Because industry was still concentrating on the statutory annual filings in February, NAIC-related activity continued at a minimum. The Risk-Based Capital (RBC) groups were the most active as they approach the upcoming April 30 deadline for 2023 formula format changes.
Update on PDF Version of the Accounting Practices and Procedures Manual (AP&P Manual)
Earlier this year, Interested Parties had asked the NAIC to consider providing the AP&P Manual in PDF format. This month the NAIC confirmed that a PDF version will be made available. Orders will still have to be placed through the NAIC’s Account Manager platform. The 2023 AP&P Manual has not yet been finalized and released. Most likely that will occur after the upcoming Spring NAIC National Meeting in March. Watch for announcements from the NAIC on the book’s availability.
Health RBC Working Group – February 7, 2023
The Working Group began by adopting a revision to the instructions for the formula’s trend test. The sentence indicating the test was for informational purposes only until such time that all the states had adopted it, was removed as adoption by the states is now complete. The same instruction as a footnote on the trend test page had previously been removed, but the instructions had been overlooked. The group then voted to send a reply to the Capital Adequacy Task Force regarding the Task Force’s referral on possible RBC revisions for the handling of insurers in run-off. The letter indicates the Working Group feels current RBC measures are adequate when paired with other regulatory tools already in place. The next item on the agenda was the annual review of the investment income factor as part of the underwriting risk factors. The group exposed for comment new factors, which could result in a significant change for some companies. With interest rates on the rise, the factor revision is favorable to the industry and could improve a company’s RBC ratios, maybe by as much as 3 to 4%. The comment period ends March 9. The American Academy of Actuaries provided a brief update on the H2 underwriting risk project, promising another update at the upcoming NAIC National Meeting. The meeting ended with a reminder that comments were due on proposal 2022-15-H by February 28.
Valuation of Securities Task Force – February 21, 2023
There were three proposals on the Task Force’s agenda, all of which had previously been exposed for comment. In 2021, the Task Force adopted a technical, nonsubstantive change to the Private Letter Securities section of the Purposes and Procedures Manual of the NAIC’s Investment Analysis Office (P&P Manual) clarifying that a NAIC 5GI designation is the equivalent of a 5.B designation category. Since that time, several other sections of the P&P Manual were found that also should have been revised. During this meeting, the Task Force adopted those needed revisions. A proposed revision to the P&P Manual requiring the modeling of collateralized loan obligations (CLOs) was addressed next. Besides adding CLOs to the existing modeling process, the proposal also recommends adding 6.A, 6.B, and 6.C NAIC Designation Categories for use in reporting CLOs. CLOs subject to financial modeling would be assigned a NAIC Designation Category by the Structured Securities Group (SSG), without the use of an administrative symbol. The proposal was adopted. The SSG will begin modeling CLOs effective January 1, 2024. When originally exposed for comment, referrals also were sent to the Capital Adequacy Task Force and the RBC Investments Risk and Evaluation Working Group requesting that two new risk factors be added to RBC for CLOs. Most of the meeting addressed the modeling methodology for CLOs, excluding scenarios and probabilities. The SSG stated that scenarios needed a more in-depth discussion once a methodology is chosen. The proposed methodology is based on the SSG’s annual CLO stress tests. The original exposure of the methodology also posed several questions to industry. No methodology decision was made during the meeting. Received comment letters were discussed, and it was decided to form an ad hoc group composed of the SSG, regulators, and industry for continuing discussions.
RBC Investment Risk and Evaluation Working Group – February 27, 2023
Half of this meeting was devoted to the discussion of CLOs and their RBC treatment. The American Academy of Actuaries (Academy) provided the material. This discussion was a follow-up to an earlier Academy presentation, with the Academy asking for some additional feedback before proceeding with its work. The Academy requested more information on five specific concepts; however, nothing was really settled during this meeting.
- Is developing RBC factors for CLOs urgent enough to require interim factors, which would then be replaced after the development of more long-term factors? Industry comments appear to indicate this issue is not urgent enough to require interim factors. Regulators appear to not yet have an opinion on urgency, although the NAIC’s Securities Valuation Office (SVO) has suggested interim factors.
- What information does the Working Group need to establish a statistical safety level? Regulators seemed inclined to receive a recommendation from the Academy on this issue.
- Does this Working Group believe that a “no RBC arbitrage” principle should be used to the methodology? There was quite a bit of discussion on this point, with consideration of comments made by the SVO.
- After establishing C-1 factors, should C-3 implications be considered? This discussion focused on the optionality embedded in some CLOs and possible effects on C-3 risk in the formula.
- Should active management of CLOs be considered when developing C-1 factors? The Working Group is looking to the Academy for recommendations.
At this point, the meeting moved onto comments letters received regarding interim guidance for residual tranches. Five different comment letters had been received. There was a range of opinions expressed in the comment letters, but no decision was made during the meeting. The Working Group indicated more discussion on residual tranches would be on the agenda for the upcoming NAIC Spring Meeting in March.
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