Due to the idiosyncrasies of rebranding, the April NAIC activity summary was not able to include activity that occurred after April 20. Accordingly, this May summary will begin by picking up those late April calls and continuing on to May activity. Late April activity finalized the 2022 risk-based capital (RBC) reporting formats, with May being the month that the statutory 2022 annual statements were finalized (almost), giving everyone a seven-month lead time to plan for their year-end processes.
Risk-Based Capital Investment Risk and Evaluation Working Group – April 21, 2022
This recently organized Working Group began its work in earnest during this regulator-to-regular meeting. Normally, non-regulators would not receive an agenda for a regulator-only meeting and, therefore, have no idea what was discussed. But a distribution mistake sent the agenda to those for which it was not intended. The session appears to have been mostly educational. An introduction to structured finance was provided and then the discussion moved to collateralized loan obligations (CLOs), including the industry exposure to CLOs. Apparently, the conversation included a potential residual interest data call and the next steps the Working Group should take on this issue.
Life Risk-Based Capital (LRBC) Working Group – April 22, 2022
The session began with a discussion on proposed LRBC structural changes to revise the reporting categories for life insurance products in the C2 section of the formula. Having been previously exposed for comment, the proposal offered two different options. After several minutes of discussion, option two of the proposal was adopted. Option two is the more principles-based approach and will require companies to provide some information from their own records. Annual statement reporting may be developed later to provide more of a direct correlation between statement reporting and RBC reporting. The proposal will now go to the Capital Adequacy Task Force for its stamp of approval. Corresponding instructional changes were exposed for comment through May 25. The meeting then continued with the American Academy of Actuaries’ C2 Mortality Work Group continuing to respond to questions/comments that were received during its recommendations’ exposure period. As the last item of discussion, NAIC staff commented that there does not appear to be an LRBC problem with the revised statement reporting of residual tranches. However, based on a few questions the NAIC staff has received, staff felt it would be prudent to revise the LRBC instructions for clarity. Staff were instructed to draft language which upon completion will then be exposed for comment through May 25.
Property Risk-Based Capital (PRBC) Working Group – April 26, 2022
There were two items that were adopted for implementation in the 2022 PRBC formula. Item 2021-17-CR inserts a possible exemption from the wildfire reporting for 2022. The exemption applies only for the testing period, not necessarily for future reporting. Item 2022-01-P removes the Trend Test footnote on PR033, which had indicated the test was used for information only until such time as all states had adopted modifications to the Risk-Based for Insurers Model Act. All of the states have now adopted those modifications, making the Trend Test an official part of the PRBC. What does that mean? It means insurers that trigger a “Yes” result to the Trend Test automatically fall into the Company Action Level of RBC formula results and must take the appropriate actions. Before exposing proposal 2022-02-P, which will provide for the routine update of the line one factors on both pages PR017 and PR018, a discussion regarding a significant bump for both the reserve factor and the premium factor for the international line of business occurred. Further investigation had indicated the anomaly was mostly driven by three companies. The exposure includes both the factors as normally calculated and possible adjustments made to the international line of business and asks for comments regarding which methodology should be applied for this year. The exposure period ends May 26. Six years ago, the Working Group had started a project regarding the reporting and handling of affiliated investments within the PRBC. The original project was abandoned, but recently restarted. The result is a proposal updating the PRBC affiliated investment instructions and reporting format. The proposed changes are quite extensive and would greatly expand PRBC affiliated reporting (and ultimately probably corresponding changes in the annual statement). To allow ample opportunity for review, the proposal was exposed for a 60-day comment period ending June 25. Keep in mind that affiliated investment reporting occurs in all of the RBC formulas, therefore a change in the PRBC may also result in similar or identical changes to the other formulas. The Working Group then voted to send a referral letter to the Blanks Working Group (BWG). The letter indicates the need for BWG to adjust the reinsurance recoverable credit risk factors used in Schedule F of the Property & Casualty Annual Statement to match those now being used in the PRBC. The meeting ended with the American Academy of Actuaries providing updates on three projects.
North American Securities Valuation Association (NASVA) – April 27 & 28
To date, NASVA has not been included in the NAIC Related Activities summaries. That is now being corrected. NASVA is a group that specializes in the world of insurer investments, and consequently most of its activity is through the Valuation of Securities Task Force and directly with the NAIC staff at the Securities Valuation Office (SVO) and the Structured Securities Group (SSG). NASVA membership includes insurance companies, investment management companies, software vendors, and other parties interested in the NAIC-established processes for valuing reporting companies’ investments (either for themselves or for clients). NASVA meets by conference call (about quarterly) with an annual conference. However, like most organizations, NASVA has not been able to hold the in-person annual conference for a while. The calls occur over two days. The first day is for NASVA members only and is used to organize thoughts and questions to be addressed with NAIC staff on the second day. The call on the second day includes NASVA members, SVO staff, SSG staff, and usually some NAIC staff support individuals of SAPWG and BWG. The focus of these conversations is on SVO and SSG procedures and comes from those investment individuals that interact with NAIC staff on a regular basis. During the call, questions can be addressed directly with various NAIC staff regarding new policies, pending guideline and procedural changes, and other investment valuation related issues. Occasionally accounting, statement reporting, and risk-based capital issues are addressed. Those interested in becoming members of NASVA can contact Tracy Lindsey, Karla Streeter, or Patricia Sullivan.
Capital Adequacy Task Force – April 28, 2022
The sole purpose of this call was to ratify RBC format changes previously adopted by its RBC Working Groups for 2022 implementation. All of these proposals have previously been discussed in the various RBC Working Group summaries, so only final action is reported here.
| Reference # | Subject | Disposition |
|---|---|---|
| 2021-17-CR |
Adds wildfire to the PRBC catastrophe risk, but for the collection of data only and with a possible exemption for companies meeting specific requirements. | Adopted for 2022 implementation. |
| 2022-01-P | Removes trend test footnote. | Adopted for 2022 implementation. |
A little explanation will probably help for the footnote removal. For some time, a footnote has appeared at the bottom of the Trend Test page. The footnote has stated that the Trend Test was for informational purposes only until the time that states had implemented the requirement through the Risk-Based Capital for Insurers Model Act. That implementation has now happened, so the Trend Test becomes an official part of the PRBC. What does that mean? It means insurers that trigger a “Yes” result to the Trend Test automatically fall into the Company Action Level of RBC formula results and must take the appropriate actions.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-03-L | Revises the current reporting format in the LRBC for the C-2 mortality risk. | Adopted for 2022 implementation. |
All the details for each adopted item can be found on the Capital Adequacy Task Force webpage. Before adjourning, the chair mentioned that the PRBC Working Group had exposed for comment suggested revisions to the formula handling of affiliated investments. The chair indicated he thought the other RBC Working Groups should also expose the same revisions for consideration to try to keep all the RBC formulas consistent. Once all the comments from the various Working Groups have been collected, more work may be needed for finalization.
Group Capital Calculation (GCC) Working Group – May 2, 2022
During a previous meeting, the Working Group had exposed for comment revisions to the GCC template and instructions to be implemented for 2022. Comments received during the exposure period were minimal. After a discussion of the comments, it was decided not to make suggested revisions to the debt cap at this time, but to monitor the situation for future consideration. A few editorial changes were made leading to both the template and instructions being adopted for 2022. The meeting ended with a brief conversation regarding educational opportunities that will be developed for both regulators and industry. Please note: Implementation of the GCC depends upon adoption of the 2020 revisions to the Insurance Holding Company System Regulatory Act by each state. Some states have already adopted those revisions. Depending upon the implementation date stated in the adopted state versions, some insurer groups may have to file the GCC for year-end 2022. Insurer holding company systems should monitor the situation closely.
Health Risk-Based Capital (HRBC) Working Group – May 4 & 11, 2022
The May 4 meeting began with the exposure of possible revisions to the handling of affiliated investments within the HRBC. This is the same draft proposal that was exposed during the PRBC Working Group meeting—see discussion above. The exposure can be found on the Working Group’s website under the exposure drafts tab, with the comment period ending July 5. The Working Group then received updates from the health test ad hoc group and the excessive growth charge ad hoc group. The Working Group was informed that a revision to the health test had been exposed for comment by the Blanks Working Group, and so far, comments received on the proposal are clarifying in nature and not material. Both ad hoc groups will continue to meet to look at possible further modification, including the possibility of looking at a different test for different size companies. Originally, it was hoped that the American Academy of Actuaries (Academy) would provide a presentation on the H2 work it is doing. However, due to a scheduling conflict, the presentation had to be rescheduled for a later date.
The May 11 meeting was spent entirely on the Academy’s rescheduled presentation regarding its methodologies considered in the H2 – Underwriting Risk review. The report included comparisons between PRBC and HRBC underwriting risk factor methodologies. Following the presentation, the Working Group was given the opportunity to ask questions. The Academy then indicated it need further instructions from the Working Group on how to proceed.
Restructuring Mechanism Subgroup – May 4, 2022
As a reminder, one reason this Subgroup was formed was to develop best practices to be used when insurers are considering and/or implementing restructuring transactions, both insurance business transfers (IBT) and corporate divisions. The stated purpose of this meeting was to consider foundational principles and best practices for possible exposure. Seven foundational principles were identified. Those are:
- Policyholders and Other Key Stakeholders Should Never Be Left Worse Off
- Robust Regulatory Review Process
- Guaranty Fund Coverage
- Secondary Market Mechanisms
- Use Uniform NAIC Valuation and Accounting Standards
- Independent Expert
- Due Process
The best practices document provides state insurance regulators’ review procedures for both IBT and corporate divisions and is divided into 10 different sections. The introduction to this document clearly states that the guidance provided does not “rise to the level of a model law or regulation.” After a brief preliminary discussion of opinions, both documents were exposed for a 45-day comment period ending June 20. Another stated goal of the Subgroup is to consider changes to the RBC formulas that may be needed for companies in runoff. The Subgroup had referred this item to the PRBC Working Group, which provided a response during this session. The PRBC Working Group stated that the best way to monitor runoff companies was through state analysis and exam team functions, not through RBC formulas. The report identifies three characteristics of a runoff company and recommends that a general interrogatory be added to both the statutory statement and the RBC report to identify a runoff company. Notwithstanding its recommendation that the RBC not be used to monitor these companies, the PRBC Working Group did indicate three areas of the PRBC that could be removed or deactivated as they are not applicable to runoff companies. The PRBC work will be shared with the other two RBC Working Groups for consideration within those insurer types. The Subgroup exposed the PRBC Working Group’s response for a 45-day comment period ending June 20. All of the exposed documents can be found on the Subgroup’s website under the exposure drafts tab.
Reinsurance Task Force – May 16, 2022
This meeting was short and to the point. In fact, it almost took longer to conduct the 37-member roll call of the Task Force than to conduct the rest of the meeting. The focus of this meeting was to consider adoption of revisions to the Uniform Checklist for Reciprocal Jurisdiction Reinsurers, which had previously been exposed for comment by the Task Force. The revisions were originally drafted by the Reinsurance Financial Analysis Working Group and had undergone comment periods during that process. Only one comment letter was received during this latest comment period. The letter was generally supportive but did comment that when trying to reconcile Schedules F and S of both the ceding and assuming companies, the process should recognize that balancing “to the penny” would not be realistic. The comment letter suggested applying a de minimis standard for the reconciliation. No further discussion was offered during the meeting, allowing the checklist to be adopted. Attending regulators were reminded that NAIC staff is compiling a point of contact list for each state indicating a person to respond to certified and reciprocal jurisdictions issues. Any state that had not yet furnished a name was asked to do so as soon as possible.
Mutual Recognition of Jurisdictions Working Group – May 19, 2022 (regulator-only meeting)
During their regulator-only meeting, the Working Group released for comment a draft of the NAIC List of Jurisdictions that Recognize and Accept the Group Capital Calculation. The comment period ends June 20. Not only is the Working Group looking for comments on the form and content of the list, but specifically would like feedback regarding any listed jurisdiction that requires a capital filing for any U.S.-based insurance group’s operations in that jurisdiction. The exposed listing can be found here.
Statutory Accounting Principles Working Group (SAPWG) – May 24, 2022
Unlike most SAPWG meetings, this session consisted only of a hearing on items that had previously been exposed for comment. No new items were exposed for comment. All of the items acted upon were either a new interpretation or items that needed to be adopted prior to the Blanks Working Group meeting to support statement reporting changes.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-03 | Premium adjustments allocated to Jurisdiction; no accounting change, reporting instructions only. | Adopted, effective immediately. |
This adoption clarifies the allocation of U.S.-based premium adjustments for Schedule T, the State Page, and the Accident and Health Policy Experience Exhibit. Although the guidance was prompted by Affordable Care Act premium adjustments related to the risk adjustment program, the guidance applies to all premium adjustments and specifies allocation is to individual jurisdictions and not reported in the aggregate in a “catch all” category such as “aggregate other alien.”
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-08 | INT 22-01 provides guidance on handling of Freddie Mac When-Issued K-Deal. | Adopted, effective immediately. |
| 2021-21 | Changes to Statement of Statutory Accounting Principle (SSAP) Nos. 25 & 43R for reporting of related party investment transactions. | Adopted with 12/31/2022 effective date. |
At first glance, reference #2021-21 appears to be a simple addition of a code column to various investments schedules. However, revisions to both SSAP Nos. 25 and 43R seem to go beyond additional disclosure requirements. Below is an attempt to provide a simple summary of the revisions. It turns out this is a very complicated issue and generated quite a discussion prior to adoption. There was a lengthy discussion between industry and regulators regarding “intent.” The key to understanding the debate over intent is the use of the phrase “related party investments” versus the usual term of “affiliated investments.” SAPWG stressed that, in their opinion, the revised language does not change any of the existing definitions or intent in either SSAP. Interested Parties (IPs) disagreed. It is highly recommended that companies very carefully review the adopted revisions when posted by SAPWG.
The revisions to SSAP No. 25 add language that requires a look through of affiliated investment structures not controlled by voting interest to identify entities over which the insurer may have direct or indirect control (with exemptions for exchange traded funds and SEC-registered mutual funds). The direct or indirect control can be through a related party as sponsor, originator, manager, servicer, or other influential roles. An example of indirect control includes a limited partnership controlled by an affiliated general partner, where the limited partnership holds greater than 10% of the voting interests of another company.
Most of the discussion surrounded the proposed revisions to SSAP No. 43R. These changes indicate that loan-backed or structured securities may involve a relationship with a related party, but not be considered an affiliated investment. This is because the relationship does not result in direct or indirect control of the issuer or because there is an approved disclaimer of control or affiliation. However, the investment is considered a related party investment (not an affiliated investment) even if not reported in the affiliated investment reporting lines of the investment schedules. Accordingly, it is to be identified as a related party investment for reporting purposes. Examples of related party relationships are given in the adopted language and include involvement of a related party in sponsoring or originating the loan-backed or structured security or any type of underlying servicing arrangement.
In particular, IPs questioned if the revisions were in conflict with language used in the Holding Company Act regarding the evaluation of the 10% level of ownership for the presumption of control. IPs stated it was their opinion that the definition of affiliate and control was measured based on voting rights of an equity holder. IPs then cited an example where asset managers meeting this definition are reported as affiliates on Schedule Y and any agreements with those affiliates reported in the related party disclosure. However, investments simply managed by an affiliate with no credit risk exposure to an affiliate and where the underlying borrowers are not affiliates, would not meet the definition of an affiliate under the Holding Company Act. Regulators disagreed with the industry perception. The discussion highlighted the different perceptions of affiliation and control, as well as called attention to the difference between a related party investment and an affiliated investment. In the end, the SAPWG regulators confirmed that they felt the new language was not in conflict with any existing language, did not change the meaning or intent of any existing language, and made no changes to the language prior to adoption.
As part of this adoption, a proposal was submitted to the Blanks Working Group (BWG) for a new electronic-only reporting column to be added to Schedules B, D, DB, BA, DA, E – Part 2, and DL. The new column will use codes to identify investments that are originated, managed, sponsored, or serviced by an affiliate or related party. The requirement to furnish one of the new codes applies to all related party transactions, regardless of whether or not it is reported on an affiliate reporting line. In addition, a referral will be sent to the Valuation of Securities Task Force suggesting the Purposes and Procedures Manual of the NAIC Investment Analysis Office should be reviewed for possible revisions.
IPs’ comments indicated that certain foreign open-end investment funds should be exempt from the look-through requirement in the adoption. IPs also suggested adding the new SSAP No. 25, paragraph nine footnote as part of the instructions to the new codes being proposed for the investment schedules. NAIC staff agreed with the suggestions and was instructed by SAPWG to draft a separate proposal to address these two issues.
Blanks Working Group (BWG) – May 25, 2022
This was BWG’s meeting to finalize the 2022 annual statements and handle a few other items. Although all of the other 2022 annual statements were finalized, the 2022 annual statement for the Life/Fraternal statement didn’t quite make it. More later.
The following actions were taken on items that had previously been exposed for comment. Please note that some of these items are not effective until 2023.
| Reference # | Subject | Disposition |
|---|---|---|
| 2021-18 | Modifies the lines of business on the state page, adds two new supplements and definitions for Life/Fraternal (L/F) statement and Life Supplement of the Health statement. | Deferred for further discussion between regulators and industry. |
| 2021-22 | Inserts a new code column on investment schedules to identify investment transactions with related parties. (All statements.) | Adopted beginning year-end 2022 reporting. |
See the discussion under the SAPWG meeting for reference #2021-21.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-01 | Adds General Interrogatory regarding company use of cryptocurrency. (All statements.) | Adopted beginning year-end 2022 reporting. |
| 2022-02 | Revises Schedule D – Part 6 – Section 1 reporting by adding four new electronic-only columns. (All statements.) | Adopted beginning year-end 2022 reporting. |
| 2022-03 | Splits Line 5 quarterly reporting on Part 1 and Part 2 of Property/Casualty (P/C) statement. | Adopted beginning first quarter 2023. |
A quick word here as to why this revision is applicable only to the Property/Casualty quarterly statement. The separation of Line 5 into Lines 5.1 and 5.2 has already been adopted for the annual statement but was not incorporated into the quarterly reporting. This adoption will align the quarterly and annual reporting.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-04 | Implements a new supplement to capture premium and loss data for Other Liability lines of business in P/C statement. | Adopted beginning year-end 2023 reporting. |
| 2022-05 | Inserts line numbers for Schedule T footnote. (All statements.) | Adopted beginning year-end 2022 reporting. |
| 2022-06 | Changes the Health Annual Statement Test. (L/F, P/C, Health statements.) | Adopted beginning year-end 2022 reporting. |
Although the Health Test is not new to the statements, the adopted revisions made some substantive changes to the test. The intent of the Health Test is to move insurers who write predominantly health business but file on the Life/Fraternal or Property/Casualty statements to the Health statement. With the changes incorporated this year, companies that had previously not met all the qualifications to switch statements may now need to change. A reporting entity passes the Health Test and switches statements if the premium and reserve ratios equal or exceed 95% for both the reporting and prior year. Removed from the test were the previous additional requirements of being licensed and actively issuing/renewing business in five states or less with 75% of the current year premiums written in a company’s state of domicile or the premium and reserve ratios equaling 100% for both the reporting and prior year regardless of the number of states in which the company was licensed. Life/Fraternal companies also required to file the Separate Accounts statement and Property/Casualty companies also required to file the Protected Cell statement are not subject to the results of the Health Test. Companies writing predominately health business but not currently reporting on the Health statement need to review the new test carefully for applicability.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-07 | Modifies Health Actuarial Opinion instructions. | Adopted beginning year-end 2022 reporting. |
| 2022-08 | Revises instructions for Property/Casualty Actuarial Opinion. | Adopted beginning year-end 2022 reporting. |
| 2022-09 | Alters the reporting of the L/F VM-20 supplement. | Adopted beginning year-end 2022 reporting. |
This revision changes the reporting for the Life Principles-Based Reserving (PBR) Exemption to match those in the Life PBR Exemption Valuation Manual (Valuation Manual). This is accomplished in Part 2 of the supplement by first determining if the reporting company has a Life PBR exemption and whether that exemption is per the NAIC Valuation Manual or via a state exemption differing from the Valuation Manual. An additional disclosure was added to Part 2 of the supplement requiring the year that the Life PBR exemption was filed and a confirmation of the eligibility criteria for ongoing exemptions. In addition, the instructions for the question in the Supplemental Exhibits and Schedules Interrogatories addressing the ongoing exemption were updated.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-10 | Clarifies reporting of premium adjustments by jurisdiction for Schedule T, State Pages, and the Accident and Health Policy Experience Exhibit. (L/F, P/C, Health statements.) | Adopted beginning year-end 2022 reporting. |
See the discussion under the SAPWG meeting for reference #2022-03.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-11 | Updates the bond factors in the Asset Valuation Reserve for the L/F and Separate Accounts statements. | Adopted beginning year-end 2022 reporting. |
Details of adopted items can be found on the BWG website.
Two new items were introduced and exposed for comment. Please note the shortened exposure period and suggested implementation date for reference #2022-13. Complete details of exposed items can be found on the BWG website, under the Exposure Drafts tab.
| Reference # | Subject | Disposition |
|---|---|---|
| 2022-12 | Combines the Health Analysis of Operations by Lines of Business Supplement page and the Health Care Receivable Supplement pages into one supplement filing for the health supplement to the L/F statement. | Exposed for comment through 10/14/2022. |
| 2022-13 | Modifies Five-Year Historical Data in L/F statement. | Exposed for comment through June 1, will then be subject to email vote and if adopted effective year-end 2022. |
If adopted, this proposal will align the reporting of A&H Claim Reserve Adequacy section within the Five-Year Historical Data pages with the newly adopted lines of business being captured in Schedule H. Although the original submitted proposal suggested a 2023 implementation date, industry asked that the changes be implemented for 2022, thus the shortened exposure period. For 2022 reporting, companies will be expected to provide data for 2022 and 2021.
The Working Group adopted several editorial changes and received a referral from the Property and Casualty Risk-Based Capital Working Group regarding reinsurer designation equivalent rating factors.
Interested Party Activity – Various Dates
Keep in mind that IPs refers to any number of industry groups that organize to provide the NAIC with feedback on various issues. There can be overlap of members of the various IP groups; however, an IP group that submits a comment letter to the Blanks Working Group may or may not be the same group of companies that submit comments to the Valuation of Securities Task Force on any of their issues. Each informal group has a kind of chair and co-chair to organize meetings, distribute information, and put together draft and final letters for submission. During April and May IPs were quite busy organizing meetings to discuss the continuing work on the principles-based definition of bonds, the SAPWG exposures for comment, Valuation of Securities Task Force exposures, and the direction SAPWG may take on the U.S. GAAP implementation of the CECL accounting standard.
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