International Developments

On February 7, 2025, the European Insurance and Occupational Pensions Authority (EIOPA) held its fourth Insurance Recovery and Resolution Directive (IRRD) webinar, which focused on the identification of critical functions. The IRRD defines critical functions as:

“activities, services or operations performed by an insurance or reinsurance undertaking for third parties that cannot be substituted within a reasonable time or at a reasonable cost, and where the inability of the insurance or reinsurance undertaking to perform the activities, services or operations would be likely to have a significant impact on the financial system or real economy in one or more Member States including, in particular, the impact resulting from effects on the social welfare of a large number of policyholders, beneficiaries or injured parties or from a systemic disruption or a loss of general confidence in the provision of insurance services.”

Presenters discussed the following issues:

Identification of Critical Functions: The resolution authority performs the criticality assessment based on information received from the insurer and with national specificities in mind. Key takeaways from the presentation on the criticality assessment are: (1) critical functions are assessed within the market—a function deemed critical in one market may not be critical in another; (2) insurer-specific factors are taken into consideration; (3) activities and services performed within the same group cannot be considered critical functions—they must be provided to third parties; (4) even though support from insurance guarantee schemes may be considered in the resolution planning process, it should not be considered in the identification of critical functions themselves; and (5) EIOPA does not intend to publish a list of common critical functions because there is variance among insurers and markets. (Note that the Financial Stability Board (FSB) has published examples, and the IRRD is purportedly in line with the FSB’s work on critical functions.)

Assessment on the Likelihood of Significant Impact: When assessing whether the failure of a function would have a significant impact on the real economy or the financial system, resolution authorities take into consideration (1) the characteristics of the function; (2) the type and number of third parties to which the function is provided; (3) the geographical level at which the function is provided; and (4) the impact of the disruption of the function on the third parties to which it is provided.

Assessment of Substitutability: The resolution authority will perform a market analysis to determine whether it is feasible for another provider in the market to carry out a particular function under the same or similar conditions at a reasonable time and cost. “Reasonable time” is determined by how fast the insurer’s inability to perform the function would impact the economy and/or financial system and the materiality of the impact. Factors that guide the substitutability assessment include (1) the nature and features of the function and properties of the market for the function; (2) the appetite and ability of other market participants to provide the same or a similar function to third parties; (3) any obstacles to the provision of activities; and (4) how the insurer’s failure impacts the availability of any replacing entities to provide the function.

The final webinar in the IRRD series is scheduled for February 21 at 5:00 a.m. ET and will focus on reporting requirements.

NAIC Updates

New Hawaii Acting Commissioner Appointed: On January 31, 2025, Gordon Ito officially retired as Insurance Commissioner of Hawaii. President Biden had nominated Ito to the Financial Stability Oversight Council, but the Senate did not confirm him before the 118th Congress adjourned. Hawaii Governor Josh Green named Jerry Bump as Acting Insurance Commissioner effective February 1. Bump served as Chief Deputy Insurance Commissioner since 2023 and has been at the Insurance Division since 2008.

NAIC Capital Markets Report Shows Decline in Schedule BA Assets at Year-End 2023: An NAIC Capital Markets Special Report shows a slight decrease in U.S. insurers’ Schedule BA assets at year-end 2023. For the first time in almost a decade, U.S. insurance companies reported a decline in long-term investments reflected on Schedule BA—from $534.8 billion at year-end 2022 to $533.7 billion at year-end 2023 (a less than 1% decrease). This decline occurred after strong double-digit year-over-year growth between 2019 and 2021, followed by single-digit growth from 2021 to 2022.

Private equity, hedge fund, and real estate investments continued to dominate Schedule BA assets, making up 73% of the total. Additionally, the report shows that life insurers’ share of Schedule BA assets increased year-over-year to 65% of the total, while P/C insurers’ share declined to 31% of the total at year-end 2023.

AI Activity

Delaware has adopted the NAIC’s AI model bulletin, which sets forth regulators’ expectations for insurers that use artificial intelligence systems. That makes 22 adopting jurisdictions.