NAIC Bulletin Highlights of the National Association of Insurance Commissioners meeting

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1 August 2017 NAIC Bulletin Highlights of the National Association of Insurance Commissioners meeting Summer 2017 update In this issue: Executive Committee and Plenary... 1 Executive (EX) Committee... 2 Financial Stability (EX) Task Force... 2 Big Data (EX) Working Group... 3 Principle-based reserving... 4 Valuation Manual amendments... 4 Variable Annuity Framework... 5 Quantitative impact study... 5 Feedback to SAPWG... 5 Statutory Accounting Principles (E) Working Group... 5 Blanks (E) Working Group... 7 Life Insurance and Annuities (A) Committee... 7 Health Insurance and Managed Care (B) Committee... 8 Property and Casualty Insurance (C) Committee... 9 Financial Condition (E) Committee Financial Regulation Standards and Accreditation (F) Committee International Insurance Relations (G) Committee Appendix A Statutory Accounting Principles Working Group Appendix B Blanks Working Group Appendix C Capital Adequacy Task Force The National Association of Insurance Commissioners (NAIC) recently held its Summer National Meeting in Philadelphia. This publication highlights issues that various NAIC groups have addressed since the 2017 Spring National Meeting. We hope you find it informative, and we welcome your comments. Please contact your local EY professional for more information. What you need to know The Statutory Accounting Principles (E) Working Group reported that the American Institute of Certified Public Accountants revised its insurance audit and accounting guides to exclude US GAAP disclosure requirements rejected by the NAIC from consideration for disclosure in the audited statutory-basis financial statements. The Executive Committee and Plenary adopted several amendments to the Valuation Manual effective for 2017 reserve valuations performed under the principle-based reserving framework. The Cybersecurity (EX) Working Group finalized and adopted the NAIC s Insurance Data Security Model Law that establishes standards for data security, for investigating a cybersecurity event and for notifying state insurance commissioners of a cybersecurity event (i.e., data breach). The Receivership Model Law (E) Working Group received approval to address guaranty fund assessment and coverage issues that currently exist for long-term care insurer insolvencies in the Life and Health Insurance Guaranty Association Model Act (#520). Executive Committee and Plenary During the Spring National Meeting, the Executive Committee and Plenary adopted the following: Amendments to Actuarial Guideline XXXVIII, The Application of the Valuation of Life Insurance Policies Model Regulation (AG 38), and Actuarial Guideline XLVIII, Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (Model #830) (AG 48)

2 Amendments to the Valuation Manual developed by the Life Actuarial (A) Task Force (LATF) Amendments to the Standard Nonforfeiture Law for Individual Deferred Annuities (#805) to exclude contingent deferred annuities since their product structure will not allow them to comply with the terms of the model Technical edits to the Investment of Insurers Model Act (Defined Limits Version) (#280) based on the revisions adopted by the Statutory Accounting Principles (E) Working Group (SAPWG) A new actuarial guideline, The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves, intended to provide uniform guidance and clarify the requirements for the appropriate support of certain assumptions used in the asset adequacy testing of long-term care (LTC) contracts, effective 31 December 2017 The Title Insurance Consumer Tool, an NAIC resource tool for consumers The 2009 revisions to the Standard Valuation Law (SVL) incorporated into Model #820 as an addition to the accreditation standards Executive (EX) Committee The EX Committee approved requests from various NAIC groups for model law development in the following areas: Life and Health Insurance Guaranty Association Model Act (#520) to address guaranty fund assessment and coverage issues that currently exist for LTC insurer insolvencies after it was approved by the Financial Condition (E) Committee Annuity Disclosure Model Regulation (#245) to revise the existing standards to revise the illustrative disclosures provided to consumers in the sale of annuity contracts Life Insurance Disclosure Model Regulation (#580) to remove the Life Insurance Buyers Guide as an appendix to the model and incorporate a policy overview document requirement that would improve the understandability of the life insurance policy summary and narrative summary Life Insurance Illustrations Model Regulation (#582) to incorporate a policy overview document requirement that would improve the understandability of the life insurance policy summary and narrative summary The EX Committee approved a request from the Creditor-Placed Insurance Model Act Review (C) Working Group to develop a new model law that would address lender-placed insurance on real property (i.e., home mortgage) loans separately from personal property (i.e., auto) loans. The EX Committee also approved a request from the Travel Insurance (C) Working Group to develop a new model law that would define a regulatory structure related to travel insurance covering market regulation, premium tax, rate regulation and enforcement. The EX Committee approved an extension requested by the Cybersecurity (EX) Working Group for it to complete its work on the Insurance Data Security Model Law. The EX Committee authorized the NAIC to serve as a data collection agent for any state that wants to collect experience data from life insurers in support of principle-based reserving (PBR). The EX Committee also approved the request to LATF to prepare amendments to the Valuation Manual to specify the NAIC as a data collection agent for the states when the adoption of PBR becomes mandatory on 1 January Financial Stability (EX) Task Force The Task Force received an overview of the NAIC s Macro-Prudential Initiative (MPI) that will analyze how the insurance sector is affected by, reacts to and contributes to financial, economic and other risk exposures. The NAIC staff identified four areas where regulatory monitoring and the information available to regulators in existing NAIC macro-prudential tools can be improved: liquidity, recovery and resolution, capital stress testing and exposure concentrations. The MPI enhancements are anticipated to be developed over a two- to three-year period. 2 NAIC Bulletin August 2017

3 The Task Force formed a new Liquidity Assessment (EX) Subgroup to review existing public and regulator-only data related to liquidity risk, identify the most appropriate metrics for a regulatory assessment of liquidity, determine whether information addressing those metrics or elements thereof already exist in NAIC macro-prudential tools and whether additional data elements should be collected. The Subgroup will also develop a proposed liquidity stress testing framework for consideration by the Financial Condition (E) Committee. This would include the proposed universe of companies to which the framework would apply (e.g., large life insurers). Cybersecurity (EX) Working Group The Working Group adopted the Insurance Data Security Model Law, which establishes the standards for data security, for investigating a cybersecurity event and for notifying state insurance commissioners of a cybersecurity event (i.e., data breach). The final standards were developed from the New York cybersecurity regulation that went into effect on 1 March The model law requires insurers and others to perform a risk assessment, the results of which will be used in designing an information security program and implementing data security measures commensurate with the identified risks. Insurers will have to conduct due diligence when selecting any third-party service providers and make sure that a third-party service provider has implemented appropriate measures to protect and secure its information systems and nonpublic information. The model law also addresses the information to be provided and the timing for notification to the state insurance commissioner when it has been determined that a cybersecurity event has occurred. Insurers are required to submit annually (by 15 February) a written statement to its domiciliary state insurance commissioner certifying its compliance with specified requirements of the model law. An exception from compliance with certain requirements of the model law is provided to insurers that submit a written statement to their domiciliary state insurance commissioner certifying their compliance with the requirements of the Health Insurance Portability and Accountability Act. The model law also was approved by the Innovation and Technology (EX) Task Force and will be sent to the Executive Committee and Plenary for consideration at a future meeting. Big Data (EX) Working Group The Working Group discussed the following areas of its draft work plan: Current regulatory frameworks for oversight of insurers use of consumer data The initial focus will be the regulatory framework (e.g., NAIC models and state laws) addressing the use of data for ratings and claims in property and casualty (P&C) personal lines business, with a recommendation to look into how states address the use of credit scores in the rate-making process. The Working Group will evaluate whether identified issues can be linked to the models and monitoring tools currently in place for specific issues to be addressed by states. Data needs and tools for regulators to monitor the marketplace The Working Group intends to identify and assess the use of financial data, market regulation data and data from other sources (e.g., Securities and Exchange Commission (SEC) filings, rating agency reports and informational filings with state insurance departments) to determine whether the type of information gathered for analysis is sufficient and relevant for its intended purpose. Proposed structure for the review of complex models The initial focus will be the development of a mechanism for the review of models used in rate filings for auto and homeowners insurance. Under the current proposal, NAIC staff members with predictive analytics modeling, insurance and actuarial experience would perform initial model reviews as assigned by states and inform the regulators on potential problem areas in model inputs based on a standardized checklist of procedures. Concerns were raised on the delegation of authority to the NAIC staff, the protection of insurers confidential trade secrets, the qualifications of individuals reviewing the models and the lack of due process and transparency. 3 NAIC Bulletin August 2017

4 Principle-based reserving The PBR framework for life insurance contracts is included in the Valuation Manual, which sets the minimum valuation standards and reserve requirements for life insurance products and variable annuities issued on or after 1 January The NAIC adopted the approach in the revised SVL incorporated into Model #820. The approach is optional for a three-year transition period, and life insurers can elect to use it on a product-by-product basis. Developments from several NAIC groups include: The PBR Review (EX) Working Group adopted with modifications the revisions to the Financial Condition Examiners Handbook that were developed by the PBR Review Procedures (EX) Subgroup. The modifications included the use of the term credentialed actuary rather than qualified actuary for consistency with other NAIC manuals. The Working Group subsequently referred the revisions to the Financial Examiners Handbook (E) Technical Group for exposure, with a suggestion for further consideration of the term appointed actuary included in its referral letter. The PBR Implementation (E) Task Force heard an update on experience reporting. The NAIC is developing software that will allow companies to submit experience data and has completed beta testing of the secure online software. The experience reporting data collection process is expected to be finalized and approved before the mandatory adoption of PBR on 1 January The PBR Implementation (E) Task Force heard an update on sensitivity testing of term model reserves. The NAIC is developing a standard term insurance model to review PBR calculations and perform sensitivity analysis of the deterministic reserve. The NAIC intends to build a repository for benchmarking results for use by regulators in evaluating the deterministic reserve calculated for a specific product against their expectations. Valuation Manual amendments LATF continued working on amending the Valuation Manual to clarify how the requirements of the PBR framework are applied. LATF s Valuation Manual maintenance agenda identifies the pending and active list of submitted proposals currently under consideration (27 proposals as of 31 July 2017, of which 9 were adopted at the Summer National Meeting). The proposed amendments would modify definitions and make other substantive and nonsubstantive revisions identified by state insurance regulators and other industry stakeholders. LATF adopted the proposal to amend the criteria for the company-wide exemption from PBR valuation requirements. The revised exemption (now referred to as the life PBR exemption) provides the domiciliary state insurance commissioner with discretion to allow insurers with less than $50 million in ordinary life premium to be exempt for one additional year if their risk-based capital (RBC) level falls below the 450% requirement for exemption. Additionally, the amendments revise the calculation of premiums in the exemption relating to pre-need and assumed reinsurance business and change the scope of universal life policies with secondary guarantees that meet the definition of a material secondary guaranty when an insurer no longer issues or assumes these types of products. LATF adopted the proposal to revise the timing for the calculation of investment spread tables under VM-20: Requirements for Principle-Based Reserves for Life Products to every month rather than every quarter. Spreads will be published in the Industry section of the NAIC website instead of in the Valuation Manual. LATF adopted the proposal to revise the information required by VM-31: PBR Actuarial Report Requirements for Business Subject to a Principle-Based Reserve Valuation by removing redundant content from the body of the report that was presented in the overview section (now referred to as the executive summary). The revisions also clarify the requirement for submission of the entire PBR report within 30 days if the state insurance commissioner request is made after 1 April. LATF adopted amendments to VM-30: Actuarial Opinion and Memorandum Requirements to clarify that asset adequacy testing should be performed under various scenarios, using both mortality assumptions when the policies were originally issued and current expected mortality assumptions. LATF adopted an amendment to indicate that the maximum requirements for fixed annuity contract valuation interest rates are defined in VM-22: Maximum Valuation Interest Rates for Income Annuities. 4 NAIC Bulletin August 2017

5 LATF adopted updates to the default costs table in VM-20 based on data through December 2016 that indicates a general decline in default costs for investment-grade securities and a variety of movement related to default costs for below-investment-grade rating categories. LATF exposed an amendment to VM-20 to incorporate guaranteed issue mortality tables in appendices VM-A and VM-C and include guaranteed issue in PBR similar to whole life policies based on a report prepared by a joint committee of the American Academy of Actuaries (AAA) and the Society of Actuaries (SOA). Separately, LATF exposed the AAA and SOA 2017 Simplified Issue Mortality Tables Report, which includes the simplified issue mortality tables and an accompanying definition of simplified issue. Comments are due by 21 September LATF exposed the AAA and SOA recommendation for accelerated underwriting data elements to solicit feedback for expanding VM-51: Experience Reporting Formats. LATF intends to establish a protocol to start collecting more data applicable to accelerated underwriting so that sufficient data will be available to conduct experience studies on accelerated underwriting and guaranteed issue blocks in the future. Variable Annuity Framework The Variable Annuity Issues (E) Working Group (VAIWG) continued working on identifying changes to be made to the NAIC statutory framework (i.e., statutory accounting, reserving and RBC requirements) for variable annuities. Quantitative impact study VAIWG received a report from consulting firm Oliver Wyman on the status of the 2017 quantitative impact study (QIS). The first phase of the 2017 QIS testing has been completed, and the results affirmed the effectiveness of the majority of Oliver Wyman s 2016 recommendations for the conditional tail expectation (CTE) calculation. The CTE-related recommendations would also reduce the majority of the five motivations cited for captive usage including mitigating non-economic volatility in statutory capital ratios and mitigating funding requirements in periods of market stress (i.e., downturn scenarios) net of the hedging strategy. The second phase of the 2017 QIS testing has begun. This testing will evaluate the effect of the following topics on the statutory reserve calculation: (1) standard scenario market paths, (2) standard scenario behavioral assumptions, (3) standard scenario diversification benefit adjustment, (4) revenue sharing and (5) equity calibration criteria. Feedback to SAPWG VAIWG drafted a letter in response to a request from SAPWG for input on the future benefit of effective hedges offsetting a variable annuity guarantee reserve once the effective hedging program has been discontinued or becomes ineffective. The issue to be addressed is whether deferred assets (for unrecognized losses) and deferred liabilities (for unrecognized gains) recorded under the special accounting provision being considered by SAPWG (Ref # ) should continue to be permitted to be recognized on the balance sheet and amortized into realized gains/losses when the overall derivative hedging program has been terminated or no longer qualifies as an effective hedge under the proposed guidance. The approach recommended by VAIWG would require amortization of the unrecognized amounts (i.e., the hedge balance) over the lessor of the remaining scheduled amortization period or five years in recognition of the future cash flows that will materialize, along with robust disclosures that clearly identify the situation and allow the regulator to consider the information in their ongoing monitoring of the insurer s financial condition. VAIWG considers the proposed approach to recognize sound risk management and the value that hedges provide throughout their ownership, balanced with the concern about any unrecognized losses associated with an overall hedging strategy that is no longer effective. Statutory Accounting Principles (E) Working Group Appendix A in this publication summarizes the actions taken by SAPWG since the 2017 Spring National Meeting, including details on the exposure of nonsubstantive revisions to statutory accounting guidance that address the settlement of variation margin for derivative contracts (Ref # ), options to further limit the admissibility of goodwill (Ref # ) and reinsurance risk transfer for short-duration contracts (Ref # ). 5 NAIC Bulletin August 2017

6 SAPWG adopted the following statutory accounting guidance: Statement of Statutory Accounting Principles (SSAP) No. 37, Mortgage Loans, was revised to clarify that mortgage loans acquired through assignment, participation or syndication are included within its scope (Ref # ). SSAP No. 26R, Bonds, was revised to clarify that recognized losses from the other-than-temporary impairment of investments within the scope of the guidance should be recorded entirely to either the asset valuation reserve (AVR) or the interest maintenance reserve (IMR) in accordance with the annual statement instructions (Ref # ). A blanks proposal will be recommended to clarify the annual statement instructions for bifurcating the related amount between AVR and IMR. In addition, SAPWG rejected the US GAAP guidance in Accounting Standards Update (ASU) , Premium Amortization on Purchased Callable Debt Securities (Ref # ) to retain the provisions of the yield-to-worst amortization methodology for callable bonds included in SSAP No. 26R. SSAP No. 65, Property and Casualty Contracts, was revised to require enhanced disclosures for highdeductible contracts (Ref # ), including the reporting of gross (of high deductible) loss reserves by line of business and the amount of the reserve credit that has been recorded, along with a ranking of the 10 largest unsecured high-deductible amounts by counterparty ranking. SAPWG also incorporated a materiality threshold to the existing disclosure requirements for professional employer organizations. Appendix A-010, Minimum Reserve Standards for Individual and Group Health Insurance Contracts, was revised to incorporate the 2016 Cancer Claim Cost Valuation Table (Ref # ). The use of this valuation table will be required for contracts issued on or after 1 January 2019, with early application permitted for contracts issued on or after 1 January SSAP No. 69, Statement of Cash Flow, was revised to incorporate the US GAAP guidance in ASU , Statement of Cash Flows Restricted Cash (Ref # ). ASU clarifies that restricted cash and cash equivalents should not be reported as cash flows from operating, investing or financing activities, rather they should be reported with cash and cash equivalents when reconciling the beginning and ending amounts on the cash flow statement. The revised amounts will be shown retrospectively to allow for comparative cash flow statements. SAPWG also adopted revisions to SSAP No. 1, Accounting Policies, Risks & Uncertainties, and Other Disclosures, to clarify that the restricted asset disclosure include information on restrictions involving cash, cash equivalents and short-term investments. Model #280 was revised for technical corrections to remove the reference to class one money market mutual funds as that concept has been eliminated and fix the definitions indicated for repurchase and reverse repurchase agreements (Ref #MO 280). These revisions were subsequently approved by the Financial Condition (E) Committee and the Executive Committee and Plenary. In addition, SAPWG exposed substantive revisions to SSAP No. 22, Leases, to incorporate concepts from the US GAAP guidance in ASU , Leases, while retaining the operating lease concept for statutory accounting (Ref # ). The proposed revisions are not intended to change the existing statutory accounting treatment for leases. SAPWG exposed substantive revisions to SSAP No. 41R, Surplus Notes, to incorporate the principle that the net balance of a surplus note issued at a discount or zero coupon should never be greater than the amount of cash and liquid admitted assets received (Ref # ). The proposed revisions would detail specific statutory accounting guidance for certain transactions (including exchanges or amendments of terms) consistent with the overall principle, as well as disclosures to capture information for discount or zero coupon surplus notes in the statutory-basis financial statements. SAPWG also exposed substantive revisions to SSAP No. 100, Fair Value, to allow the use of net asset value (NAV) per share as a practical expedient to fair value either when specifically named in statutory accounting guidance or when specific conditions exist (Ref # ). The proposed conditions are intended to allow the use of NAV of fair value in a manner that is consistent with US GAAP. Comments on exposed revisions to statutory accounting guidance are due as indicated in Appendix A. 6 NAIC Bulletin August 2017

7 SAPWG received an industry update on the activities of the Transition Resource Group formed to advise the Financial Accounting Standards Board (FASB) on implementation issues related to ASU , Credit Losses. SAPWG directed the NAIC staff to continue to solicit feedback from industry and regulators by posting this agenda item (Ref # ) on the NAIC website with no deadline specified. SAPWG also received an update from the NAIC staff on the recently published revisions in the American Institute of Certified Public Accountants (AICPA) insurance audit and accounting guides that address the application of the guidance in AICPA AU-C Section 800, Special Considerations Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, to audited financial statements prepared in the accordance with the insurance statutory basis of accounting. The revisions exclude US GAAP disclosure requirements that have been fully reviewed and rejected by the NAIC from further evaluation by the auditor to determine whether informative disclosures similar to US GAAP would be needed for the audited statutory-basis financial statements to achieve fair presentation. However, US GAAP disclosure requirements that have not been reviewed by the NAIC or for which the review process is not yet complete would continue to be subject to evaluation in accordance with AICPA AU-C 800. Blanks (E) Working Group Appendix B in this publication summarizes the actions taken by the Blanks (E) Working Group (BWG) since the 2017 Spring National Meeting. Life Insurance and Annuities (A) Committee The A Committee was provided a list of the key controversial issues raised in the drafting of the proposed Unclaimed Life Insurance and Annuities Model Act. The issues on which no consensus was reached included application of the comprehensive model law (i.e., prospective or retrospective application), whether insurance companies are required to perform death master file searches on previously lapsed policies and the specific matching criteria to be used in performing those searches. The A Committee adopted a motion to end efforts to reach consensus on a new model law and disband the Unclaimed Life Insurance Benefits (A) Working Group. Their decision was affected by the fact that many states have already adopted modern laws addressing insurance company obligations with respect to unclaimed benefits. The A Committee received an update from the Annuity Suitability (A) Working Group regarding its progress in reviewing the Suitability in Annuity Transactions Model Regulation (#275) in light of developments related to the fiduciary rule (i.e., best interest standard) issued by the US Department of Labor (DOL). DOL representatives made a presentation on the DOL s fiduciary rule, and the American Council of Life Insurers (ACLI) made a presentation on its proposed uniform standard of care. Currently, there are no suggested revisions to Model #275, and the Working Group will continue stakeholder discussions on the need for any potential revisions to the model. The A Committee approved a request for model law development to address issues identified in Model #245 by the Annuity Disclosure (A) Working Group in illustrating the required disclosures necessary to inform consumers in light of the innovations in products currently offered in the marketplace. The A Committee adopted the amendments to the Valuation Manual proposed by LATF, including the revised criteria for the life PBR exemption, the calculation of investment spreads and the clarification of information reported in the PBR actuarial report. Life Actuarial (A) Task Force LATF adopted revisions to AG 48 to clarify that the 2017 Commissioner s Standard Ordinary mortality table is required when calculating the net premium reserve for the actuarial method. LATF exposed the 2018 Generally Recognized Expense Tables recommended by the SOA. The proposed 2018 factors are based on an objective study using information obtained from NAIC annual statements. Comments are due by 7 September NAIC Bulletin August 2017

8 VM-22 (A) Subgroup The VM-22 (A) Subgroup updated LATF on the status of its work to develop principle-based valuation requirements for annuity products not covered by VM-21: Requirements for Principle-Based Reserves for Variable Annuities. The Subgroup is developing an exclusion test within VM-22 that will determine the set of calculations to follow using current guidelines or a framework similar to VM-21 and Actuarial Guideline XLIII, CARVM for Variable Annuities (AG 43). Specific calculations for the exclusion test and the framework similar to VM-21 are each still under development. Beginning 1 January 2018, the VM-22 valuation interest rates for jumbo and non-jumbo single premium immediate annuities (SPIAs) will be published in the Industry section of the NAIC website. Rate determination will be significantly automated, and the first round of results will be published to a test site by the end of August In response to direction received from LATF, a development process is underway for the Subgroup to determine valuation interest rates for all non-variable annuities similar to the process followed for SPIAs. The Subgroup will consider whether the rate should be determined at issue or annuitization date or vary based on circumstances and whether various product features such as interest rate guarantees or guaranteed durations should affect the valuation interest rate. Longevity Risk (A/E) Subgroup The Subgroup received a report from the AAA on the progress of its work to develop an approach for a longevity risk charge with an initial focus on annuity products. The Subgroup requested the AAA to evaluate an appropriate definition of a tail stress event, a potential RBC charge based on the difference between reported statutory reserves and statutory reserves using stressed mortality, and an RBC charge expressed as a factor(s) applied to statutory reserves. The AAA suggested that the Subgroup conduct a study to evaluate the results of applying its findings to actual company blocks of business and developed instructions and a template in order to conduct such a study on individual and group annuities. The Subgroup previously reached consensus that statutory reserves sufficiently cover longevity risk through an asset adequacy analysis. However, the Subgroup is evaluating whether the guidance provided to the actuary for the performance of asset adequacy testing is sufficient. The Subgroup will provide recommendations for recognizing longevity risk in statutory reserves or RBC, as deemed appropriate. Health Insurance and Managed Care (B) Committee The B Committee approved a request for an extension of model law development for the Health Insurance Reserves Model Regulation (#10) to address appropriate reserving standards for LTC insurance business in the model. The B Committee adopted The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves, which is a new actuarial guideline developed by the LTC Actuarial (B) Working Group for the performance of standalone asset adequacy testing of material blocks of LTC insurance business effective with year-end 2017 filings. The requirements of the actuarial guideline have been designed to increase the uniformity and transparency of the process followed by insurers to determine LTC reserve adequacy. The B Committee also adopted a LATF proposal to revise VM-25: Health Insurance Reserves Minimum Reserve Requirements, to allow the calculation of the calendar-year maximum valuation interest rate for certain claim reserves for group long-term disability contracts to remain unchanged given the pending changes to the calculation of the valuation interest rate for SPIAs, which are effective 1 January Health Actuarial (B) Task Force The Health Actuarial (B) Task Force (HATF) discussed the options being considered by state insurance departments in preparation of the potential elimination of cost-sharing reduction (CSR) payments for health insurance policies regulated by the Affordable Care Act (ACA). Some states have directed carriers to file their 2018 rates based on the status quo (i.e., assuming that federal funding of CSR payments will continue), while other states have directed carriers to file assuming no funding of the CSR payments or file under both scenarios. HATF directed NAIC staff to consider whether each state s CSR guidance documents outlining how it plans to treat the possible lack of funding for CSR payments in their rate filings could be posted to the NAIC website. 8 NAIC Bulletin August 2017

9 Long-Term Care Actuarial (B) Working Group The Working Group discussed the following activities of its subgroups related to developing guidance for LTC insurance: The LTC Valuation (B) Subgroup discussed whether regulators can improve the data submitted on the LTC supplement to the annual statement. The Subgroup made an informal request for information to better understand whether the users of this supplement derive value from compiling and reviewing the LTC data currently submitted or if additional data should be collected. The Subgroup also held preliminary discussions on whether a PBR methodology should be developed for the valuation of LTC insurance reserves, or whether the current valuation method is in effect similar to a PBR approach. The LTC Pricing (B) Subgroup discussed issues related to recouping past losses on LTC insurance policies through future rate increases and is in the process of developing a resource document for regulator use that describes various approaches to how recouping past losses can be treated in rate increase reviews. The following approaches have been outlined: (1) the purely prospective method, (2) the if-knew method and (3) the lifetime loss ratio method. The Subgroup has no expectation that all states will agree on a single methodology. Long-Term Care Insurance (B/E) Task Force The Task Force heard a presentation for the design of a proposed LTC run-off facility that would use the framework established in Rhode Island Insurance Regulation 68 to provide for an insurance business transfer (IBT) of commercial P&C run-off liabilities through a department-approved and court-sanctioned novation process. The IBT mechanism is viewed as a restructuring tool that, if expanded to apply to LTC run-off liabilities, would help address the inadequate capital available in the market to fund the run-off associated with these liabilities. Under the proposal, insurance companies would transfer their LTC portfolios into either a solvent or impaired facility that would be established and operated based on the core principles of policyholder protection with no impairment of policy benefits and claims without the express, informed and voluntary consent of the policyholder. The Task Force agreed to consider this approach and determine whether and to what extent it could be incorporated into its ongoing work and recommendations. Property and Casualty Insurance (C) Committee The C Committee adopted the proposal from the Auto Insurance (C/D) Working Group to collect aggregated data from insurance companies through statistical agents to study the personal auto insurance market. The C Committee also adopted the Catastrophic Event/Emergency Measures Regulatory Guidelines for state insurance regulations around emergency powers during a catastrophic event or state of emergency and the related effect on insurers. The C Committee approved a fifth request to extend the deadline for revisions to the Creditor-Placed Insurance Model Act (#375). The Creditor-Placed Insurance Model Act Review (C) Working Group has decided to develop a new model applicable only to lender-placed insurance on real property loans first and will address revisions to the existing model for personal property loans separately. Actuarial Opinion (C) Working Group The Working Group discussed potential updates to the Regulatory Guidance on Property and Casualty Statutory Statements of Actuarial Opinion (regulatory guidance) with an intent to eliminate any unnecessary overlap with the instructions for the Statement of Actuarial Opinion. The Working Group will evaluate what can be moved from the 2017 regulatory guidance to the 2018 instructions, and then determine what should be communicated in 2018 regulatory guidance. The Working Group adopted the proposed edits to the Financial Analysis Handbook documents on Annual Reserving Risk, Quarterly Reserving Risk and the Statement of Actuarial Opinion. The proposal was referred to the Financial Analysis Handbook (E) Working Group for consideration. The Working Group re-exposed the actuarial qualifications proposal that requires the actuary to explain how all of the applicable requirements in the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States are met upon initial appointment by the insurer s board of directors. The appointed actuary would satisfy the documentation requirements by completing an attestation form available from the AAA. The appointed actuary would then include documentation demonstrating 9 NAIC Bulletin August 2017

10 compliance with the requirements in the actuarial report filed annually with the domiciliary state. Similar proposals are expected to be presented to LATF and HATF, with the goal of achieving consistency in the instructions for life, health and P&C actuaries. Financial Condition (E) Committee The E Committee continued to discuss the interim investment disclosures referral from the Accounting Practices and Procedures (E) Task Force (APPTF). A.M. Best reported that it currently performs a quarterly rollforward of investment portfolios using CUSIP and par value details from the annual Schedule D and quarterly acquisition and disposition schedules filed with the NAIC. This data could be made available for the NAIC and state insurance regulators to access through existing channels. Updated fair value detail could also be provided for all investment portfolio holdings with publicly available fair value data. The E Committee requested additional information on pricing and other alternatives for gathering this information, which will be discussed at future meetings. Capital Adequacy (E) Task Force Appendix C in this publication summarizes the actions taken by the Capital Adequacy (E) Task Force (CATF) and the various NAIC groups that report to it since the 2017 Spring National Meeting. Significant actions include the adoption of the following: Implementation of the add-on charge for operational risk with an RBC factor of zero for 2017 (Ref # O) Removal of the factor for non-government money market mutual funds on the common stock page of the RBC formula in order to avoid double-counting (Ref # CA) Annual updates to the Line 1 industry underwriting factors (premium and reserve) and the use of a new methodology to calculate the Line 4 factors for underwriting risk in PR017 and PR018 of the P&C RBC formula (Ref # P and # P) The Operational Risk (E) Subgroup will perform additional work to determine the appropriate factor for operation risk to use in future years and confirm that operational risk is not double-counted in the RBC calculation of a parent with insurance company subsidiaries. The Catastrophe Risk (E) Subgroup separately rejected a proposal to clarify the methodology used to determine the catastrophe risk charge (Rcat) in the P&C RBC formula after determining that the proposal appeared to be reinstating an aggregate exceedance probability (AEP) methodology for the performance of the Rcat calculation. Investment RBC (E) Working Group The Investment RBC (E) Working Group (IRBC) heard a presentation from the AAA on its updated analysis of and recommendation for the bond factors to be used in the Life RBC formula previously exposed for comment. The AAA developed its recommendation from a review of its prior analysis (from August 2015) with an emphasis on assumptions that are more subjective in nature and have the potential to create unintended bias in the resulting factors. The primary revisions were based on changes to the composition of the representative portfolio, while the recovery assumptions and discount rate used to determine the present value of projected cash flows were unchanged. The AAA report estimates that the use of the updated base factors would increase the average industry charge for bonds on a pretax, before covariance basis and before any adjustments. The inputs to the portfolio adjustment factor were also updated to be consistent with the loss experience and other assumptions used in developing the updated base factors and measure the diversification benefit by the number of issuers similar to the approach currently used. No changes were made to the current treatment of the adjustment for the largest 10 portfolio holdings for which the factors are doubled to reflect the higher risk due to concentration. The feedback provided to the IRBC raised concerns on the size of the portfolio adjustment factor, which could have a significant effect on small and mid-sized insurance companies. AAA representatives acknowledged these concerns and agreed to modify their analysis such that the resulting factor will only represent the diversification benefit that exists at the individual portfolio level, with the updated base factors providing a greater level of confidence in the calculation of the capital requirement. The AAA intends to provide the IRBC with an updated report by 1 September NAIC Bulletin August 2017

11 The AAA report also provided alternative factors for consideration as the basis for the bond factors to be used in the Health and P&C RBC formulas. The alternative factors were developed by adjusting the updated base factors for the Life RBC formula to a pretax basis and eliminating the provision for credit risk contained in statutory life reserves since Health and P&C statutory reserves contain no provision for credit risk. These factors are not being recommended by the AAA, but were intended to be a potential starting point for a more consistent set of investment risk charges across all of the RBC formulas. The IRBC also indicated that it plans to schedule a joint meeting with the Heath RBC (E) Working Group, the Life RBC (E) Working Group and the P&C RBC (E) Working Group to consider the adoption of the revised bond structure with increased granularity (i.e., 20 designations) across all of the RBC formulas. Previously, the revised structure was adopted only for use in the Life RBC formula, and its adoption for the other RBC formulas is necessary in order for the NAIC Investment Analysis Office (IAO) to begin the process of mapping ratings from national recognized statistical rating organizations to the new designations that have been proposed for the RBC calculation. Group Capital Calculation (E) Working Group The Working Group continued to work on developing the NAIC s group capital calculation for an initial filing to state insurance regulators using 2019 annual data. The NAIC staff is currently working with regulators and volunteer insurance groups to perform a baseline exercise intended to help inform the decisions of the Working Group. The feedback provided to the Working Group raised concerns on its decision to move forward with the development of the excess relative ratio approach for determining the scalar (i.e., factor) to apply to non-us insurers subject to regulatory requirements in their domiciliary jurisdiction. Specifically, it was noted that the excess relative ratio approach assumes the intervention levels among solvency regimes (i.e., jurisdictions) are equal. An alternative (i.e., pure) relative ratio approach that calculates the scalar based on a jurisdiction s average operating capital ratios without requiring an adjustment to total available capital in the final step of the calculation was suggested. The Working Group indicated they believe the capital point at which regulatory intervention is triggered (as demonstrated in the excess relative ratio approach) is a relevant consideration, but agreed to field test both methods in the baseline exercise currently being conducted. Concerns were also raised that certain jurisdictions may not be scalar compatible and the average capital ratio needed to determine the appropriate scalars has proven difficult to obtain. The Working Group directed the NAIC staff to contact interested stakeholders and solicit input on the jurisdictions for which they believe a scalar should be developed, along with suggestions for a reliable data source applicable to these jurisdictions. Based on the information received, the NAIC staff will begin calculating scalars for those jurisdictions under both the excess relative ratio and pure relative ratio approaches. The Working Group continued to discuss the previously proposed approaches to address the following situations in the group capital calculation: The treatment of US insurers that are not subject to RBC filings, such as mortgage guaranty insurers, financial guaranty insurers and title and other companies The Working Group did not receive any feedback on this topic and tentatively agreed to use the minimum capital requirement for these insurers in the applicable NAIC model, NAIC guideline or state law as the basis for the required capital amount in the calculation. The treatment of US captive insurance companies in a holding company that also includes a traditional US insurance company The Working Group did not receive any feedback on US captives used for selfinsurance or insurance provided exclusively to its own employees and/or its affiliates and tentatively agree to the proposed approach to treat these entities as non-insurers similar to their treatment in the RBC formula. With respect to other captives, the feedback provided was generally supportive of the recommendation that the captives complete an RBC calculation using their basis of accounting with limited adjustments for the valuation of certain assets as required by paragraph 9 of SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities, and the valuation of liabilities (i.e., reserves) on the same basis as the direct writer of the business. The Working Group subsequently exposed an NAIC staff memorandum to solicit additional feedback on five decision points regarding the treatment of captives that assume XXX/AXXX business, including consideration for the potential use of PBR to calculate reserves for both new and in-force business and the treatment of grandfathered policies under the Rector framework in the calculation. Comments are due by 5 September NAIC Bulletin August 2017

12 The treatment of prescribed and permitted practices The feedback provided was generally supportive of the recommendation to include a listing of prescribed and permitted practices in the calculation; however, differing opinions were expressed about whether these practices should be automatically aggregated and their effect addressed through an on top adjustment. The Working Group directed the NAIC staff to collect data to determine whether prescribed and permitted practices are used and their estimated effect on amounts reported in the statutory-basis financial statements. The data collection exercise will be performed with the volunteer insurance groups participating in the baseline exercise. Group Solvency Issues (E) Working Group The Working Group continued developing the draft implementation guide aimed at helping insurers and state insurance regulators maximize the usefulness of the enterprise risk report (i.e., Form F). The Working Group formed an ad hoc drafting group to identify and evaluate various options available to regulators in addressing the identified problems related to the quality of information reported on Form F filings. The drafting group is currently reviewing and comparing Form F and Own Risk and Solvency Assessment (ORSA) summary report filings from various groups. Receivership and Insolvency (E) Task Force The Task Force adopted the Receivership Model Law (E) Working Group s report that included a request for amendments to Model #520 to address issues related to the insolvency of LTC insurers. The Working Group will form an ad hoc drafting group to develop the amendments and work with industry representatives to explore the following potential changes: Aggregate the life insurance/annuity and health insurance accounts of the guaranty association when making Class B assessments with respect to LTC policies issued by an insolvent member insurer. These accounts will remain separate for all other purposes. Include health maintenance organizations (HMOs) as members of the guaranty association subject to a separate account. Class B assessments with respect to LTC policies issued by an insolvent member insurer would be apportioned among the three accounts (i.e., life insurance/annuity, health insurance and HMOs) in accordance with the methodology provided by state legislation. Other revisions to Model #520 would be required to provide for the payment of claims against HMOs. Reinsurance (E) Task Force The Task Force identified and adopted the significant elements of the Term and Universal Life Insurance Reserve Financing Model Regulation (#787), which will be subsequently referred to the Financial Regulation Standards and Accreditation (F) Committee for consideration as accreditation requirements for Model #787. The Task Force highlighted the following key points considered by its ad hoc drafting group in making their determination: The drafting group used the substantially similar standard for the model regulation versus a higher standard of review (i.e., substantially similar in all material respects ) due to its technical nature, and will advise the F Committee that the NAIC legal staff should review any material changes to the significant elements of the model regulation adopted by individual states for consideration by the F Committee. The drafting group continues to support the expedited effective date of 1 January 2020 for the accreditation standard. This effective date coincides with that of PBR. The drafting group recognizes that meeting the expedited date may not be feasible and advised the F Committee that, in such cases, an individual state s compliance with the provisions of AG 48 may be satisfactory and achieve substantial compliance with the provisions of Model #787. The Task Force received a status report on the Bilateral Agreement between the European Union (EU) and the United States of America on Prudential Measures Regarding Insurance and Reinsurance (covered agreement) that would eliminate reinsurance collateral requirements for EU-domiciled reinsurers that maintain a minimum capital (equivalent to $250 million) and solvency ratio (100% under Solvency II or 300% under NAIC RBC). It would also eliminate the local presence requirement to conduct business in EU jurisdictions for US-domiciled insurers that maintain a minimum level of capital and risk-based capital. Separately, the Qualified Jurisdiction (E) Working Group updated the Task Force on its evaluation 12 NAIC Bulletin August 2017