At the NAIC Valuation of Securities (E) Task Force meeting on December 8, 2019 the SVO director and task force chair provided the following update regarding the initiative relating to "principal protected securities":

The SVO has been working with industry representatives, particularly the American Council of Life Insurers (ACLI), to refine the definition of "principal protected securities." They are taking seriously the concern that the definition needs to be carefully drafted so as not to be inadvertently over-inclusive.

Two examples of securities that the SVO wants to make sure are excluded from the definition are defeasance bonds and bona fide securitizations. The revised definition of "principal protected securities" that will be forthcoming in 2020 will be more "robust" and will include examples. It may not be until mid-February before the revised definition is available.

Three types of characteristics were mentioned as likely to bring a security within scope of the (revised) definition:

1. When the security includes underlying performance assets that are intended to provide additional returns above the "promised" return.

2. When the underlying fixed-income asset has a below-market return for its tenor, such that an insurer would not have invested in it on a standalone basis.

3. When the security results in a more favorable risk-based capital treatment than if the insurer had owned the underlying assets directly.

A representative of the American Council of Life Insurers (ACLI) spoke briefly to express appreciation on behalf of the ACLI for the SVO's willingness to work with industry in refining the definition. There was nothing said at the meeting that would suggest that the SVO or Task Force will be revisiting the decision (evident on the October 31, 2019 conference call) not to change course on the retroactivity issue raised by some of the original commenters. Rather, the comment they have taken on board is the call for a more carefully drafted definition of "principal protected securities." Having said that, it is clear that the process has slowed down, and that a lot of thought and deliberation, including input from the ACLI, is going into developing the revised definition — and that is a welcome development.

Originally published in REVERSEinquiries: Volume 3, Issue 1.
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