MPC Meets in Nashville

The Members’ Participation Council (MPC) held a meeting on October 7–8, 2024, in Nashville and online. The MPC General Session featured:

• Comments from NOLHGA Chair Gerrie Marks, who thanked outgoing MPC Chair Margaret Sperry (Rhode Island) for all she’s done during her three years as MPC Chair, particularly her efforts to enhance NOLHGA and the MPC’s educational efforts.
  
• The MPC Chair Report, during which Sperry thanked the NOLHGA Chair for her remarks. She also announced (during the Other Business portion of the General Session) that Jan VanRiper, Executive Director of the Montana guaranty association, will be retiring this year. She will be succeeded by Lori Geadelmann (formerly with Farm Bureau Life Insurance Company).
  
• The NOLHGA Management Report, in which NOLHGA President Katie Wade updated attendees on implementation of the strategic plan, including improving NOLHGA’s technology, systems, and documentation; bringing on new administrative and accounting staff members; and developing the AssessConnect system for the member guaranty associations.
  
• Closed-session (affected guaranty associations only) presentations by the task forces for Columbian Financial Group (Illinois and New York), Global Bankers Insurance Group (North Carolina), North Carolina Mutual Life Insurance Company (North Carolina), Penn Treaty Network America/American Network Insurance Companies (Pennsylvania), and Senior Health Insurance Company of Pennsylvania (SHIP).

The MPC meeting also featured:

• A meeting of the MPC Executive Committee.
  
• The Annual Meetings for GABC and LTC Re.
  
• A presentation on the lessons learned report issued by the Penn Treaty Network America/American Network Insurance Companies (Pennsylvania) Task Force.
  
• Two educational sessions—Strengthening Cybersecurity: Strategies for the Modern Landscape and Leveraging AI/ML for Reducing Organizational Cyber Risk—conducted by Jessica Walker (Connecticut), Bill Walker (National Center of Excellence for Cybersecurity), Jason Padgett (United States Cyber Command), Alexandria Royal (Marshall University), and Josh Spence (Alpha Technologies).

  Staff Contact - Sean McKenna

NAIC Updates

The Risk-Focused Surveillance Working Group adopted revised guidance for companies in runoff, incorporating interested party feedback on a prior draft; the NCIGF’s proposed revisions to the guidance were incorporated into the latest draft. New language was added to clarify that the guidance applies to solvent runoff insurers (and not companies in receivership)—most directly insurers whose entire company is in runoff, although some elements may be applicable to situations where a company has a specific block of business in runoff. The changes will be sent to the working groups with jurisdiction over the Financial Analysis Handbook and Financial Condition Examiners Handbook for approval.

The working group also discussed a referral from the Financial Regulation Standards and Accreditation (F) Committee related to the use of independent contractors for financial analysis and examinations. The referral raises questions about department oversight of such contractors and requests additional guidance on how to respond to questions about expectations from states going through an accreditation review. The working group and staff have proposed changes to the accreditation review guidelines, Financial Condition Examiners Handbook, and the Financial Analysis Handbook to address oversight, the timing of the review of contractors’ work, and the qualifications of department personnel reviewing contractors’ examination and analysis work.

An interested party group (typically focused on statutory accounting issues) raised concerns with the proposal, namely the increased involvement of independent contractors in the financial analysis function. While the proposed changes contemplate the use of contractors in financial analysis work, they also encourage regulators to consider the long-term effects of not maintaining an appropriate level of qualified staff. Judy Weaver (MI) emphasized the difficulty with providing department staff a competitive salary and encouraged industry to support department efforts to secure necessary funding. The proposed changes were exposed for a 60-day comment period ending on December 10.

Finally, the working group decided not to make any Handbook changes related to pandemic risk and adopted adjustments to the proposed per diem rates for analysts and examiners.

The Life Actuarial Task Force (LATF) recently discussed comments received on issues related to the scope of the draft Actuarial Guideline (AG) on asset adequacy testing on reinsured business. Prior to the call, NAIC staff broke down comment letters into subtopics raised by LATF members and interested parties. Here are the highlights of the call:

• Selected Limited “Option 1,” with Continued Discussion on Details to Follow: The task force agreed to limit the scope of the draft AG based on materiality, recognizing that the same reinsurance contract could be material to one company and not to another. Kevin Clark (IA) emphasized that regulators should focus on those treaties that result in material solvency concerns for a particular entity. That said, additional details regarding scope will be subject to additional discussion.
  
• Exclusion of Modco/Funds Withheld/Trust Arrangements: Some interested parties suggested excluding modified coinsurance, funds withheld arrangements, or agreements backed by a reinsurance trust from the AG. Tricia Matson (Risk & Regulatory Consulting) urged against this exemption, suggesting that “those transactions can still result in a material reduction in the amount of invested assets to fund future obligations.” No decision was made on this topic, but it is likely to reemerge in the development of the definition of Asset-Intensive Reinsurance (see below).
  
• Exemption for VM-30 Filers or VM-30 Equivalent Filings: The current draft would exempt reinsurance transactions ceded to a reinsurer that files a VM-30 report. A number of industry interested parties suggested expanding this exemption to reinsurers that file VM-30 equivalent reports with their domestic regulator and establishing criteria to determine when a filing is deemed to be equivalent to a VM-30 report. Conversely, Missouri and RAA recognized that the VM-30 exemption could conflict with the Covered Agreements. Clark noted that implicit in this discussion is the fact that the VM-30 equivalent reports would need to be submitted to the ceding company’s domestic regulator to provide greater transparency into the ceded business. Fred Andersen (MN) called for interested parties to give examples of reports that would satisfy this standard, specifically showing how those reports model key risks, provide transparency into assumptions, and address moderately adverse conditions. At numerous points in the call, ACLI encouraged regulators to use this entire AG as an educational exercise and suggested that providing this information would be part of that effort.
  
• Definition of Asset-Intensive Reinsurance: The task force agreed to pursue a definition of asset-intensive reinsurance; agreements that do not fall within the definition would not be subject to the AG.
  
• Bifurcated Effective Date: Andersen suggested a bifurcated approach to the effective date of the AG—one for affiliate agreements (potentially going back before 2020) and one for non-affiliate agreements (potentially for agreements entered into after 2020).

Other than the high-level structural decision to adopt a limited scope and a bifurcated effective date, no substantive decisions have been made related to the AG. The next task force meeting is scheduled for October 24.

The NAIC’s IT Examination Working Group provided an update on its drafting group’s efforts to revise Exhibit C of the Financial Condition Examiners Handbook. The Handbookrevisions focus on cybersecurity enhancements utilizing the new National Institute of Standards and Technology (NIST) Framework (CSF 2.0) and include updates to common controls, information requests, and testing procedures to prioritize cybersecurity risks. The revisions were exposed for a 14-day comment period ending October 24, 2024, and the working group intends to adopt the changes in advance of the Fall National Meeting to ensure inclusion in the next version of the Handbook.

On October 9, the VM-22 subgroup met for the first time since the spring. Ben Slutsker (Chair – MN) reported that many questions have come up in the VM-22 field test, which Ernst & Young gathered and sent to the NAIC. The subgroup is in the process of reviewing those items. In addition, the subgroup will be focused on revising the standard projection amount (SPA) draft and broader VM-22 draft for the rest of the year, with the intention of meeting weekly until Thanksgiving. The subgroup’s meeting was primarily focused on two things:

• Consideration of Homesteaders Life’s request for a preneed annuity exemption from VM-22, much like the exemption for preneed life insurance in VM-20. Its comment letter was exposed for 21 days.
  
• Walking through ACLI’s comments on the SPA exposure. Among the items discussed, the subgroup agreed to align the inflation rate with VM-21, changing it from 2% to 2.5%. The subgroup will continue discussing the comments on its next call.

Additional topics that will be addressed by the subgroup this year include longevity reinsurance (to be revisited in November) and withdrawal assumptions for the SPA (on which California is currently working).

During its October 8 meeting, the International Insurance Relations (G) Committee walked through and approved the NAIC’s response to the IAIS consultation on a draft Application Paper on Operational Resilience Objectives and Toolkit. Director Dunning (Chair – NE) reminded the committee that cyber-resilience is a focus of the IAIS’s current strategic plan and will continue to be so under the 2025–2029 strategic plan, along with digital innovation. The committee will next meet on October 22 to discuss NAIC comments on the latest IAIS climate-related consultation.

Also on October 8, the Cybersecurity Working Group heard a presentation from Rachel Yurkovich with the FBI’s Internet Crime Complaint Center (IC3). The center receives, processes, responds to, and analyzes internet crime complaints related to scams, fraud (including elder fraud), intrusions, and ransomware. The presentation did not touch on insurance, but the financial services sector was the fifth most targeted sector (out of 16) to be affected by ransomware attacks in 2023. Healthcare was the most targeted sector.

The IC3 reported $12.5 billion in actual losses in 2023 from internet crimes, with most losses attributed to investment-related crime, particularly crypto-investment scams. Yurkovich noted that the IC3 does not interact with financial regulators but does share some information at times with the Federal Trade Commission. She encouraged the NAIC to reach out if regulators have specific requests for information. Cynthia Amann (Chair – MO) indicated that companies are often hesitant to report cybersecurity-related issues to regulators, and that the working group would be following up with IC3 for further updates down the road.

The Long-Term Care Actuarial Working Group adopted the Minnesota Approach as the single methodology for the actuarial review of rate changes in a step toward adopting a Single LTCI Multistate Rate Review Approach. The working group worked through the comments received from the American Academy of Actuaries, the ACLI and AHIP, William Leung (Missouri), Genworth Life Insurance Company and Genworth Life Insurance Company of New York, Michael Markham (Texas), and Tomasz Serbinowski (Utah) on two proposed adjustments to haircut percentages and cumulative rate increase ranges of the cost-sharing formula in the Minnesota Approach (Proposal A and Proposal B). The universal theme throughout the discussion was how to balance insurers’ needs for flexibility and predictability when seeking rate increases with the need for increased transparency.

While the majority of the meeting consisted of walking through the comments received on the proposals, the working group co-chairs suggested that the working group need not decide on changes to the Minnesota Approach cost-sharing formula on the call. Rather, the group adopted the Minnesota Approach as the only actuarial methodology that would be used in the Multistate Actuarial Rate Review framework, effectively retiring the Texas Approach. The working group will continue to evaluate and discuss Proposal A, Proposal B, and other proposed cost-sharing changes to the Minnesota Approach. The working group opened a comment period for suggestions/revisions to the Minnesota Approach’s cost-sharing formula to run through October 28, in hopes of ultimately adopting any such changes by the upcoming Fall National Meeting.

The Statutory Accounting Principles Working Group (SAPWG) exposed a revised version of its bond definition FAQs last week. New questions address CMBS Interest Only strips, Single Asset Single Borrower Commercial Mortgage Loan securitizations, and hybrid securities. Comments on the FAQs are due by October 28.

  Staff Contact - Sean McKenna

AI Activity

The Colorado Division of Insurance exposed for comment a draft bulletin (B-10.004) regarding Regulation 10-1-1’s requirement for life insurers to include in their annual report a description of the quantitative testing conducted to detect unfair discrimination. The bulletin clarifies that because the Division has not yet adopted a quantitative testing regulation, the requirement is not applicable for the annual report due December 1, 2024 (subsequent reports will be subject to the requirement). Comments on the draft bulletin were due October 14.

The Organization for Economic Co-operation and Development (OECD) and the Financial Stability Board (FSB) recently released findings from their Roundtable on Artificial Intelligence in Finance hosted earlier this year, with the keynote speech offered by Nellie Liang, Under Secretary for Domestic Finance, U.S. Treasury, and Chair of the FSB’s Standing Committee on Assessment of Vulnerabilities. Their findings include a familiar list of the pros and cons of using AI in the banking, insurance, and asset management sectors but also note potential financial stability risks, including amplification of interconnectedness, opacity, and complexity. The findings conclude with a call for policymakers to “promote the safe use of AI in financial services,” focusing on risk-based approaches for model risk management and international cooperation to develop standards and share good practices. Regulators must also assess their regulatory capabilities in this area.

  Staff Contact - Sean McKenna

Federal Health Updates

Ahead of the November federal election, the Centers for Medicare & Medicaid Services (CMS) released its annual rule addressing updated policies for qualified health plan (QHP) coverage and other commercial health insurance coverage. The rule, usually released in November, is expected to be finalized before Inauguration Day (January 20), especially in light of a truncated 30-day comment period ending November 12. Key aspects of the rule include:

• As expected, based on several recent NAIC public meetings, CMS is proposing to expand its oversight over agent-broker activity and strengthen its suspension authority, which would complement states’ authority to suspend or remove an agent’s insurance license.
  
• In addition, CMS is considering, but not formally proposing, amending its cost-sharing reduction regulations to codify its “longstanding” policy that plan-specific factors by which issuers may adjust the market-wide index rate include adjustments that are permitted by state law and reflect the costs associated with providing cost-sharing reductions (CSRs) to the eligible enrollee population (in light of the continued absence of congressional action to fund CSRs) to the extent that such adjustments are reasonable and actuarially justified. CMS seeks feedback on whether and how to codify such policy, perhaps inviting commenters to suggest ideas in light of the Loper Bright decision.
  
• Finally, CMS is seeking comments on ways to reduce the risk of issuer insolvencies to reduce the risk that they impose to the “integrity” of the federally facilitated Exchanges. These approaches could include increasing coordination with state departments of insurance and the NAIC to identify issuers that are at risk before issues arise. For example, CMS may increase its coordination with state departments of insurance, individually and collectively in the case of multi-state issuers, and the NAIC to identify issuers that are at risk of experiencing solvency-related difficulties, both at the time of an issuer’s application for QHP certification and on a rolling basis throughout the plan year. To assess issuer solvency, the CMS could examine well-understood and industry-standard financial measures, such as the risk-based capital ratio and quick ratio, in partnership with state regulators. A second example provided is that the Department of Health and Human Services (HHS) could work in partnership with applicable state regulators to identify issuers that are experiencing levels of enrollment growth that risk exceeding their capitalization rates. In the context of the Exchanges, CMS, as operator of a Federally Facilitated Exchange, could include implementing plan suppressions, enrollment caps, denying QHP certification, or decertifying existing QHPs. However, CMS concedes that it would not coordinate as closely nor attempt to intervene in QHP certifications for state-based Exchanges.

  Staff Contact - Sean McKenna