May 2021 NAIC-Related Activity
As the May flowers bloomed and the temperatures started to remind us that summer is around the corner, NAIC-related activity buzzed along, particularly among the risk-based capital groups trying to finalize the 2021 formulas. But let us not overlook the finalization of the 2021 Annual Statement reporting, which also occurred this month. Here is a summary of NAIC-related activity.
Interested Parties (IP) SSAP No. 43R Group – May 6, 2021
Think of this May 6 call as a “fatal flaw” review prior to the Statutory Accounting Principles Working Group (SAPWG) releasing the principles-based definition of bonds for a comment period. The IPs working on the bond definition held a call with regulators to review the document and answer questions prior to the IPs’ May 6 meeting. According to those attending that call, regulators did have several questions. The consensus was that regulators may have reservations regarding the new definition because of its subjectivity. Regulators feel that state examiners may have problems applying the definition for examination or audit purposes, despite the provided examples. Toward the end of this call, IPs were reminded that the principles-based definition may prove to be a “hard sell” to regulators that have not been involved in the development process. SAPWG posted the definition to its webpage on May 26. It was exposed for a 60-day comment period ending July 15. IPs will continue to meet and develop a comment letter during the exposure period, as well as start to address other issues that will most likely arise because of a new definition, such as the reporting of securities that will no longer qualify as bonds.
Group Capital Calculation (GCC) Working Group – May 17 and 27, 2021
Most of the GCC instructions have been adopted, with the exception of additional language added to the stress scenario on pages 44, 47, 52, and 53 and new language in Appendix 1 regarding the excess relative ratio scalars source. The changes in these areas resulted from comments received during the previous exposure period. The new language was exposed for comment through May 25. The GCC template is near completion as well, with the Working Group currently asking for focused comments on the stress scenario (input 6 tab) and the addition of two additional tabs for stress inputs and a stress summary. The group also exposed for comment guidance incorporating the GCC into the Financial Analysis Handbook (Handbook). The Handbook additions include educational background information on the GCC and anticipated methodology for using the information provided by the formula. Comments will be taken through July 31. All exposed materials have been posted to the Working Group’s webpage. Upon the final adoption of the instructions and formula, the Working Group plans on proceeding to the 2021 trial implementation. As with previous testing of the GCC, NAIC staff will be posting a Q&A document to the Working Group’s webpage as they receive questions whose responses may be of benefit to all organizations.
The May 27 meeting began with the adoption of 30 percent to be used for all groups for the stress scenario. After a brief discussion of a few instructional changes that were made based on the latest set of comments received, both the GCC instructions and template were adopted. The trial implementation will now begin. There is a June 17 Webex meeting scheduled for GCC trial volunteer companies (and any others that want to join). The chair also announced that those companies can begin submitting any general questions to the group, which will be posted to the Working Group’s webpage for the benefit of all. Any questions of a confidential nature should be submitted directly to the company’s lead state regulator for handling.
Group Solvency Working Group – May 19, 2021
The purpose of this meeting was to address revisions needed to the NAIC’s Financial Analysis Handbook (FAH) that were developed by the ComFrame Financial Analysis Drafting Group (Drafting Group). The Drafting Group crafted the revisions to incorporate elements of the International Association of Insurance Supervisors’ (IAIS) Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) that were considered fitting for the U.S. system of solvency regulation. An overview of the proposed revisions was presented, indicating which IAIS Insurance Core Principles were incorporated into the FAH and the approximate location within the FAH. The chair commented that many of the proposed revisions highlighted items that should be considered, but are not prescriptive, for financial analysis. The proposed revisions were exposed for comment. At the suggestion of industry, the original 45-day comment period was extended to a 60-day comment period ending July 16.
Life Risk-Based Capital (LRBC) Working Group – May 20 and 27, 2021
The May 20 meeting began with a review of proposed changes to the bond size adjustment in the LRBC. Under both the Academy bond proposal and the ACLI/Moody’s proposal, this part of the formula would incorporate one more tier than currently used. Since neither proposal has been adopted at this time, it is still uncertain as to whether it will be possible to revise the bond size adjustment for 2021 or not. More discussion is planned at the upcoming June 3 meeting. Moody’s Analytics provided a presentation on risk premium in relationship to the LRBC C1 bond factors. As a reminder, there are currently two different LRBC bond factor proposals exposed for comment until May 27. From there, the Working Group plans to choose between the two different proposals, have one more short exposure period of that choice, and be able to have the new factors in place by the end of June of 2021 implementation.
During the May 27 meeting, the fate of revised real estate factors was decided. Format changes had previously been adopted, but revised factors for 2021 implementation were still pending. To open the discussion, the chair of the Working Group provided a quick review of concerns expressed by the SAPWG regarding the use of a market value adjustment. Consequently, the chair suggested that the revised factors be adopted for 2021, but with the market value adjustment factor being set to zero. Further discussion occurred, during which several regulators expressed uneasiness about the timing of the factor change, concerned that as the country is emerging from a pandemic, it may not be the appropriate timing. Others acknowledged these concerns but pointed out the factors are based on a long-term outlook and took into consideration real estate cycles. After a roll-call vote, the proposal was adopted. Future work regarding the market adjustment will occur. The chair then brought everyone up to date on the Economic Scenario Generator Drafting Group organized under the Life Actuarial Task Force. The Drafting Group is charged with overseeing the development and implementation of a new economic scenario generator for use in regulatory reserves and capital calculation. The group is composed of regulators, NAIC staff, and Conning staff (Conning was the selected vendor). The LRBC Working Group was then reminded that there are two 90-minute calls scheduled for the first week in June where the topics of revised bond factors, reinsurance, and longevity risk will be discussed.
Statutory Accounting Principles Working Group – May 20, 2021
As is routine, the meeting began with a hearing on previously exposed items and then moved to a “regular” meeting to discuss other items. Many of the items adopted during the hearing resulted in statement reporting change proposals to be considered by the Blanks Working Group at its next meeting. A reminder that all items adopted as nonsubstantive changes are effective upon adoption, unless otherwise stated. All of the adopted items below were designated as nonsubstantive.
Although 2021-05 was adopted, the discussion on cryptocurrencies is not over. Please note that the current adoption only addresses directly held cryptocurrencies, but not investments in cryptocurrencies held indirectly through investments in mutual funds or limited liability companies. During the exposure period, many provided comments indicating that although there was agreement that cryptocurrencies should be nonadmitted, SAPWG needs to continue to monitor cryptocurrency growth and use. The chair also reminded attendees that SSAPs were not the only authority on this issue, but state investment laws also should be consulted.
The original exposure of 2021-09 highlighted several issues with the proposed SSAP No. 107 revisions. Based on the comments received, which expanded SAPWG’s understanding of state ACA reinsurance programs, staff were directed to revise SSAP No. 107 for future exposure.
The Working Group then moved into its regular meeting, discussing four separate issues. Because of the work being done on revising SSAP No. 43R, NAIC staff, a small group of regulators, and industry interested parties have been crafting a principles-based definition of a bond. After a summary of its work, the definition (Reference item 2019-21) was then released for a 60-day comment period ending July 15. If adopted, this definition could affect classification of bonds under SSAP No. 26R as well as SSAP No. 43R.
SAPWG moved on to a referral received from the Life RBC Working Group. The referral asked for input regarding a proposal to change the method used for calculating a charge for investments in real estate in the LRBC. That proposal would apply to both directly owned real estate reported in Schedule A and indirectly held real estate reported in Schedule BA. SAPWG’s adopted response to the referral expresses its concern with several items in the proposal. The main concern was with the use of fair value for application of RBC factors. Reported fair value is not subject to audit or verification procedures; appraisals are only required for income-producing property or property held for sale reported on Schedule A and then are only required every five years. There is no appraisal requirement for indirectly held real estate reported on Schedule BA. SAPWG voted to send the response to the Life RBC Working Group.
The final two items for discussion both addressed credit tenant loans (CTL) and were discussed simultaneously. Previously, SAPWG sent a referral to the Valuation of Securities Task Force (VOSTF) regarding CTLs. Since the response from VOSTF was just recently received, NAIC staff indicated they needed additional time to review the response. At year-end 2020, SAPWG had issued INT 20-10 providing reporting guidance for nonconforming CTLs. Based on an agenda item for the upcoming VOSTF meeting, NAIC staff made revisions to the INT contingent upon action that might be taken by VOSTF at its upcoming meeting. (Item was on its agenda.) However, at the VOSTF meeting, that action was not taken; therefore, the SAPWG revisions will not be released for comment. If VOSTF confirms its new action, INT 20-10 may no longer be needed.
Valuation of Securities Task Force – May 24, 2021
The Task Force began by adopting new language to the Purposes and Procedures Manual of the Investment Analysis Office (P&P Manual) requiring the filing of a related private rating letter rationale report along with the already required private rating letter (PL). The rationale report is to include an in-depth analysis of the transaction and methodology used to arrive at the private ratings, as well as any credit, legal and operational risks, and mitigants. The filing requirement will be effective January 1, 2022, for each PL security. Special instructions apply to deferred and waived submission PL securities, as well as PL securities issued from January 1, 2018, to December 31, 2021, containing a confidentiality agreement executed prior to January 1, 2022. The group then moved on to the subject of permitting filing exception (FE) for Credit Tenant Loans and Ground Lease Financing Transactions. A proposal on the topic had previously been exposed for comment. However, based on a comment letter received from SAPWG and the corresponding meeting discussion, a new proposal was exposed for comment.
Health Risk-Based Capital (HRBC) Working Group – May 28, 2021
The HRBC Working Group became the first RBC group to adopt revised bond factors for all 20 of the current bond reporting categories. Proposal 2021-09-H will be effective for 2021 year-end reporting. Next on the agenda was proposal 2021-04-CA, an investment income adjustment to the health underwriting factors. The proposal was referred to the Capital Adequacy Task Force with a recommendation of adopting using a 0.5 percent investment return. Since this part of the HRBC also appears in the Life and Property Casualty RBC formulas, it is necessary any action taken toward adoption be handled on the Task Force level. The meeting ended with a referral letter to the Health Subcommittee of the American Academy of Actuaries requesting a comprehensive review of the H2 underwriting risk component of the formula being exposed for comment. The comment period ends June 3, 2021.
Blanks Working Group (BWG) – May 27, 2021
This is the BWG meeting that everyone anticipates each year—the meeting where the current-year annual statements should be finalized. Coming out of the meeting, there were no proposals held for further action, meaning statement reporting for 2021 has been finalized. Several of the items were slightly modified from the original version due to comments received during the exposure period. Be sure to review the final adopted versions that are posted on the BWG webpage.
The addition of this new general interrogatory is a direct result of the development of the Group Capital Calculation. In addition to the new disclosure, the terminology in the first two existing questions of this series was modified to incorporate a broader definition of the term “bank holding company” to include insurers that are part of savings and loan holding companies.
This new disclosure will more readily identify insurers that are using third parties to pay agent commissions where the insurer does not repay the amounts advanced to the agents by the third party within 90 days. In particular, regulators will be reviewing these transactions for correct accounting according to SSAP No. 71. The additional interrogatory is a direct result of work recently completed to SSAP No. 71 by SAPWG.
Five new proposals were exposed for comment. Although the number of new exposures was small, two recurring themes became apparent in the submissions: health business reported in the same manner in all of the various statement types and providing more information for certain lines of business in the property/casualty statement.
In a rather unusual move, one of the designated consumer representatives is the sponsor of this proposal. While that is certainly not prohibited, it is unusual. Also unusual was the amount of discussion that occurred during the exposure process. It was industry that asked for the referral to CASTF. Industry also suggested reconsidering the indicated implementation date of first-quarter 2022.
The editorial listing of revisions was adopted. The chair announced that the next scheduled meeting of BWG would be July 22.
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