United States: NAIC 2022 Summer National Meeting Highlights

Regulatory Considerations Update

Many in the industry have been following for some time the progress of a document compiled by the Financial Stability (E) Task Force and the Macroprudential (E) Working Group entitled “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers” (the “Regulatory Considerations”) that sets forth a list of areas of regulatory concern regarding activities overlapping with the increasing prominence of private equity in the insurance industry. The revised Regulatory Considerations were adopted at the task force/working group level on June 27, 2022, and in turn adopted with a few editorial changes by the Financial Condition (E) Committee on July 21, 2022 and by the Executive (EX) Committee and Plenary at the Summer National Meeting.

While the Financial Stability Task Force and the Macroprudential Working Group indicated that they intend to continue monitoring these items, the bulk of the Regulatory Considerations have been referred out to other groups at the NAIC for new work. For example:

• Group Solvency Issues (E) Working Group: Received referrals to do further analysis on (i) the evaluation of holding company structures and (ii) the current application of the definition and evaluation of control, taking into account contract terms such as for asset management services.
• Risk-Focused Surveillance (E) Working Group: Received referrals with respect to evaluation of (i) the terms of investment management agreements and (ii) the current alignment of incentives with owners focused on short-term results, including through a focus on investment management fees.
• RBC Investment Risk and Evaluation (E) Working Group: Received a referral with respect to the increasing presence in the market of privately structured securities in order to address related tail risk concerns not captured by reserves.
• Valuation of Securities (E) Task Force: Received referrals with respect to (i) evaluation of the terms of investment management agreements, (ii) the increasing presence in the market of privately structured securities and (iii) reliance by insurance regulators on rating agency reports.
• Statutory Accounting Principles (E) Working Group: Received referrals with respect to (i) related party-originated investments, including structured securities, and the possibility for potential conflicts and complicated fee structures, (ii) issues in identifying underlying affiliated investments and/or collateral within structured security investments, (iii) asset manager affiliates and disclaimers of affiliation avoiding current affiliate investment disclosure requirements and (iv) the increase in pension risk transfer business supported by complex investments and the need for appropriate disclosure thereof.
• Examination Oversight (E) Task Force: Received a referral with respect to issues in identifying underlying affiliated investments and/or collateral within structured security investments.
• Life Actuarial (A) Task Force: Received referrals with respect to (i) alignment of incentives with owners focused on short-term results, including through investment management fees, (ii) the increasing presence in the market of privately structured securities and (iii) the increase in pension risk transfer business supported by complex investments and related reserving considerations.
• Retained by Financial Stability (E) Task Force and the Macroprudential (E) Working Group: These groups will continue to consider a few of the points before referring them out to other groups, including (i) a concern with market conduct practices by less experienced acquirers and (ii) a concern with the structuring of offshore or complex reinsurance.

Notably, with respect to pension risk transfer business, the Financial Stability (E) Task Force and the Macroprudential (E) Working Group indicated that their eventual goal is to include disclosures about the investments supporting the pension risk transfer business in the notes to the applicable insurers' statutory financial statements. The NAIC staff has also begun engaging with the U.S. Department of Labor (the “DOL”) to discuss whether additional DOL regulations should be applicable to pension risk transfer transactions.

In addition, to address the concern with the increasing use of offshore reinsurance or more complex reinsurance structures, the regulators on the Macroprudential (E) Working Group are in the process of having confidential discussions with industry participants in order to better understand the area and will subsequently consider whether further regulatory work is needed in this area.

International

As part of an update on the activities of the International Association of Insurance Supervisors (the “IAIS”) (for further detail, see “International Insurance”, below), NAIC staff noted that the IAIS has also formed a private equity workstream that plans to produce an internal briefing memo providing an update on the evolution of private equity in various jurisdictions. We will be monitoring this workstream for relevant updates.

Climate Risk

The issue of climate risk ran through the work of a number of groups at the NAIC during the Portland meeting, with some of the more notable developments outlined below.

At the joint meeting of the Financial Stability (E) Task Force and the Macroprudential (E) Working Group, the NAIC's representative to the Financial Stability Oversight Council (“FSOC”) gave an update on developments at FSOC. Late last year, FSOC called on member agencies (including the NAIC) to address climate risk as an increasing threat to financial stability. In response to that charge, the NAIC is participating in several groups to enhance information-sharing on climate resiliency.

In addition, climate risk was a topic of discussion at the meeting of the International Insurance Relations (G) Committee, including with respect to the increased emphasis and cooperation among various regulators on climate risk mitigation and climate resiliency, including recent working group meetings of the Sustainable Insurance Forum discussing gaps in climate risk protection in various jurisdictions. The International Insurance Relations (G) Committee expects to publish a report on climate-risk issues before year-end 2022 in collaboration with the new Climate Risk Steering Group of the IAIS, which was formed to (i) examine standards for supervising climate risk and deliver supporting material to help members use these standards to do so, (ii) improve scenario analysis methods and (iii) use climate data to monitor the progress that the IAIS has made.

As discussed in further detail in “Property & Casualty Insurance—Other P&C Lines” below, there was increasing attention at the Property and Casualty Insurance (C) Committee on changing insurance needs with respect to flood and wildfire risk, where losses are expected to increase in connection with climate change. The Climate and Resiliency (EX) Task Force also received a presentation on wildfire-risk mitigation strategies and a report that, at a federal level, on August 2, 2022, the U.S. House of Representatives passed the Wildfire Response and Drought Resiliency Act, which would require the Federal Emergency Management Agency (“FEMA”) and the U.S. Government Accountability Office (the “GAO”) to study wildfire insurance coverage, including by looking at growing threats and insurer and regulatory responses.

The Climate and Resiliency (EX) Task Force has sent referrals to the applicable NAIC groups proposing modifications to the Financial Analysis Handbook, the Financial Condition Examiners Handbook and the ORSA Guidance Manual to better account for climate-related risks, and it plans to forward these referrals to the Financial Condition (E) Committee.

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