Legal Alert: NAIC Update – Spring 2015
April 22, 2015
Related People/Contributors
The National Association of Insurance Commissioners (NAIC) held its first
national meeting for 2015 in Phoenix, Arizona, from March 26 through March 31.
Noteworthy new initiatives include cybersecurity, price optimization and the
development of a model law for unclaimed life insurance benefits. Other
important topics we follow that continue to receive regulatory attention are life
reinsurance captives, Own Risk and Solvency Assessment (ORSA)
implementation, principle-based reserving, credit for reinsurance, contingent
deferred annuities, private equity, corporate governance and international capital
standards.
The following are notable highlights of the meeting, along with a summary of
subsequent actions taken by the NAIC following the meeting:
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John S. Pruitt
Eric A. Arnold
B. Scott Burton
Eric R. Fenichel
Ling Ling
Stephen E. Roth
Cynthia R. Shoss
Mary Jane Wilson-Bilik
Joshua P. Borden
Justin K. Kitchens
Daren L. Moreira
A. New Issues of Note
1. Cybersecurity
2. Price Optimization
3. Unclaimed Life Insurance Benefits Model Act
B. Ongoing Regulatory Initiatives
1. Life Reinsurance Captives
2. Group Solvency Issues – Preliminary Observations from ORSA
Pilot Program
3. PBR Update
4. Reinsurance – Reduced Collateral and Covered Agreements
5. Contingent Deferred Annuities
6. Private Equity
7. Corporate Governance
C. Briefly Noted
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1. NAIC Internal Governance
2. Ridesharing White Paper
3. Confidentiality
4. Receivership Model Law
5. Mortgage Insurance
6. International Issues
A. New Issues of Note
1. Cybersecurity
The Cybersecurity (EX) Task Force held its first public meeting in Phoenix.
Commissioner Adam Hamm (North Dakota), Chair of the Task Force, began the
meeting with an overview of the Task Force’s work plan. The plan includes: (i)
issuance of a survey to states on cybersecurity measures; (ii) development of a
“Consumer Bill of Rights” to inform consumers of their rights when a data breach
has occurred; (iii) staying abreast of information-sharing measures; and (iv)
working on certain NAIC model laws, such as the Health Information Privacy
Model Act (Model 55), the Privacy of Consumer Financial and Health Information
Regulation (Model 672), the Standards for Safeguarding Customer Information
Model Regulation (Model 673) and the Insurance Fraud Prevention Model Act
(Model 680).
Echoing remarks he made earlier this month, Superintendent Benjamin Lawsky
(New York) added that the Task Force will look at multifactor authentication and
encryption of data at rest. He also noted that the Task Force will look at
regulated entities’ vendor practices, commenting that a company’s cybersecurity
is only as good as its worst vendor.
Patrick McNaughton (Washington) provided an overview of the IT Examination
(E) Working Group of the Examination Oversight (E) Task Force. Mr.
McNaughton, who has served as Chair of the Working Group for nine years,
noted that the NAIC’s Financial Condition Examiners Handbook has had a
section on IT examinations for 20 years. He noted that every state is required to
use certified experts in IT to review data control systems during financial
examinations, which is an accreditation requirement for multistate examinations.
He also explained the differences between what examiners and security
consulting firms do: examiners make sure that the regulated companies hire the
right kinds of firms to do the right kinds of audits and testing, while the security
firms hired by the regulated entity actually audit and engage in penetration
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testing.
The Task Force concluded its meeting by receiving comments on its proposed
Principles for Effective Cyber Security Insurance Regulatory Guidance.
Specifically, there was significant discussion regarding whether a principle
should be included that provides for cybersecurity regulatory guidance
consistent with the National Institute of Standards and Technology (NIST)
framework. Several interested persons noted that the NIST should not be the
only standard considered, and instead urged consideration of multiple
standards.
In an April 16 conference call, the Task Force formally adopted a shortened list
of Principles for Effective Cyber Security Insurance Regulatory Guidance
(Principles). Despite the comments received regarding the NIST framework, the
Principles reference only the NIST framework as a guiding principle for industry
compliance. Superintendent Joseph Torti III (Rhode Island) commented that the
NIST Framework will be incorporated into the NAIC’s Financial Condition
Examiners Handbook.
The adopted Principles recognize the need for incident response planning,
vendor and service provider controls, employee training, timely breach
notification, information sharing regarding emerging threats and vulnerabilities,
and the engagement of the Board of Directors (or a committee thereof) to review
any findings of material risk to a company resulting from an internal audit of a
company’s information technology. The Principles also call for incorporation of
cybersecurity in a company’s Enterprise Risk Management (ERM) process. In
addition, the Principles recognize that state insurance regulators have an
obligation to protect all confidential information that they or the NAIC collect,
store or transfer and that all affected parties should be timely notified in the
event of a breach.
2. Price Optimization
Use of certain “price optimization” techniques for property and casualty
insurance has been taken up by the Casualty Actuarial and Statistical (C) Task
Force, which is now working on a white paper on the topic. This undertaking was
prompted by a referral from the Auto Insurance (C/D) Study Group, which
concluded that the topic of price optimization goes beyond auto insurance and
requires actuarial or statistical expertise. The Task Force prepared an initial draft
white paper for comment before its March meeting. The stated purpose of the
white paper is to provide research on price optimization, identify potential
benefits and problems with price optimization, and present options for state
regulatory responses.
The Task Force appeared challenged by definitions—or the lack thereof.
Confusion stemmed from a lack of clarity on whether price optimization means
use of rating factors or practices that are not strictly derived from loss costs and
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expenses, or whether it means use of non-loss cost factors to determine price
elasticity and charging consumers based on expected behaviors in response to
price increases. Task Force members who viewed it as the former expressed
concern with overbroad generalizations about price optimization. Charles Angell
(Alabama) said rate filings with price optimization have been approved by
regulators, while others have not, noting in particular price caps imposed by
regulators that prevent insurers from charging actuarially indicated rates. He
then commented that the issue is how far rates can deviate from purely loss-cost
pricing and suggested that the Task Force define “adequate,” “not excessive” or
“unfairly discriminatory,” or at least come up with a list of examples of things that
clearly would or would not be “unfairly discriminatory.” After a brief discussion,
the Task Force recognized that efforts to define these terms would be futile,
although the idea of developing examples will continue to be explored.
The Task Force also discussed whether the white paper should be limited to
personal lines, a view endorsed by one of the trade associations.
Birny Birnbaum, on behalf of the Center for Economic Justice, expressed
concern that use of price optimization is unfairly discriminatory and disputed that
regulatory caps on price increases are comparable to price increases premised
on expectations of individual customer behavior. In response, a Task Force
member disagreed that loss costs are the sole rating criteria and noted that
expected policyholder behavior is a significant part of life insurance pricing. A
Task Force member indicated that he was persuaded on the benefits of using
better data in pricing based on webinars presented to the panel by Earnix, Inc.
This prompted a request that the webinar be shared with the public in the
interests of transparency. The Task Force then agreed to distribute the webinar
materials—stripped of proprietary information—and these materials have been
distributed in advance of a Task Force conference call scheduled for April 28.
Just prior to the Spring National Meeting, on March 18, 2015, the Financial
Fraud and Consumer Protection Division of the New York Department of
Financial Services issued an information request to certain New York State
licensed insurers pursuant to Section 308 of the New York Insurance Law,
seeking information about insurers’ use of price optimization models or
considerations as part of their pricing, rate filing or tier placement decisions for
any line of insurance in New York. The letter defined “price optimization” as “the
practice of varying rates based on factors other than those directly rated to risk
of loss, for example, setting rates or factors based on an insured’s likelihood to
renew a policy or on an individual’s or class of individuals’ perceived willingness
to pay a higher premium relative to other individuals or classes.” The letter
clarified that, “in other words, the Department is concerned that insurers are
charging higher premiums based on whether a consumer is less likely to notice,
shop around, or object.” The letter takes the position that such practices are
inconsistent with traditional cost-based rating and could violate the insurance
law’s prohibition on the use of rates that are unfairly discriminatory.
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The New York letter follows actions in Maryland, Ohio and California, which took
a firmer position that price optimization—as each has defined it—is unlawful.
In February, the California Department of Insurance issued a notice announcing
that “any use of Price Optimization in the ratemaking/pricing process or in a
rating plan is unfairly discriminatory in violation of California law.” It defined price
optimization as “any method of taking into account an individual’s or class’s
willingness to pay a higher premium relative to other individuals or classes.” It
contended that price optimization “does not use actuarially sound methods to
estimate the risk of loss” and “represents a fundamental threat to fairness in
rating.”
The Maryland Insurance Administration issued Bulletin 14-23 on October 31,
2014. The Maryland Bulletin defined price optimization as “varying rates based
on factors other than risk of loss, including, but not limited to: (a) the likelihood
that a policyholder will engage in activities that result in policy turnover [defined
to include shopping with other carriers for a lower premium, cancelling a policy
before the expiration of the policy term, or failing to renew a policy at the renewal
of the policy term]; and (b) the willingness of a policyholder to pay a higher
premium compared to other policyholders.” The Bulletin stated that price
optimization, “by its nature,” involves discriminating against policyholders of the
same class based on factors other than actuarial risk.
The Ohio Department of Insurance followed Maryland’s lead by issuing Bulletin
2015-01 on January 29, 2015. The Ohio Department defined price optimization
as the practice of “varying premiums based upon factors that are unrelated to
risk of loss in order to charge each insured the highest price that the market will
bear.” The Bulletin took the position that price optimization allowed insurers to
set premiums based on factors that were unrelated to the risk of loss or
expense. It required insurers using price optimization to rate insurance policies
in Ohio to submit a SERFF filing compliant with the Bulletin by March 31, 2015,
with proposed effective dates no later than May 31, 2015 for new business and
June 30, 2015 for renewal business.
3. Unclaimed Life Insurance Benefits Model Act
The life insurance industry has repeatedly called on the NAIC to develop a
framework to govern unclaimed life insurance benefits, especially in light of
recent case law that has been favorable to the industry. At the 2015 Spring
National Meeting, the NAIC took a step towards answering this call, as the
Executive (EX) Committee approved the request from the Unclaimed Life
Insurance Benefits (A) Working Group to develop a new model law.
Commissioner Julie Mix McPeak (Tennessee), Chair of the Working Group,
proposed to title the model law as the “Unclaimed Life Insurance Benefits Act.”
Although the Working Group met in Phoenix prior to the meeting of the
Executive (EX) Committee, Commissioner McPeak anticipated the Committee’s
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approval of the model law request and, therefore, solicited testimony during the
meeting from interested persons on what form the model law should take.
Commissioner Kevin McCarty (Florida) stressed his opinion that the model law
should apply retroactively and that such a model law should be based on the
existing settlement agreements with life insurance companies. Commissioner
McCarty also suggested that the Working Group look at a previously proposed
law in Illinois, which could also be used as a starting point.
Industry representatives, however, expressed their disagreement with
Commissioner McCarty. They asked that the Working Group instead begin
working with the National Conference of Insurance Legislatures (NCOIL) model
law, but with two exceptions. The first exception would be to apply the law on
only a prospective basis. Industry representatives noted that applying the law
only prospectively would be consistent with the way several states have adopted
the NCOIL model, and it would be consistent with recent case law on the issue.
The second exception would be to remove the “fuzzy match” language, as
industry representatives explained that “fuzzy logic” is not effective and not
worth the significant cost to insurers.
The Working Group took the testimony under advisement and explained that a
subgroup will soon be created to draft the model law. Commissioner McPeak
asked Working Group members to consider whether they are able to participate;
California, Louisiana, Nebraska and Wisconsin are among the states that have
initially expressed interest in joining the drafting subgroup.
B. Ongoing Regulatory Initiatives
1. Life Reinsurance Captives
The issue as to whether a captive reinsurance company should be included
within the definition of a “multistate insurer,” and therefore subject to the NAIC
accreditation standards, continues to be a topic of much discussion. As
background, the Financial Regulation Standards and Accreditation (F)
Committee exposed a proposed amendment last year that would remove the
exclusion for reinsurers that are licensed in a single state but assume business
written outside the state, and would include “multistate reinsurers” in the
definition of a “multistate insurer.” In response to numerous comment letters,
Superintendent Torti acknowledged during the 2014 Summer National Meeting
that the proposed definition of a “multistate insurer” was too broad. During the
2014 Fall National Meeting, Superintendent Torti directed NAIC staff to prepare
new and completely revised Part A and Part B Preambles to clarify the scope of
the NAIC accreditation standards, including their proposed applicability to
captives engaged in reserve financing transactions, reinsurance of variable
annuities and reinsurance of long-term care insurance.
In February, NAIC staff provided the (F) Committee with a revised draft of the
Part A Preamble, which the Committee then exposed for public comment.
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During the (F) Committee meeting in Phoenix, Director Huff, Chair of the
Committee, reported that they received more than 50 comment letters on the
revised draft of the Part A Preamble. According to Director Huff, the vast
majority of these letters asked for more clarification due to the fact that the Part
A Preamble could be construed as including pure captive reinsurers within the
scope of the NAIC accreditation standards. In response to these concerns,
members of the (F) Committee issued a letter to state insurance commissioners
on March 17 to clarify that the Committee’s intent remains to subject only those
captives that reinsure certain lines of business—reserve financing transactions,
variable annuities and long-term care—to the accreditation standards. This letter
further stated that “captive insurers that do not reinsure this type of business
would not be subject to the accreditation standards, regardless of whether they
are conducting business that would otherwise be considered multi-state.” NAIC
staff were directed to further revise the Part A Preamble so that it reflects the (F)
Committee’s intent, as set out in the March 17 letter. Once completed, this
revised draft will likely be exposed again for a short comment period.
Additionally, the Financial Condition (E) Committee created the Variable
Annuities Issues (E) Working Group to oversee the NAIC’s efforts to study and
address regulatory issues resulting in variable annuity captive reinsurance
transactions. The Working Group will be chaired by Commissioner Nick Gerhart
(Iowa). Superintendent Torti also noted that an additional working group may be
created in the future to study and address regulatory issues resulting in longterm care captive reinsurance transactions.
In addition, work on reserve financing regulations were mentioned, though not
fully described, during the meeting of the Reinsurance (E) Task Force. The Task
Force mentioned future work to change the Credit for Reinsurance Model Law to
provide for a captive reinsurance model regulation. A draft was promised for the
Summer National Meeting.
2. Group Solvency Issues – Preliminary Observations from ORSA
Pilot Program
The Group Solvency Issues (E) Working Group met on Saturday, March 28, to
continue its work on changes to the Financial Analysis Handbook to address
group supervision and best practices for supervisory colleges.
Of particular note were preliminary observations by NAIC staff and committee
members from the 2014 pilot program for ORSA. NAIC staff reported that a total
of 27 insurers participated in the 2014 program, representing all segments of the
industry, including both U.S. domestic-only insurers and insurers that are part of
international groups. Staff reported the ORSA summary reports were fairly
reflective of the maturity of ERM frameworks in place, and that while companies
are doing a “good job,” there remain issues about how much is too much or too
little for the report, alignment of risk and business strategy, quantifying the risk
appetite statement and support for why a company chose a particular solvency
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capital model. Deputy Commissioner Steve Johnson (Pennsylvania) provided a
more favorable assessment of ORSA maturity, observing that the 2014 pilot
program reflected a “huge improvement” over the first pilot and citing as specific
examples linkage of business strategy to ERM, embedding of ERM in the
business and establishing a business owner for each risk. He ended with a
prediction that the industry will not experience a large insolvency for a long time
because of ORSA, prompting some laughter, including by Mr. Johnson himself,
at the ardor of his enthusiasm.
Deputy Commissioner Johnson noted that the Pennsylvania Insurance
Department has met with a number of companies that approached the
Department on their own initiative to get feedback on initial draft ORSA reports.
Deputy Commissioner Danny Saenz (Texas) echoed that companies that are
not participants in the pilot program have approached the Texas Department of
Insurance for feedback on whether their ORSA reports and ERM work are
moving in the right direction.
3. PBR Update
In 2009, the NAIC adopted a revised Model Standard Valuation Law, which
authorizes principle-based reserving (PBR), and a Valuation Manual that sets
forth the minimum reserve and related requirements for certain products under
PBR. The NAIC adopted the Valuation Manual in 2012, although PBR will not be
implemented until the revised Model Standard Valuation Law is adopted by 42
states and state adoption reflects 75% of total life insurance premiums written in
the United States.
In Phoenix, the meeting of the Principle-Based Reserving Implementation (EX)
Task Force kicked off with a report by Superintendent Torti, Co-Chair of the
Task Force, on the Valuation Manual operative date. He reported that 21 states
have now adopted the revised Model Standard Valuation Law (with Kentucky
and North Dakota also expected to adopt the law in the coming days), although
he acknowledged that the ACLI reports that 25 states have adopted the revised
law. Superintendent Torti believes that the Valuation Manual could go live as
early as January 1, 2017, and he expects it will happen no later than January 1,
2018. His report included a reminder to all states to get the revised Model
Standard Valuation Law to their legislatures as soon as possible, and he
humorously said that this message was specifically intended for New York.
Superintendent Torti also explained that a subgroup will be created to examine
the criteria for determining whether a state law is “substantially similar” to the
revised Model Standard Valuation Law. Only those “substantially similar” laws
are counted for purposes of calculating when the Valuation Manual becomes
operative. This subgroup will also reconsider the accreditation standards for
state adoption of the revised Model Standard Valuation Law, which were sent
back down to the Task Force by the Financial Regulation Standards and
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Accreditation (F) Committee.
Additionally, the Life Insurance and Annuities (A) Committee adopted an
exemption for small companies from having to comply with PBR. The exemption,
which is to be included in the valuation manuals, applies to individual companies
that have less than $300 million in ordinary life insurance premiums and to life
insurance groups that have combined life insurance premiums of less than $600
million. New York voted against the small company exemption, with Deputy
Superintendent Robert Easton (New York) arguing that the exemption is
unnecessary at this time, with the implementation of PBR still far off. Mr. Easton
further argued that the small company exemption is not actuarially justified but
rather is politically motivated as a means for getting the PBR framework adopted
by the states. California abstained from the vote. The small company exemption
is set for final approval by Executive Committee and Plenary at the 2015
Summer National Meeting in Chicago.
4. Reinsurance – Reduced Collateral and Covered Agreements
The meeting of the Reinsurance (E) Task Force began with Director John Huff
(Missouri), Chair of the Task Force, providing a status report on state
implementation of the revised Credit for Reinsurance Model Law and Regulation
(Reinsurance Models). The Reinsurance Models allow highly rated non-U.S.
reinsurers to reinsure U.S. domestic cedents with reduced collateral
requirements. According to Director Huff, 26 states representing more than 60%
of direct insurance premiums have adopted the revised Reinsurance Models.
Arizona and Arkansas are also expected to adopt the revised Reinsurance
Models, as the bills only need to be signed by their respective governors.
Director Huff noted that he expects versions of the revised Reinsurance Models
to be introduced in another 11 states during 2015, which, if adopted, would raise
the total direct insurance premiums of adopting states to 93%. Director Huff also
stated that more than 30 reinsurers have become certified under the
Reinsurance Models.
Director Huff further provided an update on actions taken by the Task Force
since the 2014 Fall National Meeting. Specifically, the following seven
jurisdictions have been approved by the Task Force as Qualified Jurisdictions:
Bermuda, France, Germany, Ireland, Japan, Switzerland and the United
Kingdom. The approval as a Qualified Jurisdiction will last for a term of five
years. Additionally, the Task Force adopted the draft application checklist for
certified reinsurer applications.
There was also significant discussion regarding the possibility of a “covered
agreement” being entered into between the Federal Insurance Office (FIO) and
the European Union (EU). Such a “covered agreement” would preempt
inconsistent state law. Regulators on the panel expressed doubt that a covered
agreement is needed to maintain strong transatlantic cooperation. Several
insurance industry representatives commented, urging support for a covered
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agreement—or at least openness to the idea—but insisted that EU recognition of
the U.S. as an equivalent or comparable regulatory jurisdiction be a part of any
such agreement.
Deputy Commissioner John Finston (California) provided a brief report on the
Qualified Jurisdiction (E) Working Group. Although the Working Group has
recently received inquiries from a few additional jurisdictions about the steps
necessary to become qualified, the Working Group has not yet received any new
formal requests to initiate the process.
Deputy Commissioner Steve Johnson (Pennsylvania) next provided the report of
the Reinsurance Financial Analysis (E) Working Group. He explained that the
Working Group is concerned that the concept of “passporting” is not being
applied consistently among the states. Deputy Commissioner Johnson stressed
the need for uniformity, especially in light of recent discussions regarding a
“covered agreement.”
5. Contingent Deferred Annuities
In Phoenix, there continued to be considerable progress made with respect to
finalizing an NAIC framework for contingent deferred annuities (CDAs). During
the 2014 Fall National Meeting, the Life Insurance and Annuities (A) Committee
adopted the Contingent Deferred Annuities (A) Working Group’s amendments to
four model regulations. During the 2015 Spring National Meeting, these
amendments were formally adopted by the Executive Committee and Plenary.
The four model regulations that were amended are: (i) the Annuity Disclosure
Model Regulation (Model 245); (ii) the Suitability in Annuity Transactions Model
Regulation (Model 275); (iii) the Advertisements of Life Insurance and Annuities
Model Regulation (Model 570); and (iv) the Life Insurance and Annuities
Replacement Model Regulation (Model 613). These amendments seek to afford
SEC-registered CDAs the same regulatory treatment that the NAIC affords to
SEC-registered variable annuities.
Additionally, in response to the Working Group’s request, industry
representatives, including the American Council of Life Insurers (ACLI) and the
Insured Retirement Institute (IRI), presented a proposal regarding cancellation
benefits for CDAs in the event of a “financial institution initiated cancellation.”
During the presentation, it was explained that their proposal included multiple
options, so as to “provide insurers the flexibility to protect the policyholder,
develop innovative products, meet market needs and manage risk.” The options
proposed included annuity benefits, such as a variable annuity with a
guaranteed living withdrawal benefit, a variable annuity with a guaranteed
minimum income benefit, a single premium immediate annuity or a deferred
income annuity. Other options included a lump sum payment of the present
value of future guaranteed income or a return of fees, either in a lump sum or in
a lifetime income stream. The Working Group was generally receptive to the
industry proposal, except for some questions as to what would constitute a
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“financial institution initiated cancellation.” Ultimately, the Working Group
discussed potentially including these proposed cancellation benefits in a
checklist template that states can adopt.
6. Private Equity
The Private Equity Issues (E) Working Group was established during 2013 to
“consider development of procedures that regulators can use when considering
ways to mitigate or monitor risks associated with private equity/hedge fund
ownership or control of insurance company assets, including the development of
best practices and consideration of possible changes in NAIC policy positions as
deemed appropriate.” The Working Group met in Phoenix to finalize changes to
the Financial Analysis Handbook to provide guidance to analysts evaluating
change-of-control applications. The Working Group concluded, prior to Phoenix,
that many of the risks associated with a change of control that are related to
private equity ownership can also be applicable to other acquiring parties. As a
result, the guidance it prepared is not specifically directed at private equity but is
designed to capture many of the “best practices” used by different states that
have evaluated transactions involving private equity investors. This includes
consideration of nine enumerated risks with respect to the acquiring entity and
the entire of group of affiliated insurers and non-insurers under its control. The
nine risks are Credit, Market, Pricing/Underwriting, Reserving, Liquidity,
Operational, Legal, Strategic and Reputational.
In Phoenix, the Working Group approved a last round of changes that were
proposed in response to a presentation by a representative from the U.S.
Securities and Exchange Commission’s Office of Compliance Inspections and
Examinations during the 2014 Fall National Meeting, which identified practices
that have the potential for abuse. In particular, new language was added to
focus regulators on cost sharing agreements and to encourage them to be on
the watch for excessive charges to regulated insurers from service providers that
might not be deemed affiliates under applicable holding company rules, but
which seem to be engaging in transactions similar to affiliates.
The meeting ended with a statement by Chair Doug Stolte (Virginia) that the
Working Group has now completed its single charge. While this suggests the
Working Group will now be disbanded, no efforts were made to do so during the
ensuing parent committee meeting.
7. Corporate Governance
The Financial Regulation Standards and Accreditation (F) Committee adopted a
motion recommending that the Corporate Governance Annual Disclosure Model
Act and the Corporate Governance Annual Disclosure Model Regulation
(Corporate Governance Models) be added as an accreditation standard. This
recommendation will be exposed for a 30-day comment period.
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The Corporate Governance Models were adopted by the Executive Committee
and Plenary during the 2014 Fall National Meeting as a result of a multi-year
project of the Corporate Governance (E) Working Group to study and compare
existing governance requirements for U.S. insurers to established best practices,
international standards and U.S. regulatory needs. The Corporate Governance
Models require that on each June 1, every insurer, or the insurance group in
which the insurer is a member, submit a Corporate Governance Annual
Disclosure (CGAD) to its lead state or domestic regulator. In the CGAD, insurers
must document, in narrative form, highly confidential information about their
corporate governance framework, including the structure and policies of their
boards of directors and key committees, the frequency of their meetings, and
procedure for the oversight of critical risk areas and appointment practices,
among other things. Insurers must also disclose the policies and practices used
by their board of directors for directing senior management on critical areas,
including a description of codes of business conduct and ethics, and processes
for performance evaluation, compensation practices, corrective action,
succession planning and suitability standards.
C. Briefly Noted
1. NAIC Internal Governance
Following a recommendation from former Connecticut Insurance Commissioner
Thomas Leonardi, the Governance Review (EX) Task Force recommended to
the Executive Committee that an outside consultant be hired to analyze existing
governance procedures within the NAIC. Last summer, the Executive Committee
adopted this recommendation and issued a request for proposal.
During the 2015 Spring National Meeting, it was reported that the Executive
Committee hired the National Association of Corporate Directors (NACD) as the
outside consultant. Representatives from the NACD were present at the Task
Force meeting, and they explained that their time in Phoenix was being spent
interviewing state insurance commissioners and several key NAIC staff
members. The NACD announced that they could have a draft report available
within 30 to 45 days, but the Task Force stressed that it was better for the report
to be done right, rather than done quickly.
2. Ridesharing White Paper
During the 2014 Summer National Meeting, the Property and Casualty
Insurance (C) Committee created the Sharing Economy Working Group, chaired
by Commissioner Dave Jones (California), to study the issue of ridesharing and
potential gaps in insurance coverage. Ridesharing is the practice of driving for
hire using an online-enabled platform to connect drivers who are using their
personal vehicles for passengers. These services are provided by transportation
network companies (TNCs), the most popular of which are Lyft, Sidecar and
Uber. The primary issue with ridesharing is the potential gap in insurance
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coverage between the driver’s personal automobile insurance policy and the
TNC’s commercial policy. State insurance regulators are working with state
legislators to determine how best to address these insurance coverage gaps.
In Phoenix, the Working Group adopted a white paper, titled “Transportation
Network Company Insurance Principles for Legislatures and Regulators,” that
describes insurance issues for legislatures and regulators to consider when
adopting laws or regulations regarding TNCs. Topics addressed in the white
paper include insurance coverage gaps, coverage amounts and types of
coverage. The Working Group also discussed compromise legislation developed
by personal lines auto insurers and TNC insurers. Commissioner Jones
commended the industry for working out differences and asked for the white
paper to be amended to reflect the existence of the model bill and identify its
supporters.
3. Confidentiality
At the meeting of the Financial Regulation Standards and Accreditation (F)
Committee, industry representatives voiced concern over weakened
confidentiality language in state adoptions of the Insurance Holding Company
System Regulatory Act and the Risk Management and Own Risk Solvency
Assessment Model Act. Industry representatives, including the National
Association of Mutual Insurance Companies (NAMIC) and the American
Insurance Association (AIA), specifically asked the (F) Committee to address
this issue in the accreditation requirements by mandating that states adopt the
confidentiality language in these models. Deputy Commissioner Danny Saenz
(Texas) agreed that, without the proper confidentiality language, insurers will be
discouraged from filing a useful ORSA Report. The (F) Committee will further
consider how to address the issue.
4. Receivership Model Law
The Receivership Model Law (E) Working Group was originally created to
examine the Insurance Receivership Model Act (IRMA). However, as discussed
during the 2015 Spring National Meeting, the focus of the Working Group has
expanded. In Phoenix, the Working Group discussed the potential impact of the
Financial Stability Board’s Key Attributes of Effective Resolution Regimes for
Financial Institutions (Key Attributes). Certain members of the Working Group
recently met with the International Monetary Fund (IMF), and, as a result of this
meeting, the members recommended that the Working Group’s focus change
from IRMA to the Key Attributes. The Working Group determined to do a survey
of state receivership laws to examine how they compare to the Key Attributes.
The Working Group acknowledged that the Key Attributes, as currently drafted,
are bank-centric. Thus, the Working Group determined to also generate
feedback that can be given to the Financial Stability Board on adapting the Key
Attributes to the insurance industry.
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Legal Alert: NAIC Update –
Spring 2015
continued
5. Mortgage Insurance
The Mortgage Guaranty Insurance (E) Working Group continues to work on
amendments to the Mortgage Guaranty Insurance Model Act. During the 2014
Fall National Meeting, Deputy Commissioner Finston recommended that the
credit for reinsurance provisions of an amended Mortgage Guaranty Insurance
Model Act more closely parallel the collateral funding provisions in the Credit for
Reinsurance Model Law.
During the 2015 Spring National Meeting, the Working Group discussed a new
February draft of an amended Mortgage Guaranty Insurance Model Act.
Although the February draft does not contain any revisions to the credit for
reinsurance provisions, the Working Group still intends to make the provisions
consistent with the Credit for Reinsurance Model Law. The Working Group
stated that they want to encourage non-affiliated, third-party reinsurance.
Industry representatives promised to provide the Working Group with comments
on the February draft and suggested language for the credit for reinsurance
provisions by the end of April.
6. International Issues
Various task forces and working groups that met in Phoenix received reports on
the progress of work on international regulatory standards for insurers, including
the International Association of Insurance Supervisors’ (IAIS) Common
Framework for Supervision of Internationally Active Insurance Groups
(ComFrame) and development of capital standards for globally significant
international insurers (G-SIIs) and Internationally Active Insurance Groups
(IAIGs). In addition, regulators also previewed their dissatisfaction with the
findings regarding shortcomings of the existing state-based regulatory
framework in the Financial Sector Assessment Program (FSAP) assessment of
the United States regulation relative to international norms as embodied in the
IAIS’s Insurance Core Principles (ICPs). The FSAP report was released shortly
after the Phoenix meeting and while it found a reasonable level of observance in
the United States of the ICPs, it nonetheless noted several areas for
development and gaps in regulation, including the absence of group-level capital
standards. We will provide a more detailed summary of the FSAP report and the
current state of work on capital standards in a separate Focus on International
Standards report.
If you have any questions about this Legal Alert, please feel free to contact any
of the attorneys listed under 'Related People/Contributors' or the Sutherland
attorney with whom you regularly work.
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