US NAIC Summer 2024 National Meeting Highlights: Risk-Focused Surveillance (E) Working Group

The US National Association of Insurance Commissioners (“NAIC”) held its Summer National Meeting in Chicago on August 12-15, 2024. The Risk-Focused Surveillance (E) Working Group (“RFSWG”) did not meet during the Summer National Meeting. However, a discussion of its recent work with respect to affiliate investment managers and affiliate investments, as well as regarding monitoring of run-off insurers, is provided below.

Affiliate Investment Management Agreements and Affiliated and Related Party Investments

The RFSWG met on May 30, 2024. In this meeting, the RFSWG discussed and proposed modifications to the NAIC’s Financial Analysis Handbook and Financial Condition Examiners Handbook to update the guidance around the review of affiliate investment management services and agreements and affiliate and related party investments.

The RFSWG referred the proposed Financial Analysis Handbook revisions to the Financial Analysis Solvency Tools (E) Working Group (“FASTWG”) and the proposed Financial Condition Examiners Handbook revisions to the Financial Examiners Handbook (E) Technical Working Group (“FEHTWG”) for consideration and adoption. On July 16, FASTWG adopted the revisions to the Financial Analysis Handbook during a conference call. FEHTWG has not yet adopted the revisions to the Financial Condition Examiners Handbook. Below is a summary of RFSWG’s updated criteria relating to evaluation of the fairness and reasonableness of affiliated investment management agreements and services.

Selection of Investments: The affiliate investment management agreement should be clear regarding how the investment adviser will select investments and must attach clear investment guidelines that align with the insurer’s investment strategy and adhere to relevant laws and regulations. These guidelines should be detailed, outlining the types of investments that are permitted, any limitations and restrictions on investment exposures, and specific risk metrics that need to be considered, such as credit quality and duration.
Authority for Transactions: The agreement should clearly specify the circumstances under which the insurer’s prior approval is required for transactions. It is inappropriate for an affiliated investment manager to have total discretion or authority over complex, illiquid, or large exposures without the insurer’s consent.
Conflicts of Interest: The agreement must detail the approach to handling conflicts of interest, ensuring that such conflicts are managed appropriately.
Fiduciary Responsibility: The criteria call for an acknowledgment of the investment adviser’s fiduciary role when advising the insurer, highlighting the investment adviser’s obligation to act in the best interests of the insurer.
Fees: Fees charged by the investment adviser must be well defined within the agreement. There should be a particular focus on the scrutiny of performance or incentive fees to ensure they are fair and reasonable. Also, the fees must reflect the current market conditions and kind of assets and the type of asset management.
Sub-advisors: If sub-advisors are to be used, the agreement should specify whether the insurer’s consent is required for their appointment and who is responsible for the payment of the sub-advisor’s fees.
Reporting: The agreement must outline the reporting requirements, which should be frequent and thorough, with reports provided at least quarterly, if not monthly.
Termination: Provisions for the termination of the agreement, both with and without cause, should be included to protect the interests of the insurer.

Monitoring of Run-off Insurers

During its July 17 meeting, the RFSWG exposed, for a 30-day comment period expiring on August 30, revisions to the Financial Analysis Handbook and the Financial Condition Examiners Handbook for monitoring run-off insurers.

The proposed revisions to the Financial Analysis Handbook include modifications for analysts to evaluate the effectiveness of an insurer’s run-off plan by tracking the company’s progress against its plan to ensure that the plan covers the size of operations during the run-off (including employee retention and capital and liquidity management), to gain an understanding of the insurer’s record-keeping processes with special attention to records and data sources and transferring claims data as needed, and to gain an understanding of the insurer’s use of service providers and third party administrators for continuity of services as its operations shrink over time.
The proposed revisions to the Financial Condition Examiners Handbook include revisions to the process for reviewing loss and loss adjustment expense reserves, such as the analyst considering more frequent independent research and a targeted exam before the next scheduled full scope exam, in addition to monitoring the need to update reserves to take account of legal developments, since loss reserves of run-off insurers can be significantly impacted by litigation activity or case law impacting claims liabilities.
Other considerations included in the proposed revisions involve gaining an understanding of recordkeeping, claims records and data sources, developing a plan to communicate as necessary with key stakeholders and regulators, reviewing the run-off insurer’s information technology systems to ensure that they are kept up to date and are cost-effective, and closely monitoring the run-off insurer’s reinsurance operations.

To view additional updates from the US NAIC Summer 2024 National Meeting, visit our meeting highlights page.