Regulatory Update: National Association of Insurance Commissioners Spring 2024 National Meeting

 

The NAIC Handbook revisions were developed by the RFS Working Group’s Affiliated Investment Management Agreement Drafting Group (IMA Drafting Group), which was formed to address the referrals made to the RFS Working Group from the Macroprudential (E) Working Group (Macroprudential Working Group) in 2022 as part of the Macroprudential Working Group’s review of private equity (PE) ownership in the insurance industry and the Regulatory Considerations for Private Equity Owned Insurers (List of PE Considerations) (described further below), including with respect to the solvency monitoring guidance for affiliated investment management agreements. The IMA Drafting Group met several times in late 2023 and early 2024 to discuss the referred issues and developed proposed edits to the NAIC Handbooks to provide additional guidance to regulators in reviewing an insurer’s investment portfolio and investment management agreements.

The proposed updates would provide additional direction in the review of IMAs, including specifically with respect to fees, risks, and conflicts of interest with investment advisors. The revisions also include guidelines for regulatory review of the fairness and reasonableness of an affiliated IMA in the context of a Form D – Prior Notice of a Transaction, which would require consideration of the following elements:

• whether the IMA is clear as to how the investment adviser will select investments and whether the investment guidelines follow the insurer’s investment strategy and applicable laws and regulations
• whether the IMA addresses the level of authority granted to the investment advisor in executing transactions
• whether the IMA specifically indicates how conflicts of interest will be considered
• whether the IMA is clear as to the investment adviser’s role as a fiduciary in advising the insurer
• whether the calculation of fees under the IMA is clearly defined and whether the structure of the fee is considered as management assesses the adviser’s performance (with extra focus on whether there are any performance or incentive fees over and above a base management fee)
• whether the IMA permits the investment advisor to engage sub-advisors with or without the consent of the insurer and how any such sub-advisors are paid
• whether the IMA is clear on expectations for the reporting of portfolio performance
• whether the IMA provides for appropriate termination with and without cause
• whether the IMA includes consideration of information that would permit the insurer to perform an adequate review of the investment advisor’s performance and execution of the insurer’s investment strategy

Members of the IMA Drafting Group noted that many questions arose around the issue of the use of sub-advisors. In response, the IMA Drafting Group developed a proposal to adjust Annual Statement General Interrogatory 29.05 to clarify that insurers should disclose any investment sub-advisors in their responses to the interrogatory. The proposal was exposed by the Blanks (E) Working Group (Blanks Working Group) for a public comment period ending April 23.

The proposed changes, once finalized, will be referred to the Financial Analysis Solvency Tools (E) Working Group (FASTWG) and the Financial Examiners Handbook (E) Technical Group for consideration of adoption.

 

The List of PE Considerations was developed after the topic of PE ownership in the insurance industry gained attention internationally as well as at the state and federal levels in the U.S. The Macroprudential Working Group developed the List of PE Considerations to address, among other things, perceived regulatory gaps with respect to the increase in PE ownership of insurers, the role of asset managers more generally in insurance, and the increase in private investments in insurers’ portfolios. The NAIC adopted the List of PE Considerations in August 2022, after which various NAIC groups received referrals from the Macroprudential Working Group for further assessment. A copy of the current List of PE Considerations can be found here.

The Macroprudential Working Group provided the following updates on the List of PE Considerations at the Spring Meeting for which work remains ongoing.

• Item 1 (Holding Company Structures) and Item 2 (Ownership and Control)
  
  In November 2023, the Group Solvency Issues (E) Working Group (GSI Working Group) adopted “regulator-only” sound practice guidance for use in reviewing complex ownership structures of insurers. The guidance document has been posted for regulator review and use.
  
  In addition, the GSI Working Group referred proposed additions to the NAIC’s Financial Analysis Handbook to FASTWG for further consideration in 2024. These edits include additional Form A (Change of Control) review procedures as well as new guidance for use by regulators in evaluating Disclaimer of Control/Affiliation filings. These documents will be exposed for public comment by FASTWG in 2024 and then adopted for inclusion in the 2025 Financial Analysis Handbook.
  
  The RFS Working Group finalized updated guidance on regulator review and monitoring of the provision of services by affiliates at the NAIC’s 2023 Summer National Meeting. This guidance was subsequently adopted for inclusion in the 2024 publications of the NAIC Handbooks.
  
  
• Item 3 (Investment Management Agreements) and Item 4 (Ownership of Insurers with Short-Term Focus)
  
  The RFS Working Group has formed the IMA Drafting Group to develop more specific guidance for use in reviewing investment advisory services provided by an affiliate (discussed above).
  
  The RFS Working Group has also referred considerations related to capital maintenance agreements to FASTWG.
  
  
  An update was also provided regarding the review of Actuarial Guideline LIII — Application of the Valuation Manual for Testing the Adequacy of Life Insurer Reserves (AG 53), which became effective for year-end 2022, to ensure that long-term liabilities are appropriately supported and that complex and/or privately structured securities’ risks are appropriately modeled. Targeted company reviews remain ongoing, and a recommendation has been made to the Life Actuarial (A) Task Force (LATF) to increase the justification needed regarding assumed equity net yields and to require more analysis be provided to regulators in certain cases where the life insurer cedes business through reinsurance.
  
  
• Item 10 (Privately Structured Securities) and Item 11 (Reliance on Rating Agencies)
  
  The American Academy of Actuaries (Academy) finalized a list of principles for structured securities with input from the Risk Based Capital Investment Risk Evaluation (E) Working Group (Investment RBC Working Group) at the 2023 Fall Meeting. As previously indicated, this work may inform the work of the Investment RBC Working Group, pending further evaluation.
  
  In 2023, the Securities Valuation Office (SVO) proposed an amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (the P&P Manual) to make all Structured Equity and Funds, which captures a subset of the private structured securities market, ineligible for filing exemption. The Valuation of Securities (E) Task Force (VOS Task Force) deferred action on that proposal and instructed the SVO to instead draft a new proposal to authorize procedures for the SVO’s discretion over NAIC designations assigned through the Filing Exemption (FE) process (discussed below). The amendment would grant the SVO staff some level of discretion over the FE process to address the NAIC’s current blind reliance on credit ratings.
  
  The VOS Task Force has had, and will continue to have, discussion and activity around this consideration and is in the process of submitting due diligence questions to the credit rating providers (CRPs) regarding their ratings processes for further review by the VOS Task Force. As those discussions continue, this consideration may expand in scope.
  
  
• Item 12 (Pension Risk Transfer (PRT) Business Supported by Complex Investments)
  
  The Macroprudential Working Group has sent referrals to LATF and the Statutory Accounting Principles (E) Working Group (SAP Working Group), and projects remain underway to address such considerations in respect of LATF’s work on VM-22 (Statutory Maximum Valuation Interest Rates for Income Annuities) and to address the risk-based capital (RBC) treatment of PRT business.
  
  
• Item 13 (Offshore/Complex Reinsurance)
  
  At the 2023 Summer Meeting, the Financial Condition (E) Committee (E Committee) adopted the reinsurance comparison worksheet (Reinsurance Worksheet), which is designed as an optional tool to allow regulators to obtain additional information to understand the economic effect of a reinsurance transaction, either upon initial review of the proposed transaction or when the regulator is performing a historical review of the transaction for another purpose.
  
  LATF has been in discussions regarding proposed enhancements to reserve adequacy requirements for life insurance companies by requiring that asset adequacy analysis use a cash flow testing methodology that evaluates ceded reinsurance as an integral component of asset-intensive business to address risks that domestic life insurers may enter into reinsurance transactions that materially lower the total asset requirement (the sum of reserves and required capital) in support of their asset-intensive business, and thereby facilitate releases of capital that prejudice the interests of their policyholders. The recommendation would require for all reinsurance transactions, including but not limited to long-duration business that is subject to material market or credit risks or is subject to material cash flow volatility, that asset adequacy testing be performed (i) using a cash flow testing methodology, (ii) at the line of business and treaty level (within each individual treaty), and (iii) standalone for life insurance, annuities, long duration health insurance, and the like. These requirements could be incorporated into the Valuation Manual (VM-30) or as an Actuarial Guideline. This proposal was exposed for a 60-day comment period ending May 17, 2024.

In addition, the International Insurance Relations (G) Committee (G Committee) meeting was focused on matters related to PE ownership of insurers. G Committee members heard updates from Peter Windsor of the International Monetary Fund (IMF) regarding the IMF Global Financial Stability Note released in December 2023 on Private Equity and Life Insurers and Ricardo Garcia of the Bermuda Monetary Authority (BMA) regarding the BMA paper “Supervision and Regulation of Private Equity Insurers,” which was also published in December 2023.

The ACLI’s proposal mirrors changes that the NAIC adopted around 2006 to reduce the C-0 RBC factor of “conforming” securities lending programs to 0.2%. The ACLI’s proposal was previously exposed for a potential year-end 2024 effective date. However, in a memorandum dated February 20, 2024, from the SAP Working Group to the Life Risk-Based Capital (E) Working Group (Life RBC Working Group), the SAP Working Group noted that the statutory accounting and reporting for securities lending and repurchase agreements are currently different and requested that the Life RBC Working Group defer consideration of the ACLI proposal until the SAP Working Group is able to assess further. In the meantime, the Life RBC Working Group exposed for comment until April 15, 2024, revisions proposed by the ACLI to its repurchase agreement proposal. As revised, to establish “conforming program criteria” for repos, reporting insurers must attest that (among other things) they “have identified a pool of dedicated reinvested assets” (rather than “have dedicated reinvestment assets”) to support the repo liability.

Based on updated criteria and modeling decisions made by LATF and GOES SG, Conning is recalibrating the model and producing updated scenario sets. Those scenario sets will be analyzed by the NAIC and discussed further at public meetings. During a presentation to the Life Insurance and Annuities (A) Committee, LATF highlighted the following guidelines that have been critical to the development of the GOES and that are expected to continue to be subject to further discussion and consideration as the project continues: (1) Unreasonable scenarios should be avoided (as the objective is to replace the current inadequate and outdated ESGs), but more extreme than historical scenarios are necessary; (2) adherence to actuarial standards of practice (which defer to laws and regulations), access to exhaustive model documentation, and maintenance of model documentation are critical to the success of GOES; and (3) a moderate approach (as proposed by the ACLI and adopted by the GOES SG) to the interest rate/equity relationship, where a positive correlation is introduced without a full functional linkage, is appropriate. It remains uncertain whether a January 1, 2025, effective date for GOES will be achievable.

In December 2023, the NAIC adopted revisions to the Guaranty Association Model Act to (i) preserve guaranty fund coverage for policyholders subject to insurance business transfers and corporate divisions where the policyholder had guaranty fund coverage before the transaction and (ii) clarify guaranty fund coverage of cybersecurity insurance.

The Receivership and Insolvency (E) Task Force recommended that the 2023 revisions to the Guaranty Association Model Act be considered acceptable, but not required, noting that the current accreditation standards merely require a regulatory framework to ensure the payment of policyholder obligations subject to appropriate restrictions and limitations when a company is deemed insolvent. Given that a “regulatory framework” is required, rather than specific elements of the NAIC’s current model laws, the task force’s view was that states should be permitted to either adopt or not adopt the revisions and still remain in compliance with the regulatory framework required by accreditation.

As of February 26, 2024, the NAIC was not aware of any jurisdiction that had adopted the 2023 revisions to the Guaranty Association Model Act.

The VOS Task Force discussed its initial draft of the proposed amendment to the P&P Manual at the 2023 Summer Meeting. In response to comments received by interested parties on the initial draft, the VOS Task Force exposed an updated draft of the P&P Manual amendment in December 2023, which incorporated the actionable comments received from VOS Task Force members and interested parties. Comments on the previously exposed draft of the amendment were due on January 26, 2024.

At the time of the Spring Meeting, the VOS Task Force noted that it required additional time for regulatory review of the comments received on the updated amendment, so a new draft of the P&P Manual amendment was not yet exposed. However, the VOS Task force reviewed two documents that summarized the comments received during the most recent exposure period, one that summarized the comments on items discussed during prior meetings and the second that included staff recommendations on comments that require further review.

With respect to the first set of comments, interested parties continued to raise concerns regarding issues on the level of transparency, the methodologies to be used, and the appropriate level of regulatory oversight. In the summary document, the comments were followed by NAIC staff responses, which VOS Task Force Chair Carrie Mears (IA) discussed at the meeting. NAIC staff noted that regulators will consider comments about the specific form that communications may take, but it is intended that insurers involved in any SVO review process will receive full transparency into the analysis conducted. NAIC staff also noted that in the prior exposed draft of the P&P Manual, the SVO highlighted several factors it will consider to initially identify a potential ratings issue, including a comparison to peer securities rated by different CRPs, the market yield for that CRP rating level, and applying other available methodologies. The SVO often relies on the methodologies of rating agencies and may apply the methodology or combination of methodologies that it believes will produce a reasonable assessment of investment risk for regulatory purposes. With respect to regulatory review, NAIC staff noted that the insurer’s domestic regulator will retain final authority with respect to any decision on an individual insurer’s holding, subject to any broader accreditation standard issues. The responses also noted that the VOS Task Force’s intent is not to target a specific asset class or category of investments and that if needed, the VOS Task Force would pursue other options to address those concerns and that this proposal was developed to address individualized issues.

 

With respect to the second set of comments, interested parties raised additional concerns regarding some of the more procedural aspects of the proposal, including whether multiple CRP ratings could be affected, the ability to attend VOS Task Force subgroup meetings, and the use of more frequent disclosures on reviews undertaken by the SVO. In response to comments regarding the proposed use of a third party to adjudicate SVO decisions, NAIC staff noted that this process presented challenges and that such issue may be addressed through the use of multiple ratings, nothing that it may be useful to require a minimum number of ratings for an FE security to be eligible to ensure there is a broad assessment of risk; however, this specific proposal was not further discussed as NAIC staff noted it was beyond the scope of this particular proposal.

NAIC staff and members of the VOS Task Force intend to work through the comments to the P&P Manual amendment to provide an updated proposal for exposure in the next few months so that any further comments can be discussed at the NAIC’s 2024 Summer Meeting, in anticipation of adopting the P&P Manual amendment with a January 1, 2025, effective date.

The amendment became effective January 1, 2024, with insurers scheduled to first report the financially modeled NAIC Designations for CLOs with their year-end 2024 financial statement filings. However, the VOS Task Force ad hoc group continues in the process of finalizing the CLO modeling methodology.

As such, the VOS Task Force expects to introduce an amendment that would extend the effective date until January 1, 2025, to provide the ad hoc group with additional time to work on the methodology.

In addition, the Investment RBC Working Group has been working to update the RBC C-1 factors for CLOs. At the Spring Meeting, the Investment RBC Working Group received comments from the Alternative Credit Council on an Oliver Wyman study addressing the 2024 45% RBC factor proposed to be applicable to residual tranches as an interim solution, and also heard an update from the Academy on their asset-backed securities RBC workstreams.

In August 2023, the NAIC adopted an interim solution to address residual tranches, under which, for reporting as of year-end 2024, the residual tranche base factor would be 45%, with a 0% sensitivity test factor. In response to statements from the Investment RBC Working Group indicating an openness to hear additional information from industry that could support other factors, the Alternative Credit Council engaged Oliver Wyman to conduct an independent analysis of the relative risk of residual tranches. According to the Alternative Credit Council, Oliver Wyman’s report indicates that residual tranches perform better than common equity under certain modeled stress scenarios, which may be evidence that the 45% interim risk-based capital charge does not reflect the actual risk when compared to the capital charges and losses applied to other assets.

In light of the report, the Alternative Credit Council argued that more diligence is needed before imposing any interim solution, and that further action be delayed to allow for further consideration. The working group, on the other hand, noted that the purpose of the interim RBC charge is not to reflect the actual risk of residual tranches, but rather to be “reasonably conservative.” Ultimately the working group elected to receive public comments on the Oliver Wyman report for a 21-day period ending April 8, 2024, but noted that they are looking only for practical comments and are not seeking alternative factors at this time. In its update at the Spring Meeting, the Academy also noted that it intends to review the Oliver Wyman report for consistency with the asset-backed securities RBC principles endorsed by the working group in December 2023.

The Academy also provided an update on two projects that are intended to inform the longer-term RBC framework for CLOs. The first involves a qualitative review of the methodologies used by credit rating providers to evaluate tail risk associated with asset-backed securities. The second involves the identification of CLO attributes that are correlated with the ultimate tail risk associated with such CLOs. If a small set of easily identifiable attributes explains most of the tail risk, then these may be used to determine the RBC C-1 factors for individual CLOs. On the other hand, if a large or complex set of attributes are required for determining risk, the Academy noted that determination of RBC C-1 factors may require the modeling of individual securities. The Academy expects to provide an interim update on these workstreams at the NAIC’s Summer 2024 National Meeting, and to have a completed proposal on the long-term RBC framework for CLOs by the NAIC’s Fall 2024 National Meeting.

The E Committee exposed an initial draft of the Investment Framework during the 2023 Summer Meeting, and comments were received on October 25, 2023, for which the E Committee received 17 comment letters. During the 2023 Fall National Meeting, the E Committee received oral summaries of the written comments, and, subsequent to that meeting, the E Committee formed a drafting group, which, among other things, developed additional documents, including a memorandum summarizing the E Committee’s views on next steps for implementing the Investment Framework and a work plan to guide the implementation of the Investment Framework. The memorandum and work plan were exposed on February 15, 2024, for a comment period ending April 8, 2024.

The memorandum includes an item-by-item summary of the drafting group’s comments and recommendations for next steps on further developing and implementing the Investment Framework. In addition, the workplan includes seven action items:

• The E Committee will reexpose the Investment Framework for comment and further discussion.
• The E Committee will request approval from the NAIC Executive (EX) Committee to develop a request for proposal (RFP) to hire an independent consultant to provide recommendations for a due diligence framework for CRPs.
• The E Committee will continue to defer to the workstreams that the VOS Task Force and the Investment RBC Working Group are developing related to the Investment Framework as they progress toward and reach outcomes.
  
  

• The E Committee (or the drafting group) will begin an assessment of a conceptual centralized investment expertise resource separate from the Investment Valuation Office, Structured Securities Group, and SVO.
• The drafting group will recommend appointing an investment-focused working group to support the E Committee, the Financial Analysis (E) Working Group, the Valuation Analysis (E) Working Group (VAWG), and other working groups.
• The drafting group will develop and implement best practices for enhanced coordination among the E Committee’s workstreams.
• The E Committee will continue to review appropriate incorporation of RBC recommendations into the final Investment Framework.

The NAIC Executive (EX) Committee has already issued its approval of the E Committee’s request to develop an RFP for the NAIC to hire a consultant to develop a due diligence framework for CRPs, and work to develop the RFP is expected to begin in the near future. The E Committee noted that interested parties will have the opportunity to offer feedback on the RFP.

The E Committee expects continued work on the Investment Framework will take place over the rest of 2024 and into 2025, with more details developed as work progresses on different aspects of the workplan.

a. NAIC Adopts Final SSAP Revisions in Connection With the Principles-Based Bond Definition Project

The SAP Working Group adopted revisions to SSAP No. 21R to incorporate a new measurement method for residual interests, which incorporate the proposal put forth by industry of an “effective yield with a cap” method, as well as a practical expedient to allow the “cost recovery” method. The revisions to SSAP No. 21R were the final remaining SSAP revisions to be adopted as part of the SAP Working Group’s Bond Project. While the effective date of the revisions is January 1, 2025, to align with the effective date for the other SSAPs related to the Bond Project, the revisions, as adopted, provide the ability for insurers to apply the residual guidance early for December 31, 2024. 

The SAP Working Group also exposed revisions to various other SSAPs, including SSAP No. 26R and SSAP No. 43R – Loan-Backed and Structured Securities, to incorporate consistency revisions for residual interests so that all SSAPs refer to SSAP No. 21R for the formal definition and accounting and reporting guidance.

Other than finalization of the Bond Project Issue Paper, the final outstanding agenda item to be adopted as part of the Bond Project are revisions to Schedule BA being considered by the Blanks Working Group. The Blanks Working Group has exposed a proposal to categorize debt securities that do not qualify as bonds under SSAP No. 26 or SSAP No. 43R under the revised Bond definition to be captured in scope of SSAP No. 21R on Schedule BA. These revisions have been exposed for comment until April 23, 2024, and are expected to be adopted in May 2024.

The NAIC is also working on a comprehensive training program for industry related to implementation of the Bond Project, which is expected to be made available in June 2024.

b. NAIC Continues Consideration of Expansion of Reporting of Collateral Loans on Schedule BA

The SAP Working Group exposed additional revisions to SSAP No. 26R to expand the transparency of reporting for collateral loans on Schedule BA to allow for quick identification of the type of collateral that supports admittance of collateral loans and define debt issued by funds operations. 

At its February 20, 2024, meeting, the SAP Working Group adopted revisions to SSAP No. 21R to incorporate a collateral loan disclosure for year-end 2024 to detail admitted and non-admitted collateral loans in accordance with the underlying collateral supporting the loan. During that same meeting, the SAP Working Group exposed additional revisions to SSAP No. 21R that would expand reporting for collateral loans on Schedule BA to enable regulators the ability to quickly identify the type of collateral in support of admittance of collateral loans in scope of SSAP No. 21R. Under the proposed revisions to Schedule BA, collateral loans will be separated by the type of collateral investment that secures the loan. Additionally, a new aggregated data-captured note is proposed to identify the admitted and non-admitted collateral loans by the type of collateral that secures the loan. These revisions were proposed in response to comments that the current reporting detail on Schedule BA does not provide sufficient clarity on the type of collateral used in support of admittance of collateral loans. These additional revisions were exposed for comment until April 19, 2024.

At the request of the SAP Working Group, the Life RBC Working Group is considering whether breaking out the categories of collateral loans for purposes of reporting on Schedule BA requires changes to the RBC instructions related to collateral loans. While the issue remains subject to further consideration by the Life RBC Working Group, the Life RBC Working Group discussed the possibility that for 2024, the different types of collateral loans might be aggregated on a single line for purposes of RBC, to allow additional time to consider whether it would be appropriate to map certain types of collateral loans through asset valuation reserve.

c. NAIC Exposes SSAP Revisions for Modifications to Existing Intercompany Pooling Arrangements

The SAP Working Group exposed revisions to SSAP No. 63 and SSAP No. 25 to address transfers of assets when modifying intercompany pooling agreements and also exposed the intent to nullify INT 03-02. The revisions were exposed until May 31, 2024.

As proposed, the revisions to SSAP No. 63 provide guidance regarding modifications to intercompany pooling arrangements that the appropriate valuation basis to be used for assets and liabilities that are transferred among affiliates in conjunction with the execution of a new intercompany pooling agreement(s) that serves to substantively modify an existing intercompany pooling arrangement is statutory book value for assets and statutory value for liabilities and the net amount of the assets and liabilities being moved among entities as a result of such modification should be used to settle the intercompany payable to minimize the amount of assets transferred in the modification. INT 03-02 is proposed to be nullified as it is inconsistent with SSAP No. 25 guidance regarding economic and non-economic transfers between related parties. 

While NAIC staff recommended against maintaining an exception to allow the transfer of assets at book value for amendments to intercompany pooling agreements, the SAP Working Group agreed to expose revisions that would maintain the exception for use of book value for the transfer of assets for intercompany pooling subject to making such guidance narrow to clarify that these revisions only apply with respect to intercompany pooling arrangements.

NAIC staff noted that the intent is to measure the total impact of the reinsurance on the related parties (not to avoid gain recognition). Using book value of assets can be distorting if the difference between fair value of the assets used and book value is material.

d. NAIC Exposes Guidance on Analysis of Combination Reinsurance Contracts

The SAP Working Group exposed revisions to incorporate guidance to SSAP No. 61R to require risk transfer to be evaluated in aggregate for contracts with interrelated features such as experience rating refunds. This agenda item was developed to address a referral by VAWG regarding reinsurance risk transfer and reserve credit for a particular form of reinsurance being observed by regulators in the life industry. The proposed revisions were exposed through May 31, 2024.

VAWG had identified that issues were arising when evaluating reinsurance for risk transfer in accordance with SSAP No. 61R when treaties involve more than one type of reinsurance and where there is interdependence of the types of reinsurance, including a refund based on aggregate experience. VAWG regulators observed that some insurers are reporting an overstated reserve credit due to a bifurcated risk transfer analysis where the insurers reported a proportional reserve credit for a coinsurance component, despite in aggregate the reinsurer’s only being exposed to loss in tail scenarios. Thus, the ceding company would take a proportional reserve credit that reflects the transfer of all actuarial risks, when not all actuarial risks are transferred. To address these concerns, VAWG made a recommendation to the SAP Working Group to consider clarifications to risk transfer requirements. 

The proposed revisions to SSAP No. 61R clarify that for purposes of evaluating whether a contract with a reinsurer transfers risk, what constitutes a contract is essentially a question of substance. For instance, the profit-sharing provisions of one contract may refer to experience on other contracts and, therefore, raise the question of whether, in substance, one contract rather than several contracts exist. Therefore, if agreements with a reinsurer do not, in the aggregate, transfer risk, the individual component contracts that make up those agreements also would not be considered to transfer risk, regardless of how they are structured.

e. NAIC Proposes SSAP Revisions to Formally Codify That Cryptocurrencies Are a Non-Admitted Asset

The SAP Working Group exposed revisions to SSAP No. 20 to clarify that directly held cryptocurrency assets are non-admitted assets for statutory accounting and to adopt the definition of cryptocurrency assets from ASU 2023-08, Intangibles — Goodwill and Other — Crypto Assets (Subtopic 350-60), Accounting for and Disclosure of Crypto Assets. The proposed revisions were exposed through May 31, 2024.

On May 20, 2021, the SAP Working Group adopted Interpretation (INT) 21-01: Accounting for Cryptocurrencies, which established statutory accounting for cryptocurrency assets after the NAIC had received several questions on the proper treatment of cryptocurrencies. INT 21-01 established that directly held cryptocurrencies have not been identified in the Accounting Practices and Procedures Manual as an admitted asset and do not meet the definition of any admitted asset thereunder. Additionally, a disclosure for cryptocurrency assets was added to the general interrogatories of the Annual Statement blanks and instructions.

The proposed revisions to SSAP No. 30 would formally codify the guidance adopted in INT 21-01 and establish that cryptocurrency assets are non-admitted assets for statutory accounting.

f. NAIC Receives an Update on Status Update on the Development of IMR Guidance

During the Spring Meeting the SAP Working Group heard an update on the work of the IMR Ad Hoc Subgroup charged with developing long-term IMR guidance. 

At the 2023 Summer Meeting, the SAP Working Group adopted INT 23-01T – Net Negative (Disallowed) Interest Maintenance Reserve, an interpretation of statutory accounting principles that provides optional, limited-term guidance for the admittance of net negative (disallowed) IMR under SSAP No. 7 for up to 10% of adjusted general account capital and surplus. INT 23-01T is effective through December 31, 2025, but may be nullified earlier or extended based on actions by the SAP Working Group to establish specific accounting guidance on net negative (disallowed) IMR to serve as a long-term solution. In connection therewith, the SAP Working Group also voted to form the IMR Ad Hoc Subgroup to work on developing such guidance.

The IMR Ad Hoc Subgroup has been meeting regularly since October 2023 and has scheduled meetings through the 2024 Summer National Meeting to finalize its work. To date, the discussions have focused on (i) information of how IMR affects actuarial calculations, (ii) the definition and purpose of IMR, (iii) the impact of derivatives on IMR, and (iv) how reinsurance affects IMR. It is expected that a key element for future discussions will be the derivatives affecting IMR, including concepts for how companies determine effectiveness for these “economically effective” derivatives that do not qualify as “accounting effective” under SSAP No. 86 – Derivatives as well as the concepts reporting entities have used in determining the amortization timeframe for IMR generated from derivative gains or losses.

NAIC staff has been compiling information on the reported 2023 year-end IMR in the statutory financial statements, including the extent that insurance reporting entities have moved to a net negative (disallowed) IMR position, and the extent (if any) companies have exceeded the 10% admittance threshold. NAIC staff intends to share additional information with regulators on this review as soon as it becomes available.

a. NAIC Adopts National Climate Resilience Strategy for Insurance

At the Spring Meeting, the Executive (EX) Committee and Plenary adopted the National Climate Resilience Strategy for Insurance (Climate Strategy), a strategy document intended to demonstrate that insurance regulators are collaborating to strengthen climate resilience. 

Pursuant to the Climate Strategy, the NAIC intends to prioritize predisaster mitigation and will take new steps on data collection and solvency tools. The Climate Strategy focuses on five primary regulatory actions: (i) identifying and coordinating the measurement of protection gaps, evaluating policy options that have been attempted or considered, and measuring progress in closing those protection gaps; (ii) creating a blueprint for the future of flood insurance; (iii) filling long-term insurance data gaps to improve understanding of how coverages are changing within and among jurisdictions; (iv) creating and coordinating new resilience tools to assist all state regulators in developing state-level mitigation grant programs and expanding incentives for predisaster mitigation; and (v) expanding insurance regulators’ leadership on new solvency tools.

b. State Insurance Regulators Issue Property and Casualty Insurance Data Call

On March 8, 2024, state insurance regulators issued a property and casualty data call to collect data related to homeowners insurance at the ZIP code level. The data call was issued to several hundred companies representing over 80% of the homeowners insurance market. Data is due June 6, 2024. In November 2023, the U.S. Department of the Treasury Federal Insurance Office (FIO) issued public notice of its intent to issue its first-ever data call from insurers to assess climate-related financial risk to consumers. State insurance regulators have agreed to share an anonymized subset of the data collected in the state data call with FIO to avoid duplication and lessen compliance burdens on industry.

a. States Adopt Guidance on Use of Artificial Intelligence Systems by Insurers

In February 2024, Alaska became the first state to adopt the NAIC Model Bulletin: Use of Artificial Intelligence Systems by Insurers (AI Model Bulletin), which the NAIC adopted in December 2023. The AI Model Bulletin describes regulatory expectations for the use of AI by insurers (including both governance and enterprise risk management standards) and provides standards for insurance regulators to oversee and examine the use of AI by insurance carriers. As of March 15, 2024, five additional states had adopted the AI Model Bulletin: Connecticut, Illinois, New Hampshire, Rhode Island, and Vermont.

b. NAIC Forms Task Force on Third-Party Data and Models

In November 2023, the Innovation, Cybersecurity, and Technology (H) Committee announced the formation of a Third-Party Data and Models (H) Task Force, which held its first meeting during the Spring Meeting. Over the next year, the task force expects to monitor and report on state, federal, and international activities related to governmental oversight and regulation of third-party data and model vendors and their products and services. In 2025, based on its findings, the task force is expected to develop and propose a model providing for the regulatory oversight of third-party data and predictive models.

The Third-Party Data and Models (H) Task Force was formed in response to ongoing work in several states addressing the role of insurance commissioners in the regulation of third-party modeling firms and the form of any such regulation. The task force is intended to build consensus and allow states to take a coordinated approach to this issue.

c. NAIC Considers Updates to Privacy Protections Regulatory Framework

At the Spring Meeting, the Privacy Protections (H) Working Group announced that it had paused work on the Insurance Consumer Privacy Protections Model Law (#674) (New Privacy Model Law). As it considers its next steps, the working group intends to begin holding open calls with privacy experts to enhance its understanding of the issues to be addressed by any new privacy regime and to discuss an appropriate direction for moving forward.

The working group’s charges for 2024 clarify that rather than continuing work on the New Privacy Model Law, the working group may instead choose to revise or update existing NAIC models, such as the NAIC Insurance Information and Privacy Protection Model Act (#670) and the Privacy of Consumer Financial and Health Information Regulation (#672). Ultimately, the working group noted its intention to move forward with a focus on transparency as well as consensus building among members of industry, consumer groups, and regulators.