Columbian Financial Group Task Force Formed
On July 10, 2024, the New York Superintendent of Financial Services, Adrienne A. Harris, filed in New York State Court a Petition for Rehabilitation for Columbian Mutual Life Insurance Company (CML), a New York–domiciled mutual life insurance company. On July 23, 2024, the Acting Director of the Illinois Department of Insurance, Ann Gillespie, filed a Complaint for Rehabilitation in Illinois State Court for Columbian Life Insurance Company (CLIC), an Illinois-domiciled insurance company and wholly owned subsidiary of CML. The Board of Directors of both companies consented to rehabilitation, and consent orders for rehabilitation were entered for CLIC on July 29 and for CML on August 13.
Both companies wrote life and annuity business. CML wrote policies in all 50 states and the District of Columbia. CLIC wrote policies in the District of Columbia and all states except Alaska, Maine, New York, and North Dakota.
In accordance with the MPC Rules and Procedures, MPC Chair Margaret Sperry has appointed the Columbian Financial Group Task Force for CML and CLIC. Bill Fisher (MA) is the Task Force Chair, and the members are Frank Knighton (GA), Janis Potter (IL), Jana Lee Pruitt (KY), Alan Shortell (NY), Brad Taman (NC), and Ben Whitehouse (TN). Joni Forsythe and Lindsay Crawford (who begins work at NOLHGA on October 1) are the NOLHGA staff contacts.
Staff Contact - Joni ForsytheNAIC Updates
On September 20, 2024, the NAIC’s Financial Analysis Solvency Tools Working Group (FASTWG) released its agenda and materials for its September 26 call. The working group will consider adoption of revisions to the Financial Analysis Handbook related to P&C Catastrophe Reinsurance Programs, Credit Risk Assessment, and Health Pricing/Underwriting Risk. The group also will discuss comments received on proposed Handbook revisions related to Form A Statements, Disclaimers of Control/Affiliation, ORSA guidance, and Form F exemptions. Several interested parties submitted comment letters arguing that the proposed changes conflict with existing laws related to control.
The working group also will consider the exposure of draft Handbook guidance related to the following: 1) recovery and resolution planning (a referral from the Group Solvency Issues Working Group); 2) surplus notes and capital maintenance agreements; and 3) combined guidance and repositories for certain risk categories. The recovery and resolution planning revisions direct a group-wide supervisor (GWS) of an internationally active insurance group (IAIG) to determine whether the information provided in a company’s ORSA Summary Report or other ERM reporting satisfies the requirement for a recovery plan for an IAIG. If not, the GWS is directed to require a stand-alone recovery plan.
With respect to resolution plans, the GWS and/or resolution authority, in consultation with the crisis management group, should have a process to regularly determine whether a resolution plan is necessary, including consideration of factors such as the size, risks, activities, and complexity of the IAIG. The head of the IAIG must ensure that the IAIG has management information systems (MIS) in place to provide information necessary for the preparation and execution of a recovery plan (and to support the development of a resolution plan, if necessary). In the event of a receivership, the receiver should be able to effectively operate the MIS.
Based on the materials, it appears the NAIC is declining to address expanding recovery or resolution planning beyond IAIGs, which is a change reflected in the IAIS’ consultation version of the revised ICPs 12 and 16.
Each of the current NAIC officers participated in the officer’s panel at the NAIC’s recent Insurance Summit. President-Elect Jon Godfread (ND) acknowledged the NAIC is “probably not done” with AI policy matters, as states need to better understand the utilization of these tools and whether a human is involved in the decision-making loop, especially if the tool has a direct consumer impact on rates and claims. The next regulatory inquiries will be on data, which is fundamental to insurance.
Godfread also shared interest in a form of “data standardization project,” which he admitted would be a decades-long project. The goal would be to better understand how the NAIC can gather company data more quickly and whether blockchain is an answer. On climate risk, NAIC President Andrew Mais (CT) shared that his state is trying to emulate a program led by Alabama, which gives a grant to residents whose property requires risk mitigation measures.
The NAIC’s Statutory Accounting Principles Working Group (SAPWG) adopted Item 2024-01, which is related to the treatment of debt securities issued by funds. The proposal, which has been through several iterations over the last nine months, clarifies that debt securities issued by funds representing operating entities can qualify as issuer credit obligations (and thus constitute a bond under the new definition), regardless of SEC registration status.
The proposal was revised to help companies analyze when a fund represents an operating entity as opposed to a securitization vehicle that represents an asset-backed security issuer. This determination can generally be made by evaluating the substance of the entity and its primary purpose. A fund representing an operating entity has the primary purpose of raising equity capital and generating returns to its equity investors. Debt securities issued for the raising of debt capital are required to be assessed as asset-backed securities. This item becomes effective on January 1, 2025 (when the new bond definition becomes effective).
On September 23, the Financial Examiners Handbook Technical Group was scheduled to vote on proposed revisions related to affiliated investment management services and agreements. The changes address issues of conflicts of interest, fiduciary responsibility of investment advisors, fees, sub-advisors, reporting, termination, and compliance with investment guidelines. These changes were referred to the Risk-Focused Surveillance Working Group (RFSWG) as part of the Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers and have already been adopted by the RFSWG.
In addition, the technical group will consider exposure of Handbook changes related to a company’s executive compensation plan—specifically where the plan includes incentives based on financial metrics that may encourage riskier decision-making. Much of the focus is on the Board’s oversight of the compensation policy. Finally, the technical group will consider exposing changes related to manual adjustments to RBC charges, including for “modified coinsurance” (modco) reinsurance and separate accounts.
Last week’s NAIC Insurance Summit included a panel on “Reinsurance and Bermuda” with Jake Stultz (NAIC), John Rehagen (MO), and John Huff (Association of Bermuda Insurers and Reinsurers). The discussion included an overview of the qualified and reciprocal jurisdiction process, the duties of the Mutual Recognition of Jurisdictions Working Group, and activity in the Bermuda market. Notably, the panelists spoke highly of their interactions with the Bermuda Monetary Authority (BMA), characterizing the supervisory authority as open, transparent, knowledgeable, responsive, and collaborative. Stultz noted that the NAIC is in the process of conducting the annual review of Bermuda’s qualified and reciprocal jurisdiction status; so far, the changes and enhancements to the BMA’s solvency regime have been viewed positively.
Staff Contact - Sean McKennaInternational Developments
On September 16, 2024, the Bank for International Settlements (BIS) included in its Quarterly Review an analysis of potential financial stability risk arising from life insurers’ increased exposure to “riskier and less liquid” assets and reliance on “complex” reinsurance agreements, trends driven by private equity firms. (The BIS’s mission is to support central banks’ pursuit of monetary and financial stability through international cooperation. The BIS hosts the IAIS in Basel, Switzerland, but the IAIS remains independent of the BIS.) The analysis gives a nod to the benefits of these trends but focuses more heavily on the risks. Unlike some of the predecessor reports on structural shifts, the BIS seems to put a finer point on the potential financial stability implications of structural shifts in the life insurance industry.
In particular, these financial stability concerns arise from life insurers’ rising reliance on asset-intensive reinsurance, increased exposure to private markets, and growing interconnectedness with private equity firms:
- Reinsurance chains have become more complex, making it more difficult to assess how risk could spread throughout the financial system.
- In the event a reinsurance contract is terminated or the reinsurer fails, cross-border asset-intensive reinsurance could prevent ceding companies from recapturing assets, weaken the ceding companies’ capital ratio as the capital relief is reversed, or leave the ceding company with assets that it is incapable of managing or that do not meet regulatory requirements.
- Under asset-intensive reinsurance, the same amount of risk may be backed by less capital and riskier assets.
- Asset-intensive reinsurance could introduce concentration risk, with risks held in a comparatively limited number of reinsurers and jurisdictions. Returns on invested assets could be highly correlated in a widespread market downturn.
- Conflicts of interest “loom large” when asset managers have incentive to allocate insurers’ funds to assets the asset manager originates, magnified by potential “strategic mispricing of illiquid and hard-to-value assets.”
- The resilience of private markets remains to be tested. Private equity–linked life insurers may present a greater exposure to widespread market downturns, facing significant valuation pressures during times of stress.
AI Activity
On September 24, 2024, the Federal Insurance Office (FIO) hosted a closed-door roundtable to discuss the use of AI in the insurance sector. The roundtable built upon the Department of the Treasury’s request for information on the use of AI in the financial services sector and was expected to focus on 1) the benefits and challenges associated with the use of AI by insurers; 2) potential consumer protections to prevent unfair discrimination; and 3) regulatory initiatives and best practices. We hope to have more information on the roundtable in a future issue of the NOLHGA Wire.
Staff Contact - Sean McKenna