Regulatory Update: NAIC Fall 2020 National Meeting
The National Association of Insurance Commissioners (NAIC) held its Fall 2020 National Meeting (Fall Meeting) December 3-9, 2020. As a result of the continuing COVID-19 pandemic, the NAIC once again met in a virtual format. This Sidley Update summarizes the highlights from this meeting in addition to interim meetings that were held during November in lieu of taking place during the Fall Meeting.
1. NAIC Adopts the Group Capital Calculation Template and Instructions and Related Revisions to the Insurance Holding Company Act
On December 9, 2020, the NAIC adopted the Group Capital Calculation (GCC) template and instructions and corresponding amendments to the Insurance Holding Company System Regulatory Act (#440) (Model 440) developed by the NAIC’s Group Capital Calculation (E) Working Group (GCC Working Group).
Development of the GCC template and instructions began in 2015 by the GCC Working Group in an effort to provide U.S. regulators with an additional analytical tool for conducting groupwide supervision. The GCC uses a risk-based capital (RBC) aggregation approach intended to act as an additional group supervisory tool for regulators, in conjunction with the Form F Enterprise Risk Report, Own Risk and Solvency Assessment (ORSA) report, and the Corporate Governance Annual Disclosure.
In addition to the GCC template and instructions, the NAIC also adopted the corresponding amendments to Model 440 to require, subject to certain exemptions, that the ultimate controlling person of each insurance group file a GCC on an annual basis with such insurance group’s lead state. Insurance groups will be exempt from filing a GCC if
- the insurance group only has one insurer within its holding company structure, and such insurer writes business only in the domiciliary state and assumes no business from any other insurer;
- the insurance group is required to perform a group capital calculation specified by the U.S. Federal Reserve Board (Federal Reserve Board) to the extent the lead state commissioner of such group is able to receive the calculation from the Federal Reserve Board;
- the insurance group has a non-U.S. groupwide supervisor located within a “Reciprocal Jurisdiction” as described in the 2019 revisions to the Credit for Reinsurance Model Law, and the Credit for Reinsurance Model Regulation that recognizes the U.S. state regulatory approach to group supervision and group capital; or
- the insurance group (i) provides information to its lead state that meets the requirements for NAIC accreditation satisfactory to allow the lead state to comply with the NAIC group supervision approach, and (ii) the insurance group’s non-U.S. groupwide supervisor that is not a Reciprocal Jurisdiction “recognizes and accepts” the GCC as the worldwide group capital assessment for U.S. insurance groups that operate in that jurisdiction.
In addition, the lead-state commissioner will have the discretion to exempt an ultimate controlling person from filing the annual GCC or may accept a limited group capital filing or report as specified by the commissioner in regulation.
The amendments to Model 440 also provide that a lead-state commissioner may require a GCC for the U.S. subgroup of any non-U.S.-based insurance holding company system where, after any necessary consultation with other supervisors or officials, it is deemed appropriate by the lead-state commissioner for prudential oversight and solvency monitoring purposes or for ensuring the competitiveness of the insurance marketplace. Up until its adoption by the Executive (EX) Committee and Plenary, regulators continued to express concern with this provision, noting that such a provision may not be consistent with the bilateral agreements between the United States and the European Union and the United States and the United Kingdom (the Covered Agreements) and could potentially expose U.S. groups to non-U.S. subgroup reporting by another jurisdiction. Discussion on this issue is expected to continue as state regulators have requested that any elements not specifically set forth in the Covered Agreements be excluded from the accreditation standard with respect to the revisions to Model 440.
The NAIC is also continuing its work with other interested jurisdictions to develop the Aggregation Method (AM), which is intended to be an alternative to the consolidated group insurance capital standard (ICS) developed by the International Association of Insurance Supervisors (IAIS) to apply to Internationally Active Insurance Groups (IAIGs). The AM will be similar to the GCC and calculated in a similar but “jurisdictionally agnostic” manner. The IAIS intends to determine by the end of 2024 whether the AM will be considered “outcome equivalent” to the ICS. In November 2019, the IAIS agreed to a definition and approach for this assessment, and in November 2020, the IAIS released a draft document setting out the overarching principles and concepts for the assessment of whether the AM provides comparable outcomes to the ICS. The International Insurance Relations (G) Committee will be scheduling a conference call in early 2021 to discuss the NAIC’s comments to the IAIS’ draft document ahead of the January 22 comment deadline.
2. NAIC Continues Discussion of Proposed Revisions to Statements of Statutory Accounting Principles
The Statutory Accounting Principles (E) Working Group (SAP Working Group) continued its ongoing work related to the following Statements of Statutory Accounting Principles (SSAPs): SSAP No. 25 — Affiliates and Other Related Parties; SSAP No. 71 —Policy Acquisition Costs and Commissions; and SSAP No. 43R —Loan-Backed and Structured Securities.
a. NAIC Exposes Further Revisions to SSAP No. 25 — Affiliates and Other Related Parties— to Clarify Reporting Requirements
The SAP Working Group voted to expose for comment further revisions to SSAP No. 25 —Affiliates and Other Related Parties to incorporate new disclosures regarding the identification of related parties and affiliates. Revisions to SSAP No. 25 were originally exposed at the 2019 Fall National Meeting and are largely aimed at aligning related party and affiliate reporting under SAP with U.S. Securities and Exchange Commission (SEC) reporting requirements, the latter of which focus on beneficial ownership and do not include the concept of a disclaimer of control or affiliation (Disclaimer).
The proposed revisions make the following clarifications:
- Any related party identified under U.S. generally accepted accounting principles or SEC reporting requirements would be considered a related party under statutory accounting principles.
- Noncontrolling ownership over 10% results in a related party classification regardless of any Disclaimer.
- A Disclaimer may affect holding company group allocation and reporting as a subsidiary controlled affiliation under SSAP No. 97 but does not eliminate the classification as a “related party” and the disclosure of material transactions as required under SSAP No. 25.
The newly exposed revisions to SSAP No. 25 incorporate recommendations from the Group Solvency Issues (E) Working Group to include a new statutory disclosure to provide information on minority ownership interests as well as significant relationships between minority owners and other U.S. domestic insurers to ensure that state insurance regulators have the full picture of complicated business structures. In response to interested party comments, a supplemental reporting schedule will also be proposed to the Blanks (E) Working Group to capture related party information. These revisions are exposed for comment until January 11, 2021.
b. NAIC Re-exposes Revisions to SSAP No. 71 in Response to Industry Concerns Regarding the Substantive Nature of the Proposed Revisions
The SAP Working Group continued discussions on the exposed revisions to SSAP No. 71 — Policy Acquisition Costs and Commissions, which were proposed to address the practice by certain insurers that use third-party arrangements to fund payments to agents. The revisions are intended to clarify existing guidance regarding levelized commissions to require full recognition of liabilities incurred under funding arrangements for commission expenses at the time an insurance policy is written.
Revisions to SSAP No. 71 were previously exposed by the SAP Working Group on October 15, 2020, to (i) improve the description of funding arrangements, (ii) delete certain previously proposed revisions, including those referencing other types of commissions and the application as a correction of an error, and (iii) propose that the revisions apply to contracts in effect on January 1, 2021. The SAP Working Group noted that the October 2020 revisions attempted to make a distinction between traditional persistency commission and levelized commission funding arrangements in response to industry comments in order to focus on funding arrangements that attempt to defer acquisition costs while ensuring that traditional persistency commissions did not inadvertently become included in the scope of the proposed revisions.
The SAP Working Group spent a significant amount of time discussing the effective date of revisions to SSAP No. 71, including whether to (i) retain the January 1, 2021, proposed effective date, (ii) push the effective date to December 31, 2021, to allow more time for company discussion with state insurance regulators, or (iii) as the proposed revisions are nonsubstantive, make such revisions effective upon adoption. The SAP Working Group voted to re-expose the revisions for comment until January 11, 2021, with the minor edits, with such revisions to be effective as of the date of adoption. NAIC staff will also draft an issue paper to document the discussion of conclusions and revisions to SSAP No. 71 for future reference.
c. NAIC Continues the Development of its Issue Paper Providing Guidance on Proposed Revisions to SSAP No. 43R —Loan-Backed and Structured Securities
While not discussed in substance during the Fall Meeting, the SAP Working Group noted its continuing work on the issue paper regarding SSAP No. 43R — Loan-backed and Structured Securities (the SSAP 43R Issue Paper), which is being developed to document discussions on proposals to determine whether an investment is within the scope of SSAP No. 43R.
Proposed revisions to SSAP No. 43R were initially exposed during the 2019 Summer National Meeting and classified as “non-substantive” changes intended to clarify that collateralized fund obligations (CFOs) and similar structures that reflect underlying equity interests but that are issued in the form of debt instruments are not within the scope of SSAP No. 43R and/or are bonds created specifically to lower the associated investment risk-based capital charge without any reduction of risk (i.e., principal-protected securities).
After discussing initial comments received to the exposed revisions, the SAP Working Group reclassified the project as substantive and directed NAIC staff to develop the SSAP 43R Issue Paper to document the rationale for all investments covered by the proposed revisions to
SSAP No. 43R. The preliminary draft of the SSAP 43R Issue Paper was exposed for comment during the Spring 2020 National Meeting. In response to that exposure, interested parties submitted a 67-page comment letter to NAIC staff outlining numerous concerns regarding the categorization process outlined in the SSAP 43R Issue Paper.
The SAP Working Group held a conference call on October 13, 2020, to discuss the comments to the draft SSAP 43R Issue Paper. During that call, the SAP Working Group discussed a proposal submitted by the Iowa Insurance Division that suggested the project proceed with first identifying principles of investments that should be captured as “bonds” on Schedule D-1 (the Iowa Proposal). The Iowa Proposal suggested that thereafter, the project proceed with identifying those characteristics that, while not impairing classification as a bond, may warrant separate identification on Schedule D-1,with secondary phases to include clarification of the classifications under SSAP No. 26R— Bonds and SSAP No. 43R. The SAP Working Group exposed the Iowa Proposal for comment until December 4, 2020. It is expected that the SAP Working Group will continue its discussions regarding the Iowa Proposal in early 2021.
3. NAIC Continues Efforts to Address Innovation and Technology in the Insurance Sector
Several NAIC task forces and working groups are evaluating the intersection of technology and insurance, including in the areas of the use of predictive modeling in rate filings by property and casualty insurers and the application of antirebating laws.
a. NAIC Committee Adopts Regulatory Review of Predictive Models White Paper
The Property and Casualty Insurance (C) Committee adopted the Regulatory Review of Predictive Models white paper (the White Paper). The White Paper identifies best practices for state insurance regulators in their review of predictive models and analytics filed by insurers to justify rates.
The four best practices for regulatory review described in the White Paper are to
- ensure that the selected rating factors, based on the model or other analysis, produce rates that are not excessive, inadequate, or unfairly discriminatory
- obtain a clear understanding of the data used to build and validate the model and thoroughly review all aspects of the model, including assumptions, adjustments, variables, and submodels used as input, and resulting output
- evaluate how the model interacts with and improves the rating plan
- enable competition and innovation to promote the growth, financial stability, and efficiency of the insurance marketplace
The White Paper also provides guidance for regulators’ review of rate filings based on predictive models by identifying specific “information elements” a regulator may need to consider. The “information elements” are set forth in Appendix B of the White Paper and organized in three
categories: (i) selecting model input, (ii) building the model, and (iii) the filed rating plan. Although Appendix B focuses on generalized linear models for personal automobile and home insurance, the White Paper notes that many of the “information elements” may be transferable to other types of models, other lines of business, and other applications beyond rating.
Two noteworthy issues that are not within the scope of the White Paper are (i) guidance for regulators to identify and minimize unfair discrimination and disparate impact, which is expected to be addressed by the Special (EX) Committee on Race and Insurance, and (ii) the importance of causality versus correlation when evaluating a rating variable’s relationship to risk. Confidentiality of predictive models is an area of industry concern, and the White Paper merely notes that whether or not rate filings, including any predictive models and supplemental information furnished to a regulator, are accorded confidential treatment is determined by state confidentiality laws.
The NAIC Executive (EX) Committee and Plenary will consider adoption of the White Paper at the 2021 Spring National Meeting.
b. NAIC Adopts Amendments to Model Unfair Trade Practices Act
The NAIC adopted amendments to the NAIC’s Model Unfair Trade Practices Act (#880) to address concerns raised by interested parties that perceive the existing antirebating laws to be an obstacle to innovative insurance solutions.
Under the Unfair Trade Practices Act and existing state rebating laws, insurers are prohibited from offering value-added products, services, or programs in conjunction with the sale of an insurance policy as an inducement to purchase insurance. The amendments focus on Section 4H and clarify that certain value-added products, services, and programs that are intended to protect policyholders or otherwise mitigate the risk of loss to a person or property should not be a prohibited “rebate” or “inducement.” The amendments also authorize insurers and producers to offer or give noncash gifts, items, or services and conduct raffles or drawings provided that, among other things, such gifts, items, services, or prizes are not valued in excess of specified amounts, the offer is not made in a manner that is unfairly discriminatory, and the customer is not required to purchase, continue to purchase, or renew a policy in exchange for such gifts, items, services, or prizes. The amendments include a drafting note that recommends that the value cap on such gifts, items, services, and prizes should be the lesser of 5% of the current or projected policyholder premium or $250. Finally, the amendments also include a prohibition against offering insurance as an inducement to the purchase of anther policy or using the words “free” or “no cost” in advertisements.
4. NAIC Continues Work to Develop Guidance Related to Long-Term Care Insurance
The subgroups of the Long-Term Care Insurance (EX) Task Force continue their work to develop guidance intended to facilitate uniformity in long-term care insurance rate reviews and the evaluation of reduced benefit offers for policies that are no longer affordable due to rate increases.
The Long-Term Care Insurance Multistate Rate Review (EX) Subgroup is conducting a pilot project to review long-term care insurance rate filings from several insurers. The subgroup has completed the related work product, which consists of a detailed rate advisory report for two insurers and is nearing completion on a third report. The reports are confidential and intended for use by regulators to develop a more consistent and effective approach to rate filings. The subgroup has also started to develop an outline for a framework for multistate long-term care insurance rate reviews and expects to present a first draft at the NAIC Spring National meeting in 2021. The development of the framework will be subject to public review and comment.
The Long-Term Care Insurance Reduced Benefit Options (EX) Subgroup adopted two principles documents: One offers guidance to regulators when evaluating the terms of reduced benefit offers by insurers; the other offers guidance to regulators when evaluating the content and presentation of notices to policyholders regarding reduced benefit offers. The two principles documents have been referred to the Long-Term Care Insurance Multistate Rate Review (EX) Subgroup to incorporate into the development of the multistate rate review framework.
5. NAIC Continues Development of the Pharmacy Benefit Manager Licensure and Regulation Model Act
The proposed Pharmacy Benefit Manager Licensure and Regulation Model Act (the PBM Model Act) establishes standards and criteria for the licensing and regulation of pharmacy benefit managers (PBMs) providing claims processing services or other prescription drug or device services for health benefit plans.
On October 29, 2020, the Pharmacy Benefit Manager Regulatory Issues (B) Subgroup adopted the PBM Model Act, which was then forwarded to the Regulatory Framework (B) Task Force (the Task Force) for consideration. The Task Force exposed the PBM Model Act for an additional public comment period until December 22, 2020.
On December 10, 2020, the U.S. Supreme Court issued a unanimous decision in Rutledge v. Pharmaceutical Care Management Association, holding that the Employee Retirement Income Security Act of 1974, as amended, does not preempt an Arkansas state law that regulates the rates at which PBMs reimburse Arkansas pharmacies and effectively requires PBMs to reimburse such pharmacies at a price equal to or higher than the pharmacy’s wholesale cost. That decision and the NAIC’s continuing work with respect to the PBM Model Act appear to pave the way for state regulation of PBMs.
6. NAIC Committee Adopts Real Property Lender-Placed Insurance Model Act
During the Fall Meeting, the Property and Casualty Insurance (C) Committee adopted the Real Property Lender-Placed Insurance Model Act (the LPI Model Act), which establishes a legal framework within which lender-placed insurance on real property (LPI) may be written in a state and includes provisions to (i) maintain the separation between mortgage lenders and servicers, on the one hand, and insurers and insurance producers, on the other hand, and (ii) minimize the possibilities of unfair competitive practices in the sale, placement, solicitation, and negotiation of LPI.
The LPI Model Act specifically covers, among other matters, (a) the duration of LPI coverage and required evidence of coverage, (b) the calculation of coverage and premium amounts, (c) certain prohibited practices, including prohibitions on insurers’ and producers’ payments of compensation to lenders and servicers in connection with the placement of LPI, and (d) rate and form filings and other regulatory reporting requirements. Certain issues of contention included whether the LPI Model Act should prohibit inclusion of (a) the lender’s monitoring costs in LPI rates and premium charges and (b) single-interest LPI covering only the lender and not the borrower. It was ultimately determined that the LPI Model Act should not contain such prohibitions.
The NAIC Executive Committee (EX) and Plenary will consider adoption of the LPI Model Act at the 2021 Spring National Meeting.
7. NAIC Holds Special Session to Discuss Federal Mechanisms to Ensure Availability of Business Interruption Insurance
During the Fall Meeting, the NAIC Center for Insurance Policy and Research held a special session to discuss pandemic business interruption (BI) insurance coverage and possible federal mechanisms to ensure widespread availability of BI coverage for pandemics.
During this session, it was noted that the results of a recent NAIC data call from 230 insurance groups writing BI coverage showed that many insurers, including many of the largest insurers in the U.S., are largely unwilling or unable to underwrite the risk of a pandemic, creating a sizable coverage gap for American businesses and, in particular, small businesses. As a result, proposals are now being put forward in order to address the gap in the availability of pandemic BI coverage that, like many existing programs, would provide a federal backstop.
The session considered existing federal insurance programs such as the Terrorism Risk Insurance Act, the National Flood Insurance Program, and the Federal Crop Insurance Program, each of which uses a different mechanism for federal involvement including through the use of government-provided primary insurance and reinsurance, and discussed several current proposals for BI coverage, such as the Pandemic Risk Insurance Act (PRIA) proposed by Rep. Carolyn B. Maloney, D-N.Y., in May 2020. PRIA would provide for a public-private federal program that would require participating insurers to offer BI insurance policies that cover pandemics with the U.S. government splitting the risk with the private sector 95%/5%. Another proposal, the Business Continuity Protection Program proposed by the American Property Casualty Insurance Association, Independent Insurance Agents and Brokers of America, Inc., and National Association of Mutual Insurance Companies, would establish a voluntary federal program within the Treasury Department to allow for the purchase of revenue replacement assistance for BI caused by a pandemic that has been federally declared as a public health emergency.
In November 2020, the Subcommittee on Housing, Community Development, and Insurance of the U.S. House of Representatives’ Financial Services Committee held a virtual hearing entitled “Insuring Against a Pandemic: Challenges and Solutions for Policyholders and Insurers” to discuss the current availability of BI coverage and the role of the federal government in making such coverage available.
To date, the NAIC has not supported any specific proposal, but it has stated that it views a federal mechanism as necessary to address the BI coverage gap for pandemic risk. The NAIC noted, however, that to the extent insurance is used to facilitate such a program, the program must (i) not undermine critical insurance regulatory protections intended to prevent an insurer from taking on an outsized risk, (ii) reduce the federal government’s (and by extension taxpayers’) exposure to future pandemics through policyholder payment of premiums, risk mitigation, and possibly more private insurance and reinsurance industry involvement over time, and (iii) incentivize the purchase of coverage by ensuring that the product is available and affordable.