NAIC Updates | June & July 2023

Several working groups of the National Association of Insurance Commissioners (NAIC) held meetings in June and July.

This article covers the latest hot topics from the meetings, e.g., a proposal that will allow the Securities Valuation Office to notch down NAIC Designation for any securities when they see fit, the admittance of net negative interest maintenance reserve (IMR) for 2023 year-end through 2025 year-end due to significant reduced value in fixed income investments, e.g., bonds and mortgages, and the big industry win on the residuals’ RBC factor which remains at 30% for 2023-year end.

It is expected that the principles-based bond project (SAPWG 2019-21) will be adopted at the Summer National Meeting in Seattle on August 13, 2023, and the relevant blank changes (2023-06BWG and 2023-07BWG) be adopted on November 7, 2023.

The NAIC published the IMR amortization table on July 11, 2023.

The following updates pertain to investment accounting.

NAIC Statutory Accounting Principles Working Group 

The Statutory Accounting Principles Working Group (SAPWG) of the NAIC held a virtual meeting on June 28, 2023.

Exposed Items with comment deadline July 21, 2023

Ref #2022-19: Net Negative (Disallowed) IMR INT 23-01T

This INT was exposed in April 2023. NAIC staff incorporated some of the interested parties’ comments into the INT, and it was re-exposed via eVote on July 5, 2023. This INT allows the insurers who have a risk-based capital greater than 300% to admit IMR assets up to 10% of the adjusted general account capital and surplus after excluding admitted positive goodwill, EDP equipment and operating system software, deferred tax assets, and admitted IMR. Insurers can begin admitting IMR assets in a separate account if the admittance of general account IMR asset is less than the 10% cap. This INT allows derivative losses to be included in IMR assets only if the insurer can prove the realized derivatives gains were included in IMR liabilities and amortized in the past. It adds new disclosure requirements, attestation statements, and application guidance for admitting IMR assets, e.g., disclosing unamortized balances in IMR from gains and losses for derivatives that were reported at fair value prior to the termination, IMR losses for fixed income related derivatives that are in compliance with prudent and documented risk management procedures, etc.  

IMR assets in the general account shall be reported as an aggregate write-in to miscellaneous other-than-invested assets in line 25 on the asset page, and those in the separate account shall be reported as an aggregate write-in to miscellaneous other-than-invested assets in line 15 on the asset page. The corresponding admitted IMR amount shall be reported as an aggregate write-in for special surplus funds in line 34 on the liabilities page for a general account and in line 19 on the liabilities page for a separate account.

The proposed nullification date of this INT is January 1, 2026, and may be changed by the SAPWG. 

NAIC Risk-Based Capital Investment Risk and Evaluation Working Group

The Risk-Based Capital Investment Risk and Evaluation Working Group (RBCIREWG) held a virtual meeting on June 14, 2023.  

Adopted Item 

RBC factors for Residual Tranches on LR008 Other Long-Term Assets (2023-09-IRE) and LR039 – Sensitivity Tests Authorized Control Level (2023-10-IRE) 

Philip Barlow, the Chair of the RBCIREWG, said the working group needs to determine the base RBC factor for the new residuals bucket they created earlier. He emphasized they do not have the ability to defer the decision because there are currently no RBC factors for the base charge and sensitivity test. After hearing comment letters from the regulators and interested parties, Minnesota regulator Fred Anderson decided to modify his original proposal to be in line with the recommendations from Texas regulator.   

A joint comment letter from Iowa and Connecticut expressed concerns about increasing the RBC factor without analysis. According to the letter, residuals do not pose significant impact to the life insurance industry at aggregate or individual level. Additionally, the information that supports a 45% charge rather than a 30% charge is from broadly syndicated CLOs. The letter pointed out that this single piece of evidence does not represent all residuals, e.g., securitization of student or aircraft loans. They will not support an automatic increase in the RBC factor without looking at underlying collateral and the thickness of the residuals. 

The Texas regulator said they do not want to deteriorate an insurer’s surplus. She suggested maintaining the RBC factor as 30% for 2023 year-end and changing the RBC factor to 45% for 2024 year-end depending on the analysis performed by the industry next year. The Academy said neither 30% nor 45% is a correct charge for residuals. They agreed to review their analysis and provide professional comment.   

Philip Barlow said the current 30% charge is based on nothing and it is not an adequate charge for residual tranches as a whole. He can’t find one single comment that agrees 30% is an appropriate charge for residual tranches. He found some comments that say 30% may not be appropriate, but the working group should leave it as is and wait for next year, or until residuals become a problem, or until analysis is performed, or 30% is generally not appropriate, but some assets deserve to have a 30% charge and it is unfair for those assets to get a 45% charge.   

Fred Andersen, the Minnesota regulator, said he preferred a 45% charge for 2023-year end because he believed strong regulation is warranted, and they didn’t want to see extraordinary growth on the residuals in life insurers’ portfolio. However, he agreed with the practical approach proposal from the Texas regulator. He modified his original proposal from a 45% base charge and 10% charge for sensitivity test to a 30% base charge and 15% charge for sensitivity test for 2023-year end, with consideration for a positive or negative adjustment to a 45% base charge for 2024-year end. 

NAIC Valuation of Securities Task Force 

The Valuation of Securities Task Force (VOSTF) held a national meeting on July 13, 2023.  

Adopted Item

Clarify the meaning of Repurchase Agreement in the Derivatives Transaction Definition for Funds in Part Three of the Purposes and Procedures Manual of the NAIC Investment Analysis Office 

The VOSTF adopted changes in 2021 to allow the use of derivatives in funds while maintaining limits on funds’ use of leverage. This proposal adds clarifying language to the definition of Derivatives Transaction in the SVO P&P Manual Part Three Paragraph 293 to maintain consistency between the SVO P&P Manual and SSAP No. 103R and eliminate any misconception that a fund cannot be the purchaser of securities or the lender of cash. 

No comments were received but the American Council of Life Insurers (ACLI) was supportive of this change at the meeting. 

Other Items 

Proposed Update to the Definition of an NAIC Designation 

This item was exposed on May 15, 2023. The Chair said they sent the amendment referral to the Capital Adequacy Task Force (CADTF) and the Statutory Accounting Principles Working Group (SAPWG) for their feedback by June 29. The CADTF distributed the referral to their members, but no comments were received. SAPWG distributed to their members for comments by July 7, and the VOSTF hasn’t received notifications that they will receive comments from the SAPWG.   

The interested parties said they are confused on the intent, rationale, scope, and potential impact of this proposal. They can’t tell if there are any changes in the scope from the proposal. They emphasize other non-credit risks were already captured within the current C-1 Risk Based Capital (RBC) risk framework. They said the proposal considers only the likelihood of payment default, but ignores the loss given default. It is inconsistent with the current RBC charges that were developed using a Moody’s framework, which includes loss given default analysis other than the probability of default. They asked the VOSTF to send a referral to the Capital Adequacy Task Force again for their comment if this proposal is in line with how the NAIC’s RBC charges were developed. Some interested parties were concerned this proposal will bestow new authority to the SVO, e.g., notching down NAIC Designation for non-credit risk or moving securities from the filing exempt bucket to the filing required bucket. Some said it is premature to change the SVO P&P Manual now because they believe the credit rating providers have significant role to play in this proposed change. 

The Chair said the SVO has seen securities characteristics that are concerning, e.g., interest deferrals. The reviews don’t always result in changing the NAIC Designations. This proposal will create a mechanism for the VOSTF members to receive information and identify the emerging characteristics of the securities held by the insurers. She said it is okay to pass through the credit ratings in most cases, but it is important to realize the usage of the NAIC Designations and create a ground level of understanding. She asked the SVO to work with the industry on this proposal, and they may change some verbiage, but she doesn’t think it would have significant change. 

Updates on the Proposed CLO Modeling Methodology and Ad-hoc Working Group 

Eric Kolchinsky, SSG Director, said the SSG recently met with the ad hoc working group. They determined no prepayment approach will be adopted. They also asked for feedback from the interested parties on the set up of the scenarios and probabilities which will be in their next step.   

The Chair emphasized this ad hoc meeting is focused on the rated notes of the CLOs. They received questions about the residual tranches. The SSG will include all tranches in the modeling but only the debt tranches will receive the NAIC Designations.   

Kolchinsky said they will upload the new cashflows with no prepay and no discount for the sample CLOs into the NAIC website. 

NAIC Blanks Working Group 

The Blanks Working Group of the NAIC held a virtual meeting on July 27, 2023.

Exposed Items with comment deadline of October 12, 2023.

Ref #2023-06BWG – Split the Schedule D Part 1 into two sections: one for Issuer Credit Obligations (ICO) and the other for Asset-Backed Securities (ABS). Update the other parts of the Annual Statement that reference the bond lines of business. (SAPWG 2019-21) 

Dale Bruggeman, SAPWG Chair, said this proposal is to revise Schedule D Part 1 to incorporate more granular reporting lines and improve investment information. The industry has been providing a number of editorial amendments and not all of them are incorporated into the proposal. He encouraged the industry to continue talking to the NAIC staff to see if any changes are needed and understand why some of their requested changes are not incorporated. He hopes this blank change will smooth the implementation of principles-based bond definition project.   

This item is re-exposed with modifications made. 

Ref #2023‐07BWG – Update the code column and delete the Legal Entity Identifier (LEI) column for the following investment schedules: Schedules A, B, BA, D Part 2, D Part 6, and E Part 1. 

Dale Bruggeman said this proposal details what was identified during the bond proposal. Some of the proposed changes are not related to bonds but related to other investments. He hoped to adopt this item at the same time as 2023-06BWG.   

This item was re-exposed with modifications made, e.g., new columns are added. Column “Investment Characteristics” is added to both Schedule A Part 1 – Real Estate and Schedule D Part 2 Section 2 – Common Stocks. Column “In Good Standing” is added to Schedule D Part 2 Section 1 – Preferred Stocks.