The National Association of Insurance Commissioners (NAIC) held its Summer 2018 National Meeting in Boston, Massachusetts, from August 4 to 7, 2018. This post summarizes the highlights from this meeting.
1. NAIC Continues its Evaluation of Insurers’ Use of Big Data
The NAIC is continuing its review of property and casualty insurers’ use of predictive modeling in rate filings and is developing related guidance materials for states to use in reviewing predictive models. The NAIC is also considering insurers’ use of big data in underwriting life insurance products.
Insurers’ use of predictive modeling continues to expand and, in response to such growing use, the Casualty Actuarial and Statistical (C) Task Force is currently drafting a white paper to provide guidance on best practices in addressing (a) the sources of data used by companies, (b) data points selected by companies as inputs for predictive modeling, (c) how the predictive models were developed, (d) the results generated by predictive models and (e) insurers’ rate filings derived from predictive models. The Task Force stressed that the guidance provided in the white paper will not be designed to preempt state authority but rather will assist regulators in providing greater consistency among states’ review of predictive models. The Task Force aims to complete the white paper by the fall of 2018.
In addition, NAIC staff continues to conduct research regarding the use of predictive models and is also in the process of soliciting input from member states to develop guidance for reviewing predictive models. The NAIC legal division is reviewing the legal implications of companies sharing confidential predictive modeling information with state insurance regulators, specifically with respect to the sharing of information among state regulators and how state trade secret laws and confidentiality protections affect the sharing of confidential predictive modeling information.
The Big Data (EX) Working Group heard a presentation from LIMRA regarding how insurers are utilizing consumer data in underwriting life insurance products. The presentation provided an overview of the growing use of automated underwriting, insurers’ engagement of third-party vendors to assist in developing automated underwriting programs, and the types of data insurers are using in order to make automated underwriting possible. Discussion following the presentation focused on stakeholder concerns regarding such use of big data, including the lack of consumer disclosures and confidentiality concerns.
2. NAIC Continues Working to Develop a Group Capital Calculation
The Group Capital Calculation (E) Working Group continued its development of a group capital calculation (GCC) as an analytical tool for regulators to evaluate the financial condition of an insurance group. While it has been determined that the GCC will utilize a risk-based capital (RBC) aggregation approach in order to leverage existing legal capital requirements, it is not clear which entities within any group will be subject to the GCC or how the GCC will apply to those entities within a group that do not have existing capital requirements. The Working Group discussed comments from interested parties in response to a June 26, 2018 NAIC staff memorandum regarding the scope of application of the GCC. The intent of the draft memorandum is to provide guidance to field testing volunteers and their respective lead state regulators on the scope of the group subject to the GCC.
The American Insurance Association, the National Association of Mutual Insurance Companies, the Property and Casualty Insurers Association of America and the Reinsurance Association of America jointly submitted comments on the NAIC memorandum (Trades Letter). The Trades Letter suggests, among other things, (a) a method for determining the scope of the group which principally relies on an initial determination made by the group’s management, (b) the use of an exemption for U.S.-based groups that are not required to file an Own Risk and Solvency Assessment (ORSA), (c) the use of an “expedited approach” for groups that are subject to certain alternative group capital assessments, and (d) the use of alternative risk charges for non-insurance entities, including regulated and non-regulated financial entities as well as other non-insurance and non-financial entities. At the Summer Meeting, the Working Group agreed to expose the Trades Letter for a 45-day comment period.
In addition to comments on the recommendations outlined in the Trades Letter, the Working Group is requesting additional input on (i) whether a specific materiality threshold should be utilized in the analysis of whether to include a non-financial entity in the scope of the group, (ii) whether to assume that non-U.S. based groups with group-wide supervisors in current qualified jurisdictions would not be required to complete a GCC (which may impact the decision by such groups to volunteer for field testing), and (iii) whether to include an exemption for groups that will submit a GCC to the Federal Reserve. In addition, the Working Group is also requesting input on alternative methods to inventory the entities in the broader insurance group that could potentially be subject to the GCC. The Trades Letter proposes an expanded Schedule Y approach, which would include all entities listed in the insurer’s most recent Schedule Y and any entity directly or indirectly owned by the ultimate controlling person and included in other relevant holding company filings.
While the next step for the Working Group is to begin field testing, which will be focused on the scope of the group subject to the GCC, the final decision as to the scope of application of the GCC will ultimately reside with each lead state regulator (in coordination with any other involved regulators).
3. NAIC Continues to Develop “Suitability Plus” Standard that Would Apply to Annuity (But Not Life Insurance) Transactions
Notwithstanding the decision of the Fifth Circuit Court of Appeals, which vacated the U.S. Department of Labor’s regulations expanding the definition of the term “fiduciary” (Fiduciary Rule), the Annuity Suitability (A) Working Group (ASWG) is proceeding with developing proposed amendments to the NAIC’s Suitability in Annuity Transactions Model Regulation (SAT). Among other things, the proposed amendments to the SAT would require producers (or insurers where no producer is involved) to comply with a “suitability plus” (rather than a “best interest”) standard in connection with annuity transactions with consumers. Although New York has encouraged the ASWG to adopt amendments to the SAT that apply to life insurance as well as annuity transactions, the ASWG has determined that it does not have the authority to do so under its existing charge.
In their current stage of development, the amendments to the SAT would require that a producer (or insurer where no producer is involved), in connection with making a recommendation to a consumer regarding the purchase or exchange of an annuity, have “reasonable grounds for believing that a recommendation is suitable” for the particular consumer. “Reasonable grounds for believing that a recommendation is suitable” would require “fair dealing and reasonable competence, trustworthiness, diligence, care, skill and prudence by the producer [(or insurer)].” As currently proposed, the amendments to the SAT would require a producer (or insurer) to make a recommendation “without placing the financial or other interests of the producer [(or insurer)] ahead of the consumer’s interests as known from the consumer’s suitability information.” The current draft of the amendments to the SAT would also require the producer (or insurer) to make certain disclosures to the consumer, including (a) the cash and non-cash compensation to be received by the producer in connection with the transaction and (b) “[a]ny and all material conflicts of interest.”
During the Summer Meeting, the ASWG discussed comments received on certain defined terms used in the amendments to the SAT, including “cash compensation,” “non-cash compensation” and “intermediary.” The ASWG also began discussing comments to the definition of “material conflict of interest.” Several of the proposed definitions imposed a reasonableness standard to determine what should be disclosed as a “material conflict of interest.” However, the chair of the ASWG indicated that he would prefer to adopt a definition of “material conflict of interest” that includes more objective criteria to identify what constitutes a “material conflict of interest” that is subject to the disclosure requirements. Prior to the NAIC’s Fall 2018 National Meeting, the ASWG hopes to finalize the amendments to the SAT and to present such amendments to the Life Insurance and Annuities (A) Committee ((A) Committee) for consideration at that meeting.
Meanwhile, the New York State Department of Financial Services has finalized amendments to its insurance regulations governing suitability in annuity transactions (New York Insurance Regulation 187), which would, among other things, require insurance producers (or insurers) to comply with a “best interest” standard in connection with both life insurance and annuity transactions with consumers. During the Summer Meeting, in response to a request from New York, the (A) Committee agreed to consider, in connection with its review of the proposed amendments to the SAT, whether the scope of the SAT should be expanded to include both life insurance and annuity transactions.
4. NAIC Continues to Develop Regulatory Guidance Regarding Changes to Life Risk-Based Capital Following Federal Tax Reform
The Life Risk-Based Capital (E) Working Group adopted a proposal for changes to the life and fraternal RBC factors and instructions during a June 8, 2018 conference call, with such proposal adopted by the Capital Adequacy (E) Task Force during a June 28, 2018 conference call. The proposal addresses changes to the life and fraternal RBC factors and instructions to reflect the current tax environment following U.S. tax reform, specifically focusing on changes to the RBC ratio denominator in order to reflect the corporate tax rate decrease from 35% to 21%. With the assistance of the American Academy of Actuaries, the Working Group is preparing a guidance document for state regulators to use in evaluating companies’ year-end 2018 RBC ratios in light of tax reform and these recently adopted changes to the RBC factors and instructions. The Working Group hopes to consider the adoption of the guidance document at the NAIC’s Fall 2018 National Meeting.
5. NAIC Forms Subgroup to Explore Licensure of Pharmacy Benefit Managers
The Regulatory Framework (B) Task Force established a new subgroup to evaluate the need for additional regulation of pharmacy benefit managers (PBMs). This work is part of a broader discussion occurring at the Health Insurance and Managed Care (B) Committee and within its related working groups regarding healthcare cost drivers, including pharmaceutical costs. PBMs are facing increased scrutiny following President Trump’s recently announced policy proposals to lower prescription drug costs, including the potential elimination of “middlemen” such as PBMs involved in the delivery of prescription drug benefits.
Members of the Task Force noted that, in connection with the development of recent amendments to the NAIC’s Health Carrier Prescription Drug Benefit Management Model Act, the Task Force had decided early on to regulate PBMs indirectly, by providing that the health carrier must ensure that the PBM is complying with the requirements of the laws and regulations applicable to the activities performed by the PBM. However, because of the increased scrutiny on PBMs, at the Summer Meeting, the Task Force decided to form a subgroup to review existing state licensing regimes applicable to PBMs and to explore the appropriate regulatory framework, if any, to be developed with respect to the licensure of PBMs.
The Task Force is aware that the National Council of Insurance Legislators (NCOIL) is drafting a Pharmacy Benefits Manager Licensure and Regulation Model Act, which would give state insurance regulators increased jurisdiction over the activities of PBMs. The NCOIL model is based on recently adopted Arkansas legislation addressing the regulation and licensure of PBMs. It is expected that the Task Force’s newly formed subgroup will consider whether the NAIC should support NCOIL’s proposed PBM legislation or, alternatively, develop additional NAIC guidance related to the regulation of PBMs.
6. NAIC Reviews Revised Drafts of ComFrame and International Capital Standard 2.0
On July 31, 2018, the International Association of Insurance Supervisors (IAIS) released the latest version of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) and International Capital Standard Version 2.0 (ICS 2.0) for a 90-day public consultation period. The ComFrame Development and Analysis (G) Working Group is reviewing the consultation materials and is developing NAIC comments in conjunction with the International Insurance Relations (G) Committee.
By way of background, ComFrame provides a framework for the supervision of internationally active insurance groups (IAIGs) and includes both quantitative and qualitative supervisory requirements that will be tailored to each IAIG. IAIGs will be classified based on a combination of international activity and size (total assets of not less than $50 billion or gross written premiums of not less than $10 billion). While currently there is no public list available setting forth the entities that have been identified as IAIGs, such a list will be made available when ComFrame is in place. Based on current field testing, it is estimated that there will be a total of 50 entities that meet the IAIG criteria, with approximately 20 entities headquartered in Europe, 15 headquartered in Asia and approximately 12 headquartered in North America.
ICS 2.0 prescribes the insurance capital standard for IAIGs and, as part of the exposure draft, the IAIS is seeking stakeholder feedback with respect to (i) the reference ICS components, (ii) additional reporting that may be required at the option of the group-wide supervisor, (iii) the expectations for the IAIS and group-wide supervisors during the five-year monitoring period, and (iv) the incremental costs and benefits of the ICS for IAIGs.
Under the current timeline, following the completion of this public consultation, if needed, a further revised version of ComFrame and ICS 2.0 will be exposed for an additional 60-day comment period at the end of June 2019. The IAIS intends for each of ComFrame and ICS 2.0 to be presented for adoption at the IAIS Annual General Meeting in November 2019.
7. NAIC Working Group Exposes Reports Regarding Bond Factors
The Investment Risk-Based Capital (E) Working Group heard a presentation from the American Academy of Actuaries (AAA), which continues to recommend the development of a set of bond factors that includes an offset for the level of credit risk reflected in statutory reserves. The Working Group also received a report from the AAA, which recommends that the NAIC consider increasing the granularity in bond factors used in the Property/Casualty RBC Formula and the Health RBC Formula by expanding the number of bond rating classes from six to 20, as well as updating the factors.
Statutory Reserve Offset in Bond Factors
The level of credit risk assumed to be reflected in statutory policy reserves acts as an offset to the total credit risk modeled in the C1 bond factors, which is based on the risk premium and the default portion of the asset valuation reserve. The AAA recommends that the assumption for risk premium be set at the mean or expected level of the credit loss distribution, which is consistent with the existing solvency framework and C1 bond factors. The Working Group exposed the AAA recommendation for a 60-day public comment period ending October 4, 2018.
Increased Granularity in Bond Factors
In addition, the AAA presented a report on developing bond risk factors for the Property/Casualty RBC Formula and the Health RBC Formula. This report analyzed the impact of increased granularity in bond factors by expanding the number of bond rating classes from six to 20, as well as updating the factors. The report recommended that, in order to increase consistency between both the Property/Casualty RBC Formula and the Health RBC Formula, as well as similar bond factors between different lines of business, an increase in bond factors granularity and updated factors should be considered. The Working Group exposed the AAA report for a 60-day public comment period ending October 4, 2018.
8. NAIC Takes Action to Begin Implementing the Covered Agreement
The Reinsurance (E) Task Force has proposed amendments to the NAIC’s Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (together, the CFR Model Laws) to implement reinsurance collateral reforms for reinsurers that meet certain conditions, as required in connection with the Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement), which was signed by the U.S. and the EU in September 2017.
The Covered Agreement prohibits a U.S. territory (i.e., state) from imposing any reinsurance collateral requirements upon a qualifying EU assuming reinsurer that would result in the EU reinsurer receiving less favorable treatment than assuming reinsurers domiciled in the state. The Task Force has proposed amendments to the CFR Model Laws to: (a) eliminate reinsurance collateral requirements for EU-based reinsurers meeting the conditions of the Covered Agreement; (b) extend similar treatment to reinsurers from other jurisdictions covered by potential future covered agreements; and (c) extend similar treatment to reinsurers domiciled in “reciprocal jurisdictions” that are not necessarily parties to existing or future covered agreements.
In their current stage of development, the amendments to the CFR Model Laws would allow a U.S. ceding insurer to take 100% credit for reinsurance for transactions with non-U.S. reinsurers that meet all of the following requirements (in relevant part):
- The assuming reinsurer has its head office, or is domiciled, in a “reciprocal jurisdiction.” A “reciprocal jurisdiction” includes: (i) any non-U.S. jurisdiction that has entered into a treaty or international agreement with the U.S. regarding credit for reinsurance; and (ii) any “qualified jurisdiction” (for certified reinsurer purposes) that is not a party to such an agreement with the U.S. and that satisfies certain requirements with respect to the treatment of U.S. reinsurers operating in such jurisdiction.
- The assuming reinsurer maintains minimum capital and surplus (or its equivalent) of not less than $250 million.
- The assuming reinsurer maintains a prescribed minimum solvency or capital ratio.
- The assuming reinsurer agrees to be subject to U.S. jurisdiction for certain limited purposes and to make certain informational filings with state insurance departments.
In the 16 comment letters that were submitted in response to the exposed amendments to the CFR Model Laws, a number of common issues were raised by interested parties, including: (i) concerns regarding the degree of commissioner discretion (including with respect to the ability to request additional information not required under the Covered Agreement) and resulting disparate treatment of non-EU jurisdictions, (ii) the need for greater conformity to the language in the Covered Agreement, and (iii) the need for recognition of qualified jurisdictions as reciprocal jurisdictions and the manner in which such jurisdictions will indicate acceptance of the U.S. state-based system.
The Task Force will further revise the proposed amendments to the CFR Model Laws and re-expose the amendments for comment prior to the NAIC’s Fall 2018 National Meeting. The Task Force intends to adopt the amendments to the CFR Model Laws by the end of this year.
9. Property and Casualty Insurance (C) Committee Adopts Travel Insurance Model Act
The Property and Casualty Insurance (C) Committee adopted the Travel Insurance Model Act (NAIC Travel Model Act), which is intended to provide a uniform, comprehensive framework for regulating the marketing and sale of insurance products related to travel protection. It is expected that the NAIC will adopt the NAIC Travel Model Act during the meeting of the Executive/Plenary Committee at the NAIC’s Fall 2018 National Meeting in November 2018.
The NAIC Travel Model Act provides a comprehensive framework for regulating travel insurance and other travel-related products, prescribing rules related to, among other things, the licensing of limited lines travel insurance producers, required disclosures to consumers in connection with the sale of travel insurance, premium taxes and marketing practices. The NAIC Travel Model Act allows travel protection plans that include insurance and non-insurance products to be bundled and offered to consumers for one price if the travel protection plan clearly discloses to the consumer at or prior to the time of purchase that it includes travel insurance, travel assistance services and cancellation fee waivers, as applicable, and provides information and an opportunity at or prior to the time of purchase for the consumer to obtain additional information regarding the features and pricing of each. The NAIC Travel Model Act makes it an unfair trade practice to market blanket travel insurance coverage as free. The NAIC Travel Model Act also includes a prohibition against requiring consumers to opt out of the purchase of travel insurance (such as by unchecking a box) when booking travel plans.
The Travel Insurance (C) Working Group used the NCOIL Travel Model Act as the starting point for developing the NAIC Travel Model Act. At least 40 states have adopted some form of the NCOIL Travel Model Act, so it is unclear how widely the NAIC Travel Model Act will be adopted by the states.
10. NAIC Forms Working Group to Consider Insurance Regulatory Issues Related to Legalized Cannabis Business
Notwithstanding that an increasing number of states have legalized the recreational and/or medical use of marijuana, the possession, production, distribution and sale of marijuana remains prohibited under Federal law. As a result, many businesses engaged in activities related to the possession, production, distribution and sale of marijuana in states where such activities are legal under state law often encounter obstacles to obtaining insurance coverage related to such activities. In response to this problem, the NAIC has formed the Cannabis (C) Working Group to “consider the insurance regulatory issues surrounding the legalized cannabis business, including availability and scope of coverage, Workers’ Compensation issues, and consumer information and protection.” The Cannabis (C) Working Group will develop a white paper outlining issues and making recommendations for the development of related regulatory guidance. Such work should be complete by the first quarter of 2020.
11. NAIC Adopts Pre-Dispute Mandatory Arbitration Clauses Bulletin
The Market Regulation and Consumer Affairs (D) Committee adopted the Pre-Dispute Mandatory Arbitration Clauses Bulletin, which prohibits the use of pre-dispute mandatory arbitration clauses and choice-of-venue and choice-of-law provisions in personal lines insurance policies. While not having the force of law, the bulletin is available to any NAIC member state for use in communicating its policy to disallow such provisions.
As adopted, the bulletin defines “pre-dispute mandatory arbitration clause” to mean a provision “requiring that future disputes involving the insurance policy or claims thereunder must be resolved through arbitration by allowing one party to the dispute to so require when the dispute arises.” “Personal lines insurance” is defined to include homeowners, tenants, private passenger non-fleet automobile, mobile manufactured home and other property and casualty insurance for personal, family or household needs.
The bulletin includes an exception from the general prohibition against pre-dispute mandatory arbitration clauses for those situations where arbitration provisions are specifically authorized or required by state insurance laws (such as state laws authorizing or requiring that disputed valuations of auto property damage claims or disputes over uninsured and underinsured motorist damages be resolved through arbitration). The bulletin also recognizes that arbitration may have benefits and would allow the parties’ mutual election of arbitration after the dispute arises. With respect to personal lines insurance policies, the bulletin prohibits choice-of-law provisions that would import the law of a state other than the insured’s state of residence and choice-of-venue provisions that would require the insured to travel outside of their state of residence to adjudicate a claim.