March 2022 NAIC-Related Activity
NAIC activity picked up a little bit in March. As you can see below, the risk-based capital (RBC) groups were hard at work on 2022 RBC formula changes. That work is already scheduled to continue into April. Several other groups held virtual meetings in lieu of in-person meetings at the upcoming NAIC Spring National Meeting in April.
Statutory Accounting Principles Working Group (SAPWG) – March 2, 2022F
The sole purpose of this meeting was to discuss a proposed principle-based bond definition that would be applicable to both SSAP No. 26R – Bonds and SSAP No. 43R – Loan-Backed and Structured Securities. (It also is likely that a few revisions will need to be addressed in other SSAPs as well.) NAIC and industry have diligently been working on this project since 2020. The intent of an updated bond definition is to clarify what is considered as a bond for reporting in Schedule D – Part 1. Prior to this meeting, an updated bond definition and a draft issue paper were distributed to encourage discussion (which did not happen). NAIC staff reviewed the changes that had been made to the previous version of the bond definition. The meeting’s conversation culminated in the re-exposure of the bond definition and the exposure of an as-of-yet unnumbered issue paper. This early draft of the issue paper does not currently include any proposed SSAP revisions but does document the discussions and decisions that have occurred in arriving at the current principle-based bond definition. The exposure period ends May 6, 2022.
Life Risk-Based Capital (LRBC) Working Group – March 10 & 23, 2022
The March 10 meeting began with a discussion of the American Academy of Actuaries’ (Academy) C2 Mortality Work Group recommendation for revisions to the C2 component of the LRBC. The proposal, which had previously been exposed for comment, was unusual in that it offered two different options for consideration. Comments from the American Council of Life Insurers suggested a different tiering of factors to be used, some additional term definitions, and eventually developing more ties back to the annual statement, while supporting Option 1. After a discussion on the merits of both Option 1 and Option 2, it was decided to delay choosing between the two options until a later date, which would be prior to the end of April, to facilitate 2022 formula implementation. The next agenda item was revisions to the Asset Valuation Reserve (AVR) bond factors. When the bond factors were changed in the LRBC formula, they were not changed in the AVR. This caused a disconnect between the two reports, as life and fraternal insurers are given credit for their AVR when calculating their RBC. The proposal updates the AVR maximum reserve factors to reflect the RBC after-tax factors. This proposal also is being sent to the Blanks Working Group for simultaneous consideration.
The March 23 meeting was in lieu of an in-person meeting at the NAIC Spring National Meeting. The group updated its working agenda and then saw a presentation on custody control accounts. The focus of the presentation was to educate and suggest that custody control accounts be allowed the same RBC treatment as currently received by comfort trusts. The discussion then moved to bond funds and in particular bond funds reported in the statement as common stock. This issue will be referred over to the Investment RBC group since the proposal also would involve other RBC formulas.
Joint Meeting of Life Actuarial Task Force & Life RBC Working Group – March 17, 2022
The focus of this meeting was a presentation and discussion of recommended Economic Scenario Generator (ESG) models for field testing. The presentation was the result of an NAIC request for the American Academy of Actuaries’ Economic Scenario Working Group to use its two model offices (Universal Life with Secondary Guarantees (ULSG) and Variable Annuities (VA)) to test the impact of some economic scenario sets on statutory reserves and capital. The Academy presented an overview of treasury, equity, and corporate models that were tested, as well as its recommendations for field testing. Since the ESG field testing is scheduled to begin the first week of June, the Academy’s recommendations were exposed for comment through April 7.
Health RBC (HRBC) Working Group – March 18, 2022
This virtual meeting was in lieu of an in-person meeting at the NAIC’s Spring National Meeting. The group discussed the Academy’s H2 – Underwriting Risk Report, which had been exposed in January for a 45-day comment period. No comments were received. The report makes six recommendations for revisions to the H2 risk of the HRBC. A request was made for additional information to be provided regarding possible different approaches mentioned in the report. A separate session will be set up for that purpose. The Working Group then decided to receive that additional information before instructing the Academy to move forward with their recommendations. (Remember, many revisions incorporated in the HRBC also will affect the health sections of the PRBC and the LRBC.) The 2022 HRBC agenda reflecting updated priorities for the group to address was adopted.
Catastrophe RBC Subgroup – March 22, 2022
The Subgroup discussed and updated its 2022 working agenda. The conversation then moved to the insured loss threshold for wildfire peril, with the group considering using the minimum 25 million insured losses per event threshold that has been used with the other perils. No decision was made. A modified proposal 2021‐17‐CR was exposed for a 14-day comment period ending April 5. This action was a little confusing as 2021-17-CR adding wildfire peril to the formula for information collection only had previously been adopted by the Subgroup. This new exposure is considered a modification to the original proposal and allows for an exemption for companies that would encounter a cost and compliance burden to meet the wildfire modeling requirements. Maybe it should have been given a new reference number to keep the confusion to a minimum? The exemption would cover the period of time where only information is being collected. The Subgroup discussed the independent model review instructions currently in the Rcat Component of the PRBC. Missouri had performed such a review and provided comments on the process, as well as addressed questions on their experience. Once again, the issue of double counting in the R5 Component for the addition of catastrophes was brought up and briefly discussed. The meeting ended by discussing needed revisions to page PR027 of the formula instructions indicating that some of the approved models can only be used for specific perils.
Reinsurance Task Force – March 22, 2022
The Task Force adopted the report of the Reinsurance Financial Analysis (E) Working Group (ReFAWG). This group meets in regulator-only meetings; therefore, only a very general summary of activity was provided. ReFAWG has asked, however, for each state department to provide a point of contact for reciprocal jurisdiction and certified reinsurer matters. The latest proposed revisions to the Uniform Checklist for Reciprocal Jurisdiction Reinsurers were discussed and then exposed for a 30-day comment period. The group then received a report on the work of the Reinsurance Activities of the Mutual Recognition of Jurisdictions Working Group and a status update on the states’ implementation of the 2019 revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). The chair reminded everyone that because of the Covered Agreement deadline of September 1, 2022, it is imperative that all states and jurisdictions that have not adopted the models take action as soon as possible. NAIC is recommending all remaining states and jurisdictions adopt the models by July 1 to allow enough time for federal analysis. The NAIC has reached out to the states/jurisdictions that have not yet taken action on the models and have been assured by all that actions are in process. The Task Force then received a status report on the states’ implementation of the Term and Universal Life Insurance Reserve Financing Model Regulation (#787), with a reminder that certain parts of the model need to be adopted to maintain state accreditation.
RBC Investment Risk & Evaluation Working Group – March 22, 2022
The Working Group discussed comment letters received (four) on the E Committee exposure for the phase II bond RBC initiative for structured securities. Comments were to be submitted to this group and not the E Committee. Although the comments varied somewhat, they all centered around the complexity of these types of investments and cautioned against the various moving parts that would need to be considered. The working agenda was adopted with a reminder that not all the goals would be addressed this year. Items referred by the E Committee were given priority. The working agenda also contains a few items that were referred to this Working Group by the Capital Adequacy Task Force and that are “hold overs” from prior to this group’s formation. Although not listed formally on the working agenda, the group feels that one of its goals is an attempt to make sure there is enough detail in the annual statement and RBC report to collect needed data to make informed decisions going forward. The meeting ended with several ideas on how the group should move forward to accomplish its goals.
Property RBC (PRBC) Working Group – March 23, 2022
This group reaffirmed the adoption of two proposals, 2021-15-CR and 2021-17-CR, which had been previously adopted by the Catastrophe RBC Subgroup. (See discussion above.) Another proposal, 2021-14-P, received no comments during its exposure period and accordingly was adopted during this meeting. With this adoption, the embedded 2 percent operational risk contained in the R3 credit risk component will be removed. (Reminder: proposals adopted by any of the RBC Working Groups also must be adopted by the Capital Adequacy Task Force before becoming final.) Proposal 2022-01-P, removing the trend test information only footnote, was exposed for a 30-day comment period, ending April 30. The group then reviewed revisions to its working agenda. The Academy provided updates on the four PRBC projects on which it is working.
Capital Adequacy Task Force – March 28, 2022
As usual, the meeting began with the adoption of its own previous meeting minutes and those of its various working groups. From there, the following RBC items were adopted.
|2021-18-H||Identifies frequency and parameters for updating of investment income factor in the HRBC.||Adopted for 2022 HRBC.|
|2021-15-CR||Adds additional “approved” third-party vendor for catastrophe risk of the PRBC.||Adopted for 2022 PRBC.|
|2021-17-CR||Adds wildfire to the formula, but for data collection only; will not be part of final PRBC calculation for 2022.||Adopted for 2022 PRBC.|
|2021-14-P||Removes embedded operational risk from the R3 credit risk factor in PRBC.||Adopted for 2022 PRBC.|
Complete copies of the adopted items will shortly be available at the Capital Adequacy Task Force website by selecting the Documents option and picking “Adopted Proposals to the Risk-Based Capital Formulas.” The Task Force reviewed and adopted its revised working agenda. The chair alerted everyone that the ad hoc group for affiliated investments will be forwarding their work and results to the three RBC Working Groups for input prior to Capital Adequacy taking any final action. The chair also announced that although the PRBC Working group has sent a referral on run-off companies to the Restructuring Mechanisms Working Group, each of the RBC Working Groups also would be receiving a copy for review and possible input.
Blanks Working Group (BWG) – March 29, 2022
Items that had previously been exposed or deferred were addressed first. Some of these items were modified from the original exposure document. Most, but certainly not all, of those modifications were the result of industry comments.
New Property/Casualty (P/C) supplement to provide additional information for Other Liability line of business.
|This previously deferred item was withdrawn and replaced by 2022-04 (see below exposures).|
|2021-15||Adds footnote to Exhibit 7 of Life/Fraternal and the Life Supplement of the Health Statement.||Adopted, effective year-end 2022.|
|2021-16||Revises Note 9 – Income Taxes.
||Adopted with modifications, effective year-end 2022.|
|2021-17||Modifies the Analysis of Operations by Lines of Business in Health statement; adds a new supplement to the Life/ Fraternal statement – Health Analysis of Operations by Lines of Business Supplement.||Adopted with modifications, including change of implementation date to 2023.|
Despite where this item was listed in the agenda order, the discussion was delayed until all other previously exposed items were handled. Many of the modifications resulted from industry input. Due to concern on the number of substantive 2022 changes already adopted for the Life/Fraternal statement, industry asked for and received a change in the implementation date until 2023. However, this adopted item should be reviewed carefully now, as many companies will find a need to redesign their company systems to be able to provide the correct reporting.
|2021-18||Changes to the Life/Fraternal State Page line of business reporting & addition of a new supplement for lines of business detail.||Deferred for further discussion.|
|2021-19||Adds columns and lines to the Health Underwriting and Investment Schedules (U&I) and Health State Page for lines of business.||Adopted with modifications, effective year-end 2022.|
The above adoption makes major changes to the reporting format for several parts of the U&I and the State Page in the Health annual statement, as well as the State Page and the U&I Analysis of Claims Unpaid in the Health quarterly. The changes align the health lines of business reported in the Health statement with that in the Life/Fraternal and Property/Casualty statements. Reporting will now be classified as:
- Comprehensive (hospital and medical) Individual
- Comprehensive (hospital and medical) Group
- Medicare Supplement
- Dental only
- Vision only
- Federal Employees Health Benefits Plan
- Title XVIII – Medicare
- Title XIX – Medicaid
- Credit A&H
- Disability Income
- Long-Term Care
- Other health
- Life (sometimes labeled Other Non-Health)
- Property/casualty (sometimes labeled Other Non-Health)
|2021-20||Expansion of reporting in the Life/Fraternal Five-Year Historical Data pages.||Adopted with modifications, effective year-end 2023.|
When the reporting on the Life/Fraternal Analysis of Operations by Lines of Business pages in the Life/Fraternal statement changed, the reporting for lines of business in the Five-Year Historical pages did not change. This adoption brings the reporting back into alignment. There is something to be aware of with this change. All five years’ worth of information will be required in 2023; 2019, 2020, 2021, 2022, and 2023. Normally, all information on these pages can be automatically pulled from parts of the annual statement and from prior years’ Five-Year Historical Data. But for this new 2023 reporting, that will not quite be the case. The pulling of data for 2023 information will obviously work, but not necessarily for prior years. That will depend upon how the company’s statement software works; companies may have to do some manual entry that first year.
|2021-21||Additional investment schedule instructions on the handling of non-rated residual tranches.||Adopted with modifications, effective year-end 2022.|
This item was actually modified during the meeting before final adoption occurred. That means that if you downloaded and/or reviewed the original proposal, it is now out of date. The revisions added reporting for residual tranches or interest with underlying assets having the characteristics of preferred stock, providing them with their own reporting category.
|2021-22||Increases reporting in investment schedules to indicate investment transactions with related parties.||Modifications were adopted and then the item was re-exposed for comment.|
|2021-23||Adds residual tranches or interests to the Life/Fraternal Asset Valuation Reserve (AVR).||Modifications mirroring those in 2021-21 were adopted, effective 2022.|
During the discussion of 2021-23, industry indicated that this revision will need to be looked at in relationship to how the change may affect Life RBC and whether or not the Life RBC Working Group may need to issue some guidelines for 2022 RBC reporting.
Adopted items will shortly be added to the “Adopted Modifications to the Financial Statements and Instructions” listing, which can be found on the BWG website.
The following items were exposed for comment until April 25, 2022. Most of the new items have a proposed implementation of year-end 2022, but a few of them are 2023 proposals. The exposures will shortly be available on the BWG website under the Exposures Drafts tab. Exposures should be reviewed carefully, as this is industry’s chance to voice their opinion and try to incorporate improvements.
|2022-01||New questions in General Interrogatories regarding cryptocurrencies.|
|2022-02||Additional electronic-only columns on Schedule D – Part 6.|
|2022-03||Split commercial multiple peril reporting in P/C quarterly statement between non-liability and liability portions. First quarter 2023.|
|2022-04||Inserts a new P/C supplement to provide additional information for Other Liability line of business. Effective 2023.|
|2022-05||Adds line numbers to existing status data point lines in the Schedule T footnote.|
|2022-06||Revises Health Test instructions in all statement instructions.|
Heads-up on this one. Although only exposed for comment at this time, what looks like some minor changes to the Health Test could mean that several companies will have to make the switch from the current Property/Casualty or Life/Fraternal statements to the Health statement. You might want to take a look at it and see if you fall into that category and then watch the progression of the proposal. By the way, the proposal originated from the Health RBC Working Group, so it will most likely be adopted.
|2022-07||Changes the Health Actuarial Opinion instructions.|
|2022-08||Modifies instructions for P/C Actuarial Opinion.|
|2022-09||Amends the Life/Fraternal VM-20 Reserves Supplement adding a question regarding Principles-Based Reserving exemption.|
|2022-10||Provides instructional changes to Schedule T, State Pages, & the Accident & Health Policy Experience Exhibit for ACA premium adjustments.|
|2022-11||Updates Life/Fraternal AVR factors for expanded bond categories.|
This last item would once again align Life RBC bond factors with the AVR bond factors.
Several minor corrections to various statements and schedules were then adopted as editorial revisions. Although these are usually instructional revisions, this time there also were several corrections to the blanks format. These items will be posted to the BWG website with other adopted items and will be reflected in the next release of the annual statement blanks and instructions. BWG received a memorandum from SAPWG regarding changes to the “Notes to the Financial Statement” disclosures that should have been addressed in the 2021 Annual Statement. Changes to the disclosures are normal at year-end. Usually both SAPWG and BWG post this type of memo to their website at year-end, thus making it available to industry. But that didn’t seem to happen this year. Instead, the memo was addressed at this meeting, which was a bit late considering most companies had a March 1 filing deadline for the 2021 Annual Statement. Hopefully everyone that needed to address these disclosures did.
Interested Party (IP) Activity
This is just a quick reminder of some of the IP activity that is taking place. The group working on the principles-based bond definition has been having a series of meetings to craft a comment letter on the draft issue paper exposed by SAPWG. The issue paper can be found on the SAPWG website. Another IP group is working on possible revisions to Schedule D reporting based on the bond definition project. The NAIC SAPWG staff has furnished a visualization of reporting; industry is reviewing the suggestions and probably will provide some counter-thoughts. The “regular” IP group working with statutory statement changes has carefully been monitoring some rather extensive proposed statement revisions and providing appropriate feedback to the regulators. In particular, IPs are very concerned about suggested implementation dates for several proposals. A new IP group is preparing comments on proposed revisions to the Financial Examiners Handbook and the Financial Analysis Handbook regarding the regulatory review of Form Ds for affiliate agreements. As part of this process, affiliated service agreements with market-based expense allocations are of specific concern.
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