Since July was the month before the next NAIC National Meeting, related activity picked up. Some of the meetings were to finalize activity going into the National Meeting; other meetings were held virtually in lieu of the National Meeting. Here’s what happened.
Valuation of Securities Task Force – July 13, 2023
This meeting was dedicated to the discussion of two proposed revisions to the Purposes and Procedures Manual of the NAIC’s Investment Analysis Office (P&P Manual). The first proposal was meant to clarify which side of a repurchase agreement constitutes a derivative transaction for use in funds. The current P&P Manual utilizes a definition (based on the SEC definition) of “reverse repurchase agreement” that contradicts the definition of that term found in Statement of Statutory Accounting Principles (SSAP) No. 103R. After a discussion, it was decided that NAIC staff will take a shot at rewriting the proposal. The stated purpose of the second proposal was to update the definition of “NAIC Designation” and move the Designation definitions found in different sections of the P&P Manual into one area and combine them into one acceptable definition. Although the majority of the changes simply move wording from one section of the P&P Manual to another, there were some material revisions also incorporated. It was those revisions that caused negative reaction in received comment letters. For the most part, the comment letters indicated disagreement with revised definitions and felt that some of the updated definitions went beyond the authority of the Securities Valuation Office (SVO) and the Structured Securities Group (SSG). In fact, some of the proposed new language would allow the SVO and SSG to override and restate ratings assigned to securities by the NAIC-recognized credit rating providers (CRPs). This caught at least one person by surprise, as the SVO has maintained for years that it is not a rating agency. One could then ask if the SVO is not a rating agency, by what authority can it override ratings assigned by national recognized statistical rating organizations? Neither proposal was adopted. More discussion and activity will be scheduled.
Catastrophe Risk Subgroup – July 18, 2023
Storming in Kansas City, Missouri complicated this meeting by causing an electric outage. This meant NAIC support staff lost their internet connection for a while. But the show went on, as others online managed to share their screen and continue. A slight modification was approved for the Subgroup’s working agenda. The Subgroup received an update on the activities of the Catastrophe Model Technical Review Ad Hoc Group. The Ad Hoc Group had composed a series of questions that were then submitted to the modeling companies for responses. The Ad Hoc Group then met with each of the vendors to discuss those questions. A nondisclosure agreement must be signed by those wanting to participate in the review of the various models. The chair of the Subgroup reminded those who wanted to participate in the review process to sign and submit their nondisclosure agreements. Verisk gave an overview of its severe thunderstorm model. Two additional presentations followed. One was on the various bills under consideration by both the House and the Senate that would affect the National Flood Insurance Program. The second presentation covered the U.S. private flood market.
Financial Conditions (E) Committee – July 19, 2023
The first two items on the agenda were the passage of factors for residual tranches in the main part of the Life Risk-Based Capital (RBC) formula, as well as a 10% factor for a related sensitivity test. As a reminder, a residual 30% factor will be implemented for 2023. Then in 2024, the factor will be updated to 45%, unless further analysis indicates a different factor would be more appropriate. Both proposals were adopted. The charges for the new Generator of Economic Scenarios Subgroup reporting to the Life RBC Working Group were adopted. The new Subgroup is a joint effort ultimately under the E and the Life Insurance and Annuities (A) Committees. The subgroup will support implementation of an economic scenario generator for use in statutory reserve and capital calculations, while reviewing economic conditions to evaluate the need for significant generator updates and ensuring the economic scenarios governance framework is being appropriately followed by all relevant stakeholders. After hearing a brief history on the Mortgage Guaranty Insurance Model Act (#630) and proposed revisions to the model, the E Committee adopted the revised model.
Reinsurance Task Force – July 24, 2023
This meeting was held in lieu of a physical meeting at the upcoming NAIC National Meeting. The Task Force adopted its 2024 proposed charges. There were no new charges added, while one charge that had been completed was eliminated. The Reinsurance Financial Analysis Working Group reported it met in May and July to review and approve applications for both certified and reciprocal reinsurers. Currently, there are 61 reciprocal reinsurers and 41 certified reinsurers approved for passporting by the states. A listing of these approved reinsurers can be found on the NAIC’s certified and reciprocal jurisdiction insurers webpage. A status report on the activities of the Mutual Recognition of Jurisdictions Working Group indicated it has not met since the NAIC Spring National Meeting. However, the group did provide a summary of some activity occurring in non-U.S. jurisdictions. NAIC staff provided a summary of other NAIC projects that would or might affect reinsurance. Those projects included:
- The creation of a new reinsurance worksheet for reinsurance by the Macroprudential Working Group.
- The consideration by the Life/Fraternal RBC Working Group to allow the use of comfort trusts as reinsurance collateral for RBC purposes only. This would not change the collateral qualifications for credit for reinsurance in the quarterly or annual statements.
- A new project by internal NAIC staff to accumulate better information on catastrophe reinsurance.
- The streamlining of the process to remove financial institutions from the approved letter of credit list for reinsurance.
A status report on the implementation of the Term and Universal Life Insurance Reserve Financing Model Regulation (#787) specified that 34 states have adopted the model, with another 12 states indicating the requirements of the model will be implemented through actuarial guidelines. The group was reminded that the model became an accreditation standard as of September 1, 2022, with enforcement procedures as of January 1, 2023.
Health RBC Working Group – July 25, 2023
The Working Group adopted the 2023 Health RBC newsletter for distribution. The newsletter contains a reminder that the Excel forecasting worksheet cannot be used to complete the required year-end RBC filing. After a discussion of the 2022 Health RBC statistics, the statistics were adopted and will be posted to the Working Group’s webpage. The 2022 statistics show an increase of 48 companies filing the Health RBC, with an increase of 14 companies triggering action levels. The number of companies triggering Regulatory Action Level and Mandatory Control Level saw a significant increase. Proposal 2023-11-H was exposed for a 30-day comment period ending August 24. The purpose of this proposal is to include Medicare and Medicaid amounts in the Other Health Risk Revenue and Fee-For-Service Offset. The group then moved on to the comments received from a previous exposure of the Health Test language proposal. Since the Health Test affects all insurer types, the exposure included the proposal being sent to all RBC Working Groups. The proposed revisions to the Health Test fix the inconsistent use of gross and net amounts in the calculation. The Working Group voted to approve the proposal and send it to the Blanks Working Group (BWG) for consideration. The American Academy of Actuaries (Academy) provided an update on the analysis it is performing on Health Care Receivables as part of claims incurred and, in particular, Other Health Care Receivables. The Academy feels some companies may be incorrectly reporting Other Health Care Receivables. The Academy feels it needs to look at reporting information from specific companies and has asked for help from the NAIC staff in reaching out to those companies. The Academy also reported on work being done regarding the underwriting risk factors and the managed care credit in the Health RBC formula. The Academy indicated it may need to take a closer look at fee-for-service business versus non-fee-for-service business. The Working Group decided to expose the Academy’s update letter for a 30-day comment period ending August 24 to get more explicit feedback from industry. The Working Group adopted its working agenda for the remainder of 2023 and beyond. The Excessive Growth Charge Ad Hoc Group reported that the excessive growth charge appears to currently be working at a reasonable level but does have a very narrow focus. The topic of pandemic risk was once again on the agenda. The NAIC will reach out to other organizations to see if any research on pandemic risk in relationship to RBC has been done, including any pandemic risk modeling.
Blanks Working Group (BWG) – July 27, 2023
BWG took the following action on items that had previously been exposed for comment.
||Revisions to the Property/Casualty Cybersecurity Supplement.
||Deferred for further work.
||Splitting Schedule D – Part 1 into two sections for all statement types.
||Re-exposed for comment through October 12.
As a reminder, this proposal was first exposed for comment by the Statutory Accounting Principles Working Group before it was even submitted to the BWG. Upon receipt of the proposal, the BWG exposed the proposal as part of its normal process. Based on comments received, a number of revisions were made, most editorial or clarifying in nature. Due to the number of changes, it was decided to re-expose the proposal.
||Update code column and eliminate LEI column on investment schedules for all statement types.
||Deferred for simultaneous adoption with 2023-06.
||Life/Fraternal new Note #37.
||Deferred for further work.
Additional work needs to be done on the above proposal. The goal of additional discussion is to eliminate redundant information and to relocate the needed information somewhere besides the Notes to Financials. The delay in adoption of the proposal will delay its implementation until 2024.
The listing of needed editorial revisions was adopted and the meeting was adjourned.
Group Capital Calculation Working Group – July 27, 2023
This meeting was devoted to the continuing discussion of scalars, beginning with the comment letter submitted by the American Council of Life Insurers (ACLI), urging the Working Group to consider the adoption of Excess Relative Ratio (ERR) scalars as the primary scalar methodology used in the Group Capital Calculation (GCC). (Scalars convert non-U.S. capital ratios into equivalent RBC ratios.) The ACLI argues that ERR scalars recognize differences in reserve methodologies across jurisdictions, can adjust to significant changes in jurisdictional solvency regimes, and are already in use by many global insurers to allocate group capital. UnitedHealth Group then expanded upon its comment letter opposing the use of any scalar methodology in the GCC, but suggesting if scalars are to be used, the Relative Total Asset Requirement (TAR) ratio should be used. The ensuing scalar discussion then brought in ideas and opinions from several different directions. Regulators had several questions, including why industry was making such a big deal of scalars now, instead of during the last six years of discussion. In addition, although the use of scalars is primarily driven by the life industry, many felt ERR scalars also should be applicable to the property/casualty and health industries. Others argued that ERR scalars could be implemented only for the life companies, as scalars are already different for each type of insurer in the GCC. It looks like the discussion will continue.
Property/Casualty RBC Working Group – July 27, 2023
The Working Group adopted the report of the Catastrophe Risk Subgroup, the 2023 Property/Casualty RBC Newsletter, the 2022 Property/Casualty RBC statistics, and its working agenda. The only discussion of the 2022 RBC statistics was the comment that the font is too small and something needs to be done about that. For those who might be interested in reviewing those statistics, they will be posted on the Property/Casualty RBC Working Group’s webpage. (Bring a magnifying glass or use the zoom function in your browser!) The Risk Evaluation Ad Hoc Group reported that it has decided to form subgroups to better review and evaluate RBC charges that have not been reviewed since developments. Subgroups are being organized for the asset concentration and geographic concentration, with the third group reviewing the purpose of the RBC and setting of guidelines for items to be considered for the RBC formulas. All groups are still asking for volunteers to participate in this process. The Academy provided an update and presentation on the investment income adjustments made to the Property/Casualty RBC underwriting factors. The investment component of these factors has not been reviewed since 2010. The Academy announced it will be releasing a formal report soon.
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