- NAIC Report: 2017 Summer National Meeting
- August 30, 2017 | Authors: Cynthia R. Shoss; Alexander F. L. Sand; Patrick J. Gennardo; Daren L. Moreira; Ling Ling; B. Scott Burton; John S. Pruitt; Mary Jane Wilson-Bilik; Michael R. Nelson; Kevin Finnegan; Stephen E. Roth
- Law Firms: Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - New York Office
The National Association of Insurance Commissioners (NAIC) met in Philadelphia, Pennsylvania for the 2017 Summer National Meeting from August 5-9. Commissioners, staff and interested parties alike converged in Philadelphia hoping for a busy and productive meeting ahead of what is expected to be a sparsely attended Fall National Meeting in Honolulu, Hawaii. The National Meetings were again dominated by themes of technological and operational change, with many meetings focused on keeping up with the rapid evolution occurring across the industry.
The following are some highlights from the Summer National Meeting. We do not cover every meeting in this report; rather, we comment on select noteworthy developments and matters of interest to our clients.
In a flurry of approvals, the NAIC took substantial steps toward finalizing its proposed Insurance Data Security Model Law during the 2017 NAIC Summer National Meeting in Philadelphia. Both the Cybersecurity (EX) Working Group and the Innovation and Technology (EX) Task Force adopted the revised sixth version of the Model Law. Only Arkansas, New Mexico and Utah voted against adoption of the Model Law at the Working Group level. The Model Law next goes to the Executive (EX) Committee, and then to the Plenary for final adoption. The exact timing for these last approvals is uncertain. For more information regarding the Model Law, see our Legal Alert: NAIC Takes Major Step Toward Final Approval of Insurance Data Security Model Law.
2. Regulating Big Data
The Big Data (EX) Working Group discussed a number of ongoing initiatives and proposals related to the use of big data by insurers and insurance regulators. Both Working Group members and interested parties offered an active commentary throughout the discussion, showing that regulators, industry and consumer advocates continue to focus on big data issues as this area develops rapidly.
The Working Group’s first charge for 2017 is to review existing regulatory frameworks used to oversee insurers’ use of consumer and non-insurance data. NAIC staff provided an update on progress on this initiative, noting that the staff has begun to pull together overviews of existing relevant frameworks, with an initial focus on personal lines property and casualty insurance. To date, NAIC staff has identified model laws and state laws addressing rate setting, limitations on permissible rating factors, unfair trade practices and claims settlement restrictions. The staff is continuing its research, next focusing on the regulation of data vendors and brokers. The end goal of the research is to develop a report that has a description of how data is being used by insurers and how those uses intersect with existing regulatory tools. Multiple members of the Working Group urged staff to ensure that all types of data used by insurers are discussed as part of the research, including credit score data and non-credit consumer data. The staff noted that they are looking at all types of data being used by insurers, but that the review is not currently being conducted as a 50-state survey, although they may discuss conducting such a survey in the future. Birny Birnbaum, from the Center for Economic Justice, suggested that as part of its research, the Working Group should include a list of the challenges presented by big data and an assessment of whether existing regulatory tools are sufficient to address those challenges.
The Working Group also received an update from NAIC staff on their ongoing assessment of required data and tools for regulators to monitor the marketplace and evaluate market practices that use big data. Staff presented an initial, high-level list of the types of data currently available to regulators, including data sourced from financial reporting, market regulation reporting and auto insurance availability and affordability data reporting, among others. Members discussed potential other data sources that could be added, seeking mainly to set the stage for future conversations among the Working Group members. Commissioner Mike Kreidler (Washington) noted that most regulators do not currently have the expertise in-house that would be needed to review and use the data sources identified by the Working Group, and that it would be a challenge to obtain that expertise. The Chair of the Working Group, Commissioner Laura Robison (Oregon) noted that technology development and resource sharing among states could assist with that challenge.
The Working Group also discussed an initial draft of a proposal for sharing resources among states through the NAIC for the review of complex rating models for auto and homeowners insurance that rely on the use of big data. The proposed structure was previously exposed for public comment, and the NAIC reports that they received a range of comments expressing concerns. At the outset of the discussion and in response to those comments, Commissioner Robison emphasized that the goal of the project was for states to share resources to help with speed-to-market in the review of complex models, while maintaining individual state authority. To date, interested parties have raised concerns regarding the delegation of authority to NAIC staff, the protection of insurers’ confidential data and trade secrets, qualifications of the individuals reviewing the models, response deadlines included in the proposal and a perceived lack of due process and transparency. Commissioner Robison also noted that the proposal is meant as a starting point, and urged commenters to propose solutions that address their concerns, stating that there will be additional opportunities to comment on the proposed structure as it progresses. As next steps on this project, the Working Group will develop a revised proposal for discussion based on the comments received, and will submit the proposal for review by NAIC legal to ensure it falls within the bounds of the NAIC’s authority.
B. Update on FSOC and Systemic Risk
The Financial Stability (EX) Task Force Chair, Director Peter Hartt (New Jersey), gave an update on the US Financial Stability Oversight Council (FSOC), where Director Hartt is the state insurance commissioner representative. Director Hartt noted that he continues to provide FSOC with insights into the state regulatory system and voice ongoing concerns with the process for the designation of non-bank systemically important financial institutions (SIFIs) and with the SIFI designations made to date. Director Hartt also discussed the April 21, 2017 memorandum issued by President Trump directing Treasury to evaluate FSOC’s processes for designating SIFIs, including whether such processes are consistent with the seven Core Principles laid out in President Trump’s February 3, 2017 executive order, and to provide a report by October of this year.
The Task Force also discussed a proposed framework for the NAIC’s Macro-Prudential Initiative, which involves analyzing how the insurance sector is impacted by, reacts to, and contributes to financial, economic and other common risk exposures. This framework is related to the Task Force’s new charge, adopted at the Spring 2017 National Meeting, to “analyze existing post-financial crisis regulatory reforms for their application in identifying macro-prudential trends, including identifying possible areas of improvement or gaps, and propose to the Financial Condition (E) Committee or other relevant Committee enhancements and/or additions to further improve the ability of state insurance regulators and industry to address macro-prudential impacts. . . .” The framework highlights four areas of focus for potential enhancements: (i) liquidity, (ii) recovery and resolution, (iii) capital stress testing and (iv) exposure concentrations. While representatives from some of the largest US insurance groups voiced their support of the framework, a representative of the National Association of Mutual Insurance Companies (NAMIC) voiced concerns about potential new reporting requirements arising from the initiative.
The Task Force additionally appointed a new Liquidity Assessment (EX) Subgroup, which is charged to (i) “review existing public and regulator only data related to liquidity risk, identify any gaps based upon regulatory needs, and propose the universe of companies to which any recommendations may apply”, and (ii) “construct a liquidity stress testing framework proposal for consideration by the Financial Condition (E) Committee, including the proposed universe of companies to which the framework will apply, (e.g. large life insurers).”
The Reinsurance (E) Task Force met at a National Meeting for the first time under the leadership of Superintendent Maria T. Vullo (New York). The Task Force received a status report on the proposed covered agreement between the United States and the European Union. (For the latest on the covered agreement, its timetable for implementation and the road ahead, see our Legal Alert: US-EU Covered Agreement: An Overview.
Superintendent Vullo noted that there is a great deal of work for the NAIC to do with respect to the implementation of the covered agreement, and that it will be an open and transparent process. However, the Task Force declined to provide specifics regarding how the NAIC would handle implementation, noting that the NAIC will not engage in formal discussions until after the covered agreement has been signed and Treasury and the US Trade Representative have released their anticipated policy statement on implementation. It was noted that most people believe that the covered agreement would necessitate conforming revisions to the NAIC Credit for Reinsurance Model Law and Model Regulation, and that achieving a consensus on revisions could be time-consuming.
In light of the impending execution of the covered agreement, the Task Force directed the Qualified Jurisdiction (E) Working Group to cease work on its report on EU member state implementation of Solvency II and the potential impact on their applicable qualified jurisdiction status until further notice. Under the NAIC Credit for Reinsurance Model Law and Regulation, an unauthorized reinsurer may be certified to provide credit for reinsurance with reduced collateral if it is domiciled and licensed in a “qualified jurisdiction.” In determining whether the domiciliary jurisdiction is a qualified jurisdiction, the commissioner must consider, among other things, whether there is reciprocal recognition of US reinsurers. However, in response to reports that some EU jurisdictions were imposing requirements for US reinsurers seeking to do business in those jurisdictions as part of their implementation of Solvency II, in December 2016, the Working Group initiated steps to reevaluate those EU jurisdictions that were already qualified. If executed, the covered agreement would appear to make these issues moot.
The Qualified Jurisdiction (E) Working Group also reported that it received a request to evaluate a new EU jurisdiction as a qualified jurisdiction (the identity of the jurisdiction was withheld as confidential), and the Task Force directed the Working Group to proceed with its evaluation notwithstanding the impending execution of the covered agreement.
Other NAIC initiatives also were put on hold pending implementation of the covered agreement. The Financial Regulation Standards and Accreditation (F) Committee deferred consideration of the adoption as accreditation standards of the Corporate Governance Annual Disclosure Model Act and Model Regulation and the 2014 Revisions to the Insurance Holding Company System Regulatory Act. The Committee determined that deferral was prudent to avoid adopting standards that might require revisions based on the implementation of the covered agreement and related guidance expected to be issued by Treasury. The Committee will take the issue up again at the Fall National Meeting and decide whether to further defer adoption.
International Capital Standards. Commissioner Katherine Wade (Connecticut), Chair of the International Insurance Relations (G) Committee, gave an update on the work of the International Association of Insurance Supervisors (IAIS) on the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), including the Insurance Capital Standard (ICS). She reported that the IAIS recently approved ICS Version 1.0 for extended field testing.
Separately, at the Comframe Development and Analysis (G) Working Group, Peter Windsor (IAIS Secretariat) also gave an update on ComFrame and ICS. Peter emphasized that the ICS is part of ComFrame, which is a complete supervisory framework for Internationally Active Insurance Groups (IAIGs). He explained that there is a need for balance between quantitative and qualitative requirements in ComFrame. Peter also highlighted some of the issues the IAIS will be addressing as it starts discussions in September of ICS version 2.0, which will include valuation, capital resources and capital requirements. ICS 2.0 is due in late 2019.
NAIC Capital Standards. Commissioner David Altmaier (Florida), Chair of the Group Capital Calculation (E) Working Group, asked Julie Garber (NAIC staff) to provide an overview of her July 19, memorandum on the treatment of captives in the group capital calculation. Ms. Garber explained that, as a result of comments, four scenarios had been identified: (1) captives not in a traditional US holding company; (2) pure captives; (3) captives that do not assume XXX/AXXX business; and (4) captives that assume XXX/AXXX business. The first three were relatively non-controversial and the Working Group tentatively agreed to the proposed approaches for each. The fourth generated the most comments and, as a result, four decision points related to asset and liability valuation were developed from the comment letters. The Working Group exposed the memo for a 30-day public comment period and requested feedback on the different decisions that need to be made with respect to the treatment of captives that assume XXX/AXXX business in the group capital calculation.
Chairman Altmaier stated that the consensus is that scalars should be developed for use with non-US insurers but how they should be developed hasn’t been determined. Here, scalars are multipliers used in capital calculations to calibrate capital requirements for non-US insurers based on their home jurisdictions. Feedback about which jurisdictions the Working Group should start with was solicited. The ACLI and NAMIC provided a list of jurisdictions and the source of data that was used to create the scalar for each. The Chair asked NAIC staff to begin calculating scalars for those jurisdictions based on the pure relative ratio approach (proposed by Transamerica) and the excess relative ratio approach (proposed by the NAIC). NAIC staff will now begin field testing the two capital calculation approaches as applied to the identified test jurisdictions using the identified data sources.