FINANCIAL REGULATION STANDARDS AND … · Eric A. Cioppa Maine Tom Glause Wyoming ... Laws and...

© 2018 National Association of Insurance Commissioners 1

Date: 2/28/18

2018 Spring National Meeting Milwaukee, Wisconsin

FINANCIAL REGULATION STANDARDS AND ACCREDITATION (F) COMMITTEE Saturday, March 24, 2018

2:00 – 3:00 p.m. Wisconsin Center—Ballroom A—1st Floor

ROLL CALL

Todd E. Kiser, Chair Utah Mike Chaney Mississippi Elizabeth Kelleher Dwyer, Vice Chair Rhode Island Bruce R. Ramge Nebraska Jim L. Ridling Alabama Marlene Caride New Jersey Allen W. Kerr Arkansas Larry Deiter South Dakota Katharine L. Wade Connecticut Kent Sullivan Texas Gordon I. Ito Hawaii Scott A. White Virginia Eric A. Cioppa Maine Tom Glause Wyoming Patrick M. McPharlin Michigan

NAIC Support Staff: Becky Meyer/Julie L. Garber/Sara Franson

AGENDA

1. Consider Adoption of its Dec. 18, 2017, and 2017 Fall National Meeting Minutes—Commissioner Todd E. Kiser (UT)

Attachment One

2. Discuss Revisions Adopted in 2017 to NAIC Publications Referenced in the AccreditationStandards—Commissioner Todd E. Kiser (UT)

Attachment Two

3. Discuss Amendments to the Life and Health Insurance Guaranty Association Model Act(#520)—Commissioner Todd E. Kiser (UT)

Attachment Three

4. Consider Adoption of the 2014 Revisions to the Insurance Holding Company System RegulatoryAct (#440) as an Addition to the Part A Accreditation Standards—Commissioner Todd E. Kiser (UT)

Attachment Four

5. Receive Update on the Impact of the Covered Agreement on the Term and Universal LifeInsurance Reserve Financing Model Regulation (#787) and the 2016 Revisions to the Credit forReinsurance Model Law (#785)—Commissioner Todd E. Kiser (UT)

6. Discuss Any Other Matters Brought Before the Committee—Commissioner Todd E. Kiser (UT)

7. Adjournment

W:\National Meetings\2018\Spring\Cmte\F\Open\0 - AGENDA Spring 2018 FRSAC Open.docx

Attachment One

Meeting Minutes

Draft Pending Adoption


Draft: 1/24/18

Financial Regulation Standards and Accreditation (F) Committee Conference Call

December 18, 2017

The Financial Regulation Standards and Accreditation (F) Committee met via conference call Dec. 18, 2017. The following Committee members participated: Todd E. Kiser, Chair (UT); Elizabeth Kelleher Dwyer, Vice Chair (RI); Jim L. Ridling represented by Richard Ford (AL); Allen W. Kerr represented by Mel Anderson (AR); Gordon I. Ito represented by Tian Xiao (HI); Eric A. Cioppa (ME); Patrick M. McPharlin (MI); Chlora Lindley-Myers represented by John Rehagen (MO); Bruce R. Ramge (NE); Peter L. Hartt (NJ); and Jacqueline K. Cunningham represented by David Smith (VA). Also participating were: Steve Kinion (DE); and Dale Bruggeman (OH).

1. Deferred Action on the 2014 Revisions to Model #440 as an Addition to the Part A Accreditation Standards

Commissioner Kiser stated that in 2014, the NAIC adopted revisions to the Insurance Holding Company System Regulatory Act (#440). The revisions provide authority to a designated state to act as a group-wide supervisor for an internationally active insurance group (IAIG).

Commissioner Kiser provided a reminder that the referral to adopt the 2014 revisions to Model #440 was publicly exposed for an initial 30-day public comment period in 2015 and a one-year period ending Dec. 31, 2016. The referral was considered for adoption as an accreditation standard at the Summer National Meeting, but was deferred due to uncertainty surrounding the “Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance” (covered agreement) and its potential impact on Model #440. The covered agreement has now been signed, and the referral was then discussed at the Fall National Meeting. At the Fall National Meeting, comments were provided by the NAIC Legal Division that the clarifying guidance given by the U.S. Department of Treasury (Treasury Department) indicated no impact on Model #440. However, additional questions were raised regarding the appropriate manner in which to apply the standard due to the unique nature of the revisions being primarily related to IAIGs, and the Committee again deferred consideration of the referral.

The Committee agreed that additional time is needed to allow thorough consideration of the revisions and how widely the accreditation requirements should be applied. This discussion is expected to continue at the 2018 Spring National Meeting.

2. Adopted a Referral from the ORSA Implementation (E) Subgroup Regarding Part B Accreditation Guidelines for theORSA Reports

Commissioner Kiser stated the Committee is considering a referral from the ORSA Implementation (E) Subgroup recommending inclusion of Own Risk and Solvency Assessment (ORSA) review requirements in the accreditation guidelines for analysis and exams (Attachment A). The proposed changes to the guidelines focus on assuring the report is reviewed by the lead state and that pertinent information is incorporated into the analysis or examination work performed. No comment letters were received.

Superintendent Cioppa made a motion, seconded by Mr. Ford, to adopt the referral from the ORSA Implementation (E) Subgroup related to the Part B revisions to the accreditation guidelines for ORSA effective Jan. 1, 2018. The motion passed.

3. Adopted Referrals to Incorporate Risk-Focused Analysis Concepts into the Part B Accreditation Guidelines

Commissioner Kiser stated that the Committee is considering referrals from the Financial Analysis Handbook (E) Working Group (Attachment B) and the Financial Examiners Handbook (E) Technical Group (Attachment C) to incorporate risk-focused analysis revisions into the Part B analysis and examination accreditation guidelines. The self-evaluation guide/interim annual review in the accreditation manual was also updated for consistency (Attachment D). No comments were received. However, there were a number of questions regarding documentation expectations in one of the proposed guidelines. A clarification was, therefore, proposed.

Sara Franson (NAIC) discussed the clarification proposal and stated there were questions regarding the analysis Review Team Guideline e. Documented Analysis Procedures. The standard lists the various information sources that should be reviewed and considered during analysis. The proposal initially stated that this information should be evidenced by sign-off and dating, leading to questions on whether the documents listed were required to be included in the analysis file in order to

Attachment One



be physically or electronically signed off. However, the intent is that each document does not need to be included in the file, only that evidence of their review must be included in the file. The proposed change to the guideline, therefore, states: “The review should be evidenced by sign-off and dating of the information source, a procedure step or a simplified checklist.” This clarifying language will allow for an analyst to show evidence of a review and/or consideration of these various information sources without physically including every document in the analysis file (Attachment E).

Mr. Bruggeman asked if the Committee could clarify the intent of analysis guideline d. Priority Based Analysis. The current standard states that the priority scheme should follow the guidelines and classifications outlined in the NAIC’s Financial Analysis Handbook (Handbook). The scheme outlined in the Handbook requires a uniform prioritization scale with ratings from one through four be used when sharing information with other states. However, the Handbook further allows for the use of an alternate prioritization scheme for use internally within a state insurance department. Since the standard does not specify the details of the priority scheme, Mr. Bruggeman asked the Committee to confirm that the standard allows for both the uniform priority scale when sharing information with other states and also the option of using an alternate prioritization scale for internal purposes. The Committee confirmed Mr. Bruggeman’s interpretation of the standard.

Mr. Xiao made a motion, seconded by Superintendent Dwyer, to adopt the proposed referrals, including the clarifying language described by Ms. Franson, and changes to the self-evaluation guide/interim annual review procedures effective Jan. 1, 2018, beginning with work performed for the 2017 annual analysis. The motion passed.

4. Adopted Editorial Changes to Part A: Laws and Regulations to Correct References in the Preamble

Dan Schelp (NAIC) summarized the recommendation that the drafting note in the Part A Preamble that references the XXX/AXXX Model Regulation be deleted (Attachment F). The reference was initially included to serve as a reminder until the final model was adopted. Since the model has now been adopted as the Term and Universal Life Insurance Reserve Financing Model Regulation (#787) and is under consideration by the Committee for inclusion in the accreditation standards, the reference is now outdated and unnecessary. Removal of the drafting note does not change the effect of the Part A Preamble with respect to captive reinsurance.

Mr. Kinion asked for clarification on the current accreditation requirements regarding captive reinsurers. Mr. Schelp described the requirements, which were adopted by the NAIC in 2015 and are located in the Part A Preamble of the 2016 NAIC Accreditation Program Manual. In summary, XXX/AXXX captive reinsurers are subject to the Part A standards unless they meet the XXX/AXXX Reinsurance Framework, which includes application of Actuarial Guideline XLVIII—Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (AG 48) .

Commissioner Kiser stated that the change is not substantive, but rather works to correct an outdated reference, and that he supports the revision.

Superintendent Cioppa made a motion, seconded by Mr. Ford, to adopt the revision to remove the drafting note referencing the XXX/AXXX Model Regulation from the Part A Preamble. The motion passed.

Having no further business, the Financial Regulation Standards and Accreditation (F) Committee adjourned.

W:\National Meetings\2018\Spring\Cmte\F\Interim Call\Interim 12-F min.docx

Attachment One



Draft: 12/7/17

Financial Regulation Standards and Accreditation (F) Committee Honolulu, Hawaii December 2, 2017

The Financial Regulation Standards and Accreditation (F) Committee met in Honolulu, HI, and via conference call Dec. 2, 2017. The following Committee members participated: Todd E. Kiser, Chair, and Jake Garn (UT); Elizabeth Kelleher Dwyer, Vice Chair (RI); Allen W. Kerr represented by Mel Anderson (AR); Gordon I. Ito represented by Tian Xiao (HI); Eric A. Cioppa (ME); Patrick M. McPharlin represented by Judy Weaver (MI); Chlora Lindley-Myers represented by John Rehagen (MO); Bruce R. Ramge (NE); Peter L. Hartt (NJ); John G. Franchini represented by Robert Doucette (NM); Javier Rivera Rios (PR); Kent Sullivan and Doug Slape (TX); and Tom Glause (WY).

1. Discussed its Dec. 1 Regulator-to-Regulator Meeting

Commissioner Kiser said the Committee met in regulator-to-regulator session Dec. 1 pursuant to paragraph 7 (consideration of individual state insurance department’s compliance with NAIC financial regulation standards) of the NAIC Policy Statement on Open Meetings. During this meeting, the Committee discussed state-specific accreditation issues and voted to award continued accreditation to the insurance departments of Alaska, Missouri and Texas.

2. Adopted its Sept. 1 and Summer National Meeting Minutes

Superintendent Cioppa made a motion, seconded by Commissioner Glause, to adopt the Committee’s Sept. 1 (Attachment One) and Aug. 6 (see NAIC Proceedings – Summer 2017, Financial Regulation Standards and Accreditation (F) Committee) minutes. The motion passed unanimously.

3. Adopted Model #305 and Model #306 as an Addition to the Part A Accreditation Standards

Commissioner Kiser stated that, in 2014, the NAIC membership adopted the Corporate Governance Annual Disclosure Model Act (#305) and the Corporate Governance Annual Disclosure Model Regulation (#306), which incorporate a number of enhancements to strengthen corporate governance standards within the U.S. solvency system. Most notably, the models require an insurer or group of insurers to provide a confidential disclosure regarding its corporate governance practices to the lead state and/or domestic regulator annually.

Both models have been through the formal process for consideration as an accreditation standard, which included a 30-day initial exposure period in 2015 and a one-year exposure period that ended Dec. 31, 2016. Five comment letters were received during the initial exposure period (see NAIC Proceedings – Summer 2015, Financial Regulation Standards and Accreditation (F) Committee, Attachment Four, Attachment Five, Attachment Six, Attachment Seven and Attachment Eight) and onecomment letter was received during the subsequent one-year exposure period (see NAIC Proceedings – Spring 2017,Financial Regulation Standards and Accreditation (F) Committee, Attachment Six). All comments were discussed at theSpring National Meeting.

Commissioner Kiser reminded the Committee the comments included a recommendation from the Risk Retention Group (E) Task Force not to include this standard for risk retention groups (RRGs.) This recommendation is supported by other comment letters received and is due to the fact that there is already a corporate governance standard in place specific to RRGs through the Model Risk Retention Act (#705) that became effective for accreditation Jan. 1, 2017.

Following the comment periods, the models were considered for adoption as an accreditation standard by the Committee at the Summer National Meeting, with an expected effective date of Jan. 1, 2020. At that meeting, the Committee decided to defer adoption of the models as an accreditation standard due to uncertainty surrounding the “Bilateral Agreement between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance” (covered agreement) and its potential impact on the models. The covered agreement has now been signed, prompting the Committee to again consider adoption of the models as an accreditation standard.

Kay Noonan (NAIC) stated that based on the subject matter included in the covered agreement, as well as further guidance provided by the U.S. Department of Treasury (Treasury Department), the NAIC Legal Division does not believe that the covered agreement will have an impact on Model #305 and Model #306. In fact, the additional guidance received from the Treasury Department indicates that under the terms of the covered agreement, U.S. insurers will not be subject to any of the

Attachment One



requirements of Solvency II, which is read as an affirmation of the state-based system of solvency regulation, including the matter of corporate governance disclosure.

Mr. Slape suggested it may not be appropriate to move forward with adopting Model #305 and Model #306 as an accreditation standard. Similar to the statements made in the comment letter received from Michigan, Texas struggles with the value of the proposal. He said the states already have a number of other tools related to corporate governance, and the disclosure statement is likely to become a compliance exercise for many companies without providing the expected outcomes.

Mr. Slape said experience highlights that companies are not likely to disclose corporate governance problems. Rather, these issues are disclosed through other tools in place, such as the examination process and the risk-focused analysis process that is being implemented. Ms. Weaver agreed, stating that Michigan will have difficulty getting the models passed through its legislature.

Superintendent Cioppa stated the models have already been discussed and have gone through several votes, noting that this is the final step to their implementation. He stated there is value in the models, noting that the NAIC membership has committed to the international community and to the other states that it intends to adopt the models.

Superintendent Dwyer, Commissioner Glause and Mr. Rehagen stated they were in favor of adopting the models as an accreditation standard, with a Jan. 1, 2020 effective date.

Superintendent Cioppa made a motion, seconded by Superintendent Dwyer, to adopt the Corporate Governance (E) Working Group’s recommendation (Attachment Two) to add Model #305 and Model #306 as a new Part A requirement for traditional insurers, excluding RRGs, effective Jan. 1, 2020. The motion passed, with Michigan and Texas dissenting.

4. Deferred Action on the 2014 Revisions to Model #440 as an Addition to the Part A Accreditation Standards

Commissioner Kiser stated that, in 2014, the NAIC adopted revisions to the Insurance Holding Company System Regulatory Act (#440). The revisions provide authority to a designated state to act as a group-wide supervisor for an internationally active insurance group (IAIG).

This model has also been through the formal process for consideration of adoption as an accreditation standard. This process included a 30-day initial exposure period in 2015 and a one-year exposure period that ended Dec. 31, 2016. Five comment letters were received during the initial exposure period (see NAIC Proceedings – Summer 2015, Financial Regulation Standards and Accreditation (F) Committee, Attachment Four, Attachment Five, Attachment Six, Attachment Seven and Attachment Ten). All comments were discussed at the Spring National Meeting.

Similar to Model #305 and Model #306, this model was considered for adoption at the Summer National Meeting. At that meeting, the Committee decided to defer adoption of the revisions as an accreditation standard due to uncertainty surrounding the covered agreement and its potential impact on the model.

Ms. Noonan stated that the Treasury Department mentions Model #440 in its clarifying guidance on the covered agreement. Specifically, it states that the U.S. does not see a basis to expect that state insurance regulators, in adhering to Article 4 reporting provisions of the covered agreement, which deals with group supervision, will encounter conflicts with state law based on Model #440. Based on that clarification, the NAIC Legal Division’s understanding of what the covered agreement calls for, and what is believed to be a recognition of the existing system of group supervision in the U.S. as reflected in Model #440, it is not anticipated that there will be any revisions to Model #440 that would come about as a result of the covered agreement.

Commissioner Kiser stated the decision this Committee is facing is not just whether to include the revisions in the NAIC Financial Regulation Standards and Accreditation Program, but also how broadly to apply the standard. Specifically, should the standard apply to: 1) all states regardless of involvement with IAIGs; 2) states that are the lead state of an IAIG as defined in Model #440; or 3) all states that are the lead state of an IAIG and states that are the domestic regulator for any insurer that is part of an IAIG. Previous discussions on the matter considered requiring compliance for accreditation purposes only by states that are the lead state and group-wide supervisor for an IAIG.

Director Hartt stated that he strongly believes that these kinds of requirements should apply to all states consistent with the way in which the Committee generally proceeded with Model #440 and group supervision. He stated he did not see a

Attachment One



compelling reason to change course at this point, noting that there are some compelling reasons not to change course. One reason is the amount of scrutiny the states are under right now at the international and federal levels in regard to exercising group supervision. Another is the potential for regulatory arbitrage. Director Hartt stated that a uniform approach is generally what the NAIC works to achieve, and it seems to be particularly appropriate in this instance.

Director Hartt made a motion, seconded by Superintendent Dwyer, to make the 2014 revisions to Model #440 an accreditation standard applicable to all states.

Superintendent Cioppa stated that he agrees all states should be subject to the accreditation standard. He stated that Maine has enacted the revisions to Model #440, and he was able to explain to the legislature that while Maine does not currently have an IAIG, but to the extent they ever do, the model requirements will apply by providing the appropriate authority in regard to IAIGs. Superintendent Cioppa stated that he recognizes the limited applicability to the states that do not have IAIGs, but does not see the harm in adopting it.

Commissioner Glause stated that being from a small state, he has had to explain to his legislature several proposed model laws that do not apply to Wyoming’s domestic industry. The legislature is hesitant to consider model acts for accreditation purposes that do not apply to the state. He does not agree that it furthers the proposition of consistency for all states when it does not apply to some states. He recognized Wyoming would not be exempt from the IAIG requirement of Model #440 if it does get an IAIG, and it may be better to give those states a grace period if, in the future, they get an IAIG.

Mr. Slape stated that Texas has already enacted the revisions, but he agrees with Wyoming that those states that do not have an IAIG should not be required to enact the law. He stated it makes little sense to take the time of the legislature to consider and enact a statute that has no application in the state. He stated the accreditation standard should, therefore, be limited to those lead states of an IAIG. He recommended consideration of a provision that if a state obtains an IAIG, the state would have a window of time to enact the legislation. He further stated that this language codifies what many believe the states already have full authority to do in being a group-wide supervisor of an international company. Texas, therefore, supports passage as an accreditation standard for lead states of an IAIG and not all states regardless of involvement with IAIGs.

Mr. Garn agreed with Wyoming and Texas, stating that enacting the legislation seems like a waste of effort for the states that do not, and may never, have these types of insurers in their states. If a state ever does have an IAIG, it will either need to pass the legislation or will be out of compliance with accreditation.

Ms. Noonan suggested that because there are differing views, the Committee could defer adoption for a short period to allow NAIC staff time to develop a recommendation for the Committee to consider requiring all states enact the 2014 revisions to Model #440 as an accreditation standard and include guidance for the Committee when determining if a state is in compliance. That guidance could include recommending the Committee consider very strongly whether a state has any IAIGs that would be covered by these requirements. That might be a way to meet both goals, which is to maintain uniformity across the states that have an IAIG where they are the lead state and to take into account the fact that it might be challenging to enact in the states where it does not apply.

Superintendent Dwyer stated that Rhode Island is a small state and does not have an IAIG, but she believes it is important to put this level of standard in to prevent regulatory arbitrage. Historically, during an accreditation review, the accreditation team takes into consideration whether a standard is applicable in the state under review. Notwithstanding the fact that Rhode Island is not the lead of an IAIG and would have to put this through the legislature, she still thinks it important to adopt it uniformly.

Director Hartt stated he is concerned about a large company that may redomesticate to a state that does not have the authority outlined in the proposed standard. Regulators are then in a position of lack of clarity about the extent of group supervision of a major multi-national company that requires supervision, and it could take time before the situation is resolved due to the time it takes to enact legislation. Such a delay could be an embarrassment for the state-based regulatory system.

Director Hartt withdrew his motion for the time being in order for the Committee to pursue the course of action recommended by Ms. Noonan. Superintendent Dwyer withdrew her second to the motion.

Superintendent Cioppa made a motion, seconded by Commissioner Glause, to defer adoption of the 2014 revisions to Model #440 as an accreditation standard pending NAIC staff developing a recommendation for the Committee’s review. The recommendation should include how broadly the standard will apply and guidance on how the Committee should address

Attachment One



issues in the states where there is not currently an IAIG. The recommendation will be discussed during an interim conference call prior to the 2018 Spring National Meeting. The motion passed.

5. Deferred Action on Model #787 as an Addition to the Part A Accreditation Standards

Commissioner Kiser stated that the Term and Universal Life Insurance Reserve Financing Model Regulation (#787), more commonly referred to as the XXX/AXXX Model Regulation, establishes uniform, national standards governing reserve financing arrangements pertaining to term life and universal life insurance policies with secondary guarantees. Model #787 also includes provisions to ensure that funds backing these captive reinsurance transactions, which consist of primary security and other security, are held in the forms and amounts that are appropriate.

During the initial comment period in the spring, two comment letters were received from the American Council of Life Insurers (ACLI) and a joint letter from New York Life Insurance Company and Northwestern Mutual Life Insurance Company (see NAIC Proceedings – Summer 2017, Financial Regulation Standards and Accreditation (F) Committee, Attachment Two and Attachment Three).

During the recent exposure of the significant elements, which ended Oct. 2, one additional joint comment letter was received from New York Life Insurance Company and Northwestern Mutual Life Insurance Company (Attachment Three). Each of these comment letters expressed support for including Model #787 as an accreditation standard.

Mike Monahan (ACLI) stated that the ACLI supports adoption of Model #787 as an accreditation standard.

Mr. Slape stated that the effect of the covered agreement on credit for reinsurance has not yet been determined. It is widely expected that work needs to be done on the models related to credit for reinsurance. He stated it does not makes sense to adopt an accreditation standard today when there may yet be further amendments in handling the covered agreement.

In the meantime, most states have adopted Actuarial Guideline XLVIII—Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (AG 48), which ensures the states still have the protections in place that these changes were envisioned to guard against. He suggested deferring adoption of Model #787 until the change in the Credit for Reinsurance Model Law (#785) and/or Credit for Reinsurance Model Regulation (#786) is complete.

Ms. Noonan agreed with Mr. Slape. She said it does not make sense to adopt Model #787 for accreditation purposes, which, in some states, is dependent on Model #785, until after the Reinsurance (E) Task Force meets to discuss potential amendments to the model.

Mr. Slape made a motion, seconded by Mr. Rehagen, to defer the discussion of Model #787. The motion passed.

Having no further business, the Financial Regulation Standards and Accreditation (F) Committee adjourned.

W:\National Meetings\2017\Fall\Cmte\F\Draft Minutes\12-F min.docx

Attachment One

Attachment Two

2017 Revisions to NAIC Publications

© 2018 National Association of Insurance Commissioners

MEMORANDUM

TO: Commissioner Todd E. Kiser (UT), Chair, Financial Regulations Standards and Accreditation (F) Committee Elizabeth Kelleher Dwyer (RI), Vice Chair, Financial Regulations Standards and Accreditation (F) Committee

FROM: Dale Bruggeman (OH), Chair, Statutory Accounting Principles (E) Working Group Jim Armstrong (IA), Vice Chair, Statutory Accounting Principles (E) Working Group

DATE: February 2, 2018

RE: Financial Regulation Standards – As of March 2017 Accounting Practices and Procedures Manual

In 2001, the Financial Regulation Standards and Accreditation (F) Committee adopted a motion to adopt the Accounting Practices and Procedures Manual – Effective January 1, 2001, Version 1999 (AP&P Manual) as an accreditation standard. The intention of this memorandum is to update the Committee on changes the Statutory Accounting Principles (E) Working Group has made to the AP&P Manual in 2017. This memo is to provide the customary annual update regarding changes to the AP&P Manual.

Attachment A to this memo includes a detailed listing of the material changes made to the AP&P Manual in 2017. On behalf of the Working Group, it is our opinion that none of these items, either individually or collectively, should be considered “significant” as defined by the financial solvency accreditation standards. Although some of the changes have been categorized as “substantive” by the Working Group, this is not meant to suggest the modifications are synonymous with the term “significant” within the Committee’s context.

As outlined in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles (SAP Policy Statement), modifications will be made to the AP&P Manual each year. As such, it will be reprinted with an “as of” date associated with it. For example, the next printing of the AP&P Manual, which encompasses the attached modifications, will be titled Accounting Practices and Procedures Manual – as of March 2018. This process allows for an efficient way to update the AP&P Manual and virtually guarantees that users have the latest version. Reprints and updates are necessary because of the evolutionary nature of accounting—in both the statutory accounting principles and the generally accepted accounting principles arenas— and are positive for users of the AP&P Manual.

The Working Group sincerely requests that the Committee consider the items listed in Attachment A as “insignificant” changes to the AP&P Manual. We will continue to notify the Committee of any changes to the AP&P Manual and to advise if, in our opinion, those changes are “significant” by financial solvency accreditation standards.

Attachment

cc: Sara Franson, Sherry Shull, Becky Meyer, Robin Marcotte, Julie Gann, Fatima Sediqzad and Jake Stultz

Attachment Two

1

Attachment A


Summary of Changes to the As of March 2017 Accounting Practices and Procedures Manual

Included in the As of March 2018 Version

The following represents a summary of the changes that were made to the As of March 2017 Accounting Practices and Procedures Manual (Manual) to create the As of March 2018 version.

The first section summarizes substantive revisions to statutory accounting principles. Substantive revisions introduce original or modified accounting principles. Substantive revisions can be reflected in an existing SSAP or a new SSAP. When substantive revisions are made to an existing SSAP, the front of the SSAP identifies the substantive changes and effective date of the substantive revisions. If substantive revisions in an existing SSAP are depicted by underlines (new language) and strikethroughs (removed language), this tracking will not be shown in subsequent manuals. Substantively revised SSAPs and new SSAPs usually refer to a corresponding issue paper that will reflect the substantive revisions for historical purposes. If language in an existing SSAP is superseded, the superseded language is shaded, with the reader referred to the new or substantively revised SSAP. SSAPs that are completely superseded and interpretations that are nullified are included in Appendix H.

The second section summarizes the nonsubstantive revisions to statutory accounting principles. Nonsubstantive changes are characterized as language clarifications which do not modify the original intent of a SSAP, or changes to reference material. Nonsubstantive changes are depicted by underlines (new language) and strikethroughs (removed language) and will not be shown as marked in subsequent manuals. Nonsubstantive revisions are effective when adopted unless a specific date is noted within the agenda item.

The third section summarizes any revisions to the appendices in the Manual.

1. Substantive Revisions – Statutory Accounting PrinciplesSection Reference Description

SSAP No. 26R 2013-36

Removes SVO-identified instruments from the definition of a bond and provides separate statutory accounting guidance. Incorporates the definition of a “security” in the definition of a bond and defines various instruments noted in the standard.

SSAP No. 35R 2017-01 Requires discounting of long-term care guaranty fund assessments and related assets.

SSAP No. 100R 2017-24 Allows net asset value as a practical expedient to fair value, either when specifically named in a SSAP or when specific conditions exist.

2. Nonsubstantive Revisions – Statutory Accounting PrinciplesSection Reference Description

SSAP No. 1 SSAP No. 69

2017-02

Clarifies that restricted cash and cash equivalents shall not be reported as operating, investing or financing activities, but shall be reported with cash and cash equivalents when reconciling beginning and ending amounts on the cash flow statement. Requires information on restricted cash, cash equivalents and short-term investments is in the restricted asset disclosure.

SSAP No. 2R SSAP No. 26 SSAP No. 30

2017-01EP Deletes transition footnotes detailing application for the 2016 year-end and interim 2017 financial statements for money market mutual funds.

SSAP No. 2R SSAP No. 103R

2017-23 Clarifies that acquisitions and disposals of shares in money market mutual funds are not subject to the wash sale disclosure.

Attachment Two

2

Attachment A


2. Nonsubstantive Revisions – Statutory Accounting Principles (continued)Section Reference Description

SSAP No. 12 SSAP No. 104R

2017-05 Adopts with modification ASU 2016-09, Improvements to Employee Share-Based Payment Accounting and incorporates the U.S. GAAP simplifications to the accounting for share-based payments.

SSAP No. 22 2017-17 Adopts with modification ASU 2017-10, Determining the Customer of the Operation Services and clarifies the customer of service concession arrangements.

SSAP No. 26R

2016-41

Clarifies that recognized losses from other-than-temporary impairments shall be recorded entirely to either the asset valuation reserve (AVR) or the interest maintenance reserve (IMR) in accordance with the annual statement instructions.

2017-10 Expands the definition of a “bank loan” to include bank loans directly issued by a reporting entity.

2017-13 Rejects ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities and retains the “yield-to-worst” amortization methodology.

SSAP No. 30 SSAP No. 48 SSAP No. 97

2016-47 Adopts with modification ASU 2016-07, Investments-Equity Method and Joint Ventures, providing guidance for the prospective application of equity method accounting.

SSAP No. 37 2016-39 Clarifies that the scope of SSAP No. 37—Mortgage Loans includes both a “participant” and “co-lender” in a mortgage loan.

SSAP No. 43R 2017-22 Removes outdated transition guidance pertaining to the 2009 substantive revisions and updates the Question and Answer Implementation Guide.


2015-37 Incorporates limited disclosures from ASU 2015-09, Disclosures About Short-Duration Contracts, but rejects ASU 2015-09, with indication that reporting entities shall follow the statutory accounting disclosures.

SSAP No. 65 2017-11 Expands the disclosures for high deductible policies and adds a reporting threshold to an existing disclosure for unsecured high deductible recoverables.

SSAP No.68 SSAP No. 90

2017-19 Rejects five ASUs related to intangibles and incorporates guidance into SSAP No. 68—Business Combinations and Goodwill pertaining to triggering events for impairment assessment.

SSAP No. 69 2016-46 Adopts ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) with language clarifying the effective date and transition.

SSAP No. 86 2016-48 Revisions require disclosures on financing premiums in derivative

contracts for year-end 2017.

2017-04 Clarifies that variation margin changes shall not be recognized as “settlement” until the derivative contract has terminated and/or expired.


2017-14 Rejects ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and retains existing statutory disclosures.

Attachment Two

3

Attachment A


2. Nonsubstantive Revisions – Statutory Accounting Principles (continued)Section Reference Description

SSAP No. 97

2017-20 Clarifies that limited statutory adjustments are required for all foreign insurance SCA entities regardless of whether they have an audited U.S. GAAP or audited U.S. foreign GAAP financial statement.

2017-08

Extends the Sub 1 filing to 90 days after the initial acquisition or formation of an SCA, and extends the Sub 2 filing deadline to August 31, with a provision to allow a one-month deadline after the audit date for an SCA entity that regularly receives its audit report after August 31.

SSAP No. 101 2016-45 Rejects ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory.

SSAP No. 104R 2017-16 Adopts ASU 2017-09, Stock Compensation – Scope of Modification Accounting.

SSAP No. 107 2017-26 Incorporates guidance to reflect high-cost risk pool payments under the Affordable Care Act risk adjustment program as adjustments to premium.

3. Revisions to the AppendicesSection Reference Description

Appendix A

2017-09 A-010: Incorporates the 2016 Cancer Claim Cost Valuation Tables (CCCVT) into Exhibit 1 of this appendix.

2016-44

A-791: Incorporates additional language from the Life and Health Reinsurance Agreements Model Regulation (#791) to note that the reinsurance agreement shall constitute the entire agreement and that amendments are required to be signed by all parties to be effective.

Appendix B 2016-43 Clarifies that INT 01-25: Accounting for U.S. Treasury Inflation-Indexed Securities is limited to direct obligations of the U.S. government.

Appendix C

2017-01EP AG 34 AG 39

Deletes Actuarial Guideline XXXIV—Variable Annuity Minimum Guaranteed Death Benefit Reserves and Actuarial Guideline XXXIX—Reserves for Variable Annuities With Guaranteed Living Benefits from Appendix C, noting that both have not been in effect since 2009.

AG 38

Revisions in Section 8D of Actuarial Guideline XXXVIII—The Application of the Valuation of Life Insurance Policies Model Regulation establish the most recent version of the Valuation Manual as the appropriate statutory authority, and indicates in Section 8E that policies issued after Jan. 1, 2013, that are being valued under PBR are no longer subject to AG 38.

AG 48 2017

Valuations AG 49

Revisions to Actuarial Guideline XLVIII—Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (Model 830) clarifies that the 2017 CSO mortality table is to be used for all years of issue when applying the actuarial method as required by Section 6 of the Term and Universal Life Insurance Reserve Financing Model Regulation (#787). Revisions to Actuarial Guideline XLIX—The Application of the Life Illustrations Model Regulation to Policies With Index-Based Interest clarify that effective March 1, 2017, Section 4 and Section 5 shall be effective for all in-force life insurance illustrations on policies within the scope of AG 49, regardless of the date the policy was sold.

Attachment Two

4

Attachment A


3. Revisions to the Appendices (continued)Section Reference Description

AG 51 New Actuarial Guideline LI—The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserve requires performing stand-alone asset adequacy analysis of long-term care blocks.

Appendix D

Rejected as Not Applicable to Statutory Accounting:

2017-06 ASU 2017-02, Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity

2017-07 ASU 2017-03, Amendments to SEC Guidance

2017-15 ASU 2013-08, Financial Services – Investment Companies – Amendments to the Scope, Measurement, and Disclosure Requirements

Appendix E

2017-27

Issue Paper No. 143R—Guaranty Fund Assessments documents substantive revisions adopted to SSAP No. 35R—Guaranty Fund and Other Assessments related to assessments for insolvencies of entities that wrote long-term care insurance.

2013-36

Issue Paper No. 156—Bonds documents substantive revisions to SSAP No. 26—Bonds to remove SVO-identified instruments from the definition of a bond, incorporate the definition of a “security” in the definition of a bond, and to define various instruments noted in the standard.

2017-24

Issue Paper No. 157—Use of Net Asset Value documents substantive revisions to SSAP No. 100—Fair Value to allow net asset value per share as a practical expedient to fair value, either when specifically named in a SSAP or when specific conditions exist.

Appendix F

2010-08 NAIC Policy Statement on Coordination with the Valuation Manual

2016-13 NAIC Policy Statement on Coordination of the Accounting Practices and Procedures Manual and the Purposes and Procedures Manual of the NAIC Investment Analysis Office

Appendix G No revisions impacting this appendix were adopted in 2017.

Appendix H 2017-29

INT 17-01: Extension of Ninety-Day Rule for the Impact of Hurricane Harvey, Hurricane Irma and Hurricane Maria allowed an optional, temporary 60-day extension of the normal 90-day rule pertaining to premium receivables for policies impacted by the noted hurricanes. INT 17-01 was effective immediately and was nullified Feb. 16, 2018.

G:\DATA\Stat Acctg\1. Statutory\E. Referrals\2018\2017 Accreditation Memo.doc

Attachment Two

5

Attachment Two

6


MEMORANDUM

TO: Honorable Todd E. Kiser, Chair Financial Regulation Standards and Accreditation (F) Committee

FROM: Jake Garn, Utah Chief Financial Examiner, Chair Blanks (E) Working Group

DATE: January 19, 2018

RE: Items Affecting the Current Accreditation Standard

Please find attached a list of items adopted by the Blanks (E) Working Group during 2017. The Working Group adopts numerous changes to the Annual Statement Blanks and Instructions each year. Most of the changes are made to clarify current requirements or are considered enhancements to existing reporting. The changes adopted in 2017 do not represent a substantive change to any reporting requirements.

I am planning to be present when the Financial Regulation Standards and Accreditation (F) Committee meets in Milwaukee, WI, in the event any member of the Committee wishes to discuss these issues.

Attachment Two

7

Changes to blanks and instructions adopted during 2017

1. Add instructions for the life insurance policy locator contact to Jurat electronic only section. Property and Title areincluded because the Jurat page and instructions are uniform or all statement types (2016-29BWG) Effective12/31/2017.

2. Modify instructions for Long-Term Care Insurance Experience Reporting Form 5 to indicate a Grand Total pageshould be filed. Add crosschecks to Columns 1, 2 and 3 to Form 2, Part C and Form 3 (2016-30BWG) Effective12/31/2017.

3. Reduce the number of collateral type categories from 21 to 10 on the Schedule D, Part 1 and to also add moreexplanations and examples to the categories (2016-31BWG) Effective 12/31/2017.

4. Split the Cybersecurity and Identity Theft Insurance Coverage Supplement blank into three parts (interrogatories,stand-alone policies and packaged policies). Add interrogatory questions to better indicate if a company writescertain types of cybersecurity and identity theft business. Clarify in the instructions who should be completing thesupplement. Add information on claims open, closed with payment and closed without payment (2016-32BWG)Effective 12/31/2017.

5. Modify the appropriate instructions and blank pages to reflect the movement of money market mutual funds frombeing reported on Schedule DA, Part 1 to being reported on Schedule E, Part 2. Change the title for Schedule EVerification to include the reference to Part 2 and add a column to the annual verification for money market mutualfunds (2016-33BWG) Effective 12/31/2017.

6. Modify the illustration for Note 12A(3) - Retirement Plans, Deferred Compensation, Postemployment Benefits andCompensated Absences and Other Postretirement Benefit Plans (Defined Benefit Plan) (2016-34BWG) Effective12/31/2017.

7. Combines the current Schedule F, Parts 3, 4, 5, 6, 7 and 8 into a single new Schedule F-Part 3-Ceded Reinsurance,modify the crosscheck references for Lines 13 and 16 of the Liability Page to reflect the changes to Schedule F andmake changes to Schedule F Part 1 to eliminate the under $100,000 aggregation for consistency with the changes toSchedule F, Part 3. In addition changes for consistency are being made to the Schedule F, Part 3 Supplement forproperty, Schedule F instruction and blank for the Health Property Supplement and Schedule F, Parts 1 and 2 of theLife Workers’ Compensation Carve-out Supplement as these schedules are based on similar schedules in Schedule Fof the property statement (2016-35BWG) Effective 12/31/2018.

8. Delete the Health Property Supplement instructions and blank pages. Update the Supplemental Exhibits andSchedules Interrogatories to reflect the deletion (2017-01BWG) Effective 12/31/2017.

9. For Column 34, Capital Structure Code on Schedule D, Part 1, replace the description of “Other” for Code 4 with“Not Applicable” (2017-02BWG) Effective 12/31/2017.

10. Modify the CUSIP column for Schedules BA and DL and add a ISIN Column to Schedule DL for consistency withchanges made to Schedule D. Add additional header for Schedule DL so it is easier to identify which schedulereflect securities included in other investment schedule and which reflects one line reporting (2017-03BWG)Effective 12/31/2017.

11. For 2017 P&C Statement of Actuarial Opinion and Actuarial Opinion Summary instructions, the changes includeclarifications on current requirements. For 2017 Title Statement of Actuarial Opinion instructions, the changesinclude incorporation of the same changes made to the 2016 and proposed 2017 instructions for the P&C Statementof Actuarial Opinion (2017-04BWG) Effective 12/31/2017.

12. Add clarification to the line of business definitions for property and health for determining what line of business toreport riders, endorsements and floaters. Also add clarification to the Analysis of Operation by Lines of Businessinstructions for life, heath and fraternal (2017-05BWG) Effective 12/31/2017.

13. Add additional definitions to the property line of business definitions in the appendix of the instructions for AnnualStatement Lines 9, 15, 17 and 34 (2017-06BWG) Effective 12/31/2017.

14. The change incorporates the Valuation Manual requirements regarding the Appointed Actuary, Qualified Actuaryand the Actuarial Opinion into the Actuarial Opinion instructions. It also references the 2009 amendments to theStandard Valuation Law (#820), which authorizes the Valuation Manual (2017-08BWG) Effective 12/31/2017.

15. Modify the instructions to reflect changes to NAIC Valuation of Life Insurance Policies Model Regulation (#830).Modify some of the column header descriptions in Part 1. Add additional columns to Part 1, 2A, and 2B and removecolumns form 2A and 2B to allow room on the page for the columns added. Modify the lines used on Part 3 (2017-09BWG) Effective 12/31/2017.

Attachment Two

8

16. Remove the definition for notional amount from the Schedule DB General Instructions, Schedule DB, Part AGeneral Instructions and replace with the definition of notional amount adopted by the Statutory AccountingPrinciples Working Group for SSAP No. 86—Derivatives in the general instruction for Schedule DB. Modify theinstruction for the Notional Amount Column for Schedule DB, Part A and Part B (2017-10BWG) Effective12/31/2017.

17. Modify the instructions and illustrations for Note 5A(4) and 5A(5) to reflect additional disclosures required bySSAP No. 37—Mortgage Loans (2017-11BWG) Effective 12/31/2017.

18. Add a code to the Code Column to allow designation of SVO Identified Funds for valuation using systematic valueand make the appropriate modifications to the instructions for the Book Adjusted/Carrying Value Column, theUnrealized Valuation Increase/(Decrease) Column and the Current Year’s (Amortization)/Accretion Column forSchedule D (Parts 1, 4 and 5) and Schedule DA (Part 1). Also add additional disclosure to Note 1C for mandatoryconvertible securities, and SVO-identified investments (2017-12BWG) Effective 12/31/2017.

19. Remove the repurchase agreement and reverse repurchase agreement disclosures from Note 5E and add newdisclosures for them as 5F through 5I and renumber the remaining Note 5 disclosures accordingly. The illustrationsfor 5F through 5I will be data captured. Also Note 17B(5) and 17B(7) instructions will be modified to removereferences to repurchase agreements and reverse repurchase agreements (2017-13BWG) Effective 12/31/2017.

20. Modify the current illustration for Note 31, High Deductibles and data capture. Add additional illustration to Note31 also for data capture (2017-14BWG) Effective 12/31/2017.

21. Add additional disclosure item to Note 25, Change in Incurred Losses and Loss Adjustment Expenses (life, health,property, fraternal and title) and Note 32 Discounting of Liabilities for Unpaid Losses or Unpaid Loss AdjustmentExpenses (property) (2017-15BWG) Effective 12/31/2017.

22. Add new disclosure to Note 14, Liabilities, Contingencies and Assessments for Long-Term Care insolvenciesrelated guaranty funds liabilities and assets. The new illustration for the disclosure will be data captured (2017-16BWG) Effective 12/31/2017.

23. Add a new line B10 to the bond section of the Cash from Investments Worksheet in the Cash Flow Statementinstructions; renumber the remaining lines in the bond section (B10 and B11) and update the formula for the existingling B11 to reflect the line addition (2017-17BWG) Effective 1/1/2018.

24. Move the total count of “L” (and “D” for property) status codes provided for Column 1 of Schedule T to footnoteand provide in the footnote a count for each status provided in Column 1. Add a crosscheck to ensure a status isprovided for each jurisdiction on Lines 1 through 57 (2017-18BWG) Effective 1/1/2018.

25. Add a question to the General Interrogatories, Part 2 to help identify insurers that assume reinsurance businesscovering risks in at least two states (2017-19BWG) Effective 1/1/2018.

26. Add question to the General Interrogatories Part 1 to determine if the reporting entity is part of a publicly tradedgroup. Add clarifying instruction to Schedule Y, Part 1A when a Central Index Key (“CIK”) is provided. Addcrosscheck between Column 6 and Column 7 of Schedule Y, Part 1A to ensure that when data is provided for one itis provided for the other (2017-20BWG) Effective 1/1/2018.

Attachment Two

9

Attachment Two

10

MEMORANDUM

TO: Todd E. Kiser , Chair Financial Regulation Standards and Accreditation (F) Committee

FROM: David Altmaier, Chair Capital Adequacy (E) Task Force


RE: Accreditation Standards – Changes to the RBC Formulas and Instructions for Life and P/C

Attached please find a brief description of changes to the 2017 Risk-Based Capital Report Including Overview and Instructions for health, life and property/casualty (P/C). These changes were adopted by the Capital Adequacy (E) Task Force and Executive (EX) Committee and Plenary in 2017. Significance of these changes was viewed as it relates to the overall risk-based capital (RBC) standard.

No changes to the RBC formulas or instructions were deemed to be significant for health, life or P/C.

Any questions can be directed to NAIC staff: P/C – Eva Yeung Life – Dave Fleming Health — Crystal Brown

Health RBC Formula

Not Significant Additional guidance was added to the excessive growth charge on page XR021 to allow for the use of projected amounts in Line (13) and Line (15) for start-up companies.

Not Significant The money market mutual funds (MMMFs) will be isolated on their own line on the Miscellaneous Fixed Income Assets section and subtracted from the cash equivalents due to the reclassification of MMMFs to cash equivalents by the Statutory Accounting Principles (E) Working Group. Also, the factor for non-government money market funds reported in XR009 was changed to 0.000 to avoid double-counting.

Not Significant The operational risk for informational only page was modified to include only the growth risk portion, and the basic operational risk charge was moved to the Calculation of Total Risk-Based Capital After Covariance on page XR025 as an “add-on” approach with a 0% charge.

Not Significant The factors for Supplemental Benefits within Stand-Alone Medicare Part D Coverage reported in XR014, Line (22.1) was increased to 0.500.

Not Significant A tiered factor approach was developed for stop loss. This new approach will be applied to Line (22) on page XR014.

Life RBC Formula

Not Significant A line was added to LR034 Risk-Based Capital Level of Action to show the Authorized Control Level RBC ratio.

Not Significant Instructional changes were made to LR036 XXX/AXXX Reinsurance Primary Security Shortfall by Cession to clarify the cessions that are to be included in this schedule.

Attachment Two

11

Not Significant The operational risk for informational only page was modified to include only the growth risk portion, and the basic operational risk charge was moved to the Calculation of Authorized Control Level Risk-Based Capital on page LR031 as an “add-on” approach with a 0% charge.

Not Significant The MMMFs will be isolated on their own line on the Miscellaneous Assets schedule and subtracted from the cash equivalents due to the reclassification of MMMFs to cash equivalents by the Statutory Accounting Principles (E) Working Group. Also, the factor for non-government money market funds reported in LR005 was changed to 0.000 to avoid double- counting.

Not Significant A tiered factor approach was developed for stop loss. This new approach will be applied to Line (9) on page LR019.

Not Significant The factors for Supplemental Benefits within Stand-Alone Medicare Part D Coverage reported in LR019, Line 5 and Line 14 were increased to 0.500.

P/C RBC Formula

Not Significant The calculation of the RBC charge for the ownership of investment affiliates (affiliate Type 7) will be simplified by applying a fixed 22.5% times the book-adjusted carrying value (BACV) of the common stocks, preferred stocks and bonds.

Not Significant The operational risk for informational only page was removed, and the “add-on” approach for basic operational risk with 0% charge was added to page PR032.

Not Significant A tiered factor approach was developed for stop loss. This new approach will be applied to Line (9) on page PR019.

Not Significant The MMMFs will be isolated on their own line on the Miscellaneous Assets schedule and subtracted from the cash equivalents due to the reclassification of MMMFs to cash equivalents by the Statutory Accounting Principles (E) Working Group. Also, the factor for non-government money market funds reported in PR007 was changed to 0.000 to avoid double-counting.

Not Significant The catastrophe risk component was adopted to become part of the formula for 2017. Also, a clarifying change was made to the interrogatory that provides insurers with little or no exposure to earthquake or hurricane risk to obtain exemption from reporting catastrophe risk.

Not Significant The factors for Supplemental Benefits within Stand-Alone Medicare Part D Coverage reported in PR019, Line 3.2 and Line 10.2 were increased to 0.500.

Not Significant An updated review of the PR017 and PR018 Line 4 Underwriting Risk factors using the revised methodology was completed by the American Academy of Actuaries (Academy). The Property and Casualty Risk-Based Capital (E) Working Group agreed to update the factors based on scenario #1 (10% capped) of the Academy report. The factors will be re-evaluated again and are expected to reach the fully proposed values in next four years.

Not Significant The PR017 and PR018 Line 1 industry average development factors were updated.

Attachment Two

12

MEMORANDUM

TO: The Financial Regulation Standards and Accreditation (F) Committee

FROM: Susan Bernard, Chair, Financial Examiners Handbook (E) Technical Group

DATE: January 31, 2018

SUBJECT: Consideration for Financial Accreditation Standards 2018 Financial Condition Examiners Handbook

The Accreditation Program Manual includes Review Team Guidelines to be used for financial examinations performed using the risk-focused surveillance approach that is found in the NAIC Financial Condition Examiners Handbook (Handbook). This memorandum is to update the Financial Regulation Standards and Accreditation (F) Committee on changes that the Financial Examiners Handbook (E) Technical Group has made to the Handbook during 2017.

Modifications are made to the Handbook each year, and a new edition is printed annually. This process allows for an efficient way to update the Handbook and ensures that users have the latest version. The Technical Group made several changes to the Handbook in 2017. It is the Technical Group’s opinion that just one of these changes should be considered “significant” for accreditation purposes. The Technical Group defined “significant” as a change that may immediately warrant a change to at least one accreditation standard or the Review Team Guideline(s) for said standard. Although the Technical Group has categorized some changes as “significant,” this is not meant to suggest the modifications are synonymous with the term “significant” within the Financial Regulation Standards and Accreditation (F) Committee context.

During 2017, the Technical Group made the following changes:

Significant Changes to the Handbook Affecting Accreditation Standards and/or Review Team Guidelines:

• Revised guidance related to the use of a specialist to include the requirement that an actuarial specialist beused when the company under examination has a substantial amount of business subject to principle-based reserve (PBR) calculations or exclusion tests.

As a result of these revisions, the Technical Group would advise accreditation to consider revising theguideline pertaining to Accreditation Standard C: Use of Specialists regarding situations in whichspecialists are required to be used. The Technical Group would suggest the following language be used toreflect this change in the accreditation manual:

(Actuarial): Credentialed actuaries should be involved on all life/health company examinations where thecompany has a substantial amount of interest-sensitive business or with a substantial amount of businesssubject to principle-based reserve (PBR calculations or exclusion tests and on all property/casualty (P/C)examinations where the company has a substantial amount of long-tail lines of business.

Other Changes to the Handbook:

• Revised the definitions for the Credit and Operational Branded Risk Classifications to differentiate thetwo classifications and to clarify the type of risks that would apply to each classification.

Attachment Two

13


• Added a reference to the Own Risk and Solvency Assessment (ORSA) Information Sharing BestPractices document to assist examiners in evaluating whether ORSA-related information can be sharedwith other state insurance regulators.

• Revised Exhibit A – Examination Planning Questionnaire to ensure consistency with the related analysisand accreditation guidance that requires the examiner and analyst to meet via conference call or in personduring examination planning. Email communication is not sufficient for this purpose.

• Revised Exhibit B – Examination Planning Procedures Checklist to clarify that if the company hasalready provided the insurance department with the requested information, the company can indicate thedate the item was provided and to whom on the checklist, in lieu of resubmitting the information request.

• Added guidance to incorporate specific revisions that should be included in affiliated service agreements.

• Enhanced information technology (IT) guidance, including:

o Revised IT review narrative guidance to include considerations related to evaluating a company’sintegration of cybersecurity risk into its enterprise risk management (ERM) function, evaluatingemployee training and evaluating a company’s vulnerability management process.

o Added additional requests to the IT planning questionnaire related to a company’s cybersecuritypolicies.

o Added narrative guidance to Exhibit C, Part Two related to state insurance regulator use of third-party work during an IT review.

o Added procedures related to third-party access, vulnerability management, multi-factorauthentication and various other cybersecurity topics to Exhibit C, Part Two - IT Work Program.

• Revised the Reinsurance – Assuming, Reinsurance – Ceding, and Related Party exam repositories toensure appropriate risks and procedures were included. Minor related revisions were made to the Capitaland Surplus and Investments Repositories to ensure consistency.

• Added guidance related to special considerations when examining insurers in run-off situations.

• Added guidance for transferring regulatory information between states when an insurance companyredomesticates.

• Clarified guidance regarding which states belonging to a holding company group are responsible forcompleting Exhibit Z, Part 2D – Exam Coordination.

• Revised various information requests on Exhibit E – Audi Review Procedures to clarify that the examinershould obtain documentation for the most recent year of the examination period and only seek additionalyears if warranted.

• Added various revisions to incorporate principle-based reserving into the Handbook, including:

o Added a new section of guidance that provides an overview of life insurance reserves, includingan explanation of the differences between formula-based and principle-based reserves;

o Updated the Reserves/Claims Handling – Life exam repository to include consideration of PBR-related risks and possible test procedures.

o Revised Exhibit M – Understand the Corporate Governance Structure to include consideration ofmanagement oversight of the actuarial function.

o Revised Exhibit Y – Examination Interviews to include sample questions related to the actuarialfunction.

Attachment Two

14


The Technical Group sincerely requests that the Committee consider the items listed above as insignificant changes to the Handbook. We will continue to notify the Committee of any changes to the Handbook and also advise if, in our opinion, those changes are “significant” by accreditation expectations.

W:\National Meetings\2018\Spring\Cmte\F\Open\Revisions to 2018 Exam HB for Accreditation.docx

Attachment Two

15

Attachment Two

16


MEMORANDUM

TO: Financial Regulation Standards and Accreditation (F) Committee

FROM: Kevin Fry, Chair, Valuation of Securities (E) Task Force Bob Carcano, Senior Counsel, Investment Analysis Office, NAIC

CC: Dan Daveline, Director, NAIC Financial Regulatory Services Charles Therriault, Director, NAIC Securities Valuation Office


RE: Report of the Valuation of Securities (E) Task Force ____________________________________________________________________________________________________

A. Purpose – This report is presented to assist the Financial Regulation Standards and Accreditation (F) Committee todetermine if amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual)adopted by the Valuation of Securities (E) Task Force in 2017 require corresponding changes in either the FinancialRegulation Standards (defined below) or state laws or regulations adopted in conformity with Part A: Laws and Regulationsof the Financial Regulation Standards.

B. Financial Regulation Standards – The NAIC Policy Statement on Financial Regulation Standards (SFRS) in the2017 Accreditation Program Manual consists of four parts: 1) Part A identifies laws and regulations deemed necessary tofinancial solvency regulation; 1 2) Part B identifies regulatory practices and procedures that supplement and supportenforcement of the financial solvency laws and regulations discussed in Part A;2 3) Part C contains three standards related toan insurance department’s organizational and personnel policies; and 4) Part D focuses on organization, licensing and changeof control of domestic insurers. This report is concerned with the financial solvency standards in Part A. Those standardsrelevant to this report are shown immediately below and can be characterized as NAIC model legislation, codified NAICguidance (i.e., the Accounting Practices and Procedures Manual [AP&P Manual]): analytical work product of the NAICstaff (including the NAIC Investment Analysis Office), and state laws and regulations that contain substantially the samestandards as NAIC model legislation or guidance. A review indicates that the work product of the NAIC Investment AnalysisOffice (IAO) is directly or indirectly incorporated into the following Part A standards. For example:

Standard 5 – This standard requires that insurer-owned securities be valued in accordance with the standardspromulgated by the NAIC IAO;3

Standard 2 – The Risk-Based Capital (RBC) for Insurers Model Act (#312)4 assigns RBC factors for securities based ontheir credit risk as measured by NAIC designations;

Standard 3 – The AP&P Manual5 uses NAIC designations produced by the Securities Valuation Office (SVO) or byinsurers through the filing exempt (FE) process and/or price grids produced by the Structured Securities Group (SSG) toidentify valuation rules applicable to an investment and the reserved capital amount the insurer must report;

Standard 8 – This standard pertains to state investment regulations that often incorporate NAIC mechanisms that relateasset allocations to credit risk expressed in the form of NAIC designations;6 and

Attachment Two

17


Standard 10 – The Credit for Reinsurance Model Act (#785)7 identifies insurer-owned securities compiled by the SVOinto a List of Investment Securities published quarterly in the NAIC Automated Valuation Service Plus (AVS+)product, and letters of credits (LOC) issued by the banks on the NAIC Bank List administered by the SVO, as eligiblefor use as collateral in reinsurance transactions.

C. Investment Analysis Office Standards Identified in the P&P Manual – All SVO and SSG standards related tothe assessment of credit risk in insurer-owned securities, identification of additional non-payment risk in securities,classification of certain assets as bonds or as bond-like for reporting purposes, the valuation of insurer-owned securities, andother activities conducted by the SVO or the SSG in support of state insurance regulatory objectives are determined andpromulgated by the Valuation of Securities (E) Task Force and published in the P&P Manual. In 2017, the P&P Manual wasrevised once, in December, with all policies, analytical procedures and instructions adopted during 2017 effective for year-end financial reporting. Amendments to the P&P Manual would automatically be reflected in the SFRS if any or all of theSFRS standards identified in paragraph A of this memorandum have been adopted by an accredited state or incorporated byreference into the laws or regulations of an accredited state. For example, amendments to the P&P Manual would be directlyincorporated by reference if the laws or regulations of an accredited state refer to or incorporate Standard 5 on valuation.Amendments to the P&P Manual would be indirectly incorporated by reference if the law or regulations of a state refer to orincorporate any other standard that itself uses NAIC designations or other analytical products of the IAO as a component—for example, Standard 2 in the case of RBC and/or Standard 3 in the case of statutory accounting.

D. Conclusion – In our opinion, reasoning as discussed above, amendments to the P&P Manual adopted by theValuation of Securities (E) Task Force in 2017 can be characterized as maintenance items consistent with the existingregulatory framework and automatically incorporated into the Part A Standards identified above. In addition, the amendmentsidentified in Attachment One did not create processes or practices external to the P&P Manual or other NAIC modellegislation, guidance or analysis of NAIC staff that would suggest the need to consider an amendment to NAIC modellegislation or guidance or legislative action on the part of an accredited state.

We hope this is responsive to the issues and concerns before the Committee.

Attachment Two

18


Attachment One

RECENT CHANGES TO THE PURPOSES AND PROCEDURES MANUAL OF THE NAIC INVESTMENT ANALYSIS OFFICE

Published in the Dec. 31, 2017, Publication

Transfer of Valuation Instructions for Subsidiary, Controlled or Affiliated (SCA) Investments – The instructionsfor valuation of SCA investments were deleted from Part Five, Section 2 of the Purposes and Procedures Manual of theNAIC Investment Analysis Office (P&P Manual) and moved to Exhibit A of Statement of Statutory Accounting Principles(SSAP) No. 97—Investments in Subsidiary, Controlled and Affiliated Entities. The deletion of the valuation instructionsfor SCA investments was accompanied by a decision of the Valuation of Securities (E) Task Force to transfer oversightof this activity from the Task Force and the Securities Valuation Office (SVO) to the Statutory Accounting Principles (E)Working Group and the Financial Regulatory Services Division.

The Valuation of Securities (E) Task Force adopted this amendment on Feb. 22, 2017.

References to the Integrated Securities Information System (ISIS) Removed – The NAIC has implemented a newcomputer platform for the SVO called VISION. The Task Force adopted an amendment to delete references andinformation related to ISIS from Part One, Section 2 (g) and Part Two, Section 1, Section 6, Section 7 and Section 9 ofthe P&P Manual. In lieu of adding information to the P&P Manual about VISION, a link has been added to guide usersto information about VISION, which is now stored on the VISION platform.


Description of Nationally Recognized Statistical Rating Organization (NRSRO) Status of Credit Rating Providers(CRPs) on the NAIC CRP List – The Task Force adopted a revised format to identify the CRPs that provide creditrating services to the NAIC and new text to describe the credit rating categories for which each CRP has registered as anNRSRO under the federal Securities Exchange Act of 1934.


Replacement of the Bank List – The Reinsurance (E) Task Force and the Valuation of Securities (E) Task Force agreedto reformulate the Bank List concept into an expanded List of Qualified U.S. Financial Institutions (Issuers of Letters ofCredit as Collateral in Reinsurance Arrangements). The reformulation reflects a desire to bring the List into compliancewith the NAIC Credit for Reinsurance Model Law (#785). Anyone interested in this activity should read the new PartSix, Section 1 through Section 6 in their entirety.

The Valuation of Securities (E) Task Force adopted the proposed amendment describing the reformulated procedure onJune 8, 2016, effective Jan. 1, 2017. The effective date was subsequently postponed to July 1, 2017, to permit the SVO tofinalize preparations on systems and procedures for the new activity. The Task Force adopted an amendment thatcontained editorial changes to the initially adopted text on May 18, 2017, and on June 15, 2017, adpted an SVOproposed amendment to the text describing the SVO’s monitoring function. As amended, the procedure described in thisManual was implemented on July 1, 2017.

Transfer of the Special Reporting Instruction from SVO Auspices to a General Interrogatory – The SpecialInstruction in Part Two, Section 5 of the P&P Manual permitting the use of NAIC 5* and NAIC 6* designations incertain certification procedures has been removed from the auspices of the SVO, at its request, and transferred to aGeneral Interrogatory. The Special Instruction is commonly referred to as the “five star/six star rule.” Certificationprocedures permitted an insurer to obtain the regulatory treatment associated with NAIC 5 or NAIC 6 designations for asecurity if the insurer certified that it could not provide an Audited Financial Statement to the SVO to permit theproduction of an analytically determined NAIC designation in situations requiring an SVO determined designation orthat it could not obtain a credit rating for a filing exempt (FE) security. Part Two, Section 5 has been amended to reflectthe change described above.

The Valuation of Securities (E) Task Force adopted this amendment on Aug. 1, 2017.

Attachment Two

19

Amendment Adds Filing, Documentation and Analytical Methodology Instructions for Power Generation andRenewable Energy Projects – The Task Force adopted a new methodology and related instructions to provide greatertransparency and to modernize analytical approaches to power generation and renewable energy projects. Themethodology is located in a new Part Three, Section 7. Documentation instructions are contained in a new Part Two,Section 10 (c) (i) (H).

The Valuation of Securities (E) Task Force adopted this amendment on Aug. 7, 2017.

Production of NAIC Designations for FE and Securities Subject to Private Letter (PL) Ratings Transferred to theSVO – Text was deleted and other text modified and consolidated into a single procedure to govern the assignment ofNAIC designations to FE securities by the SVO. The procedure includes a new process to verify that credit ratings havebeen assigned to securities subject to PL rating. The amendment retains and extends the existing FE rule and process tosecurities subject to private ratings, modifies the definition of the administrative symbol FE, and adds a new PL symboland definition for securities subject to private rating letters.

The Valuation of Securities (E) Task Force adopted this amendment on Nov. 13, 2017.

Text Giving the SVO Authority to Ignore the Credit Rating of NAIC Credit Rating Providers When ProducingNAIC Designations is Deleted – Part One, Section 4 (c) (iv) of the P&P Manual was amended to delete a clause thatgave the SVO discretion to ignore the ratings of any NAIC CRP when translating credit ratings into NAIC designations.


Text Giving the SVO Authority to Require an Insurer to File a Security Rated by an NAIC CRP for Evaluation isDeleted – Part Two, Section 4 (d) (i) of the P&P Manual was deleted. The clause provided that the SVO had authority torequire insurers to file any FE security with the SVO.


Z Rule is Modernized, and a New Carryover Procedure is Adopted – The Z Rule has been revised to permit insurersto identify all securities transitioning from one filing status to another. For example, an FE security may transition to asecurity eligible to be filed with the SVO if NAIC CRPs withdraw assigned credit ratings. Under the previous rule, aninsurer could also self-designate a security properly filed with the SVO but not designated by the SVO by year-end. Anew procedure was developed to address this situation. Under the procedure, the SVO would assign the symbol “YE” toall annual updates and extend their designation for the new-year. All properly filed initial filings would be assigned thesymbol “IF” and the insurers would self-designate IF securities. The SVO would then prioritize the analysis of thiscarryover population of “YE” and “IF” securities and remove the symbols when a designation is assigned and publishedin Automated Valuation Service Plus (AVS+). The SVO would also report the carryover list to the Task Force todetermine if additional resources, if any, are needed.


Amendment Clarifying SVO Authority to Assign NAIC Designations to Schedule BA Private Funds is Adopted –New text was added to Part Three, Section 5 (b) of the P&P Manual to provide a definition for fixed income andpreferred stock like Schedule BA assets. The definition clarifies that: 1) a Schedule BA fixed or variable rate asset hasthe underlying characteristics of a bond or other fixed income instrument if it has a stated maturity and a fixed or floatingcoupon rate; and 2) a joint venture, partnership or limited liability company has the underlying characteristics of a fixedincome instrument if it predominantly holds debt (or loans) and receives a public rating with annual surveillance from anNAIC CRP, or is designated by the NAIC through the application of a weighted average rating factor (WARF)methodology that takes into account the NAIC designation and/or the CRP assigned to the underlying investments.


END NOTES


Attachment Two

20

1 “… The purpose of the Part A: Laws and Regulations standards are to assure that an accredited state has sufficient authority to regulate the solvency of its multistate domestic insurance industry in an effective manner. … A state may demonstrate compliance with a Part A standard through a law, a regulation, an established practice, which implements the general authority granted to the state or any combination of laws, regulations or practices, which achieves the objective of the standard …” 2014 Accreditation Program Manual. “…For those standards included in the Part A … where the term ‘substantially similar’ is included, a state must have a law, regulation, administrative practice or a combination of the above that addresses the significant elements included in the NAIC model laws or regulations. ...” Accreditation Interlineations (Substantially Similar)

2 “ … Part B sets out standards required to ensure adequate solvency regulation of multistate insurers … In addition to a domestic state’s examination and analysis activities, other checks and balances exist in the regulatory environment. These include … analyses by NAIC’s staff, … and to some extent the evaluation by private rating agencies …” 2014 Accreditation Program Manual

3 The SFRS requires that securities owned by insurance companies be valued in accordance with standards promulgated by the NAIC’s Capital Markets and Investment Analysis Office approved by the Valuation of Securities (E) Task Force while other invested assets should be valued in accordance with procedures promulgated by the Financial Condition (E) Committee. The Investment Analysis Office refers to two independent staff functions: i.e., that of the SVO and that of the NAIC Structured Securities Group (SSG). The SSG was formally established as an NAIC staff function in 2013 and assumes responsibility for the conduct of the year-end financial surveillance of insurer-owned residential mortgage-backed securities (RMBS) and commercial mortgagebacked securities (CMBS) conducted by the SVO since 2009. The SSG is also presumptively the segment of NAIC professional staff that would lead assessment of structured finance products generally.

NAIC valuation procedures, applicable to corporate, municipal and asset-backed securities (ABS), are contained in Part Five of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual). These procedures seek to identify a market value and, in certain circumstances, to require the use of a market value. Insurance companies either report the fair value determined by the SVO for a security or determine a fair value in accordance with one of the valuation methodologies described in the P&P Manual. The fair value determined in accordance with the P&P Manual is reported in the fair value column, and the book/adjusted carrying value (BACV) column of the NAIC financial annual statement blank. In addition, the Annual Statement Instructions require insurers to report a fair value, so that even an insurer entitled to use amortized value in the “Book/Adjusted Carrying Value” column must use fair value in the “Rate Used to Report Fair Value” column.

The financial modeling process administered by the SSG generates intrinsic price values (referred to as price grids) for RMBS and CMBS instead of an NAIC designation. These standards are contained in Part Seven of the P&P Manual. price grids are used by insurers to generate NAIC designations in accordance with procedures specified in paragraph 25 of Statement of Statutory Accounting Principles (SSAP) No. 43R—Loan-Backed and Structured Securities of the NAIC Accounting Practices and Procedures Manual (AP&P Manual). Accordingly, to the extent that the AP&P Manual is incorporated by reference in any standard, price grids and NAIC designations derived by reference to them would also be incorporated.

4 The SFRS requires the adoption of the Risk-Based Capital (RBC) for Insurers Model Act (#312) or a substantially similar law or regulation. RBC factors are tied to NAIC designations assigned by the SVO or in certain cases—for example, in the case of mortgage referenced aecurities—by the SSG; NAIC designations assigned by insurance companies pursuant to the filing exempt rule contained in the P&P Manual or NAIC designations derived by insurance companies for RMBS and CMBS from price grids produced by the SSG pursuant to paragraph 25 of SSAP No. 43R. “… This standard does not articulate a threshold level for minimum capital and surplus required for insurers to transact business ... Risk-based capital will, however, effectively require minimums when adopted by states.” Accreditation Interlineations – Financial Regulation Standards

5 The SFRS requires the use of the codified version of the Accounting Practices and Procedures Manual. Valuation procedures applicable to long-term invested assets are determined by the nature of the insurer (life or property/casualty) and the NAIC designation assigned to the security by the SVO or SSG; NAIC Designations assigned by insurance companies pursuant to the filing exempt rule contained in the Purposes and Procedures Manual or NAIC Designations derived by insurance companies for RMBS and CMBS from price grids produced by the SSG pursuant to paragraph 25 of SSAP No. 43R. “ … To satisfy this standard, … specific adoption of the NAIC Annual Statement Blank, NAIC Annual Statement Instructions, and the NAIC Accounting Practices and Procedures Manual [is required] … .” Accreditation Interlineations – Financial Regulation Standards

6 The SFRS requires a diversified investment portfolio. Although the Investments of Insurers Model Act (Defined Limits or Defined Standards) (#280)is not specifically identified, portions of one or the other model acts have been adopted by many of the states, and these relate specific asset allocations to NAIC designations provided by the SVO or, in some cases, by the SSG; NAIC designations assigned by insurance companies pursuant to the filing exempt rule contained in the P&P Manual or NAIC designations derived by insurance companies for RMBS and CMBS from price grids produced by the SSG pursuant to paragraph 25 of SSAP No. 43R. “ … This standard … [will require] that statutes, together with related regulations and administrative practices, provide adequate basis … to prevent, or correct, undue concentration of investment by type and issue and unreasonable mismatching of maturities of assets and liabilities. The standard is not interpreted to require an investment statute that automatically leads to a fully diversified portfolio of investments.” Accreditation Interlineations – Financial Regulation Standards

The NAIC Investment of Insurers Model Act (Defined Limits Version) (# 280) imposes a 3% limit on the amount an insurer can invest in a single person (the threshold diversification limit) and also imposes a percentage limit on total investments of a defined credit quality, expressed by reference to NAIC designation categories (the threshold credit quality limit). An additional percentage limit is then assigned to specific asset categories, which may or may not be subject to adjustment with the two threshold requirements. The limits identified in Model #280 are what would guide portfolio allocation decisions. Once made, the insurer would shift to monitoring changes in the portfolio and rebalancing the allocations accordingly. Assuming a process for the identification of concentrations caused by indirect exposures, the insurer would aggregate such exposures with similar risks across all activities.

7 The SFRS requires the adoption of the Credit for Reinsurance Model Law (#785), Credit for Reinsurance Model Regulation (#786) and Life and Health Reinsurance Agreements Model Regulation (#791) or substantially similar laws. The SVO maintains a list of banks that meet defined eligibility criteria to issue letters of credit in support of reinsurance obligations or that are eligible to serve as trustees under various arrangements required by state insurance law.


Attachment Two

21

Attachment Two

Attachment Three

Guaranty Model

MEMORANDUM

TO: Commissioner Todd E. Kiser (UT), Chair, Financial Regulation Standards and Accreditation (F) Committee

FROM: Kristine A. Maurer (NJ), Chair, Receivership and Insolvency (E) Task Force

DATE: March 5, 2018

RE: 2017 Amendments to the Life and Health Insurance Guaranty Association Model Act (#520)

The current accreditation standards include Part A: Laws and Regulations standard #14 – Guaranty Funds. This standard requires a regulatory framework, such as that contained in the NAIC’s model acts on the subject, to ensure the payment of policyholder obligations subject to appropriate restrictions and limitations when a company is deemed insolvent. The applicable models include the Life and Health Insurance Guaranty Association Model Act (#520) for life companies and the Property and Casualty Insurance Guaranty Association Model Act (#540) for property/casualty (P/C) companies.

In 2017, Model #520 for life companies was amended to include: 1) broadening the assessment base for long-term care insurance (LTCI) insolvencies to include both life and health insurers and splitting the assessment 50%/50% between the life and health insurers; 2) clarifying the guaranty associations’ coverage of LTCI; and 3) including health maintenance organizations (HMOs) as members of the guaranty association, similar to other health insurers. A clean copy of Model #520 is available on the NAIC website. A copy with the revisions shown as tracked changes is available upon request.

For this standard in which a “regulatory framework” is required rather than specific elements of the models, the revisions do not necessitate an exposure period by the Committee to include them as part of the acceptable framework for accreditation. The inclusion of the revisions as acceptable within the framework would allow a state to either adopt the revisions or not adopt the revisions and still remain in compliance with the regulatory framework required by accreditation. Following this process, the model will be considered acceptable but not required when determining if a regulatory framework is in place in accordance with the accreditation standard.

Attachment Three

Attachment Four

2014 Revisions to Holding Company Act

--

MEMORANDUM

TO: Director John Huff, Chair, Financial Regulation Standards and Accreditation (F) Committee

FROM: Danny Saenz, Chair, Group Solvency Issues (E) Working Group

DATE: March 27, 2015

RE: 2014 Changes to the Insurance Holding Company System Regulatory Act (Model #440)

In December 2015, the Group Solvency Issues (E) Working Group, the Financial Condition (E) Committee and the NAIC Plenary adopted changes to the Insurance Holding Company System Regulatory Act (Model #440). The changes to the model provide authority to a designated state to act as a group-wide supervisor for an internationally active insurance group. Such groups are defined in #440 as U.S. based groups with a) premiums written in at least three countries; b) the percentage of gross premiums written outside the United States is at least ten percent (10%) of the insurance holding company system’s total gross written premiums; and c) groups with total assets of the insurance holding company system are at least $50 billion or total gross written premiums of the insurance holding company of at least $10 billion.

During the development of the model for adoption by the Plenary, it was noted that there may be some question whether this language is necessary for the states that would not be considered the lead state for such a group. However, it was further noted that because the groups that do meet the above criteria tend to operate in the vast majority of the states, and the proposed changes to #440 discuss the authority of domestic regulators to cooperate together to require certain action by the insurance holding company, it was recommended that all states consider enacting this statutory language. However, the Working Group did not develop a recommendation regarding whether the changes should be required for accreditation purposes. The Working Group plans to discuss each member’s plans for proposing the introduction of such changes into their legislative docket, however it’s likely that the Working Group may not be prepared to make a recommendation even after that discussion.


Attachment Four

2© 2018 National Association of Insurance Commissioners 2

Attachment Four

--

MEMORANDUM

TO: Director John Huff, Chair of the Financial Regulation Standards and Accreditation (F) Committee

FROM: Danny Saenz, Chair, Group Solvency Issues (E) Working Group

DATE: July 10, 2015

RE: Recommendations Regarding 2014 changes to the NAIC Insurance Holding Company System Regulatory Act (#440)

Executive Summary

In early 2014, the Group Solvency Issues (E) Working Group (GSIWG) was charged, with among other things, reviewing the Insurance Holding Company System Regulatory Act (#440) to consider adding language that gives states the clear legal authority to act as the group-wide supervisor for an internationally active insurance group (IAIG). In December 2014, the GSIWG, Financial Condition (E) Committee and the Plenary, all adopted changes to #440 to effectuate the charge given to GSIWG. GSIWG believes that certain elements of these amendments should be incorporated into the accreditation standards for any state that is the lead state of an IAIG as defined in #440 and any state that is the domestic regulator for any insurer that is part of an IAIG.

A statement and explanation of how the potential standard is directly related to solvency surveillance and why the proposal should be included in the standards:

The changes made to this NAIC model are intended to clarify and confirm to other regulators (e.g., international and/or federal regulators) that the states have the authority to act as the group-wide supervisor of a large U.S.-based internationally active insurance group (IAIG). However, it should be understood that these changes to this model are limited to groups with a) premiums written in at least three countries; b) the percentage of gross premiums written outside the United States is atleast ten percent (10%) of the insurance holding company system’s total gross written premiums; and c) groups with totalassets of the insurance holding company system are at least $50 billion or total gross written premiums of the insuranceholding company of at least $10 billion. These criteria are based on current international standards for defining an IAIG.When this model was adopted by the NAIC, it was recommended that lead states of the small number of U.S.-based groupsthat meet this threshold should consider adopting the revised language from this NAIC model into their statutes as quickly aspossible. The GSIWG now recommends that this become a Part A standard for any state that is the group-wide supervisor ofa group that meets the criteria, under the normal proposed timing standard established by the Committee (e.g., 2020). Thiswould achieve the original stated objective of clarifying and confirming to international regulators that these states possesssuch authority.

However, the GSIWG would also note that when this model was adopted by the NAIC, it was recommended that all states consider adopting the statutory language because the U.S. groups that meet the above criteria tend to operate in the vast majority of the states, and the proposed changes discuss the authority of domestic regulators to cooperate together to require certain action by the insurance holding company. The GSIWG would therefore recommend that this also become a Part A standard for any state that has a domestic company in a U.S. group that meets the criteria (e.g. where the group-wide supervisor is a U.S. state), under the normal proposed timing standard established by the Committee (e.g., 2020). Our understanding is there are particular situations within the existing Part A standards (e.g., RRG requirements for the NAIC Annual Financial Reporting Model Regulation) where this type of precedent has been set. This approach may require the GSIWG to establish some process in which states that are group-wide supervisors for groups that meet the criteria are


Attachment Four

required to submit certain high level information on their largest groups and make that available to all states so that all states can determine if they have a domestic in such groups.

Although we don’t necessarily see the need for states that do not have a domestic company in one of these groups to adopt this language, we are mindful of the fact that an acquisition of an existing company by one of these large groups in one of these states could quickly require the state to come into compliance. The GSIWG has no recommendation relative to whether the Financial Regulation Standards and Accreditation (F) Committee should require non-domestic states of one of these groups to adopt the language. Said differently, the GSIWG has no recommendation as to whether this language should become a Part A standard for all states, similar to most other NAIC model laws.

A statement as to why ultimate adoption by every jurisdiction may be desirable:

As noted above, the changes to this model discuss the authority of domestic regulators to cooperate together to require certain action by the insurance holding company. Because the groups that meet the above criteria tend to operate in the vast majority of the states, the GSIWG recommends that all states adopt this language but the GSIWG has no recommendation whether this language should become a Part A standard for all states.

A statement as to the number of jurisdictions that have adopted and implemented the proposal or a similar proposal and their experience to date:

As of April 2015, three states had adopted language similar in concept to the proposed changes, while 1 other state had drafted legislation and was ready to introduce. Three other states had considered similar language during 2014 legislative sessions.

A statement as to the provisions needed to meet the minimum requirements of the standard. That is, whether a state would be required to have “substantially similar” language or rather a regulatory framework. If it is being proposed that “substantially similar” language be required, the referring committee, task force or working group shall recommend those items that should be considered significant elements:

The Working Group recommends that states’ law should contain the provisions of section 7.1 of Model #440 or an act that is substantially similar. The sections of Model #440 that would be considered significant elements are as follows:

• Section 1.D & G-A provision that includes the definition of group-wide supervisor and internationallyactive insurance group.

• Subsection A-Include a provision for authorizing the commissioner to either act as the group-widesupervisor for an internationally active insurance group or acknowledging another regulatory official forthe same.

• Subsection B-Include a provision that makes the determination of the group-wide supervision based uponfactors similar to this particular section of the model.

• Subsection C-Include a provision that requires the group-wide supervisor to be reconsidered if there is amaterial change similar to the factors stated in this particular section of the model.

• Subsection D-Include a provision that authorizes the Commissioner to collect information necessary tomake such a determination.

• Subsection E-Include a provision that authorizes the Commissioner to engage in group-wide supervisionactivities similar to those defined within this particular section of the model.

• Subsection I-Include a provision that requires the insurer to pay the reasonable expenses of thecommissioner's participation in the administration of this section.

An estimate of the cost for insurance companies to comply with the proposal and the impact on state insurance departments to enforce it, if reasonably quantifiable:

The GSIWG has not prepared an estimate, but believes that all aspects of changes are similar in concept to the broad authority of the Commissioner throughout the remaining portions of Model #440, for which the 2010 changes will become


Attachment Four

the basis of an accreditation requirement on January 1, 2016. Again, the changes to this NAIC model are intended to clarify and confirm to other regulators (e.g., international and/or federal regulators) that the states have the authority to act as the group-wide supervisor of a large U.S.-based internationally active insurance group (IAIG).

Additional information: None


Attachment Four


Attachment Four

Comment Letter Received via Email April 27, 2015

Julie, Washington State supports the five (5) exposed items below and has no specific comments. Thanks.

Bill

William R. Michels, MBA, CPA, CFE Deputy Insurance Commissioner - Company Supervision Washington State Office of the Insurance Commissioner


Attachment Four


Attachment Four

May 1, 2015

Director John Huff, Chair Financial Regulation Standards and Accreditation (F) Committee National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, MO 64108

Attn: Julie Garber, CPA, Senior Accreditation Manager Via e-mail: [email protected]

Re: Exposure on whether the Corporate Governance Annual Disclosure Model Act, accompanying Model Regulation, and 2014 revisions to the Insurance Holding

Company System Regulatory Act should be incorporated into the Part A Accreditation Standards

Dear Director Huff:

Thank you for the opportunity to comment on whether the Corporate Governance Annual

Disclosure Model Act and Model Regulation (“CGAD”) and the 2014 revisions to the Insurance Holding Company System Regulatory Act (“HCA”), should be added to the Part A Accreditation Standards. The undersigned interested parties believe that both the CGAD and the 2014 revisions to the HCA should be included in the Accreditation Standards, provided they specifically require adoption of language which provides the same level of protection as provided by Sections 6 and 7 of the CGAD through language that is either identical or functionally equivalent to the language in these sections. Our specific comments related to each item follow.

Corporate Governance Annual Disclosure Model Act and Model Regulation

Generally, we support the concept of adding the CGAD to the Accreditation Standards in order to promote uniformity among the states with regard to the disclosure of corporate governance information. The CGAD contains the lead state concept that would make the filing of such information more effective and efficient.

That said, we also believe that the CGAD’s confidentiality provisions are critically important and need to be adopted by the states. As we said in our letter to the Corporate Governance Working Group on November 7, 2014 (attached), the current language in the Accreditation Standards relating to confidentiality protections in other models has proven to be insufficient in many cases. We cannot support the CGAD as a new Accreditation Standard unless it preserves the agreement made by industry and regulators in the development of the CGAD. The new Accreditation Standard, therefore, should expressly require that each state’s corporate governance disclosure laws contain confidentiality provisions that provide the same level of protection as provided by Sections 6 and 7 of the CGAD through language that is either identical or functionally equivalent to the language in these sections.


Attachment Four

mailto:[email protected]

Insurance Holding Company System Regulatory Act

Provided confidentiality is appropriately addressed, we also support updating the Accreditation Standards to include the 2014 revisions to the HCA. This would require states to have uniform language relating to the definitions of “internationally active insurance group” (“IAIGs”) and “group-wide supervisor,” as well as to the determination of who is the appropriate group-wide supervisor of an IAIG and its powers and authority. A uniform system will ensure that all states utilize the same factors to determine which state is to be designated as the group-wide supervisor for each IAIG. Uniform adoption of these HCA revisions by all of the states is needed, even in those states that do not currently have any IAIGs domiciled in them, since it is important to continue to demonstrate that the U.S. has an effective, uniform system of group supervision in place.

The 2014 revisions to the HCA also include a number of provisions that impact confidentiality, including the specific language added to Section 8. As with the Accreditation Standard for the CGAD, the Accreditation Standard for the HCA should expressly require that each state’s holding company act contain confidentiality provisions that provide the same level of protection as provided by Sections 7.1 and 8 of the HCA, through language that either is identical or functionally equivalent to the language in these sections. This will ensure that each state that enacts the 2014 revisions to the HCA “achieves the objective of the [accreditation] standard.”1

We thank you again for the opportunity to provide comments. As always, feel free to call on the undersigned interested parties with any questions and for further assistance.

Organization Name Phone Number E-mail Address

American Council of Life Insurers

Wayne Mehlman

202-624-2135 [email protected]

American Insurance Association

Adam E. Kerns


America's Health Insurance Plans

Bob Ridgeway


Blue Cross Blue Shield Association

Joseph E. Zolecki


National Association of Mutual Insurance Cos.

Michelle M. Rogers

317-875-5250x1070

[email protected]

Property Casualty Insurers Association of America

Stephen W. Broadie


Reinsurance Association of America

Karalee C. Morell


1 April 2015, Financial Regulation and Accreditation Standards Program Pamphlet, Part A Preamble, page 7, http://www.naic.org/documents/committees_f_FRSA_pamphlet.pdf.


Attachment Four








November 7, 2014

Commissioner Susan L. Donegan, Chair Corporate Governance (E) Working Group National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, MO 64108

Attn: Mr. Bruce Jenson, Senior Manager – Solvency Oversight Policy Via e-mail: [email protected]

Re: Accreditation Recommendations – Corporate Governance Annual Disclosure Model Act

Dear Commissioner Donegan:

We want to thank you and the Working Group members for this opportunity to comment on your recommendation to the Financial Regulation Standards and Accreditation (F) Committee to establish accreditation standards and guidelines for the soon-to-be-adopted Corporate Governance Annual Disclosure Model Act #305 (CGAD). We have a fundamental concern, detailed below, that we would like addressed before such a recommendation is submitted to the F Committee.

Our good faith collaboration with regulators produced the Insurance Holding Company System Regulatory Act (HCA), the Risk Management and Own Risk and Solvency Assessment Model Act (ORSA) and now the CGAD. Each of these Models include strong protections for the highly sensitive and proprietary insurance company information that is required to be submitted to state insurance departments for regulatory review. We are, however, very disappointed that these mutually-agreed upon confidentiality provisions have been compromised or weakened by some states during their adoption of the HCA and the ORSA. As a result, we are unable to support the establishment of the CGAD as an accreditation standard unless it requires states to adopt its confidentiality provisions, thereby ensuring that our members’ proprietary interests are protected.

We, therefore, urge the Working Group to modify Subparagraph (d) on page 3 of the proposed memo to the F Committee in order to ensure that the confidentiality provisions of a state’s corporate governance disclosure legislation are not just “similar” (or even “substantially similar”) to the provisions of Section 6 of the CGAD, but are instead, “functionally equivalent” with those in Section 6 of the CGAD so they actually achieve the same level of protections that were intended and agreed by both regulators and industry. We have attached language to be inserted in Subparagraph (d) to accomplish that goal.

We thank you for your consideration of our concerns.


Attachment Four

mailto:[email protected]�

Organization Name Phone Number E-mail AddressAmerican Council of Life Insurers

Wayne Mehlman 202-624-2135 [email protected]

American Insurance Association

Adam E. Kerns 202-828-7163 [email protected]

America's Health Insurance Plans

Bob Ridgeway 501-333-2621 [email protected]

Blue Cross Blue Shield Association

Kim Holland 202-626-4810 [email protected]

National Association of Mutual Insurance Companies

Neil Alldredge 317-875-5250x1103

[email protected]

Property Casualty Insurers Association of America (PCI)

Stephen W. Broadie


Reinsurance Association of America

Karalee C. Morell 202-783-8380 [email protected]


Attachment Four








Attachment Modified Language for CGWG Memo, p. 3, Subsection (d)

d. Provides confidentiality protection for the CGAD, including provisions maintainingconfidentiality for information shared with state, federal or international regulators,including materials, documents, or other information gathered, created or assembled forsuch sharing (collectively or separately, the Materials), achieving the same level ofconfidentiality protection as, and functionally equivalent to, those contained in Section 6of Model #305, by containing provisions which include but are not limited to thefollowing key elements:

1. The Materials are confidential by law, privileged, and contain trade secrets;2. The Materials are not subject to the state’s Open Records, Sunshine, Freedom

of Information, or other similar laws; 3. The Materials are not subject to subpoena nor are they subject to discovery or

admissible in any private civil action; 4. The Commissioner may use the Materials in furtherance of any regulatory or

legal action brought as part of the Commissioner’s official duties, but shall not otherwise disclose the Materials without the prior written consent of the insurer;

5. Neither the Commissioner nor any other person who has received any of theMaterials while acting under the authority of the Commissioner, nor any other person with whom the Materials have been shared, shall be permitted or required to testify in any private civil action in any way which relates to the Materials or their content;

6. The Commissioner may only share the Materials with other state, federal andinternational regulators, including members of a supervisory college as defined in [insert appropriate reference to state’s HCA, as amended], and with third-party consultants pursuant to Section 7, if the recipient agrees in writing to preserve the confidentiality of the Materials and has verified it has the legal authority to do so;

7. The Commissioner may receive Materials from officials of other jurisdictionsincluding members of supervisory colleges, and from the NAIC, only if the Commissioner maintains confidentiality protections equal or greater than those applicable under the laws of the jurisdiction which is the source of the Materials;

8. No waiver of any claim of privilege, confidentiality, proprietary nature or tradesecret status of the Materials shall occur as a result of any disclosure under Section 6 or 7 of this Act.

9. The Commissioner may share Materials with the NAIC or third-partyconsultants provided the NAIC and any such consultants are subject to, and have verified they are able to comply with, the same confidentiality protections listed above.

10. Any written agreement between the NAIC and/or a third party consultantgoverning the sharing and use of the Materials shall contain all six of the provisions listed in [appropriate reference Section 7.E of the Model].


Attachment Four


Attachment Four

�.VERMONT

State of Vermont Department of Financial Regulation 89 Main Street Montpelier, Vf 05620-3101

April 6, 2015

Honorable John M. Huff

For consumer assistance:

[All Insurance] 800-964- 1784

[Securities] 877-550-3907

[Banking] 888-568-4547 www.dfr.vennont.gov

Chairman, Financial Regulation Standards and Accreditation (F) Committee National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197

Via e-mail: [email protected]

Dear Chairman Huff:

Thank you for the opportunity to comment on recently exposed potential accreditation requirements.

With respect to the Corporate Governance Annual Disclosure Model Act (#305) and Model Regulation (#306), the Vermont Department of Financial Regulation does not believe that these models should be applicable to risk retention groups (RRGs). RRGs are, or soon will be, required to comply with the corporate governance standards in the Model Risk Retention Act which are very detailed and impose strict requirements on RRGs. This model requires RRGs to develop governance standards, make them available to the membership/policyholders of the RRG, and include the standards in the plan of operation provided to each state where the RRG conducts business. Any state that domiciles RRGs will be required to adopt those standards to maintain their accreditation. The corporate governance standards in the Model Risk Retention Act were developed by the Risk Retention Group (E) Task Force, which has extensive technical expertise relating to RRGs. Models #305 and #306 would impose additional filing requirements with no added benefits for risk retention groups, their members, or state regulators.

The standards in the Model Risk Retention Act are effective January 1, 2017 as a nationwide accreditation standard. Legislation adopting the corporate governance standards for RRGs has passed the Vermont House and Senate and is scheduled to be signed by the Governor on May 7.

The 2014 revisions to the Annual Financial Reporting Model Regulation (Model #205) should not apply to risk retention groups. These revisions relate to internal audit requirements for insurers with $500 million or more in premiums. No RRGs exceed the threshold, and few risk retention groups even approach it. Those RRGs that do have the highest premium volume tend to have a relatively small

Banking

802-828-3307

Insurance

802-828-3301

Captive Insurance

802-828-3304

Securities

802-828-3420


Attachment Four

number of members that each pay high premiums; in those cases, the $500 million threshold does not necessarily reflect the complexity, or lack thereof, of the company' s operations.

The 2014 revisions to the Insurance Holding Company System Regulatory Act (Model #440) also should not be applicable to risk retention groups. These revisions relate to the group-wide supervision of internationally active insurance groups. No RRG currently meets the threshold requirements of the model law, and it is highly unlikely that one ever will.

One could maintain that the latter two standards should be adopted in the event an RRG ever meets the respective thresholds, but state legislators are generally opposed to enacting laws that are moot upon passage. If the committee ultimately recommends adoption of these two standards, it should be made clear that states will not need to demonstrate compliance with those standards if the state can provide evidence that none of their RRGs meet the indicated thresholds.

Sincerely,

~./JtwA -David F. Provost Deputy Commissioner, Captive Insurance


Attachment Four

Vermont s

\/ ��-

e,--'-CAPTIVE INSURANCE

A S S O C IATIO N

Honorable John Huff Chairman, Financial Regulation Standards and Accreditation (F) Committee

1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197

Via e-mail: [email protected]

Dear Chairman Huff:

May 4, 2015

This letter is written in response to the recent exposure for a 30-day comment period of certain items as potential accreditation requirements.

With respect to the Corporate Governance Annual Disclosure Model Act (#305) and Model Regulation (#306), the Vermont Captive Insurance Association (VCIA) does not believe that these models should be applicable to risk retention groups. Risk retention groups (RRGs) are required to comply for accreditation purposes with the corporate governance standards in the Model Risk Retention Act which are detailed and imposed strict requirements on RRGs. The standards in the Model Risk Retention Act are effective January 1, 2017 and already Vermont has approved legislation adopting the corporate governance standards for RRGs. Models #305 and #306 would require additional paperwork with no added benefits for risk retention groups or regulators. In addition, the corporate governance requirements in the Model Risk Retention Act were developed by the Risk Retention Group (E) Task Force, which has extensive technical expertise relating to RRGs.

The 2014 revisions to the Annual Financial Reporting Model Regulation should not apply to risk retention groups. These revisions relate to -internal audit requirements for insurers with $500 million or more in premiums. Since risk retention groups do not approach this premium volume, the revisions should not be applicable to risk retention groups.

Aclditionally, the 2014 revisions to the Insurance Holding Company System Regulatory Act should not be applicable to risk retention groups. These revisions relate to group supervision of very large insurance companies or insurance holding companies that have substantially more assets or premium volume than risk retention groups. We do not believe, therefore, that these revisions should be applicable to risk retention groups.

Thank you for the opportunity to comment on these items.

�� Richard Smith President

cc: Dave Provost, State of Vermont

180 Battery Street, Suite 200 Burlington, VT 05401-5212 phone: 802.658.8242 fax: 802.658.9365

www.vcia.com

e-mail: [email protected]


Attachment Four


Attachment Four

MEMORANDUM

TO: Director John M. Huff (MO), Chair Financial Regulation Standards and Accreditation (F) Committee

FROM: Jill Jacobi on behalf of Commissioner Dave Jones (CA), Chair Risk Retention Group (E) Task Force

DATE: July 9, 2015

RE: Applicability of the 2014 Revisions to the Insurance Holding Company System Regulatory Act (#440) to Risk Retention Groups for Accreditation Purposes

The Insurance Holding Company System Regulatory Act (#440) is currently included in the Part A: Laws and Regulations Accreditation Standards for risk retention groups (RRGs) licensed under a state’s captive laws. In 2014, Model #440 was revised to include a definition of a group-wide supervisor and to include a new section related to internationally active insurance groups (IAIG). An IAIG is an insurance holding company system that meets the following criteria: (a) premiums are written in at least three countries; (b) the percentage of gross premiums written outside the United States is at least 10% of the insurance holding company system’s total gross written premiums; and (c) based on a three-year rolling average, the total assets of the insurance holding company system are at least $50 billion, or the total gross written premiums of the insurance holding company system are at least $10 billion.

At the 2015 Spring National Meeting, the Financial Regulation Standards and Accreditation (F) Committee discussed the revisions to Model #440 and exposed them for public comment as a possible additional significant element for the Holding Company Systems standard with the Part A Standards.

Per review of the 2014 annual statements, there are no RRGs in a holding company system that met the IAIG criteria noted above. There were only four RRGs that reported more than $100 million in direct and unaffiliated assumed premium, with the highest premium being $361 million. In addition, most RRGs that are in holding company system are the only insurer in the group, and RRGs do not write premiums outside of the United States.

The Risk Retention Group (E) Task Force discussed the revisions to Model #440 and whether they should be included in the Part A Standards applicable to RRGs. There was agreement it is unlikely that any RRG will ever be in a holding company system that meets the definition of an IAIG. If the revisions to Model #440 are included in the Part A Standards for RRGs, the Task Force recommends states should only be required to adopt the IAIG provisions if they have an RRG in a holding company system that meets the definition of an IAIG.

Thank you for the opportunity to comment on this matter.

W:\National Meetings\2017\Spring\Cmte\F\Open\6 - Holding Company Revisions\06g - RRG on IAIG.docx


Attachment Four

FINANCIAL REGULATION STANDARDS AND … · Eric A. Cioppa Maine Tom Glause Wyoming ... Laws and...

Documents

Transcript of FINANCIAL REGULATION STANDARDS AND … · Eric A. Cioppa Maine Tom Glause Wyoming ... Laws and...