NAIC Bulletin Highlights of the National Association of Insurance Commissioners meeting

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1 May NAIC Bulletin Highlights of the National Association of Insurance Commissioners meeting Spring update In this issue: Executive Committee and Plenary... 2 Executive (EX) Committee... 2 Big Data (EX) Working Group... 3 Principle-based reserving... 3 PBR pilot project... 3 Valuation Manual amendments... 4 Variable Annuity Framework... 4 Quantitative impact study... 4 Effect on statutory accounting and reporting... 5 Accounting Practices and Procedures (E) Task Force... 5 Life Insurance and Annuities (A) Committee... 6 Health Insurance and Managed Care (B) Committee... 7 Property and Casualty Insurance (C) Committee... 8 Financial Condition (E) Committee... 8 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 Spring National Meeting in Denver. This publication highlights issues that various NAIC groups have addressed since the 2016 Fall 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 adopted revisions to SSAP No. 26R, Bonds, to incorporate the US GAAP definition of a security and that of certain non-bond, fixed-income instruments. Other instruments identified by the Securities Valuation Office were removed from the definition of a bond, and separate statutory accounting guidance will be provided for them. The Capital Adequacy (E) Task Force adopted structural changes to each risk-based capital (RBC) formula for to include an add-on charge for basic operational risk. The Investment RBC (E) Working Group delayed the implementation date for the revised structure and related factors being developed for investments to the end of 2018 to provide enough time to analyze the effect on each industry sector. The Innovation and Technology (EX) Task Force held its first meeting. The Task Force will provide a forum for state insurance regulators to learn about and discuss innovation and technology in the insurance sector, monitor technology developments affecting the state insurance regulatory framework and develop regulatory guidance as appropriate.

2 Executive Committee and Plenary The Executive Committee and Plenary took the following actions at the Spring National Meeting: amendments to the Health Insurance Reserves Model Regulation (#10) to incorporate the 2016 cancer claim cost valuation tables (CCCVT) amendments to the Privacy of Consumer Financial and Health Information Regulation (#672) to incorporate a new federal model privacy form that may be used to meet the requirements of the privacy and opt-out notices set forth in Model #672 amendments to two NAIC consumer resource publications, A Consumer s Guide to Home Insurance and A Shopping Tool for Homeowners Insurance amendments to the plan of operation for the NAIC Consumer Protection Program to provide additional considerations for the qualifications, appointment and term of NAIC-designated consumer representatives (these revisions were adopted by the NAIC/Consumer Board of Trustees on 28 December 2016) Approved the formation of the joint task force of the Health Insurance (B) Committee and the Financial Condition (E) Committee to coordinate all aspects of the NAIC's activities relating to the long-term care (LTC) insurance market Executive (EX) Committee The EX Committee adopted the final report of the Governance Review (EX) Task Force that included recommendations to address the following issues: Administrative due process for NAIC work product, such as the annual and quarterly financial statement blanks, the Accounting Practices & Procedures Manual (AP&P Manual) and the Valuation Manual (VM), which is incorporated by reference in state statutes and can have the force of law upon adoption by the NAIC without requiring further actions by the state Voting procedures in letter committee conference calls when it may be unclear whether the committee maintained a quorum during the call in which votes are taken The Governance Review (EX) Task Force was disbanded since it had completed its charges. The EX Committee also approved a request from the Short Duration LTC Policies (B) Subgroup to develop a new model law that would address LTC policies of short duration (i.e., term of less than one year) excluded from the Long Term Care Insurance Model Act (#640) and related model regulation and not covered by the Accident and Sickness Insurance Minimum Standards Model Act (#170) and related model regulation. Innovation and Technology (EX) Task Force The recently formed Task Force held its first meeting. The Task Force will provide a forum for state insurance regulators to learn about and discuss innovation and technology in the insurance sector, monitor technology developments affecting the state insurance regulatory framework and develop regulatory guidance as appropriate. Cybersecurity (EX) Working Group The Working Group said its ad hoc drafting group exposed the third version of the proposed Insurance Data Security Model Law in late February, and there appears to be consensus in the comments received on the proposed risk-based security requirements. Interim conference calls will be held in an effort to reach final consensus on the provisions, specifically on the type of harm trigger for requiring data breach notifications to consumers. The Working Group heard a presentation from the New York State Department of Financial Services (NYDFS) on the implementation of the state regulation on cybersecurity for financial services companies, which is effective 1 March. The regulation requires an insurer regulated by the NYDFS to perform a risk-based assessment of its cybersecurity risk profile and establish a cybersecurity program that addresses those risks. 2 NAIC Bulletin May

3 Big Data (EX) Working Group The Working Group exposed its draft work plan for, which would include reviewing current regulatory frameworks employed to oversee insurers use of insurance and non-insurance data; identifying resources to assist in states review of complex models used by insurers for underwriting, rating and claims; and assessing the data and tools regulators need to monitor and evaluate underwriting, rating, claims and marketing practices. The Working Group will revise the work plan to put more emphasis on how insurers innovative use of data is having a positive effect on consumers. Additional prioritization of tasks and the timeline for their completion will be determined based on a review of the comments received. Principle-based reserving The revised Standard Valuation Law included in the Minimum Life and Annuity Reserve Standards Model Regulation (#820) incorporates the various sections of the Valuation Manual that establish the minimum valuation standards and requirements for principle-based reserving (PBR) for life products and variable annuities and the minimum reserve requirements for health insurance and credit life and disability insurance. The Valuation Manual became effective on 1 January, subject to a three-year transition period during which insurers can elect to move some or all applicable new business to a PBR methodology. The NAIC updated its PBR implementation plan to address the completion of the PBR pilot project, the establishment of the Valuation Analysis (E) Working Group (VAWG) and other enhancements to various sections of the Valuation Manual addressing different aspects of the PBR methodology. Developments from several NAIC groups include: The Financial Regulation Standards and Accreditation (F) Committee adopted the referral from the Life Actuarial (A) Task Force (LATF) to consider additional sections from the 2009 revisions to the Standard Valuation Law in Model #820 as significant elements for inclusion in Part A: Laws and Regulations Liabilities and Reserves of the accreditation standards. The accreditation requirement is effective on 1 January The PBR Review Procedures (EX) Subgroup exposed revisions to the Financial Condition Examiners Handbook aimed at addressing the principle-based valuation of reserves. Comments received will be discussed at future meetings. The Financial Analysis Handbook (E) Working Group adopted revisions to the Financial Analysis Handbook incorporating a risk-focused assessment for reserves. The VAWG s charges and membership were updated. The VAWG will assist state insurance regulators in their review of an insurer s application of the PBR methodology and make referrals to LATF when the guidance needs to be clarified. PBR pilot project The final results of the PBR pilot project were discussed at the Spring National Meeting. The project was designed to help insurers and state insurance regulators prepare for the implementation of PBR for life products. Participating insurers performed reserve valuations in accordance with VM-20: Requirements for Principle-Based Reserves for Life Products, completed the VM-20 reserve supplement, prepared the PBR actuarial report in accordance with VM-31: PBR Actuarial Report Requirements for Business Subject to a Principle-Based Reserve Valuation and submitted the information to their state insurance regulators for review. The project generated several observations from state insurance regulators on the output of the PBR valuations and content of the PBR actuarial report. For example, it was noted that the treatment of reinsurance in certain of the PBR valuations did not have the intended effect (i.e., the pre-reinsurance ceded reserves were lower than the post-reinsurance ceded reserves). It was also noted that none of the VM-31 PBR actuarial reports submitted were considered fully complete by the reviewers. However, the NAIC indicated that reports with additional detail generally had fewer follow-up questions about their content. The reviewers also indicated there was duplicative information included in the executive summary and the body of the PBR actuarial report in some cases, and this could lead to the development of additional guidance that would address how much information to include in the executive summary. 3 NAIC Bulletin May

4 The project led to the creation of an informal Valuation Manual review drafting group that includes NAIC staff, state insurance regulators and other industry stakeholders. The group will address questions from insurers about applying a PBR methodology and provide interpretations of the guidance. Valuation Manual amendments LATF continued working on amending the Valuation Manual to clarify the requirements for life insurance, accident and health insurance and deposit-type contracts. LATF created a maintenance agenda that identifies the pending list of submitted proposals (there were 22 1 proposals as of the Spring National Meeting). The proposed amendments would modify definitions and make other non-substantive clarifications identified by state insurance regulators and other industry stakeholders, among other things. LATF proposed amending the criteria for the company-wide exemption from PBR valuation requirements. Under the proposed amendments, the domiciliary state insurance commissioner would have discretion to allow insurers with less than $50 million in ordinary life premium to be exempt for one additional year if their RBC level falls below the 450% requirement for exemption. In addition, the amendments would revise the calculation of premiums in the company-wide exemption relating to pre-need premium and assumed reinsurance premiums 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 exposed the American Academy of Actuaries (AAA) and the Society of Actuaries (SOA) guaranteed issue mortality tables report for a comment period ending 10 June. The report was based on a study of data collected from 15 companies and defines guaranteed issue as a policy or certificate under which the applicant must be accepted for coverage if he or she is eligible and premiums are paid. LATF has requested feedback on the guaranteed issue definition and whether the proposed tables should be used for nonforfeiture and reserve valuation (e.g., inclusion in appendices VM-A and VM-C). LATF intends for these tables to be finalized and effective as of 1 January LATF exposed amendments to VM-30: Actuarial Opinion and Memorandum Requirements, based on a recommendation from the Longevity Risk (A/E) Subgroup. The amendments are intended to clarify that asset adequacy testing should address whether the current expected mortality assumptions are generally different from those that were made when the policies were originally issued (i.e., perform testing under both scenarios). In addition, the documentation should support the actuaries conclusion on the sufficiency of the reserve using assumptions that represent moderately adverse conditions. Separately, the Life Insurance and Annuities (A) Committee adopted amendments to Actuarial Guideline XXXVIII The Application of the Valuation of Life Insurance Policies Model Regulation (AG 38), to align its requirements with the version of the Valuation Manual in effect on the valuation date. Variable Annuity Framework The Variable Annuity Issues (E) Working Group (VAIWG) continued working to identify changes that should be made to the NAIC statutory framework (i.e., statutory accounting, reserving and RBC requirements) for variable annuities. Quantitative impact study The process for the second quantitative impact study (QIS) started in February after VAIWG finished receiving feedback from state insurance regulators and other industry stakeholders about its scope. The QIS participants will include 15 variable annuity insurers that comprise $1 trillion in variable annuities under management. The QIS will be completed in three phases, and VAIWG will receive the final analysis in the fall of. VAIWG will use the results to formulate its recommendations on revising the NAIC statutory framework for variable annuities. A key aspect of this QIS that was not included in the scope of the first one performed in 2016 is that all of the components of the testing will be evaluated together to determine the aggregate effect of the potential changes identified on the statutory accounting, reserving and RBC requirements for variable annuities. 1 For a complete listing of all exposures, refer to the NAIC s website at 4 NAIC Bulletin May

5 Effect on statutory accounting and reporting The Statutory Accounting Principles (E) Working Group (SAPWG) exposed an issue paper with revised statutory guidance that would provide special accounting treatment for certain derivative contracts hedging variable annuity guarantees (Ref # ). The guidance would allow certain derivatives hedging variable annuity guarantees (measured under Actuarial Guideline XLIII CARVM for Variable Annuities) that are subject to fluctuations from interest rate risk to receive hedge accounting treatment. This would differ from the existing statutory accounting requirements in Statement of Statutory Accounting Principles (SSAP) No. 86, Derivatives, which do not allow hedge accounting treatment to be applied to these contracts. The issue paper would clarify the requirements for applying the proposed guidance, which include obtaining explicit approval from the domiciliary state insurance commissioner. If the proposed requirements are met, the insurer would utilize a form of macro hedging (i.e., hedged item is a portfolio of variable annuity contracts) to treat the derivative contracts as a fair value hedge. Comments are due by 19 May. SAPWG also referred a request to VAIWG for input on hedging programs that initially would fall under the proposed guidance before being subsequently terminated or deemed ineffective. This information will assist SAPWG in clarifying the statutory accounting requirements that would be applied to these derivative contracts. Accounting Practices and Procedures (E) Task Force The Accounting Practices and Procedures (E) Task Force exposed SAPWG s referral about a policy change that would facilitate the collection of electronic-only investment information capturing CUSIP, par, book/adjusted carrying value and fair value for Schedule D investments on an interim basis (i.e., second quarter) beginning in The comments received will be discussed on an interim conference call on 2 May. Statutory Accounting Principles (E) Working Group Appendix A in this publication summarizes the actions taken by SAPWG to revise statutory accounting and reporting guidance since the 2016 Fall National Meeting. Significant actions include the adoption of the following: SSAP No. 35R, Guaranty Fund and Other Assessments, was revised to require insurers to discount the liability and related asset recognized for guaranty fund assessments resulting from insolvencies of insurers that wrote LTC insurance contracts (Ref #-01), effective 1 January. The discount rate applicable to amounts expected to be settled in over one year will be the maximum valuation interest rate prescribed for whole life policies. SSAP No. 26R, Bonds, was revised to incorporate the US GAAP definition of a security into that of a bond and include definitions of non-bond, fixed-income instruments (i.e., bond exchange-traded funds); instruments identified by the Securities Valuation Office (SVO) were removed from the definition of a bond, and separate statutory accounting guidance for these instruments was provided (Ref # ). The revisions are effective 31 December. SSAP No. 55, Unpaid Claims, Losses and Loss Adjustment Expenses, and SSAP No. 65, Property and Casualty Contracts, were revised to incorporate certain US GAAP disclosure requirements in Accounting Standards Update (ASU) , Disclosures about Short-Duration Contracts (Ref # ). The additional disclosures will address significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the statutory-basis financial statements, and the amount of interest accretion recognized for the reporting period and the line item(s) in the statement of operations in which the interest accretion is classified. SAPWG rejected all other aspects of ASU SSAP No. 30, Unaffiliated Common Stock, SSAP No. 48, Joint Ventures, Partnerships and Limited Liability Companies, and SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities, were revised to incorporate the requirements in ASU , Simplifying the Transition to the Equity Method of Accounting, with modification to reflect statutory terms and concepts (Ref # ). The revisions eliminate the requirement to retroactively adjust the amount recognized by the reporting entity when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. 5 NAIC Bulletin May

6 Appendix A-791, Life and Health Reinsurance Agreements, was revised to incorporate Section 5(C) of the Life and Health Reinsurance Agreements Model Regulation (#791) (Ref # ). The revisions clarify that a reinsurance agreement constitutes the entire agreement between the parties with respect to the business being reinsured, and any change or modification to the agreement must be in the form of an amendment signed by both parties for it to be effective. SSAP No. 69, Statement of Cash Flow, was revised to incorporate the US GAAP guidance in ASU , Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Ref # ). ASU addresses cash flow activities for which there is no guidance or the guidance is unclear. The NAIC s statutory guidance for the classification of items in the statement of cash flow is provided in the Annual Statement instructions. SAPWG also solicited feedback on the following: Revisions to SSAP No. 26R and on whether bank loans directly issued by the reporting entity should be in the scope of the guidance (Ref #-10); SAPWG also sent a referral to the Valuation of Securities (E) Task Force (VOSTF) asking for details on the variations between directly issued and acquired bank loans and whether different risks warrant different statutory accounting treatment. Revisions to SSAP No. 65 to expand disclosures about high-deductible policies to facilitate data capture for the year-end ; it also requested feedback on whether a high-deductible threshold should be established (Ref #-11). The proposed revisions are based on recommendations made in the 2016 Workers Compensation Large Deductible Study. Revisions to SSAP No. 86 to clarify liability recognition for the cost to acquire derivatives with a deferred or financing premium and provide disclosure and reporting requirements for these premiums (Ref # ); SAPWG also requested feedback on how the legal settlement of variation margins affects the statutory accounting and reporting for derivatives (Ref #-04). Comments on these items are due by 19 May. Blanks (E) Working Group Appendix B in this publication summarizes the actions taken by the Blanks (E) Working Group (BWG) since the interim conference call on 15 December Life Insurance and Annuities (A) Committee The Unclaimed Life Insurance Benefits (A) Working Group made a request to suspend its work on the proposed Unclaimed Life Insurance and Annuities Model Act due to the lack of consensus on its applicability to existing and future policies, contracts and retained asset accounts. The new model act is intended to establish a uniform process for life insurers to identify deceased insured individuals and perform meaningful searches for beneficiaries entitled to receive unclaimed life insurance (i.e., death) benefits. The A Committee extended the deadline for developing the new model act and requested a list of key controversial issues raised in its drafting from the Working Group. The A Committee formed the Annuity Suitability (A) Working Group to review and revise as necessary the Suitability in Annuity Transactions Model Regulation (#275) and consider how to promote greater uniformity in adherence across NAIC jurisdictions. The Working Group plans to perform an assessment of the suitability standards in Model #275 in consideration of developments related to the Department of Labor s fiduciary rule (i.e., best interest standard) and feedback received from state insurance regulators and other industry stakeholders. Life Actuarial (A) Task Force LATF adopted the proposal of the VM-22 Subgroup to modernize the valuation methodology for interest rates on income annuities included in VM-22: Maximum Valuation Interest Rates for Income Annuities, effective 1 January The methodology is expected to be more responsive to the current economic environment and result in an appropriate level of reserves being established for these products. The guidance will be presented to the A Committee for incorporation into the Valuation Manual at the Summer National Meeting. 6 NAIC Bulletin May

7 VM-22 (A) Subgroup The VM-22 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. VM-22 currently only prescribes the valuation interest rates to be used for some, but not all, of the products that are in its scope. All reserve requirements for non-variable annuities outside of the scope are contained in appendices VM-A and VM-C of the Valuation Manual. These requirements are not intended to change the reserve requirements for annuities in the accumulation phase. The Subgroup indicated that the valuation interest rates for products in the defined scope of VM-22 supersede those in VM-A and VM-C but do not otherwise change the way those appendices are to be interpreted. Health Insurance and Managed Care (B) Committee The B Committee adopted revisions to Model #10 to incorporate the 2016 CCCVT based on an analysis performed by the AAA and SOA. Insurers are required to apply the 2016 CCCVT to new cancer insurance contracts issued on or after 1 January 2019, with an option to begin applying these tables for contracts issued on or after 1 January The B Committee also adopted the recommendations developed by the LTC Innovations (B) Subgroup for federal policy options to be presented to Congress for potentially increasing the number of affordable asset protection products available to finance the LTC insurance needs of middle-income individuals. The recommendations will be forwarded to the Government Relations (EX) Leadership Council for its consideration. Health Actuarial (B) Task Force The Health Actuarial (B) Task Force (HATF) proposed amending VM-25: Health Insurance Reserves Minimum Reserve Requirements to clarify its application to group long-term disability claim reserves, effective 1 January The proposed amendment would address a recent change in the calculation of the single premium immediate annuities (SPIA) valuation interest rate, which is referenced in Appendix A-820, Minimum Life and Annuity Reserve Standards, of the AP&P Manual for certain claim reserves included in the scope of VM-25. However, the change in the calculation of the SPIA valuation interest rate was not meant to affect these claim reserves. HATF also discussed creating a new subgroup to develop a process that will address future changes to Model #10 as changes are made to the Valuation Manual, including VM-25. HATF disbanded the Joint LTC Guidance Manual (B) Subgroup, which has completed its charges. Long-Term Care Actuarial (B) Working Group The Working Group discussed the following subgroup activities related to developing guidance for LTC insurance: The LTC Valuation (B) Subgroup exposed a revised proposal for an actuarial guideline to address the application of asset adequacy testing to LTC insurance reserves. Model #10 and VM-25 establish requirements for the recognition of LTC reserves; however, state insurance regulators have observed insurers apply the guidance to determine LTC reserve adequacy and the reasonableness of the reported reserves inconsistently. The actuarial guideline is meant to clarify the requirements for the appropriate form (e.g., gross premium valuation or cash flow testing) and support of certain assumptions (e.g., anticipated rate increases by jurisdiction) used in asset adequacy testing performed by insurers with material blocks of LTC insurance business. It would be effective for 31 December asset adequacy testing and eventually be incorporated into the VM-30 requirements. Comments are due by 11 May. The LTC Pricing (B) Subgroup continued discussing the responses to the questions sent to state insurance regulators on how LTC insurance rate increases are evaluated. The Subgroup reported that there was no consensus in the responses provided for a majority of the questions. The Subgroup also reported that a resource document for state insurance regulators will be developed with input from an actuarial consulting firm. The document is expected to be finalized by the Summer National Meeting. 7 NAIC Bulletin May

8 Property and Casualty Insurance (C) Committee The C Committee adopted revisions to two NAIC resource publications, A Consumer s Guide to Home Insurance and A Shopping Tool for Homeowners Insurance, which provide insurance consumers with general information about the coverage and costs of a homeowners insurance policy, including information on home-sharing rentals and other types of home-related insurance (e.g., private mortgage insurance, title insurance, home warranties). The C Committee also approved a fourth 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 been reviewing Model #375 to determine whether it should be retained as a model law, amended, converted to a guideline or archived. Casualty Actuarial and Statistical (C) Task Force The Task Force approved the comment letter that will be submitted to the Accounting Standards Board (ASB) on its third exposure draft of the proposed Actuarial Statement of Practice (ASOP), Estimating Future Costs for Prospective Property/Casualty Risk Transfer and Risk Funding. The Task Force agreed with the ASB that there appear to be considerable differences in opinion within the actuarial profession about certain aspects of ratemaking and price setting. The Task Force also indicated that while the ASOP would address concerns about estimating future costs, there would still be differences in opinion, and the Task Force recommended addressing them in a future ASOP. Actuarial Opinion (C) Working Group The Working Group exposed an actuarial qualifications proposal that would require 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 actuary would satisfy the documentation requirements by completing an attestation form available from the AAA. The appointed actuary would then include documentation demonstrating 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 property and casualty (P&C) actuaries. Financial Condition (E) Committee The E Committee received a summary of the recommendations from the 2016 Workers Compensation Large Deductible Study performed by the NAIC/IAIABC Joint (C) Working Group, which included the following questions for consideration by the E Committee: Should the existing reporting framework be enhanced by additional disclosures or replaced with a framework that requires policy reserves to be recognized on a gross basis and sets standards for an insurer to receive credit for anticipated deductible reimbursements? Do the existing RBC charges associated with large deductible business need to be enhanced to make sure that they properly address both the risk associated with unsecured or undersecured reserves and the risk that adverse development of reserves that are currently recognized might result in reimbursable losses that exceed the related amount of collateral? Should other types of loss-sensitive programs (e.g., retrospective rating plans) also be subject to some or all of the standards that apply to large deductible programs? The study included the following recommendations: Enact legislation to establish financial requirements for large deductible workers compensation coverage, which would include a definition of large deductible policies subject to endorsements or side agreements that shift risk back to the employer, size and financial strength requirements for insurers that write large deductible policies, limitations on the risk employers may retain relative to their financial capacity and requirements for collateral Enact legislation that governs the rights and duties of the various parties in insolvencies, with acknowledgement that the NAIC has developed model language on this point 8 NAIC Bulletin May

9 Enact provisions (in those states that do not already have such language) that would permit the collection of large deductible reimbursements from insureds Develop RBC standards associated with large deductible business and make sure they address the risk associated with any anticipated reimbursements that are unsecured or undersecured and the risk of adverse reserve development resulting in losses in the deductible in excess of the collateral currently deemed to be adequate Require the insurer s staff to evaluate its policyholders creditworthiness Consider setting qualifying thresholds that, if exceeded, would require reporting to the domiciliary state insurance regulator and therefore allow a special examination to be conducted by an examiner with expertise in this type of business The E Committee will review the study and determine whether to take any actions to revise the NAIC statutory framework. Capital Adequacy (E) Task Force Appendix C in this publication summarizes the actions taken since the 2016 Fall National Meeting by the Capital Adequacy (E) Task Force (CATF) and the various NAIC groups that report to it. Significant actions include the adoption of the following: The revision of the treatment of money market mutual funds in the RBC calculation by moving the reporting of exempt money market mutual funds under cash equivalents with a zero RBC charge (Ref # CA) The inclusion of an add-on charge for basic operational risk in each of the RBC formulas for, based on applying a factor to the insurers calculated RBC, which will eliminate the requirement to provide informational-only disclosures for operational risk in the RBC blanks (Ref # O) The implementation of the catastrophe risk charge (Rcat) in the P&C RBC formula (Ref # CR) The Catastrophe Risk (E) Subgroup separately exposed a related proposal to clarify the methodology used to determine the Rcat in the P&C RBC formula with a comment period ending 8 May (Ref #-04-CR). Operational Risk (E) Subgroup The Subgroup exposed a proposal for the use of a 3% factor to determine the add-on charge for operational risk for (Ref# O). The Subgroup recommended this factor after evaluating how operational risk is measured by other jurisdictions and the risks already factored into the existing RBC formulas. The NAIC staff tested factors as high as 6% and indicated that the use of a higher factor would not have a material effect on the RBC calculation but would provide an earlier warning for when RBC is approaching regulatory action levels. Comments are due by 4 May. Investment RBC (E) Working Group The Investment RBC (E) Working Group (IRBC) delayed the implementation date for the revised structure and related factors being developed for investments in each of the RBC formulas (i.e., life, health and P&C) until year-end 2018 to provide enough time to evaluate their effect on each industry sector. IRBC continued its work to revise the bond factors in the Life RBC formula. The AAA provided an update on the work being performed to adjust the bond factors based on feedback from state insurance regulators and other industry stakeholders. The AAA indicated the recovery rates used in the analysis could not be updated due to data limitations. However, the composition of the representative bond portfolio used in the model was updated to include all investment grade bonds (i.e., bonds with an NAIC designation of 1 or 2) and bonds with a different distribution of ratings. This resulted in a widening of the base factors for below investment grade bonds. The AAA plans to release the updated bond factors and supporting analysis by 1 June. 9 NAIC Bulletin May

10 IRBC discussed the recommendations from the AAA for the portfolio adjustment for bonds included in the Life RBC formula and decided to keep the current methodology (i.e., based on number of issues) and update the size factor adjustments. IRBC will also consider whether the Health RBC formula should also include a portfolio adjustment for consistency with the Life and P&C RBC formulas. IRBC requested the AAA to recommend bond factors for the Health and P&C RBC formulas by rerunning the updated life bond factors with adjustments for known differences in the RBC formulas, including the treatment of taxes and risk premium offsets. Concerns were raised on whether the 10-year horizon used in the development of the life bond factors should be also be adjusted since health and P&C insurers generally hold investments for a shorter period. The AAA indicated that such an adjustment was not needed since the 10-year time horizon represents a proxy for bond market cycles and is intended to be independent of the average duration of an investment portfolio. IRBC also exposed structural changes to the Health and P&C RBC formulas that would increase the granularity of bond factors (i.e., bond designations would increase to 20 from 6), consistent with the recent structural changes adopted for the Life RBC formula. The proposed revisions are intended to achieve consistency in the inputs to the RBC calculation for bonds across industries, except the source data would feed into each of the RBC calculations differently (i.e., investment data feeds into the Life RBC formula from the insurer s asset valuation reserve (AVR) filing, which does not exist for health and P&C insurers). Comments are due by 26 May. Group Capital Calculation (E) Working Group The Working Group continued developing the US group capital calculation using the inventory method (i.e., identifying a specific capital charge for each company in the group), with the goal of finalizing it and performing field testing on the inputs to the calculation for an initial filing to state insurance regulators using 2019 annual data. The Working Group decided to move forward with the development of the relative ratio approach for determining the scalar (i.e., factor) to apply to non-us insurers subject to regulatory requirements in their domiciliary jurisdiction. This approach is complex and will require research by the NAIC staff to determine the amount of industry-wide available capital and the first regulatory intervention level by jurisdiction (e.g., company action level RBC in the US). This information then would be used to annually determine the scalar to convert the legal entity s local capital requirements to a comparable US standard for use in the group capital calculation. The Working Group exposed an NAIC staff memorandum on possible approaches to address the following situations that need to be factored into the group capital calculation (comments due by 26 May ): 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 NAIC staff has recommended that the minimum capital requirement per state law should be used as the basis for that insurer in the group capital calculation, unless there are different requirements between states, in which case, one basis should be chosen and applied for all insurers of that particular type. The treatment of US captive insurance companies in a holding company that also includes a traditional US insurance company The NAIC staff has recommended that US captives subject to the group capital calculation be required to complete an NAIC RBC calculation using their basis for accounting with limited adjustments such as those required by SSAP No. 97 (e.g., adjustments for non-admitted assets). An exception to this requirement would exist only when the US captive was being used exclusively for self-insurance or insurance provided exclusively to its own employees and/or its affiliates. In such situations, the US captive would be treated as a non-insurer similar to their treatment in the RBC formula (e.g., capital charge equal to 22.5% of book/adjusted carrying value). The treatment of prescribed and permitted practices The NAIC staff has recommended that all adjustments for prescribed and permitted practices be aggregated and their related effect on capital be addressed through an on-top adjustment. 10 NAIC Bulletin May

11 Group Solvency Issues (E) Working Group The Working Group continued discussing 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 received a report from the NAIC s legal staff on its review of the proposed requirements of the implementation guide and the scope of the Insurance Holding Company System Regulatory Act (#440) and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450). The legal review indicated that some of the language included in the implementation guide appears to expand the scope of Form F and may conflict with the definition of enterprise risk in Model #440 and Model #450. The Working Group will form an ad hoc drafting group to address the definition of enterprise risk in the implementation guide and improve the comparison chart of information required to be submitted in the ORSA summary report and Form F. The Working Group also adopted the report of the ORSA Implementation (E) Subgroup that included guideline recommendations for the review of ORSA summary reports beginning on 1 January The Working Group referred the recommendations to the Financial Regulation Standards and Accreditation (F) Committee for potential inclusion in Part B of the accreditation standards. The recommendations address the nature of the ORSA review to be performed, the obligation to share the results with other affected states and the incorporation of results into the financial analysis and examination process. Receivership and Insolvency (E) Task Force The Task Force adopted the report of the Receivership Model Law (E) Working Group, which summarized its discussion of assessment and coverage issues for LTC insurance identified in comments received on receivership practices and/or possible revisions to the Life and Health Insurance Guaranty Association Model Act (#520). Interim conference calls will be scheduled to continue these discussions. The Receivership Model Law (E) Working Group also exposed the following items (comments due by 10 May ): Proposed recommendations for states to review improvements in their receivership laws relating to receivership stays, injunctions and reciprocity provisions A referral to the Financial Analysis Handbook (E) Working Group and the Financial Examiners Handbook (E) Technical Group requesting that the Financial Analysis Handbook and the Financial Condition Examiners Handbook include instructions for analysts and examiners to make sure that management, service and cost-sharing agreements under review include language in accordance with state law (similar to Section 19 of Model #450) addressing when an insurer is placed into receivership Reinsurance (E) Task Force The Task Force discussed the referral from the Reinsurance Financial Analysis (E) Working Group (ReFAWG) requesting guidance on the use of the group rating issued to a certified reinsurer when assigning a reinsurance collateral rating for purposes of passporting. The Task Force exposed revisions to the Uniform Application Checklist for Certified Reinsurers that would allow the lead state to consider the group rating with peer review by ReFAWG. Comments are due by 8 May. The Task Force also discussed the proposed accreditation standard for the Term and Universal Life Insurance Reserve Financing Model Regulation (#787) that was adopted by the Executive Committee and Plenary during the 2016 Fall National Meeting. The Task Force will form an ad hoc drafting group to identify the significant elements (i.e., minimum standards) in Model #787 that must be met for accreditation purposes for consideration by the Financial Regulation Standards and Accreditation (F) Committee. The Task Force received a status report on the covered agreement between the European Union (EU) and the US on prudential measures related to insurance and reinsurance. If accepted in its current form, the covered agreement would eliminate reinsurance collateral requirements for EU-domiciled reinsurers that maintain a minimum capital and solvency ratio and 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 of EU member state implementation of Solvency II and the potential effect on the qualified jurisdiction status of certain EU jurisdictions (i.e., France, Germany, Ireland and the UK), with a recommendation that no action be taken at this time given the uncertainty in the covered agreement process. 11 NAIC Bulletin May

12 Risk-Focused Surveillance (E) Working Group The Working Group continued discussing the proposed revisions to the Financial Analysis Handbook intended to promote greater uniformity and consistency in the prioritization framework for solvency monitoring used by state insurance regulators. The Working Group updated its proposal to clarify the intent of the prioritization guidance and indicated that states will have flexibility in determining their internal system for prioritization but would be required to convert their rating to the prioritization framework in the Financial Analysis Handbook for use in communicating across states. The Working Group also reduced the number of priority ratings from five to four to align the ratings with the accreditation requirements. The proposed guidance was referred to the Financial Analysis Handbook (E) Working Group. If adopted, the new guidance would be effective for analysis performed on year-end information. Valuation of Securities (E) Task Force VOSTF discussed the proposed amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) that would delete outdated instructions, modify administrative procedures for the filing exemption process, add a verification procedure for private letter-rated securities and add a data quality assessment procedure to the SVO compilation function. Various concerns were raised during the comment process about the resulting significant policy changes, including changes affecting the use of private letter ratings and the ability of the SVO to modify ratings provided by Nationally Recognized Statistical Rating Organizations (NRSROs) on the NAIC list of credit rating providers. VOSTF will work with the SVO staff to create a list of identified issues that will be addressed at future meetings. The earliest date for adoption of these amendments would be 1 January VOSTF adopted the following amendments to the P&P Manual: Deleted the valuation instructions for investments in subsidiary, controlled and affiliated (SCA) entities as a result of the incorporation of SVO filing guidance into an appendix to SSAP No. 97 by SAPWG (Ref # ) Identified the current status of NRSROs on the NAIC list of credit rating providers Replaced information about the Integrated Securities Information System platform with information on the new VISION platform VOSTF also considered the following in connection with the P&P Manual: It exposed an amendment that would delete two references to the use of the 5* certification process in the special reporting instructions. Comments are due by 8 June. Additional references to the use of the 5* certification procedure will continue to be reviewed with additional recommendations made as necessary. It exposed editorial changes to the instructions for the List of Qualified US Financial Institutions adopted in June Comments are due by 9 May. It exposed a memorandum received from the Investment Analysis Office on the referral from the Investment RBC (E) Working Group regarding increased granularity in the Life RBC formula. Comments are due by 9 May. It discussed an SVO report indicating that the SVO lacked a methodology to address the special risks identified in SSAP No. 25, Affiliates and Other Related Parties, as part of its credit quality assessment for debt and preferred stock transactions between related parties. VOSTF directed the SVO to continue assigning NAIC designations to such transactions consistent with its historical practices until further guidance is developed. VOSTF exposed the SVO report for a comment period ending 9 May and asked SAPWG to assist in identifying the regulatory criteria to be used in the SVO methodology. It exposed a report from the Structured Securities Group on the application of through-the-cycle orientation to the financial modeling of RMBS. Comments are due by 8 June. The proposed approach is intended to eliminate the inherent procyclicality (i.e., base prediction is negative in good markets and positive in bad markets) that currently exists in the macroeconomic scenarios developed for use in the year-end modeling process for these securities. 12 NAIC Bulletin May

13 Financial Regulation Standards and Accreditation (F) Committee The F Committee discussed the proposed addition of the Corporate Governance Annual Disclosure Model Act (#305), the Corporate Governance Annual Disclosure Model Regulation (#306) and the 2014 revisions to the Annual Financial Reporting Model Regulation (#205) to Part A of the accreditation standards. The F Committee will consider whether these requirements should apply to risk retention groups. It also discussed the proposed addition of the 2014 revisions to the Insurance Holding Company System Regulatory Act (#440) to Part A of the accreditation standards and will determine whether NAIC jurisdictions that do not act as a group-wide supervisor for internationally active insurance groups (IAIGs) must comply with these requirements. The F Committee plans to vote on these items at the Summer National Meeting. In addition, the F Committee exposed the Reinsurance (E) Task Force s recommendation to incorporate the requirements of the 2016 revisions to the Credit for Reinsurance Model Law (#785) and Model #787 in the accreditation standards, effective 1 January Model #787 is intended to establish a uniform national standard for regulating XXX/AXXX reserve financing transactions and the ability of an insurer to obtain reserve credit for reinsurance ceded to captive insurers, special purpose vehicles, reinsurers that are not eligible to become certified reinsurers or reinsurers that materially deviate from statutory accounting and/or RBC requirements. 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 (AG 48) will be superseded in those NAIC jurisdictions that adopt Model #787. Comments are due by 11 May. International Insurance Relations (G) Committee The G Committee reported that the International Association of Insurance Supervisors (IAIS) application paper on group corporate governance was circulated for public comment. The paper seeks to provide good supervisory practices and examples to address challenges related to the governance of insurance groups, as well as to create a common understanding among supervisors on how to assess or evaluate the governance framework of insurance groups. The NAIC s comments will be approved by the G Committee for submission to the IAIS before the comment period deadline of 1 May. The G Committee continued discussing the work of the IAIS and its potential effect on the US system of state-based insurance regulation. Specific updates were provided in the following areas: Standard-setting activities The IAIS released a number of revised insurance core principles (ICPs) and draft material for the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). Comments are due by 1 June. The NAIC has started reviewing and drafting comments on how to integrate the content of the ICPs into the ComFrame standards and guidelines so they are consistently applied to IAIGs. Financial stability The IAIS began performing its assessment of global systemically important insurers (G-SIIs) for There are 16 US-domiciled insurance groups that met either the size or activity threshold to require data submission to the IAIS by the first week of May. The IAIS also formed the Systemic Risk Assessment Task Force to improve the current methodology for G-SIIs by developing a holistic framework for systemic risk assessment and measurement. The Task Force will consider an activities-based approach to systemic risk measurement. Implementation of standards The IAIS continued its work to review its coordinated implementation framework and enhance its implementation assessment program. The IAIS intends to increase the relevance of its program and address participation in the Financial Sector Assessment Program (FSAP) performed by the International Monetary Fund (IMF). Proposals have been developed that consider the intent of the IMF to move away from performing full FSAP assessments to focus on systemically important issues. One such proposal would require an FSAP assessment to be conducted every 10 years, with certain IAIS jurisdictions being subject to an Insurance Core Principle implementation assessment every five years. 13 NAIC Bulletin May