NAIC Updates
The Risk-Focused Surveillance Working Group adopted changes to the Financial Analysis Handbook and Financial Condition Examiners Handbook related to the review of investment management agreements (IMAs) between affiliates. AHIP submitted the only comment letter on the exposure, suggesting that some of the proposed language seems to require analysts to request all IMAs, not just those that insurers are required to file under the law. The revision softens that language and directs the analyst to consider requesting copies of IMAs that have not been filed with the department. Interested parties were comfortable with that change. The changes now head to the Financial Analysis Solvency Tools Working Group and Financial Condition Examiners Handbook Technical Group for approval.
The working group then received a referral from the Financial Analysis Working Group (FAWG) related to best practices for monitoring run-off companies. FAWG identified a number of sound practices that may need to be incorporated into the analysis and exam functions, including considerations related to logistics and records, communications, legal risks, operational risks, liquidity risks, reserving risks, and reinsurance risks. The working group directed NAIC staff to draft proposed revisions to address these items.
On May 30, 2024, the Life Actuarial Task Force (LATF) discussed comment letters received on its proposal to require asset adequacy testing on reinsured business using a cash flow testing methodology. Most industry comment letters (namely from the ACLI and American Academy of Actuaries) encouraged regulators to focus more on the creditworthiness of the reinsurer and enhanced disclosures, rather than the prescriptive methodology originally proposed. Interested parties also called for a proportional, risk-based approach.
Several task force members suggested that focusing on reinsurer counterparty risk alone is insufficient to address regulator concerns—it was emphasized that regulators need to know why reserves are reduced as a result of a particular transaction (i.e., is it a market vs. book value issue or is the insurer using unrealistic assumptions). The prospect of a tiered approach based on the “riskiness” of a transaction—with low risk transactions resulting in one-time disclosures and high-risk transactions requiring robust cash flow testing—was raised, but no proposal was made, and some task force members recognized that they have not had a chance to absorb the comment letters. Task force members were encouraged to continue to think about the proposal.
Also in May, the Financial Examiners Handbook Technical Group provided an email update on current workstreams. The technical group recognizes that most of these projects are being handled by other groups at the NAIC, but the projects ultimately will affect the Financial Condition Examiners Handbook:
Run-Off Insurers: A referral was made to the Risk-Focused Surveillance Working Group as a result of the Financial Analysis Working Group annual meeting (the referral is discussed above).
Affiliated Investment Management Agreements: The Risk-Focused Surveillance Working Group has drafted and exposed guidance for inclusion in the Financial Condition Examiners Handbook (also discussed above).
Enhancements to Exhibit C (regarding IT controls): The Information Technology Examination Working Group has formed a drafting group to update Exhibit C, utilizing the new National Institute of Standards and Technology Framework.
Executive Compensation: The Financial Examiners Handbook Technical Group will review Exhibit Y and determine if interview questions should be added to address the topic of executive compensation and oversight of any incentive programs.
The technical group plans to schedule a call this summer once proposed revisions to the Financial Condition Examiners Handbook are available.
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On May 21, the Department of Commerce released its strategic vision for the U.S. AI Safety Institute (AISI), which was established as a follow-up to President Biden’s AI executive order. The AISI’s mission is to “help define and advance the science of AI safety.” Among other things, AISI will launch projects that will “[b]uild and publish specific metrics, evaluation tools, methodological guidelines, protocols, and benchmarks for assessing risks of advanced AI across different domains and deployment contexts.”
Colorado Governor Jared Polis signed Senate Bill 24-205 on May 17, making Colorado the first state to require developers and deployers of high-risk AI systems to take steps to prevent algorithmic discrimination. The law is effective in 2026 but contains a carveout for insurers that are subject to SB 169 and any rules adopted by the insurance commissioner.
According to the Governor’s statement, he signed the bill with reservations, voicing concerns about “the impact this law may have on an industry that is fueling critical technological advancements” and the potential for a patchwork of regulation across states that can “tamper innovation and deter competition.” He went on to say that the federal government is better suited to addressing the potential discrimination and unintended consequences of AI technologies.
On May 20, the European Council adopted the EU AI Act. In the coming days, the Act is expected to be signed by the President and Secretary-General of the European Parliament and Council and published in the EU’s Official Journal. Once that happens, the Act will enter into force after 20 days and become fully applicable in June 2026. More information, including what provisions will apply before 2026, is available in a recent article published by Faegre Drinker.
Staff Contact - Sean McKenna