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IN THIS EDITION:
- NAIC Spring National Meeting Review
NAIC Spring National Meeting Review
The NAIC held its Spring National Meeting on March 14–18, 2024. Below is a summary of the guaranty association–related activity at the meeting:
Opening Session
NAIC President Andy Mais highlighted the following projects for the 2024 year:
- Create a climate dashboard, which will include multi-state comprehensive data
- Modernize the NAIC Securities Valuation Office (SVO)
- Modernize the Generator of Economic Scenarios (GOES)
- Enforce requirements around improper marketing and development of a comprehensive tool for consumers to review service provider licenses
- Establish a proposed framework for third-party models and predictive models
Lastly, Mais announced that the first NAIC Foundation scholarship has been awarded to a student at Troy University for the Spring 2024 semester. The student will also be provided the opportunity to work at the Alabama Department of Insurance.
Receivership and Insolvency (E) Task Force
Discussion of 2021 “Critical Elements” Memo: Jacob Stuckey (Illinois) reminded task force members of the 2021 memo highlighting aspects of state receivership and guaranty association/fund laws that have been deemed to be “critical…with respect to a multi-jurisdictional receivership.” The memo encourages states to review their relevant laws to ensure they address the topics contained in the memo. Stuckey re-emphasized the importance of states performing this analysis and provided an overview of the key subject areas addressed. Laura Slaymaker (Pennsylvania) emphasized the importance of continuation of coverage provisions in particular.
NCIGF Presentation on Pre-liquidation Planning: Roger Schmelzer (NCIGF) presented on the importance of pre-liquidation planning to ensure efficient claims handling in the event of an insolvency. Stuckey noted the value of December’s tabletop exercise, particularly for those regulators who are not regularly involved in receivership issues.
Update on State FHLB Legislation: Stuckey updated task force members on state laws addressing how Federal Home Loan Bank (FHLB) collateral is treated in receiverships. The laws generally provide that FHLBs are not subject to the stay provisions related to collateral pledged by an insolvent insurer. Stuckey said that more education may be needed to explain to states the goal of this legislation. After brief discussion, the task force approved the Receivership Law Working Group pursuing those educational efforts.
Discussion on Updates to Global Receivership Information Database (GRID): Jane Koenigsman provided an overview of GRID and reminded regulators that GRID’s accuracy depends on states providing detailed, current information.
Report on International Resolution Activities: Bill Arfanis (Connecticut) reminded the task force that the IAIS is preparing to expose proposed changes to ICP 12 – Exit from the Market and Resolution related to resolution planning. The IAIS Resolution Working Group has endorsed the less prescriptive of two approaches under consideration. After further IAIS process, Arfanis anticipates a consultation by the end of March, with approval anticipated in December.
Life Actuarial (A) Task Force (LATF)
Asset Adequacy Testing Using Cash Flow Methodology: The task force spent most of the afternoon of the first day discussing a proposal to require asset adequacy testing (AAT) on reinsured business using cash flow testing methodology. The task force ultimately exposed the AAT deck, cover memo, and initial letter, specifically requesting feedback on terminology, aggregation, whether a requirement will be prospective or retrospective (or retrospective back to a certain date), the narrowing of scope of reinsurance arrangements subject to testing, and ideas for alternatives to address perceived regulatory concerns. As it relates to scope/materiality, Mike Yanacheak (Iowa) proposed the concept of a checklist of exemptions for certain reinsurance arrangements that would not be subject to testing (e.g., business ceded to a U.S. reinsurer). Comments on the AAT exposure are due May 17.
Fred Andersen (Minnesota) kicked off the conversation with an overview of the issue and the concern regulators are trying to address—to ensure that any reduction in reserves associated with a reinsurance arrangement is justified and assets supporting those reserves are adequate. Brian Bayerle (ACLI) pressed regulators to provide additional information on whether AAT is the correct mechanism to address this issue.
Prior to the task force’s discussion, the American Academy of Actuaries presented on its recent Issue Brief on the topic of asset-intensive offshore reinsurance. The brief, which focuses on business ceded to Bermuda reinsurers, outlines common practices and relevant guidance for U.S.-based actuaries. Tricia Matson (on behalf of the Academy) emphasized that an appointed actuary already is required to perform AAT on all direct business (including reinsured business), but there is no prescribed methodology to do so.
Update on Valuation Analysis Working Group (VAWG) Reviews of AAT Submissions: Andersen also provided an update on VAWG’s review of AAT submissions. VAWG’s first step was to identify companies using outlier net yield assumptions; in most cases, these companies have added the recommended conservatism and will be removed from the list of outliers. Other companies have increased conservatism, and their assumptions will be reevaluated following year-end 2024 submissions. A very small number of companies are going through financial exams and may end up adding conservatism to their assumptions in the future. Task force members also received detailed information on companies’ attribution analysis (see pages 161-166 of the meeting materials).
Comments on Group Annuity Mortality Experience Data Collection: After a brief discussion and comments from ACLI, LIMRA, and the Society of Actuaries, LATF members agreed that data collection for group annuity mortality experience should be mandatory. As far as next steps, Seong-min Eom (New Jersey) will develop the first draft of a statistical plan, and then the task force will engage the American Academy of Actuaries. There is a fair amount of work to be done regarding allocation of NAIC resources because this is being “built from the ground up.” Updates will be provided at future National Meetings.
Generator of Economic Scenarios (GOES) Update: The task force discussed comments received on the acceptance criteria and heard a presentation on decisions made to-date by the GOES Subgroup on the following items: equity-treasury linkage, corporate model, scenario stratification, scenario methodology, and treasury flooring methodology (starting on page 94 of the meeting materials). The GOES Subgroup planned to review and confirm field test scenarios received by Conning on its March 27 call.
Discussion of Valuation Manual Variations: At the very end of the two-day meeting, Iowa raised the prospect of developing a process for states to vary from the Valuation Manual (similar to the permitted practice concept in statutory accounting). The need for a robust process and central repository in the event regulators want to pursue such a framework was emphasized. The task force will discuss in regulator-only session, but additional activity is expected.
Long-Term Care Actuarial (B) Working Group
Minnesota Methodology Exposed as the Preliminary Single Multistate Rate Review Approach: The working group continued its ongoing discussion about establishing a single, long-term care insurance rate review methodology approach for use in multistate actuarial (MSA) filing reviews. The working group began by outlining certain methodology principles for which there is general regulator consensus: (1) lower rate increases for policyowners at very advanced ages with high-duration policies that have had substantial past rate increases; (2) consideration of the aspects of the proposals labeled as “non-actuarial” by the ACLI; (3) balancing consumer protection with preventing further financial distress for insurers; (4) inclusion of a “catch-up” provision to attain a similar rate level between all states; and (5) allowance of rate pre-approvals with phased increases over a reasonable period of time as opposed to requiring annual re-filings.
The working group then heard presentations from state representatives for the two competing approaches for the single methodology—the Texas approach and the Minnesota approach. Texas noted its primary concerns are (1) unfair discrimination, as rates would be determined by issue age (i.e., if premiums are capped for older policyowners, younger policyowners are arguably absorbing that additional cost); and (2) Minnesota’s lifetime loss ratio assumptions would result in significantly higher rate increases than the Texas method. The working group emphasized that it must have a singular MSA methodology by November, and as such, it agreed to expose the Minnesota approach for 45 days after the meeting. The working group emphasized that the Minnesota approach is just a starting point for the single methodology and that all concerns regarding this approach would be addressed.
Health Actuarial (B) Task Force
Change Healthcare Discussion: The task force heard an update from representatives of the Federal Center for Consumer Information and Insurance Oversight (CCIIO) on how CMS is responding to the Change Healthcare cyberattack. Recent actions include issuing advance payments, meeting regularly with impacted payers and providers, creating certain flexibilities across all programs, and developing mitigation strategies. CCIIO will continue to update regulators on CMS engagement.
Revised 2024 Charges Adopted: The task force adopted its revised charges to reflect that the Long-Term Care Actuarial Working Group no longer reports to the Health Actuarial Task Force.
Actuarial Presentations: The task force heard updates and presentations from actuarial organizations. The Society of Actuaries updated the task force on its research institute activities, including an overview of its recently published study “Calculated Risk: Driving Decisions Using the 5/50 Research” and a presentation on its education redesign efforts.
The American Academy of Actuaries provided an update on the Health Practice Council’s policy priorities: (1) health equity; (2) public health challenges; (3) insurance coverage and benefit design; (4) health care costs and quality; (5) Medicare sustainability; (6) long-term services and supports; (7) financial reporting and solvency; and (8) professionalism. The Academy also gave a professionalism update.
Risk-Focused Surveillance (E) Working Group
Exposure of IMA Guidance: The working group exposed changes to the Financial Analysis Handbook and Financial Condition Examiners Handbook related to analysts’ and examiners’ review of investment management agreements (IMAs) for a 45-day comment period. Most of the new guidance relates to affiliated IMAs. The proposed revisions address various aspects of IMAs, including the selection of investments, authority for transactions, conflicts of interest, fiduciary responsibilities, calculation of fees, sub-advisors, reporting, termination, and performance reviews.
Amy Malm (Chair-Wisconsin) highlighted the working group–sponsored Blanks proposal (currently out for comment through April 23), clarifying that all investment advisors with discretion to make investment decisions, including sub-advisors, should be disclosed through Annual and Quarterly Statement Interrogatories. Comments on the IMA exposure are due April 30.
Referral to FASTWG: The working group also sent a referral to the Financial Analysis Solvency Tools Working Group (FASTWG) regarding surplus notes and owners of insurers “focused on short-term results.” These items are being sent to FASTWG because they are not related to affiliate services.
Peer Review Sessions: The NAIC continues to hold peer review sessions to identify sound practices in financial analysis and exams and to identify potential areas of improvement. The next exam session will be held in August, and the next financial analysis session will be held in October.
Statutory Accounting Principles (E) Working Group
Adoption of Residual Changes – final SSAP revisions for bond project completed: The working group adopted the final substantive SSAP changes related to the bond project, which address the reporting and measurement of residuals. The changes clarify that residuals should be reported pursuant to SSAP 21R – Other Admitted Assets and incorporate an “effective yield method with a cap” measurement methodology for residuals. The changes allow a company to take the more conservative approach as a practical expedient (under the practical expedient, a company would utilize a “return of cost basis” approach, in which all cash flows reduce Book/Adjusted Carrying Value (BACV) with interest income not recognized until BACV is zero). The changes are effective January 1, 2025, but companies can “early adopt” the residual guidance for January 31, 2024.
Note that the NAIC will be holding comprehensive training sessions on the principles-based bond definition. NAIC staff is targeting June for the first session, but it could be earlier than that.
Debt Issued from Funds/Collateral Loans: In January, the working group exposed revisions to SSAP 26R – Bonds to clarify the guidance for debt securities issued by funds. The changes are intended to move away from a rules-based framework and instead permit debt securities issued by funds to be classified as issuer credit obligations if the fund represents an operating entity. The intent of the revisions is to simply eliminate differences that could occur in bond classification for debt issued by funds that are seemingly identical except for SEC registration status.
Since the initial exposure, NAIC staff has heard that some interested parties are interpreting the revised language to mean that debt securities issued by feeder funds or rated notes are issuer credit obligations, which is not the intent of regulators. The item was re-exposed, and feedback is requested on the scope of the guidance. (Ref #2024-01; See Attachment 14)
Combo Reinsurance: This agenda item addresses concerns raised by the Valuation Analysis Working Group (VAWG) related to risk transfer and reserve credit for reinsurance agreements containing multiple interdependent types of reinsurance (e.g., YRT and coinsurance). VAWG has observed that some companies are performing risk transfer analysis for these components as though they are separate agreements. VAWG members have suggested that companies are taking too large of a reinsurance credit in light of the risks that are being transferred. The changes would require that all components of a contract be evaluated in the aggregate. (Ref #2024-06; See Attachment 2.4)
Changes Related to Separate Account Assets Reported at Book Value: NAIC staff noted that they are seeing an increase in separate account assets being reported at book value—either due to prescribed practices or interpretations that pension risk transfer business or registered indexed-linked annuities fall within the “fund accumulation contracts” language in SSAP 56. The working group directed NAIC staff to work with industry in determining current application and differences in interpretations to present to the working group, along with possible revisions to SSAP 56. (Ref #2024-10; See Attachment H)
The working group also adopted (A) revisions that update the language in SSAP No. 97—Investments in Subsidiary, Controlled, and Affiliated Entities on audits and admissibility to better align with guidance in paragraphs 26 and 27 on the look-through methodology (Ref #2023-30); and (B) revisions that will be forwarded as a proposal to the Blanks Working Group to clarify that realized gains and losses on perpetual preferred stock and mandatory convertible preferred stock shall not be added to the IMR, regardless of NAIC designation, and shall follow the same concepts that exist for common stock in reporting through the asset valuation reserve. (Ref #2023-29)
Big Data and Artificial Intelligence (H) Working Group
2024 Project Plan: The working group discussed its upcoming projects for the year. The full list of projects is available in the meeting materials (see page 5), but here are a few highlights:
Support development and analysis of the Artificial Intelligence/Machine Learning (AI/ML) health insurance survey: Representatives from 17 states (Vermont, Colorado, Connecticut, Nebraska, Pennsylvania, Oregon, Oklahoma, Maryland, Wisconsin, Minnesota, North Dakota, Louisiana, Iowa, Illinois, Virginia, West Virgina, and Michigan) have begun developing the survey. The development group has narrowed the scope of included health products to comprehensive major medical (individual and group) plans, student health plans, limited benefit plans, and stop-loss plans. Some survey questions have already been drafted, and the working group intends to engage five companies in the pilot effort. The exact timeline is unclear, but the goal is to have the survey completed and results analyzed no later than the 2025 Spring National Meeting.
Rotational plan for past survey work: The working group will consider developing follow-ups to past surveys, starting with private passenger auto. The follow-up surveys will be smaller in scope than the initial ones.
Projects related to the oversight of the Collaboration Forum on Algorithmic Bias:
- Tracking of AI Model Bulletin adoption: The working group is actively supporting and encouraging the adoption of the AI Model Bulletin. Related efforts include: (1) monthly updates to a recently developed state adoption map, which includes acknowledgement of AI-related actions taken by states prior to the NAIC’s adoption of the bulletin; (2) high-level and detailed comparison documents that outline the similarities and differences between state adoption of the bulletin; and (3) a regulator-only tool to serve as a resource when drafting bulletins. All of these deliverables are regulator-only since they are still in development, but eventually they will be published on the working group’s website (except the regulator-only drafting tool).
- Creation of an independent synthetic data set: Regulators are looking at resource/planning demands and logistics required to develop this data set. Updates will be provided when more is known.
- Development of a glossary to help regulators understand technical concepts associated with AI/ML.
IAIS: Following the publication of the FinTech Forum’s AI/ML thematic review last year, the FinTech Forum is now working on a related Application Paper that looks at the ICPs in the context of managing AI risks. The paper is expected to provide examples of AI practices and discussion on associated challenges.
OECD: The Insurance and Private Pensions Committee is working on a paper related to the use of digital tools in insurance.
EU-US Insurance Dialogue Project: AI is a regulator topic of conversation during the bilateral meetings, and the project’s Innovation and Technology Working Group is hearing presentations and monitoring the EU AI Act and adoption of the NAIC AI Model Bulletin.
The NAIC’s data scientist, Dorothy Andrews, gave a presentation on bias, fairness, and governance and an overview of recent papers on the topics. A paper on harm caused by algorithmic bias is expected to be published by the Fall National Meeting.
Senior Issues (B) Task Force
California LTC Insurance Task Force Presentation: California officials and Oliver Wyman consultants presented on the recommendations from the state’s long-term care insurance task force, which was mandated by the legislature to provide options for implementing a public long-term care insurance (LTCi) program. The actuarial analysis was completed in December 2023 and discussed by the presenters.
Washington Cares Fund: Consistent with prior task force meetings, the task force also heard an update from Washington official Ben Veghte on the continued exploration of improvements to the offering of supplemental private LTCi products that are often necessary to consumers in the “middle market” to purchase in the event their WA Cares benefit is exhausted. Veghte expects legislation addressing the supplemental private LTCi market to be enacted in the next state legislative session.
Long-Term Care Insurance (B) Task Force
2024 Work Plan: The task force members indicated support (or lack of stated opposition) to the task force leadership’s plan to develop a single LTCi multistate approach for actuarial rate review (the single LTCi MSA approach). To move this forward, Paul Lombardo (Connecticut) announced that the Minnesota approach (see the report for the Long-Term Care Actuarial (B) Working Group, above) would be used as a starting point, with adjustments as needed to align with agreed-upon concepts. A 45-day exposure period for the Minnesota approach was published by the actuarial working group; comments are due May 3. The task force also discussed the actuarial working group’s plans to address issues relating to 80+ attained age considerations, long duration, and cumulative increases and will attempt to address this as it develops the single MSA approach in as nondiscriminatory a fashion as possible.
CIPR Reduced Benefit Options Project: The task force eagerly awaits the results of a research project on reduced benefit options and consumer notices that is being conducted by the NAIC’s Center for Insurance Policy and Research (CIPR). Preliminary survey results are expected later this Spring.
Actuarial Guideline LI: The task force adopted an amendment to Actuarial Guideline LI—The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves (AG 51).
Long-Term Care Industry Trends: A brief report facilitated by Fred Anderson (Minnesota) noted the importance of certain industry trends affecting LTCi company solvency and reserves that the task force continues to monitor: cost-of-care inflation, morbidity and incidence improvements, rate increase approvals, and asset performance.
Third-Party Data and Models (H) Task Force
Commissioner Conway (Chair – Colorado) offered a preview into what’s ahead for the task force over the next two years:
Year 1 – Fact Finding: The task force will explore state efforts to regulate (or potentially regulate) third-party data and predictive models, as well as federal and international activity.
Year 2 – Model Regulation Development: In 2025, assuming consensus is reached on a path forward based on what’s learned this year, the task force will begin drafting a model on regulatory oversight of third-party data and predictive models.
The remainder of the meeting was a presentation from the State Board of Administration of Florida on the framework used by the Florida Hurricane Commission to review and approve catastrophe models.
Financial Stability (E) Task Force (FSTF)
Macroprudential Updates: Bob Kasinow (New York) provided the task force with several updates from the Macroprudential Working Group (MWG).
Reinsurance Worksheet Amendment: The working group recently amended the optional reinsurance template designed to help lead state regulators better understand the economics of a reinsurance transaction. Among other things, the changes require insurers to (1) provide additional information related to the capital ratio in the reinsurer’s jurisdiction; (2) report the valuation source or methodology for any level 3 assets (as defined in SSAP 101); (3) provide more information on modco reserves; and (4) list recapture triggers in the agreement (see Attachment Two-B). These changes were made in regulator-only session and did not go through any formal amendment process.
NAIC Engagement with BMA: The NAIC continues to communicate regularly with the Bermuda Monetary Authority (BMA). On March 1, the BMA met with U.S. regulators in a closed session to discuss its December 2023 paper on the regulation of private equity insurers, which addresses several of the issues outlined in the 13 MWG Considerations (see below). Kasinow applauded the BMA’s efforts and noted that the BMA was at the national meeting to further conversations with state regulators.
Cross-Border Reinsurance Review: Kasinow suggested the MWG will continue its efforts to review cross-border reinsurance, with a focus on large block, asset-intensive reinsurance. As an initial step, regulators will review the information currently available related to these arrangements.
13 MWG Considerations: Included in the meeting materials is a table providing status updates on the Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers, along with an indication of whether work on each consideration is complete or ongoing (see Attachment Two-A). The MWG will continue to update the table with links and identify items adopted as a result of these workstreams.
Update on VAWG Reviews of Asset Adequacy Testing Submissions: In an encore performance of his presentation at LATF, Fred Andersen (Minnesota) provided an update on VAWG’s review of asset adequacy testing submissions. See the report on the Life Actuarial (A) Task Force (above) for more detail.
Other Updates: The task force also received updates on the task force’s climate risk dashboard, counterparty project, LST work related to separate account assets, Macroprudential Risk Assessment Dashboard, and international macroprudential developments.
Valuation of Securities (E) Task
SVO Challenge Framework and NAIC Designation Definition: The main items on the task force’s agenda were (1) the framework to give the NAIC’s Securities Valuation Office (SVO) the authority to challenge a rating agency rating if it disagrees with the rating by three or more notches; and (2) the revisions to the definition of NAIC Designation. For both items, NAIC staff has drafted proposed responses to interested party comments; tables summarizing the proposed responses are available in the meeting materials (see Attachment Two-A on NAIC Designations; and Attachment Three-B on SVO Discretion). Attachment Three-A contains regulator responses to various issues related to the SVO challenge proposal.
Carrie Mears (Chair - Iowa) emphasized a handful of noteworthy points related to the challenge framework: (1) the task force is committed to strong transparency; (2) the SVO is not a rating agency and has no intention of becoming one (or competing with them); (3) the proposal is not designed to address issues with particular asset classes, but is instead designed to target individualized issues; (4) regulators retain all oversight and authority over this process; and (5) the task force believes the framework is consistent with the E Committee’s Holistic Review of Insurer Investments.
On the NAIC Designation changes, interested parties highlighted the confusion caused by the “other nonpayment risk.” The task force will meet in regulator-only session in May and expose revised versions of both documents shortly thereafter with a goal of discussing again at the Summer National Meeting.
Staff to Pursue Delay in CLO Modeling Effective Date: The Collateralized Loan Obligations (CLO) modeling ad hoc group is working diligently to develop modeling methodology—cash flows for 6 representative deals under 10 scenarios are available on the CLO modeling website. That said, NAIC staff plans to exercise its option to extend the effective date of CLO modeling to year-end 2025 and will expose a P&P Manual amendment to that effect in the coming months. In addition to allowing the group to improve the methodology, this will also allow the group to align this work with other NAIC workstreams, including the E Committee’s Holistic Review of Insurer Investments.
Practical Expedient for PLR Filings: The task force directed the SVO to work with interested parties to develop a practical expedient to determine the issue date for private letter ratings.
Exposed Technical P&P Manual Changes: The task force also exposed two sets of clean-up changes to the P&P Manual related to U.S. Government Agency and Other U.S. Government Obligation abbreviations and SCA and Related Party Bond or Preferred Stock Investments.
Annual SVO Report: The SVO’s annual report is included in Attachment Seven of the meeting materials. There were 1,262 carry-over filings for year-end 2023, for a carry-over rate of 8.1% (down from 9.2% in 2022). According to the report, a carry-over rate of 10% or higher would be an indication that there is an analytical resource constraint issue for the SVO. The report also breaks down the filings reviewed by the SVO by filing type and by industry.
Special (EX) Committee on Race and Insurance
The Health Insurance Workstream will meet in the near future in regulator-only session to review last year’s work and determine what can be done this year. Commissioner Arnold (Co-Chair – Minnesota) used an update to the Network Adequacy Model Law as an example of a path forward, giving a window into the workstream’s thinking. In addition, the workstream will work with the Big Data and AI Working Group on development of the Health Insurance AI/ML Survey, take a deeper look at Section 1557 regarding discriminatory benefit designs (with a potential upcoming workstream meeting on the topic), and hold discussions regarding health insurance data collection.
The Life Insurance Workstream will continue its focus on financial education, having just exposed a draft endorsement that supports state requirements for a mandatory financial literacy course in high schools. In addition, the workstream planned to explore how criminal history influences access to life insurance on its March 28 call.
International Insurance Relations (G) Committee, followed by the IAIS Secretariat Q&A Session with Interested Parties
IMF & BMA Remarks on Private Equity Papers: As part of an update on international activities related to insurer investments, the committee heard an overview of two papers published in December 2023:
- The International Monetary Fund’s Global Financial Stability Note on Private Equity and Life Insurers, presented by Peter Windsor. In response to a question from Director Dunning (Vice Chair – Nebraska), Windsor suggested regulators prioritize the valuation of private assets.
- The BMA’s Supervision And Regulation Of Private Equity Insurers, presented by Ricardo Garcia. In response to a question from Director Cameron (Idaho), Garcia emphasized that reactions to the BMA’s supervisory enhancements largely have been positive from both companies and supervisors.
- The IAIS will develop an issues paper related to structural shifts in the life insurance sector to be published in Q2 2025. The paper will cover challenges, risks, whether additional tools are needed to ensure an adequate response to risks, and recommendations (if any supervisory gaps are identified).
- On the AM comparability assessment, Dixon announced that a few areas have been identified for further analysis, and an additional targeted data collection will be needed. Dixon was unable to divulge further information when asked but did say it will be very targeted and on a smaller scale than what was done last year.
- The IAIS Strategic Plan will be finalized in June and adopted in September.
Overview of Academy’s ABS Work: Steve Smith (American Academy of Actuaries) provided an update on the Academy’s C-1 Subcommittee efforts on asset-backed securities (ABS)—namely CLOs. The subcommittee currently is working on three major projects: (1) developing “comparable attributes” for CLO tail risk (long term); (2) review of credit rating providers’ rating methodologies (middle term); and (3) review of Oliver Wyman’s residual tranche study (short term). The Academy’s presentation is included as Attachment B to the meeting materials.
For the “comparable attributes” project (with the underlying goal of moving away from modeling of individual securities), the Academy is collecting several pieces of CLO analytics/data (e.g., thickness of tranche, rating, waterfall structure, underlying collateral) and seeing how those data points affect selected risk outputs—essentially running a big regression model to see whether some of the attributes explain the risk outputs. If the Academy is able to identify a small number of attributes that explain the risk outputs, there will be no need to run complicated models on individual securities.
For the “review of credit rating providers’ rating methodologies” project, the Academy is in the process of obtaining qualitative descriptions of the rating methodologies from the five rating agencies that rate ABS (Moody’s, S&P, Fitch, KBRA, and DBRS). The initial focus of the review is on CLO methodology, with a goal of expanding the review to other ABS in the future.
Oliver Wyman Study: The Oliver Wyman study examines residual risk for specific asset classes (middle market CLOs, broadly syndicated loan CLOs, prime auto loan ABS, subprime auto loan ABS, and private student loan ABS) and compares those results to common equity—generally finding that ABS residual tranches realize lower losses on a portfolio-level than common stock under corresponding levels of macroeconomic stress.
The report was commissioned by the Alternative Credit Council (an affiliate of the Alternative Investment Management Association). Following discussion, the report was exposed for a 21-day comment period ending April 8, with a specific request for “practical comments for what work might be done to get us to a final product.” As noted above, the Academy is reviewing the study and will compare various aspects of the paper to its C-1 Principles for Structured Securities RBC. Here is some of the initial feedback from regulators:
- Different Charges for Different Underlying Collateral: Kevin Clark (Iowa) raised the prospect of having different charges based on the type of collateral supporting the residual (e.g., a higher charge for equity-backed residuals), reminding the working group that the initial exposure included three-tiered risk charges.
- New York suggested that one of his concerns is “complete loss of value of residuals,” suggesting that some companies use a 100% risk charge for residuals.
- Statistical Safety Level: Carrie Mears (Iowa) and Rachel Hemphill (Texas) both asked questions regarding Oliver Wyman’s selection of the 95th percentile severity and the deep-tail scenario modeled after the Great Depression and how that compares to the Conditional Tail Expectation (CTE) used in other contexts.
- At the end of the call, Barlow suggested that the report does a good job justifying the 45% factor. Mariana Gomez-Vock (ACLI) argued that the Oliver Wyman report may justify the 45% charge for BSL CLOs but was not clear whether it supported that charge for other ABS.
Status of 45% Residual Charge: Philip Barlow (Chair - District of Columbia) explained that last year’s decision to adopt a 45% interim charge for residuals was “reasonably conservative,” noting that the working group gave interested parties an opportunity to provide information to show that a different charge was more appropriate. Representatives of the Alternative Investment Management Association (Joe Engelhard), Nassau Financial Group (David Altmaier), and Talcott Resolution (Kathy Belfi) suggested that the Oliver Wyman report supports use of a 30% interim charge as a “reasonably conservative” factor and encouraged the working group to consider this approach.
- ACLI Call for Delay: At the end of the meeting, Mariana Gomez-Vock (ACLI) requested a one-year temporary delay of the implementation of the interim residual charge, arguing that new information necessitates additional analysis and that for some classes of residuals (namely those associated with ABS other than CLOs), the charge may be effective for a significant period of time. Gomez-Vock also updated the working group on the ACLI’s residual projects and upcoming plans to analyze the alternatives that have emerged to date. She also noted that the additional time would allow the working group to align the work with the E Committee’s Holistic Review of Insurer Investments. That said, as an initial matter, Barlow was not receptive to another delay—specifically noting that regulators have already delayed implementation of the 45% charge once.
Residual Reports: NAIC staff will prepare a report on residuals using companies’ 2023 annual filings. Regulators will receive a more detailed report containing specific company information, and an aggregate report will be available publicly.
CIPR Event: Insurance to Improve Quality of Life - Understanding and Addressing Barriers to the Financial Inclusion of Insurance
The event featured a panel discussion to understand and address barriers to accessing insurance as a means of financial stability. Kelly Edmiston of the Center for Insurance Policy and Research (CIPR) also presented a report on its research findings.
CIPR reported on its research on why there is a gap in access to financial stability across races, looking particularly at health, life insurance, and retirement. On health insurance, the research found that black and Hispanic individuals are less likely to be covered than white and Asian individuals, and that a significant share of the uninsured population would be unable to pay for medical care. The key life insurance takeaways were that white, black, and Asian consumers have life insurance in roughly equal proportions, with Hispanic consumers much less likely to be covered, citing cost as the most significant factor for that gap.
Karl Hersch of Deloitte discussed its surveys on accessing life insurance, finding that about 40% of individuals are underinsured. Lack of financial literacy is a significant reason for that gap; ways to reach underinsured or uninsured populations vary significantly depending on factors such as race and age. Hersch also discussed the need for the insurance industry to increase trust with consumers. He addressed how many consumers have very few interactions with the insurance company issuing a policy, and how consumers’ limited knowledge on how to use their insurance properly or experience of negative claims processes increases distrust among consumers.
Kristi Rodriguez of the Nationwide Retirement Institute (NRI) discussed studies that found the top concern regarding retirement is health-care costs, noting that one in five Americans delay health-care procedures or treatment because of cost concerns. For life insurance, the NRI found that black Americans are often over-insured for funeral and burial costs but are underinsured in ways that allow for wealth transfer. Finally, Rodriguez discussed the Financial Alliance for Racial Equity (FARE) Coalition, the NRI’s effort to bring together financial service firms, historical black colleges and universities, and industry partners to make change in the financial services industry.
NAIC Consumer Representative Brenda Cude discussed the need for the insurance industry to address not only financial literacy but specifically insurance literacy. She discussed how financial literacy programs and education place greater focus on banking and have limited information regarding insurance and product types. Cude discussed the need for the NAIC to better engage on financial literacy and advocate for a greater focus on insurance.
Cybersecurity (H) Working Group
CERP Adoption: The working group adopted its Cybersecurity Event Response Plan (CERP), which is intended to support regulators in responding to cybersecurity events at regulated insurance entities. In light of industry concerns, the group emphasized that the CERP is merely a non-binding guidance document for regulators and not a model law. Regulators can choose to utilize the CERP when responding to a breach and modify it to adapt to their specific needs or laws, but it is not compulsory.
2024 Work Plan: The plan includes topics such as the impact of legacy hardware/software systems, the European Union’s recently passed AI Act, data modernization, and third-party data vendor oversight.
Life Insurance and Annuities (A) Committee
Indexed Universal Life (IUL) Illustration Subgroup: Fred Andersen (IUL Illustration Subgroup Chair – Minnesota) briefly discussed the subgroup’s review of company illustrations for compliance with existing rules. He noted this work could lead to “eventually developing recommendations for rulemaking.”
Accelerated Underwriting Working Group (AUWG): Commissioner Houdek (AUWG Chair – Wisconsin) announced an April 3 meeting of the AUWG to discuss next steps related to the development of the accelerated underwriting guidance and the working group’s 2024 work plan.
Annuity Suitability Working Group (ASWG): Commissioner Ommen (ASWG Chair – Iowa) provided observations from the NAIC best interest model (#275) implementation review that he and other regulators have been conducting. The review has uncovered systemic deficiencies in how companies are implementing the safe harbor provisions, which likely will prompt the working group to create regulatory guidance on the topic.
Federal Update: Taylor Walker (NAIC staff) reported on the status of the Department of Labor Fiduciary Rule, which was sent to the Office of Management and Budget (OMB) on March 8. OMB has 90 days to review, but the review could happen on a quicker timeline. Walker also reported on congressional bills related to the Living Donor Protection Act, which the NAIC is reviewing.
ACLI Concerns on BOLI-related Proposal: The ACLI briefed the committee on its concerns regarding the proposed rule from Treasury, the Federal Reserve, and the FDIC on bank-owned life insurance (BOLI). The proposed rule was issued in September 2023, and the ACLI argues that the corporate disclosure provisions would harm mutual companies and other non-public life insurers due to the elevated risk charge for those companies. The ACLI has submitted comments.
Financial Condition (E) Committee
Commissioner Houdek Sends Request on CRP Diligence Consultant: Nathan Houdek (Chair- Wisconsin) sent a request for approval to the NAIC’s Executive Committee to develop an RFP to engage a consultant to design and help implement a new due diligence process over the use of credit rating providers (CRPs). The new process would include both quantitative and qualitative parameters for CRPs to use their ratings for NAIC Designations. Houdek emphasized that this will be a transparent process—a point that was reiterated by Carrie Mears (Iowa), who encouraged interested parties to reach out directly on the RFP and diligence project.
E Committee Hears Comments on Investments Framework: Interested parties provided oral comments on the latest iteration of the Framework for Regulation of Insurer Investments – A Holistic Review (and related cover memo and workplan). Comments included:
- Carrie Haughawout (ACLI): (1) Supports a recognized framework for coordination to ensure work is consistent with the holistic framework and explain how specific actions interact with other workstreams; (2) suggests incorporating a cost-benefit analysis into framework; and (3) requests additional information regarding how the Life Actuarial Task Force’s activities fit into the framework.
- Mike Consedine (Athene): (1) Supports the framework, encourages continued respectful and direct dialogue, and supports the goal of modernizing the approach to analyzing insurer investments; (2) argues that the framework should not limit the concept of “equal capital for equal risk” to “equal capital for equal tail risk,” as proposed in latest draft; and (3) suggests that, while CLO modeling may be a useful tool at a portfolio level, CLO modeling should not supplant use of CRPs in analyzing the credit risk of CLOs.
- Christopher Anderson (Anderson Insights): Calls for (1) additional analytics to measure performance of rating agencies, including use of data mining and AI; and (2) examination of the SVO.
- Edward Toy (Risk & Regulatory Consulting—RRC): (1) Emphasized that regulator needs related to credit risk are incremental, suggesting a need to focus more on market volatility and liquidity risk; and (2) supports the new working group contemplated in framework.
- Francisco Paez (MetLife): (1) Commended the committee on its decision not to delay or pause existing workstreams, suggesting that risk taking among industry “continues to build”; and (2) suggested that tail risk is a fundamental driver of increased risk in the industry.
Comments on the revised documents were due April 1.
Health Insurance and Managed Care (B) Committee
2024 Priorities Surveyed: Based on a survey conducted earlier in the year, the members of the committee have the following 10 areas of interest: mental health, network adequacy, pharmacy benefit managers, claims denial, senior issues, cost transparency, health of the small group market, prior authorization, plan design, and ground ambulance. Director Fox (Michigan) emphasized that some of these areas will not be thoroughly explored by the B Committee, noting the Change Healthcare cybersecurity attack threw a “curve ball” and was the subject of a regulator-only session at the Phoenix meeting that included important updates, offering that commissioners are trying to understand what levers, if any, state insurance departments can pull given the cyberattack directly impacted a non-insurer yet is affiliated with an insurer.
Long-term Care Insurance Updates: Paul Lombardo (Connecticut) briefed the committee on the work of the LTCi task force and the LTCi actuarial working group (see the >B>Long-term Care Insurance Task Force summary). Responding to Fox’s question, Lombardo clarified that states are not required to adopt a multistate actuarial (MSA) rate review approach as a model, if the actuarial working group is able to develop one.
Innovation, Cybersecurity, and Technology (H) Committee
Privacy Protections Working Group (PPWG): According to Commissioner Beard (PPWG Chair – Indiana), drafting on the new privacy model (#674) has been paused with the working group leadership transition. In April, the working group will begin meeting with subject matter experts to discuss potential issues of focus and direction. NAIC Legal will create an issue matrix to aggregate information from the SMEs and compare the latest draft of Model #674 and existing Models #670 and #672. The matrix will be used by the working group as a tool to understand issues/model provisions and help determine the best privacy regime and language to reflect that. PPWG leadership will restart public calls when appropriate.
Technology and Innovation in InsurTech Working Group: The working group intends to hold in-person meetings at the upcoming Summer and Fall National Meetings to hear InsurTech-related presentations.
E-Commerce Working Group: The comment period on the revised modernization guide closed on March 14. The working group will meet on April 4 to discuss comments and adopt the guide.
In other news, Commissioner Birrane (Chair – Maryland) reminded attendees that the work of the Collaboration Forum on Algorithmic Bias is now under the purview of the Big Data and Artificial Intelligence Working Group. However, the committee has launched two additional Collaboration Forums—one on data collection (chaired by North Dakota Commissioner Godfread) and another on the development of tools for regulators as they evaluate AI and algorithm-driven systems (chaired by Iowa Commissioner Ommen). Both forums are under development.
AI/ML Presentations: Frank Chang (Uber and Casualty Actuarial Society) presented on types of AI/ML, focusing primarily on modeling and how to address fairness and adverse consumer outcomes. Danny Tobey (DLA Piper) presented on the current landscape of AI regulation, focusing primarily on international activities, including an overview of the EU AI Act.