This week, legislation was proposed in New York that would significantly change how an insurer’s capital needs and availability are calculated and reported. The proposed legislation would require that capital be calculated on a group basis through a Group Capital Calculation (GCC) that takes into account the insurer’s full insurance holding company system. See, NY Senate Bill 9006, introduced on May 3, 2022 and NY Assembly Bill 10226, introduced on May 9, 2022.
The GCC would look beyond the insurer’s entity-based risk-based capital (RBC) and quantify capital at the level of the insurer’s holding company system (Holding Company), which includes the insurer’s affiliates, i.e., persons affiliated with a person directly or indirectly controlling the insurer, including through one or more intermediaries. Such affiliates include individuals and business entities, regardless of where they are located or if they are organized as insurers.
The insurer’s Holding Company would file the GCC on an annual basis, along with an annual liquidity stress test, with the Superintendent of the New York Department of Financial Services (NYDFS). The filing requirement may, in certain instances, be subject to an exemption or be limited in some fashion through regulations to be promulgated by the Superintendent.
Stage Regulatory Activity/NAIC
New York is not the sole U.S. jurisdiction considering GCCs. Insurance regulators throughout the U.S. have been formally addressing group supervision of insurance holding systems and capital initiatives since at least 2008, mostly through Working Groups and Task Forces of the National Association of Insurance Commissioners (NAIC). The goal is to enable regulators to better understand financial risks to the insurer’s affiliates, as well as the insurer, applying lessons learned from the 2008 financial crisis. A group capital calculation tool was first proposed in 2015 by the NAIC’s ComFrame Development and Analysis (G) Working Group.
Although insurance regulators currently have authority to request financial information concerning an insurer’s affiliates, they do not currently have analytical tools for evaluating such information. The GCC is meant to serve as a consistent financial metric for identifying risks throughout the insurer’s Holding Company system. Regulators are striving to understand the financial condition of non-insurance entities in an insurer’s group, how capital is being distributed across the system, and the extent to which insurers might be supporting operations of non-insurance entities. The NAIC approach is to aggregate available and minimum capital of each entity in the insurer’s group so that the calculation would apply to all groups, regardless of their structure. Essentially, RBC aggregation methodology would be used for all entities within the insurance holding company system, including non-U.S. entities.
Another reason for the move to GCCs relates to U.S. obligations regarding group supervision, solvency and reporting for insurers in global holding company systems set forth in “Covered Agreements” signed by the U.S. and other jurisdictions. See Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance (September 22, 2017) and corresponding agreement between the US and UK (December 18, 2018) (Covered Agreements). The Covered Agreements are intended to address circumstances where an insurer domiciled in one jurisdiction has a parent resident in another jurisdiction. Where each jurisdiction is a party to the Covered Agreement, the insurer’s jurisdiction would not impose a GCC on the worldwide parent if the regulation of the group (by the jurisdiction of the parent) is considered “sufficiently robust”.
In December 2020, the NAIC began a “test run” of GCCs when its Group Capital Calculation (E) Working Group adopted instructions for GCCs and a reporting template, which was subsequently adopted by the full NAIC. See, updated 2002 GCC Instructions and Reporting Template. Using the template and instructions, a “trial implementation” phase was conducted in 2021 with selected companies submitting data to their lead regulators using the adopted template in order to elicit feedback.
The NAIC included a GCC mechanism in the December 2020 amendments to its Insurance Holding Company System Act (Model #440) and Regulation (Model #450) (Holding Company Amendments). A hot button issue during discussions on the Holding Company Amendments was availability of exemptions to GCC requirements. While the Holding Company Amendments, as adopted, require a group to file an initial GCC before seeking an exemption from further filings, a different version of the Amendments was presented to the NAIC’s accreditation committee (which individual state legislatures may adopt). This alternative version allows regulators to grant exemptions to groups otherwise meeting certain qualifications even where the group has not previously filed a GCC. Thus, as states amend their holding company act statutes, they may decide to apply this alternative and broader exemption.
State Legislative Activity
The NAIC’s Holding Company Amendments do not become “law” in any jurisdiction, as individual state legislatures still need to pass corresponding legislation. New York is the first to propose such legislation and we expect additional states to follow suit shortly. As noted above, the Holding Company Amendments are currently before the NAIC’s accreditation committee, with an exposure period that ends December 31, 2022 and an accreditation deadline that would result in an effective date of January 1, 2026. However, regulators are encouraging states to adopt the GCC portions by November 7, 2022, especially states that have in their domicile an insurance group affected by the Covered Agreements, which anticipate appropriate group supervision and group capital calculations by that date.
The NY Senate Bill, introduced on May 3, was assigned to the Insurance Committee and is on its second calendar reading (May 10). The Assembly Bill was assigned to the Assembly Insurance Committee on the date of its introduction (May 9). No hearings have been scheduled as of this date. In addition to GCCs and annual liquidity stress tests, the Proposed Legislation would also:
- Allow the Superintendent more flexibility in sharing insurer information with other officials, even if such information includes “trade secrets”. Regulations promulgated by the Superintendent would specify the persons or entities with whom such information can be shared.
- Clarify confidentiality afforded to reports and information submitted under New York’s Holding Company Act and note that they are not subject to subpoena or discovery or admissible in evidence in any private civil action.
- Authorize the Superintendent to promulgate regulations that would:
- Address records, data, premiums and other funds of a controlled insurer that are held by a holding company;
- Require a controlled insurer in a hazardous financial condition to post a deposit or bond for certain transactions within the holding company system; and
- In instances where a subsidiary is party to an agreement with a parent corporation, require that such subsidiary be subject to any proceeding against the parent corporation under New York receivership laws and for the receiver to enforce and oversee the subsidiary’s obligations under the agreement to perform services for the parent.
The GCC requirements (and relevant exemptions) are applicable to Holding Companies reporting to the NYDFS under Article 15 of the New York Insurance Law (NYIL) and to some extent filings made by authorized domestic property-casualty insurers that register with the NYDFS under Article 16 of the NYIL (relating to investments in subsidiaries) and Parent Corporation filings under Article 17 of the NYIL (including domestic life insurers).
We are continuing to monitor these bills closely and participating on related NAIC initiatives.