July 2024 MPC Meeting Schedule Posted
The schedule for the July 2024 MPC meeting in Boston has been posted on the Legal Seminar/MPC meeting website in the Meeting Materials section. The website also includes in-person or virtual registration for the Seminar (July 25 and 26) and MPC meeting (July 24) as well as online hotel reservations, the Legal Seminar agenda, and speaker bios.
Registration for the Legal Seminar is $975; there is a guest fee of $125 for all group events. There is no cost to attend the July MPC meeting, but some presentations will be restricted to guaranty association representatives only.
If you have any trouble accessing the Seminar website, please contact Dan Hicks. If you have any questions about the Legal Seminar or MPC meeting, contact Sean McKenna.
Staff Contact - Sean McKennaLabor Department Issues Report on Pension Risk Transfer Bulletin
On June 24, 2024, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) issued its report on Interpretative Bulletin 95-1 (IB 95-1), which provides guidance on the ERISA fiduciary duties a company faces when selecting an annuity provider to transfer the obligations of its defined benefit pension plan—also known as a pension risk transfer (PRT). The report follows EBSA’s consultation with the ERISA Advisory Council, which conducted a hearing on IB 95-1 in July 2023, at which NOLHGA testified.
The report does not recommend any changes to IB 95-1 at this time, but it does cite areas for further analysis, such as developments in both the life insurance industry and the PRT market, to determine whether some of the bulletin’s factors (see below) need revision or supplementation and whether additional guidance should be developed. The report also cites several concerns raised by stakeholders, such as the prevalence of “private equity” insurers in the PRT market, the soundness of insurers’ investments, and the use of off-shore reinsurance.
The report does discuss state life and health insurance guaranty associations, reaffirming that guaranty association coverage should remain a factor for fiduciaries to consider.
As a reminder, IB 95-1 lists six factors that a company (or its fiduciary) must consider when evaluating an annuity provider’s ability to pay claims and creditworthiness. These factors are:
- The quality and diversification of the annuity provider’s investment portfolio
- The size of the insurer relative to the proposed contract
- The level of the insurer’s capital and surplus
- The lines of business of the annuity provider and other indications of an insurer’s exposure to liability
- The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts
- The availability of additional protection through state guaranty associations and the extent of their guarantees
In summary, EBSA found that the bulletin’s current factors are still relevant to a fiduciary’s evaluation and that guidance in this area should remain principles-based.
Staff Contact - Sean McKennaNAIC Updates
On its June 18, 2024, call, the Valuation of Securities Task Force exposed revised versions of two material proposals—changes to the definition of “NAIC Designation” and the Securities Valuation Office (SVO) challenge framework.
The revised definition of “NAIC Designation” would broaden the lens from “credit risk” to “investment risk” and would remove the application of Subscript S for “other non-payment risks.” The following excerpts are included in the updated proposal and reflect a change from the current NAIC Designation definition:
- “NAIC Designations represent opinions of gradations of the likelihood of an insurer’s timely receipt of an investment’s full principal and expected interest. Where appropriate for a given investment, NAIC Designations and Designation Categories shall reflect ‘tail risk’ and/or loss given default, the position of the specific liability in the issuer’s capital structure, and all other risks, except for volatility/interest rate, prepayment, extension or liquidity risk.”
- “NAIC Designations should consider if risks, such as tail-risk, are inconsistent with, or duplicative of, risks already captured and defined in the risk-based capital factors, as applicable.”
Comments on this exposure are due on July 18.
The revised SVO challenge framework has incorporated several interested party suggestions. Under the revised proposal, once the SVO Credit Committee determines a rating appears to be an unreasonable assessment of investment risk, the security will be placed “Under Review,” and insurers holding that security will be notified and given an opportunity to provide additional information. The revised proposal also contemplates that at the Spring National Meeting, the SVO Director will summarize all discretionary actions taken by the SVO during the prior year. An anonymized summary of each unique issue or situation will also be published by the SVO. The framework has also changed “credit risk” references to “investment risk” to be consistent with the proposed change to the NAIC Designation definition described above.
Task Force Chair Mears noted that during the latest exposure period, a comment was made relating to the separation of policymaking and implementation within the SVO and the Investment Analysis Office (of which the SVO is a part). While the comment is not reflected in this exposure, she explained that it will be reviewed as part of the E Committee’s holistic review of insurer investments—specifically how regulators utilize centralized investment expertise within the NAIC.
Mears also recognized stakeholders’ request for oversight over this process. Again, she pointed to the E Committee framework, specifically the RFP that is being created for due diligence and oversight over rating agencies. The RFP contemplates an assessment process for the SVO and any output of NAIC Designations. The RFP has not been made public to date.
SVO Director Charles Therriault suggested that the framework likely will take one to two years to implement, once approved. Comments on this exposure are due on July 26.
The Valuation of Securities Task Force also received an update on the development of collateralized loan obligation (CLO) modeling methodology. NAIC staff has nearly completed the inventory of 2023 CLOs and will start running that universe through the 10 scenarios, with a goal of having those results by the Summer National Meeting. Eric Kolchinsky (NAIC Structured Securities Group) noted that once that step is complete, staff will provide the much-anticipated probabilities, suggesting that people will react “not in a pleasant way.” Staff continues to work with the American Academy of Actuaries on the RBC for CLOs.
Finally, the task force adopted five previously exposed items, none of which were contested. The changes permit NAIC Designations for short-term asset-backed securities, add Spain to the list of Foreign Jurisdictions eligible for netting in the P&P Manual, change the effective date of CLO modeling to year-end 2025, add clarifying language related to insurers’ self-assigning of an NAIC 6* Designation, and update the SVO’s list of responsibilities in the P&P Manual.
In other news, following more than a year of discussion, the RBC Investment Risk and Evaluation Working Group voted to increase the base factor for residual tranches/interests from 30% to 45% on an interim basis. While this decision was first made last year, the working group gave industry the opportunity to provide information supporting the use of a different charge.
Despite an Oliver Wyman report, several comment letters, an alternative proposal from the Iowa Insurance Division, and an alternative proposal from industry, the working group voted 9-6 to retain the increase to 45% for all residuals beginning with year-end 2024 reporting. Moving forward, the working group will work on a permanent solution for the treatment of residuals. The working group will lean heavily on work done by the American Academy of Actuaries in identifying “comparable attributes” that can be used to analyze the tail risk of CLOs.
The Life Actuarial Task Force (LATF) exposed a list of eight concepts related to asset adequacy testing of reinsured business, with the goal of getting consensus on these items before moving forward with a proposal for an Actuarial Guideline (or other change). Fred Andersen (MN) prepared the presentation and explained the proposal and potential next steps. Here are the concepts, followed by some of the noteworthy commentary made during the meeting:
1. Need for reserve adequacy review beyond or as part of collectability review: Andersen suggested that reserve adequacy goes beyond collectability, adding that rating agencies likely are not analyzing reserve assumptions. Brian Bayerle (ACLI) requested that the task force be mindful of the other reinsurance-related work taking place at other NAIC groups and urged regulators to review issues through a holistic lens. He also requested that any proposal be principles-based and provide the Appointed Actuary with considerations (as opposed to containing prescriptive requirements). Andersen noted that the next few months would be a learning exercise for both regulators and industry.
2. Materiality threshold for no additional disclosure, attribution analysis, or cash-flow testing: The task force continues to contemplate a tiered approach based on risk and materiality. In other words, some reinsurance transactions would not require any additional information or analysis, and cash flow testing would be required “for the largest, riskiest transactions.” Bayerle reiterated his request for a principles-based approach and suggested that the Appointed Actuary should be the one making materiality determinations.
3. More rigorous and/or more frequent analysis to the extent there are significant risks: Andersen listed several potential ways an arrangement could convey “significant risks,” including the lack of a VM-30 actuarial memorandum by the reinsurer, a significant reduction in reserves due to reinsurance, use of a non-primary security to back reserves, and significant collectability risk. The presentation suggested that affiliated status or protections such as trusts or use of funds withheld arrangements could also factor into the analysis.
Regulators generally will target optimistic judgment on key assumptions or more favorable assumptions where there is not relevant, credible data on key factors. Bayerle questioned the idea that a decrease in reserves necessarily constitutes a risky arrangement and encouraged regulators to learn more about the reports that reinsurers provide to their domestic regulators to see if any of the information they are seeking is already available.
4. Analysis considerations: This item suggests that attribution analysis (as opposed to cash flow testing) would be required in most material cases. It also raises the idea that the Appointed Actuary should make a statement that the total reserve amount held is a reasonable estimate of liabilities under moderately adverse conditions. Bayerle emphasized that the ACLI would have some concern with any proposal that requires cash flow testing, noting that states already have the authority to request it, as necessary. He also noted that most Appointed Actuaries likely are conducting their analysis under moderately adverse conditions.
5. Aggregation considerations: Andersen explained that it is possible that reserves on one block could be inadequate even as reserves for the entire book are adequate. This item will require additional work, as industry has expressed strong opposition against any cash flow testing at a treaty or reinsurer level.
6. Attribution analysis details: A draft attribution template is being exposed concurrently with the eight concepts; the template would require companies to show why a reinsurance arrangement results in a reduction in reserves.
7. Use of information already available: This section suggests that there may be instances where regulators are able to obtain necessary information from existing sources. Andersen cited the Reinsurance Task Force’s reinsurance template (although no states are required to use this template) and highlighted potential coordination with other jurisdictions, where applicable.
8. Timing of development and implementation of requirements: The LATF does not plan to have changes in place in 2024. Instead, Andersen raised the possibility of a limited survey/inquiry that could act as a field test. Assuming changes are complete for year-end 2025 reporting, Andersen suggested a “more generous” and flexible first year where companies would have greater discretion on the level of rigor of analysis, including materiality determinations. If regulators are satisfied with year-one results, that flexibility could remain for future years.
The concepts and template are exposed for 30 days, with comments due July 19.
On June 18, the Life Risk-Based Capital (RBC) Working Group adopted (1) Item 2014-15-L, which updates the RBC formula to ensure that BA mortgages continue to receive their historical RBC treatment, despite a statutory accounting change that will result in these investments being reported as collateral loans; and (2) Item 2024-17-L, which cleans up the mapping of affiliated mortgages.
The working group also heard an update from Paul Navratil on the American Academy of Actuaries’s work on covariance in the life RBC formula (see Attachment 5 of the Meeting Materials). Key takeaways include:
- The Academy noted that the current approach is simpler than other capital regimes, with every correlation set at either 0% or 100% (whereas Solvency II sets correlations at different levels (e.g., 25% for credit and market risk and 50% for credit and interest risk)).
- Changes to covariance could be material for a number of companies. Once the Academy establishes potential factors, it will review materiality of impact on the industry. The goal is to have a proposal for the working group’s consideration by the end of this year.