Updates from the National Association of Insurance Commissioners’ 2023 summer national meeting

The Climate and Resiliency Task Force heard a presentation from the Arizona State University Global Futures Laboratory regarding their work on the rising global temperatures and the effects on rising sea levels and other catastrophic perils. The effects of rising global temperatures can be seen with the recent major wildfires in Australia in 2020 in which three billion animals were killed or displaced and over 46 million acres burned; as well as Hawaii in August 2023 in which over 100 people were killed and many more displaced from their homes. There have also been an increasing number of droughts, with the last two decades being the driest recorded since 800 A.D. These major events will continue to have negative impacts on the insurance market as catastrophic losses are incurred, highlighting the need for alternative energy sources and removing more carbon dioxide out of the atmosphere.

The Climate and Resiliency Task Force heard a presentation from Ceres regarding their study on inclusive insurance and a review of climate risk disclosures. Ceres is a nonprofit organization that works with market leaders to solve sustainability challenges such as protecting and restoring life, building a just and inclusive society and advancing climate solutions. Ceres presented on their recent report published in January 2023 related to inclusive insurance for climate-related disasters. 

Ceres focused on how important disaster insurance is for recovery and that their studies have found that many people are uninsured against disasters or are unable to afford and find coverage that meets their needs. Ceres further presented on the barriers to inclusivity regarding disaster insurance and provided recommendations ranging from the federal or state policy level to the local government and private sector level to improve the inclusivity of disaster insurance.

The Climate and Resiliency Task Force heard a presentation from the California Department of Insurance regarding atmospheric river storms mainly impacting western states. Atmospheric rivers are large, narrow streams of water vapor that travel through the sky and on average are 1,600km long and 640km wide. These atmospheric rivers can result in a month’s worth of precipitation in a few days and account for more than half of California’s water supply while contributing to more than 90% of the state’s flood damages. 

The California Department of Insurance recommended focusing on certain protection gaps and risk mitigation opportunities as atmospheric rivers are a growing source of insured and uninsured losses in the western part of the state.

The Solvency Workstream provided an update on their work which included addressing referrals and updating guidance. The Solvency Workstream is also focusing on an approach to handle scenario analysis and approaches used to provide valuable information to regulators. A draft referral is to be updated and exposed for public comment.

The P&C Workstream reported on their work related to algorithmic bias that causes unfair discrimination and also looked at potential bias in marketing. The P&C Workstream plans to review the entire product life cycle including access to insurance, underwriting, rating and claims handling and their first evaluations are focused on marketing and access. The P&C Workstream met with several insurers to learn more about their corporate governance principles and best practices and will continue to engage the industry to resolve diversity, equity and inclusion (DE&I) issues both internally and externally.

The Life Workstream reported on their work on current DE&I initiatives at the District of Columbia Department of Insurance, Securities and Banking. The Life Workstream reported that the District of Columbia Department of Insurance, Securities and Banking is working to provide resources about life insurance to the public which includes information on when to purchase and how to choose the appropriate policy depending on needs. The Life Workstream concluded that the continued focus on marketing, distribution and access to life insurance products for minority communities and improving financial literacy is the goal of their new initiatives.

The Health Workstream reported on their progress to remove barriers to accessing and using health insurance for historically disadvantaged populations at the community and micro-community levels. The Health Workstream completed seven sessions with plan networks, providers, carriers and consumers to help learn the challenges that historically underserved communities face as well as barriers that are currently in place and what available tools state insurance regulators have to combat those barriers. The information gathered from these sessions will be available to the NAIC membership to serve as a platform for discussion and conversations related to health equity and other related items.

The Member Diversity Leadership Forum reported on DE&I best practices across territories and provided feedback received on the regulator coursework program that was piloted in Feb. 2023 and noted the coursework program titled ‘Foundations of Diversity, Equity and Inclusion for Regulators’ is available to all state insurance regulators through the NAIC Education and Training Department.

Due to rapid expansion, the sophistication of new product developments and constantly evolving state and local regulations in the cannabis industry in recent years, the Cannabis Insurance Working Group made updates to the original whitepaper ‘Regulatory Guide to Understanding the Market for Cannabis Insurance’ that was written in 2019. Key changes made to the updated whitepaper were discussed during the meeting and are further outlined below. 

During the meeting, Peg Brown, Deputy Commissioner of Insurance for the State of Colorado, noted that the working group has not encountered any controversy related to the updated whitepaper because it avoids advocacy-oriented discussion and instead places an emphasis on issues impacting the affordability and availability of insurance for cannabis-related risks in states that have legalized its use. The 2023 updated whitepaper noted that most commercial insurance for cannabis-related businesses is still found in the non-admitted market, affecting smaller industry players with minimal “off-the-shelf” coverages available in the admitted market. It was also noted as product and service offerings evolve in the industry’s emerging areas such as ancillary services, cannabis-infused products and social consumption lounges, insurance gaps are the most prevalent. Potential structures such as state-based commercial insurance programs, risk retention groups (RRGs), captives and joint underwriting associations (JUAs) are being explored to address these insurance gaps.

Telematics insurance programs, which gather consumer driving data through various technologies, have surged in popularity recently. With its growing prevalence, regulators are focused on ensuring that consumer protections, particularly in pricing fairness and safe driving incentives, are enforced at the state level. Despite the rise, guidance for state departments of insurance and lawmakers on telematics remains scant, with limited existing laws or regulations. Current challenges with telematics programs involve issues of transparency, data usage, consumer privacy, actuarial soundness and fairness. Michael DeLong of the Consumer Federation of America outlined key goals for telematics consumer protections, including clear transparency regarding variables used and their respective consumer impacts, actuarial justification for each variable, assurance against unfair discrimination, robust privacy standards and stringent controls on data that insurers collect and use.

Ken Klein of the California Western School of Law gave a presentation on his research surrounding underinsurance, beginning with the gap in the understanding homeowner’s hold regarding their insurance coverage, with the majority of homeowners believing they are fully insured when actually they are significantly underinsured. From his work with the California Department of Insurance, Klein was able to obtain two years of fire claims data which indicated that after a catastrophe, about 95% of homeowners have less coverage than it would take to rebuild, with most homeowners at least 57% underinsured. Klein emphasized that homeowners are often not intentionally choosing to underinsure, as many bought extended replacement cost where they choose 100% of the estimate of reconstruction costs. However, as insurers use algorithms at point-of-sale to estimate reconstruction costs, the estimates are presented to customers as the insurer’s estimated cost of reconstruction of the house based on information the insurer has about the house. An issue with this process is the lack of information provided to the customer regarding the error rates in the algorithm-generated estimates, with Klein indicating that the error rates of the algorithm appearing significant in recent years when it has typically been significantly low. 

Klein’s solution in his presentation focused on suggesting that state regulators require insurers to report the following for each total loss claim:

• The insurer’s point-of-sale estimated reconstruction cost and the estimation software used to determine that estimate
• Any updated estimated reconstruction cost and the software used for following years
• The dwelling reconstruction coverages and the coverage limit of Coverage A
• The incurred loss
• Whether the loss occurred in a catastrophe

Further, he suggested that state regulators adopt the approach of California and Colorado in terms of disclosure rules by requiring insurers to 1) make annual calculations of the error rates of their point-of-sale reconstruction cost algorithm and 2) disclose to the insured their error rate within the algorithm so the insured can decide which coverage amount to choose. He said this would reduce the frequency of unintended underinsurance. Klein said this research will be published in January 2024.

During the summer national meeting, the Financial Condition Committee heard a presentation from the Macroprudential Working Group and adopted the macroprudential reinsurance worksheet which had been adopted by the Macroprudential Working Group in June. The worksheet has been designed to provide regulators with a framework to assess cross-border reinsurance treaties where there are different regulatory systems involved to assist the regulators in identifying the true economic impacts from the reinsurance transaction. Emphasis was made on the limited use of the reinsurance worksheet which is not intended to be used for every reinsurance contract and can be used for both life and P&C reinsurance contracts.

The Financial Condition (E) Committee presented the framework document which contains three main pieces of work:

1. Risk-Based Capital Investment Risk and Evaluation (E) Working Group to modify the life risk-based capital (RBC) formula
2. Valuation of Securities (E) Task Force to begin financially modeling collateralized loan obligations (CLOs) in December 2024
3. Valuation of Securities (E) Task Force to be authorized to challenge the credit rating for a filing exempt (FE) security

The framework document is designed to provide a review of ongoing projects which are intended to address a material shift in insurer investment strategies. The framework document also provides guidelines for developing changes in the RBC factors for investments and address areas where inconsistent treatment would result in a capital charge that does not correspond to the underlying asset risk. The framework draft was exposed for a 45-day public comment period that ended on Oct. 2, 2023.

The Financial Condition (E) Committee heard a presentation from the Office of the Superintendent of Financial Institutions (OFSI) about the use of artificial intelligence and the potential impact. Emphasis was placed on the Risk Assessment Data Analytics Report (RADAR) which pulls in various data elements to create an interactive dashboard of common financial risk indicators across insurance and banking. Additionally, OFSI discussed the use of the Meltwater Media monitoring tool which is designed to allow insurance supervisors the ability to monitor media and social media throughout the industry and other companies.

During the summer national meeting, the Capital Adequacy Task Force presented the current working agenda for the 2023 calendar year with most items expected to be completed during Q4 of 2023. A few high priority items presented for the Life RBC Working Group related to the appropriate treatment of longevity risk transfers and guidance for the adopted C-2 mortality treatment for 2023.

The Capital Adequacy Task Force exposed revisions to the 2024 proposed charges document which details the responsibilities of the task force as well as the various working groups that fall under the task force. Major changes include the proposed addition of the Generator of Economic Scenarios (GOES) (E/A) Subgroup of the Life Risk-Based Capital (E) Working Group and the Life Actuarial (A) Task Force. The GOES Subgroup will be responsible for monitoring and reviewing the economic scenario generator updates and regularly review key economic conditions and metrics used in the economic scenario generator. 

This agenda item was exposed for a 30-day public comment period that ended on Sep. 30, 2023. The Capital Adequacy Task Force has not met since the summer national meeting so any comment letters received have not yet been made available to interested parties.

The Life Risk-Based Capital (E) Working Group adopted 2023-05-L which removes the dual presentation of the trend test. The Life Risk-Based Capital (E) Working Group noted that the dual presentation of the test was needed during the transition from the 2.5 threshold to the 3.0 threshold but as that transition is now complete, there is no longer a need for dual presentation.

The Life Risk-Based Capital (E) Working Group reviewed 2023-06-L which would make structural changes and instructional changes for LR025, Life Insurance. The change would assign the same factors to group permanent life as individual permanent life categories stating with and without price flexibility. The change would also add a new financial statement note to develop the net amounts at risk in the categories needed for the Life C-2 schedule to create a direct link to a financial statement source. After discussion, the Life Risk-Based Capital (E) Working Group noted that further analysis was needed based on the feedback and will revisit at the fall national meeting.

The Life Risk-Based Capital (E) Working Group adopted 2023-07-L, which aligns the CM6 and CM7 factors for non-performing commercial and farm mortgages with the factors for Schedule A and Schedule BA investments in real estate since those factors were adjusted in 2021.

On April 21, 2023, the FSOC released its new proposed guidance and analytic framework. The new framework is intended to provide greater transparency to the public about how the council identifies, assesses and addresses potential risks to financial stability. The following framework could potentially impact insurer’s surrounding the designation of non-banks that potentially pose financial stability risks.

A designation by the FSOC indicates that the FSOC has determined that the particular entity poses a systematic risk to the entire financial system and, therefore, should be subject to enhanced supervision by the Federal Reserve. The FSOC has not indicated whether there are specific firms or insurers on its radar. However, recent public work of the FSOC has focused on a broad range of companies across the financial sector, including non-bank lenders, hedge funds, crypto firms and asset managers.

The NAIC staff are continuing to review the 2022 LST filings that were due on June 30, 2023, to provide summarized results and insights soon. One of the primary objectives of the Macroprudential (E) Working Group was to determine if interest rate assumptions used in prior year filings were large enough compared to actual increases in 2022. Other objectives include understanding if potential asset sales that were reported in the LST scenarios materialized or differed from actual experience, how the rise in interest rates may have affected the value as well as the impact of collateral calls on derivative contracts. 

The scope criteria for the 2023 LST framework used to identify life insurers and their groups for potential participation in the LST project will be evaluated again in 2023, with the Macroprudential (E) Working Group also considering any modifications to the stress scenarios and other requirements that may be included.  

The LST study group is in the process of considering how to address potential separate account asset sales in a stress scenario, with separate account liquidity concerns currently excluded from the current LST framework. As part of these considerations, the study group is working on a data call for lead states to require their participant life insurance groups to provide some context around the dollar amount of specific asset types included in separate accounts, which are not already subject to the Securities and Exchange Commission’s (SEC) liquidity stress requirements.

The first submissions of the newly adopted actuarial guideline 53 (AG 53) disclosure for non-exempt life insurers were due in April 2023. The Valuation Analysis (E) Working Group considered a review of net yield assumptions to be its top priority due to the implications if a company is assuming high investment returns resulting in more favorable asset adequacy results, where a lower amount of assets could be held for reserves to be considered adequate leaving the potential for risk to be understated and inadequate reserves. 

The presentation by the NAIC staff included a table with four net yield assumption types from most conservative to outlying/aggressive with the corresponding adequate reserves associated with each net yield assumptions type to demonstrate the significant impact net yield assumptions have in the determination of adequate reserves. The example presented by the NAIC staff demonstrated how with all other factors remaining constant, a change in the net yield assumption from most conservative to most aggressive can result in a difference in the amount of reserves to be considered adequate of approximately 20%.

All exposed items below had a 30-day public comment period that ended on Sept. 14, 2023, unless specifically noted otherwise. The Receivership and Insolvency Task Force has not met since the summer national meeting so any comment letters received have not yet been made available to interested parties. 

Amendments to model 540 

The Receivership and Insolvency (E) Task Force exposed a draft removing paragraphs that had conflicting language related to certain assumed claims and the new optional provisions in Section 5G(3) and Section 8A(3). The Receivership and Insolvency (E) Task Force noted that the removal of these paragraphs still maintains the key portions of the 2009 assumed claims transaction language in the drafting notes and also includes the correction of references in certain sections.  

Template describing the U.S. receivership regime 

The Receivership and Insolvency (E) Task Force exposed a template that was drafted that could be used by a U.S. lead state to describe the U.S. receivership regime within resolution plans or to facilitate dialogue with international supervisors during supervisory colleges and crisis management group discussions. The template would be used to summarize information for the international jurisdiction to gain an understanding of the U.S. receivership process.

Update on international resolution activities  

The Receivership and Insolvency (E) Task Force reported on their work with the International Association of Insurance Supervisors (IAIS) Resolution Working Group which includes work on the policyholder protection issues paper and IAIS insurance core principles that deal with resolution.   

Update on Part A: Financial regulation and accreditation standards  

The Receivership and Insolvency (E) Task Force reported on their review of the Insurer Receivership Model Act (555), the Life and Health Insurance Guaranty Association Model Act (model 520) and model 540. Their review is designed to focus on U.S. laws in comparison to the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions. The NAIC staff made note that the work towards substantially similar standards are a continued focus of importance because it means a state’s laws, regulations or ad

The Valuation of Securities Task Force (VOSTF) has continued to focus on amending the P&P manual to provide further clarity on instructions and guidelines, in addition to streamlining certain administrative processes. The VOSTF adopted an amendment to part three of the P&P manual, which clarified the meaning of repurchase agreements in the derivatives transaction definition for funds. The amendment aligns the guidance in the P&P manual with SSAP No. 103R, Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, and provides further clarity dispelling the myth that a fund cannot be the purchaser of securities or the lender of cash. 

The VOSTF discussed its proposed amendment to the P&P manual to update the definition of an NAIC designation to clarify the meaning of NAIC designations, including their use, purpose and risks they address. The amendment seeks to accomplish this through consolidating the explanations and definitions of an NAIC designation currently included in separate parts, part two and part three into a single part, part one. The proposed amendment would also update the definition of “other non-payment risks” for securities assigned a subscript “S”, in addition to the inclusion of examples of other non-payment risks warranting the assignment of this subscript in the P&P manual. 

The VOSTF also discussed comments on its proposed amendment that would authorize the procedures for the Securities Valuation Office's (SVO’s) discretion over NAIC designations assigned through the filing exemption process. This proposal would establish criteria for the NAIC SVO to follow when challenging the use of credit rating provider’s ratings to determine an NAIC designation. Due to a significant amount of feedback received during the public comment period, The VOSTF directed the NAIC SVO staff to develop a modified proposal that incorporates actionable takeaways addressing feedback received. 

The VOSTF also discussed the final list of questions for NAIC credit rating providers, including the feedback received by the SVO on the initial list of questions. The final list of questions has been published on the NAIC website.

Adopted revisions to the Part A Insurance Holding Company Systems Accreditation Standard  

The Financial Regulation Standards and Accreditation Committee adopted revisions to the Insurance Holding Company System Regulation Act (model 440) and the Insurance Holding Company System Model Regulation (model 450). The revisions include implementation of a group capital calculation (GCC) for the purpose of group solvency supervision and also include a liquidity stress test (LST) for macroprudential surveillance. The adoption of these revisions allows for commissioner exemptions for qualifying groups without having to file at least once. These accreditation standards are recommended for all states to implement Jan. 1, 2026.  

NAIC model bulletin: Use of Algorithms, Predictive Models, and Artificial Intelligence Systems by Insurers  

The Committee received preliminary public feedback on the initial model bulletin, with comments submitted by 10 speakers representing diverse stakeholders, including trade groups and consumer advocates. Initial observations mainly focused on language pertaining to third-party oversight, terminology definitions and advocating a principles-based approach to establish governance expectations.  

The Big Data and Artificial Intelligence Working Group discussed the Home Insurance Survey Report. The survey encompassed 10 states and targeted eligible insurers (operating within a participating state and having at least $50 million in national homeowners' insurance premium for the year 2020). The objective of the survey was to assess their utilization of artificial intelligence (AI) and machine learning (ML) in an effort to identify industry risk, mitigate model-related risks, comprehend industry trends and provide foundational information for regulatory approaches and frameworks. 

Survey results revealed that out of 194 participating companies, approximately 70% indicated their affirmative intention to use, currently use or explore the use of AI and ML within their insurance operations. Notably, the implementation of AI/ML was most prevalent in claims operations and underwriting operations, as outlined in the subsequent table summarizing the survey responses regarding AI/ML utilization by insurer function:

The Privacy Protections (H) Working Group furnished a report detailing the status of finalizing the NAIC's Insurance Consumer Privacy Protections Model Law (model 674). It was indicated that an extension to the development timeline would be requested once the next model law draft is exposed for public comment.