Captive Update on the 2017 NAIC Summer Meeting

The National Association of Insurance Commissioners (NAIC) recently held its Summer 2017 National Meeting in Philadelphia, Pennsylvania. While most captive insurers do not have to report directly to the NAIC, the NAIC promotes model acts and model regulations as part of the NAIC accreditation standards for state insurance regulators. When the NAIC adopts a model as its accreditation standard, it is required to become part of the laws and regulations of each state within a certain amount of time. Therefore, it behooves captive insurers to stay abreast of issues and proposals being raised by the NAIC.

This is a recap of some of the issues raised at the Summer 2017 National Meeting. Captives should consult their auditors and general counsel for specific recommendations on how these issues may impact their operations.

Cybersecurity (EX) Working Group

As described on the NAIC website, "The mission of the Cybersecurity (EX) Working Group is to consider issues concerning cybersecurity as they pertain to the role of state insurance regulators." One of its main charges is development of the "Insurance Data Security Model Law." "This model law is specific to insurers, brokers, and other state-regulated entities, regarding cybersecurity standards," the website explains. Most readers should be aware that New York has already adopted a cyber security regulation, and insurers domiciled in the state are now reporting under this law. We looked at some of the differences between the NAIC proposal and the New York law last year in "Competing Cyber Security Laws: NAIC v. New York."

This model law continues to be a top focus area for the NAIC, as evidenced by the comments made by Michael Consedine, NAIC CEO, in an interview written by Gloria Gonzalez and published in Business Insurance August 7, 2017. In the article, he says, "Our cyber security model will be up for discussion. That has come a long way through multiple evolutions and I think is in a really good place right now.... The model has evolved. It mirrors in many respects the New York regulation, which I think is a great result and allows for some consistency and uniformity in approach, which I know is a big issue for the marketplace. And we have the benefit of having already gone through the process in New York and learning from their experience."

Our observation on the proposed model law is that captive insurers should be wary of the way this accreditation standard has been created. New York chose to front run the NAIC on cyber security regulation. It now appears that the proposed model law will incorporate a large portion of the New York state law. Therefore, captives that have no nexus whatsoever to New York will effectively be impacted by its cyber security regulation. While we support the need for a model law, we believe it should be created through consensus of the various state regulators versus being written by a single state.

Corporate Governance (E) Working Group

As described on the NAIC website:

In 2012, the National Association of Insurance Commissioners (NAIC) formed the Corporate Governance (E) Working Group to outline high-level corporate governance principles for use in U.S. insurance regulation and to develop regulatory guidance, including detailed best practices, for the corporate governance of insurers. The requirements for extensive disclosure of regulated insurance companies' corporate governance practices that were developed were set in the Corporate Governance Models adopted by the Executive Committee and Plenary during the 2014 Fall National Meeting. Following that meeting the Corporate Governance (E) Working Group was disbanded.

The models in question are the "Corporate Governance Annual Disclosure Model Act" and "Corporate Governance Annual Disclosure Model Regulation." These proposed models call for insurance companies to file a corporate governance disclosure form each year. Risk retention groups are already subject to these reporting requirements. Other captive insurers should ascertain if the models have been adopted by their state domicile to determine if they are in compliance.

Financial Stability (EX) Task Force

As described on the NAIC website, "The mission of the Financial Stability (EX) Task Force is to consider issues concerning domestic or global financial stability as they pertain to the role of state insurance regulators." The committee has a number of documents pertaining to financial stability available on its webpage. These include "Academic Perspectives on Systemic Risk and Insurance" and Insurance Sector Investments and Their Impact on Financial Stability.

Captive owners should monitor the issues under discussion by this task force. Insurance regulation is unique in the United States, where responsibility is delegated to the states versus maintained at a national level. As globalization initiatives continue, particularly from a regulatory perspective, captive insurers need to at least be aware of what the rest of the world is considering and how it may influence and/or impact regulation at the state level.

Financial Condition (E) Committee—ORSA Subcommittee

As described on the NAIC website, "The mission of the Financial Condition (E) Committee is to be the central forum and coordinator of solvency-related considerations of the NAIC relating to accounting practices and procedures; blanks; valuation of securities; the Insurance Regulatory Information System (IRIS); financial analysis and solvency; multi-state examinations and examiner training; and issues concerning insurer insolvencies and insolvency guarantees." According to the NAIC website, the Own Risk and Solvency Assessment (ORSA) Implementation (E) Subgroup is charged with the following.

• "Continue to provide and enhance an enterprise risk management (ERM) education program for regulators in support of Own Risk and Solvency Assessment (ORSA) implementation.
• "Continually review and monitor the effectiveness of the Risk Management and Own Risk and Solvency Assessment Model Act (#505) and its corresponding NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual; consider revisions as necessary."

The NAIC is interested in promoting the adoption of ERM standards, and ORSA is part of this endeavor. The NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual is a useful template for captives interested in enhancing their own ERM capabilities.

Group Capital Calculation (E) Working Group

The mission of this committee is to, as described on the NAIC website, "[c]onstruct a U.S. group capital calculation using an RBC [risk-based capital] aggregation methodology; liaise as necessary with the ComFrame Development and Analysis (G) Working Group on international capital developments and consider group capital developments by the Federal Reserve Board, both of which may help inform the construction of a U.S. group capital calculation."

"At its meeting on August 6, the Working Group agreed to expose the ... NAIC Staff memo on captives for a public comment period of 30 days." according to the NAIC website. "The memo discusses possible approaches in the group capital calculation for XXX/AXXX captive insurance companies, and the Working Group is specifically requesting feedback on the five decision points listed in the memo.

"Comment letters should be sent to Julie Garber by Tuesday, September 5," the website says.