audits, the possibility of granting accounting and RBC relief, and the future of on-site exams.
The Property and Casualty Insurance (C) Committee heard an update from NAIC staff on the ongoing NAIC data call on BI coverage. In May, the NAIC issued a data call to all US property/casualty insurers that wrote BI coverage in the United States in 2019 or 2020 to assist state regulators in analyzing “the financial condition of commercial insurers to understand which insurers are writing business interruption coverage, the size of the market, the extent of exclusions related to COVID-19, and claims and losses related to COVID-19.” The data call requires insurers to respond in two parts, with information on BI-related premiums due May 22 and reporting on BI-related claims due monthly from June 15 through November 19, 2020. As of July 2020, NAIC data indicates that approximately $48.7 billion in total premium had been written for policies with BI coverage. Of these policies, 83% of small business policies and 82% of medium business policies include an exclusions for viral contamination, virus, disease, pandemic or a similar exclusion, while approximately 78% of policies for large businesses include such an exclusion. In contrast, 98% of small business policies and 97% of medium business policies include a physical loss requirement, while approximately 85% of large business policies include a physical loss requirement.
The Producer Licensing (D) Task Force heard updates on actions states are taking to facilitate producer licensing during the pandemic, including allowing online testing and temporary licenses. It was reported that, as of July 2020, 15 states have adopted online testing for producer licensing exams, with an additional five states expected to adopt producer licensing during the month of August. Prior to the pandemic, only one state (Washington) allowed online testing. Despite these developments, it was reported that states are still experiencing significant backlogs in testing.
- Developments of the Surplus Lines Task Force
The Surplus Lines (C) Task Force is considering updates to the Nonadmitted Insurance Model Act (#870) to implement the provisions of the federal Nonadmitted and Reinsurance Reform Act of 2010 (NRRA). The Model Act provides rules governing state insurance company licensing requirements, including activity that constitutes “transaction of insurance” requiring licensing, and rules governing the placement and taxation of nonadmitted insurance, including surplus lines placements, independently procured insurance and other licensing exemptions. Enacted in 2010, the NRRA made significant changes to the regulation of nonadmitted insurance in the United States – most notably, streamlining eligibility requirements for surplus lines insurers and granting the “home state” exclusive authority to regulate and tax nonadmitted insurance transactions. Despite these changes, the NAIC has not yet amended the Model Act to align with the NRRA (in part, because, following the NRRA’s enactment, regulators were uncertain if states would implement a nationwide system for reporting and allocating nonadmitted insurance premium taxes (they have not)). Instead, in 2011, the NAIC issued the Nonadmitted Insurance Reform Sample Bulletin, which summarized the scope of and changes provided under the NRRA, but does not have the force of law.
During the Task Force meeting, Bob Woody, speaking on behalf of the American Property Casualty Insurance Association (APCIA), noted that some members of industry were concerned that reopening the Model #870 at this time might result in changes that no one anticipates, and encouraged the Task Force to proceed cautiously. Several commenters also noted that most states have already updated their laws to implement the NRRA. As a next step, the Task Force has directed NAIC staff to develop a drafting group to produce a summary document that outlines the significant updates needed to modernize the Model #870.
The Task Force also agreed to table a proposal to modify annual and quarterly financial statement Schedule T (Exhibit of Premiums Written) to add a new section for reporting the allocation of surplus lines premiums to each state based on the definition of “home state” under the NRRA. The proposal was intended to help regulators reconcile broker-reported surplus lines premium with company-provided information to ensure that states are receiving the proper amount of surplus lines premium taxes. The proposal was first exposed for comment in September 2019, but the Task Force deferred action while regulators considered the proposal and potential alternatives. Ultimately, Task Force members unanimously voted to table the proposal, following strong opposition from industry, including APCIA and the Wholesale and Specialty Insurance Association.
- NAIC Adopts Workers’ Compensation Insurance White Paper
The NAIC adopted the Workers’ Compensation Policy and the Changing Workforce white paper. The paper calls for a review of existing workers compensation insurance system, which the paper claims have become outdated with the passage of time, significant changes in the employer-employee relationship, and the growth of independent contractors and the gig economy. The white paper notes the increasing complexity of federal and state employment laws, the lack of coordination between the two regimes, and the gaps in regulatory oversight that have developed in recent years. The white paper concludes by proposing several alternative coverage models for workers’ compensation that regulators may consider.
- Briefly Noted
- The Impact of COVID-19 on ORSA
The ORSA Implementation (E) Subgroup is developing proposed revisions to the Own Risk and Solvency Assessment (ORSA) review guidance in the Financial Analysis Handbook and Financial Condition Handbook and is planning to hold a conference call to discuss the impact of COVID-19 on ORSA.
- Updates from the Financial Regulation Standards and Accreditation (F) Committee
The Financial Regulation Standards and Accreditation (F) Committee adopted (1) a referral to clarify that the 2019 and 2011 revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) apply to risk retention groups as an accreditation standard; and (2) technical changes to the new accreditation standard for Term and Universal Life Insurance Reserve Financing Model Regulation (#787) consistent with a reference that was revised in 2020.
The committee also exposed the following for a 30-day public comment period ending September 11, 2020: (1) revisions to the Review Team Guidelines and the Self-Evaluation Guide for Part C: Organizational and Personnel Practices, which incorporate references to salary ranges in the Financial Analysis Handbook and the Financial Condition Examiners Handbook; and (2) revisions to the Review Team Guidelines for Part B1: Financial Analysis, which clarify that the section applies to all risk retention groups and not just those that follow GAAP.
- Update on State Adoption of 2019 Revisions to Credit for Reinsurance Model Law and Regulation
The Executive & Plenary (EX) Committee approved the 2019 amendments to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) as an addition to the Part A accreditation standards, effective September 1, 2022. The 2019 amendments implement the reinsurance collateral provisions of the covered agreements between the United States and the EU and UK by eliminating reinsurance collateral requirements for qualified EU/UK reinsurers, and extend comparable benefits to qualified reinsurers domiciled in “reciprocal jurisdictions.” Enforcement of the new accreditation standard is scheduled to begin January 1, 2023.
During the Reinsurance (E) Task Force meeting, it was reported that 11 states have adopted the 2019 amendments to Model #785, with legislation pending in an additional 7 jurisdictions, and only 1 state (Virginia) having adopted the amendments to both Model #785 and Model #786.
- New York DFS Issues First Enforcement Action Under Cybersecurity Regulations
The New York Department of Financial Services (NY DFS) has issued its first enforcement action under its landmark cybersecurity regulations. Those regulations, which went into effect in four phases over the course of 2018 and 2019, formed the basis for the NAIC’s own Data Security Model Law (#668). New York is the first state to bring an enforcement action consistent with Model #668, accusing a large title insurer of failing to safeguard mortgage documents that included bank account numbers. For more information about the NY DFS enforcement action and other cybersecurity and privacy enforcement actions, see our Legal Alert: No rest for the weary: cybersecurity and privacy enforcement actions heat up.
- Climate Risk and Resiliency (C) Working Group Hears Update on Climate Risk Survey
The Climate Risk and Resiliency (C) Working Group heard a presentation on the preliminary findings of the NAIC climate risk survey and steps being taken to compile and analyze company responses. The survey is administered by the California Department of Insurance (CDI) and includes approximately 1,000 companies licensed to do business in California, Connecticut, Minnesota, New Mexico, New York and Washington (representing approximately 70% of direct written premium in the United States). The eight-question survey asks insurers to provide a description of how they incorporate climate risks into their mitigation, risk management and investment plans. Insurers are asked to identify steps taken to engage key constituencies and policyholders on the topic of climate change. The Working Group’s final report is expected to be released during the NAIC Insurance Summit in September.