February 2021 NAIC Activity
As industry labored to complete their year-end 2020 statutory filings by the March 1 deadline (for most), NAIC-related activity was kept to a minimum.
Interested Parties (IP) SSAP No. 43R Group – February 4, 11, & 26, 2021
IPs continued their meetings working on substantive revisions to SSAP No. 43R – Loan-Backed and Structured Securities. The emphasis continues to be a definition of “bonds.” NAIC staff and personnel from the Iowa Department of Insurance thought some of the industry suggested language was too broad, while admitting their original language probably established too high of a bar. IPs acknowledged the need to meet in the middle. IPs also crafted two new examples to be used for definition clarification. As the meetings with NAIC staff and regulators continue, new issues to be addressed are recognized and conquered. As is almost always the case when working with a large, diversified group of people, it is often difficult to come to a consensus on all topics. For this particular group, representatives from the different companies may be using the same group of investments but with different goals or purposes. Therefore, investments are not always viewed consistently within the group. The IP group is doing a great job of blending sometimes differing opinions into one coherent, uniform document to represent industry.
Health Risk-Based Capital (HRBC) Working Group – February 10, 2021
The meeting began with a report from the American Academy of Actuaries regarding the inclusion of investment income as an adjustment to the HRBC factors used in the Underwriting Risk. Discussions will continue on this issue. The group then moved on to Proposal 2021-02-CA, covering the handling of incentives in the managed care credit. The proposal was exposed for a 30-day comment period ending March 12, 2021. Changes would clarify that incentives are to be included in the managed care credit of the various RBC formulas. Currently, the formula format and the instructions only reference “bonuses.” The proposed revisions would indicate that “incentives” also are to be included. For example, currently Category 2 in the managed care credit section is titled “Bonus/Withhold Arrangements.” The new wording would become “Bonus and/or Incentives/Withhold Arrangements.” The complete proposal can be reviewed on the Working Group’s website, under the Exposure Drafts tab. An update on the bond factor analysis also was discussed.
Life Risk-Based Capital (LRBC) Working Group – February 11 & 26, 2021
The February 11 call was focused on developing new bond and mortgage loan factors for use in the 2021 LRBC formula. The Working Group heard a report from Moody’s Analytics on the bond factor revision project. The report timeline indicated that proposed new bond factors will be presented to the Working Group for exposure by April 30. That will include documentation and an impact analysis. In the meantime, the chair asked the Academy if it would update factors it had previously developed for the new tax law and present them to the group for a separate exposure. The ultimate goal is to have new factors adopted by both the Working Group and the Capital Adequacy Task Force by June 30. Meeting this timeline would allow for use of the factors in the 2021 LRBC filing. Time did not allow for the second item on the agenda, an update on the mortgage reporting guidance from the American Council of Life Insurers (ACLI) and the Mortgage Bankers Association (MBA). New mortgage guidance is needed to accommodate the extension of the effective date of INT 20-03 – Troubled Debt Restructuring Due to COVID-19. The ACLI and MBA had prepared suggested revised language that was exposed for a 10-day comment period. As the final act, the chair informed meeting attendees that the Life Actuarial Task Force currently has an exposure related to hedging strategies exposed for comment and that exposure might have possible LRBC implications if adopted.
The call on February 26 covered a mortgage reporting update that was previously exposed for comment and a discussion of the ACLI’s real estate factor proposal. The mortgage reporting update was adopted and will be incorporated into the 2021 LRBC formula. The Working Group then moved on to the real estate factor proposal, with the ACLI giving an overview of revisions it is suggesting to the current factors. The proposal would change factors on all of the directly owned real estate including encumbrances on real estate, recognize unrealized gains on real estate, and change the factors for indirectly owned real estate reported on Schedule BA. It was decided that more discussion was needed before the factor changes could be exposed for comment. The Working Group will continue the discussion at its upcoming March 12 meeting.
Valuation of Securities Task Force – February 18, 2021
An amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) that would change the financial modeling instructions for RMBS/CMBS securities was exposed for a 30-day comment period. Comments are due by March 20, 2021. The Task Force heard a report on work being done by Securities Valuation Office (SVO) staff on a referral received last year from the Financial Condition (E) Committee. As a first step in addressing part of the referral, SVO staff is suggesting that Private Rating Letter Rationale Reports be filed with the SVO. No action was taken at this time. The discussion then moved on to a referral from the Statutory Accounting Principles Working Group on Credit Tenant Loans. SVO staff will begin work on assessing the referral. SVO staff pointed out the need to revise the list of approved credit rating providers and the related rating conversion criteria to reflect the merger of Morningstar, Inc. and Dominion Bond Rating Service. Suggested language changes were exposed for a 30-day comment period. SVO staff indicated that future discussion would need to be held regarding Rule 18f-4 that was adopted by the SEC. The meeting wrapped up with an announcement that the NAIC is taking bids for a company to perform the modeling of RMBS/CMBS. This is a routine call for bids that occurs on a regular basis.
Group Capital Calculation Working Group – February 25, 2021
The goal of this meeting was to finalize accreditation recommendations to the Financial Condition (E) Committee regarding the group capital calculation. That goal was met. A great deal of time was spent discussing a request for an expedited adoption timeline that was in the recommendation. A number of comments received, however, were not in favor of the expedited timeline. The concept of allowing a bifurcated accreditation effective date was considered. The bifurcation would differentiate states serving as groupwide supervisors under the Covered Agreements with the EU and U.K. versus those states that do not. NAIC staff pointed out that implementation was not this Working Group’s responsibility to decide upon, but rather to provide enough information for a decision to be made by the F Committee at a later date. The decision was to retain the recommendation for an expedited timeline but also to summarize the discussion that occurred during this meeting. A few other minor edits were made. The letter was adopted and will be sent to the E Committee.
The Working Group also adopted a memo to be sent to the E Committee recommending the formation of a new working group, the Mutual Recognition of Jurisdictions Working Group. The new Working Group would be charged with developing a process for evaluating jurisdictions that meet the NAIC requirements for recognizing and accepting the NAIC Group Capital Calculation.
NAIC/AICPA Working Group
Although this Working Group did not hold a meeting, it did release for comment a proposed revision to the Model Audit Rule Implementation Guide. The revisions address regulators being able to verify CPA qualifications and to check compliance with partner rotation requirements for the independent audit report. Originally the Working Group had proposed disclosure of the information in a company’s annual Auditor Qualifications Letter. However, several comments were received indicating industry was not comfortable providing the information in a document that is readily available to the public. The new proposal would include the information in a confidential document, the Internal Control Related Matters Noted in an Audit Letter. The comment period ends March 12, 2021. The proposed language changes can be found on the Working Group’s website. Please note, the exposed document is under the Related Documents tab, not the Exposure Drafts tab.
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