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VI. Principal Regulatory Developments Affecting Insurance Companies
reserves than the current formulaic approach. The result of these efforts, the implementation of principle-based reserving (“PBR”), the result of these efforts, now appears to be less than one year away. It was reported by the NAIC in late November that 39 states have now enacted the amendments to the NAIC Model Standard Valuation Law (the “SVL”), that the amendments were under consideration in one further state, and that bills proposing to enact the SVL amendments would be introduced shortly in several further states. These states represent more than 75% of total industry premium volume. In order for PBR to become effective as of January 1, 2017 (which is the current target date), no fewer than 42 states representing 75% of the total industry premium must enact laws “substantially similar” to the amended SVL by July 1, 2016. We note that the NAIC is currently determining whether the 39 states discussed above have, in fact, enacted laws “substantially similar” to the amended SVL. The criteria for making this determination were adopted by the NAIC in November 2015.
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outright. The purpose of AG 48 was to implement the substantive requirements of the Framework effective as of January 1, 2015, pending the development and adoption by the states of the new Model Regulation.
The NAIC originally planned to adopt during 2015 both the Model Regulation and the amendment to the Model Law necessary for state regulators to implement the Model Regulation. However, this timeline proved to be too ambitious. Instead, it is now expected that the Model Regulation will not be finalized until the next NAIC national meeting in April of this year at the earliest. One aspect of the Model Regulation that was finalized by the NAIC in 2015 is the noncompliance penalty provision. As decided by a 12-to-8 vote of the NAIC Reinsurance (E) Task Force, the Model Regulation will incorporate the “All or Nothing” approach to the noncompliance penalty, pursuant to which a cedent would receive no credit for reinsurance in the event of a shortfall in “Primary Security” assets as defined in AG 48 (i.e., the types of “hard assets” required to collateralize the portion of the total statutory reserve approximately equal to the PBR level) or “Other Security” as defined in AG 48. The “All or Nothing” approach is not consistent with AG 48— which, instead, provides for a so-called “Dollar-for-Dollar” approach, pursuant to which credit for reinsurance would be reduced by the amount of shortfall in Primary Security assets, while giving full credit for Other Security assets.
The revisions to the Model Law were adopted by the NAIC on January 8, 2016. These revisions grant authority to state insurance regulators to adopt not only the Model Regulation, but also regulations with respect to: (i) variable annuities with guaranteed death or living benefits; (ii) long-term care policies; and (iii) such other life and health insurance and annuity products as to which the NAIC adopts model regulatory requirements with respect to credit for reinsurance. Such regulations would not apply to: (1) an alien reinsurer that has qualified as a “certified reinsurer” in the state (or, if the state has not adopted the “certified reinsurer” concept, an alien reinsurer that has qualified as a “certified reinsurer” in at least five states); or (2) a reinsurer that maintains at least $250 million in capital and surplus (without the impact of any permitted or prescribed practices) and that either is
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
When PBR was first proposed, two states immediately voiced their opposition to the concept of principle-based reserving: California and New York. California’s stance towards PBR has since changed; indeed, California became one of the states to enact the amendments to the SVL in late 2015. New York, on the other hand, has continued to oppose PBR—although, as discussed in Section VI.I.1, we understand that the NYDFS has discussed with the NAIC the possibility of the NYDFS supporting PBR if the NAIC were to agree to make certain revisions to the net premium reserve/formulaic floor in the Valuation Manual.
b. Captive Update
i. XXX/AXXX Framework, AG 48 and XXX/AXXX Model Regulation
Over the last two years, state insurance regulators and the NAIC have devoted significant energy to reassessing their regulation of captive XXX and AXXX transactions, leading to the adoption in 2015 of a new regulatory framework for such transactions (defined above as the “Framework”) and AG 48. The Framework and AG 48 aim to set standards applicable to XXX and AXXX transactions, instead of restricting them