January 2022 NAIC-Related Activity

Thoughtware Alert Published: Feb 07, 2022
Connie Jasper Woodroof, CJW Associates
Related Industries
Two people looking over files

With most everyone in the insurance industry deeply embedded in the year-end process, official NAIC activity was at a minimum in January, with the possible exception of the risk-based capital groups that have an end of April deadline for adopting any formula structural changes. Interested parties (IP), on the other hand, were quite active in January. IP meetings have been held on the continuing bond project, discussions on the latest items released for comment by the Statutory Accounting Principles Working Group (SAPWG) and the Blanks Working Group and two meetings addressing proposed SAPWG revisions to SSAP No. 25 – Affiliates and Other Related Parties. Below is a summary of the “official” NAIC activity.

Joint Financial Condition (E) Committee and Risk-Based Capital Investment Risk and Evaluation Working Group (RBC Investment Risk) – January 12, 2022

There were two items on the agenda for this joint meeting: Phase II of the bond factor proposal that will address structured securities and asset-backed securities and the recent revisions to SSAP No. 43R for residual tranches. After providing a brief history of the bond factor proposal, the chair of the E Committee indicated a decision needed to be made regarding how to move forward with Phase II. The chair presented two scenarios, which included the NAIC hiring a consultant for the project. A very aggressive timeline also was presented. Comments were then taken from the E Committee and RBC Investment Risk members. The chair of the RBC Investment Risk (who also serves as chair of the Life RBC Working Group) took exception to the two options, indicating he was strongly opposed to the NAIC hiring a consultant. He pointed out that there is already a good process in place for considering outside RBC recommendations and he thought that process should be followed. He also questioned the presented timeline and whether the project should be inclusive of all RBC formulas or limited to just the Life RBC. Several other regulators agreed with his comments. Industry was not given an opportunity to comment during the meeting; however, a 45-day comment period ending February 28, 2022, was put in place for anyone interested. At the end of the comment period, a decision will be reached, hopefully by the time of the NAIC Spring Meeting in April. The conversation then moved on to recent residual interest revisions to SSAP No. 43R. The E Committee acknowledged that the issue impacts at least three different areas: statutory accounting and reporting, the work of the Investment Analysis Office, and the RBC formulas. The chair encouraged all of the groups involved in these areas to keep the lines of communication open and to coordinate their activities. 

Life Risk-Based Capital (LRBC) Working Group – January 20, 2022

Knowing that all 2022 LRBC formula format changes must be approved by the Capital Adequacy Task Force by the end of April, the first order of business was the release for comment of a proposal to change the C-2 Life Mortality risk. The comment period is for 45 days, ending March 7. The proposal presents two different structural changes for consideration, with those commenting to indicate and justify their preference. Although the comment document includes instructions and factors, only the format change is being considered for adoption at this time. The instructions and factors do not have to be put in place until a later date. A brief discussion on the future monitoring of the newly implemented longevity risk then ensued. The last topic of discussion was the updating of the Asset Valuation Reserve (AVR) bond factors. When the bond factors were updated in the LRBC for 2020, the AVR factors were not updated, thus creating a lag between the two reports. The Working Group, along with the American Council of Life Insurers, is currently working on an AVR proposal, which will be submitted to the Blanks Working Group with the hope of having it in place for 2022 year-end. 

Catastrophe Risk Subgroup – January 25, 2022

Being the first meeting of the year for this group, the meeting was more of an informational “here’s what we need to do” type of meeting rather than an action meeting. With a proposal to add wildfire to the Property Risk-Based Capital (PRBC) formula already exposed for comment, the group discussed moving forward with the possibility of adding flood peril to the PRBC. This resulted in an interesting discussion questioning why flood was even being considered for addition, since flood premiums are very immaterial to the overall property/casualty industry. Among the concepts discussed was that 15 companies account for 92 percent of all flood premiums and none of the companies have a material amount in force compared to the overall property/casualty industry. The question of materiality was brought up not only by industry but by some of the regulators as well. This discussion will continue at a later date. A brief review of the instructions allowing the use of independent catastrophe models occurred next, with further discussion to occur later. The group then revisited an issue that had be raised during 2021: the possible double counting of earthquake and hurricane risk within the formula. It appears the double counting occurs between the Rcat component and the R5 components of the formula. The chair asked the Subgroup members to be prepared to discuss this issue during a later meeting but did state that he would like to see a possible correction for 2022 reporting. The meeting ended with the chair reminding everyone that proposal 2021-17-CR had previously been exposed for a 60-day comment period that is due to end on February 13 and announcing that there is a new co-chair of the group for 2022. 

Statutory Accounting Principles Working Group – January 27, 2022

The purpose of this meeting was to adopt, or not adopt, two SSAP revisions that would be effective for year-end 2021 reporting. Those items were:

Table of SSAP revisions
A more detailed discussion of these adoptions can be found here

NAIC staff indicated that since these revisions were adopted after the normal cutoff date for the production of the 2022 Accounting Practices & Procedures Manual, these revisions will be included in the updates section of the new manual. A guidance document regarding these changes will be forwarded to the Blanks Working Group for posting on its website, and SAPWG’s disclosures checklist also will be updated with the changes. 

Health Risk-Based Capital (HRBC) Working Group – January 28, 2022

There were four items on the Working Group’s agenda, and each of those four items was re-exposed or exposed for comment during the meeting. A Health Test Ad Hoc Group has been working on revisions to the health test that appears in each of the annual statements and is used to determine if the reporting entity should be reporting on the Health Annual Statement, regardless of how they are licensed. The proposal eliminates three of the four elements previously used to determine if the company “passes” the health test, leaving only the percentage of health premiums and reserves to the company’s overall business as the sole determinant. The proposal had been discussed previously and was re-exposed for a 15-day comment period ending February 14. The goal is to have the test updated in the 2022 annual statements. In a related action, a referral letter to the Health Actuarial Task Force also was exposed for comment. The letter asks the Task Force to consider adding language to Actuarial Guideline LI – The Application of Asset Adequacy Testing for Long-Term Care Insurance Reserves indicating that regardless of the statement a company files, asset adequacy testing for long-term care insurance is still required if the criteria are met. The comment deadline is February 14. Proposal 2021-18-H adding instructions to the HRBC to identify the frequency and parameters to be used when adjusting the underwriting risk factors for investment income was re-exposed for comment. The comment period ends February 14. The final item was exposed for a 45-day comment and was the American Academy of Actuaries’ H2 – Underwriting Risk Report. 

For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.

Related Thoughtware

Kate & Ben — How can we help you? Contact Us!

How can we help you?