International Developments
On July 1, 2024, the International Association of Insurance Supervisors (IAIS) published a preview of the results from the 2024 Global Monitoring Exercise (GME). The final Global Insurance Market Report (GIMAR) will be published at year-end; in the meantime, the mid-year update shows that the 2024 GME continues to focus on last year’s themes:
Interest rate, liquidity, and credit risks faced by insurers under the current macroeconomic environment: The IAIS’s attention is focused on geopolitical risks, commercial real estate exposures, debt sustainability of fixed-income assets, digitalization, and AI.
Structural shifts in the life insurance sector:
- The IAIS is concerned that growing investments in alternative assets could increase risks related to liquidity, valuation, hidden leverage and credit, and affiliated third-party transactions.
- It is further concerned that cross-border asset-intensive reinsurance raises supervisory concerns in some jurisdictions, concentration risks, and potential herd behavior among insurance firms.
- The IAIS is continuing its monitoring of potential financial stability implications and will publish an Issues Paper in 2025. The Issues Paper will focus on practices used by IAIS members to supervise risks linked to higher capital allocation to alternative assets and will develop a principles-based classification of alternative assets. It will also explore practices for supervising risks, concerns, and benefits of asset-intensive reinsurance (types of transactions, features, risks, and safeguards). The Paper, which will be published for public consultation in the first half of 2025, will determine whether these matters are adequately addressed in existing IAIS supervisory material.
On July 11, the Department of the Treasury and the Federal Reserve issued official notice that they will begin drafting a report to Congress on the impact of the Insurance Capital Standard (ICS) on consumers and U.S. markets “before supporting or consenting to the adoption of any final insurance capital standard.” The report, in accordance with Section 211(c)(3)(A) of the Economic Growth, Regulatory Relief, and Consumer Protection Act, will be drafted by Treasury’s Federal Insurance Office and the Federal Reserve, which must consult with the NAIC.
Staff Contact - Sean McKennaNAIC Updates
The Long-Term Care (LTC) Actuarial Working Group has requested comments on using the “Minnesota Approach” for a single LTC Insurance Multistate Rate Review—with adjustments to the haircut percentages and cumulative rate increase ranges of the cost-sharing formula. The adjustments are intended to increase the cost-sharing burden for the company where cumulative rate increases are very high (which tends to be the case for higher-age policyholders and higher-duration policies) and potentially decrease the cost-sharing burden for the company for lower-duration policies. The Minnesota Approach, including the current cost-sharing formula, is described here. Comments are due August 1, and the approach will be discussed further on August 12 at the NAIC Summer National Meeting.
On July 10, Commissioner Beard (IN), Chair of the Privacy Protections Working Group (PPWG), clarified that the group will be moving forward with revisions to Model #672, as determined by the June 12 vote, and not voting again on which model to revise, despite misleading information circulated prior to the meeting. Beard noted that industry’s 672 Plus draft will be considered as part of the drafting process. A Subject Matter Expert group will be formed to begin the revision process. Beard and Vice Chair Erica Weyhenmeyer (IL) said more materials would be circulated ahead of the Summer National Meeting, which hopefully will provide a clearer understanding of next steps for stakeholders to evaluate.
As previewed at the Spring National Meeting, the NAIC is hosting a virtual one-week course on the principles-based bond definition. This course is designed to assist companies in determining whether a debt security qualifies as a bond under the new definition, including analysis of real-world examples using the revised criteria. Participants could begin the course any Monday starting on July 15 and can set their own study pace during the one-week course.
The Cybersecurity Working Group continued its educational sessions from cyber experts. During the week of July 7, FBI Special Agent Ignace Ertilus gave a presentation on the changing cyber landscape. Ertilus outlined cyber defense best practices (which are on page 15 of the meeting materials) and noted the importance of partnering with law enforcement (namely the FBI) before an incident. He also touted the FBI’s Internet Crime Complaint Center as a tool for stakeholders to stay educated about the latest cyber threats. It also serves as a reliable and convenient reporting mechanism for the public to submit information to the FBI concerning suspected Internet-facilitated criminal activity.
Staff Contact - Sean McKennaAI Activity
On July 10, the NAIC’s Third-Party Data and Models Task Force reviewed comments submitted on its draft work plan. Commissioner Conway (Chair – CO) observed that many comments were focused on the potential regulatory framework for third-party models and not on the work plan itself. He identified three common themes in the feedback received. Commentors raised questions regarding (1) the ultimate problem the task force is trying to solve; (2) how broadly the framework will apply; and (3) whether the process for creating such a framework will be transparent.
Conway clarified that (1) regulators have growing concerns about the impact of third-party models and need to have confidence in the fairness of what insurers are utilizing; (2) the task force will be hearing presentations and having discussions to inform the scope/applicability of a framework, and related questions have been built into the work plan; and (3) the task force is committed to an open and transparent conversation.
Alabama raised questions about whether the work plan is sufficiently broad or requires more specificity on considerations regarding model filings. Conway suggested that Alabama submit additions in writing (if desired), and the task force will vote on the work plan via email in the near future. The task force will meet next on July 30 to hear presentations on risk-based regulatory frameworks.
The New York Department of Financial Services released its final circular on the use of AI systems and external consumer data and information sources (ECDIS) in insurance underwriting and pricing. The final version is very similar to the proposed version; it maintains a heavy focus on unfair/unlawful discrimination and requires regular testing.
Several federal agencies (the OCC, Federal Reserve Board, FDIC, NCUA, CFPB, and FHFA) adopted a final rule governing the use of automated valuation models (AVMs) by mortgage originators and secondary market issuers. The rule requires that affected parties adopt policies, procedures, and control systems to ensure (among other things) that AVMs comply with nondiscrimination laws and are subject to testing and reviews.
Staff Contact - Sean McKenna