US NAIC Summer 2023 National Meeting Highlights: Joint Meeting of the Financial Stability (E) Task Force and the Macroprudential (E) Working Group

At the Summer 2023 US National Meeting of the National Association of Insurance Commissioners (“NAIC”), the Joint Meeting of the Financial Stability (E) Task Force (the “Task Force”) and the Macroprudential (E) Working Group (the “Working Group”, together with the Task Force, the “Joint Group”) met on August 13. The Joint Group considered several topics and heard several updates.

Update on Developments at the Financial Stability Oversight Council (the “FSOC”): The NAIC’s representative to the FSOC, Elizabeth Kelleher Dwyer (Director of the Rhode Island Department of Business Regulation) provided a report on developments at the FSOC that are most directly related to the NAIC’s work:

• On April 21, the FSOC released its new proposed guidance and analytic framework for designating nonbanks that potentially pose financial stability risks (that is, the policies and documents that would guide the FSOC should it decide to “designate” a nonbank entity). This designation authority extends to insurers, as well as other nonbank entities. After a brief extension, the comment period closed on July 27.
  • A designation means the FSOC has determined that the particular entity poses a systemic risk to the entire financial system and, therefore, should be subject to enhanced supervision by the Federal Reserve, in addition to any existing functional oversight by a state insurance regulator. This was the authority utilized after the 2008 financial crisis to subject certain insurer groups to enhanced oversight by the Federal Reserve.
  • In recent years, the FSOC has focused on an “activities-based” approach to dealing with systemic risk (focusing on the type of activities that lead to contagion and catastrophe regardless of which entities may be engaged in them). Nevertheless, the ability to designate entities as posing systemic risk remains one of the most significant tools in its arsenal and remains an option for the FSOC (as shown by its new framework).
• The FSOC has not indicated whether it is currently focusing on any particular firms or insurer groups. However, recent public work of the FSOC has focused on broad areas of the financial sector, including nonbank lenders, hedge funds, crypto firms, and asset managers.

Update Regarding the Liquidity Stress Testing Framework: As previously reported, at the NAIC’s Fall National Meeting in 2022, the Joint Group adopted the 2022 Liquidity Stress Framework (the “2022 LST”), which is geared toward large life insurers with an aim of capturing the outward impacts on the broader financial markets of aggregate asset sales under liquidity stress. Working Group Chair, Robert Kasinow (Acting Deputy Superintendent at the New York State Department of Financial Services), provided an update on this project:

• The 2022 LST filings were due June 30. The filings are under review and summarized results and insights are expected to be provided soon.
• Work on the 2023 Liquidity Stress Testing Framework (the “2023 LST”) will begin soon. A key consideration will be whether to modify the scope criteria used to identify life insurers and their groups for potential participation in the 2023 LST. Other considerations include whether to make any modifications to the stress scenarios and other requirements to be included in the 2023 LST.
• Separate account liquidity concerns, other than the guaranteed portion included in the general account, are excluded from the current 2022 LST. A study group (the “LST Study Group”) is considering how to address potential separate account asset sales in a stress scenario.
  • The LST Study Group is working on a data call for lead states to require their participant life insurance groups to provide some context around the dollar amount of specific asset types included in separate accounts, which are not already subject to US Securities and Exchange Commission (“SEC”) liquidity stress requirements.
  • Once the LST Study Group has access to the results of this data call, state insurance regulators will be in a better position to consider the potential impact of this universe of assets. If deemed significant, state insurance regulators will move on to constructing a methodology for assessing the potential asset sales, which could occur in likely stress scenarios.
  • Further updates are expected to be announced as work continues on the 2023 LST Framework.

Updates to Considerations for Private Equity (“PE”) Owned Insurers: Kasinow reported that NAIC staff had recently posted a new status update document on the referrals of the Working Group’s list of 13 PE and related considerations to other arms of the NAIC. Kasinow noted the following key developments:

• For Items 1 (Holding Company Structures) and 2 (Ownership and Control), addressing concerns around holding company structures, ownership, and control, the Group Solvency Issues (E) Working Group has formed a drafting group to develop best practices for regulatory review in this area.
• For Items 4 (Owners of Insurers with Short-Term Focus and/or Unwilling to Support a Troubled Insurer) and 10 (Privately Structured Securities), a separate update on Actuarial Guideline LIII—Application of the Valuation Manual for Testing the Adequacy of Life Insurer Reserves (“AG 53”) discussed relevant developments (summarized separately below).
• For Item 5 (Operational, Governance and Market Conduct Practices), the Working Group will soon begin considering this item now that the Task Force has completed the reinsurance worksheet to address the offshore/complex reinsurance topic in Item 13 (Offshore/Complex Reinsurance).
• For Item 7 (Identifying Related Party-Originated Investments (Including Structured Securities)) which concerns identifying related party-originated investments, this consideration has been addressed by the 2022 adoption of additional related party codes for investment reporting and the more recent adoption of revisions in the Statutory Accounting Principles (E) Working Group’s Ref #2022-15. These revisions clarify that any invested asset held by a reporting entity that is issued by an affiliated entity, or which includes the obligations of an affiliated entity, is an affiliated investment.
  • The revisions for Item 7 also address many of the considerations for Item 8 (Identifying Underlying Affiliated/Related Party Investments and/or Collateral in Structured Securities), which concerns identifying underlying affiliated/related party investments and/or collateral in structured securities, and Item 9 (Asset Manager Affiliates and Disclaimers of Affiliation), which concerns asset manager affiliates and disclaimers of affiliation.
  • There may be additional work as state insurance regulators gain more insights from reviewing statutory financial statements, including these new disclosures and accounting clarifications.
• For Item 11 (Reliance on Rating Agencies), the Valuation of Securities (E) Task Force has had a lot of discussion and activity around this consideration, which is expected to continue and possibly expand in scope.
• For Item 12 (Pension Risk Transfer Business Supported by Complex Investments) and its considerations around pension risk transfers (“PRTs”), it is the NAIC’s understanding that the US Department of Labor (“DOL”) has had many meetings with trade associations and insurers, along with many other groups to work to update the fiduciary requirements under the DOL’s Interpretative Bulletin 95-1.

Kasinow also reported that updating the Macroprudential Risk Assessment (“MRA”) dashboard to include incorporating additional climate risk metrics was a priority for the Working Group before the NAIC’s Fall 2023 National Meeting and further noted that the MRA work will also include comparing the NAIC’s framework to the FSOC’s framework to identify any gaps and propose a way forward.

Update Regarding AG 53: Fred Andersen, Deputy Commissioner of Insurance at the Minnesota Department of Commerce provided an update on AG 53. As previously reported, in 2022 the NAIC adopted AG 53, with its main purpose being to help ensure claims paying ability even if complex assets do not perform as expected. AG 53 requires disclosure for most life insurers over a size threshold of asset-related information, where the first submissions were due April 2023. It was noted that the disclosures provide an opportunity for companies to tell their stories regarding their complex assets and associated risks, as well as how their cash-flow testing models address those risks.

• In 2023, the NAIC received AG 53 filings from 246 life insurers. To review these filings, the Valuation Analysis (E) Working Group formed an AG 53 Review Group (the “Review Group”) consisting of a team of actuaries, investment experts, and other financial staff to perform reviews.
• The update noted that a review of net yield assumptions to be the top priority of the Review Group, as a result of the implications that, if a company is assuming high investment returns (i) more favorable asset adequacy analysis results; (ii) with more favorable asset adequacy results, a lower amount of assets could be held for reserves to be considered adequate; (iii) the concern is if risk is understated and assets underperform, reserves will turn out to be inadequate, and previously released money may have been needed.
  • Following its review, the Review Group noted that, while a vast majority of life insurers assume reasonable returns on their assumptions (approximately 85% to 95% of companies reviewed appear to have completely safe numbers), there is a sizable number of companies that assumed net yields in potentially problematic amounts.
• Future activities for the Review Group include:
  • Reviewing reinsurance counterparty risk by sending requests for additional information from a targeted set of ceding companies; and
  • Continuing efforts to help ensure claims-paying ability even if complex assets do not perform as expected.

International Update: Tim Nauheimer, Manager of Macroprudential Supervision at the NAIC, reported that the International Association of Insurance Supervisors (“IAIS”) has completed numerous data calls and analyses as part of the Global Monitoring Exercise (“GME”), which includes individual insurer monitoring (“IIM”) and sector-wide monitoring. The GME is part of the IAIS’s holistic framework for systemic risk identification, which takes a broader approach to financial stability and macroprudential surveillance. The data collections conducted will be utilized to focus collective discussions by the IAIS on potential systemic risk issues and that the process has identified six insurers for discussion (though the identity of such insurers must remain confidential). Nauheimer further reported that the collective discussions will take place in meetings held at the end of September, during which group-wide supervisors will provide an overview of the supervision of their insurers.

In addition, Nauheimer noted that the IAIS has approved the updated IIM Assessment Methodology after the resolution of comments, but work on the following ancillary indicators to refine systemic monitoring will continue this year: (i) level 3 assets; (ii) credit risk; (iii) derivatives; and (iv) reinsurance. It was also noted that overarching themes for the IAIS with respect to sector-wide monitoring this year include: (i) managing increased interest rate, credit, and liquidity risks against a challenging macroeconomic backdrop; (ii) cross-border reinsurance; and 3) alternative assets.

Finally, Nauheimer reported that the IAIS released its first public consultation that covers the addition of new material into the IAIS Insurance Core Principles Introduction, work related to climate risk and governance, and the IAIS plans to address climate risk issues more broadly.

Looking Ahead

It is likely that there will be further developments with respect to the above. We will continue to track and report on these developments.

To view additional updates from the US NAIC Summer 2023 National Meeting, visit our meeting highlights page.