August 2, 2024

MPC Meets in Boston

The Members’ Participation Council (MPC) held a meeting on July 24, 2024, in Boston and online. The MPC General Session featured:

• Comments from NOLHGA Chair Gerrie Marks, who noted the heightened scrutiny of the insurance industry and guaranty system that will most likely arrive with the Global Bankers insolvencies. She stressed the importance of the system speaking with one voice and being responsive to state regulators fielding inquiries from consumers, legislators, and the press.
  
• The MPC Chair Report, in which MPC Chair Margaret Sperry (Rhode Island) gave an update on the 2024 educational sessions and encouraged members to share their suggestions for future topics and presenters with the Administrators Education Steering Committee. She also noted that the MPC Business Continuity Plan Subgroup will soon begin working with NOLHGA and MPC members to collaborate on options for doing business continuity and succession planning on a systemwide basis.
  
• The NOLHGA Management Report, in which NOLHGA President Katie Wade reported on the organization’s efforts to implement aspects of the strategic plan, including improving NOLHGA’s technology, systems, and documentation; bringing on new administrative and accounting staff members; and developing the AssessConnect system for the member guaranty associations. She also updated attendees on educational outreach efforts to the NAIC and other organizations.
  
• An explanation of the upcoming poll to select the next MPC Chair, by MPC Chair Preference Poll Committee member Tom Sullivan (Iowa).
  
• An update on the activities of the Security Advisory Committee (SAC) by Co-Chair Dan Hicks (NOLHGA).
  
• A report from the PHL Variable Insurance Company (Connecticut) Task Force (see below) as well as closed-session (affected guaranty associations only) presentations by the task forces for Global Bankers Insurance Group (North Carolina), North Carolina Mutual Life Insurance Company (North Carolina), Penn Treaty Network America/American Network Insurance Companies (Pennsylvania), and Senior Health Insurance Company of Pennsylvania (SHIP).

The MPC meeting also featured:

• A meeting of the MPC Executive Committee.
  
• Assessments 201, an educational session on how to conduct a Class B member assessment. The session was conducted by moderator Beth Hoffman (District of Columbia and Maryland), Janis Potter (Illinois), Jana Lee Pruitt (Kentucky), and Todd Thakar (California and Nevada).

  Staff Contact - Sean McKenna PHL Variable Insurance Company (Connecticut)

Task Force Chair Nancy Margolis (Pennsylvania) and other task force members conducted a presentation on this new rehabilitation. PHL Variable Insurance Company and its two captive reinsurance subsidiaries—Concorde Re, Inc., and Palisado Re, Inc.—were placed in receivership by the Connecticut Insurance Department on May 20, 2024. The company, which sold life and annuity products, was licensed in every state except Maine and New York. The department has issued a moratorium on benefit withdrawals on certain products as it develops a rehabilitation plan, which is expected to be completed in the next 12 months.

For more information on the rehabilitation, visit the Connecticut Insurance Department website.

Task Force Chair - Nancy Margolis   Staff Contact - Jennifer Webb

Nestor To Retire from Arizona Guaranty Funds

Lori Nestor, Executive Director of the Arizona Life & Disability Insurance Guaranty Fund and the Arizona Property & Casualty Insurance Guaranty Fund since late 2019, plans to retire from the position in late 2024. Nestor currently serves on the Penn Treaty Network America/American Network Insurance Companies and Time Insurance Company (Wisconsin) Task Forces, as well as the MPC Executive Committee Asset Recovery Subgroup. She plans to attend the NOLHGA Annual Meeting in October, so her colleagues will have a chance to wish her well there.

The Arizona Department of Insurance & Financial Institutions is accepting applications for the Executive Director position. Interested parties should contact Nestor at [email protected].

  Staff Contact - Sean McKenna

Department of Labor Fiduciary Rule Stayed

In two separate and very significant rulings in Texas U.S. District Court, judges have issued stays of the Department of Labor’s new fiduciary rule and associated prohibited transaction exemptions (PTEs). The rules package, which would have gone into effect on September 23, is now subject to a nationwide stay until the pending litigation—including any appeals—is concluded.

Under the now-stayed rules, one-time recommendations of investments, annuities, and many life insurance products in connection with ERISA plans and IRAs—or rollovers, transfers, or distributions to or from plans and IRAs—would have been considered fiduciary advice requiring compliance with an exemption. This would have been an especially difficult transition for independent producers and carriers who would have been required to comply with extensive new requirements in PTE 84-24 in order to receive commissions. The rules package also made significant changes to PTE 2020-02, affecting career agents and other financial professionals and institutions, including broker-dealers, investment advisors, and banks.

In Federation of Americans for Consumer Choice (FACC), et al. v. US Department of Labor, et al., the judge on July 25 granted the FACC’s more narrow request that focused on the new fiduciary definition and on the revised PTE 84-24. On July 26, in ACLI, et al. v. US Department of Labor, et al., the judge granted a separate and much broader stay requested by the ACLI applicable to the entire Department of Labor fiduciary rule package, which includes the fiduciary definition, revised PTE 84-24, revised PTE 2020-02, and revisions to several other exemptions.

Both judges used unusually strong language in granting the stay—for example, the judge in the ACLI case wrote that the ACLI was “virtually certain” to prevail on the merits, and both judges indicated that the fiduciary definition and associated exemptions wrongly interpret the statute, are inconsistent with the 5th Circuit’s prior 2018 ruling in U.S. Chamber, et al. v. US Department of Labor, and are arbitrary and capricious rulemakings. The Department has the right to appeal the stay decisions to the 5th Circuit, or it may proceed to merits litigation.

  Staff Contact - Sean McKenna

NAIC Updates

The Receivership Law Working Group held a call during the week of July 21, 2024: Highlights include:

Update on FHLB Statute: The working group received a general overview and update on state laws addressing the treatment of insurer collateral pledged to the Federal Home Loan Bank (FHLB) in the event of an insurer receivership. To date, 29 states have adopted laws that provide favorable treatment to collateral pledged to the FHLB in an insurer insolvency.

Penn Treaty/IRMA Discussion: Michael Broadbent (Cozen O’Connor) gave a presentation on how issues raised in Penn Treaty could be addressed by states through adoption of specific provisions in the NAIC’s Insurer Receivership Model Act (IRMA). Broadbent highlighted the following issues that arose during the Penn Treaty receivership in connection with “above guaranty association limits” benefits and how each of those issues is addressed by IRMA:

• Fixing of rights and liabilities at the time of liquidation (addressed by IRMA Section 501B, which contemplates a date other than the date of the liquidation order as the date rights and liabilities are fixed)
  
• Termination of coverage no later than 30 days following the liquidation order (addressed by IRMA Section 502B and 502D, which, among other things, provide for the continuation of life, disability income, LTC, or health insurance or annuities to the extent necessary to permit guaranty associations to discharge their statutory obligations)
  
• Prohibition against creating subclasses and splitting benefits within a policy (addressed by IRMA Section 801, which provides that claims “incurred during the extension of coverage provided for in Section 502” are in the same priority class as nearly all other policyholder loss claims under the category of “[a]ll claims under policies of insurance”)

Broadbent walked through the Pennsylvania courts’ decisions related to above-the-limit claims and the lack of specific statutory authority in Pennsylvania on the issues above. He noted that the Commonwealth Court highlighted the fact that Pennsylvania did not adopt certain provisions of IRMA in arguing that the liquidator did not have the authority to issue a plan providing for the payment of above-the-limit benefits. Broadbent argued that adoption of these provisions would likely reduce the litigation expenses in a given state during a liquidation.

Working Group Chair Kevin Baldwin (IL) suggested that this conversation will spur states to look at their law and consider whether to pursue changes incorporating these provisions. Neither Broadbent nor Laura Slaymaker (PA) addressed whether the Pennsylvania Insurance Department is pursuing (or will pursue) such amendments in Pennsylvania.

The Receivership and Insolvency (E) Task Force conducted a study in 2019 regarding state adoption of Section 502. The study showed wide variance among states that had Section 502, those that had an older version of Section 502, and states that did not have any provision at all on this issue.

On July 25, the Life Actuarial Task Force (LATF) held a call to discuss stakeholder comments on concepts related to asset adequacy testing for reinsured business. LATF had requested feedback on the following eight topics—major takeaways from the conversation are below:

Need for reserve adequacy review beyond or as part of collectability review

• Industry continues to highlight the Appointed Actuary’s existing obligations related to collectability—to review whether a reinsurer is able to fulfill its obligations in a moderately adverse environment. The ACLI has argued that any additional review should be limited and proportionate to the underlying risk of a given transaction.
  
• Risk & Regulatory Consulting (RRC) argues that review of counterparty risk/collectability alone is insufficient to address concerns related to the reduction in total asset requirements in certain reinsurance transactions.

Materiality threshold for no additional disclosure, attribution analysis, or cash-flow testing

• At multiple points during the call, Task Force Chair Fred Andersen (MN) raised the question of whether certain deals are so large that they should be subject to cash-flow testing regardless of safeguards (collateral, business ceded to a U.S. reinsurer, etc.).
  
• The ACLI is advocating for a flexible, tiered approach, highlighting issues that should be taken into account to determine what additional analysis and reporting are required (if any), including the size and impact of a transaction on a company’s financials, credit quality of the reinsurer, existing reporting and tools the ceding company’s domestic has access to, and structural protections in place (e.g., trusts, investment guidelines, etc.).
  
• The American Academy of Actuaries supports an exemption for immaterial treaties.

More rigorous and/or more frequent analysis to the extent there are significant risks

• The parties agree with this concept in principle, but the ACLI suggests that much of this risk analysis should be conducted by the Appointed Actuary.
  
• The RRC suggests that there are certain instances where increased rigor may be appropriate, including when the reinsurer does not provide a VM-30 memorandum to its regulator, when there is a significant reserve decrease as a result of a transaction, when there is a significant collectability risk associated with the reinsurer, or when an arrangement does not include a trust or funds withheld.

Analysis considerations

• Several commenters emphasized the need for any additional analysis to be tied to increased risk. The ACLI argues that (1) attribution analysis should be broadly defined and should be sufficient in most cases, and (2) any cash-flow analysis or sensitivities performed should be for disclosure purposes only and only in an aggregated form.
  
• A coalition made up of the Reinsurance Association of America, Swiss Re, and Hannover Re continue to raise concerns about potential conflicts with existing Covered Agreements.

Aggregation considerations

• The American Academy of Actuaries notes that the Appointed Actuary must comply with ASOP 22 in determining aggregation and suggests a possible disclosure of the rationale for aggregation.
  
• The ACLI opposes the creation of any new standards on aggregation of reinsured business.

Attribution analysis details

• Questions remain about whether attribution analysis would appropriately address regulatory concerns. Both the ACLI and the Academy suggest that if additional attribution analysis is required, the Appointed Actuary should be able to exercise judgment.

Use of information already available.

• This was not a major topic of discussion, but the ACLI notes that any framework the NAIC develops should leverage information already available before determining what, if any, new requirements should be imposed.

Timing of development and implementation of requirements.

• Industry stakeholders continue to argue for prospective application of any changes.
  
• Andersen has suggested a cutoff date for retroactive application but also has raised the idea of requiring additional analysis on certain large transactions (regardless of timing).

Andersen is working on a “strawman” actuarial guideline for discussion at the Summer National Meeting in Chicago.

The Reinsurance Task Force held a meeting on July 22 in lieu of meeting at the Summer National Meeting in Chicago. Here are the major takeaways:

Received update from Re-FAWG: The Reinsurance Financial Analysis Working Group (Re-FAWG) continues to review certified and reciprocal jurisdiction applications. To date, Re-FAWG has approved 85 reciprocal jurisdiction reinsurers (RJRs) and 41 certified reinsurers for passporting, and 49 states have passported at least one RJR. A list of RJRs and certified reinsurers (and the states where those reinsurers are passported) is available here.

Received updates on ongoing reinsurance-related projects:

• Asset adequacy testing: As mentioned above, interested parties previewed their comments before the Life Actuarial Task Force (LATF) meeting. Karalee Morell spoke on behalf of the Reinsurance Association of America, Hannover Re, and Swiss Re, noting several concerns about the proposal, including the potential for duplication of regulatory requirements, unintended consequences, and potential conflict with Covered Agreements. Brian Bayerle (ACLI) raised similar concerns and proposed a disclosure-based framework. He also emphasized that any potential change should be applied prospectively only. Tricia Matson (Risk & Regulatory Consulting) voiced support of the proposal and suggested that review of counterparty risk and disclosures alone would not provide regulators with sufficient information to ensure that assets supporting reinsured business are sufficient.
  
• Reinsurance worksheet (no new updates): John Rehagen (MO) reminded the task force members of the optional worksheet tool available for lead states/domestic regulators in their review of reinsurance agreements.
  
• VAWG review of AG 53 submissions: The Valuation of Analysis Working Group (VAWG) continues to review AG 53 (Asset Adequacy Testing) submissions in regulator-only sessions.
  
• SAPWG referral: The Statutory Accounting Principles Working Group (SAPWG) sent a memo to the task force highlighting two ongoing reinsurance-related workstreams at SAPWG. The first simply removes a sentence from Appendix A-791. The second provides additional guidance for combination reinsurance contracts, directing regulators to evaluate risk transfer in the aggregate when a contract contains multiple reinsurance types (e.g., coinsurance and yearly renewable term (YRT)) and certain features (e.g., experience refund).
  
• Expansion of reporting of funds withheld and modco assets: SAPWG is also pursuing changes that would expand the reporting of funds withheld and modco assets through a new blanks schedule.

Adopted two new charges for 2025: The task force adopted the following new charges for next year: (1) coordinate with the Mutual Recognition of Jurisdictions Working Group on matters regarding reinsurance; and (2) monitor reinsurance-related activities of other task forces and working groups at the NAIC.   Staff Contact - Sean McKenna