• NAIC Report: 2017 Fall National Meeting
  • December 27, 2017 | Authors: Kevin Finnegan; Patrick J. Gennardo; Alexander F.L. Sand; Ling Ling; Mary Jane Wilson-Bilik; John S. Pruitt; B. Scott Burton; Michael R. Nelson
  • Law Firms: Eversheds Sutherland (US) LLP - New York Office; Eversheds Sutherland (US) LLP - New York Office; Eversheds Sutherland (US) LLP - Atlanta Office ; Eversheds Sutherland (US) LLP - New York Office
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    A. International Issues

    1. International Reinsurance and the Covered Agreement

    The Reinsurance (E) Task Force met in the wake of the signing of the 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.) With the covered agreement now signed, the Task Force is now beginning the process of evaluating the reforms to state credit for reinsurance rules that will be required in light of the covered agreement. States now have five years to adopt reinsurance reforms that remove reinsurance collateral requirements for EU reinsurers if they meet certain qualifications. Motivating the NAIC and state regulators to meet this timetable is the ability of federal regulators to preempt state law under the Dodd-Frank Act to the extent they believe that state law: (1) is inconsistent with the terms of the covered agreement; and (2) results in less favorable treatment of EU-domiciled insurers than of US insurers domiciled, licensed, or otherwise admitted in that state.

    As a first step toward implementation, the Task Force, led by Superintendent Maria T. Vullo of New York, has tentatively scheduled an initial public hearing for February 20, 2018, in New York City. The hearing will provide a forum to discuss potential approaches to implementing the covered agreement and how the Task Force should move forward. Of particular note, Superintendent Vullo highlighted that one of the key purposes of the hearing would be to gather information and perspectives on how to address risk for US ceding insurers under the agreement, including the possible need for additional guardrails to ensure the solvency of US ceding insurers.

    During a subsequent meeting of the Executive and Plenary Committee on December 21, the NAIC requested comments from state regulators and interested parties addressing: (1) potential revisions to the NAIC Credit for Reinsurance Model Law and Regulation that may be required in light of the covered agreement; (2) whether the benefits provided to EU reinsurers should be extended to other qualified jurisdictions; and (3) potential guardrails that should be implemented. Comments are due by February 6, 2018.

    While most other business of the Task Force remains on hold pending implementation of the covered agreement, the Task Force did adopt a recommendation that the states consider Kroll Bond Rating Agency as a Nationally Recognized Statistical Rating Organization (NRSRO) for certified reinsurance purposes, although the Task Force acknowledged states will need to align Kroll’s rating designations to the designations specified in the NAIC’s Credit for Reinsurance Model Regulation for A.M. Best, S&P, Moody’s and Fitch. The Task Force additionally adopted the report of the Reinsurance Financial Analysis (E) Working Group, noting that the Working Group met on October 26, 2017, in a regulator-to-regulator meeting to discuss actions taken with respect to the passporting of certified reinsurers by states. Details of the discussion and the specific companies involved were not disclosed.

    2. Group Capital Calculation

    The Group Capital Calculation (E) Working Group did not meet in Hawaii, but the Financial Condition (E) Committee adopted a report of the Working Group detailing conference calls held by the Working Group on October 30-31, 2017. These conference calls were held by the Working Group with the express intention of making progress on the group capital calculation. During the conference calls, the Working Group exposed for comment three memos regarding aspects of the group capital calculation: one relating to captives, one relating to non-regulated entities, and one regarding the treatment of senior debt and surplus notes. There was also a discussion on the conference calls about permitted and prescribed practices, because there are two schools of thought on how they should be treated in a group capital calculation. Some regulators feel there should be an on-top adjustment for consistency and comparison purposes, while others think no such adjustment should be made as the practices were previously approved. NAIC staff is performing research relating to this matter and no conclusion has yet been reached.

    In addition, during the Working Group’s interim conference calls there was a brief update on the Baseline Exercise, which started earlier this year with nine volunteer companies working with their lead state regulators to collect data intended to help inform the Working Group’s decisions. The Baseline Exercise is currently in round two (collecting data on the exposures addressed above), which will be the last round, and the Working Group then hopes to field-test a beta version of the group capital calculation. The Working Group has indicated that there is no set timeframe for completion of the group capital calculation, but noted that the Working Group should move as quickly as possible, aiming for an exposure at the end of the first quarter or beginning of the second quarter of 2018.

    3. Update on FSOC and Systemic Risk

    During the meeting of the Financial Stability (EX) Task Force, Director Peter Hartt (New Jersey), Chairman of the Task Force, provided a report on international and domestic activities related to assessments of systemic risk. Director Hartt reported that:

    • The International Association of Insurance Supervisors (IAIS) is increasingly focusing on an Activities-Based Approach to systemic risk and an interim public consultation paper on the topic is currently open for comment through February 15, 2018.
    • The Financial Stability Board (FSB), in consultation with the IAIS, issued a press release on November 21, 2017, announcing that it had decided not to publish a new list of globally systemically important insurers (G-SIIs) for 2017. The press release notes that the IAIS’s work to develop an Activities-Based Approach to systemic risk could have significant implications for the identification of G-SIIs and for G-SII policy measures. In the meantime, policy measures will continue to apply to the nine firms on the 2016 G-SII list (including three US firms).
    • The Financial Stability Oversight Council (FSOC) met in September, October and November. During the September meeting, AIG’s designation as a systemically significant nonbank financial institution was rescinded. The decision acknowledged developments and enhancements to state insurance regulation since the original designation, including the work that is being done by the Financial Stability Task Force through the Macro-Prudential Initiative (MPI).
    • The Treasury Department issued its report on non-bank designations on November 17, 2017. While the report does not recommend the elimination of FSOC’s designation authority, it does recommend that FSOC focus on an activities-based or industry-wide approach and work with primary regulators to address any systemic concerns. If, after such an approach is utilized, it is determined that one or more firms still may pose risks to financial stability, FSOC should consider an entity-based designation at that time. The report also endorses many of the issues for which state regulators have previously advocated.
    The Financial Stability Task Force also released two proposals from the Liquidity Assessment (EX) Subgroup (a Baseline Blanks Proposal and a Note Blanks Proposal) for a 45-day comment period ending January 16, 2018, that would expand product category breakouts in the Analysis of Operations by Line of Business schedule and the Analysis of Increase in Reserves schedule, as well as establish notes disclosures for life products similar to what exist for annuity disclosures.