July 2021 NAIC-Related Activity
Most who follow the NAIC are aware of the initialism the organization likes to use. Some of those have gone beyond just initialism and have developed into acronyms. As an added feature this month, acronyms have been furnished, where applicable, with their phonetic respelling to indicate the “accepted” pronunciation. It always helps to be familiar with the jargon.
Since the NAIC has moved to a hybrid meeting format for its upcoming Summer National Meeting in August, groups that will not be part of the in-person meeting are holding virtual meetings instead. Consequently, some of the “in lieu of” meetings were held in July, with the remainder being scheduled for August. There also were a few regularly scheduled working meetings that happened. Regardless of the circumstances, July was a busy month. Here is a brief summary of July NAIC-related activity.
Interested Parties (IP) SSAP No. 43R Group – July 1, 8, 15, & 29, 2021
The goal of any IP group is to give others besides regulators input into the “rules” of the insurance regulatory world. This bipartisanship between industry and regulators also encourages the education of both “parties” (and others as well). The result is industry and regulators attempting to craft guidelines that are acceptable to both. However, in this scenario we have to remember there is no concept of “the majority rules.” The power resides with regulators when it comes to making the final decision. Regulators win—always. That doesn’t mean they may not change their minds along the way (or not), but they always make the final decision.
With that in mind, remember how long this particular IP group has been meeting in an attempt to help draft a regulatory definition. A decision is nearing. The focus of the earlier July calls was the finalization of the IP comment letter addressing the proposed principle-based definition of bonds, which was exposed for comment by the Statutory Accounting Principles Working Group (SAPWG, SĂP-wĭg). In general, the IP letter supports the proposed definition but provides a handful of comments, particularly regarding the examples included in the proposal. The July 15 meeting provided everyone with the opportunity to put their final stamp of approval on the IP comment letter, which was due to SAPWG that same day. The remainder of the July meetings were proactive in nature, with IPs anticipating regulatory response to their comments and planning a counterattack. A smaller IP subgroup has regularly been meeting with regulators and, as a courtesy, gave the regulator group a heads-up on the IP comment letter. As a result, there were a couple of topics that regulators agreed needed public airing and resolution. The question that keeps arising in IP meetings is whether regulators will actually approve the concept of a principle-based bond definition and move forward with SSAP No. 43R revisions. Regulators will shortly be holding a “regulators only” call to talk about the idea of a principles-based definition. There is a strong possibility the whole idea will be trashed. Hopefully SAPWG will be able to provide an update at its next meeting later in August.
Health Risk-Based Capital (HRBC) Working Group – July 12, 2021
The 2021 edition of the HRBC newsletter was adopted and will be posted to the Working Group’s website shortly. Each year the newsletter is posted providing information regarding current changes to the formula as well as any needed filing instructions. The Working Group briefly reviewed the 2020 HRBC filing statistics, which also will be posted to the website. The American Academy of Actuaries (Academy) asked for guidance on the underwriting risk factors project the Working Group had requested. The discussion that followed included information on the scope of the project and phases of work, desired output/perspective, and the general time frame with key dates/deadlines. The conversation then turned to the recently adopted bond factors. The new factors had been based on the Academy’s work for the Life RBC formula, which ended up not being adopted by the Life RBC Working Group. Instead, the adopted Life bond factors are based on work undertaken by Moody’s Analytics. The HRBC Working Group is now questioning whether there should be further work on the health bond factors, tailoring the research more specifically for the health industry and corresponding health company investment portfolios. Of course, it is too late to consider any factor changes for this year. This conversation will continue, but the next round of talks will most likely be held by the Capital Adequacy Task Force, this Working Group’s parent committee. Earlier this year the Working Group had adopted the addition of investment income to underwriting risk factors for specific health lines of business. During that process, the group had decided to develop benchmarking guidelines for updating the factors in the future. A possible concept for establishing those benchmarks was presented and briefly discussed. At least one health company suggested the presented concept was not appropriate and needed further consideration. The conversation will continue in the future.
Valuation of Securities (VOS) Task Force – July 15, 2021
VOS (vŏs) revised and adopted its charges, then moved onto adopting revisions to the Purposes and Procedures Manual of the NAIC’s Investment Analysis Office. The following items were adopted:
- Additional instructions for the review of funds.
- Filing exemption for real estate lease-backed securities.
- Revisions for Working Capital Finance Investments to bring guidance in alignment with Statement of Statutory Accounting Principle (SSAP, săp) No. 105R.
The next item for discussion was whether or not the Securities Valuation Office (SVO) should use the rating of a parent in assigning an NAIC designation to a Working Capital Finance Investment issued by an unrated subsidiary, where there is no guarantee of payment by the parent. The SVO previously indicated it is not in favor of this concept; however, in case the Task Force decides to move forward by instructing the SVO to provide an NAIC designation, revised draft language supporting the concept was exposed for comment until August 16. The conversation then turned to an item that had previously been adopted during a March 22 meeting. This adoption changes the modeling process for RMBS and CMBS securities and was targeted for implementation by this year-end. At the time of adoption, the SVO indicated it thought 2021 implementation was feasible. Industry thought it was desirable but not feasible. The SVO is now expressing concern that with the number of other changes slated to occur this year for investments, including new bond factors for RBC, “another substantial revision will be adding even more reporting complexity for this year.” Translation: We can’t do it. A joint letter from the American Council of Life Insurers and the North American Securities Valuation Association also expressed concern about the 2021 timeline and the possible need to prioritize changes. The letter offered possible solutions, including the phasing in of some items between this year and 2022. That letter has been posted to the VOS webpage and is available for review. No final decision on this issue was made but will need to happen soon.
Catastrophe Risk Subgroup – July 15, 2021
The Subgroup adopted changes to its working agenda and then heard an update from the Catastrophe Model Technical Review Ad Hoc Group, which has been looking at the technical issues of adding wildfire risk to the Property Risk-Based Capital calculation. AIR Worldwide provided a brief presentation on wildfires in the Western U.S. and stochastic wildfire modeling for risk assessment, including the most common causes of the fires.
Joint Meeting of Mutual Recognition of Jurisdictions Working Group and Group Capital Calculation Working Group – July 20, 2021
The purpose of this joint meeting was to discuss the draft Process for Evaluating Jurisdictions that Recognize and Accept the Group Capital Calculation. This was the first time anyone had seen the draft, which was quickly reviewed and an opportunity for questions was provided. The paper was then exposed for a 30-day comment period ending August 30. During this meeting, it was suggested that the Mutual Recognition of Jurisdictions Working Group (MRJWG), a newly renamed working group, should become known as the Mr. J Working Group. Time will tell if that name sticks or not.
Life/Fraternal Risk-Based Capital (L/FRBC) Working Group – July 21, 2021
The Working Group held a relatively short meeting adopting minutes to 10 previous meetings and the 2021 L/FRBC newsletter, reviewing the 2021 L/FRBC statistics, and updating its working agenda. The newsletter will soon be posted to its website.
Blanks Working Group – July 22, 2021
The Blanks Working Group (Blanks) only adopted one item during this meeting, item 2021-10, which removes the requirement to file a quarterly merger/history file as well as eliminates the corresponding general interrogatory. The removal becomes effective the first quarter of 2022. Several items were deferred until October 22, 2021, for additional discussion. Those items were:
- 2021-11, adding a new annual statement supplement to the property/casualty statement and additional reporting to the quarterly statement to capture statistical data on certain lines of business.
- 2021-12, which was modified and then deferred. The proposal would reformat some lines on the Analysis of Operations by Lines of Business – Accident and Health of the Life/Fraternal statement, as well as add some additional validations.
- 2021-13 was modified according to recommendations received from the Casualty Actuarial and Statistical Task Force and then deferred for further discussion. The proposal would provide a new supplement to the Property/Casualty statement capturing additional information for the Other Liability – Occurrence, Other Liability – Claims-Made, and Excess Workers’ Compensation lines of business.
- 2021-14 also was modified and then deferred. This proposal will expand the lines of business reported on Schedule H in both the Property/Casualty and Life/Fraternal statements to match the lines of business reported in the health statement.
An editorial listing of changes was adopted. Guidance for the year-end 2021 preparation of the Health Actuarial Statement of Opinion (Opinion) was adopted and will be posted to the Blanks webpage. The guidance clarifies that the Opinion is to address the treatment of actuarial liabilities and assets, according to Actuarial Standard of Practice No. 28.
Property Risk-Based Capital (PRBC) Working Group – July 22, 2021
The 2021 edition of the PRBC newsletter was adopted. The newsletter is posted to the Working Group’s website each year, providing information regarding current changes to the formula as well as any needed filing instructions. The group briefly reviewed the 2020 PRBC filing statistics and then adopted its updated working agenda. The American Academy of Actuaries (Academy) reviewed its report entitled Update to Property and Casualty Risk-Based Capital Underwriting Factors Experience Through December 31, 2017, which was recently submitted to the Working Group. The Academy also provided updates on four other projects it is working on for the Working Group. The Working Group held this meeting in lieu of an in-person meeting at the upcoming NAIC Summer National Meeting.
Group Capital Calculation (GCC) Working Group – July 26, 2021
In a brief meeting, the Working Group exposed two drafts for comment. The comment period for the Procedures of the Financial Conditions (E) Committee’s Group Capital Calculation Working Group in Connection with Proposed Amendments to GCC Template and Instructions ends September 24. Hopefully, the title of the document explains its content. The second document is a memo addressed to the Capital Adequacy Task Force explaining differences in the treatment of some insurer subsidiaries between the GCC and the RBC formulas. Although the memo does not specifically say so, it does imply the Task Force should consider adopting similar guidance from the GCC. Before adjourning the meeting, the chair reminded everyone that the GCC 2021 trial is underway, with filings due by the end of the month, and that there is another document exposed for comment by the MRJWG until August 20. (See discussion above.)
Accounting Practices and Procedures Task Force – July 27, 2021
This meeting lasted a quick 20 minutes, with a lot of that time spent calling roll for the 44 members of the Task Force. However, quick is good for this group, as it indicates that it was business as usual with no controversial topics. Accordingly, the Task Force adopted the minutes of its two working groups, SAPWG and Blanks, thus ratifying their activity. The 2022 working agenda for the Task Force was adopted. The group then approved a request from the NAIC/AICPA Working Group to incorporate the most recent version of the Implementation Guide for the Annual Financial Reporting Model Regulation (Guide) in the Accounting Practices and Procedures Manual. This is normal procedure when the Guide has been revised.
Reinsurance Task Force – July 27, 2021
This is one of the NAIC groups that has a large following. At one point, as many as 167 participants were logged in to the virtual meeting. Participants included NAIC staff, regulators, and nonregulators. The Task Force adopted its 2022 charges, which did not change from its 2021 charges. The report from the Reinsurance Financial Analysis Working Group (ReFAWG, RĒ-fŏg) was adopted. This report is very general in nature, as most of the group’s work is done behind closed doors in regulator-only sessions. Revisions to the Process for Evaluating Qualified and Reciprocal Jurisdictions were discussed. Most of these revisions were the result of comments received during the document’s previous exposure period. Since the revisions were considered nonsubstantive in nature, the document was adopted without further re-exposure. The conversation then moved to the ReFAWG Review Process for Passporting Certified and Reciprocal Jurisdiction Reinsurers paper, which had previously been exposed for comment. Several parties that had submitted comments were given a chance to speak. The process was not adopted at this time. The next agenda item was the consideration of the Republic of Korea’s application to become a qualified jurisdiction. Although the submitted evaluation report recommended that the Republic of Korea be recognized as a qualified jurisdiction, the application was rejected at this time and sent back to the MRJWG for reconsideration. The rejection resulted from information provided in one of the received comment letters that needed further clarification. The Task Force’s attention then turned to the implementation status of the 2019 Credit for Reinsurance models by the states. The chair reminded everyone that all states need to have these models adopted by a “drop dead” deadline of September 1, 2022, or the federal government may take control of reinsurance regulation. The chair also encouraged states to try to push for adoption by July 1, 2022, and not wait until the last moment. The final item was an update on the status of states’ adoption of the Term and Universal Life Insurance Reserve Financing Model Regulations, which is an accreditation standard and mirrors Actuarial Guidelines 48 that has been in place for some time.
Capital Adequacy Task Force – July 28, 2021
This 18-minute meeting accomplished quite a lot. As the parent of all the RBC working groups, the Task Force adopted the minutes of the Health, Life/Fraternal, and Property/Casualty RBC Working groups, as well as the Catastrophe Risk Subgroup. The discussion then moved to proposal 2021-04-CA, which had previously been adopted at the Task Force’s June 30 meeting. A modification to the proposal was needed to address rounding problems due to NAIC system constraints. The proposal correction was adopted and will be effective for this year-end reporting. The group then adopted its 2022 working agenda.
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