NAIC Updates
On December 4, 2024, Oklahoma Insurance Commissioner Glen Mulready hosted three commissioners at his Insurance Day. Newly elected NAIC Officer Jon Pike (UT) discussed the priorities Jon Godfread (ND) will set as NAIC President. Pike emphasized familiar themes, including how the NAIC approaches RBC and the involvement of commissioners in financial regulation. Pike also echoed efforts to eliminate the Federal Insurance Office (FIO), calling it “low hanging fruit” for executive branch efficiency efforts. He further urged the NAIC to be less accommodating on the international stage and to better defend the U.S. system, which he believes could come easier as President-Elect Trump begins his second term.
As previewed by Eric Kolchinsky (NAIC Structured Securities Group) at the Fall National Meeting, the CLO Modeling Ad Hoc Group met last week to roll out its initial method to establish probabilities for the CLO modeling project. The underlying thesis of the project is that “matching the RBC on the CLO tranches with the RBC of the underlying portfolio ensures that risk is conserved.” That said, Kolchinsky re-emphasized that NAIC staff will follow the will of the regulators as they analyze various ways to determine CLO risk, including the American Academy of Actuaries’s efforts to develop a less complex way to analyze risk (i.e., identifying a small number of Comparable Attributes, rather than modeling of individual securities). The probability work discussed at the meeting was presented to the Academy on December 9. The Academy also confirmed that it will have an update on its Comparable Attributes work by the 2025 Spring National Meeting, if not earlier. The NAIC staff are using 100% for equity rather than the 45% interim factor used for residual tranches “to avoid penalizing the senior debt tranches.” At industry’s request, Kolchinsky agreed to provide an analysis of the impact of that decision and what the probabilities would look like with a 45% charge for equity.
The ad hoc group is soliciting specific feedback on the probability approach (see slide 10 of the deck linked above) and will accept both official and unofficial (off the record) feedback from stakeholders. The ad hoc group will hold a call next month to further discuss the approach. Stakeholders were encouraged to work with all the information provided on the CLO webpage.
Additionally, the NAIC will update its model results early in the year and plans to do so on a monthly basis moving forward; the next round of results will incorporate certain changes proposed by interested parties earlier this year. Future data also will include FE designations. Industry raised the idea of providing FE information on a historical basis for residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), comparing those designations to the model results—something Kolchinsky is in favor of pursuing in connection with the E Committee’s investment framework.
In other news, the VM-22 Subgroup exposed revisions to its Standard Projection Amount (SPA) behavior assumptions, reflecting comments and feedback from the ACLI. The proposed changes were exposed for a 60-day comment period. Prior to making the exposure, Ben Slutsker (Chair – MN) gave the same update he gave at the Fall National Meeting. The subgroup continues to analyze field test results.
The subgroup planned to meet this week to discuss longevity reinsurance options and hoped to hold a vote on a path forward at that time. The subgroup is tentatively scheduled to discuss field test results next week, but it is unclear if the data will be ready in time. A few open questions remain related to the exclusion test, SPA, and reinvestment guardrails, each of which the subgroup intends to address next year. Likewise, certain aspects of the framework that were decided on early in the process will need to be readdressed. Regulators continue to target a January 1, 2026, effective date with a 3-year optional implementation period (and a January 1, 2029, requirement) to use VM-22 on a prospective basis for non-variable annuities.
Staff Contact - Sean McKennaAI Activity
On December 4, 2024, the House Financial Services Committee held a meeting on the future of AI, blockchain, and venture capital. Witnesses expressed the need for federal guidance and regulations on AI, blockchain, and venture capital to keep the United States on par or ahead of foreign countries while at the same time ensuring that the regulations do not impede innovation. Committee members expressed concern regarding the risks and impacts of bias and automation with AI, data privacy and security concerns regarding AI and blockchain, and the consolidation of venture capital on the coasts. All speakers appeared to agree that regulation and developments are needed for the United States to remain as a global leader in these matters.
Staff Contact - Sean McKennaPrivacy Updates
On November 22, 2024, the California Privacy Protection Agency (CPPA) opened the formal public comment period for its recent proposed rules and regulations regarding (1) cybersecurity audits and risk assessments, (2) consumers’ rights to access and opt out of businesses’ use of automated decision making technology, and (3) insurance companies’ compliance with the CPPA. The public comment period ends on January 14, 2025.
On November 25, New York Attorney General Letitia James and New York Department of Financial Services Superintendent Adrienne Harris secured $11.3 million in penalties from two auto insurers, GEICO and The Travelers Indemnity Company, for poor data security that led to compromising the personal data of more than 120,000 New Yorkers. In addition to the penalties, the settlement requires the insurers to adopt a series of measures aimed at strengthening their cybersecurity practices moving forward.
On the federal side, the NIST Privacy Framework Team released the initial public draft of the NIST Privacy Workforce Taxonomy, which is aimed to help organizations better achieve desired privacy outcomes, support recruitment, and inform the education and training of professionals. Interested parties may submit feedback through January 17, 2025.
On November 21, the Consumer Financial Protection Bureau (CFPB) issued a final rule—Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications. The rule allows the CFPB to supervise larger nonbank companies that offer payment apps and digital wallets, including supervision of their privacy practices, and is aimed at protecting personal data, reducing fraud, and stopping illegal “debanking.” The rule will go into effect 30 days after its publication to the Federal Register.
On December 3, the CFPB released a proposed rule to stop data brokers from selling sensitive personal data to scammers, stalkers, and spies. The proposed rule would limit the sale of personal identifiers (such as Social Security numbers and phone numbers) collected by data brokers and make sure that financial data is only shared for legitimate purposes. The proposal also clarifies that when data brokers sell certain sensitive consumer information, they are “consumer reporting agencies” under the Fair Credit Reporting Act (FCRA) and must comply with requirements under FCRA. Interested parties may submit comments until March 3, 2025.
Staff Contact - Sean McKennaIAIS Developments
The International Association of Insurance Supervisors (IAIS) Annual Conference concluded on December 6, 2024, in Cape Town, South Africa. Highlights of the conference included:
- Petra Hielkema (European Insurance and Occupational Pensions Authority, or EIOPA) was appointed the newest Vice Chair of the IAIS Executive Committee; she joins fellow Vice Chairs Andy Mais (Connecticut), and Siham Ramli (Morocco).
- Structural shifts in the life insurance sector (increased investment allocations to alternative assets and increased use of asset-intensive cross-border reinsurance) were prominently featured in several panels and a stakeholder roundtable discussion, all of which will inform an upcoming Issues Paper on structural shifts (scheduled for consultation in March).
- The Insurance Capital Standard (ICS) as a prescribed capital requirement (PCR) was officially adopted on December 5, and the Level 1 (overarching principles and concepts) and Level 2 (detailed specifications) texts were published. The following supporting documents were also released: ICS Calibration Document; ICS Economic Impact Assessment Report; and the Resolution of Public Comments.
- Amendments to several international core principles (ICPs) were adopted: ICP Introduction and Assessment Methodology, and ICPs 8, 12, 14, 15, 16, and 17. The changes are a result of several consultations related to climate risk, the holistic framework (primarily recovery and resolution topics), and valuation and capital (related to finalization of the ICS).
- Matt Walker (Chair – Policy Development Committee, Federal Reserve) announced that ICS data collection will be discontinued. While the IAIS may still need further data on investment portfolios for internationally active insurance groups (IAIGs), it hopes to be able to collect that data at the aggregated jurisdictional level and will resort to limited, targeted data calls only as necessary. On implementation, the ICS assessment methodology (to be developed in 2025) will not be published for consultation, following the model used when the holistic framework implementation assessment methodology was developed. Stakeholders will have opportunities to engage on the assessment methodology through workshops and regional meetings.
- Key risks in the current macroeconomic environment: Areas of focus relate to surrender risk, debt sustainability of fixed-income assets, risks related to commercial real estate exposures, impact of derivatives and margin calls, impact of AI and digitalization, and transmission channels from geopolitical risk.
- Structural shifts in the life insurance sector: Focuses on increased investment allocations toward alternative assets and increased use of cross-border asset-intensive reinsurance. The paper identifies the drivers, benefits, and concerns associated with both areas of focus and discusses an upcoming Issues Paper that will inform enhancements to supervisory and supporting material.
Feedback received will be considered in the regular review and development of the GME assessment methodology and will inform whether the IAIS includes the new ancillary indicators. The updated GME documentation will be published in 2025. Below are the key points for each proposed indicator:
- Credit Risk: Aims to capture exposure to certain asset types and potential losses in the event of defaults or downgrades of relevant counterparties. The consultation proposes two credit risk metrics: (1) investments by credit rating and (2) credit risk scenario analysis. The consultation notes that a pullback of credit provided by insurers in active markets could impact the economy, and losses can be significant if defaults or downgrades occur in sectors/asset classes in which insurers are heavily invested.
- Derivatives: The IAIS acknowledges that derivatives are useful tools for insurers, but in some cases, derivative positions may lead to liquidity or credit risk. The consultation proposes several metrics for derivatives due to the complexity of associated risks and benefits: (1) relative use of derivatives; (2) potential future exposure; (3) materiality of OTC derivatives; (4) margin and collateral calls; (5) central clearing; and (6) hedging. In particular, the IAIS notes that assessing the materiality of OTC derivatives will help evaluate the insurer’s systemic risk potential, particularly in stressed situations.
- Reinsurance: The consultation proposes three metrics to monitor the development of reinsurance and promptly identify any macroprudential concerns: (1) reliance on reinsurance; (2) cross-border life reinsurance; and (3) (re)insurers’ market share. With respect to cross-border reinsurance, the objective is to capture the transfer of life provisions to both non-affiliate and affiliate entities, including those ceded through modified coinsurance (ModCo) and coinsurance contracts, as well as coinsurance with funds withheld.
- Mark-to-Model Assets: The IAIS is proposing an adjusted mark-to-model assets indicator to measure the overall share of mark-to-model assets (including mortgages) of insurers regardless of accounting treatment. The paper identifies valuation uncertainty as a risk associated with non-traded, illiquid assets, and undervaluing assets could impact the solvency and liquidity of insurers and the broader system.
- Liquidity Metrics Adjustments: In 2022, the IAIS included liquidity metrics as part of the GME to monitor liquidity risk. Comments in response to the 2022 consultation suggested addressing the different liquidity profiles across the insurance sector. Accordingly, the adjustments proposed in the current consultation are meant to segregate liquidity needs arising from different business lines within a group. The following liquidity stress categories are proposed: life stress, P&C stress, repos and securities lending, funding, derivative, and operational risk.
Other International Developments
On December 5, 2024, the Financial Stability Board (FSB) published its 2024 Resolution Report, which includes the anticipated 2024 List of Insurers Reported as Subject to Resolution Planning Standards Consistent with the FSB Key Attributes. The list names 13 insurers, six of which were previously on the FSB’s global systemically important institution (G-SII) list (last published in 2016), including the three U.S. groups: AIG, MetLife, and Prudential Financial. The FSB clearly states that inclusion on this list does not mean the insurer is automatically considered systemically important, and therefore, the list differs materially from the discontinued G-SII list (however, by the FSB’s terms, the Key Attributes apply only to insurers that are systemically significant or critical in failure.) The FSB also notes that the list will be published annually and is likely to grow.
In addition to its Resolution Report, the FSB’s Annual Report touches on resolution-related issues, including resolution of Global Systemically Important Banks and Central Counterparties. The report also states that more work is needed on developing resolution regimes globally. The larger themes in the annual report include addressing systemic risk in non-bank financial intermediation, the financial stability consequences of climate-related risks, and development of policy frameworks around AI. We are likely to see additional FSB outputs of high interest to industry stakeholders.
On December 4, the Bermuda Monetary Authority (BMA) released a Consultation Paper outlining the proposed instructions and guidance on the application of the Prudent Person Principle (PPP). Bermuda law requires an insurer to implement a PPP as part of its risk management framework covering investment risk. The PPP requires that an individual entrusted with managing a client’s funds may invest only in instruments that a reasonable individual aiming for capital preservation and return on investment would consider owning. The consultation paper contains guidance on governance, investment risk management, outsourcing investment services, risk concentration/accumulation and diversification, complex and non-publicly traded assets, affiliated/related/connected party assets, and the use of derivatives and other financial instruments. The BMA is proposing a July 1, 2025, effective date. Comments are due February 5, 2025.
On November 21, Petra Hielkema (Chair of the European Insurance and Occupational Pensions Authority, or EIOPA), delivered remarks at the annual EIOPA Conference. While her comments covered familiar topics—including inflation, geopolitical matters, AI and cyber threats, and Solvency II review—she took the opportunity to again advocate for greater authority residing with EIOPA. Namely, she believes that EIOPA should have the ability to intervene in cross-border supervisory cases that remain unresolved due to inaction by a national supervisor. In particular, EIOPA should be equipped with the same powers as a national supervisor to be used as a last resort. Hielkema additionally advocated for the harmonization of insurance guarantee schemes (IGSs), noting with irony that insurers can operate across Member States with a single license but there is no similar single protection for consumers in the event of an insurance failure.
On November 29, EIOPA held its first of several webinars to discuss aspects of the Insurance Recovery and Resolution Directive (IRRD) framework. This webinar was focused on the general aspects of the IRRD, which include recovery and resolution planning, cooperation and coordination between countries, and funding considerations. EIOPA briefly touched on its proposal to harmonize IGSs, which was ultimately not adopted, but Article 98 of the IRRD calls for an assessment and report on the appropriateness of minimum common standards for IGSs within two years. EIOPA is currently focused on development of the technical instruments needed to implement the IRRD, which will be released for consultation in batches (the first in April 2025). The next webinar, scheduled for January 17, 2025, will be focused on recovery planning.
Staff Contact - Sean McKenna