April 2021 NAIC-Related Activity
Sprinkled within the month of April, and in addition to the NAIC’s Spring National Meeting, a few of the other NAIC and Interested Parties’ groups kept moving toward their goals.
Interested Parties (IP) SSAP No. 43R Group – April 15 & 29, 2021
As a reminder, this Interested Parties group was first organized upon the announcement that SSAP No. 43R was going to be reviewed and probably revised. But to date, all of the activity being conducted by the NAIC staff, a group of regulators, and this IP group has been to craft a principles-based definition of bonds to be used for Schedule D – Part 1 reporting. When finished, this definition will apply to both SSAP No. 26 and SSAP No. 43R bonds. The group is now on version 25 of the definition. Under the developing definition, it is quite possible some securities now being reported on Schedule D may no longer qualify for that reporting. Of course, that leads to the question of where those securities would ultimately be reported. That will have to be decided later. IP conversations with NAIC staff and regulators have indicated there may be some bonds that will remain on Schedule D – Part 1 but also may require some type of separate reporting to call attention to those bonds’ characteristics. This distinct reporting might be accomplished using separate reporting categories on Schedule D or could possibly be handled in an additional supporting schedule. During the last meeting in April, the IP group was told NAIC staff still intends to expose the crafted definition for a 60-day comment period during a May 20 meeting. IPs were reminded that despite all of the work that has gone into this definition, after exposure it will still need regulator approval. The group of regulators that has been working on this definition is a very small subset of regulators needed for final approval. It is quite possible the principles-based definition will not be approved and/or will need major revisions to result in approval.
Life/Fraternal Risk-Based Capital (RBC) Working Group – April 6, 15, 22, & 29, 2021
The entire April 6 meeting was dedicated to the American Council of Life Insurers’ (ACLI) real estate proposal. The proposal, 2021-01-L, was partially adopted for structural changes to the life/fraternal formula for real estate reporting. The new format applies to both directly owned real estate included in Schedule A and indirectly owned real estate reported in Schedule BA. Proposed factor and instructional changes contained in the same proposal were exposed for comment, with the comment period ending May 24.
The April 15 meeting was devoted to the bond factors. The chair first reviewed the Working Group’s anticipated timeline for finalizing the bond factors. The discussion moved to a review of comments received on the exposure of the Academy of Actuaries proposed bond factors. Moody’s Analytics then provided some new information regarding its approach to researching and suggesting revised bond factors. The chair asked the members of the Working Group to have their input ready, including any needed additional information, for the next meeting.
The April 22 meeting was a continuing discussion of new bond factors for the Life/Fraternal RBC formula. The push is on for this Working Group to finalize new bond factors for 2021 Life/Fraternal RBC reporting. To accomplish that, the new factors must be adopted by the end of June by both the Working Group and the Capital Adequacy Task Force. Prior to having Moody’s Analytics continue with its factor discussion, the chair of the Working Group expressed his three areas of concern. The chair wanted to make sure the topics were discussed in more detail prior to any final adoption. Those topics were 1) the discount rate being used, 2) risk premium, and the slope of the factors. Moody’s then continued its presentation, which had not been completed during the last meeting. As seems to be the case with this group lately, time ran out before everything on the agenda could be discussed in detail. However, because the deadline for adopting new bond factors is quickly approaching, it was decided that after Moody’s updated its discount factor as discussed during the meeting, both bond factor proposals would be exposed for a 30-day comment period. Prior to adjourning, the possibility of a portfolio adjustment change also was discussed. Changes in this area potentially could be both factor and structural changes, depending upon the depth of the revisions. Structural changes are supposed to be in place by the end of April, but that deadline probably would not be met for 2021 implementation if changes are needed in this area. The chair asked for feedback for the RBC software vendors on the feasibility of a format change occurring after the end of the April deadline. The Working Group has another meeting scheduled for April 29 and will be scheduling an additional call to discuss risk premium.
On April 29, the Working Group addressed additional instructions for real estate, life reinsurance, and longevity risk. An error was found in the current real estate proposal that had been released for comment. The Working Group decided to correct the current exposure daft and then redistribute the proposal. The original comment deadline of May 24 did not change. Previously, the Working Group had been charged by the Capital Adequacy Task Force with reviewing the credit risk charge for reinsurance receivables to ensure the formula included all types of reinsurers. A proposal was exposed for a 30-day comment period ending May 28 that would allow for the inclusion of amounts held for reciprocal jurisdiction reinsurance. Since this is not a format change, if adopted, the proposal would be effective for 2021 reporting. The next topic was a proposal from the Longevity Risk Subgroup. The Subgroup presented a proposal that provided factors. The proposal also suggested the concepts of guardrail factors and correlation factors. The proposal was exposed for a 30-day comment period. An impact analysis had been conducted regarding the longevity risk but was not released with the proposal, as some inconsistencies were found in the analysis. The analysis will be corrected and distributed during the comment period. The chair has asked that comments submitted on the proposal include a discussion of the risk factors, correlation factors, and guardrail factors. The ACLI then informed the Working Group that there is an item on its current bond exposure that is incorrect on page LR030. The Working Group decided to release for comment a proposal that would make the needed correction. It will be a standalone exposure but will be subject to the same time period as the current bond exposure (see summary of the April 6 meeting).
Health Risk-Based Capital Working Group – April 23, 2021
The meeting began with a discussion of proposed individual factors for each of the 20 bond NAIC designation categories. The conversation included an analysis of the industry impact of factor changes, using both two-year and five-year time horizons. Analysis information was presented by company size and indicated the percentage changes in the H1 segment, the change in authorized control level RBC, the RBC ratio, and the number of companies that changed action levels. It should be noted that for both the two-year and five-year horizons, overwhelming companies fell into the -5 percent to +5 percent change range. The proposal indicating the use of a five-year horizon was exposed for a 25-day comment period ending May 17. The discussion then turned to incorporating investment income into the Underwriting Risk – Experience Fluctuation Risk factors for comprehensive medical and hospital, Medicare supplement, dental, and vision coverages. Since this proposal had previously been exposed, comments received were reviewed. The Working Group voted to refer the proposal to the Capital Adequacy Task Force for a 25-day exposure period. It is necessary that this issue be handled on the Task Force level, as all three of the RBC formulas contain this health section. Factor changes for that section need to be approved for all of the formulas. The last item on the agenda was to consider requesting the American Academy of Actuaries to conduct a comprehensive review of the H2 underwriting risk component including the managed care credit. The Working Group voted to send the referral and then adopted the review as a new item on its working agenda.
Catastrophe Risk Subgroup – April 26, 2021
The Subgroup exposed for comment a response memorandum to the Climate and Resiliency Task Force regarding suggested actions the Subgroup should take over the next two years. The Task Force suggestions were to expand the Property Risk-Based Capital (PRBC) catastrophe framework to include other climate-related perils, in general—in particular, add two new perils by year-end 2021 and allow insurers to use all commercial catastrophe models. The Subgroup’s response indicates it has been researching the addition of wildfire peril to the PRBC but cannot commit to having the wildfire peril included in the PRBC by year-end 2022. The Subgroup does expect to have some disclosure requirements included by 2022. In response to the suggestion regarding the use of all commercial catastrophe models, the Subgroup explained its current approach to understanding different models but stated that not all models are created equally. Therefore, any approval of commercial models needs to be thoroughly and methodically done. The comment period for the Subgroup’s draft response is May 25. The Subgroup then heard a report of the Catastrophe Model Technical Review Ad Hoc Group. The meeting ended with the updating of the Subgroup’s working agenda to include an information-collecting mechanism for wildfire peril in the 2021 PRBC.
Property Risk-Based Capital Working Group – April 27, 2021
The meeting began with the adoption of proposal 2021-03-P. This adoption incorporates examples for converting reinsurers’ financial strength ratings issued by approved rating agencies to equivalent rating categories for PRBC reporting into the instructions for the R3 component of the PRBC. Three items were then exposed for a 30-day comment period ending May 26:
- Proposal 2021-05-P updates the 2021 underwriting risk factors for line 1 on PRBC pages PR017 and PR018.
- A draft response to a request for input received from the Restructuring Mechanisms Subgroup. The Subgroup asked whether the PRBC formula should be changed or applied differently for insurers in runoff.
- Proposal 2021-08-P would incorporate new bond factors and corresponding instructions, modification of the Bond Size Factor, and reclassification of hybrid securities for year-end 2021. It should be noted the bond factors and changes to the Bond Size Factor were derived based on a study specifically done for property/casualty companies and are different than factors currently exposed for both the Life/Fraternal and Health Risk-Based Capital formulas.
Previously, the Working Group had asked the American Academy of Actuaries to research the methodology previously used for calculating underwriting risk factors and suggest possible updating to that process. Accordingly, the Academy of Actuaries provided a presentation of its current findings. Its research would update the range of industry experience used through December 31, 2017. Time ran out before the presentation could be complete. A later meeting will be scheduled to continue this discussion.
Group Capital Calculation (GCC) Working Group – April 27, 2021
The Working Group is very near finalizing items needed for the 2021 GCC trial. The overall goal of this meeting was to get to that finalized point. The first part of the meeting was spent briefly reviewing clarifying edits to the GCC instructions made by NAIC staff and suggested changes from industry. The instructions were then re-exposed for a brief 10-day period ending May 10. The next discussion topic was the scenario tests (sometimes referred to as stress tests) being incorporated into the trial. This set of tests is a new item that appeared in the Working Group’s discussion just recently. When first introduced, industry was skeptical of one set of tests to be applied to all insurer types and the amount of additional time that would be necessary to provide the needed data. NAIC staff explained the tests used data elements that are already in the calculation template and are similar in nature to the current sensitivity tests used in the Risk-Based Capital formulas. The tests were included to provide regulators with more insight on a group-by-group basis. Concerns about including the scenario tests in the trial implementation were voiced by industry, mainly because of the newness of the concept and lack of industry review. The tests also were exposed for a 10-day comment period. After the end of the exposure period, the group hopes to have everything finalized for the trial implementation by the end of May.
Capital Adequacy Task Force – April 29, 2021
The Task Force had some activity that needed to be completed to be able to implement changes to the 2021 Risk-Based Capital formulas. The following actions were taken:
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