The National Association of Insurance Commissioners (the "NAIC") held its 2022 Fall National Meeting (the "Meeting") from December 12 to 16, 2022, in Tampa, Florida. We attended many of the conference sessions, and in this update we highlight meeting developments of particular interest to our insurance industry clients, colleagues and friends.
Private Equity in Insurance
Private Equity Regulatory Considerations Update
As we reported in our NAIC 2022 Summer National Meeting Highlights, the NAIC's Executive (EX) Committee and Plenary formally adopted the "Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers" (the "Regulatory Considerations") in August 2022. The NAIC, through referrals to several of its working groups and task forces, continues to make progress in addressing the Regulatory Considerations, with ramifications for private equity actors and others in the insurance space.
To address concerns that acquirors of insurers are using complex holding company structures to avoid regulatory disclosure requirements, the Group Solvency Issues (E) Working Group is developing a proposal to request more information from Form A applicants, including information regarding the acquiror's economic goals, dividend expectations and ability to provide additional capital support in the future. They also discussed possible modifications to the Form A reporting template to contemplate private equity-like structures that have been encountered by regulators in the past. In September 2022, the NAIC conducted advanced regulatory training in Kansas City about emerging private-equity holding company structures. During the Meeting, the Working Group supported an initiative to provide more comprehensive and regular regulatory training sessions on this matter.
The Group Solvency Issues (E) Working Group also formed a drafting group tasked with identifying scenarios in which owners (directly or indirectly) of under 10% of the voting securities of an insurer may be deemed to have "control." Regulators are concerned that transactions are being structured around the definition of control in the Model Holding Company Act (which provides for a presumption of control at an ownership level of 10% or more of voting securities), thereby allowing investors to exert control without submitting to reporting or monitoring activities and regulator approval or non-disapproval requirements. The proposed drafting group is designed to help regulators more easily identify types of arrangements—such as board representations, non-customary minority shareholder rights, restrictive investment management agreements or excessive control or discretion over investment strategies—that could create controlling influences.
In an effort to address the Regulatory Consideration regarding the use of increasingly complex asset classes to support pension risk transfer ("PRT") business, in 2021, modifications to PRT reporting requirements went into effect, requiring entities to use disaggregated product identifiers. However, the Statutory Accounting Principles (E) Working Group conducted a review of these 2021 PRT disclosures and found that entities are still broadly grouping their PRT activities. In addition, the NAIC staff is in continuing discussions with the Department of Labor to review the applicability of labor protections to pension beneficiaries in PRT transactions.
In addition, to address the Regulatory Consideration regarding the increasing use of offshore reinsurance and sidecar vehicles by insurers, the Macroprudential (E) Working Group has been holding ongoing confidential discussions with foreign regulators and industry members to gather information on the increasing use of these structures and regulation thereof in other jurisdictions. The Working Group expects these discussions to conclude in early 2023 and thereafter to develop a template for use in the review and monitoring of these reinsurance transactions.
The Regulatory Considerations also address a concern that new entrants into the insurance sector may have misaligned priorities or a lack of insurance experience that could negatively affect an insurer's operational, governance or market conduct practices. While no specific actions on this Regulatory Consideration have yet been advanced, the Macroprudential (E) Working Group indicated that it plans to develop more specific suggestions and thereafter refer this matter to the Risk-Focused Surveillance (E) Working Group.
Several changes made earlier this year related to the Regulatory Conditions are already effective as of 2022 year-end reporting. For example, the Statutory Accounting Principles (E) Working Group adopted revisions to Statement of Statutory Accounting Principles ("SSAP") 25 (Affiliates and Other Related Parties) to clarify related-party and affiliate investment disclosures, and the Blanks (E) Working Group added six related-party reporting codes. These adoptions build upon Schedule Y, Part 3, a new financial statement schedule that became effective for 2021 year-end reporting and requires the identification of all investors with holdings in the applicable insurer or insurance group in excess of 10% of its equity interests, regardless of any disclaimers of control or affiliation. Additionally, the Life Actuarial (A) Task Force adopted revisions to Actuarial Guideline 53 that enhanced adequacy testing requirements for certain "complex" life insurer investments.
Statutory Accounting
Negative Interest Maintenance Reserve
The Statutory Accounting Principles (E) Working Group acknowledged that revisions to SSAP 7 (Asset Valuation Reserve and Interest Maintenance Reserve) are urgently needed to address the rising interest rate environment that has created an increased likelihood that reporting entities move to a net negative interest maintenance reserve ("IMR") position from the sale of fixed income instruments. Under current statutory accounting principles, negative IMR is not an admitted asset, and so, net negative IMR-positioned insurers must record a non-admitted asset, thus lowering the insurer's surplus and RBC.
In particular, the Statutory Accounting Principles (E) Working Group was concerned with and is urgently soliciting feedback on whether some guardrails are necessary to prevent admitting negative IMR from incentivizing companies to undertake short-term non-economic activity that is not in the best interest of long-term financial health, like selling down bonds. The American Council of Life Insurers ("ACLI") submitted a comment letter in late October asking for urgent attention to be given to this issue, with a request that a negative IMR position be permitted as an admitted asset. Otherwise, the treatment could negatively impact ratings and consumer confidence and could result in double-counting of losses in asset adequacy testing (although this point has since been addressed by the Life Actuarial (A) Task Force). Some suggestions for resolving this issue raised at the Meeting included: (i) treating net negative IMR as part of a "special surplus" not taken into account for purposes of determining the amount of dividends permitted; (ii) limiting the amortization schedule of net negative IMR; and (iii) limiting the amount of net negative IMR to a percentage of admitted assets of the applicable insurer. Until additional guidance is adopted with respect to negative IMR, an insurer is left to rely on its domestic regulators approving a permitted practice for admitting negative IMR as an asset, after considering the insurer's specific situation.
Related Party Investments
The Statutory Accounting Principles (E) Working Group exposed revisions to SSAP 25 (Affiliates and Other Related Parties), with respect to the definition of affiliated investments, as well as income disclosures, revised so that reported interest income due and accrued includes interest from gross, non-admitted and admitted amounts. Notably, the SSAP amendments add a new reporting obligation for any investment with a related party as sponsor, originator or other similar transaction party, regardless of whether the investment is otherwise captured on the affiliate reporting line. The revisions to SSAP 25 have a comment period ending on February 10, 2023.
The Valuation of Securities (E) Task Force also adopted amendments to the NAIC's Purposes & Procedures Manual (the "P&P Manual") that update the instructions for Related Party and Subsidiary, Controlled and Affiliated ("SCA") Investments to clarify that SCA and Related Party Filing Exempt Investments will be defined to mean any investment (i) issued by an affiliate or related party special purpose entity that itself is not an obligor or ultimate source of the investment repayment or (ii) issued as part of a structure in which the originator, sponsor, manager, servicer, or other influential transaction party is an affiliate or related party of the reporting insurance company.
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