October NAIC Activity
In late September, the NAIC announced its Fall National Meeting would be a virtual meeting with rescheduled dates for early December. Although the NAIC has been holding virtual meetings all year, once again the format has changed. The format being used in December greatly reduces the number of meetings usually held by the various NAIC groups. Consequently, most of the activity of various subgroups, working groups, and some task forces is occurring prior to the National Meeting, starting about the middle of October and continuing through November. Below is a summary of NAIC activity or NAIC-related activity that occurred in October.
Life Risk-Based Capital (LRBC) Working Group – October 9, 2020
The Working Group began the meeting by adopting both a guidance document and 2021 LRBC instructional changes regarding the mortgage loan section of the formula. The guidance document contains adjustments that can be made for the 2020 LRBC calculation, as well as an alert to future adjustments (beginning 2022) to the three-year rolling mortgage loan Net Operating Income (NOI) calculation. It should be posted to the LRBC website soon. The instructional changes that were adopted are for 2022 and address the NOI calculation. NAIC staff will further refine the instructions to incorporate additional disclosures requested by regulators. The Working Group discussed a letter from Financial Conditions (E) Committee regarding new bond factors for the formula. The letter more than strongly suggests that the Working Group finalize the new bond factors in time to be used for the 2021 LRBC filing. To accomplish this, all analysis needs to be completed and the factors submitted to the Working Group by the end of January 2021. The proposed factors then would need to be exposed for comment by the end of April 2021, with adoption required by the end of June 2021. The Working Group discussed what steps need to happen in order to meet that goal.
Statutory Accounting Principles Working Group (SAPWG) – October 13, 2020, & October 15, 2020
The October 13 meeting was originally “billed” by SAPWG as being held to address proposed revisions to SSAP No. 46R – Loan-backed and Structured Securities (SSAP No. 43R). However, the meeting began with the disposal of five other items, as shown below.
SAPWG then turned its attention to SSAP No. 43R. In March, an Issue Paper that would ultimately result in revisions to SSAP No. 43R was released for a lengthy comment period. The Issue Paper was viewed as a concept paper, as it did not contain any suggested revisions to SSAP No. 43R but rather addressed primary concepts used to determine if an investment falls within the scope of SSAP No. 43R. The Issue Paper also suggested various buckets of classifications to be used. The Working Group received comment letters from Interested Parties and the Iowa Insurance Division, both of which were discussed briefly. Interestingly, the Iowa letter addresses one of the main questions that was asked by Interested Parties: “What is the problem the NAIC is trying to solve?” Iowa emphasized that the primary focus of the Working Group should be developing a principles-based definition of bonds that are reported on Schedule D – Part 1. Their letter includes language that could be used as a starting point for definitions. Iowa went on to state that only after the definitions have been established should SAPWG consider if revised/new reporting categories should be used in Schedule D – Part 1 reporting and if clarification is needed in determining which bonds should be subject to SSAP No. 43R and which would be subject to SSAP No. 26R. At the conclusion of the meeting, SAPWG exposed for comment the Iowa Division of Insurance letter. The exposure period ends December 4.
During the October 15 meeting, NAIC staff provided a brief update on the ACA Risk Corridors related to the 2014-2016 program. As a result of a Supreme Court decision, Centers for Medicare & Medicaid Services (CMS) exposed draft guidance indicating how insurers are to treat new recoveries of the risk corridor payments related to the 2014-2016 program in their Medical Loss Ratio. The CMS comment deadline was October 21. NAIC staff reminded the industry that statutory accounting guidance for this issue is found in SSAP No. 107 – ACA Risk-Sharing. The remainder of the call was dedicated to the discussion of proposed revisions to SSAP No. 71 – Policy Acquisition Costs and Commissions (SSAP No. 71), an issue that has been discussed off and on since August of 2019. Interestingly, a history lesson of this issue was provided by a retired New York regulator who had been part of the original group crafting the accounting guidance for policy acquisition costs and commissions. He took exception to the comment made by NAIC staff that current industry practices and SSAP No. 71 did not reflect the intent of the original accounting guidance. He was quite adamant that the guidance said exactly what the group intended. Industry’s key concerns with the proposed revisions were discussed, and a revised edition of the proposal was exposed for comment, with comments due October 30. Further discussion will occur during SAPWG’s November 12 conference call.
Catastrophe Risk Subgroup – October 19, 2020
The Subgroup exposed for comment proposal 2020-08-CR, which provides clarification of the interrogatories on PR027 of the PRBC formula regarding catastrophe risks. The clarifications provided pertain to insurers that do not write or assume earthquake or hurricane risks, as well as insurers that qualify for exemption from the hurricane risk charge. The comment period ends on November 18. Discussion then moved to what steps would have to be taken to add wildfire catastrophe to the formula. It was noted that one of the problems with wildfire risk is the current lack of reliable and available modeling. Next on the agenda was both internal and commercial catastrophe model evaluation processes and a short discussion of how models can be “approved” for RBC application. At the end of the meeting, the current Chair (Ohio) announced that he would be stepping down as chair and Connecticut would be taking over.
Group Capital Calculation Working Group (GCCWG) – October 20, 2020, & October 30, 2020
The goal of the October 20 meeting was to discuss the latest versions of the Holding Company Models’ revisions that had been released for comment. Amendments to the Models allow for a group capital calculation to be implemented. The chair of the Working Group announced that the Working Group would like to have finalized versions of the revised Models available to move up to the Financial Conditions (E) Committee by their November meeting. NAIC staff summarized comments received and provided recommendations to the Working Group on the disposition of each comment. A few revisions were made but not all comments received resulted in revisions. Most of the 90-minute meeting was spent addressing concerns regarding “subgroup” reporting for the calculation requirement. (“Subgroup” as defined in the current revisions.) As part of this discussion, NAIC staff summarized a call that occurred between the NAIC, the Federal Insurance Office, and the U.S. Trade Representative regarding how parts of the Models’ revisions would be viewed in relationship to the current U.S. Covered Agreements. The Working Group adopted some new language to help address these concerns. Revised Models were then released for comment, with the comment deadline set for October 30. GCCWG met on November 4 with the hope of finalizing the Models.
The focus of the October 30 meeting shifted back to the template and instructions for the group capital calculation. The discussion covered the latest set of comments received since the last exposure. Areas that were discussed and resulted in revisions were the calibration level, the allowance for debt, and the treatment of financial entities that don’t have capital requirements. Scalers and next steps/data collection were also discussed, but no changes were made at this time. However, as is the case for all of the different areas of the calculation, the monitoring of data and results will be ongoing. A revised template and accompanying instructions were released for a “fatal flaws” exposure with the comment period ending November 12.
Interest Parties (IPs) Calls on SSAP No. 43R – October 20, 2020
After the release of the Iowa comment letter during the SAPWG October 13 meeting, Interested Parties (IPs) scheduled a series of conference calls to craft an industry response. The October 20 call was the organizational call, with industry expressing the opinion that the Iowa comment letter was a step in the right direction. IPs also felt that Iowa has the expertise within their department to take the regulatory lead on this issue. A variety of suggestions were floated during this call. The group leader indicated he would summarize the call discussion to serve as the beginning of a formal comment letter in time for the next call. The IP calls on SSAP No. 43R are scheduled through November 24.
Securities Valuation Office (SVO)/Structured Securities Group (SSG) – October 23, 2020
This was not an official meeting of the Valuation of Securities Task Force, but rather an informational meeting organized and presented by the SVO/SSG. The two topics presented were the reviewing of Principal Protected Securities using a Weighted Average Rating Factor and SSG Economic Assumptions for year-end 2020. The SSG commented that since a multi-scenario approach is already being used, the SSG is in a good position to allow for the effects of COVID-19 going into this year-end. The scenarios will be posted to the SSG website.
Property Risk-Based Capital (PRBC) Working Group – October 27, 2020
Proposal 2020-11-CR, which would remove the operation risk factor that is part of the reinsurance contingent credit risk of the PRBC Rcat section, was exposed for a 35-day comment period ending December 1. A referral from the Statutory Accounting Principles Working Group (SAPWG) was discussed. The referral comes from a review of SSAP No. 62R and the handling of retroactive reinsurance. SAPWG is working to expand SSAP No. 62R guidance for clarification of the handling of retroactive reinsurance within Schedule P reporting. Since Schedule P amounts are also vital to the PRBC calculation, the PRBC Working Group will continue to monitor revisions to SSAP No. 62R and review how any changes may affect PRBC. The Working Group decided to form a subgroup to look at a referral from the Restructuring Mechanisms Subgroup asking if runoff companies should be subject to different PRBC requirements than other insurers. The newly formed subgroup is composed of both regulators and industry Interested Parties. The PRBC Working Group discussed and updated their working agenda. The meeting ended with a dialog on Line 1 Underwriting Risk Reserves and Premium factor methodology currently being used vs. the methodology being used for Line 4 factors.
Life Risk-Based Capital (LRBC) Working Group/Life Actuarial Task Force (LATF) – October 27, 2020
This joint meeting consisted of a presentation on implementing a new Economic Scenario Generator (ESG) with the goal of having everything in place for January 1, 2022. The search for a new ESG began in 2017 when the American Academy of Actuaries announced it would not have the ability to maintain ESGs that would meet the requirements coming with the adoption of VM-20 and VM-21 of the Valuation Manual, as well as changes that would be forthcoming for LRBC. That began the NAIC’s quest for a new vendor. Ultimately, the NAIC’s Executive Committee awarded the contract to Conning on September 30, 2020. The presentation briefly described Conning’s scope of work for initial deliverables, ongoing production, maintenance and support including tools and calibration criteria, documentation and training, as well as ongoing production, maintenance, and support. The Working Group and the Task Force will continue to have joint meetings to continue the work needed to get the new ESG operational. Some of those meetings will be open to the public, which will also give Interested Parties the opportunity to express their views regarding the ESG, parameters, tools, etc. Although the goal is to have everything in place for 2022, the group did recognize that goal might be a little optimistic.
Capital Adequacy Task Force – October 27, 2020
The Task Force released proposal 2020-10-CA for comment, which would change the way risk-based capital (RBC) bond amounts are pulled from Schedule D, Schedule DA, and Schedule E – Part 2 for 2021. The revisions would utilize footnotes that were added to these investment schedules for 2020 Annual Statement reporting. The comment period ends on December 11. The group received a proposal, 2020-09-CA, that would change the handling of exchange traded bonds funds within the Asset Concentration of each RBC formula. There was a brief discussion on this proposal. The Task Force will review it, possibly make a few revisions based on the discussion, and consider releasing it for comment at a later date.
Health Risk-Based Capital (HRBC) Working Group – October 29, 2020
The Working Group discussed and adopted a referral to be sent to the Blanks Working Group (BWG) asking BWG to post guidance for the 2020 reporting of health care receivables within the Health Annual Statement. The group then proceeded to adopt proposal 2020-07-H that splits the Bond page and the Miscellaneous Fixed Income Assets page into separate pages for the 2021 formula. The American Academy of Actuaries provided a brief update on investment income included in the underwriting risk and indicated they should have a more detailed report ready by the Working Group’s December meeting. The Excessive Growth Charge Ad Hoc Group provided an update on their work. The Health Test Ad Hoc Group reported they put a hold on any further work on the health test, as they had been informed that the BWG was also working on the issue. The Ad Hoc Group did not want to duplicate efforts between the two groups and will wait for BWG to complete their work.
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