To print this article, all you need to do is be registered or log in to Mondaq.com.
Regulatory Considerations Update
Many industry players have been following the development of a document compiled by the Financial Stability Task Force (E) and the Macroprudential working group (E) titled “Regulatory Considerations Applicable to (but Not Exclusive to) Insurers Owned by Private Equity (PE) Firms” (the “Regulatory Considerations”) which sets out a list of areas of regulatory concern regarding activities that overlap with the growing importance of private equity in the insurance industry. The revised regulatory considerations were adopted at the task force/working group level on June 27, 2022, and subsequently adopted in turn with some editorial changes by the
Financial Situation Committee (E) on July 21, 2022 and by Executive Committee (EX) and Plenary at the National Summer Meeting.
While the Financial Stability Task Force and the Macroprudential Task Force have indicated that they intend to continue to monitor these items, the bulk of regulatory considerations have been referred to other NAIC groups to new work. For instance:
- Group Solvency Matters Working Group (E):Received references to perform further analysis on (i) the valuation of holding company structures and (ii) the current application of the definition and assessment of control, taking into account contractual terms such as asset management services.
- Risk-Based Supervision Working Group (E):Received references regarding the assessment of (i) the terms of investment management agreements and (ii) the current alignment of incentives with owners focused on short-term results, including a focus on fees investment management.
- RBC Working Group on Investment Risk and Valuation (E): Received a recommendation regarding the increasing presence in the market of privately structured securities to address concerns about tail risk not captured by reserves.
- Credential Assessment Working Group (E):Received references regarding (i) the assessment of the terms of investment management agreements, (ii) the growing presence in the market of privately structured securities and (iii) the confidence of insurance regulators in the reports rating agencies.
- Working Group on Statutory Accounting Principles (E): Received references regarding (i) investments created by related parties, including structured securities, and the possibility of potential conflicts and complicated fee structures, (ii) issues in identifying underlying affiliated investments, and /or guarantees in investments in structured securities, (iii) asset manager affiliates and affiliate disclaimers avoiding current affiliate investment disclosure requirements and (iv) increasing pension risk transfer activities supported by complex investments and the need for appropriate disclosure thereof.
- Exam Invigilation Working Group (E): Received a recommendation regarding issues in identifying underlying affiliated investments and/or collateral in structured securities investments.
- Actuarial Working Group (A): Received references regarding (i) alignment of incentives with owners focused on short-term results, including through investment management fees, (ii) growing presence in the market of structured securities and (iii) increased pension risk transfer activity supported by complex investments and related funding considerations.
- Selected by the working group on financial stability (E) and the macroprudential working group (E): These groups will continue to consider a few of the points before referring them to other groups, including (i) a concern about market conduct practices by less experienced acquirers and (ii) a concern about the structuring offshore or complex reinsurance.
In particular, with respect to pension risk transfer activities, the
Financial Stability Task Force (E) and the
Macroprudential working group (E) indicated that their ultimate objective is to include information on the investments supporting the pension risk transfer activity in the notes to the statutory financial statements of the insurers concerned. NAIC staff also began engaging with the US Department of Labor (the “DOL”) to discuss whether to apply additional DOL regulations to pension risk transfer transactions.
In addition, to address concerns about the increasing use of offshore reinsurance or more complex reinsurance structures, regulators in the Macroprudential working group (E) are in the process of having confidential discussions with industry participants to better understand the area and will subsequently consider whether further regulatory work is needed in this area.
As part of a review of the activities of the
International Association of Insurance Supervisors(the “AICA”) (for more details, see “International Insurance” below), NAIC staff noted that the AICA has also formed a Private Equity Task Force which plans to produce an internal briefing note providing an update on private equity developments in various jurisdictions. We will monitor this workflow for relevant updates.
The issue of climate risk ran through the work of a number of NAIC groups at the Portland meeting, with some of the more notable developments described below.
At the joint meeting of the Financial Stability Task Force (E) and the Macroprudential working group (E), the NAIC representative on the Financial Stability Oversight Council (“FSOC”) provided an update on developments at the FSOC. Late last year, the FSOC called on member agencies (including the NAIC) to address climate risk as a growing threat to financial stability. In response to this accusation, the NAIC is participating in several groups to improve information sharing on climate resilience.
Furthermore, climate risk was a subject of discussion during the meeting of the International Insurance Relations Committee (G), including in relation to the increased focus and cooperation between various regulators on climate risk mitigation and climate resilience, including recent meetings of the Sustainable Insurance Forum working group to discuss gaps in protection against climate risks in various jurisdictions. The
International Insurance Relations Committee (G)plans to publish a report on climate risk issues before the end of 2022 in conjunction with the new IAIS Climate Risk Steering Group, which has been formed to (i) review climate monitoring standards climate risk and provide supporting documents to help members use them to do so, (ii) improve methods for scenario analysis and (iii) use climate data to track progress by the IAIS.
As discussed in more detail in the “Property and Casualty Insurance—Other Lines of P&C Insurance” section below, increasing attention has been paid to P&C Insurance Committee (C) on the evolution of insurance needs in the face of flood and forest fire risks, where losses are expected to increase in connection with climate change. The Climate and Resilience Task Force (EX) also received a presentation on wildfire hazard mitigation strategies and a report that at the federal level, on August 2, 2022, the United States House of Representatives passed the Wildfire Response and Drought Resiliency Act , which would require the Federal Emergency Management Agency (“FEMA”) and the US Government Accountability Office (the “GAO”) to study wildfire insurance coverage, including examining growing threats and responses from insurers and regulatory authorities.
The Climate and Resilience Task Force (EX) has sent referrals to relevant NAIC groups proposing changes to the Financial Analysis Handbook, Financial Examiners Handbook, and ORSA Guidance Handbook to better address climate-related risks, and plans to forward these references to Financial Situation Committee (E).
To see the full article, click here
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
POPULAR ARTICLES ON: United States Insurance