The National Association of Insurance Commissioners (NAIC) held its 2024 Summer National Meeting August 11-15 in Chicago, Illinois, where regulators continued to work through the implementation of numerous investment-related initiatives that are intended to enhance regulatory oversight and adapt the state-based insurance regulatory framework to evolving insurer investment strategies. An overview of the NAIC’s current investment-related strategic initiatives is provided in Section I below. Section II provides a status report on the key NAIC workstreams that are underway as part of those initiatives as of August 2024.

I. INVESTMENT-RELATED STRATEGIC INITIATIVES

a. Holistic Framework for Regulation of Insurer Investments

During the 2023 Summer National Meeting, the NAIC Financial Condition (E) Committee exposed an initial version of the Framework for Regulation of Insurer Investments – A Holistic Review (Holistic Framework Memo) that identifies areas “where the insurance regulatory framework [for insurer investments] could be enhanced.” Among other items, the Holistic Framework Memo proposes:

• reducing or eliminating “blind reliance” on credit rating providers (CRPs) but retaining overall utilization of CRPs with the implementation of a strong due diligence framework designed and implemented by an external consultant
• permitting the NAIC Securities Valuation Office (SVO) to perform individualized credit assessments of securities and utilize regulatory discretion when needed under well-documented and -governed parameters
• enhancing the SVO’s portfolio risk analysis capabilities with investment in a risk analytics tool and corresponding personnel
• reviewing and increasing staffing to include analysts with investment actuarial and risk management backgrounds who can provide dedicated investment-related support to risk-based capital (RBC) and reserving teams
• providing additional resources to the NAIC Structured Securities Group to enhance structured asset-modeling capabilities
• building out a broad policy function at the SVO and keeping key external consultants on retainer to provide guidance
• considering the establishment of a broad investment working group under E Committee to act in an advisory capacity to various investment processes
• reducing the size of the NAIC Valuation of Securities (E) Task Force (VOSTF) and renaming it – and the SVO – to better reflect the responsibilities of the groups beyond securities valuation

The Holistic Framework Memo, which is intended to be a “working document,” has been released for public comment several times over the past 18 months and has garnered significant attention. During the 2024 Summer National Meeting, E Committee exposed an Updated Holistic Framework Document for a 60-day comment period ending on October 14, 2024. Notable NAIC actions taken consistent with the “Action Items” outlined in the Holistic Framework Memo are detailed in Section II below.

b. Private Equity Considerations List

In 2022, E Committee tasked the Macroprudential (E) Working Group (MWG) with the development of a strategic risk assessment tool and the coordination of NAIC activities concerning private equity (PE) firm involvement in the insurance sector. That workstream resulted in the list of 13 Regulatory Considerations Applicable (But Not Exclusive) to Private Equity Owned Insurers (PE Considerations List), a wide-ranging list of considerations pertaining to PE firm involvement in insurance and the ability of state insurance regulators to adequately monitor and assess the risks related to the same. The latest version of the PE Considerations List, which was adopted in summer 2022, includes the following observations:

• regulators may not be obtaining a clear picture of risk due to holding companies structuring contractual agreements in a manner to avoid regulatory disclosure requirements or affiliated party agreements impacting an insurer’s risk that may be structured to avoid disclosure
• control may exist with less than 10% ownership, e.g., a party may exercise a controlling influence over an insurer through board representation or contractual arrangements, including non-customary minority shareholder rights or covenants, investment management agreement (IMA) provisions such as onerous or costly IMA termination provisions, or excessive control or discretion given over the investment strategy and its implementation
• the material terms of IMAs and whether they are arm’s-length transactions or include conflicts of interest (including the amounts and types of investment management fees paid by the insurer, the termination provisions, and the degree of discretion or control of the investment manager over investment guidelines, allocations and decisions)
• owners of insurers may be focused on short-term results that may not be in alignment with the long-term nature of liabilities in life products; for example, excessive investment management fees paid to an affiliate could effectively act as a form of unauthorized dividend in addition to reducing the insurer’s overall investment returns or that owners may not be willing to transfer capital to a troubled insurer
• there is possible increased risk and lack of transparency related to material increases in privately structured securities
• there is regulator concern about the level of reliance on rating agency ratings and their appropriateness for regulatory purposes
• The trend of life insurers in the pension risk transfer business and supporting such business with certain of the more complex investments
• insurers’ use of offshore reinsurers (including captives) and complex affiliated sidecar vehicles to maximize capital efficiency could introduce complexities into the insurance group structure

The MWG has tracked 20 workstreams that are contemplated by the PE Considerations List since it was first adopted in summer 2022. As of the 2024 Summer National Meeting, the MWG reported that it considered seven of the 20 workstreams to be “addressed” and “closed,” seven of the 20 workstreams having resulted in “significant progress” for which “a few open items” remain, and six of the 20 workstreams having resulted in “progress” but “work continues.” The latest version of the tracker, updated as of August 2024, is available here. Notable NAIC actions taken consistent with the PE Considerations List are outlined in Section II below.

c. The Principles-Based Bond Project

The Principles-Based Bond Project (Bond Project) was undertaken by the NAIC to establish principal concepts for determining whether a debt security qualifies for reporting as a “bond” on Schedule D-1 (Long-Term Bonds) of an insurer’s statutory financial statements (such securities generally receive more favorable RBC treatment under statutory accounting rules). As part of the Bond Project, the NAIC adopted changes to NAIC Statutory Statements of Accounting Principles (SSAP) No. 26R (Bonds), SSAP No. 43R (Asset-Backed Securities) and SSAP No. 21R (Other Admitted Assets) to provide more granular guidance on what can, and cannot, be reported as a “bond” under SSAP No. 26R. Incorporation of these changes into various other NAIC guidelines, financial statement blanks and related materials remains ongoing.

Under the new definition, a “bond” must be classified as either an “issuer credit obligation” (ICO) or an “asset-backed security” (ABS). An ICO is a bond for which the general creditworthiness of an operating entity or entities (through direct or indirect recourse) is the primary source of repayment. An ABS is defined as a bond issued by an entity that is created for the primary purpose of raising debt capital backed by financial assets or cash-generating nonfinancial assets owed by the ABS issuer, whereby repayment is primarily derived from the cash flows associated with the underlying defined collateral rather than the cash flows of an operating entity. An ABS must qualify as a bond under SSAP No. 43R in order to receive bond treatment. If the security does not meet the principles-based definition of a bond, it may qualify for admitted asset treatment under another SSAP, e.g., SSAP No. 21 (Other Admitted Assets).

All Bond Project amendments take effect January 1, 2025. The “Bond Project Documents,” including the amended SSAPs referenced above, are available here (under the Documents tab). A draft Bond Project Q&A Guide is available here and an issue paper on procedural developments related to the Bond Project is available here (beginning on page 81). Notable NAIC actions taken consistent with the Bond Project at the 2024 Summer National Meeting are outlined in Section II below.

II. INVESTMENT-RELATED WORKSTREAMS: LATEST DEVELOPMENTS

a. Life Actuarial (A) Task Force Considers Cash Flow Testing Methodology at the Line of Business and Treaty Levels for Life and Annuity Insurers

Actuarial Guideline 53 (AG 53) Asset Adequacy Testing was adopted by the NAIC in 2022 to ensure the claims-paying ability of insurers even if complex assets do not perform as expected. In part, AG 53 requires a company to provide commentary on reinsurance collectability and counterparty risk in its asset adequacy analysis (AAA). In spring 2024, the Life Actuarial (A) Task Force (LATF) exposed an initial proposal to require AAA for life and annuity reinsurance transactions that would require AAA to be performed using a cash flow testing methodology at the line of business and treaty level. LATF’s goal is to address what regulators believe to be one of the drivers of the increase in reinsurance transactions; namely, the ability of insurers to significantly lower the total asset requirement (i.e., the sum of reserves and required capital) for long-duration blocks of business that rely heavily on asset returns. The comment period on that exposure ended May 17, 2024.

At its June 20, 2024 meeting, LATF received the presentation “Reinsurance Asset Adequacy Testing (AAT)” from Fred Anderson (MN), who presented eight considerations for consensus (the presentation is available here and the corresponding spreadsheet is available here.) Those materials were exposed for a 30-day comment period ending July 20, 2024.

LATF continued its discussion on AAT for reinsurance ceded by life insurers during the 2024 Summer National Meeting and exposed a straw man AAT for Reinsurance Actuarial Guideline Draft (Draft AG) for 60 days, ending October 11, 2024. During this 60-day comment period, interim comment periods have been established for two of the eight sections of the Draft AG: (1) comments on Section 2 (Scope) are due by September 19, 2024, and comments on Sections 5.C and 7 (Aggregation Considerations) are due by October 3, 2024. Insurance regulators are currently working on a timeline that contemplates the adoption of a final guideline in 2025.

b. E Committee Adopts SVO Proposal for Discretion Over NAIC Designations Assigned Through the Filing Exemption Process

During the 2024 Summer National Meeting, the VOSTF voted to adopt a Revised Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) Authorizing the Procedures for the SVO’s Discretion Over NAIC Designations Assigned Through the Filing Exemption Process. As background, in 2023 the SVO proposed an amendment to the P&P Manual to make certain structured equity and funds, which captures a subset of the privately structured securities market, ineligible for the filing exemption (FE) process. VOSTF deferred action on that proposal and instructed the SVO to instead draft a new proposal that was more limited in scope and that would enable the targeting of individual securities with material risk assessment differences.

The amendment attempts to address so-called “blind reliance” on credit ratings for use in the FE process by granting the SVO discretion to remove a security from the FE process if it believes the NAIC designation resulting from the FE process is “not a reasonable assessment of investment risk” (interpreted as a three-or-more-notch difference). Such a removal is subject to a number of procedural steps that must be satisfied in order to take such action, as well as an appeal process, and requires the SVO Director to provide annual summaries of instances where such discretion was utilized. The latest guidance indicates that the SVO does not expect to exercise its discretion often, but industry remains broadly concerned with how this new process will be implemented.

During the 2024 Summer National Meeting, E Committee was expected to adopt the amendment but unexpectedly tabled the vote. The reason for the delay in adoption was to give Credit Rating Providers (CRPs) additional time to make a case for the incorporation of language that would require that the relevant CRPs be notified of a review of their ratings and be permitted to participate in the process (under the current proposal, insurers are permitted to invite CRPs to participate). During a virtual meeting held on August 29, E Committee rejected the proposed language (noting the confidential nature of communications between an insurer and its regulators) and adopted the proposal unanimously.

As of the date of this alert, the proposed effective date of the amendment is January 1, 2026, though this could be delayed if additional time is needed to implement the required SVO system updates.

c. Financial Condition (E) Committee Exposes RFP for Assistance in Developing a Due Diligence Process for Credit Rating Providers and an Updated Holistic Framework Document

Action Item #2 of the Holistic Framework Memo contemplates the ability of the SVO to “perform individualized credit assessment[s] and utilize regulatory discretion when needed[] under well-documented and [-]governed parameters.” To that end, during the 2024 Spring National Meeting, E Committee received approval to develop a request for proposal (RFP) to engage a consultant to design and help implement a “strong due diligence program” over the role of CRPs in the investment regulation framework. An initial draft RFP, developed by E Committee and its subordinate working groups, was exposed for public comment during the 2024 Summer National Meeting. Among other things, the draft RFP seeks “detailed technical recommendations that would aid in [the NAIC’s] objectives to … [r]educe/eliminate ‘blind’ reliance on CRP ratings but retain overall utilization of CRP ratings with the implementation of a strong due diligence framework. This framework should be extremely robust with focused resources within the NAIC in its implementation and maintenance.” Comments on the draft RFP are due to E Committee by October 14, 2024.

d. SVO CLO Modeling Ad Hoc Working Group Provides Update to VOSTF

One of the NAIC’s ongoing investment-related initiatives is an effort to address what some regulators view as “RBC arbitrage” through the use of collateralized loan obligations (CLOs) and other structured securities. See, for example, Item #10 of the PE Considerations List. Those efforts have led to a number of changes in recent years, including revisions to the P&P Manual to make CLOs “financially modeled securities” (beginning year-end 2025) and increased RBC charges for residual tranche investments of all structured securities (beginning year-end 2024).

During the 2024 Summer National Meeting, Eric Kolchinsky (Director, NAIC Structured Securities Group and Capital Markets Bureau) provided an update on the CLO Modeling Ad Hoc Working Group (Ad Hoc Group), which is developing the stress-testing methodology that would be used for the financial modeling of CLOs. Mr. Kolchinsky reported that the Ad Hoc Group recently completed an inventory of insurer investments in CLOs as of year-end 2023 and that it expected to run those investments through the Ad Hoc Group’s 10 scenarios in the coming days. He also advised that the Ad Hoc Group has completed its scenario testing for the previously published CLO deals and that the results would be published shortly. Finally, Mr. Kolchinsky reported that the Ad Hoc Group updated its proposed CLO methodology to address comments from an interested party. The updated methodology is expected to be published in early September, with a public Ad Hoc Group call to follow.

e. Risk-Based Capital Investment Risk (E) Working Group Receives Update on RBC Factors for ABS; Announces Comprehensive Review of RBC Treatment for All “Fund” Investments

Shortly after the 2023 Fall National Meeting, the American Academy of Actuaries (Academy) finalized a set of Principles for Structured Securities that are intended to guide the Academy as it develops a framework for determining whether to separately model new asset classes (or individual assets within a particular asset class) for RBC purposes. In July 2024, the Risk-Based Capital Investment Risk (E) Working Group (RBCIRE) advised that the Academy was working diligently to establish a methodology for CLOs. The CLO methodology is particularly important, as it is expected to serve as a framework upon which potential other methodologies for ABS are based.

During the 2024 Summer National Meeting, the RBCIRE received a report that the Academy is in the process of developing a list of common attributes of CLOs that can be used to explain tail risk and help determine a factor or methodology to produce an appropriate RBC charge. The Academy was originally scheduled to present its findings during the 2024 Fall National Meeting, but that presentation is now delayed to 2025 due to challenges associated with obtaining the necessary data. An interim update is expected at the 2024 Fall National Meeting.

During the 2024 Summer National Meeting, RBCIRE Chair Philip Barlow (DC) also noted that the working group expects to conduct a comprehensive review of the RBC treatment for all “fund” investments to ensure consistent treatment across investments following adoption of the new principles-based bond definition. As a first step, the RBCIRE is compiling a list of every type of investment that could be generally considered a “fund.” The American Council of Life Insurers is preparing an initial list for consideration by the RBCIRE, which the working group will consider later this year.

The RBCIRE also adopted a working agenda for future projects during the 2024 Summer National Meeting (included in the RBCIRE Summer National Meeting Materials as Exhibit H). Notable items on the working agenda include evaluating RBC treatment for structured notes, RBC factors for all ABS (including CLOs and collateralized fund obligations), RBC treatment for all residual tranche investments and the evaluation of tail risk for privately structured securities not currently captured in insurance company reserves.

f. Statutory Accounting Principles Working Group Adopts Principles-Based Bond Definition Issue Paper

As noted above, the NAIC has adopted several new SSAPs that govern statutory financial statement reporting of debt securities as bonds (SSAP No. 26R), ABS (SSAP No. 43R) or other admitted assets (SSAP No. 21R). These new SSAPs go into effect January 1, 2025. During the 2024 Summer National Meeting, the Statutory Accounting Principles Working Group adopted Statutory Issue Paper No. 169, which provides a history of the Bond Project and guidance for determining whether a security is properly reportable as a bond, ABS or other admitted asset, including the factors to be considered when evaluating specific investment structures. Several amendments to the Issue Paper (related to rated note feeder funds), as well as a draft Implementation Questions and Answers Document, were released for a public comment period ending September 6, 2024.

g. Financial Analysis Solvency Tools (E) Working Group Proposes Additions to the NAIC Financial Analysis Handbook Relating to Insurer “Control” and Credit Risk Assessments

The Financial Analysis Solvency Tools (E) Working Group (FASTWG) exposed proposed edits to the NAIC Financial Analysis Handbook (Handbook) that contemplate additional review procedures as well as new guidance for use by regulators in evaluating Insurance Holding Company Act Form A (Acquisition of Control) and Disclaimer of Control/Affiliation filings. The intent of the proposed amendments is to assist regulators in determining who controls an insurer (particularly for limited liability partnerships, trusts and non-US-owned insurers) and to provide additional guidance for identifying where a party that has disclaimed control of an insurer can exert control, including ongoing reporting requirements for parties that disclaim control.

The FASTWG also recently exposed proposed edits to the Handbook regarding credit risk assessments and reinsurance receivables assessments. The proposed edits include best practice guidance for insurers and flag potential conflict-of-interest and overlapping fee concerns that may exist with respect to structured securities that are originated by an asset manager or affiliate.

The proposed Handbook revisions were exposed for a comment period ending August 30, 2024. It is expected that the revisions will be incorporated into the 2025 version of the Handbook if adopted this year.

h. FASTWG to Consider Amendments to the Financial Analysis Handbook on Surplus Notes and Capital Maintenance Agreements

The FASTWG also received a referral regarding consideration of amendments to the Handbook regarding surplus notes and capital management agreements. Specifically, the Risk-Focused Surveillance (E) Working Group referred to the FASTWG the following PE Considerations List items for deliberation:

• Surplus notes and appropriate interest rates given their special regulatory treatment, including whether floating rates are appropriate. See the regulator discussion under Consideration #3 in the full text of the attached referral for additional information and context.
• Owners of insurers, regardless of type and structure, may be focused on short-term results, which may not be in alignment with the long-term nature of liabilities in life products. See the regulator discussion under Consideration #4 in the full text of the attached referral for additional information and context.

Regulators from Texas, Michigan and Connecticut are considering revisions to the Handbook and are expected to present initial draft amendments to the FASTWG at its September 26, 2024 meeting.

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