United States: NAIC Fall National Meeting Drives Efforts On Capital Requirements, Redundant Life Reserves And More

At its 2015 Fall National Meeting in National Harbor, Maryland, held Nov. 18-21, and in subsequent conference calls and working group meetings, the National Association of Insurance Commissioners ("NAIC") has moved ahead recently on a number of key issues affecting the insurance and reinsurance industries. Highlights include the following.

Credit for Reinsurance

At Fall National, the Reinsurance Task Force voted to expose for public comment five options for revisions to the Model Credit for Reinsurance Law. The revisions would accommodate the forthcoming model regulation on reinsurance of term life and universal life with secondary guarantees (so-called Reg. XXX-AXXX risks). At a subsequent conference call with interested parties on Dec. 9, discussion on these drafts resulted in two further revised versions of the Model Law amendments circulated Dec. 15 for public comment. These in turn will be the subject of a conference call on Jan. 6, 2016.

The forthcoming model regulation contemplated by these Model Law amendments, based on Actuarial Guideline 48 adopted in December 2014, will likely relax certain collateral requirements associated with reinsuring these kinds of policies by allowing any type of asset (in the commissioner's discretion) to constitute valid security for such reinsurance above certain levels of reserves. Below that level (the so-called Required Level of Primary Security), collateral must consist of specified high-grade investments.

The alternative Model Law amendments would grant the relevant state's insurance commissioner discretion to impose requirements consistent with the expected Reg. XXX-AXXX credit for reinsurance regulation. The versions differ in some of their details as to whether this discretion should be in the form of a carve-out to the basic credit for reinsurance rule, or alternatively should be grafted onto existing sections of the Model Law concerning regulations generally. These and other nuances were discussed at the Task Force meeting and during the Dec. 9 call. Among other concerns raised by interested parties at the Fall National Meeting, some participants argued that the Model Law's proposed grant of authority to the state commissioner is excessive, given the intended narrow focus on Reg. XXX-AXXX risks. Others expressed the concern that future parties to reinsurance agreements would not have sufficient certainty ex ante on their ability to take balance sheet credit because of the risk that the regulator could subsequently introduce a retroactive approval requirement. The credit for reinsurance issue seems likely to continue well into 2016.

International

The International Insurance Relations (G) Committee, which focuses on the NAIC's coordination with international regulatory regimes and includes the ComFrame Development and Analysis Working Group ("CDAWG"), approved CDAWG's recommendation for the NAIC to develop its own group capital calculation standards for U.S. insurance groups. Such standards, regulators stressed, are not intended to serve as separate capital requirements independent of the contemporaneous developments at the International Association of Insurance Supervisors ("IAIS"), but rather to serve as a tool to help state regulators interact with international bodies and to ensure that the U.S. state-based approach to group supervision is accounted for as international standards are developed.

To this end, the International Committee approved a recommendation previously adopted by CDAWG that requests that the NAIC Executive Committee and Plenary charge the Financial Condition (E) Committee to:

"Construct a U.S. group capital calculation using an [risk-based capital] aggregation methodology; liaise as necessary with [CDAWG] on international capital developments and consider group capital developments by the Federal Reserve Board, both of which may help inform the construction of a U.S. group capital calculation."

Although CDAWG has previously considered various approaches to developing such standards (including approaches based, respectively, on existing statutory accounting standards and GAAP standards), the group recommended an "RBC aggregation" approach that would build on pre-existing legal entity risk-based capital requirements rather than developing new standards. Such an approach, the group concluded, would be less burdensome and costly to regulators and industry alike, would respect other jurisdictions' existing capital regimes, and would be the quickest to develop and implement. The Executive Committee adopted this charge at the Fall National Meeting, and Plenary ratified the charge in its year-end conference call on Dec. 17. Meanwhile, on Nov. 25 the IAIS launched its own comment solicitation from interested parties on standards for identifying "global systemically important insurers" for purposes of its own enhanced capital requirements, as well as on so-called nontraditional activities conducted by insurers that may, in the IAIS's view, cause systemic risk.

RBC and Investment Affiliates

At Fall National, the Property and Casualty Risk- Based Capital (E) Working Group considered the proposal of the Capital Adequacy Task Force ("CATF") to ascribe a capital charge to "investment affiliates" of property-casualty insurers (see our prior client alert on this topic). The NAIC defines an "investment affiliate" as any affiliate of the insurer, other than a holding company, that is engaged or organized primarily to participate in the ownership and management of the insurer's investments. An insurer might use an investment affiliate for administrative purposes or as a "blocker" for legal, tax or other motivations.

Currently, the RBC charge for a property-casualty insurer's investment in an investment affiliate is based on the RBC of the underlying assets, prorated to account for such insurer's degree of ownership of these underlying assets. This "look through" approach assumes that the charge for an investment affiliate should be the same as if the insurer held the assets directly. The insurer's equity interest in the affiliate itself is thus disregarded, and the insurer does not incur a capital charge in respect of such equity interest (ordinarily, insurers must hold more capital against equity investments than debt). CATF has proposed to abandon this "look through" approach and impose an RBC charge for an investment in an investment affiliate to be based on a certain, as yet undetermined, percentage multiplied by the carrying value of the investment affiliate's common and preferred stocks and bonds. The P&C RBC Group agreed to defer further action until the Investment Risk- Based Capital Working Group has the opportunity to further review the proposal.

While the NAIC has not yet proposed a specific percentage associated with such capital charge, any change may have significant implications for how insurers structure merger and acquisition transactions, joint ventures, and other structured investments in their asset portfolios. The benefits of using an investment subsidiary (administrative simplicity, legal remoteness, etc.) would have to be weighed against the incremental capital cost, potentially frustrating such benefits. This change to the RBC regime is already being applied to health insurers.

Receivership And Insolvency

The Receivership and Insolvency Task Force adopted revisions to the "Receivers Handbook for Insurance Company Insolvencies" relating to the materials and data that a receiver should request for pre-receivership planning guidance. The revisions to the handbook augment the authority of a prospective receiver to request additional information, as evidenced by the examples set forth below of what a receiver may now consider. These broadened categories of information that a regulator may obtain reflect some of the major regulatory trends of the post- 2008 era – a focus on groups rather than legal entities, concerns regarding valuation, and risks resulting from nontraditional investment instruments such as derivatives. Assuming these revisions are advanced by the task force's parent bodies, insurers approaching insolvency can expect a more rigorous review by their domiciliary regulators as these officials prepare to petition a court for rehabilitation or liquidation authority.

Under the revisions, receivers may seek, in the pre-petition stage, the following information, among other things:

  • An organizational chart of the insurer and its subsidiaries and affiliates that describes, among other items, the holder of each legal entity and foreign office; provides the location, jurisdiction of incorporation, licensing and key management associated with each material legal entity and foreign office identified; and identifies whether the company utilizes any third-party vendors.
  • A description of the corporate governance structure and processes related to resolution planning.
  • A detailed inventory and description of the key management information systems and applications, including those for risk management, policy and claims administration, reinsurance, and financial and regulatory accounting used by the company and its material entities.
  • The processes the company employs for determining the current market values and marketability of the core lines of business, critical operations and material asset holdings of the company.
  • Information relating to payroll and employee benefits.
  • Disclosure regarding the company's involvement in derivatives.

The Receivership Task Force also received an update on federal legislative developments related to insurance insolvency, highlighting the U.S. House of Representatives' passage of the Policyholder Protection Act of 2015 on Nov. 16 (it later passed the Senate as part of the omnibus spending bill on Dec. 18 and was signed into law by President Obama on the same day). The bipartisan-led legislation, which is widely supported by state regulators and industry, clarifies, among other provisions, state insurance regulators' authority to wall off insurance company assets within savings and loan holding companies in order to protect insurance consumers. The new provision also prevents the Federal Deposit Insurance Corporation from placing liens on an insurer's assets without the approval of the applicable state insurance regulator.

Workers' Comp

The Workers' Compensation Task Force heard a report concerning ongoing updates to the NAIC's 2006 study on large-deductible workers' comp policies. The update process involves regulators, insurers, guaranty funds, professional employment organizations (PEOs), trade associations and state workers' comp administrators. The organizers of the update are focused particularly on solvency concerns and claims challenges arising from the use of large-deductible plans, as well as on the distinctive issues presented by PEOs, which affect underwriting practices and day-to-day administration.

The Task Force discussed the potential for abuse and inefficiency suggested in the update's findings but did not conclusively identify any prospective requirements or enforcement measures, although a related NAIC session did note that recently enacted Illinois Senate Bill 1805 imposes collateral requirements on some large-deductible workers' comp arrangements. Specifically, S.B. 1805 mandates that an insurer having (i) a rating below A-minus from A.M. Best and (ii) less than $200 million in surplus must require its policyholder to post collateral in respect of its obligations where the workers' comp policy provides for a $100,000 or greater per-claim or per-occurrence deductible. The legislation also caps a policyholder's obligations under such a policy at 20% of the policyholder's net worth. PEOs featured prominently in these discussions, with meeting participants noting that a PEO's status in the case of an insolvent client and outstanding workers' comp obligations can be difficult to navigate for beneficiaries and regulators alike. Speakers called for safeguards to make PEOs and employers generally more accountable, particularly in the case of these high-deductible plans. The changing landscape of labor, employment and health care will make workers' comp a key area of focus for the NAIC in the coming months and years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions