GA Update Online is intended for NOLHGA’s guaranty association members only. The contents are confidential and should not be shared with third parties. NOLHGA reserves all rights with respect to applicable privileges from disclosure.
IN THIS EDITION:
- Introduction
- Financial Stability (EX) Task Force
- Receivership Model Law (E) Working Group
- Receivership and Insolvency (E) Task Force (RITF)
- Unclaimed Life Insurance Benefits (A) Working Group
- Cybersecurity (EX) Task Force
Introduction
Peter Gallanis and Joni Forsythe attended the NAIC’s Spring National Meeting, held in New Orleans on April 3-4, 2016. In addition, NOLHGA and the NCIGF jointly hosted a luncheon on April 4 for guaranty association administrators, Board members, and invited guests to review NAIC activities of interest to guaranty associations.
The following is a report on relevant activities within the NAIC Committees that NOLHGA is monitoring.
Financial Stability (EX) Task Force
The task force, which met at the Spring National Meeting, monitors and provides input concerning global financial stability and resolution standards as they relate to insurance regulation and the role of state insurance regulators in the United States.
In his opening remarks, Task Force Chair Peter Hartt (New Jersey) commented on the March 30 decision from the U.S. District Court for the District of Columbia, reversing FSOC’s 2014 designation of MetLife as a Systemically Important Financial Institution (SIFI). The opinion of the court was initially issued under seal in order to afford the parties a week to consider and submit briefs with respect to any portion of the opinion that should remain sealed. The full opinion was subsequently released on April 7. In that opinion, the court rejected MetLife’s argument that it was not eligible for SIFI designation but went on to conclude that FSOC's designation of MetLife as a SIFI was arbitrary and capricious and that FSOC failed to adhere to administrative law and the standards set forth in its own adopted guidance in making the designation. FSOC has indicated it will appeal the decision.
The task force also discussed the NAIC’s written comments to a series of questions set forth in the Financial Stability Board’s (FSB) November 2015 Consultative Document, Developing Effective Resolution Strategies and Plans for Systemically Important Insurers. The NAIC’s comments, which were submitted on January 4, focused primarily on three issues. The first relates to issues of jurisdictional authority and the need to take into account different regulatory regimes in place throughout the world, such that the U.S. state-based regulatory system is not measured strictly in terms of compliance with Key Attributes designed to fit different (non-U.S.) regulatory structures. The second point focused on the underlying policy goals of insurance regulation in the United States and underscored the primacy of policyholder protection in the U.S. regulatory scheme. Finally, the comments addressed the significant role and value of the guaranty association system in the United States as partners in resolution planning and implementation and sought to correct misperceptions that guaranty associations are simply a source of funding or should be called upon to provide support in a solvent run-off. The guidance set forth in the FSB Consultative Document is not yet final, and the NAIC is hopeful that its comments will be considered and incorporated.
The task force also heard a presentation by Ann Kappler (Prudential Financial) concerning the requirements for resolution planning and the process undertaken by companies designated as SIFIs to develop and assess their enterprise-wide resolution plans. According to Kappler, the process is useful for understanding the interconnectedness of entities within the enterprise but should not be viewed as creating a pre-packaged insolvency plan, because the plans are developed based on very specific scenarios.
The meeting wrapped up with a brief NAIC staff presentation on interest rate risk and stress testing for the life insurance industry, including actions that can be taken by companies to address low interest rate environments and regulatory tools available to address interest rate risk. Presentation slides are included with the published meeting materials and posted on the task force web page.
Receivership Model Law (E) Working Group
At the conclusion of its meeting last November, this working group requested comments from regulators and interested parties concerning the results of an NAIC survey of state insurance departments seeking information concerning specific aspects of state receivership laws and how they may correlate to specific standards set forth in the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes). In particular, the working group asked that comments include recommendations concerning specific areas where existing state receivership laws and practices should be improved and/or made more consistent and any related recommendations for improvement that the working group should consider, including recommendations for enhancing consistency between state receivership laws. Comments were due by February 1 and were discussed on a March 7 call.
NOLHGA and the NCIGF submitted a joint comment letter encouraging the working group to focus its review of receivership laws and practices to align with the scope and goals of the Key Attributes; i.e., namely resolution of any insurer designated as a SIFI or G-SII (Globally Systemically Important Insurer). To that end, comments by NOLHGA and the NCIGF focused on promoting Dodd-Frank Implementation Legislation, as reflected in the NAIC Guideline for Implementation of State Orderly Liquidation Authority, and continuing to advocate for and advance the role of the guaranty system in resolution pre-planning and preparedness. Comments were also submitted by the Florida Insurance Department, the International Association of Insurance Receivers, and the Reinsurance Association of America.
At the close of the March 7 call, the working group asked each participant to submit a list of up to five issues that they consider to be top priorities for working group consideration. The joint comments submitted by NOLHGA and the NCIGF maintained focus on Dodd-Frank Implementation and the role of the guaranty system in pre-planning and preparedness, and again urged the working group to focus its recommendations on receivership law provisions and issues responsive to the Key Attributes and for which there is broad support. ACLI submitted comments responsive to working group questions concerning the 24-hour stay provision related to Qualified Financial Contracts, and seven state insurance departments commented on various issues.
Following discussion at its April 3 meeting, the working group identified a list of eight issues and/or receivership law provisions as topics for continued discussion. These include: Dodd-Frank implementation; application of receivership laws to non-regulated entities that are operationally related to insurers; reciprocity/full faith and credit for receivership court orders; automatic stays; receiver immunity; Qualified Financial Contracts and the NAIC Guideline for stays upon termination of netting agreements; guidance on coordinated pre-planning and early consultation with the guaranty system; and large deductible provisions. The working group plans to have a follow-up call in approximately 30 days to continue discussion of these issues.
Receivership and Insolvency (E) Task Force (RITF)
In addition to adopting the reports of its Receivership Model Law Working Group (RMLWG) and Receivership Financial Analysis Working Group, the RITF discussed the following:
Factored Structured Settlements
The task force is reviewing a proposal for limited revisions to the Life and Health Insurance Guaranty Association Model Act designed to clarify and confirm the exclusion from coverage of persons who have purchased from an original structured settlement annuity payee his or her rights to receive structured settlement annuity benefits and the exclusion from coverage under the Model Act of such purchased structured settlement annuity benefits. The proposal was originally submitted by the ACLI and subsequently modified by the National Structured Settlements Trade Association (NSSTA). NOLHGA has reviewed the proposal and has noted no objections. Following brief discussion, the task force voted to expose the proposal for a 60-day comment period. Comments on the proposal are due on or before June 3. The text of the proposed amendment is posted to the NAIC’s RITF web page.
Federal Legislative Update
NAIC staff provided a brief update concerning federal legislation, including the recent passage of the Policyholder Protection Act, which clarifies the authority of state regulators to wall-off insurer assets from failed financial institutions. According to NAIC staff, the Policyholder Protection Act includes technical changes to Dodd-Frank that modify the FDIC’s lien authority in regard to insurer assets in order to limit the negative impact on insureds.
Staff also discussed NAIC activities with respect to a recent regulatory issue relating to the treatment of Qualified Financial Contracts in receiverships. According to staff, the provision in the NAIC’s receivership model law dealing with the treatment of Qualified Financial Contracts (IRMA §711) was criticized by the Federal Insurance Office (FIO) because it did not include a 24-hour stay on netting provisions for these contracts. The NAIC subsequently adopted a guideline including proposed language for incorporating a 24-hour stay provision. However, certain federal agencies (the OCC, Federal Reserve Board, and FDIC) have since issued Interim Proposed Rules relating to the definition of Qualifying Master Netting Agreements, which rules do not recognize state-based stays. Once those rules are finalized, netting agreements entered into by insurers and their counterparties in any state that has adopted the 24-hour stay provision would no longer fall within the definition of “eligible master netting agreement.” The result would be higher collateral requirements and credit charges imposed on those insurers. In order to avoid that result, NAIC staff is reaching out to the federal agencies to request that this issue be resolved before the rules are finalized. The ACLI has asked that the NAIC not pursue adoption of the 24-hour stay guideline in the states until such time as that issue is resolved.
International Issues Update
At the November 2015 meeting, the task force reported on the November 3 release of the FSB’s Consultative Document titled Developing Effective Resolution Strategies and Plans for Systemically Important Insurers. The task force then assembled a small group of regulators to review the document and develop recommendations for comments. The NAIC’s comments were submitted to the FSB on January 4, 2016. The substance of the comments was discussed during the April 3 meeting of the Financial Stability (EX) Task Force, as summarized above. A copy of the NAIC’s January 4 comment letter can be accessed here.
Mr. Kennedy also reported briefly on recent public sessions held by the International Association of Insurance Supervisors (IAIS) in Basel, Switzerland, for stakeholder discussion of resolution issues, noting appreciation for the participation of U.S. guaranty system representatives. The NAIC hopes to see more IAIS public sessions in the future.
Unclaimed Life Insurance Benefits (A) Working Group
This working group did not meet during the Spring National Meeting, but its drafting subgroup has continued to hold weekly conference calls in an effort to complete an initial draft of an NAIC model law to address insurer obligations with respect to unclaimed life insurance benefits.
Following months of discussion and debate over competing proposals, a preliminary discussion draft was circulated to the drafting group, interested parties, and interested regulators last November, with a comment deadline of December 14, 2015. Comments were submitted by a multitude of interested parties and interested regulators from various states. These comments were then populated into a flow chart for further discussion and consideration on a section-by-section basis. Throughout the first quarter of 2016, the drafting group has continued to discuss and debate language in the preliminary draft as well as various amendatory proposals. Key points of contention that persist include, among other things, the scope and frequency of Death Master File searches to be required; vague criteria for “thorough” search requirements; “fuzzy match” criteria (including the parameters for matching incomplete Social Security Numbers, nicknames, initials, and variations for hyphenated names); appropriate exclusions; timeframes for specific actions to be taken; efforts required for periodic update of insurer records; and retroactive application.
The drafting group is working hard to resolve these challenging issues and expects to have a draft model completed for submission to the working group by June. If that occurs, the NAIC’s draft model could be passed up to A Committee as early as August. It is unclear at this point whether enough of the controversial issues will be resolved in a manner that would result in greater industry and regulator support for the proposed NAIC model. In the meantime, the NCOIL Unclaimed Life Insurance Benefits Model has been adopted in approximately 19 states, and legislation is pending in several others.
Cybersecurity (EX) Task Force
Federal Legislative Update: NAIC staff reported on the status of federal cybersecurity legislation. The Cybersecurity Information Sharing Act of 2015 (S. 754) was passed at year-end 2015. This law authorizes the government to share unclassified, technical data regarding cyber threat indicators, methods of attack, and defensive measures. According to staff, this bill also provides limited liability protections for businesses that cooperate with federal regulators and share information concerning cyber threats and vulnerabilities through a platform provided through the Department of Homeland Security.
The Data Security Act of 2015, introduced earlier in 2015, was reviewed and marked-up by the House Financial Services Committee in December. NAIC representatives have met with bill sponsors to voice opposition based on the level of federal preemption and the imposition of federal standards that would create ceilings for protections, thereby limiting more stringent state-based protections in some areas. A copy of the NAIC’s December 3, 2015, letter to the House Financial Services Committee can be accessed here. Prospects for passage of this legislation remain uncertain.
On February 12, President Obama signed an Executive Order on cybersecurity that establishes a Cybersecurity National Action Plan, including the creation of a Federal Commission on Enhancing Cybersecurity, and establishes a new federal position, a Federal Chief Information Security Officer. An overview of the National Action Plan can be found here. The President also released a 2016 Federal Cybersecurity Research and Development Strategic Plan outlining federal strategic research and development goals for the advancement of cybersecurity technologies. This 50-page strategic plan is included in the meeting materials posted to the NAIC’s Cybersecurity Task Force web page.
NAIC Insurance Data Security Model Law: Last Fall, the Cybersecurity Task Force developed and released a Cybersecurity Bill of Rights Document, which was the focus of much controversy and was adopted by the task force notwithstanding overwhelming opposition by industry representatives concerned that the document purports to create rights for consumers that are inconsistent with established state privacy laws. Thereafter, the task force announced that it would be making recommendations for incorporating the controversial standards reflected in the Bill of Rights Document into various NAIC privacy and fraud model laws.
In subsequent discussions, industry representatives encouraged the task force to develop a single data security model, rather than injecting data security provisions across four preexisting fraud and privacy models. As a result of those discussions, the NAIC Cybersecurity Task Force quickly developed a proposed new cybersecurity model law applicable to licensed insurers; producers; and anyone required to be licensed, authorized, or registered under state law.
This new model was released on March 2 for comments by March 23. The task force received approximately 131 pages of comments, including a joint comment letter signed by 13 industry trades. The comments identify various fundamental concerns with the draft and argue that many provisions conflict with state and federal law and are “simply not workable.” One much-cited example is a provision in the draft that purports to exclude licensees from the scope of all other state or federal laws or data security regulations on the grounds that this statute would constitute the regulation of the business of insurance pursuant to McCarran-Ferguson. (As noted above, the NAIC opposes the federal Data Security Act of 2015 and would seek exclusion for insurers if that legislation moves forward.)
At the April 4 meeting, all those who submitted written comments were afforded three minutes each to address the task force. In addition to substantive concerns identified in the draft model, many of the speakers raised concerns about the process, noting the shortened three-week comment period and further noting that the three-minute time limit for speakers did not afford any opportunity for meaningful discussion and dialogue on the important legal and policy issues raised in the draft model. They urged the task force to schedule time for meaningful discussion on the substantive issues in order to address and work through the problems in the draft in the hope of achieving a workable model that could receive industry support. The task force advised that they would consider the comments and decide what next steps they will take.