NAIC Bulletin Highlights of the National Association of Insurance Commissioners meeting

December 2017 NAIC Bulletin Highlights of the National Association of Insurance Commissioners meeting Fall 2017 update In this issue: Executive Committee and Plenary... 2 Financial Stability (EX) Task Force... 2 Big Data (EX) Working Group... 2 Principle-based reserving... 3 Valuation Manual amendments... 3 Variable Annuity framework... 4 Quantitative impact study... 4 Long-term care insurance regulation... 4 Statutory Accounting Principles (E) Working Group... 5 Blanks (E) Working Group... 6 Life Insurance and Annuities (A) Committee... 7 Health Insurance and Managed Care (B) Committee... 8 Property and Casualty Insurance (C) Committee... 8 Financial Condition (E) Committee... 9 Financial Regulation Standards and Accreditation (F) Committee... 12 International Insurance Relations (G) Committee... 12 Appendix A Statutory Accounting Principles Working Group... 14 Appendix B Blanks Working Group... 18 Appendix C Capital Adequacy Task Force... 19 The National Association of Insurance Commissioners (NAIC) recently held its Fall National Meeting in Honolulu. This publication highlights issues that various NAIC groups have addressed since the 2017 Summer 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 Annuity Suitability (A) Working Group exposed revisions to the Suitability in Annuity Transactions Model Regulation (#275) that would incorporate a best interest standard of conduct for insurance producers. The Financial Condition (E) Committee adopted revisions to the Life and Health Insurance Guaranty Association Model Act (#520) to include HMOs as members of the guaranty association and spread future assessments for long-term care insurer insolvencies equally between the life and health insurance industries. The Variable Annuities Issues (E) Working Group exposed a report containing 28 recommendations for revisions to the statutory reserving and regulatory capital requirements for variable annuities. The Reinsurance (E) Task Force will hold a public hearing to discuss how to incorporate the reinsurance collateral requirements in the covered agreement between the US and EU in state insurance regulations. The NAIC elected its 2018 executive officers: Julie Mix-McPeak (Tennessee) as president, Eric A. Cioppa (Maine) as president-elect, Ray Farmer (South Carolina) as vice president and Gordon Ito (Hawaii) as secretary-treasurer.

Executive Committee and Plenary During the Fall National Meeting, the Executive Committee and Plenary adopted the following: The 2018 Generally Recognized Expense Table (GRET) for use in policy illustrations in the sale of individual life insurance business The consumer alert Be Skeptical About Free Meal Seminars: Question Credentials of Insurance and Financial Services Experts that was adopted by the Life Insurance and Annuities (A) Committee The Catastrophic Event/Emergency Measures Regulatory Guidelines adopted by the Property and Casualty Insurance (C) Committee The 2014 revisions to the Annual Financial Reporting Model Regulation (#205) as an addition to Part A of the accreditation standards, effective 1 January 2020 The Executive Committee and Plenary adopted on 24 October 2017 the Insurance Data Security Model Law, which establishes the requirements for data security, investigating a cybersecurity event and notifying state insurance commissioners of a cybersecurity event (e.g., data breach). Financial Stability (EX) Task Force The Task Force exposed two blanks proposals drafted by the Liquidity Assessment (EX) Subgroup on the collection of additional data used by state insurance regulators in their assessment of liquidity risk for life insurance companies. One proposal would expand the breakout of product category information in the analysis of operations by line of business schedule and the analysis of increase in reserves schedule. The other proposal addresses disclosures to identify reserves for life insurance and annuity products by withdrawal characteristics. The Blanks (E) Working Group (BWG) will be notified of the Task Force s exposure of the proposals. Comments are due by 16 January 2018. The Task Force also adopted a referral letter to be sent to the Receivership and Insolvency (E) Task Force requesting its consideration of the following aspects of the recovery and resolution process: An evaluation of current recovery and resolution laws, guidance and regulatory tools to determine whether they incorporate best practices for the areas identified as important to financial stability A review of the information and/or processes used in recovery and resolution planning by other jurisdictions that could be considered by state insurance regulators as potential requirements for large cross-border (including state borders) US insurance groups An identification and evaluation of any current misalignments between federal and state laws that could be an obstacle to achieving an effective and orderly recovery and resolution for US insurance groups Innovation and Technology (EX) Task Force The Task Force voted to disband the Cybersecurity (EX) Working Group following the adoption of the Insurance Data Security Model Law. The Task Force will handle topics or issues related to cybersecurity in the future. Big Data (EX) Working Group The Working Group finalized its work plan and advanced its initiatives in the following areas: Current regulatory frameworks for oversight of insurers use of consumer data The Working Group previously exposed a memorandum that summarizes the regulatory framework (e.g., NAIC models, state laws) addressing the use of data for ratings and claims in property and casualty (P&C) personal lines of business, as well as considering unfair trade practices. Comments are due by 12 January 2018. The Working Group discussed issues identified in the regulatory framework and plans to survey individual states to identify prohibited data variables. Data needs and tools for regulators to monitor the marketplace The Working Group continued identifying and assessing the use of financial data to determine whether the type of information gathered for analysis is sufficient and relevant for its intended purpose. The Working Group previously exposed a memorandum that identifies various data sources and regulator uses for that data. Comments are due by 12 January 2018. 2 NAIC Bulletin December 2017

Proposed structure for the review of complex models The Working Group continued developing a mechanism for the review of models used in rate filings for personal auto and homeowners insurance, with the objective of developing best practices and achieving greater consistency across states. The Working Group discussed a referral letter to be sent to the Casualty Actuarial and Statistical Task Force (CASTF) requesting that it consider forming a Predictive Analytics Working Group consisting of regulatory actuaries that would identify best practices for the review of predictive analytics and models used by insurers to justify rates. Separately, the Antifraud (D) Task Force discussed the potential to coordinate with the Working Group on a project to review algorithms that are used by insurers to evaluate the likelihood of a claim being fraudulent and guide their claim settlement and anti-fraud investigations for potential bias against a particular group of consumers. Principle-based reserving The principle-based reserving (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 2017. The NAIC adopted the approach in the revised Standard Valuation Law (#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. Following the adoption of revisions to the Financial Condition Examiners Handbook and contributions to the development of an experience reporting framework, regulators determined that the objectives of the PBR Implementation (EX) Task Force and the NAIC groups that report to it had been met. The Task Force voted to disband. The Life Actuarial (A) Task Force (LATF) will perform any future work to update the Valuation Manual and address issues related to PBR implementation. LATF continued its review of a previously exposed amendment to VM-20: Requirements for Principle- Based Reserves for Life Products that would incorporate guaranteed issue (GI) mortality tables developed by a joint committee of the American Academy of Actuaries (AAA) and the Society of Actuaries (SOA) in appendices VM-A and VM-C of the Valuation Manual. The amendment would also include GI policies in the PBR framework similar to whole life policies. However, additional work is needed to provide for PBR credibility and margins. LATF expects that GI policies would generally meet the exceptions within the PBR framework, but it will consider explicitly exempting GI policies from the PBR framework. Separately, LATF continued its work on developing a clarified definition for simplified issue and simplified underwriting policies. LATF continued its review of the AAA and SOA recommendation for the collection of accelerated underwriting data in VM-51: Experience Reporting Formats. LATF is conducting a study to identify methods that insurance companies are using and develop a baseline mortality for this data. LATF heard an update from the AAA on the aggregation of mortality experience. VM-20 requires separate mortality segments for groups of policies that are expected to have different experiences. The question to be addressed is whether insurance companies should be able to aggregate the experiences of multiple mortality segments for the purposes of determining credibility. LATF expects to draft a proposed amendment to VM-20 or a guidance note to address this topic. Valuation Manual amendments LATF adopted various amendments to the 2018 edition of the Valuation Manual for implementation in 2019 that, among other things, revise several term definitions and move them to VM-01: Definitions for Terms and Requirements, remove VM-05: NAIC Model Standard Valuation Law and make editorial changes. LATF also continued its work on clarifying how the requirements of the PBR framework are applied. LATF s Valuation Manual Maintenance Agenda contains the list of submitted proposals for amendments to the Valuation Manual that are currently under consideration. LATF exposed revisions to VM-50: Experience Reporting Requirements to reference that the NAIC has been approved to serve as the experience data collection agent on behalf of the states when adoption of PBR becomes mandatory on 1 January 2020. Comments are due by 12 January 2018. 3 NAIC Bulletin December 2017

LATF re-exposed an amendment that would clarify the treatment of riders in the calculation of the model reserve and the treatment of term riders when valued separately from the base insurance policy. Comments are due by 15 January 2018. LATF exposed a number of other amendments with comments due by 15 January 2018, including amendments that would: Improve the VM-20 language defining the permitted values of starting assets Clarify the definitions of deterministic reserve and stochastic reserve Clarify a requirement for the grouping of assets Clarify various references in VM-51 Adds a guidance note to VM-31: PBR Actuarial Report Requirements for Business Subject to a Principle-Based Reserve Valuation to clarify the appropriate use of implicit mortality margin LATF also exposed an amendment to VM-20 that would smooth the grading for the use of credible data based on company experience to an industry table in setting the mortality assumption. Comments are due by 30 January 2018. Variable Annuity framework The Variable Annuities Issues (E) Working Group (VAIWG) continued its work on a project to identify and address the regulatory issues that exist in the NAIC statutory framework (i.e., statutory accounting, reserving and regulatory capital requirements) for variable annuities. Quantitative impact study VAIWG received a report from consulting firm Oliver Wyman that provided recommendations to reform the reserve and risk-based capital (RBC) requirements for variable annuities. The firm made 28 recommendations for potential revisions to various areas of the variable annuity framework, including the calculation of the conditional tail exception amount, the standard scenario amount and the C3 component of the RBC charge, additional disclosure requirements, an increase in the admissibility limits for designated variable annuity hedges and deferred tax assets related to variable annuities. These revisions would be implemented over a three-year period with no grandfathering of in-force business from the revised framework. Oliver Wyman indicated that the effect of reinsurance and the potential effect of US tax reform legislation was not considered in the 2017 quantitative impact study. VAIWG exposed the recommendations in the Oliver Wyman report, along with a redline version of the proposed revisions to AG 43, CARVM for Variable Annuities, and the C3 Phase II component of the Life RBC formula. Comments are due by 2 March 2018 and should suggest an alternative to the recommendation that would equally or better address the rationale provided by Oliver Wyman. VAIWG intends to discuss the comments received at the 2018 Spring National Meeting. However, a list of priority items related to conceptual changes to the variable annuity framework will be compiled, distributed and discussed on periodic interim calls to be scheduled by the VAIWG before the 2018 Spring National Meeting. Modifications to the requirements in AG 43 and the calculation of the C3 Phase II component of the Life RBC formula are expected to occur after the conceptual changes are finalized. Long-term care insurance regulation The Receivership Model Law (E) Working Group completed its work to develop revisions to the Life and Health Insurance Guaranty Association Model Act (#520). The effect of these revisions will include health maintenance organizations (HMOs) as members of the guaranty association subject to a separate account. Future assessments for long-term care (LTC) policies issued by an insolvent member insurer will be split evenly between the life and health insurance industries to provide a broader and more predictable base on a nationwide basis, with specific amounts apportioned among the three accounts (i.e., life/annuity, health and HMOs) in accordance with the methodology provided by state legislation. In addition, the guaranty association will have the authority to file for actuarially justified rate or premium increases for any policy or contract for which it provides coverage. The revisions to Model #520 were adopted by the Financial Condition (E) Committee and will be forwarded to the Executive Committee and Plenary for final adoption by the NAIC. 4 NAIC Bulletin December 2017

Other NAIC groups have been working on initiatives addressing issues in LTC insurance regulation. Developments from these groups include: The Long-Term Care Actuarial (B) Working Group adopted a recommendation on actuarial issues that should be considered when determining whether or not to include a non-duplication provision in an LTC insurance policy and the effect that such a provision may have on pricing. The adopted recommendation will be forwarded to the Senior Issues (B) Task Force for further consideration. The Long-Term Care Valuation (B) Subgroup continued to discuss whether the data submitted on the LTC supplement to the annual statement could be improved. The Subgroup reviewed the survey results from state insurance regulators regarding the LTC experience reporting forms used. The Subgroup is soliciting comments on how to improve these forms. Comments are due by 9 January 2018. The Long-Term Care Pricing (B) Subgroup continued its work to develop a resource document that state insurance regulators can use when evaluating requests for rate increases on LTC insurance policies. The Subgroup has analyzed a number of approaches to computing allowable rate increases, with consideration of the recoupment of past losses as a component of the rate calculation. In response to a request from the Long-Term Care Insurance (B/E) Task Force, the Subgroup held an interim call on 7 December 2017 to discuss and expose a draft rate increase review checklist that would address significant aspects of LTC rate increase review inquiries from all of the states. Comments are due by 5 February 2018. Statutory Accounting Principles (E) Working Group Appendix A in this publication summarizes the actions taken by the Statutory Accounting Principles (E) Working Group (SAPWG) to revise statutory accounting and reporting guidance since the 2017 Summer National Meeting. SAPWG adopted revisions to Statement of Statutory Accounting Principle (SSAP) No. 100, Fair Value, to allow the use of net asset value (NAV) per share as a practical expedient for the measurement of fair value either when specifically named in statutory accounting guidance or when specific conditions exist (Ref #2017-24). The revisions allow for the use of NAV in a manner that is consistent with US GAAP. Various revisions to SSAP No. 86, Derivatives, were adopted. Under the revised guidance, insurers are required to present information on financing premiums in derivative contracts in aggregate for 2017, which will be data captured in Schedule DB for 2018 (Ref #2016-48). The revised guidance also requires the recognition of changes in variation margin as unrealized gains/losses until the derivative contract has matured, terminated and/or expired (Ref #2017-04). The revised guidance applies to both over-thecounter derivatives and exchange-traded futures, regardless of whether the counterparty or exchange considers the variation margin payment to be collateral or a legal settlement. Reporting entities that previously recognized changes in variation margin as a component of realized gains/losses can apply the revised guidance prospectively. Separately, SAPWG directed the NAIC staff to perform an overall review of the statutory accounting guidance for derivatives and develop potential revisions in accordance with US GAAP requirements, including the concepts in ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (Ref #2017-33). The following statutory accounting guidance has been revised to incorporate (in whole or in part) relevant aspects of US GAAP requirements: SSAP No. 104R, Share-Based Payments, to incorporate ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Ref #2017-05) and ASU 2017-09, Stock Compensation Scope of Modification Accounting (Ref #2017-16) SSAP No. 22, Leases, to incorporate ASU 2017-10, Determining the Customer of the Operation Services (Ref #2017-17) SAPWG incorporated the statutory accounting guidance for triggering events from SSAP No. 90, Impairment or Disposal of Real Estate Investments, into SSAP No. 68, Business Combinations and Goodwill, to address the impairment process in its entirety (Ref #2017-19). 5 NAIC Bulletin December 2017

SAPWG also adopted multiple revisions to SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities. The deadlines for submitting SUB-1 and SUB-2 filings were revised. The revisions provide a 90-day time frame for an insurer to submit a SUB-1 after the acquisition/formation of a subsidiary, controlled or affiliated (SCA) entity, and a deadline of 31 August or one month after the audit date for an SCA entity that regularly receives its audit report after 31 August for the annual SUB-2 filing (Ref #2017-08). Additionally, the revisions clarify that the limited statutory adjustments will apply to all foreign insurance SCAs (i.e., 8.b.iv entities) regardless of whether the SCA entity has audited US GAAP or audited foreign GAAP financial statements (Ref #2017-20). SAPWG adopted revisions to SSAP No. 2R, Cash, Cash Equivalents, Drafts, and Short-Term Investments, and SSAP No. 103R, Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to clarify that acquisitions and disposals of shares in money market mutual funds are not subject to the wash sale disclosure requirements (Ref #2017-23). SAPWG also exposed revisions to SSAP No. 103R that would exclude cash equivalents, derivative instruments and short-term investments with credit assessments equivalent to an NAIC 1 or NAIC 2 designation from the wash sale disclosure requirements (Ref #2017-31). The US Department of Health and Human Services in December 2016 adopted a new regulation that changed how the risk adjustment program of the Affordable Care Act (ACA) would function. Specifically, the ACA risk adjustment program will include a reinsurance-like element to address the pooling of highcost claims in the individual and small group markets beginning in 2018. SAPWG adopted revisions to SSAP No. 107, Risk-Sharing Provisions of the Affordable Care Act, to clarify the statutory reporting of amounts related to the high-cost risk pooling element as adjustments to premiums. The revisions to SSAP No. 107 also incorporate new disclosures and the removal of existing disclosures pertaining to the transitional ACA reinsurance program, which has ended (Ref #2017-26). In response to this year s devastating hurricanes, SAPWG adopted Interpretation 17-01 Extension of Ninety-Day Rule for the Impact of Hurricane Harvey, Hurricane Irma and Hurricane Maria (Ref #2017-29). The interpretation allows for an optional temporary 60-day extension of the 90-day admissibility rule in paragraph 9 of SSAP No. 6, Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers, for policies affected by the identified catastrophes or the related flooding. If an insurer elects the extension, it would have a total of 150 days to admit premium receivables from directly affected policies or agents. This relief provided by INT 17-01 will sunset on 15 February 2018. In accordance with the initiatives of the NAIC s Investment Classification Review Project, SAPWG updated the definition of a bank loan in SSAP No. 26R, Bonds, to include bank loans issued directly by a reporting entity (Ref #2017-10). In addition, SAPWG exposed a request for comment on proposed concepts to update SSAP No. 30, Unaffiliated Common Stock (Ref #2017-32). These concepts include the consistency of the statutory definition of common stock with market and Securities and Exchange Commission (SEC) terms, the inclusion of closed-end funds and unit investment trusts within the scope of SSAP No. 30 and the consideration of reporting and RBC enhancements to allow the reporting of NAIC designations for certain investments. SAPWG also directed the NAIC staff to draft an issue paper addressing the effect of the adoption of the Financial Accounting Standards Board s ASU 2016-13, Financial Instruments Credit Losses: Measurement of Credit Losses on Financial Instruments, on statutory accounting (Ref #2016-20). SAPWG indicated that the US GAAP requirements would ultimately result in a more conservative approach than the current statutory accounting guidance for investments recorded at amortized cost or fair value if the ASU s requirements are not incorporated into the statutory framework. The potential adoption of the US GAAP requirements will have RBC implications since an expected credit loss methodology is already considered in the established risk factors. Comments are due on exposed revisions to statutory accounting guidance as indicated in Appendix A. Blanks (E) Working Group Appendix B in this publication summarizes the actions taken by the BWG since the 2017 Summer National Meeting. 6 NAIC Bulletin December 2017

Life Insurance and Annuities (A) Committee The A Committee adopted the 2018 GRET developed by the SOA. The A Committee discussed an identified issue in interpreting the Life Insurance and Annuities Replacement Model Regulation (#613) related to whether the use of proceeds from the sale of a deferred annuity to purchase an immediate annuity would be considered a replacement transaction subject to the requirements of Model #613. The A Committee requested that NAIC legal staff perform a review and provide potential options for addressing this issue in Model #613. Life Actuarial (A) Task Force LATF discussed the proposed revisions to AG 42, The Application of the Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities, that would provide guidance on the proper set of mortality rates to be used by the valuation actuary in the application of the 2017 Commissioners Standard Ordinary (CSO) Preferred Class Structure Mortality Table. AG 42 currently provides guidance on the selection and documentation of mortality rates when the 2001 CSO Preferred Class Structure Mortality Table has been elected. LATF will consider adoption of the proposed revisions on an interim call. Annuity Suitability (A) Working Group The Working Group exposed an initial draft of proposed revisions to 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. The revisions would incorporate a best interest standard of conduct into the requirements of Model #275. The Working Group indicated that best interest and suitability are intended to be separate standards that together would address the fiduciary responsibility that an insurance producer (or insurance firm) has to the consumer. The revisions also include a definition for what would constitute a material conflict of interest and reasonable cash compensation for the insurance producer (or insurance firm if annuities are sold directly to the consumer). Comments on the initial draft are due by 22 January 2018, with the goal to present a final draft of proposed revisions to the A Committee for consideration at the 2018 Spring National Meeting. Annuity Disclosure (A) Working Group The Working Group continued its work to assess the adequacy of required disclosures in the Annuity Disclosure Model Regulation (#245) in light of product innovations. The Working Group will consider on an interim call separate proposals for amendments to Model #245 addressing (1) the use of a formulabased approach to the illustration of participating income annuities and (2) illustrating indexed returns for an index that has not been in existence for 10 calendar years. VM-22 (A) Subgroup The Subgroup continued its work to develop principle-based valuation requirements for annuity products not covered by VM-21: Requirements for Principle-Based Reserves for Variable Annuities and an exclusion test that will determine the set of calculations to follow in VM-22: Requirements for Principle-based Reserves for Non-Variable Annuities. Several questions have been raised regarding the applicability of VM-22 in specific situations, including the effective date and whether the VM-22 methodology will apply to annuities in various stages of accumulation and payout. In response, the Subgroup exposed a document compiling a list of common questions and proposed answers. Longevity Risk (A/E) Subgroup The Subgroup continued its work on a project to address the recognition of longevity risk in statutory reserves and/or the RBC calculation, as appropriate. The scope of this project has focused on the assessment of longevity risk related to payout annuities for individual and group business. The Subgroup previously determined that an RBC charge for longevity risk should be developed to address the difference between recorded reserves (i.e., the formulaic amount plus any additional reserves from asset adequacy testing) and the amount of statutory reserves calculated using stressed mortality assumptions. The AAA provided the Subgroup with a proposed methodology to calculate the RBC charge based on the following components of longevity risk: Basis risk, which is intended to address the difference between the prescribed statutory mortality assumptions in the reserve valuation tables and actual company experience 7 NAIC Bulletin December 2017

Trend risk, which is intended to address a stress event for mortality improvement (i.e., represents a pad for potential issues that arise from tail stress events) The quantification of these risks would be converted to a factor and applied to the recorded reserves to determine the required level of regulatory capital for payout annuities. The Subgroup will discuss on an interim call whether the AAA or the NAIC staff will perform the field testing of the proposed methodology using actual company data. The results of the field testing are expected to validate whether the formulaic reserves for payout annuities are set at a sufficient confidence level or if adjustments to the reserve valuation table are necessary. Health Insurance and Managed Care (B) Committee The B Committee adopted revisions to the Health Carrier Prescription Drug Benefit Management Model Act (#22) that address issues related to disclosure, transparency and accessibility of prescription drug benefits. The B Committee also approved a request from the Long-Term Care Actuarial (B) Working Group for an extension of model law development to address the appropriate standards to be used in the valuation of LTC insurance liabilities in the Health Insurance Reserves Model Regulation (#10). Health Actuarial (B) Task Force The Health Actuarial (B) Task Force adopted revisions to Model #10 to clarify that the mortality table requirements for calculating health insurance reserves should not incorporate selection or underwriting factors. Regulatory Framework (B) Task Force The Task Force discussed the status of revisions to the Accident and Sickness Insurance Minimum Standards Model Act (#170) and the Model Regulation to Implement the Accident and Sickness Insurance Minimum Standards Model Act (#171). The work on these models was suspended in 2016 due to the ACA repeal and replacement activities occurring at the federal level. The Task Force anticipates that the work will resume in 2018, with additional revisions required to address short-term health contracts in response to recent ACA developments. Health Reserves (B) Subgroup The Subgroup continued its work to develop a proposal that would amend VM-25: Health Insurance Reserves Minimum Reserve Requirements to include a reference to AG 51, The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves, since AG 51 requires the establishment of premium deficiency reserves in specific situations. The Subgroup will also investigate whether any content in the Valuation Manual specifies that the claim incurral date should be the same as the contract issue date for a health insurance contract and, if necessary, develop an amendment to clarify that the incurral date used in calculating a claim reserve for a health insurance contract differs from the issue date of the underlying contract. Property and Casualty Insurance (C) Committee The C Committee heard an update from the Terrorism Insurance Implementation (C) Working Group on the potential for a joint data call to be conducted by the Federal Insurance Office (FIO) and state insurance regulators to collect terrorism risk insurance data from commercial line insurers in 2018. The FIO has collected data at a higher level of granularity than the states did in the last two years. Casualty Actuarial Statistical (C) Task Force CASTF said it will pursue the development of an actuarial attestation form that would be completed and signed annually to verify that the actuary is qualified to sign a statutory P&C statement of actuarial opinion. The requirements of the attestation form currently used by the AAA will be considered as a starting point for the development of the NAIC form. CASTF adopted the Regulatory Guidance on Property and Casualty Statutory Statements of Actuarial Opinion, Actuarial Opinion Summaries, and Actuarial Reports for the Year 2017 that was developed by the Actuarial Opinion (C) Working Group. This document supplements the P&C annual statement instructions to provide clarity and timely guidance to insurance companies and appointed actuaries regarding regulatory expectations for the content to be submitted. 8 NAIC Bulletin December 2017

The Actuarial Opinion (C) Working Group acknowledged that AG 51 implicitly applies to P&C insurance companies but elected not to update the annual statement instructions to include a requirement to perform a standalone asset adequacy analysis on material blocks of LTC insurance business for year-end 2017. However, language has been included in the regulatory guidance document with the intent to encourage P&C insurance companies to follow the guidance in AG 51 due to the well-recognized uncertainties associated with the adequacy of LTC insurance reserves. The Working Group will discuss the application of AG 51 requirements to P&C insurance companies on interim calls and develop appropriate guidance to include in the annual statement instructions in future years. Financial Condition (E) Committee The E Committee adopted revisions to Model #520 that are intended to address the guaranty fund assessment and coverage issues that currently exist for LTC insurer insolvencies. The E Committee also approved the regulatory objective of three policy initiatives adopted by the Valuation of Securities (E) Task Force (VOSTF) that will require changes to NAIC technology systems to generate NAIC designations for certain types of securities (e.g., filing exempt securities, securities subject to private letter ratings and securities whose reporting status is in transition). 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 Summer National Meeting. Operational Risk (E) Subgroup The Subgroup continued to discuss methods that would address the potential for double-counting the basic operational risk charge in the RBC calculation of a parent with subsidiaries that are also insurance companies subject to RBC requirements. The Subgroup exposed structural changes to each of the RBC formulas that would bring forward the C-4a component of the RBC charge calculated by a life insurance subsidiary to offset the basic operational risk charge in the RBC calculation of the parent insurer. Feedback was also requested on the following questions: Should the C-4a component of a life insurance subsidiary that is used to offset the basic operational risk charge of the parent insurer be capped at the amount of the offset used by that subsidiary in its own RBC calculation? Should the amount of operational risk calculated by an insurer subject to RBC requirements be the same regardless of whether it operates in combination with insurance subsidiaries that are also subject to RBC requirements or not (e.g., all write direct business, parent insurer cedes to subsidiary insurer, parent is a reinsurer and subsidiary writes direct business)? Investment RBC (E) Working Group The Investment RBC (E) Working Group (IRBC) announced that the target implementation date for the revised structure and factors for investment risk will be delayed by one year until year-end 2019. This delay will allow sufficient time to analyze the potential effect of the revised bond factors on each of the RBC formulas. Once the factors are finalized, the NAIC Investment Analysis Office (IAO) will update its systems to map the new designations and corresponding factors to ratings received from nationally recognized statistical rating organizations (NRSROs). IRBC exposed a report from the AAA with an updated set of base factors and portfolio adjustment factors for bonds to be used in the Life RBC formula. The AAA developed these factors from a representative portfolio of investments held by a life insurer over a 10-year period. The updated analysis increases the confidence level provided by the base factors and modifies the portfolio adjustment factor to address diversification in an individual insurer s portfolio. Overall, these updates do not increase the proposed regulatory capital requirements for bonds, since any change in the base factors will be offset by the change in the portfolio adjustment factor. Comments are due by 22 January 2018. 9 NAIC Bulletin December 2017

Group Capital Calculation (E) Working Group The Group Capital Calculation (E) Working Group continued its work to develop the requirements for 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 first round of the baseline exercise has been completed, and the second round will include field testing and data collection activities that will address the following topics: The appropriate approach to use in developing the scalar (i.e., factor) to convert the local capital requirements for non-us insurers into a comparable US standard (i.e., RBC requirements). Two approaches will be field tested: the excess relative ratio approach and the pure relative ratio approach. The extent to which prescribed and permitted practices are used and their estimated effect on the statutory-basis financial statements. An initial analysis of the data indicates that the aggregate effect would be immaterial to the industry as a whole, but further analysis is needed to identify the relative materiality of these practices on individual insurers or insurance groups. The Working Group previously solicited feedback on five decision points regarding the treatment of captives that assume XXX/AXXX business in the group capital calculation, including consideration of the potential use of PBR to calculate reserves for both new and in-force business and the treatment of grandfathered policies under the AG 48 framework. The feedback received demonstrated that there is a wide range of opinions on the topic. The Working Group subsequently exposed an NAIC staff memorandum that documents the conceptual approach of looking through the captive (i.e., unwind the captive transaction) by taking the allowable statutory assets and the required statutory reserves with on-top adjustments to mimic the results that should be reported for the insurance group. Comments are due by 29 December 2017. The Working Group previously reached a tentative decision to apply a flat charge of 22.5% to the book/adjusted carrying value for non-regulated entities, which is consistent with how these types of entities are treated in the RBC formulas. This decision was criticized as not being risk sensitive. The Working Group subsequently exposed an NAIC staff memorandum detailing an alternative approach that would require separate identification of financially regulated entities and entities that pose material risks to the group, with criteria yet to be developed that would allow certain non-regulated entities to be grouped together. Comments are due by 15 January 2018. The Working Group also exposed an NAIC staff memorandum with recommendations for how to treat senior debt and surplus notes in the group capital calculation. Comments are due by 15 January 2018. Group Solvency Issues (E) Working Group The Working Group exposed revisions to the comparison chart of information required to be submitted in the enterprise risk report (i.e., Form F) and in the Own Risk and Solvency Assessment (ORSA) summary report. The revisions are intended to improve the identification of similarities and differences in the basic reporting requirements applicable to insurers and insurance groups for the Form F and the ORSA summary report, as well as to provide regulator observations on the content to be submitted for each of the identified areas. The Working Group also exposed revisions to the Form F implementation guide intended to help insurers and state insurance regulators maximize the usefulness of information reported in the enterprise risk report to identify material risks within the insurance holding company system that could pose enterprise risk to the insurer. NAIC staff developed these revisions to address the following objectives: Clarify that the purpose of the Form F implementation guide is to outline best practice recommendations for reducing potential follow-up questions from regulators and the scope of additional analysis and regulatory exam activities, if followed Reduce redundancy in the reporting requirements for ORSA filers, particularly in relation to insurance risk exposures Provide more guidance regarding the regulator s interest in information on risk management practices for those insurance groups not subject to ORSA reporting requirements Comments on both items are due by 12 January 2018. 10 NAIC Bulletin December 2017

Reinsurance (E) Task Force The Task Force adopted the final memorandum from the Reinsurance Investment Security (E) Subgroup with its recommendations for evaluating new products in the investment market and determining whether they would qualify for use as either reinsurance collateral or primary security in a regulatory transaction. The Task Force adopted a recommendation for Kroll Bond Rating Agency to be considered as an NRSRO for certified reinsurer purposes. This adoption will result in corresponding revisions to the Uniform Application Checklist for Certified Reinsurers, with clarification that the NRSRO must be recognized by the SEC in order for it to provide financial strength ratings on insurance companies. Kroll Bond Rating Agency will also be included in the matrix of ratings and collateral levels. The Task Force heard an update on the NAIC s plans to address reinsurance collateral for qualifying entities domiciled in the European Union (EU) in response to the covered agreement between the US and EU signed on 22 September 2017. This covered agreement includes a provision for US states to eliminate collateral requirements for EU reinsurers that meet certain conditions for financial strength and market conduct within five years. Otherwise, the FIO can implement regulations that would preempt any state law that imposed collateral requirements within 42 months. The Task Force will discuss this topic at a public hearing on 20 February 2018. Before that meeting, the Task Force will seek feedback on how states should address the terms of the covered agreement in their regulations and viewpoints on the potential risks for US ceding insurers upon its implementation. Valuation of Securities (E) Task Force VOSTF continued to adopt amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to clarify instructions, modify various administrative procedures and improve the compilation function of the NAIC Securities Valuation Office (SVO). VOSTF continues to work with the NAIC SVO staff to create a list of identified issues that will be addressed at future meetings. The earliest effective date for these amendments would be 1 January 2018. VOSTF amended the P&P Manual to include securities subject to private letter ratings within the filing exempt (FE) process and to indicate that it is the responsibility of the NAIC SVO to assign NAIC designations to FE securities. The amendment also adds a new administrative symbol (PL) for securities subject to private letter ratings and establishes the procedure for assigning NAIC designations to those securities. The revised process is effective 1 July 2018 for securities issued on or after 1 January 2018. VOSTF also adopted amendments to the P&P Manual that: Clarify that fund investments are not filed with the NAIC SVO for an NAIC designation and are not eligible for a filing exemption, except for the three fund investments recognized in the P&P Manual and the Accounting Practices and Procedures Manual (AP&P Manual) Remove the ability of the NAIC IAO to have discretion to ignore credit ratings Remove the requirement for FE-rated securities to be filed with the NAIC IAO Remove the authority of the NAIC SVO to require an insurer to file a security rated by an NAIC credit rating provider for evaluation Retain and modernize the Z rule, which previously permitted an insurer to self-designate a security in the period before the security is filed with the NAIC SVO, to identify securities whose reporting status is in transition relative to both the annual update and initial filing of securities that have been properly filed with the NAIC SVO for evaluation Create an administrative procedure for the population of carryover securities, which are defined as securities filed with the NAIC SVO and not yet assigned an NAIC designation Separately, VOSTF exposed an amendment to the P&P Manual to include money market mutual funds added by the NAIC SVO on the US Direct Obligations/Full Faith and Credit Exempt List and rename it as the US Obligations/Exempt List. VOSTF also received a recommendation to add instructions to the P&P Manual for SCA transactions that resemble unaffiliated investments and passed a motion for insurers to continue to use prior-year designations until a final solution is determined. 11 NAIC Bulletin December 2017

VOSTF withdrew a previously submitted proposal to the BWG that would have incorporated YE, IF, RE and PL designations within the general interrogatories of the annual statement, with the intention to reintroduce a more comprehensive proposal in 2018. Financial Regulation Standards and Accreditation (F) Committee The F Committee adopted the proposal to include the corporate governance requirements in the Corporate Governance Annual Disclosure Model Act (#305) and the Corporate Governance Annual Disclosure Model Regulation (#306) in Part A of the accreditation standards, effective 1 January 2020. Upon the adoption of the proposal by individual states, an insurer (or group of insurers) will be required to provide a confidential annual disclosure regarding its corporate governance practices to the lead state and/or domiciliary state regulator. The F Committee also determined that these requirements will not apply to risk retention groups that are already required to comply with the corporate governance standards in the Model Risk Retention Act (#705) for accreditation purposes. The F Committee discussed the proposal to include the 2014 revisions to the Insurance Holding Company System Regulatory Act (#440) as an update to Part A of the accreditation standards. These revisions only apply to states that act as a group-wide supervisor of an internationally active insurance group (IAIG). Concerns were raised by regulators from states that are not group-wide supervisors about the implications of having to pass another law that was not relevant to them. The F Committee deferred action on this proposal and will further discuss it on an interim call. The F Committee also discussed the previously exposed referral from the Reinsurance (E) Task Force to consider adding the significant elements of the Term and Universal Life Insurance Reserve Financing Model Regulation (#787) to Part A of the accreditation standards. Further action on this referral was deferred until the 2018 Spring National Meeting to provide time to analyze the potential implications on reinsurance collateral requirements that will result from the required adoption of the covered agreement. International Insurance Relations (G) Committee The G Committee approved the comments submitted by the NAIC on the proposed revisions to the following Insurance Core Principles (ICPs) released by the International Association of Insurance Supervisors (IAIS): ICP 1, Objectives, Powers and Responsibilities of the Supervisor ICP 2, Supervisor ICP 18, Intermediaries ICP 19, Conduct of Business ICP 24, Macroprudential Surveillance and Insurance Supervision The G Committee will provide comments to the IAIS on proposed revisions to the following ICPs and related materials to integrate the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) into those ICPs that are currently out for public consultation: ICP 8, Risk Management and Internal Controls ICP 15, Investments ICP 16, Enterprise Risk Management for Solvency Purposes The G Committee also heard an update on recent IAIS activities related to the development of its riskbased global insurance capital standard (ICS) and the potential effect of implementing such a standard on the US system of state-based insurance regulation. US representatives raised concerns about a recent IAIS proposal to move forward with a single valuation method for the ICS calculation that would be based on a consolidated market adjusted valuation (MAV) approach, with an indication that internal models would be given consideration as an alternative to the standard method. It was requested that the US-supported aggregation approach for assessing group capital be considered as an alternative to the standard method, similar to the treatment of internal models, and that the IAIS incorporate information 12 NAIC Bulletin December 2017

needed to assess the aggregation approach into its field testing of version 1.0 of the ICS in 2018. It was also requested that the IAIS retain both the generally accepted accounting principles with adjustments (GAAP+) and MAV approaches in its development of the standard method. The IAIS ultimately agreed that the implementation of version 2.0 of the ICS will be conducted in two phases. In the first phase (i.e., the monitoring period), which will last for five years, the ICS will be used for confidential reporting to group-wide supervisors and discussion in supervisory colleges. This will allow the ICS to be assessed in comparison with existing group capital standards or calculations that are in development. In the second phase, ICS will be implemented as a group-wide prescribed capital requirement for IAIGs. Implementation will include confidential reporting by all IAIGs of a reference ICS based on a MAV approach, a standard method for capital requirements and converged criteria for qualifying capital resources. Additional reporting of the ICS based on a GAAP+ approach and/or internal model-based capital requirement calculation could be conducted during the monitoring period at the option of the group-wide supervisor. Both the GAAP+ approach and the use of internal models were considered viable options that will be considered for inclusion in the ICS by the end of the monitoring period. The next two years of field testing and the five-year monitoring period effectively delays the application of the ICS until 2026. This will provide the NAIC and Federal Reserve Board time to further develop their respective capital approaches in collaboration, with the support of the US Department of the Treasury. The IAIS agreed to collect from interested jurisdictions data relevant to the development of the aggregation method, with the goal of being in a position by the end of the five-year monitoring period to assess whether the aggregation method provides an outcome comparable to those with the ICS. If it does, it will be considered an outcome-equivalent approach in the implementation of the ICS as a prescribed capital requirement. Stay tuned The NAIC s 2018 Spring National Meeting is currently scheduled for 24 27 March 2018 in Milwaukee. Conference calls or other meetings will be held before then. A list of meetings can be found at http://naic.org/meetings_calendar.htm. EY Assurance Tax Transactions Advisory 2017 Ernst & Young LLP. All Rights Reserved. SCORE No. 07228-171US ey.com/us/accountinglink About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. 13 NAIC Bulletin December 2017