NAIC Summer 2016 National Meeting update
INSIGHT ARTICLE |
The following update summarizes information discussed at the National Association of Insurance Commissioners (NAIC) Summer 2016 National Meeting held in San Diego in August. Professionals from RSM US LLP’s insurance industry practice attended these meetings and actively participated in many of the taskforce and expert panel meetings leading up to the national meeting. This enables us to review and share information we believe is most pertinent to our middle-market insurance clients. If you have any questions about the following information, please reach out to Jim Richardson.
The Cybersecurity Taskforce introduced its proposed changes to its draft Insurance Data Security Model Law (Model Law), which serves to establish standards for data security, investigation and notification of a data breach. The Model Law draft was met with harsh criticism from many interested parties representing various industry groups, including the American Council of Life Insurers and Property Casualty Insurers. Chief among the concerns were:
- Interested parties felt that, as written in the Model Law, data breaches that would result in no harm to a consumer would have to be reported. This would lead to more notices being issued and risk desensitizing consumers to notices when actual harm had been done.
- The Model Law seems either redundant or conflicting in matters related to consumer notifications required by federal and state regulations, such as the Gramm–Leach–Bliley Act, that already address what should be disclosed to consumers in the event of a data breach.
Overall, the interested parties were not supportive of the most recent draft of the NAIC’s Model Law and many suggested they would oppose any attempts to pass this through state legislatures.
The two main investment issues discussed during the Statutory Accounting Principles Working Group’s (SAPWG) meeting included the measurement of fixed income exchange traded funds (ETFs) and quarterly reporting of investment schedules.
ETFs: The current measurement method for these ETFs is amortized cost. The SAPWG recognizes that this is not a feasible method given that these ETFs do not have maturity dates, par values, or stated interest rates, all of which would be necessary to amortize an ETF to its maturity date par value. Further, the SAPWG noted that roughly half of the insurers holding ETFs have been measuring them incorrectly.
The draft issue paper would propose to use fair value as the measurement for any Securities Valuation Office-designated equity instruments, such as these ETFs. Net asset value would be permitted as a practical expedient for fair value. Insurers expressed concerns over a fair value measurement model given that future interest rate increases would most likely decrease the fair value of the ETFs resulting in large charges to surplus.
The SAPWG discussed an optional measurement method described as “systematic value,” which is based upon a specific calculation that has been developed by BlackRock. This method would be more approximate to an amortized cost value and would not respond to interest rate volatility the way a fair value method would.
Insurers appeared to be in favor of this optionality in determining the measurement method to use. The SAPWG passed a motion to allow for this optionality, though two members voted against the motion.
Quarterly reporting of investment schedules: The SAPWG received comments from interested parties related to the quarterly reporting of investment schedules. After much discussion, which centered on the cost and time for insurers to complete the proposed quarterly reports, the SAPWG agreed to expose an additional alternative for comment. This alternative would be a mid-year collection of Schedule D investment information. This mid-year collection would be less in scope than a full Schedule D and would include CUSIP, par value, book/adjusted carrying value and fair value and would be required to be filed with the second quarter financial statements. Industry appeared to support these less frequent and less extensive reporting requirements that appear to be a lower-cost alternative that would achieve the insurance regulators’ objectives. The SAPWG has exposed this change with comments due by Oct.10, 2016.
The Reinsurance Taskforce heard comments from interested parties regarding recent actions taken by European regulators that would negatively impact U.S. companies’ ability to compete in European markets. Most recently, the German insurance regulator, BaFin, issued letters to U.S. reinsurers that indicated those reinsurers would need to form and capitalize a subsidiary or branch in order to become authorized in their country. Options provided by BaFin to get around the formation of a branch or subsidiary seemed to preclude a U.S. reinsurer from writing business in Germany through a broker, which would significantly curb U.S. reinsurers ability to attract new and retain existing business. While many of the middle-market insurers we work with do not provide reinsurance to Germany, the United Kingdom or other European Union nations, we recognize that many of our middle-market insurers purchase reinsurance, either directly or through a broker, from these countries.
We feel this topic is worth monitoring to assess whether there will be any direct reciprocal actions taken by the United States or unintended consequences resulting from potential breakdowns in discussions of the Transatlantic Trade and Investment Partnership.
The following tables are based on information found on the NAIC website. However, we’ve tried to include the information we deem as most relevant to RSM insurance industry clients.