## EXECUTIVE SUMMARY

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---

### Scope, timing, and context
- Targeted review of cross-cutting themes building on the detailed assessment of the Insurance Core Principles (ICPs) conducted in 2015.
- Analysis relied on a targeted self-assessment against a subset of ICPs covering valuation and solvency, risk management, conduct, winding-up, corporate governance and enforcement, and the objectives, powers and responsibility of supervisors.
- Focus on the state-based system of regulation and supervision; based on framework and practices as of March 10, 2020.
- On-site work dates:
  - Main on-site work: October 15–November 8, 2019.
  - Sections on Mortgage Guaranty Insurance and Natural Catastrophes: February 18–March 5, 2020.
- COVID-19:
  - Pandemic is having a significant impact primarily through investments and to a lesser extent claims patterns.
  - The analysis did not cover COVID-19 impacts or regulators’ pandemic response; recommendations are to be considered once impact is clearer and extraordinary measures eased.
  - State regulators have taken market conduct and prudential actions (e.g., facilitating late premium payments, banning cost sharing for COVID-19 tests, uniform data calls, regulatory relief and forbearance, statutory accounting exceptions).

### Overall assessment and progress since 2015
- 2015 detailed assessment: U.S. assessed as observed 8 ICPs, largely observed 13 ICPs and partly observed 5 ICPs.
- Progress since 2015:
  - Implementation of Principles-based reserving (PBR) in the life insurance industry.
  - Implementation of risk-focused surveillance in financial analysis and financial examinations.
- Four overarching unresolved themes: independence of supervisors, risk-based supervision, reserving (and total balance sheet approach), and group capital.

### Market structure and industry scale (selected exact figures)
- U.S. insurance market: 28 percent of global direct premiums written in 2018.
- Industry represents 11 percent of the total U.S. financial system assets and is equivalent to 48 percent of the U.S. GDP.
- Sector penetration: 7 percent of GDP when measured by premiums at end 2018.
- Insurance density (premiums per capita): US$4,481 at end–2018.
- Foreign participation:
  - Imports of insurance services: US$51 billion (mostly reinsurance).
  - Insurance services provided to U.S. persons by majority owned affiliates of foreign multinational enterprises: US$72 billion in 2017.
  - U.S. insurance sector operations outside the United States: US$18 billion of exports of insurance services (mostly reinsurance).
  - Insurance services provided by majority owned affiliates of U.S. multi-national entities in 2017: US$62.3 billion.
- Industry consolidation: number of companies has been gradually consolidating over the last five years.

### Life insurance industry (selected exact figures)
- Number of licensed life insurance companies: 722 at end of 2018 (down from 855 in 2009 and 763 in 2014).
- Total net admitted assets: US$6.8 trillion including US$2.5 trillion in separate account assets.
- Life sector assets represent 8 percent of financial sector assets and 37 percent of U.S. GDP at end–2018.
- Life industry profitability: 26 percent decline in 2018, down to US$28 billion.
- Total net written premium and deposits: increased 4.4 percent (US$32.9 billion) to US$784.4 billion in 2018.
- Annuity new premium: US$218.6 billion in 2018, up 1.6 percent over 2017.
- Industry net investment yield: 4.4 percent in 2018; declined from 5.1 percent in 2009.
- Investment shifts: NAIC year ended 2018 largest increase in acquisitions of mortgage loans was US$44.5 billion to an annual total of US$521.5 billion; acquisitions of bonds increased by US$16.8 billion to an annual total of US$2.999 trillion.

### Property & Casualty (P&C) industry (selected exact figures)
- Total assets increased from US$1.8 trillion in 2015 to US$2 trillion at end-2018.
- Number of P&C companies: 2,600 at end-2018 (down from 2,831 in 2009 and 2,666 in 2014).
- Personal lines represent 53 percent of net premium written.
- Direct premiums written increased 5.4 percent in 2018.
- Underwriting profit/loss:
  - Underwriting loss in 2017: US$22.5 billion.
  - Catastrophe losses: US$78 billion in 2017 and US$52 billion in 2018.
  - Underwriting profit of US$3 billion in 2018.
- Combined ratio: 99.1 percent for 2018; 100.5 percent in 2016 and 103.9 percent in 2017.
- Investment yield: 3.26 percent in 2018; net income increased to US$57.9 billion from US$38.7 billion in 2017.
- Unrealized capital losses: US$40.5 billion; policyholders’ surplus declined from US$786.0 billion at end-2017 to US$780.0 billion at end-2018.
- Market concentration: top 10 groups made up 47 percent of the market in 2018.

### Health insurance industry (selected exact figures)
- Number of health entities filing with NAIC in 2018: 1010 (increase from 943 in 2014).
- Total assets: US$446 billion (up from US$355 billion in 2015).
- Premiums: 6.5 percent increase to US$707 billion in 2018.
- Medical and hospital expenses: US$323 billion in 2009; US$451 billion in 2014; US$597 billion in 2018.
- Medicare and Medicaid represented 54 percent of the market in 2018 (up from 51 percent in 2015).
- Group comprehensive cover premium: US$165 billion in 2018; combined Medicare and Medicaid premium: US$384 billion.
- Individual comprehensive cover increased from US$19 billion to US$76 billion over ten years (400 percent), representing about 11 percent of the market.

### Key findings: supervisory independence
- Independence is a key outstanding issue.
- Factors undermining perceived or actual independence:
  - Appointment at the pleasure of the state governor or direct election of insurance commissioners.
  - Government control of access to resources.
  - Constraints on staff remuneration.
- Recommended actions for state governments:
  - Reform appointment and dismissal of commissioners and senior staff (see Main Recommendations).
  - Ease civil service remuneration constraints to attract and retain qualified staff.
  - Pass along all cost recovery assessments to state insurance regulators to boost budgetary independence.

### Key findings: risk-based supervision
- Current approach remains partly rules-based and mechanical; risk-based supervision should be developed further.
- Recommendations to strengthen risk-based supervision:
  - Focus analysis and examinations on risk culture, governance and quality of risk management.
  - Reduce internal barriers across financial analysis and financial examinations.
  - Move away from universal quinquennial in-depth examinations toward more frequent, narrower scope examinations while ensuring comprehensive scope coverage within a five-year period.
  - Increase interaction between state regulators and insurers, including more frequent engagement with C-Suite management.
  - Add a market significance or impact-of-failure overlay to the existing prioritization framework to ensure large and important insurers and groups receive suitable ongoing supervisory attention.

### Key findings: reserving and total balance sheet approach
- Consistency of life insurer liability valuation methods is needed:
  - Variety of methods exist; inconsistent conservatism and lack of a consistent methodology for determining a central estimate and appropriate margin.
  - Mixed pre-PBR and post-PBR reserves create a “mixed bag” of valuation requirements.
  - Lack of consistency has encouraged industry arbitrage (e.g., growth of captive insurers for certain products).
- Recommendation on reserving:
  - Require all reserves be moved to a consistent PBR basis after a target transition period of five years with floors and guardrails removed.
- Total balance sheet approach:
  - Need to align statutory valuation of assets and liabilities; greater consistency will enable re-design and recalibration of life insurer RBC requirements to reflect underlying economics.

### Key findings: group capital
- Development of a group capital requirement should be advanced.
  - Federal Reserve and NAIC are developing aggregation approaches (BBA and GCC) which may diverge technically while aiming for comparable outcomes.
  - Potential divergence on calibration: Federal Reserve focuses on comparability across financial activities; NAIC approach appears calibrated toward existing U.S. insurance capital requirements.
- Recommendation:
  - Develop a consolidated group capital requirement similar to GAAP-Plus ICS for IAIGs and optionally for domestic groups in parallel with FRB and NAIC aggregation approaches.
  - If the NAIC’s proposed Group Capital Calculation (GCC) is adopted, it should be made into a requirement rather than merely a calculation.

### Natural catastrophes and protection-gap issues
- Increasing incidence and severity of natural catastrophes require medium- to long-term strategic regulatory responses that:
  - Ensure adequate price signals of rising risk to policyholders.
  - Incentivize mitigation efforts to enhance resilience.
- California wildfires:
  - Insured losses: estimated US$18 billion in each of 2017 and 2018.
  - Calibrated regulatory responses needed to produce sustainable, risk-based pricing while maintaining availability.
  - Observed rate-filing data (California):
    - Average indications for necessary rate increases over 2018 and 2019 based on 51 filings: 27.07 percent.
    - Average rate changes requested: 6.35 percent.
    - Many insurers request 6.9 percent increases to avoid public hearing triggers (public hearing if average requested > 7 percent).
    - These practices mask larger increases for high-risk individual policyholders; cumulative increases for high fire risk areas likely 50–200 percent.
- Florida:
  - Florida accounts for 41 percent of all hurricanes making landfall in the U.S.
  - FHCF statutory limit: US$17 billion of fund coverage available across the market.
- Flood risk and NFIP:
  - NFIP provides national flood insurance up to US$250,000 limit.
  - Private flood market in 2018: 15 percent of total flood insurance market (US$4.2 billion); direct premium written US$644 million in 2018 (9 percent increase over 2017; 71 percent increase over 2016).
  - NFIP Risk Rating 2.0 scheduled to go into effect on October 1, 2021; rate increase limits for primary residences of 5–18 percent per year apply.
- Protection gap concerns:
  - High flood protection gap documented (e.g., take-up rates < 50 percent in SFHA; Harvey and Sandy: < 20 percent of households suffering flood losses had flood insurance).
  - McKinsey analysis: in most affected areas of Hurricanes Harvey, Irma and Maria: 80 percent of homeowners in affected areas of Texas lacked flood insurance; 60 percent in Florida; 99 percent of Puerto Rico homeowners lacked flood insurance.

### Other regulatory development issues and sector priorities
- Private Mortgage Insurers (PMIs):
  - Six PMIs accepting new business; total loans insured approximately US$1.2 trillion with risk in force just over US$300 billion.
  - PMIERs by GSEs are binding financial requirements on PMIs; NAIC/state regulators working on a risk-based capital model including a countercyclical factor due end-2020.
  - PMIs are currently excluded from RBC; proposed state model retains 25 to 1 risk-to-capital ratio as a floor.
- Governance and process improvements:
  - Streamline development of model laws to ensure timely reaction to market developments (example: slow adoption of Insurance Data Security Model Law).
  - Give state insurance regulators a clear mandate for financial stability; inclusion of financial stability in mission/statute should become an accreditation standard.
  - Prioritize NAIC model laws where a national approach is required or highly desirable.
  - Put in place insurance-specific regulatory governance and risk management requirements (e.g., remuneration policies, fit and proper requirements, organization of risk functions) to clarify expectations and enhance enforceability.

### Specific supervisory capability and product-area recommendations
- Reserving and actuarial capacity:
  - NAIC and state regulators should significantly expand in-house supervisory actuarial capability; consider a shared center of expertise in addition to NAIC VAWG resources.
- Captives:
  - Regularly monitor and publicly report on impact of captives used by direct writing insurers and groups, including combined impact on reserve and capital positions.
  - Align valuation (SAP) and capital (RBC) requirements for captives with direct insurers to remove arbitrage opportunities.
- Long-Term Care (LTC):
  - Develop a balanced approach to rate approvals recognizing trade-off between fair treatment of customers and protecting policyholders against insurer insolvency.
  - NAIC and state regulators should develop a more consistent response to LTC rate approvals to avoid cross-subsidization between states.
  - State and federal governments should work together to find alternative solutions to funding aged care, potentially more appropriate insurance products.
- Own Risk and Solvency Assessment (ORSA):
  - Align ORSA filing deadlines across states; example target: July 1.
  - NAIC and state regulators should benchmark ORSAs across all states to document practices, identify trends and inform macroprudential issues.

### NAIC Accreditation, governance, and model law process
- NAIC created by state regulators; conducts standard-setting and provides regulatory support.
- Model laws are not binding unless enacted by state legislatures; adoption gaps exist (examples: Model #235 not enacted; LTC Model Act #640 not enacted by any NAIC member).
- Accreditation Program:
  - All fifty states, DC, and Puerto Rico are accredited.
  - Comprehensive review every five years; annual self-assessment required.
  - Part A sets out laws/regulations necessary for solvency supervision.
  - Incorporation into accreditation is the path to near-universal state adoption.
- Challenges:
  - Model law development process described as cumbersome and slow; recommendation to streamline and prioritize national consistency areas or adopt a model state insurance act enabling more agile regulation.

### RBC framework and aggregated data (exact figures)
- Intervention first level: 300 percent of ACL.
- Aggregated U.S. life insurer RBC data (Table 3):
  - 2018:
    - Number of Companies: 703
    - Total Adjusted Capital - US$ Billion: 540.4
    - Authorized Control Level RBC - US$ Billions: 64.3
    - ACL RBC Ratio (%): 840
  - 2017:
    - Number of Companies: 704
    - Total Adjusted Capital - US$ Billion: 526.6
    - Authorized Control Level RBC - US$ Billions: 56.4
    - ACL RBC Ratio (%): 934
  - 2016:
    - Number of Companies: 718
    - Total Adjusted Capital - US$ Billion: 508.7
    - Authorized Control Level RBC - US$ Billions: 53.4
    - ACL RBC Ratio (%): 953
  - 2015:
    - Number of Companies: 725
    - Total Adjusted Capital - US$ Billion: 495.4
    - Authorized Control Level RBC - US$ Billions: 51.3
    - ACL RBC Ratio (%): 966
  - 2014:
    - Number of Companies: 727
    - Total Adjusted Capital - US$ Billion: 486.6
    - Authorized Control Level RBC - US$ Billions: 50.0
    - ACL RBC Ratio (%): 973
- Aggregated U.S. P&C RBC data (Table 4):
  - 2018:
    - Number of Companies: 2465
    - Total Adjusted Capital - US$ Billion: 931.2
    - Authorized Control Level RBC US$ Billions: 151.1
    - ACL RBC Ratio (%): 616
  - 2017:
    - Number of Companies: 2486
    - Total Adjusted Capital - US$ Billion: 935.9
    - Authorized Control Level RBC US$ Billions: 149.9
    - ACL RBC Ratio (%): 624
  - 2016:
    - Number of Companies: 2492
    - Total Adjusted Capital - US$ Billion: 876.9
    - Authorized Control Level RBC US$ Billions: 138.7
    - ACL RBC Ratio (%): 632
  - 2015:
    - Number of Companies: 2494
    - Total Adjusted Capital - US$ Billion: 833.5
    - Authorized Control Level RBC US$ Billions: 133.8
    - ACL RBC Ratio (%): 623
  - 2014:
    - Number of Companies: 2520
    - Total Adjusted Capital - US$ Billion: 830.1
    - Authorized Control Level RBC US$ Billions: 133.9
    - ACL RBC Ratio (%): 620
- Aggregated U.S. health insurance and LTC RBC data (Table 5):
  - 2018:
    - Number of Companies: 965
    - Total Adjusted Capital - US$ Billion: 156.7
    - Authorized Control Level RBC US$ Billions: 25.0
    - ACL RBC Ratio (%): 627
  - 2017:
    - Number of Companies: 937
    - Total Adjusted Capital - US$ Billion: 142.1
    - Authorized Control Level RBC US$ Billions: 23.2
    - ACL RBC Ratio (%): 613
  - 2016:
    - Number of Companies: 925
    - Total Adjusted Capital - US$ Billion: 127.8
    - Authorized Control Level RBC US$ Billions: 22.6
    - ACL RBC Ratio (%): 565
  - 2015:
    - Number of Companies: 897
    - Total Adjusted Capital - US$ Billion: 118.3
    - Authorized Control Level RBC US$ Billions: 20.8
    - ACL RBC Ratio (%): 569

### Main recommendations (selected, with Timeframe and Priority)
- Independence
  - State governments should change legislation to allow insurance commissioners and their staff to be appointed for fixed terms or appointed for open-ended terms; appointment should not be aligned with the term of the governor. (¶39) — MT H
  - State governments should introduce clear criteria for dismissal of insurance commissioners; reasons for any dismissal should be public and subject to appeal. (¶39) — MT H
  - State governments should strengthen financial independence by ensuring state governments pass on all assessments for cost recovery to state insurance regulators. (¶40) — NT H
  - State governments should consider reforms to remuneration of state insurance regulators’ staff to safeguard ability to attract and retain key skilled personnel, while maintaining appropriate accountability for public resources. (¶44) — MT H
- Reserving
  - NAIC and state insurance regulators should require all in-force business be moved to PBR after a target transition period of 5-years. (¶72) — MT H
  - NAIC and state insurance regulators should commence work to re-calibrate the RBC to PBR reflecting underlying economics and a total balance sheet approach, including valuation of investments to ensure consistency of all elements of the SAP balance sheet. (¶80) — MT M
  - NAIC and state insurance regulators should significantly expand in-house supervisory actuarial capability; consider a shared center of expertise in addition to NAIC resources to VAWG. (¶82) — NT M
- Risk-Based Supervision
  - State insurance regulators should better coordinate and leverage expertise of teams dedicated to financial analysis and financial examination for large insurance groups including IAIGs. (¶127) — NT H
  - State insurance regulators should reduce separation between financial analysis and financial examination functions to focus on understanding risk culture, governance and quality of risk management, partly through more frequent engagement with C-Suite management. (¶127) — NT M
  - State insurance regulators should undertake more frequent, narrower scope examinations such that comprehensive scope coverage occurs within a five-year period but with more frequent onsite processes. (¶127) — MT M
  - NAIC and state insurance regulators should add a market significance or impact-of-failure overlay to the existing prioritization framework. (¶115) — MT M
- Group Capital
  - For IAIGs and optionally for domestic groups, NAIC, state insurance regulators and the Federal Reserve should develop a consolidated group capital requirement similar to GAAP-Plus ICS. (¶149) — MT H
- Regulatory Developments and Other Priorities
  - Streamline model law development approach to ensure timely reaction to market developments. (¶30) — MT M
  - State governments should give state insurance regulators a clear mandate for financial stability. (¶34) — MT M
  - NAIC should prioritize development of model laws on issues where a national approach is required or highly desirable. (¶29) — NT L

### Supervisory cooperation and macroprudential coordination
- Federal Reserve consolidates supervision of SLHCs and developed the Building Block Approach (BBA) for group capital aggregation.
- NAIC developing Group Capital Calculation (GCC); coordination between FRB and NAIC recommended.
- FSOC published final interpretive guidance to apply an activities-based approach for nonbank financial companies; practice untested.
- Recommendations:
  - Upgrade the State Insurance Commissioner member on FSOC to a voting member, replacing the independent member with insurance expertise.
  - Continue developing NAIC Financial Stability Task Force (FSTF) workstreams and MPI (liquidity risk, recovery and resolution, capital stress testing, counterparty exposure concentrations).
  - Develop structured, shared group-wide views of risk, governance and risk management within supervisory colleges.
  - Advance counterparty concentration tools/data, sector-wide heat map, and prepare for capital stress testing once GCC is operational.

*Source: EXECUTIVE SUMMARY (content unit: 1usaea2020004) from the provided IMF PDF content.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Major Sections Covered
- INTRODUCTION
  - A. Scope and Approach
  - B. Market Structure
- INSTITUTIONAL SETTING
  - A. Supervisory Responsibilities, Objectives, and Powers
- REGULATION
  - A. Governance
  - B. Valuation, Investments, Reinsurance, Captives, and Capital
  - C. Product Filing and Rate Review
  - D. Enterprise Risk Management and Group and Large Insurer ORSA
  - E. Group-Wide Powers Over Holding Companies
  - F. Oversight of Mortgage Guaranty Insurance
- SUPERVISION
  - A. Federal Reserve Consolidated Supervision
  - B. State Supervision
  - C. Supervisory Cooperation
- MACROPRUDENTIAL SUPERVISION
  - A. Federal Role – FSOC and FIO
  - B. State Insurance Regulator’s Role
- CHANGING INCIDENCE AND SEVERITY OF NATURAL CATASTROPHES

### Boxes (listed verbatim)
- Box 1. List of Model Laws and Other Requirements to be Enacted for Accreditation
- Box 2. FIO Authority Under the Dodd-Frank Act
- Box 3. Example of AP&P Definitions: Conservatism
- Box 4. Examples of SAP versus GAAP Differences For Property & Casualty, Life/A&H Insurers, Fraternal Societies, and Health Entities

### Figures (listed verbatim)
- Figure 1. Insurance Industry Mortgage Exposures are Rising
- Figure 2. Insurance Sector Asset Structure—Broadly Stable
- Figure 3. Life Insurers RBC with Captives and Without Impact of the Captive
- Figure 4. Long-term Care Insurance—Projections vs Reality
- Figure 5. Increasing Use of Mortgage Insurance by GSEs
- Figure 6. Number of Receiverships by Insurer Type

### Tables (listed verbatim)
- Table 1. Main Recommendations
- Table 2. Characteristics of Life Valuation Methods
- Table 3. Aggregated U.S. Life RBC Data
- Table 4. Aggregated U.S. Property & Casualty RBC Data
- Table 5. Aggregated U.S. Health Insurance RBC Data

### Appendix
- I. Status of the Recommendations of the 2015 FSAP

### Glossary (selected acronyms and terms preserved verbatim)
- ACL Authorized Control Level RBC
- AP&P Manual NAIC’s Accounting Practices and Procedures Manual
- ASOP Actuarial Standards of Practice
- BBA Building Block Approach
- CDI California Department of Insurance
- CID Connecticut Insurance Department
- Citizens Citizens Property Insurance Corporation
- CMGs Crisis Management Groups
- ComFrame IAIS’ Common Framework for the Supervision of IAIGs
- DAR Detailed Assessment Report
- DFA Dodd–Frank Wall Street Reform and Consumer Protection Act
- FAST Financial Analysis Solvency Tools
- FEMA Federal Emergency Management Agency
- FAWG Financial Analysis Working Group of the NAIC
- FHCF The Florida Hurricane Catastrophe Fund
- FHLPMC The Florida Hurricane Loss Projection Methodology Commission
- FLOIR The Florida Office of Insurance Regulation
- FIO Federal Insurance Office
- FRB Board of Governors of the Federal Reserve System
- FSAP Financial Sector Assessment Program
- FSOC Financial Stability Oversight Council
- FSTF Financial Stability Task Force
- GAAP Generally Accepted Accounting Principles
- GCC Group Capital Calculation
- GSE Government Sponsored Enterprises (“Fannie Mae” and “Freddie Mac”)
- HOLA Home Owners’ Loan Act
- IAIG Internationally Active Insurance Group (as determined by local supervisors according to IAIS defininition)
- IAIS International Association of Insurance Supervisors
- ICPs Insurance Core Principles
- ICS Global Risk-based Insurance Capital Standard (IAIS)
- LTC Long-Term Care
- MDI Macro Prudential Initiative
- MPI Massachusetts Division of Insurance
- NAIC National Association of Insurance Commissioners
- NFIP National Flood Insurance Program
- NJDOBI New Jersey Department of Banking and Insurance
- NYDFS New York Department of Financial Services
- ORSA Own Risk and Solvency Assessment
- PBR Principles-based Reserving
- P&P Manual Purposes and Procedures Manual of the NAIC Investment Analysis Office
- RBC Risk-based Capital
- RRG Risk Retention Group
- SLHC Saving and Loan Holding Company
- TN Technical Note
- UCAA Uniform Certificate of Authority Application

*Source: EXECUTIVE SUMMARY (content unit: 1usaea2020004) from the provided IMF PDF content.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Scope, timing, and context
- This Technical Note (TN) is a targeted review of cross-cutting themes building on the detailed assessment of the Insurance Core Principles (ICPs) conducted in 2015.
- Analysis relied on a targeted self-assessment against a subset of ICPs covering valuation and solvency, risk management, conduct, winding-up, corporate governance and enforcement, and the objectives, powers and responsibility of supervisors.
- The focus of the analysis has been on the state-based system of regulation and supervision, reflecting the existing institutional setup.
- The analysis is part of the 2020 Financial Sector Assessment Program (FSAP) of the United States and is based on the regulatory framework in place and the supervisory practices employed as of March 10, 2020.
- At the time of writing, the COVID-19 pandemic is having a significant impact on the insurance industry, primarily through the impact on investments and to a lesser extent through changing claims patterns.
  - The analysis has not covered the impact of the COVID-19 pandemic on insurers or insurance regulators’ response to it; recommendations are meant to be considered once the impact of the pandemic on the insurance sector becomes clearer and when extraordinary measures can be eased.
  - State insurance regulators have taken numerous market conduct actions in response to COVID-19 (for example, facilitating late payment of premiums by policyholders while maintaining coverage and banning health insurers from imposing cost sharing for COVID-19 tests).
  - Prudential measures by state insurance regulators include heightened monitoring of insurers through uniform data calls on the solvency impact and regulatory relief and forbearance in a number of critical areas, particularly in regard to various statutory accounting exceptions.

### Overall assessment and progress since 2015
- In the 2015 detailed assessment the U.S. was assessed as observed 8 ICPs, largely observed 13 ICPs and partly observed 5 ICPs.
- Authorities have made some progress implementing the 2015 FSAP recommendations:
  - Implementation of Principles-based reserving (PBR) in the life insurance industry is a step toward addressing valuation issues identified in the 2015 FSAP.
  - Implementation of risk-focused surveillance in financial analysis and financial examinations is another key step forward, albeit still a work in progress.
- Several unresolved issues are further analyzed; most significant findings fall under four themes: independence of supervisors, risk-based supervision, reserving, and group capital.

### Key findings: supervisory independence
- Supervisory independence is a key outstanding issue.
- Factors undermining perceived or actual independence include:
  - Appointment of insurance commissioners and their senior staff at the pleasure of the state governor or the direct election of the insurance commissioner.
  - Government control of access to resources.
  - Constraints on staff remuneration.
- Recommended actions for state governments:
  - Consider reforms for the appointment and dismissal of commissioners and their senior staff (see Main Recommendations).
  - Ease civil service remuneration constraints so that sufficiently qualified staff can be attracted and retained.
  - Pass along all cost recovery assessments to the state insurance regulators to boost budgetary independence.

### Key findings: risk-based supervision
- Risk-based supervision should be developed further; the current approach remains partly rules-based and mechanical.
- Recommendations to strengthen risk-based supervision:
  - Focus analysis and examinations on understanding risk culture, governance and the quality of risk management.
  - Reduce internal organizational barriers across financial analysis and financial examinations.
  - Move away from universal application of quinquennial in-depth examinations toward more frequent, narrower scope examinations while ensuring comprehensive scope coverage within a five-year period.
  - Increase interaction between state insurance regulators and insurers, including more frequent engagement with C-Suite management.
  - Add a market significance or impact-of-failure overlay to the existing prioritization framework to ensure large and important insurers and groups receive suitable ongoing supervisory attention.

### Key findings: reserving and total balance sheet approach
- Consistency of life insurer liability valuation methods is needed.
  - A variety of methods exist for valuation of different portions of life insurer policyholder obligations; methods are inconsistent in approaches and lack uniformity in the level of conservatism generated.
  - There is no consistent methodology for determining a central estimate and appropriate margin over central estimate even within the various valuation methodologies of PBR, let alone across pre- and post-PBR valuation.
  - Lack of consistency has encouraged industry arbitrage (with insurance regulator agreement) of regulatory valuation requirements viewed as uneconomic (e.g., growth of captive insurers for certain products).
  - The lack of consistency makes it difficult for supervisors to develop a consistent comprehensive view of liability strength.
- Recommendation on reserving:
  - Require all reserves be moved to a consistent PBR basis after a target transition period of five years with floors and guardrails removed so that a consistent economic approach can be applied.
- A total balance sheet approach to insurer solvency assessment needs implementation:
  - Insurer statutory valuation requirements for assets and liabilities cannot currently be aligned due to variety of valuation methods allowed within PBR and the gradual adoption of PBR.
  - Without consistent valuation of assets and liabilities, available capital resources are subject to spurious and volatile changes between periods, undermining the confidence in Risk-Based Capital (RBC) requirements.
  - Greater consistency in valuation of life insurer products will necessitate and enable re-design and recalibration of life insurer RBC requirements to ensure appropriate solvency protection for policyholders based on a clearly stated desired level of policyholder protection.
  - The NAIC and state insurance regulators should commence work to re-calibrate the RBC to PBR to reflect underlying economics and a total balance sheet approach to risk and solvency assessment, including valuation of investments to ensure consistency of all elements of the Statutory Accounting Principles (SAP) balance sheet.

### Key findings: group capital
- Development of a group capital requirement should be advanced.
  - Both the Federal Reserve and the NAIC are developing aggregation approaches to group capital; these approaches may diverge in certain technical areas while aiming for comparable outcomes over time.
  - Possible divergence on calibration: the Federal Reserve’s focus is to calibrate capital requirements for insurance and other financial activities to comparable levels, while the NAIC approach appears developed to calibrate toward existing U.S. insurance capital requirements.
- Recommendation on group capital:
  - Develop a consolidated group capital requirement similar to GAAP-Plus insurance capital standard (ICS) for internationally active groups and optionally for domestic groups in parallel with aggregation approaches by the FRB and the NAIC.
  - The GAAP-Plus approach is designed to use jurisdictional GAAP as a basis for calculating the ICS.
  - If the NAIC’s proposed Group Capital Calculation (GCC) is adopted, it should be made into a requirement not merely a calculation.

### Natural catastrophe and protection-gap issues
- Regulatory responses to increasing risk and severity of natural catastrophes need medium- to long-term strategic focus to match the evolution of these risks.
  - Regulatory responses should ensure adequate price signals of increasing risk to policyholders and incentivize mitigation efforts to enhance resilience.
- Examples and observations:
  - California wildfires (2017 and 2018): regulatory response focused on short-term protection of policyholders from significantly increased rates and maintaining availability of insurance; a medium- to long-term plan is needed to achieve sustainable and forward-looking risk-based pricing that incentivizes insurers to remain in the market and policyholders to invest in mitigation.
  - Florida homeowners’ market: after crises in the 1990s and early 2000s, the market stabilized except for a recent legal risk increasing legal expenses following hurricanes; a recent legislative change may curb these expenses.
  - Flood risk protection gaps in the U.S. are likely significant and should be thoroughly analyzed; widening protection gaps could produce spillover risks into other financial sectors because property securing mortgage loans is generally not insured against catastrophe losses.
- Authorities are urged to consider a range of possible solutions to close the protection gap in the medium to long-term.

### Other regulatory development issues
- The NAIC and state insurance regulators need to quickly finalize and legally implement post-crisis reforms to requirements for Private Mortgage Insurers (PMIs).
  - PMIERs imposed by the GSEs are the binding financial requirements for PMIs rather than minimum capital requirements of state regulators.
  - The NAIC and state regulators are working on a risk-based capital requirement including a countercyclical factor to capture risks from rising house prices compared to incomes; this needs to be quickly finalized including regulatory intervention levels.
- Recommended governance and process improvements:
  - Streamline the approach to developing model laws to ensure timely reaction to market developments.
  - Give state insurance regulators a clear mandate for financial stability.
  - Prioritize NAIC development of model laws where a national approach is required or highly desirable.
  - Put in place insurance-specific regulatory governance and risk management requirements to clarify expectations, create greater enforceability, and reduce differentiation among states from differing interpretations of supervisory handbooks.

### Specific supervisory capability and product-area recommendations
- Reserving and actuarial capacity:
  - The NAIC and state insurance regulators should significantly expand in-house supervisory actuarial capability to supervise PBR effectively; consider formation of a shared center of expertise in addition to NAIC resources available to the Valuation Analysis (E) Working Group (VAWG).
- Captives:
  - The NAIC and state insurance regulators should regularly monitor and report publicly on the impact of captives used by direct writing insurers and insurance groups, including combined impact on reserve and capital positions.
- Long-Term Care (LTC):
  - Develop a balanced approach to rate approvals at the states level that recognizes the trade-off between treating customers fairly and protecting policyholders against insurer insolvency.
  - NAIC and state insurance regulators should work together to develop a more consistent response to LTC rate approvals to avoid cross-subsidization between states.
  - State and federal governments should work together to find an alternative solution to funding aged care in the community including potentially more appropriate insurance products.
- Own Risk and Solvency Assessment (ORSA):
  - State insurance regulators should align filing deadlines for ORSA across states.
  - The NAIC and state insurance regulators should start benchmarking ORSAs across all states to document best and weak practices, identify risk trends and help inform NAIC and state supervisors of emerging macroprudential issues.

### Main recommendations (selected, with Timeframe and Priority)
- Independence
  - State governments should change legislation to allow insurance commissioners and their staff to be appointed for fixed terms or appointed for open-ended terms; appointment should not be aligned with the term of the governor. (¶39) — MT H
  - State governments should introduce clear criteria for dismissal of insurance commissioners; reasons for any dismissal should be public and subject to appeal. (¶39) — MT H
  - State governments should strengthen financial independence by ensuring state governments pass on all assessments for cost recovery to state insurance regulators. (¶40) — NT H
  - State governments should consider reforms to remuneration of state insurance regulators’ staff to safeguard ability to attract and retain key skilled personnel, while maintaining appropriate accountability for public resources. (¶44) — MT H
- Reserving
  - NAIC and state insurance regulators should require all in-force business be moved to PBR after a target transition period of 5-years. (¶72) — MT H
  - NAIC and state insurance regulators should commence work to re-calibrate the RBC to PBR reflecting underlying economics and a total balance sheet approach, including valuation of investments to ensure consistency of all elements of the SAP balance sheet. (¶80) — MT M
  - NAIC and state insurance regulators should significantly expand in-house supervisory actuarial capability; consider a shared center of expertise in addition to NAIC resources to VAWG. (¶82) — NT M
- Risk-Based Supervision
  - State insurance regulators should better coordinate and leverage expertise of teams dedicated to financial analysis and financial examination for large insurance groups including IAIGs. (¶127) — NT H
  - State insurance regulators should reduce separation between financial analysis and financial examination functions to focus on understanding risk culture, governance and quality of risk management, partly through more frequent engagement with C-Suite management. (¶127) — NT M
  - State insurance regulators should undertake more frequent, narrower scope examinations such that comprehensive scope coverage occurs within a five-year period but with more frequent onsite processes. (¶127) — MT M
  - NAIC and state insurance regulators should add a market significance or impact-of-failure overlay to the existing prioritization framework. (¶115) — MT M
- Group Capital
  - For IAIGs and optionally for domestic groups, NAIC, state insurance regulators and the Federal Reserve should develop a consolidated group capital requirement similar to GAAP-Plus ICS. (¶149) — MT H
- Regulatory Developments and Other Priorities
  - Streamline model law development approach to ensure timely reaction to market developments. (¶30) — MT M
  - State governments should give state insurance regulators a clear mandate for financial stability. (¶34) — MT M
  - NAIC should prioritize development of model laws on issues where a national approach is required or highly desirable. (¶29) — NT L

*United States: Technical Note — targeted review of ICP-related themes as part of the 2020 FSAP (Executive Summary).*

### 2.      The analysis has not covered the impact of the COVID-19 pandemic on insurers or

### 1usaea2020004 - 2.      The analysis has not covered the impact of the COVID-19 pandemic on insurers or

### Scope and timing of analysis
- Analytical work and on-site work were carried out before the global intensification of the COVID-19 outbreak.
- On-site work supporting findings and conclusions conducted during October 15-November 8, 2019.
- Sections on Mortgage Guaranty Insurance and the Increasing Incidence and Severity of Natural Catastrophes are based on onsite work during February 18–March 5, 2020.
- The note focuses on medium-term challenges and policy priorities for regulation and supervision of securities markets in the U.S. and does not cover the outbreak or the related policy response.
- Recommendations are meant to be considered once the impact of the pandemic on the insurance sector becomes clearer and when extraordinary measures can be eased.

### Supervisory focus and methodology
- Focus in this FSAP is on the state-based system of regulation and supervision (contrast with previous detailed assessment which covered Federal government oversight in greater depth).
- Four state supervisors were visited: New York, Connecticut, Massachusetts and New Jersey; files were reviewed for significant insurance groups for which these state supervisors act as lead state supervisors.
- Discussions held with Federal Insurance Office (FIO), Financial Stability Oversight Council (FSOC) and the Board of Governors of the Federal Reserve System (Federal Reserve).
- Supervision practices of the Federal Reserve were not reviewed in detail reflecting its relatively limited role in the current juncture.

### Thematic focus
- The thematic focus reflects aspects of insurance and regulation judged most significant to financial stability and a follow-up on key recommendations from the 2015 detailed assessment.
- Analysis covered life, property and casualty, and health insurance industry with more focus on life insurance.
- Life insurance is significant to the overall U.S. financial sector and a significant source of credit to the corporate sector.

### Market structure — high-level facts
- The United States has the world’s largest single-country insurance market with 28 percent of global direct premiums written in 2018.
- The industry represents 11 percent of the total U.S. financial system assets and is equivalent to 48 percent of the U.S. GDP.
- Sector penetration is seven percent of GDP when measured by premiums at end 2018.
- Insurance density (premiums per capita) was US$4,481 at end–2018.
- Foreign participation: US$51 billion of imports of insurance services (mostly reinsurance) and US$72 billion of insurance services in 2017 provided to U.S. persons by majority owned affiliates of foreign multinational enterprises.
- U.S. insurance sector operations outside the United States: US$18 billion of exports of insurance services (mostly reinsurance) and US$62.3 billion of insurance services in 2017 provided by majority owned affiliates of U.S. multi-national entities.
- Industry consolidation trend: number of companies serving various markets has been gradually consolidating over the last five years.

### Life Insurance Industry — structure, assets, profitability, and investment trends
- Number of licensed life insurance companies: 722 at end of 2018 (down from 855 in 2009 and 763 in 2014).
- Total net admitted assets: US$6.8 trillion including US$2.5 trillion in separate account assets.
- Life sector assets represent 8 percent of financial sector assets and 37 percent of U.S. GDP at end–2018.
- Life industry profitability: 26 percent decline in 2018, down to US$28 billion.
- Total net written premium and deposits: increased 4.4 percent (US$32.9 billion) to US$784.4 billion in 2018.
- Annuity business new premium: US$218.6 billion in 2018, up 1.6 percent over 2017.
- Annuity premium trends: direct annuity premium increasing 12.4 percent; assumed and ceded premium increasing 167.3 percent and 131.4 percent respectively (indicating increased reinsurance of annuities).
- Industry net investment yield: 4.4 percent in 2018; declined from 5.1 percent in 2009.
- Investment shifts: growing share of mortgage loans — NAIC year ended 2018 largest increase in investments acquired was US$44.5 billion in acquisitions of mortgage loans to an annual total of US$521.5 billion and US$16.8 billion in acquisitions of bonds to an annual total of US$2.999 trillion.
- Large life insurers are active underwriters of commercial mortgages; industry mortgage loans described as high quality in terms of security and diversification.

### Property and Casualty (P&C) Insurance Industry — scale, lines, results
- Total assets increased from US$1.8 trillion in 2015 to US$2 trillion at end-2018.
- At end-2018 there were 2,600 P&C companies (down from 2,831 in 2009 and 2,666 in 2014).
- Personal lines represent 53 percent of net premium written; top three personal lines: Private Passenger Auto liability, Homeowners Multiple-Peril and Private Passenger Auto Physical Damage.
- Top three commercial lines: workers compensation, other liability – occurrence and commercial multiple peril.
- Direct premiums written increased 5.4 percent in 2018.
- Claims experience improved due to lower catastrophe losses, culminating in a small underwriting profit of US$3 billion in 2018.
- Market concentration: top 10 groups made up 47 percent of the market in 2018.
- Underwriting loss in 2017: US$22.5 billion; catastrophe losses US$78 billion in 2017 and US$52 billion in 2018.
- Combined ratio: 99.1 percent for 2018; 100.5 percent in 2016 and 103.9 percent in 2017.
- Investment yield: improved to 3.26 percent; net income increased to US$57.9 billion from US$38.7 billion in 2017.
- Unrealized capital losses: US$40.5 billion contributing to a slight decline in policyholders’ surplus from US$786.0 billion at end-2017 to US$780.0 billion at end-2018.

### Surplus lines and alien entities
- Approximately 160 alien entities wrote approximately US$14 billion in surplus lines premium in the United States, secured by approximately US$6 billion in trust funds.
- Alien premium accounts for approximately 30 percent of the surplus lines market.
- NAIC International Insurers Department (IID) functions as regulator for alien syndicates and insurers doing business as surplus lines carriers per the 2010 Dodd–Frank Act.

### State and federal involvement in specific P&C areas
- Flood and earthquake perils usually excluded from homeowner policies; most flood cover provided by National Flood Insurance Program (NFIP) and administered through private insurers which collect premiums and pay claims; California Earthquake Authority provides catastrophic residential earthquake insurance.
- Federal Crop Insurance Corporation created in 1938 to carry out the federal crop insurance program as a supplement to private crop/hail insurance.
- Terrorism risk is privately written and backstopped by the federal government under the Terrorism Risk Insurance Act and subsequent program.

### Health Insurance Industry — growth and composition
- Number of health entities filing with NAIC in 2018: 1010 (increase from 943 in 2014).
- Total assets of health insurance industry: US$446 billion (up from US$355 billion in 2015).
- Premiums: 6.5 percent increase to US$707 billion in 2018.
- New earned premiums: US$527 billion in 2014 and US$373 billion in 2009.
- Medical and hospital expenses: US$323 billion in 2009; US$451 billion in 2014; US$597 billion in 2018.
- Medicare and Medicaid represented 54 percent of the market in 2018 (up from 51 percent in 2015).
- Group comprehensive cover premium: US$165 billion in 2018; combined Medicare and Medicaid premium: US$384 billion.
- Group comprehensive cover declined from US$176 billion in 2009 to US$165 billion.
- Individual comprehensive cover increased 400 percent in premium from US$19 billion to US$76 billion over ten years, representing about 11 percent of the market.

### Insurtech developments and industry technology trends
- Insurtech activity occurring through startups and established industry participants; initial focus on P&C personal lines, growing interest in commercial lines; life and annuity product innovation lags but is growing.
- Expected future growth areas: products, pricing, underwriting; policy administration; claims and back office efficiencies; big data analytics; technologies and data to better assess and mitigate risk.
- Most Insurtech startups are not disruptive in the sense of becoming full stack underwriters; many get licensed as producers or managing general agents and partner with incumbents as data or technology service providers.
- Industry incumbents are significant investors in technology via internal units, venture capital investments or direct investments.
- Strategic technology deals: 66 deals in first two quarters of 2019 compared to 118 in total in 2018 and 119 in 2017 (based on FIO monitoring and Willis Towers Watson/Willis Re/CB Insights Quarterly InsurTech Briefing Q2 2019).
- Aging hardware and infrastructure constrain technological advancement; larger insurers often develop new systems in parallel with legacy systems; smaller insurers may find it harder to update systems and remain competitive.

*Authors of the note: Peter Windsor (IMF) and Stuart Wason (IMF expert).*

### 22.      Insurance is regulated primarily at the state level. Each state’s legislature enacts

### 22.      Insurance is regulated primarily at the state level. Each state’s legislature enacts insurance laws and empowers agencies to implement and enforce those laws.

### NAIC governance and role
- The insurance regulators from the 50 states, the District of Columbia, and five territories created the NAIC.
- The NAIC conducts standard-setting activities and provides regulatory support to its member insurance regulators.
- The insurance regulators collectively control and govern the NAIC.
- Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight.

### Model laws, adoption patterns, and implications
- Through the NAIC, state regulators have developed a set of model laws, regulations, and other NAIC requirements.
- NAIC model laws have no binding effect on states unless enacted by state legislatures; NAIC maintains a record whether states have adopted a substantially similar state law.
- A core set of solvency model laws and regulations are required as part of the NAIC Accreditation Program.
- NAIC handbooks and manuals such as the Accounting Practices and Procedures Manual are incorporated into State law by reference and can therefore be updated regularly.
- Adoption gaps and examples:
  - Interest-Indexed Annuity Contracts Model Regulation (Model #235), adopted by the NAIC in July 1998, has not been enacted in any NAIC member jurisdiction; only Vermont has a Bulletin related to this matter.
  - LTC Insurance Model Act (Model #640) from 2017 has not been enacted by any NAIC member; the new model replaces a prior iteration adopted by the majority of the states.
  - One of the three lead state supervisors for Mortgage Guaranty Insurers has not adopted the relevant model law, so supervision according to the requirements of the model law has no legal basis.
- Since 2007, model law/regulation development uses a two-pronged test:
  1. The subject must call for a minimum national standard or require uniformity among the states.
  2. NAIC members must commit significant regulator and NAIC staff resources to educate, communicate and support adoption.
- If the two-pronged test is not met, committees may develop guidelines instead of model laws; despite the test, many non-accreditation model laws continue to lack universal adoption.

### Box 1 — Model Laws and Other Requirements for Accreditation (high-level elements)
- Model Laws for Accreditation include (selected): Model Law on Examinations; RBC for Insurers Model Act; RBC for Health Organizations; Insurance Holding Company System Regulatory Act (up to 2010 revisions); Standard Valuation Law, Actuarial Opinion and Memorandum Regulation; Risk Management and ORSA Model Act; and others.
- Other Requirements include: NAIC’s Accounting Practices and Procedures Manual (AP&P Manual); Standard promulgated by NAIC’s Capital Markets and Investment Analysis Office; Maximum net amount of risk to be retained by a property and casualty insurer for an individual risk is 10 percent of the company’s capital or surplus; Requirement for an actuarial opinion on reserves and loss and loss adjustment reserves by a qualified actuary; Filing of annual quarterly statements with NAIC in a format acceptable to the NAIC.
- New Requirements from 2020 listed include: Insurance Holding Company System Regulatory Act 2014 revisions; Annual Financial Reporting Model Regulation 2014 revision; 2009 Revisions to the Standard Valuation Law (PBR); Corporate Governance Annual Disclosure Model Act and Model Regulation.
- Source for Box 1: 2019 Accreditation Program Manual.

### Accreditation Program: structure, scope, and performance
- The NAIC Accreditation Program promotes consistency of solvency regulation and supervision across U.S. states and territories.
- The Accreditation Program requires a state insurance department to demonstrate to a team of reviewers that they meet legal, financial, functional, and organizational standards.
- Focus areas include solvency laws and regulations, including RBC requirements and risk-based financial analysis and examination processes; cooperation and information sharing; ability and willingness to take necessary action for financially troubled insurers; organizational oversight; personnel practices; company licensing; and review of proposed changes in control.
- Coverage and cadence:
  - Currently, all fifty states, the District of Columbia, and Puerto Rico are accredited.
  - The Accreditation Program involves a comprehensive review every five years covering laws and regulations, regulatory practices and procedures, organizational and personnel practices and organization, licensing and change of control of domestic insurers.
  - Every year, state regulators must provide a self-assessment regarding their ability to meet accreditation standards on an ongoing basis.
- Part A of the Accreditation process sets out the laws and regulations necessary to ensure sufficient authority to regulate solvency of a multi-state domestic insurance industry.
- Incorporation of a model law in the accreditation process is the only way to achieve close to 100 percent adoption of a model law across all states and territories.
- Oversight and enforcement:
  - The Accreditation Program is overseen by the Financial Regulation Standards and Accreditation Committee (F Committee) with membership made up of 15 state insurance commissioners.
  - In the last five years, a number of states have been required to undergo re-reviews and/or report to the F Committee to confirm required changes were made; re-reviews or reports confirmed expected progress or change.
  - Failure to maintain accreditation results in additional scrutiny of domestic companies by other state regulators in those states where those domestic companies are licensed.
- Evolution and external assessment:
  - The 2015 Detailed Assessment Report (DAR) recommended the NAIC review the scope and operation of the accreditation program, including potential external assessment and quality assurance.
  - Work performed in 2019 is conducted by external assessors with reports provided to the F Committee.
  - An accreditation modernization project effective in 2017 shifted focus to greater emphasis on substance and quality of work and developed additional guidelines to assess department senior management.
  - Accreditation is a driver for states to make changes ahead of accreditation assessments.

### Challenges in model law development and proposed structural reforms
- The approach to develop, legislate and incorporate model laws into accreditation standards is described as cumbersome and slow relative to emerging risks (example: Insurance Data Security Model Law (Model #668) adopted by NAIC in October 2017 had been adopted by seven states as at May 31, 2019).
- The U.S. Treasury Department urged states to adopt the Insurance Data Security Model Law within five years or face federal preemption.
- Recommendations and proposals:
  - Prioritize model law development on issues that require a national approach.
  - Either expand Accreditation Program scope to ensure all matters of national consistency are addressed or further focus model law development on issues of important national consistency.
  - Streamline the process by revising the architecture of state insurance law via a comprehensive state insurance legislative act:
    - Create a model state insurance act setting out subject matter and delegating powers for state regulators to make more specific requirements or incorporate NAIC model laws by reference.
    - The model state insurance act should replace the patchwork of existing legislation created to implement model laws and other state-specific insurance requirements.
    - Subject matters addressed should include at least all existing subjects of model laws.
    - Allow legislative review of incorporation of model laws into State law where necessary.
    - This structure would enable regulators to develop new regulations more agilely to address emerging risks (e.g., data security) on a nationally consistent basis while preserving legislative authority.
  - Example: a state insurance act could grant regulators power to set detailed data security requirements and make clear that such regulation replaces other relevant state laws for insurers; regulation could be copied or incorporated by reference with a legislature review period before effectiveness.

### State supervisory objectives and mandate clarity
- Common broad mandates across state regulators: protection of the insurance consumer and maintenance of solvent insurance companies.
- Variation in how mandates express objectives and inclusion of financial stability:
  - New York Department of Financial Services (NYDFS): integrated financial services regulator; mission includes reforming regulation of financial services, guarding against financial crises, and protecting consumers and markets from fraud; references to solvency and fair business practices; no specific reference to financial stability at state or U.S. level; includes reference to state economic development which appears first among goals.
  - Connecticut Insurance Department (CID): Commissioner duty to administer and enforce law; CID required to adhere to minimum standards established by NAIC for financial surveillance and regulation; CID mission described as consumer protection; no reference to financial stability.
  - Massachusetts Division of Insurance (MDI): mission to monitor solvency to promote a healthy, responsive and willing marketplace for consumers; no reference to financial stability.
  - New Jersey Department of Banking and Insurance (NJDOBI): mandate includes promoting the growth, financial stability and efficiency of industries regulated; NJDOBI is noted as the one state regulator with a specific financial stability objective for industries it regulates, including insurance.
- Status of NAIC joint statement adoption and mandate conflicts:
  - The 2015 DAR recommendation that all states adopt the joint statement of objectives of insurance regulation remains partially implemented; to date, 17 states have adopted the NAIC’s joint statement of objectives.
  - Recommendation to remove mandate elements that could conflict (e.g., to promote or develop the insurance sector) remains outstanding; New York continues to have a statutory mandate of this kind.
- Recommendation: State insurance regulators should have a clear mandate for financial stability:
  - Inclusion of financial stability in mission, objectives and/or statutory mandate should become an accreditation standard.
  - A clear mandate would ensure state regulators can deploy resources toward financial stability-related activities, important for NAIC Macroprudential Initiative and IAIS holistic framework implementation.

### Tensions between solvency and consumer protection mandates
- State regulators balance ensuring financial solvency and consumer protection; these mandates can conflict.
- Examples and implications:
  - Market conduct supervision and premium rate filings are key consumer protection aspects; conflicts arise when actuarially justified premium increases (supporting solvency) are limited to protect consumers.
  - Long-term care (LTC) sector case: LTC writers have requested very significant premium rate increases (sometimes more than 200 percent) which are actuarially justified given product design, but state regulators generally approve much smaller incremental increases to avoid policyholder shock—causing stress to solvency of some LTC writers.
  - Divergent state decisions lead to cross-subsidization by states granting higher increases compared to those granting smaller increases.
- Recommendation: States should coordinate rate decisions to take diversification benefits across the United States into account and avoid market distortions from state-by-state interventions.

### Independence and political influence of state insurance regulators
- As at 2018, of the 56 insurance commissioners that are members of the NAIC:
  - 12 are elected.
  - 44 are appointed.
- Appointment/dismissal arrangements can expose regulators to political influence:
  - Appointed commissioners may serve fixed terms or at the pleasure of the governor or appointing body.
  - Election of commissioners may create perception of industry influence and politicization; press reports on funding of elected commissioners’ campaigns illustrate potential perception issues.
- State-specific arrangements (selected examples):
  - New York: Superintendent of Financial Services is appointed by the governor with advice and consent of the New York Senate; Superintendent holds office at the pleasure of the governor; senior management serve at the pleasure of the governor.
  - Connecticut: Insurance Commissioner appointed by the governor and serves at the governor’s pleasure; CID staff appointed by the Commissioner under civil service contracts; no particular dismissal requirements for the Commissioner.
  - Massachusetts: Commissioner of insurance appointed by the governor for the same term as the governor and serves at the pleasure of the governor; Commissioner can appoint and remove senior staff with approval of governor and council.
  - New Jersey: Commissioner appointed by the governor and confirmed by the Senate for the term of the governor and serves at the pleasure of the governor; Commissioner is a member of the governor’s cabinet; Director of Insurance and Director of Banking are also appointed by the governor and confirmed by the Senate.

*Source: 1usaea2020004 - 22.      Insurance is regulated primarily at the state level. Each state’s legislature enacts*

### 39.      The 2015 FSAP recommendations related to appointment and dismissal of

### 39.      The 2015 FSAP recommendations related to appointment and dismissal of 

### Appointment, dismissal, and independence of state insurance commissioners
- The 2015 DAR recommended that states reform arrangements for the appointment and dismissal of commissioners, providing for fixed terms for all, with dismissal only for prescribed causes and with publication of reasons.
- No state has reformed the method of appointment and dismissal of commissioners since these recommendations were made.
- Recommendations:
  - There should be clear criteria for appointment and dismissal of the commissioners.
  - Insurance commissioners and their staff should be appointed for fixed terms not aligned to the term of a particular governor or be appointed for open-ended terms.
  - The reasons for any dismissal of a commissioner should be made public and be subject to appeal.
- Rationale:
  - Operational independence combined with accountability and transparency are important to the legitimacy of any supervisor.
  - Independence needs to be both perceived and demonstrated; some commissioners serving at the governor’s pleasure give a perception of a lack of independence.
  - The IMF has not found actual lack of independence; the focus is on perception and avoiding potential for actual lack of independence in decision making.

### Funding, budgetary independence, and cost recovery
- Finding:
  - State governments should pass on all assessments for cost recovery of state insurance regulators to those state insurance regulators.
  - Of the four state insurance regulators visited, all are subject to state government budgeting processes despite issuing assessments to insurers and producers to recoup the costs of regulation and supervision.
  - Assessments to recoup the costs of the state insurance regulators go to the general account of state governments and state insurance regulators are allocated an amount of state government budget that in all cases did not 100 percent reflect the assessments issued to recoup costs.
- Recommendation:
  - Greater budgetary independence should go hand in hand with transparency on deployment of those resources and accountability of the supervisors to the state legislatures for those resource allocation decisions.
- Importance:
  - Stable, predictable and transparent financing and the ability of a supervisor to deploy those resources as it sees fit are all critical to the independence of a supervisor.

### Human resources, remuneration, and use of external experts
- Findings:
  - Resources available to state insurance regulators vary.
  - State civil service pay scales restrict the ability of state insurance regulators to provide market competitive remuneration to insurance professionals, such as actuaries.
  - Insurance professionals and financial services professionals in the private sector are well remunerated; typical civil service pay scales are below the level necessary to attract and maintain relevant skill sets for effective insurance supervision.
  - The use of external experts is correlated with the inability to attract and maintain expertise in-house, such as actuaries.
  - All four states visited have a significant cohort of very experienced older staff, some not that far from retirement age; recruiting younger staff has proven a challenge.
- Implications:
  - Use of external experts can provide advantages (e.g., cyber security expertise) but may result in loss of institutional knowledge about insurers’ risk culture, management competence, governance and control processes.
  - This loss is mitigated to some degree by having external experts work under the direct supervision of internal staff.
- Recommendations:
  - When remuneration of state regulator staff is better aligned with the market for insurance and financial services professionals, state regulators should consider reducing the use of external experts for financial examinations.
  - States need to consider ways in which state insurance regulators can break free of civil service remuneration constraints and determine their own resourcing needs, while maintaining appropriate accountability for the use of public resources.
  - One option is restructuring state insurance regulators as independent commissions or statutory authorities so that usual salary schedules or pay grades do not apply and there is independence in funding and budget with appropriate government oversight and accountability.
  - The text notes this has been achieved in other jurisdictions.23

### Federal roles: Federal Reserve and Federal Insurance Office (FIO)
- Federal Reserve (FRB):
  - In 2019, the Federal Reserve is the primary, consolidated federal regulator of savings and loan holding companies (SLHCs).
  - As of 2019, there are eight SLHCs predominately engaged in the business of insurance subject to Federal Reserve supervision; these eight groups represent approximately 10 percent of the total insurance market across life, health and P&C.24
  - The Federal Reserve currently does not supervise any insurance nonbank financial companies.
  - The Federal Reserve’s authority to supervise insurance depository institution holding companies is provided in the Bank Holding Company Act of 1956 (BHC Act), Home Owners’ Loan Act (HOLA), the International Banking Act of 1978, and DFA.
  - The Federal Reserve’s supervisory approach for insurance depository institution holding companies includes ensuring enterprise-wide safety and soundness and protection of the subsidiary insured depository institution and is conducted in coordination and collaboration with State insurance supervisors.
  - The regulatory framework for insurance depository institution holding companies is still under development, with RBC requirements subject to consultation.
- Federal Insurance Office (FIO):
  - The DFA established FIO within the U.S. Treasury.
  - The overarching role of the FIO is advising the Secretary of the Treasury on major domestic and prudential international insurance policy issues.
  - The FIO director is a non-voting member of the FSOC.
  - FIO led the negotiation, from a U.S. perspective, of the Bilateral Agreement between the United States and the European Union on Prudential Measures Regarding Insurance and Reinsurance (U.S.-EU Covered Agreement), signed on September 22, 2017.
  - The U.S.-EU Covered Agreement addresses group supervision, reinsurance (including collateral) and exchange of information between supervisory authorities and contains specific provisions on EU reinsurers with a minimum amount of own funds equivalent to US$250 million and a solvency capital requirement (SCR) of 100 percent under Solvency II.
  - For U.S. insurance groups operating in the EU and for U.S. reinsurers assuming business from EU ceding insurers, the EU agreed not to apply aspects of its Solvency II regulation to U.S. insurers and reinsurers, subject to conditions in the agreement.
- FIO authority under DFA (selected tasks listed in Box 2):
  - Monitor all aspects of the insurance industry, including identifying issues or gaps in regulation that could contribute to a systemic crisis.
  - Monitor access to affordable insurance products regarding all lines of insurance (except health insurance) for traditionally underserved communities and consumers, minorities, and low- and moderate-income persons.
  - Recommend to FSOC that it designate an insurer as a nonbank financial company supervised by the FRB.
  - Assist the Secretary in the administration of the Terrorism Risk Insurance Program.
  - Coordinate federal efforts and develop federal policy on prudential aspects of international insurance matters and represent the United States in IAIS where appropriate.
  - Determine whether state insurance measures are preempted by covered agreements.
  - Consult with the states regarding insurance matters of national importance and prudential insurance matters of international importance.
  - Perform other related duties as assigned by the Secretary.
  - Before the Secretary makes a determination to resolve an insurer under Title II of the DFA, the Secretary must first receive a written recommendation from the FIO Director and the Federal Reserve.
  - FIO and the Federal Reserve coordinate on annual analyses of nonbank financial companies supervised by the Federal Reserve, particularly with respect to stress testing.
- U.S.-EU Covered Agreement timing and implementation:
  - The obligations of the EU and the United States under the U.S.-EU Covered Agreement are fully applicable 60 months following signature (September 23, 2022).
  - U.S. states not in compliance with provisions concerning reinsurance collateral by the first day of the months 60 months after signing face potential pre-emption by Federal Law.
  - The NAIC adopted in June 2019 its Credit for Reinsurance Model Law and Regulations intended as the basis for adoption and implementation of changes to state law consistent with the covered agreements.
  - FIO will continue to focus on ensuring that each state conforms its laws to the terms of the agreement and that any state insurance measures are not inconsistent with the U.S.-EU Covered Agreement.

### Potential arbitrage and group capital considerations
- Observation:
  - The U.S.-EU Covered Agreement may result in arbitrage opportunities for European groups with U.S. operations in the absence of a U.S. group capital requirement.
  - The text notes it is possible to consider this issue in the context of the use of captives in the United States discussed later under Regulation where there is an allowed arbitrage occurring within the U.S. system.

### Regulation — governance, disclosure, and alignment with ICPs
- State regulation — corporate governance:
  - The NAIC adopted the Corporate Governance Annual Disclosure Model Act and Regulation (Model #305/#306) in November 2014 to collect more detailed information on insurers’ corporate governance practices.
  - The Model Act does not prescribe new corporate governance standards but requires tailored, confidential reporting of governance policies and procedures.
  - The Model Act is an accreditation requirement, effective January 1, 2020.
  - The Model Act requires disclosure of what insurers and groups do with respect to governance rather than requiring them to implement a good model of governance.
- Issues identified:
  - The state-based system uses both regulation and supervision; some requirements applied in other regulatory systems through regulation are addressed through supervision in the U.S. system.
  - Certain prescriptive elements of good governance and risk management structures are not incorporated into laws; the Model Act simply requires disclosure.
  - If governance elements are not working, enforceability may be unclear without codifying requirements.
  - While there are wide powers under Model Regulation to Define Standards and Commissioners Authority for Companies Deemed to be in Hazardous Financial Condition, potential shortcomings exist in relation to supervision.
- Recommendation:
  - States should put in place regulatory governance and risk management requirements to bring the state regulation system more clearly in line with the ICPs.
  - This would require explicit references in statute or regulation about requirements of insurers in terms of specific governance elements such as: remuneration policies, fit and proper requirements (other than review of biographical information and background checks for key positions) and the organization of certain risk functions (e.g., actuarial and compliance).
  - Clarify expectations, create greater enforceability of the requirements and reduce differentiation among states that could occur through different interpretations of supervisory handbooks.
- Remaining deficiency:
  - The lack of regulatory governance and risk management requirements was an issue identified in the 2015 DAR and has not been addressed; Model #305/#306 does not address this deficiency nor does a supervisory process.

### Federal regulation — Federal Reserve corporate governance expectations
- The FRB has set out its expectations for corporate governance for all supervised institutions, including those with insurance operations, with assets over US$50 billion.26
- The guidance supports a tailored approach accounting for unique risk characteristics while covering core supervisory focus areas:
  - Enhancing resiliency: guidance on capital and liquidity planning and positions; corporate governance; recovery planning; and management of core business lines.
  - Reducing impact of firm failure: guidance on management of critical operations; support for banking offices; resolution planning; and additional macroprudential supervisory approaches to address risk to financial stability.

### Valuation, investments, reinsurance, captives, and capital — state-level context
- Importance:
  - In the financial analysis and solvency assessment of insurers, state laws and requirements with respect to valuation of insurance obligations (reserves), investments, reinsurance, captives, and capital are important.
  - The NAIC Financial Regulation Standards and Accreditation Program lays out the minimum requirements in each of these areas for states to maintain their NAIC accreditation.

*UNITED STATES — INTERNATIONAL MONETARY FUND*

### 58.      The NAIC accreditation standards for each state require that all insurers file the

### The NAIC accreditation standards for each state require that all insurers file the appropriate NAIC annual return

### Statutory Accounting Principles (SAP) and AP&P Manual
- SAP underpins preparation of NAIC statutory financial statements and is prescribed in the insurance statutes, regulations, administrative rules of the various states, and in the AP&P Manual, with reporting requirements contained in the Annual Statement Instructions and NAIC designation determinants and P&P Manual.
- “Permitted” or “prescribed” statutory accounting practices:
  - “Permitted” accounting practices must be explicitly approved by the domiciliary state insurance departments on a company-specific basis.
  - ”Prescribed” accounting practices are variations from the AP&P Manual detailed in state statute and apply to all insurers domiciled in that state.
  - All variations from the AP&P Manual (whether “permitted” or “prescribed”) are required to be detailed in Note 1 of the statutory financial statements; Note 1 reconciles items from “state basis” to the “SAP basis”.
  - Permitted practices are disclosed and reported by the domiciliary regulator to each state regulator where the insurer holds a license in accordance with the AP&P Manual Preamble Section 10 and through the NAIC ISITE system.
- SAP is primarily directed toward determination of an insurer’s financial condition and ability to satisfy obligations to policyholders and creditors when due, emphasizing conservatism, consistency, and recognition as defined in the AP&P Manual.

### Examples and definitions: conservatism and SAP vs GAAP differences
- Conservatism as defined in AP&P Manual (Preamble, Paragraphs 32–33):
  - Financial reporting requires substantial judgments and estimates; conservatism should be followed when developing estimates and establishing accounting principles for statutory reporting.
  - Valuation procedures should, to the extent possible, prevent sharp fluctuations in surplus and be reasonably conservative over economic cycles.
- Selected SAP versus U.S. GAAP differences (examples from Box 4):
  - Acquisition Costs: Under SSAP No. 71 all acquisition costs are expensed as incurred; under GAAP certain acquisition costs are capitalized and amortized.
  - Valuation of Bonds and Redeemable Preferred Stocks: Under SSAP No. 26R and SSAP No. 32 bonds and redeemable preferred stocks are carried at amortized cost or lower of amortized cost or fair value depending on NAIC designation; under GAAP carried at amortized cost only if entity has ability and intent to hold to maturity and no other-than-temporary declines.
  - Deferred Income Taxes: Under SSAP No. 101 DTAs are limited under admissibility test and amounts over the criterion are non-admitted; changes in DTAs and DTLs are reported as a separate line in the surplus section. Under GAAP, valuation allowance used to reduce asset and changes are recognized in earnings.
  - Goodwill: Under SSAP No. 68 goodwill is difference between cost and reporting entity’s share of book value of acquired entity; under GAAP goodwill is difference between cost and fair value of assets less liabilities acquired. Under SAP aggregate goodwill is limited to 10 percent of the insurer’s adjusted capital and surplus; amounts over 10 percent are non-admitted.
  - Surplus Notes: Under SSAP No. 41R certain surplus notes considered surplus; under GAAP surplus notes are debt.
  - Reinsurance in Unauthorized Companies: Under SSAP No. 62R collateral is required for business reinsured with unauthorized reinsurers; under GAAP reinsurance recoverables allowed regardless of authorization subject to recoverability tests.
- Contrast in emphasis:
  - SAP stresses measurement of the ability to pay claims in the future.
  - U.S. GAAP stresses measurement of emerging earnings period to period (e.g., matching revenue to expenses).

### Investment valuation, diversification, and capital requirements
- NAIC accreditation standards require:
  - Securities owned by insurance companies to be valued in accordance with standards promulgated by the NAIC’s Capital Markets and Investment Analysis Office.
  - Other invested assets to be valued according to procedures promulgated by the NAIC’s Financial Condition (E) Committee.
  - Domestic insurers to maintain a diversified investment portfolio both as to type and issue and include a requirement for liquidity.
  - State laws restrict types of assets insurers may purchase and place aggregate or percentage limits to ensure diversification of risk; some states have adopted a version of the NAIC Investments of Insurers Model Act.
- Capital and surplus:
  - States require insurers to have and maintain a minimum level of capital and surplus to transact business and retain authority to require additional capital and surplus based on type, volume and nature of business.
  - The RBC for Insurers Model Act and the RBC for Health Organizations Model Act or substantially similar provisions are included in state laws or regulations.

### Special cases: risk retention groups (RRG) and impact on comparability
- Most RRGs formed as captives are not required to comply with NAIC’s SAP, RBC or holding company statutes.
- RRGs may use GAAP, modified SAP, or modified GAAP for reporting, which can lead to results that are less meaningful, less reliable, or misrepresented compared with direct insurers.

### Life insurance—balance sheet valuation, reserves, and asset/liability management
- Asset valuation for life insurers:
  - Assets of a life insurer, including separate account assets, are valued according to SAP as defined by the NAIC.
  - Bonds, mortgages, redeemable preferred stocks of the general account typically valued at amortized cost; general account equities and most separate account assets are valued at fair value.
  - Interest Maintenance Reserve (IMR) amortizes realized capital gains and losses on debt securities and preferred stocks into investment income over remaining term; IMR cannot be negative.
  - Asset Valuation Reserve (AVR) operates as a form of assigned surplus held in the form of a liability; AVR includes realized non-interest-related (default) and realized and unrealized equity risks; changes in AVR are accomplished through changes in surplus not through the income statement; AVR has no bearing on required capital or RBC ratio.
- Reserve valuation evolution:
  - Traditional net premium reserving (e.g., Commissioners Reserve Valuation Method or CRVM) used prescribed mortality and interest assumptions locked-in at issue for cohorts.
  - Product innovation in 1980s–1990s (non-level premiums/benefits) exposed interest rate mismatch and other risks.
  - New York Regulation 126 (1990) introduced mandatory cash flow testing for annuity and single premium life obligations.
  - ASOP 22 promulgated in 2001 to assist actuaries in conducting asset adequacy testing (AAT).
  - NAIC requires the qualified actuary appointed by the Board to conduct and opine on asset adequacy testing for all lines of business.
- Regulatory responses to product innovation and reserve financing:
  - NAIC “XXX reserves” (2000) for certain term life policies and “AXXX reserves” for certain universal life policies were developed in response to product innovations that lowered reserve levels.
  - Insurers used captives to lay off or finance redundant reserves; NAIC adopted AG 48 in December 2014 (effective January 1, 2015) to define rules for new life XXX and AXXX reserve financing transactions executed after the effective date.
- Principle-Based Reserving (PBR):
  - Valuation Manual for PBR became effective in 2017 with a three-year transition period starting on January 1, 2017; companies could choose to move some or all applicable new business (not in-force business) to PBR during transition.
  - Beginning in January 2020 compliance with PBR is mandatory for all companies not otherwise exempted and PBR becomes an NAIC accreditation standard for all member states.
  - PBR requires the insurer to calculate reserves in three ways and hold the highest of the following results:
    - A rules-based net premium type reserve - calibrated to produce a reasonably conservative floor for reserves.
    - A deterministic reserve - a gross premium reserve, using company specific assumptions, plus margins, with some regulatory guardrails. The assumptions are to be periodically reviewed and updated as appropriate.
    - A stochastic reserve - a Conditional Tail Expectation 70 of the greatest present value of accumulated deficiencies across prescribed economic scenarios.
  - Footnote: Companies do not have to calculate a stochastic reserve if they perform and pass a stochastic exclusion test, where allowed. For some product types, a deterministic exclusion test may then be performed which, if passed, allows the company to avoid calculating the deterministic reserve.
- Observations and implications:
  - PBR introduces judgement-based reserving with best estimates and margins to new business along with regulatory guardrails and will require insurers and supervisors to develop expertise, experience and supervisory practices, including retaining additional supervisory in-house actuarial staff.
  - The coexistence of pre-PBR and post-PBR reserves creates a “mixed bag” of valuation requirements for in-force and new business; pre-PBR reserves remain traditional conservative net premium method with locked-in assumptions at issue.
  - The lack of uniformity across various reserve methods (e.g., XXX, AXXX, PBR, VM-21 for variable annuities) has encouraged regulatory arbitrage (e.g., growth of captive insurers) and makes it difficult for supervisors to develop a consistent comprehensive view of liability strength.
  - Recommendation: move all reserves to a consistent PBR basis after a target transition period of five years.
- Asset/liability mismatch risk:
  - Long-term life products face difficulty matching asset duration to liability duration; conservatism in pricing for reinvestment risk is important.
  - Modern international practice uses Asset Adequacy Testing (AAT) directly in both the determination of liabilities and in required capital; AAT assigns a value to mismatch risk and ensures supporting asset cash flows are sufficient under various economic scenarios.
  - An AAT-driven valuation of liabilities is agnostic about statement value of assets; reserves are driven by current economic assessment of liability cash flows and supporting asset cash flows.

_Italic: IMF staff summary of the provided chapter text._

### 76.      The U.S. regulatory requirements related to mismatch risk began with NY Regulation

### 1usaea2020004 - 76.      The U.S. regulatory requirements related to mismatch risk began with NY Regulation

### Regulatory history and foundational requirements
- NY Regulation 126 applied to annuity and single premium life products at their 1989 and later year ends and initially used a limited range of economic scenarios.
- Section 8 of the 1991 NAIC model Actuarial Opinion and Memorandum Regulation (AOMR) requires an asset adequacy analysis (analysis of whether the company’s assets supporting the reserves are adequate to mature the company’s obligations).
- The American Academy of Actuaries developed supporting actuarial standards by late 2001.
- Asset Adequacy Testing (AAT) is a requirement of the Standard Valuation Law for most life insurer product types.

### Valuation methods and mismatch risk treatment
- Products subject to PBR stochastic modelling (including all variable annuity business) include a robust determination of mismatch risk inherent in liability determination; reserves and supporting assets include an economic provision for all policyholder risks with a moderate level of conservatism.
- Capital requirements for variable annuity contracts are determined directly by comparing the results of the VM 21 stochastic valuation at two different confidence levels.
- Other life insurer products (e.g., pre-PBR insurance contracts) use simpler AAT with more limited testing of future investment scenarios; AAT may reveal the need for an aggregate top-up provision to be added to reserves.
- Simpler reserve provisions rely on:
  - the use of prudent long-term valuation rates of interest, and
  - provisions for interest rate risk and market risk in capital requirements,
  to provide overall solvency protection from mismatch risk.
- Current life products are not valued and capital required according to a consistent total balance sheet approach.

### Table: Characteristics of Life Valuation Methods (text summary)
- Pre-PBR business:
  - Net premium reserve method (rules based; locked-in assumptions)
  - Regulation XXX/AXXX products over-reserved; captives formed
  - Subject to aggregate asset/adequacy testing
- PBR business:
  - Largest of three calculations is held:
    - Net premium reserve (rules based; locked-in prescribed valuation interest rate assumptions; prescribed mortality and lapse assumptions may be unlocked at some future date)
    - Deterministic (best estimate plus margins; unlocked; judgement based)
    - Stochastic Conditional Tail Expectation 70 reserve (form of asset adequacy testing)
- Overall:
  - Mix of valuation methods:
    - Some new, some old
    - Varying degrees of conservatism
    - Varying degrees of responsiveness to emerging experience

### Consistency, transition to PBR, and recommended timeline
- SAP principle of “consistency” supports new approaches that meet regulatory objectives.
- Identified problems:
  - Variety of valuation methods (pre- and post-PBR) lack uniformity in level of conservatism.
  - No consistent methodology for determining a central estimate and appropriate margin over central estimate within and across methodologies.
  - Inconsistency has enabled regulatory arbitrage (e.g., growth of captive insurers for certain products).
  - Difficulty for supervisors to develop a consistent comprehensive view of liability strength.
- Recommendation:
  - Move all reserves to a consistent PBR basis with floors and guardrails removed so a consistent economic approach can be applied.
  - Develop an appropriate transition period due to practicalities of building full PBR capacity and amending state legislation.
  - Proposed target transition period: five years.

### Total balance sheet approach and RBC recalibration
- A total balance sheet approach to insurer solvency assessment needs implementation, requiring revised valuation and subsequent recalibration of capital requirements and available capital resources.
- Current inability to align statutory valuation requirements for assets and liabilities due to:
  - Variety of valuation methods allowed within PBR and gradual adoption of PBR.
- Consequences of inconsistency:
  - Available capital resources subject to spurious and volatile changes between periods, making determination of RBC requirements to provide a desired level of confidence impossible.
  - Inconsistent conservatism makes it difficult to develop complementary total balance sheet capital requirements.
- Recommendation:
  - NAIC and state insurance regulators should commence work to re-calibrate the RBC to PBR to reflect underlying economics and a total balance sheet approach to risk and solvency assessment.

### Longevity risk recognition and reserving adequacy
- RBC does not currently require life insurers to carry capital for longevity risk.
- NAIC project underway to consider how longevity risk is recognized in statutory reserves and/or RBC to ensure adequate reflection.
- Market context:
  - Annuities and longevity risk transfer transactions are increasing, with significant use of captive reinsurance.
- Expectation:
  - It is envisaged that by the end of 2020, RBC for life insurers will include a charge for longevity risk with the offsetting diversification against mortality risk recognized.
  - The adequacy of reserving will also be considered as part of the project.

### Supervisory actuarial capacity
- NAIC and state insurance regulators should significantly expand in-house supervisory actuarial capability to supervise PBR effectively.
- Consider formation of a shared center of expertise in addition to NAIC resources available to the Valuation Analysis (E) Working Group (VAWG).

### Reinsurance and collateral changes
- June 2019 NAIC Plenary approved revisions to the Credit for Reinsurance Model Law (#785) and Model Regulation (#786) with respect to collateral requirements for alien reinsurers to align with covered agreements with the European Union and United Kingdom.
- Changes intend to allow reinsurers domiciled in NAIC-qualified jurisdictions (currently Bermuda, Japan and Switzerland) the possibility of similar reinsurance collateral reductions.

### Captives: use, impacts, and recommendations
- 2013 NAIC Captive and SPV Use (E) Subgroup found commercial insurers cede business to captives for a variety of business purposes, mainly related to financing of XXX and AXXX perceived reserve redundancies.
- Implementation of PBR expected to reduce need for new captives, but existing captives and SPVs will likely remain while blocks run off.
- 2013 NAIC White Paper: 27 states indicated they allow insurance risks to be transferred from a domestic insurer to a captive or SPV in their state.
- 2012 NAIC survey: majority of large U.S. insurers with XXX and AXXX business formed captives to lessen statutory reserving burden; reported statutory XXX reserves could be as large as four to five times their estimates of economic value. Companies are allowed to hold letters of credit (LOC’s) or similar instruments to back the portion of the reserve in excess of economic value.
- Recommendation:
  - NAIC and state insurance regulators should regularly monitor and report publicly on the impact of captives by direct writing insurers and groups, including combined impact on reserve and capital positions.
  - Valuation requirements (SAP) and capital requirements (RBC) for captives should be aligned with direct insurers to remove arbitrage opportunities in light of PBR development.
- NAIC GCC (E) Working Group is field-testing treatment of XXX/AXXX business and other business ceded to captives under the GCC, including estimating reserve overstatement and asset overstatement and “looking through” transactions (unwind the captive transaction).
- Field-test note:
  - A select group of 44 life insurance companies’ ACL RBC ratios with and without captive impact showed only three of the 44 would breach the Company Action Level (CAL) RBC ratio if the captive transaction was unwound.

### Risk-based Capital (RBC) framework and state authority
- NAIC accreditation requires the ability to require a minimum level of capital and surplus and the authority to require additional capital based on type, volume and nature of business.
- The Risk Based Capital (RBC) for Insurers Model Act and the RBC for Health Organizations Model Act (or substantially similar provisions) shall be included in state laws or regulations.
- Intervention: first level of intervention at 300 percent of ACL.

### Aggregated U.S. life insurer RBC data (Table 3 exact figures)
- 2018:
  - Number of Companies: 703
  - Total Adjusted Capital - US$ Billion: 540.4
  - Authorized Control Level RBC - US$ Billions: 64.3
  - ACL RBC Ratio (%): 840
- 2017:
  - Number of Companies: 704
  - Total Adjusted Capital - US$ Billion: 526.6
  - Authorized Control Level RBC - US$ Billions: 56.4
  - ACL RBC Ratio (%): 934
- 2016:
  - Number of Companies: 718
  - Total Adjusted Capital - US$ Billion: 508.7
  - Authorized Control Level RBC - US$ Billions: 53.4
  - ACL RBC Ratio (%): 953
- 2015:
  - Number of Companies: 725
  - Total Adjusted Capital - US$ Billion: 495.4
  - Authorized Control Level RBC - US$ Billions: 51.3
  - ACL RBC Ratio (%): 966
- 2014:
  - Number of Companies: 727
  - Total Adjusted Capital - US$ Billion: 486.6
  - Authorized Control Level RBC - US$ Billions: 50.0
  - ACL RBC Ratio (%): 973

### Property & Casualty industry observations and aggregated RBC data (Table 4 exact figures)
- Observations:
  - Short-term nature of many P&C risks leads to relatively short-duration claim liabilities, frequently estimable through loss development analysis.
  - No significant P&C reserving or balance sheet issues identified during the review (in contrast to life insurance).
- Aggregated data:
  - 2018:
    - Number of Companies: 2465
    - Total Adjusted Capital - US$ Billion: 931.2
    - Authorized Control Level RBC US$ Billions: 151.1
    - ACL RBC Ratio (%): 616
  - 2017:
    - Number of Companies: 2486
    - Total Adjusted Capital - US$ Billion: 935.9
    - Authorized Control Level RBC US$ Billions: 149.9
    - ACL RBC Ratio (%): 624
  - 2016:
    - Number of Companies: 2492
    - Total Adjusted Capital - US$ Billion: 876.9
    - Authorized Control Level RBC US$ Billions: 138.7
    - ACL RBC Ratio (%): 632
  - 2015:
    - Number of Companies: 2494
    - Total Adjusted Capital - US$ Billion: 833.5
    - Authorized Control Level RBC US$ Billions: 133.8
    - ACL RBC Ratio (%): 623
  - 2014:
    - Number of Companies: 2520
    - Total Adjusted Capital - US$ Billion: 830.1
    - Authorized Control Level RBC US$ Billions: 133.9
    - ACL RBC Ratio (%): 620

### Health insurance and long-term care aggregated RBC data (Table 5 exact figures)
- Aggregated data:
  - 2018:
    - Number of Companies: 965
    - Total Adjusted Capital - US$ Billion: 156.7
    - Authorized Control Level RBC US$ Billions: 25.0
    - ACL RBC Ratio (%): 627
  - 2017:
    - Number of Companies: 937
    - Total Adjusted Capital - US$ Billion: 142.1
    - Authorized Control Level RBC US$ Billions: 23.2
    - ACL RBC Ratio (%): 613
  - 2016:
    - Number of Companies: 925
    - Total Adjusted Capital - US$ Billion: 127.8
    - Authorized Control Level RBC US$ Billions: 22.6
    - ACL RBC Ratio (%): 565
  - 2015:
    - Number of Companies: 897
    - Total Adjusted Capital - US$ Billion: 118.3
    - Authorized Control Level RBC US$ Billions: 20.8
    - ACL RBC Ratio (%): 569

### Health balance sheet valuation and reserving standards
- VM-25 Health Insurance Reserve Minimum Reserve Requirements outlines reserving standards for all individual and group health [accident and sickness] coverages including single premium credit disability insurance.
- VM-25 provides minimum reserving standards for some reserve liabilities (e.g., disabled life claim liabilities) and reserving principles for other premium and claim liabilities.
- 1991 ASOP No. 18, LTC Insurance, adopted by the Actuarial Standards Board.
- In setting statutory reserves, actuaries are required to apply VM-25, the LTC Insurance Model Regulation for riders and acceleration of benefits on life and annuity benefits, and applicable state regulations.

### Long-term care insurance (LTCI): adverse experience, impacts, and policy responses
- ASOP 18 and the LTC Model Regulation provide general direction and principles; ASOP 18 indicates the need for conservatism and review of emerging experience.
- Emerging experience for LTCI has tended to be unfavorable on major assumptions (e.g., low interest rates, low lapse experience, improved longevity, seniors’ access to later life living options).
- Empirical indicators (life insurance LTC only):
  - Actual incurred claims are at or near 250 percent of actuarial estimates of expected incurred claims.
  - Actual lives insured versus actuarial estimates of lives insured indicate policyholders are keeping LTC policies longer than expected (actual lives covered vs actuarial estimates data shown across 2014–2018).
- Consequences:
  - Claim costs skyrocketing for LTC carriers; many stopped writing new business while remaining responsible for existing policyholders.
  - Insurers must continually press for rate increases and strengthen claim reserves; some states restrict actuaries from assuming future premium increases in asset adequacy testing, other states allow consideration if increases are justifiable.
  - Industry continues to experience high levels of LTC losses despite rate increase approvals.
  - Projected future costs have risen dramatically from initial estimates, affecting underwriting results, reserve increases, insurer withdrawals from new business, and policyholder affordability.
  - Number of LTC writers has greatly diminished; some remaining writers are mutual insurers with limited ability to raise capital.
  - Size of rate increases granted varies by state, raising cross-subsidization concerns.
  - Weakened solvency currently an issue for only a limited number of insurers; most larger writers that stopped new sales are well diversified and well capitalized.
- Policy coordination:
  - U.S. Treasury convened a federal interagency task force on LTC to develop policies at the Federal level to complement state regulation; the task force aims to issue its report during the first quarter of 2020.
  - NAIC formed an executive level committee to consider LTC issues including consistent rate approvals across states.

*Source: IMF Staff Own Analysis; NAIC; S&P Global Market Intelligence; material as presented in the provided content unit.*

### 98.      While not rising to the level of systemic concern, a reform of LTC insurance is needed

### 98.      While not rising to the level of systemic concern, a reform of LTC insurance is needed

### Findings and policy recommendations on LTC insurance
- While LTC insurance does not rise to the level of systemic concern, a reform of LTC insurance is needed without further delays.
- Recommended actions:
  - The NAIC and state insurance regulators develop a balanced approach to rate approvals that recognizes the trade-off between their dual responsibilities to treat customers fairly and protect policyholders against insurer insolvency.
  - The NAIC and state insurance regulators should develop a more consistent response to LTC insurance rate approvals to avoid cross-subsidization between states.
  - State and Federal governments work together to find an alternative solution to funding aged care in the community including potentially lower-priced, more attractive insurance products.

### Product filing and rate review (state-level processes)
- States require the filing and review of rate, rule and form filings for all lines of insurance.
- NAIC tools and guidance:
  - Product Filing Review Handbook: intended to help insurance regulators provide speed to market while maintaining consumer protection; explains filing and review of rate, rule and form filings and basic ratemaking processes.
  - SERFF (System for Electronic Rate and Form Filing): allows electronic submission of insurance product filings; described as a true multi-state electronic filing system (licensed in all jurisdictions).
- Property and casualty:
  - Each state has enacted state insurance rating laws; some based on NAIC model rating laws and guidelines, others from All-Industry Bills of 1947.
  - No issues found by assessors relating to these processes for property and casualty.
- Health insurance:
  - State rating laws and NAIC guidance exist; FSAP found no issues except those related to LTC.
- Life insurance and annuities:
  - Many states do not regulate life insurance premium rates and annuity purchase rates, except for credit life insurance.
  - Several states require filing of life insurance rates and rate changes.
  - Life filings generally review contract provisions and compliance with nonforfeiture law; may need to include premium rates to confirm compliance with Standard Nonforfeiture Law for Life Insurance (#808).
  - Some states require compliance with Valuation of Life Insurance Policies Model Regulation (#830).

### Types of life insurance and regulatory scope
- Three types of life insurance policies and annuity contracts based on treatment of investment earnings:
  - variable life and annuity contracts;
  - equity indexed universal life insurance and equity-indexed annuity products; and
  - all other insurance and annuity products.
- All three types are regulated by state insurance departments, and variable life and annuity contracts are additionally regulated by the SEC.

### Enterprise Risk Management and ORSA (developments and recommendations)
- Progress since 2015 FSAP:
  - Insurance Holding Company System Model Act (#440) and Model Regulation (#450) requirements for annual Enterprise Risk Report (Form F) became effective for NAIC accreditation on January 1, 2016.
  - NAIC accredited lead states now receive and review Form F filings annually; Form F reports material risks within the insurance holding company system.
  - Deadline for filing Form F varies by state from March 1 to September 15.
  - Form F exemptions possible where an ORSA Summary Report at the UCP level addresses all enterprise risk exposures or where the holding company system’s size, structure and nature make Form F non-additive.
- ORSA (Risk Management and ORSA Model Act #505):
  - Large and medium size U.S. insurers and insurance groups are required to perform an ORSA and file a confidential ORSA Summary Report annually with the lead state regulator; proposed effective date no earlier than January 1, 2015.
- Observations from four states visited:
  - Filing dates vary by insurer and state (examples: as late as December 1 and as early as March 1).
  - Some ORSAs are hundreds of pages and may require consultants to review.
  - Some state regulators benchmark ORSA reports; benchmarking helps assess practices and systemic risks and should be spread more widely.
  - Sharing of ORSA Summary Reports is allowed under Model #505, but some states hesitate due to differences in confidentiality language; impacted states may need to request ORSA reports directly from insurers if sharing is constrained.
  - One large insurer’s ORSA included a projection forward of only one year; supervisor expects multi-year projections in future.
- FSAP recommendations for ORSA:
  - Filing deadlines for ORSA be aligned across states so companies can complete year-end yet supervisory need for timely delivery is met (example: July 1 deadline). Recommendation acknowledges having the filing date shortly after a company’s annual risk management and planning processes in the 3rd and 4th quarter is ideal.
  - Benchmarking of ORSA’s by individual states and by the NAIC be continued and extended across all states to learn of best and weak practices, identify risk trends and inform supervisors of emerging macro-prudential issues.

### Group-wide supervisory powers
- NAIC model laws form a framework for group-wide supervision:
  - Primary sources: Insurance Holding Company System Regulatory Act (Model #440), Insurance Holding Company System Model Regulation (Model #450), Model Law on Examinations (Model #390).
  - Model #440 defines lead state authority over records of the holding company, subsidiaries and affiliates, requires information from the ultimate controlling entity, and grants power to examine such entities’ information.
  - Group-wide supervision extends to insurers, operating and non-operating holding companies, regulated entities, non-regulated entities and special purpose vehicles within a ‘holding company system’.
  - Model #440 was updated in 2010 and 2014; as of November 2019 all states had adopted the 2010 changes, and 44 states had adopted the 2014 changes with one more state under consideration.

### IAIS standards and supervisory coordination
- IAIS adopted revised ICPs incorporating ComFrame and the holistic framework for systemic risk in November 2019.
- State insurance regulators have organized supervisory colleges for IAIGs and some have organized Crisis Management Groups (CMGs), though CMG membership may need further consideration to ensure relevant resolution authorities are present.
- NAIC Receivership & Insolvency Task Force conducted analysis of resolution and recovery concerns relevant to financial stability as part of the Macroprudential Initiative (MPI) in 2018 and 2019, which may help address ICP 12 material.

### Oversight of Mortgage Guaranty Insurance (PMIs)
- Role and characteristics:
  - Mortgage Guaranty Insurance provided by Private Mortgage Insurers (PMIs) provides credit enhancement for mortgages with high loan-to-value (LTV) ratios.
  - GSEs are required by charters to obtain credit enhancement for mortgages with LTV ratios above 80 percent.
  - PMI coverage traditionally accounted for most of the PMI industry’s business in GSE-guaranteed mortgages.
  - Mortgage Guaranty Insurance covers unpaid principal, delinquent interest and expenses associated with default and foreclosure; typically written on first lien mortgage loans secured by owner-occupied single-family homes, but can also cover investor/non-owner-occupied homes, vacation or second homes.
- Industry scale and cyclicality:
  - PMI business model is cyclical—relatively long periods of profitability followed by catastrophic loss during recessions.
  - There are currently six PMIs accepting new business with the total loans insured of approximately US$1.2 trillion with risk in force of just over US$300 billion as coverage provided is typically for the first 25 percent of the loan value.
  - The total market for insured loans comprises PMIs, Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) insured loans, with the importance of PMI growing from 13 percent in 2010 to 43 percent in 2018.
- PMIERs and capital/operational standards:
  - GSEs impose Private Mortgage Insurer Eligibility Requirements (PMIERs) on PMIs, including operational and underwriting standards, and detailed risk-based financial and capital metrics.
  - PMIERs are counterparty risk management tools (not government regulation) and are the dominant requirements on PMIs given state-based regulation is still under development after the GFC.
  - Under PMIERs, financial adequacy is measured by comparing available assets to minimum required assets; minimum required assets is defined as the greater of US$400 million or the total risk-based required assets amount.
  - PMIs are turning toward alternative risk transfer markets to transfer tail risk to capital markets.
- State-based regulation gaps and reform:
  - State-based regulation of PMIs needs further development.
  - Existing state financial requirements apply a simple 25 to 1 limit of risk-in-force (total loan value insured) to surplus and do not differentiate by loan characteristics.
  - PMIs are excluded from the RBC.
  - The six PMIs are supervised by three lead state supervisors: North Carolina, Pennsylvania, and Wisconsin; they are licensed to sell mortgage guaranty insurance by other states. Note: Pennsylvania has not implemented the Mortgage Guaranty Insurance Model Act (#630).
  - State insurance regulators are overhauling the Mortgage Guaranty Insurance Model Act (#630) including a new capital model due to be implemented at the end of 2020.
    - Proposed capital model is risk sensitive, takes into account loan characteristics and includes a counter-cyclical factor based on the ratio of income to property price.
    - Proposed model raises capital requirements as home prices increase relative to per capita incomes and reduces requirements as home prices decline relative to per capita incomes.
    - The 25 to 1 risk-to-capital ratio from the 1976 version will be retained as a floor.
    - The state-based capital model is likely to be calibrated to a lower level than the PMIERs financial requirements assuming the countercyclical factor is not significant.
    - Regulatory action levels based on capital have not yet been decided because the MI capital model does not fit with RBC and its defined action levels.
  - Contingency reserve requirement: 50 percent of premium must be held in the reserve for 10 years unless loss ratios increase above 35 percent, creating a countercyclical system that builds capital within the reserve prior to a stress period and restricts dividend payouts.

### Federal Reserve consolidated supervision approach
- The Federal Reserve supervises eight SLHCs predominantly engaged in insurance business, focusing on consolidated supervision of the group and using entity-level supervisors’ work (state insurance regulators).
- The Federal Reserve is required to supervise all nonbank financial institutions designated as systemically important by the FSOC; currently none are so designated.
- Effective consolidated supervision requires cooperation with state insurance regulators because the Federal Reserve does not regulate insurance activities of its supervised entities; primary supervisors for insurance activities are the individual states.
- Federal Reserve supervisory objectives for insurance SLHCs include evaluation of safety and soundness of banking and nonbanking organizations within the holding company system, assessment of risk management systems, financial condition, and compliance with banking laws and regulations.
- Authority: Under HOLA, the Federal Reserve can conduct offsite monitoring and onsite inspections of SLHCs including their nonregulated subsidiaries.
- The Federal Reserve relies extensively on information and assessments provided by state insurance regulators and on state supervisors to monitor and enforce corrective measures regarding insurance activities.

*Source: 1usaea2020004 - 98.      While not rising to the level of systemic concern, a reform of LTC insurance is needed*

### 116.      The Federal Reserve monitors governance and controls of supervised firms through

### 1usaea2020004 - 116.      The Federal Reserve monitors governance and controls of supervised firms through

### Federal Reserve supervision of insurance SLHCs
- The Federal Reserve, as consolidated supervisor at the holding company level, utilizes the RFI C/D rating system which includes a risk management component requiring assessment of governance and controls of an insurance SLHC.
- Expectations include appropriate risk measurement and risk monitoring and a forward-looking perspective by the firm’s board and senior management.
- The Federal Reserve does not presently administer or require stress testing in its supervision of insurance SLHCs.
- The financial component of the RFI C/D requires evaluation of the firm’s liquidity position, including the firm’s ability to attract and maintain sources of funds necessary to support operations and meet obligations.
- Liquidity risk management processes and funding programs should:
  - Take into full account the institution’s lending, investment, and other activities.
  - Ensure adequate liquidity is maintained at the parent holding company and each of its subsidiaries.
  - Incorporate real and potential legal and regulatory constraints on the transfer of funds among subsidiaries and between subsidiaries and the parent holding company.

### Group Capital Requirement (Building Block Approach)
- The Federal Reserve has developed the Building Block Approach (BBA) for combining or aggregating capital reported by each group to provide an overall assessment of group strength.
- The Federal Reserve coordinates with the NAIC on the development of the GCC.
- The Federal Reserve published its NPR on the BBA ahead of the NAIC’s further development of the GCC.

### State supervision approach and risk-focused surveillance
- The NAIC and member state regulators have developed a risk-focused surveillance process; the Financial Analysis Handbook (2018 Annual/2019 Quarterly) and the Financial Condition Examiners Handbook 2019 contain essentials of this process and are updated annually.
- The Financial Analyst is the focal point for offsite monitoring based on filings and, together with their supervisor, determines the insurer’s priority rating which drives supervisory intensity.

### Prioritization framework and priority categories
- A risk-rating/prioritization framework determines priority of analysis and examination work for each domestic insurer.
- Priority definitions and supervisory expectations:
  - Priority 1: Troubled companies subject to intense supervisory scrutiny as outlined in the Troubled Insurance Company Handbook; analysts generally need to complete annual filing analysis by the end of April each year; likely subject to FAWG peer review.
  - Priority 2: Not yet troubled but subject to unfavorable trends and metrics; elevated ongoing monitoring; analysis performed ahead of Priority 3 and 4.
  - Priority 3 / Priority 4: Lower priority; Priority companies require some additional monitoring beyond basic level required for Priority 4.
- The formal prioritization framework focuses on net risk and financial position without structured consideration of market significance or impact of failure; NAIC guidance encourages consideration of market significance and impact of failure.
- The Financial Analysis Handbook (2019 edition) guidance excerpts:
  - Priority 2 definition: “High priority insurers may also include those subject to heightened monitoring for reasons other than financial solvency risks, as determined by the department” (Page 23).
  - Specific prioritization factors: “impact on the public of an insurer’s insolvency,” “policyholder and jurisdictions affected,” and “structure and complexity of the insurer or insurance group” (page 24).
- Recommendation: Require assessment of guidance factors in a structured way (for example, applying a matrix approach to consider risk of failure and impact equally).

### Financial Analysis Working Group (FAWG)
- FAWG provides peer review, advice, and coordination for nationally significant insurers trending toward being financially troubled.
- Supported by the NAIC Financial Analysis and Examination Unit of the NAIC Financial Regulatory Services Division which selects and analyzes potentially troubled nationally significant insurers.
- Selection triggers: various ratios benchmarked against usual values and industry averages, material declines in surplus or RBC, low RBC ratios (including Trend test results), other negative trends; can also arise from regulator requests, publicized ratings actions, or market news.
- Group selection criteria add group-focused indicators such as multiple insurers within the group in financial trouble and review of GAAP financial results and SEC filings.
- FAWG operations:
  - Annual meeting and conference calls eight times per year.
  - Communications to domicile or lead state regulators take the form of a letter to which a response is expected and followed up by FAWG.
  - Maintains the Troubled Insurance Company Handbook and the Solvency Monitoring Risk Alert.

### Risk assessment methodology and tools
- Risk assessment uses nine “branded risks”: credit risk, legal risk, liquidity risk, market risk, operational risk, pricing and underwriting risk, reputation risk, reserving risk and strategic risk.
- Outcomes produce a heat map matrix with risk ratings: minimal concern, moderate concern or significant concern, and trend noted as decreasing, static or increasing.
- Observed variability in analytic clarity: some assessments were descriptive and lacked clear basis for low/medium/high ratings and trend analysis; other analyses demonstrated deep critical thinking about inherent risk and mitigating controls.
- Financial analyst annual cycle and filings:
  - Annual Financial Statement (filed by March 1 for the 12 months ended on December 31 in the prior year).
  - Quarterly filings received on May 15, August 15 and November 15 for Q1, Q2 and Q3 respectively.
  - Management Discussion & Analysis provided by April 1.
  - Audited Financial Statement Report provided by June 1.
  - ORSA filings (see separate section).
- Automated and analytic tools:
  - Once filings are loaded into NAIC database, Financial Analysis Solvency Tools (FAST) provide automated analysis.
  - FAST scoring: based on multiple ratios (18 to 22 annual ratios and 13 to 18 quarterly ratios depending on the type of company) producing a points score to screen filings and target analysis.
  - Insurance Regulatory Information System (NAIC) ratios are also calculated from annual financial statements.
  - Other systems provide outlier identification, regulatory actions history, consumer complaints database, and market conduct supervisory action tracking.

### Onsite examinations: scope, phases, and frequency
- Onsite financial examinations are conducted at least every five years and are extensive in-depth examinations conducted in seven phases:
  1. Understand the company and identify key functional activities to review (may not be needed for every exam but includes corporate governance and risk management).
  2. Identify and assess inherent risk in activities, including branded risk categories.
  3. Identify and evaluate risk mitigation strategies and controls.
  4. Determine residual risk.
  5. Detailed examination procedures to understand and test material risks.
  6. Update priority rating and supervisory plan.
  7. Draft the examination report, management letter and the Summary Review Memorandum to share with the Financial Analyst.
- Findings from examinations should inform continuous updates to the Financial Analyst’s knowledge.

### Use of external expertise and resourcing considerations
- Many state regulators use external contractual expertise for examination work and occasionally for offsite analysis.
- Benefits: flexible resourcing and access to specialist expertise (e.g., cyber risk experts).
- Corollary concern: reliance on external experts can result in regulators not retaining in-house examination experience; Examination Handbook requires a state employee to oversee consultants and sign off on key deliverables.
- Variation in reliance on external experts among regulators:
  - CID: little reliance; uses experts only where specialist skills required.
  - MDI: extensively uses experts with MDI oversight for Financial Examinations and Market Conduct Examinations, for staff training, and some analysis work; MDI has no valuation actuaries on staff.
  - NYDFS: uses external experts for Financial Examinations as needed with NYDFS oversight; NYDFS generally uses staff for Market Conduct Examinations.
- Compensation and recruitment challenges: civil service pay scales disadvantage state regulators in competing for insurance and financial services experts who can earn more in industry and consulting; external experts are available but at greater cost.
- Recommendation: Where possible, retain expertise in-house to preserve institutional knowledge.

### Integration of financial analysis and examinations; engagement with management
- Many state regulators keep offsite financial analysis and onsite examination functions separate; this separation limits financial analysts’ exposure to examination insights.
- Observed practices:
  - Financial analysts participate in teleconference interviews with senior executives; some states require senior management to come into the regulator’s office annually.
- Recommendations:
  - Reduce separation between financial analysis and financial examination functions to better understand risk culture, governance and quality of risk management.
  - Move toward more frequent, narrower-scope examinations such that comprehensive coverage occurs within a five-year period (targeted/interim exams based on new risks found during comprehensive exams are an example).
  - Create teams of supervisors dedicated to both financial analysis and financial examination for large insurance groups including IAIGs.
  - Increase routine engagement of state regulators with C-Suite management on a regular basis outside of full-scope financial examinations.

### Preventative and corrective measures (RBC ladder of intervention)
- RBC framework and levels:
  - ACL: number determined under the RBC formula in accordance with RBC instructions; if total adjusted capital is at or below ACL, a state regulator can place an insurer under regulatory control.
  - Mandatory Control Level RBC (MCL RBC): level at which the state insurance regulator must place the insurer under regulatory control; this is at 70 percent of the ACL RBC.
  - Regulatory Action Level RBC: at 150 percent of ACL RBC; if total adjusted capital falls below this level the state regulator can require an RBC plan, perform necessary examinations and issue orders specifying corrective actions.
  - Company Action Level RBC: at 200 percent of ACL RBC; insurer must prepare an RBC Plan containing corrective actions.
  - An RBC Plan can also be required if insurer has total adjusted capital at less than 300 percent of ACL RBC and is exhibiting a negative trend.

*Source: 1usaea2020004*

### 135.      Under the Hazardous Financial Condition Model Regulation (Model #385), state

### 1usaea2020004 - 135.      Under the Hazardous Financial Condition Model Regulation (Model #385), state

### Hazardous Financial Condition Model Regulation (Model #385)
- State insurance regulators have broad authority to seek corrective actions for a broad range of shortcomings within insurers.
- Triggers for supervisory action include:
  - adverse findings in examinations, audit reports and actuarial opinions;
  - adverse findings with regard to reserving;
  - adverse findings regarding the insurer’s reinsurance program;
  - significant reductions in the insurer’s surplus;
  - concerns about contingent liabilities;
  - identified cash flow and liquidity issues;
  - concerns about affiliate transactions.
- The model regulation provides authority to correct corporate governance practice deficiencies and require insurers to adopt and utilize governance practices acceptable to the supervisor.
- The supervisor can consider whether management, including officers, directors, or any other person who directly or indirectly controls the operation of the insurer, "fails to possess and demonstrate the competence, fitness and reputation deemed necessary to service the insurer in such position."
- There may be variations in state enactment, but the NAIC Accreditation program requires state law to be substantially similar to this model.
- Observation: these powers are comprehensive but are typically triggered only when insurer circumstances are "severely negative." Example trigger language: the supervisor must determine that “the continued operation of the insurer licensed to transact business in this state may be hazardous to its policyholders, creditors or the general public...”
- Consequence: powers under Model #385 are often invoked at a point requiring urgent action rather than earlier preventive intervention.
- Preferable approach identified: address governance and risk management issues through regulatory requirements rather than waiting to invoke urgent-action powers based on severe deficiencies.

### Licensing
- The Uniform Certificate of Authority Application (UCAA) was created by the NAIC to create a national uniform license application; a majority of states (and Puerto Rico) accept the UCAA.
- The UCAA can be used for all lines of insurance except for a Health Maintenance Organization (HMO).
- Additional authorizations beyond a Certificate of Authority may be required in some states based on statutory or state-specific requirements.
- Regulated insurance activities and permitted lines of business are defined in each state’s statutes; unauthorized insurance activities are explicitly prohibited and subject to sanctions.
- The permissible legal forms of domestic insurers and procedures for establishment of foreign insurers are defined through insurance legislation and other state legislation (e.g., state corporate law).
- States’ responsibility for issuing licenses is explicitly specified in legislation.
- Licensing practices:
  - Circumstances, experience and financial standing of companies are assessed thoroughly.
  - There are cases where insurers licensed in one state were denied licenses in other states due to inadequacy of experience with the relevant proposed state market or other shortcomings.
  - States communicate effectively regarding licensing decisions.
- Minimum capital levels may vary between states, but in practice are not the binding constraint for initial capital of newly licensed insurers.
- State supervisors require license applicants to submit business plans and require capital to be held at a level that will sustain healthy levels of solvency during initial operations.
- In practice, initial capital must meet multiples of ACL RBC required in the future under the business plan for the license to be granted.

### Exit from the Market; Receivership and Insolvency
- Over the last 10 years the number of insolvencies has been less than 1 percent of total domestic insurers in each year and is trending downwards.
- U.S. state insurance laws establish a receivership scheme providing states broad powers in the exit of insurance companies; all states have enacted a statute governing insolvency proceedings of insurance companies.
- NAIC model laws are the basis for state receivership schemes. The most recent receivership model is Insurer Receivership Model Act (#555), adopted in 2007.
- Prior NAIC receivership models include the Uniform Insurers Liquidation Act and the Insurers Rehabilitation and Liquidation Model Act.

### Guaranty Funds and Policyholder Protection
- Guaranty funds provide a safety net for policyholders and other claimants and beneficiaries, triggered by the legal finding of insolvency, and serve to indemnify policyholders up to stated limits.
- For life and health guaranty associations the safety net can include the authority, depending on circumstances, to continue policy coverage for protection of policyholders.
- Guaranty Funds are authorized in state laws based on NAIC Life & Health Insurance Guaranty Association Model Act (#520) and Property & Casualty Insurance Guaranty Association Model Act (#540).
- Example policyholder protection range: life insurance death benefits vary from US$300,000 to US$500,000.
- If a failed insurer lacks sufficient funds, the state guaranty fund collects funds from other member insurance companies in that state ex-post to make up the shortfall; there is a cap on the amount that can be assessed to each insurer.
- All insurers licensed in a state must be members of the relevant guaranty fund, with a few exceptions.
- A policyholder will be supported by the guaranty fund of the state in which they live.
- National coordination:
  - National Organization of Life & Health Insurance Guaranty Associations (NOLHGA) coordinates life and health guaranty funds across all 50 states and DC, assembling a task force for multistate insolvencies to analyze commitments and arrange payment or policy transfer.
  - National Conference of Insurance Guaranty Funds (NCIGF) provides a coordinating platform for property and casualty guaranty funds in the 50 states and DC.
- Assessment: receivership and liquidation laws plus guaranty funds and national coordination create an adequate system for resolution of insurers, but the system has not yet been tested by the failure of a complex set of insurance companies across life, health and/or P&C, other financial and non-financial entities, and U.S. and international operations under common ownership through a holding company.

### Group Supervision
- The lead state supervisor is responsible for insurer holding company analysis; domestic state supervisors of groups outside the lead state domicile analyze the impact on their domestic insurer.
- Depth and frequency of holding company analysis depend on sophistication, complexity and financial strength of the holding company system, availability of information, and issues found during review of insurance holding company filings.
- Analysts must document results annually into the Group Profile Summary (GPS) and update as needed.
- Core inputs and timelines:
  - Forms B and C filings are required to be analyzed by October 31 each year and recorded in the GPS.
  - Analysts must complete analysis of the impact of the group structure on the domestic insurer by December 31 each year.
  - Form B (Insurance Holding Company System Annual Registration Statement) is filed annually on June 1 and contains governance, fitness and propriety information and some financial information; MD&A provides organizational and strategic information.
- Other inputs encouraged: GAAP-based group consolidated financial statements, SEC filings, investor presentations, rating agency reports.
- The Risk Management and ORSA Model Act (NAIC #505) allows sharing of ORSA Summary Reports and ORSA-related information with other impacted regulators, NAIC and third-party consultants.
- Confidentiality issues: some states may be hesitant to share ORSA reports due to differences in confidentiality language; other states may need to request ORSA reports directly from the insurer.
- Analysts are expected to include overall conclusions on the risks of the group and the overall risk management of the group in the GPS, though samples reviewed suggested GPS entries could contain more critical analysis.
- Supervisory colleges exist for all IAIGs; formation of CMGs for IAIGs is a positive development though membership may be restricted to a subset of supervisors of more material parts of the group.
- Best practice observed: Connecticut holding regional colleges; recommendation to roll out regional colleges more widely.
- Consideration: involve more resolution authorities in CMGs going forward (example: New York Liquidation Bureau participates).

### Group Capital
- Two parallel domestic processes to develop group capital:
  - The Federal Reserve is developing its BBA.
  - The NAIC is developing its own GCC.
- Both employ a similar aggregation approach; approaches may diverge in technical areas while aiming for comparable outcomes over time.
- Potential divergences noted:
  - Calibration focus: Federal Reserve aims to calibrate capital requirements for insurance and other financial activities to comparable levels; NAIC approach appears developed to calibrate toward existing U.S. insurance capital requirements.
- Additional development: the United States and other jurisdictions are developing the Aggregation Method as a potential alternative to the ICS.
- Reporting question raised: whether the eight SLHCs will be required to report both the BBA to the Federal Reserve and the GCC to the lead state supervisor.
- The BBA is a proposed capital requirement; all firms subject to the rule would be required to submit the calculation to the Federal Reserve on an annual basis.
- Only one source for supervisors to obtain a consolidated economic view of risk with risk metrics is the ORSA; ORSA is inherently a company view and will not be comparable even if benchmarking occurs.
- Supervisors have access to consolidated GAAP-based financial statements where issued, but these mainly provide accounting information and do not include risk metrics.
- Recommendation: The NAIC, state insurance regulators and the Federal Reserve should develop a consolidated group capital requirement.
  - Specifically recommended: develop a version of GAAP-Plus ICS based on U.S. GAAP as an internationally consistent way forward to address the current gap in insurance group capital requirements in the United States.
  - GAAP-Plus approach: use jurisdictional GAAP as a basis for calculating the ICS.
  - Note: in November 2019 the IAIS agreed to consider comparability of the Aggregation Method and the IAIS ICS reference method (not finalized at FSAP completion).
- Recommendation on enforcement: If the GCC is adopted, it should be made a requirement rather than just a calculation to add credence to the initiative.
  - Rationale: if companies know there is a consequence to breaching a group capital requirement they are more likely to manage to it.
  - Without requirement, reporting an adverse ratio leaves open the question of what supervisors can do; one option is the hazardous financial condition model law, but that may be difficult to justify until severe financial stress exists.

### Supervisory Cooperation
- The institutional landscape places a strong onus on effective supervisory cooperation among state and federal parties.
- States provide primary supervision of insurers; federal agencies such as the FIO and FRB occupy specific roles.
- Because many insurers operate in multiple states, there is a need for cooperation among state supervisors.
- There is also a need for international supervisory cooperation due to:
  - operations of U.S. domestic insurers in other countries; and
  - operations of non-U.S. insurers in the United States.

*Source: Content unit 1usaea2020004 (extracted text).*

### 157.      In SLHCs with substantial insurance business, the Federal Reserve does not seek to

### 1usaea2020004 - 157.      In SLHCs with substantial insurance business, the Federal Reserve does not seek to 

### Coordination between the Federal Reserve and state insurance regulators
- The Federal Reserve (FRB) does not seek to replace or override the role of the lead state regulator and is required by law to rely as far as possible on state supervisors’ work.
- The FRB works in parallel with the lead and other states, coordinating with the lead.
- Both state and FRB regulators may invite the other to participate in joint examination work; such joint work has been limited to date.
- The FRB has access to insurance companies’ financial statements; most states also provide the FRB with quarterly and annual analysis work papers as well as state offsite analysis and examination work papers when requested.
- For all SLHCs, there is an identified state insurance regulator which is the key interface with the relevant Federal Reserve Bank, although other states may also be involved in discussions with the Federal Reserve, including through the supervisory college.

### Lead state supervisor: selection, responsibilities, and coordination
- Decisions on which state leads are taken collectively by the domestic state regulators of the group (i.e., supervisors in states where the group’s legal entities are incorporated).
- Factors considered in lead-state selection include: domiciliary state of the parent or largest insurance company; physical location of main corporate offices or largest operational offices; states’ knowledge of business attributes and structures; affiliated arrangements or reinsurance agreements. (NAIC Financial Analysis Handbook, section 4E Holding Company Analysis)
- The lead state is responsible under the NAIC accreditation standards for undertaking the holding company analysis where a company is part of a holding company system.
- Lead states typically coordinate supervisory work (leading multistate examinations) and chair the supervisory college for relevant U.S. groups.
- Lead-state prescribed roles and responsibilities (section VI-B of the Financial Analysis Handbook) include:
  - completing the holding company analysis and the Group Profile Summary;
  - assessing Corporate Governance Risks;
  - assessing Enterprise Risk Management (EM) Risks;
  - considering Market Conduct Risks;
  - conducting a Period Meeting with the Group;
  - coordinating the Risk-Focused examination;
  - performing Targeting Examination Procedures;
  - other coordinating activities such as:
    - the establishment of procedures to communicate information regarding troubled insurers with other state insurance departments;
    - participation on joint examinations of insurers;
    - assignment of specific regulatory tasks to different state insurance departments in order to achieve efficiency and effectiveness in regulatory efforts and to share resources and expertise;
    - establishment of a task force consisting of personnel from various state insurance departments to carry out coordinated activities; and
    - coordination and communication of holding company system analysis. (NAIC Financial Analysis Handbook, section VII, Appendix A, Holding Company and Supervisory College Best Practices)
- Information-sharing procedures between the states are defined and are a component of the NAIC accreditation standards and accreditation program as is holding company analysis.
- The wider role and effectiveness of the lead state regulator is being addressed with the inclusion of the GPS.
- Lead states may coordinate regular discussions amongst U.S. supervisors between meetings of the supervisory college.
- A key role for lead states is coordination of regular examinations; the lead state system, coupled with pressures for increased efficiency, has helped to deliver a more coordinated approach in recent years.

### Supervisory colleges and international cooperation
- Supervisory colleges have been established for all U.S. insurance groups meeting the IAIS definition of an Internationally Active Insurance Group (IAIG).
- A total of 12 U.S. group colleges now meet, at different frequencies, along with some regional colleges.
- Colleges are chaired by the lead state supervisor, who assumes the role of Group-Wide Supervisor (GWS).
- CMGs have been formed for two IAIG’s by the New York DFS and one by New Jersey.
- At present 19 states are signatories to the IAIS Multilateral Memorandum of Understanding (MMoU).
- The NAIC has developed guidance for establishment and management of supervisory colleges, drawing on IAIS guidance; emphasis on risk-focused surveillance and crisis preparedness. (NAIC Financial Analysis Handbook, section VII, Appendix A, Holding Company and Supervisory College Best Practices)
- College membership generally comprises the involved U.S. state regulators and all foreign regulators if they choose to participate; CMGs are smaller groupings with foreign regulators of major parts of the group only.
- The FIO has participated in some CMGs but not in colleges.
- Some states have explicit thresholds for participation, expressed in terms of size of U.S. business and share of the host country market.
- Colleges generally operate on terms of reference agreed by members on the initiative of the U.S. chair; these define purpose, membership, identify the GWS and specify roles, scope, frequency, etc.
- File reviews indicated colleges for IAIG’s were conducted every year but may rotate format with in-person meetings between international supervisors and senior management of the IAIG over one or two days or a conference call or webinar.
- Typical college agenda items include management presentations and C-suite level discussion, and international supervisory discussion in camera; frequent topics: group profitability, key risks, capital and governance matters.
- Supervisory colleges have not yet developed a structured, shared view of group-wide risks, group-wide governance, and risk management beyond what is documented in the GPS.
- Absent a U.S. or global groupwide capital standard view on the financial condition of the group, comparing capital and surplus to standardized risk measures is not yet a feature of discussions.

### Macroprudential supervision — Federal role (FSOC and FIO)
- In December 2019, FSOC published final interpretive guidance announcing its intention to apply an activities-based approach to assessing potential risks to U.S. financial stability arising from non-bank financial companies, including insurers. This guidance replaced its 2012 interpretive guidance on nonbank financial company determinations.
- The processes for making a determination under s113 of DFA to subject a nonbank financial company to Federal Reserve supervision include enhanced analytical rigor and transparency.
- By the end of 2014, four nonbank financial companies (three of which were insurers) had been designated by FSOC under s114 of DFA based on the 2012 guidance, resulting in supervision by the Federal Reserve.
- In March 2016, the U.S. District Court for the District of Columbia ordered the rescindment of the designation of an insurer by FSOC; in January 2018 FSOC discontinued the appeal process for that decision.
- FSOC rescinded one non-insurer, nonbank designation in June 2016 and rescinded the two remaining insurer SIFI designations in September 2017 and October 2018.
- FSOC has authority under s120 of DFA to “provide for more stringent regulation of a financial activity” by publicly issuing non-bank recommendations to primary financial regulatory agencies to apply new or heightened standards and safeguards.
- Under the final guidance, FSOC will pursue entity-specific determinations under s113 of DFA only if a potential risk or threat cannot be adequately addressed through an activities-based approach.
- The activities-based approach aims to identify and address risks to financial stability on a system-wide basis irrespective of entity type, regulatory body or charter, reducing potential for regulatory arbitrage and competitive disadvantages.
- Risks to financial stability that can be assessed under the activities-based approach include: elevated asset valuation risk, rising credit risk, excessive leverage, elevated liquidity risk, interconnectedness across the financial sector, growth of unregulated financial activities and operational risks including those arising from the digital transformation of the financial sector.
- FSOC’s consideration of amplified financial stability risks focuses on how the risk could be triggered, transmission mechanisms to markets or entities, impact on the financial system and whether that impact could harm the U.S. economy.
- Examples of methodologies and data used by FSOC are demonstrated in FSOC’s annual reports.
- Where a potential risk is identified, relevant federal and, in the case of insurers, state regulators could receive recommendations for implementing heightened or new regulations under s120 of DFA; relevant regulators, including state insurance regulators, would be consulted on assessment and regulatory options.
- The activities-based approach is yet to be tested and some practical implementation modalities remain unclear.
- Representation of the insurance sector on FSOC:
  - Insurance sector represented by: the independent member with insurance expertise (voting member), the director of the FIO (non-voting member), and a state insurance commissioner (non-voting member).
  - Of those three, only the state insurance commissioner has any authority to supervise and regulate insurers.
  - The assessment suggests it would be appropriate to upgrade the State Insurance Commissioner member to a voting member, replacing the independent member with insurance expertise.

### FIO mandate and coordination
- The FIO’s mandate includes monitoring the insurance industry, identifying issues or gaps in regulation that could contribute to a systemic crisis in the insurance industry or the U.S. financial system.
- The FIO may recommend to FSOC that it designate an insurer as a nonbank financial company subject to regulation.
- Before the Secretary of the Treasury makes a determination to resolve an insurer under Title II of the DFA, the Secretary must first receive a written recommendation from the FIO Director and the Federal Reserve.
- FIO and the Federal Reserve coordinate on annual analyses of nonbank financial companies supervised by the Federal Reserve, particularly with respect to stress testing.
- At the international level, FIO represents the United States at the IAIS and assists the Secretary in negotiating covered agreements.

### State insurance regulator role, NAIC initiatives, and macroprudential tools
- The NAIC’s Financial Regulatory Services and Capital Markets Bureau are charged with monitoring, gathering and producing data on insurer activities and considering broader market factors that could impact insurers, insurance groups or the industry.
- Relevant data is made available to state insurance supervisors through regulatory data tools and is provided to the FAWG which produces a regulator-only Risk Alert twice a year to keep regulators up to date on material and emerging risks.
- The Risk Alert leverages NAIC data and FAWG members’ experience in their own states; capital markets related issues are shared with the Valuation of Securities Task Force.
- The NAIC’s Financial Stability Task Force (FSTF) began work on the Macro Prudential Initiative (MPI) in August 2017, focused on four areas:
  - liquidity risk;
  - recovery and resolution;
  - capital stress testing; and
  - counterparty exposure concentrations.
- The FSTF referred work on recovery and resolution to the NAIC Receivership & Insolvency Task Force (RITF) to evaluate:
  - Recovery and resolution laws, guidance and tools, and determine whether they incorporate best practices with respect to financial stability.
  - Recovery and resolution planning tools for systemically important cross-border U.S. groups.
  - Whether there are misalignments between federal and state laws that could be an obstacle to effective and orderly recovery and resolution for U.S. insurance groups.
- Capital Stress Testing has been deferred until the GCC initiative is complete; once the GCC is operational then work can begin on applying stress testing to the calculation.
- The FSTF is considering the need for additional tools and/or data to assess counterparty concentrations at legal entity and group level, taking into account on- and off-balance sheet items; aims to identify reporting and disclosure gaps and propose ways to address them.
- The FSTF aims to develop a U.S. sector-wide risk assessment heat map to assess the U.S. insurance sector’s vulnerability to macroeconomic exposures and identify systemic risk, based on existing data, tools and reports.
- The NAIC’s Financial Regulatory Services group provides state regulators analysis on issues including reinsurance market, reinsurance companies, and the impact of alternative capital through insurance linked securities.
- The NAIC’s Capital Markets Bureau monitors investment-related activity affecting insurers; analysis is shared confidentially with state regulators. Areas of focus include securities lending, structured securities, derivatives use, reliance on external asset managers and commercial real estate exposure.
- The Center for Insurance Policy and Research (CIPR) provides research and education via:
  - hosting market-issue programs and focused policy sessions at NAIC annual meetings;
  - publishing CIPR research and distributing academic research via the Journal of Insurance Regulation;
  - applying research findings to regulatory operations via training curriculums;
  - maintaining issue briefs explaining complex insurance issues and linking to state supervisory activity.

### Findings, ongoing gaps, and recommendations
- Findings:
  - Lead state supervisors are in place for all groups.
  - Supervisory colleges for IAIGs are established and generally meet annually, but have not developed a structured, shared view of group-wide risks, governance, and risk management outside of GPS documentation.
  - There is not yet a U.S. or global groupwide capital standard in use to compare capital and surplus to standardized risk measures in college discussions.
  - The activities-based approach by FSOC is consistent with international developments but remains untested in practice.
  - State regulators have substantial data, analysis, and coordination mechanisms (NAIC bureaus, FAWG, FSTF), but aggregation into a coherent macroprudential surveillance framework is incomplete.
- Recommendations and suggested actions:
  - Upgrade the State Insurance Commissioner member on FSOC to a voting member, replacing the independent member with insurance expertise.
  - Continue to develop the FSTF workstreams; reconsider FSTF focus so that, in addition to domestic objectives, it focuses on implementation of the IAIS holistic framework and ensures existing relevant workstreams meet that objective.
  - Develop structured, shared group-wide views of risk, governance, and risk management within supervisory colleges beyond GPS documentation.
  - Advance work on counterparty concentration tools/data, sector-wide heat map, and prepare for capital stress testing once the GCC initiative is operational.
  - Enhance coordination between lead state supervisors, other state regulators, the FRB, FIO and FSOC in implementing activities-based assessments and potential s120 recommendations.

*International Monetary Fund — content unit 1usaea2020004*

### 181.      The FSAP recommends several actions to further expand and deepen the authorities’

### 181. The FSAP recommends several actions to further expand and deepen the authorities’ analysis of risks in the insurance sector

### Enhancing risk analysis and monitoring
- NAIC’s framework for monitoring individual asset-side risks is advanced but could benefit from further integration of scenario-based and correlated risk analysis.
- Scenario-based stress testing should:
  - Enhance vulnerability analyses when investment, underwriting and liquidity risks are correlated.
  - Regularly consider liquidity characteristics of both assets and liabilities.
- NAIC’s pioneering liquidity stress test is commended and should be integrated into regular scenario analyses.

### Reinvestment, search-for-yield, and exotic assets
- In a low-for-long interest rate environment, state supervisory authorities and the NAIC should:
  - Closely monitor reinvestment risks and search-for-yield behavior.
  - Assess insurers’ risk management capabilities when investing in more exotic assets.

### Natural catastrophe exposures and reinsurance
- State supervisors and the NAIC should further analyze primary insurers’ exposures to natural disasters, including:
  - The capacity of and pricing trends in the reinsurance market.
  - The role of state catastrophe or guarantee funds where present, to identify potentially misaligned incentives and minimize local market disruptions after severe disasters.

### Changing incidence and severity of natural catastrophes — overview
- Losses from increasing incidence and severity of natural catastrophes are a concern for the insurance sector in the United States and globally; the insurance sector is central to mitigating evolving risks.
- The U.S. Government’s National Climate Assessment 4 (NCA4) provides a comprehensive analysis of impacts on U.S. society and the U.S. economy; flooding along the U.S. coastline and the incidence of wildfires are of most interest for the insurance sector.
- Observations based on past climate-related events indicate issues the industry will face going forward as risks evolve (for example, hurricanes with higher sustained wind speed and slower motion; flooding risk increase).

### Coordination and disclosure initiatives
- The Mitigation Framework Leadership Group (MitFLG), chaired by FEMA with FIO membership, published the National Mitigation Investment Strategy in August 2019 to support links between risk reduction and financial risk transfer mechanisms.
- NAIC Catastrophe Insurance Working Group activities include finalizing the NAIC State Disaster Response Plan, monitoring private flood insurance market development, and reviewing the NAIC Catastrophe Modeling Handbook.
- Six state regulators (California, Connecticut, Minnesota, New Mexico, New York, Washington State) conduct an annual Insurer Climate Risk Disclosure Survey of insurers with direct written premiums over US$100 million — around 1,000 insurers representing 70 percent of U.S. direct written premium.
  - Beginning with the 2019 survey, insurers were encouraged to align responses with the TCFD recommendations; there was little take-up in the first year.
- 2019 survey findings: insurers have a short-term focus in investment and underwriting decisions; longer-term climate risks are not a focus. Insurers with longer investment horizons tend to include climate-risk in comprehensive ERM processes. Some insurers offer discounts/credits for mitigation actions (e.g., storm shutters, higher deductibles).

### California wildfires — observed impacts and industry response
- Wildfires caused an estimated US$18 billion of insured losses in each of 2017 and 2018; these were the most destructive years in California’s history.
- There is evidence of insurers beginning to withdraw from high risk zones (Wildland Urban Interface, WUI).
- Milliman analysis: on a gross basis the P&C industry made cumulative profits of US$10.2 billion over the 25-year period from 1991 to 2016, but in 2017 and 2018 had a combined loss of approximately US$20 billion.
- Catastrophe models are being recalibrated after 2017–2019 events which did not appropriately account for windspeed-driven fire spread and slowed firefighting efforts; reinsurance is becoming more expensive.
- California rate-filing constraints:
  - Average indications for necessary rate increases over 2018 and 2019 based on 51 rate filings: 27.07 percent.
  - Average rate changes requested: 6.35 percent.
  - Many insurers request 6.9 percent increases to avoid triggering a public hearing (triggered if average rate increase requested is over 7 percent).
  - Public hearing process can take 14 months instead of an average of five months without a public hearing.
  - These practices hide larger increases for high-risk individual policyholders; insurers have filed multiple rate increases within 12 months and many received multiple approvals within 2–3 years, producing cumulative double digit overall rate increases; for high fire risk areas this likely means 50–200 percent increases.
- Regulatory restrictions affecting insurer risk management in California:
  - Insurer use of underwriting to decline risks is restricted by requiring renewal of policies in areas declared by the Governor as disaster areas (SB 824; SB 894).
  - Rate filings historically could not fully reflect reinsurance cost increases or updated catastrophe model science; catastrophe load allowed based on at least the last 20 years of catastrophe losses (now includes 2017 and 2018 experience).
  - CDI required increase of additional living expense coverage from 24 months to 36 months, raising claims costs not originally priced into premiums.
- These regulatory approaches may stabilize markets short-term but can lead to medium-term consequences, including insurer exit from high-risk areas in the medium term (3–5 years) unless risks are mitigated.

### Market indicators and consumer impacts in California
- Insurer-initiated non-renewal statistics (CDI data):
  - From 2015 to 2017 insurer-initiated non-renewal averaged 86,643 policies.
  - Insurer-initiated non-renewal increased to 88,187 in 2018; 2015 figure was 89,571.
  - Insured-initiated non-renewal: 375,388 policies in 2018 compared to an average of 370,455 per year in the preceding three years.
  - New policies issued in high-risk areas: 501,214 in 2018 compared to 494,470 new policies issued on average each year in the previous three years.
  - State-wide total renewed policies: 3,800,919 in 2018 compared to previous three-year average of 3,782,218.
  - Data limitations: it is unclear whether non-renewing policyholders obtained new cover or went without cover.
- FAIR Plan (insurer of last resort) indicators:
  - FAIR Plan issued a total of 89,248 new policies in the years 2015 to 2018 representing 13.3 percentage of non-renewed policies statewide.
  - FAIR Plan in-force policies: 122,310 after the Camp Fire of November 2018; increased to 179,263 policies as of January 2020.
  - Typical FAIR Plan issuance pre-November 2018: about 2,000 policies per month; October 2019 peaked at almost 9000 policies per month.
  - Total California homeowners’ insurance market in 2018: 8.5 million policies.
  - FAIR Plan is an expensive option for fire cover.
- Surplus lines market trends:
  - 2019 surplus lines homeowner’s premium in California: US$232 million from 46,479 transactions.
  - 2018 surplus lines homeowner’s premium in California: US$122 million from 49,821 transactions.
  - Increased premium but slightly decreased number of transactions suggests significant premium increases and possibly higher-value homes being covered.

### Mitigation, standards, and insurer incentives
- Most insurers do not currently incorporate homeowner or community wildfire mitigation into underwriting or premium credits due to:
  - Lack of evidence on mitigation effectiveness.
  - Lack of assurance that mitigation measures are maintained.
- CALFIRE and IBHS propose a three-tiered set of standards for wildfire mitigation (Tier Risk Management Model for Wildland Fire Insurance Evaluation Version 3) to allow insurers to underwrite by risk tolerance and potentially provide discounts for mitigation.

### Policy recommendations and medium-to-long-term planning
- Regulatory responses should ensure adequate price signals of increasing homeowner risk to incentivize mitigation; responses should be strategically focused on the medium to long term to match the evolution of risks.
- A coordinated, multi-staged approach involving the insurance sector, CDI, California Government, and Federal bodies is recommended to develop sustainable and affordable insurance solutions requiring tradeoffs between affordability, market sustainability, and resilience.
- A medium-to-long-term plan should aim for sustainable risk-based pricing while protecting policyholders from short-term volatility and providing regulatory certainty to incentivize insurers to remain in the market.
- Components of a medium-to-long-term plan may include:
  - Time to develop standardized mitigation measures and for policyholders to invest in those measures.
  - Recognition that catastrophe risk should be considered over several underwriting years (through-the-cycle pricing).
  - Potential regulatory tools such as restricting dividends in highly profitable years without catastrophes to allow surplus buildup for high-loss catastrophe years.
  - A place for scientifically based catastrophe modelling and scenario-based stress testing to inform prudential and macroprudential supervision, given high uncertainty in climate science and hazard links.
- Lessons may be learned from Florida’s regulatory adjustments following Hurricane Andrew in 1992.

*Source: UNITED STATES — INTERNATIONAL MONETARY FUND (excerpts 181–197).*

### 198.      Florida is significantly exposed to hurricanes and accounts for 41 percent of all

### Florida is significantly exposed to hurricanes and accounts for 41 percent of all

### Hurricane exposure and loss drivers
- Florida accounts for 41 percent of all hurricanes making landfall in the U.S.
- Five of the costliest hurricanes in U.S. history hit Florida: Irma, Andrew, Wilma, Michael, and Charley.
- Florida has a very high value of insured properties in coastal counties.
- Hurricanes pose two major threats: damage from windspeed and damage from flooding due to storm surge.
- Losses are usually greater from flooding than from windspeed.
- Two separate coverages are generally needed to address hurricane risks:
  - Standard homeowners’ policy: covers damage from windspeed.
  - Additional flood policy: covers damage from flood.

### Homeowners’ insurance market structure and oversight
- Standard homeowners’ policies are provided in a competitive market by private insurers.
- Florida created a stable, competitive market after significant hurricane loss events in 1992 (Andrew) and 2004 and 2005 (multiple Category 3 and above hurricanes).
- Regulatory measures contributing to market stability include:
  - The Florida Office of Insurance Regulation (FLOIR) conducts an annual Catastrophe Stress Test and Reinsurance Data Call.
    - The reinsurance data call runs from February to June and is conducted in three parts, enabling FLOIR to assess intended reinsurance programs and compare them with market-obtained reinsurance.
    - The annual stress test is based on scenarios of previous hurricanes.
  - The Florida Hurricane Loss Projection Methodology Commission (FHLPMC) evaluates hurricane computer simulation models used in rate filings and to determine maximum loss levels.
    - In 2014 FHLPMC was charged with a similar role for residential flood insurance coverage in anticipation of a private flood insurance market.
    - The Florida Hurricane Catastrophe Fund (FHCF) must use Commission findings to establish premiums.
    - FHLPMC has approved models it assessed as accurate and reliable, acknowledges scientific evolution and inherent uncertainty, and has found model results differ widely.
    - Observation: approving specific models for rate filings prevents insurers from using blends of outputs; allowing blends may better reflect insurers’ risk management practices.

### Florida Hurricane Catastrophe Fund (FHCF) and market implications
- The FHCF:
  - Is a tax-exempt state trust fund providing reimbursement to insurers for some catastrophic hurricane losses.
  - Participation in FHCF is mandatory.
  - Was created to provide market stability after Hurricane Andrew.
  - Is administered by the State Board of Administration (like FHLPMC) and therefore separate from FLOIR.
  - Has a statutory limit of US$17 billion of fund coverage available across the market.
  - Sets FHCF premiums to reflect hurricane risk and specifically do not fluctuate based on market conditions.
    - This stable pricing facilitates long-term capital commitment by insurers to the Florida market.
  - Gives access to reinsurance at a price that would not be available in the private reinsurance market due to tax exemption and absence of profit requirement.
  - Can fund losses through:
    - Its assets,
    - Risk transfers into the reinsurance and capital markets,
    - Pre and post event issued bonds which can be serviced by assessments on all homeowner policies in Florida.

### Citizens Property Insurance Corporation and risk transfer mechanisms
- Citizens Property Insurance Corporation (Citizens) is the insurer of last resort in Florida.
  - Provides insurance for residential and commercial property for applicants unable to obtain insurance through the private market.
  - If other qualifying private market coverage is available, risks cannot be covered by Citizens.
  - Risks for specific coverages with Citizens are required to be submitted to a Clearinghouse and offered to other insurers, which has reduced Citizens’ footprint.

### Market challenges and litigation costs
- Challenges remain despite market stabilization:
  - Significant legal fees can be imposed on insurers when increased claims amounts are awarded in court cases.
    - Legal fees have become a material addition to economic losses and have driven insurers to file for significant rate increases.
  - Affordable insurance is more likely when most premiums go to restoring economic losses rather than administrative and legal fees.
  - Legislation passed in July 2019 to disincentivize assignment of benefits to third parties will go some way to addressing litigation drivers, but more is needed to reduce claims litigation.
  - A mandatory out of court dispute settlement process is suggested as one possible way forward.

### Flood risk, NFIP, and private flood insurance market
- Floods are the most common and most damaging natural catastrophes in the U.S.; eight out of ten of the costliest natural disasters were from flooding.
- All 50 states have experienced flooding in the last five years; coastal floods caused by hurricanes or other storms have been the costliest.
- Most flood insurance for homeowners is provided nationally by the NFIP up to a US$250,000 limit with significant federal government financing.
  - NFIP is administered by the Federal Emergency Management Agency (FEMA).
  - One reason for limited private flood insurance is that NFIP rates are cited as below sustainable levels.
- Legislative and fiscal history of NFIP:
  - Biggert-Waters Flood Insurance Reform Act of 2012 (BW12) mandated actuarially acceptable rates to be phased in over many years.
  - March 2014 Homeowner Flood Insurance Affordability Act stopped or slowed many BW12 price increases.
  - NFIP has used approximately US$20 billion of its US$30 billion in borrowing authority from the Treasury to cover losses over time.
  - In October 2017, the federal government canceled US$16 billion of NFIP debt; without this action NFIP debt would be US$36 billion and above its borrowing authority.
- Private flood insurance market size and growth (NAIC data):
  - In 2018, the private market represented 15 percent of the total flood insurance market (US$4.2 billion).
  - Direct premium written in 2018 was US$644 million, representing a 9 percent increase over 2017 and a 71 percent increase over 2016.
- NFIP reauthorization and Risk Rating 2.0:
  - NFIP requires Congressional reauthorization to sell new or renewing policies.
  - NFIP was authorized to operate by selling and renewing policies until September 30, 2020.
  - Risk Rating 2.0 introduces new risk-based pricing for NFIP and is scheduled to go into effect on October 1, 2021 for all NFIP policies nationwide.
    - Risk Rating 2.0 implements phasing out NFIP subsidies and “will not be able to increase rates faster than the existing limit for primary residences of 5–18 percent per year.”
    - Consequently, the move toward risk-based pricing will take time.
- In early 2019, five federal regulatory agencies issued a joint rule requiring institutions that offer federally backed mortgages to accept certain private flood insurance policies in addition to NFIP policies.
  - State insurance regulators engaged with federal agencies during rule development and states have undertaken regulatory and legislative action to streamline private carriers writing flood insurance.
  - NAIC developed a best practices document to facilitate the private flood insurance market; National Council of Insurance Legislators (NCOIL) is proposing a model law to reduce regulatory burden.
  - State regulators and insurers have been working to assess flood risk and encourage private flood insurance market growth.

### Protection gap: extent, consequences, and policy options
- Insurance penetration is important for economies exposed to natural catastrophe; regions with high insurance penetration recover more quickly.
- The United States has high insurance penetration by global standards, including in higher-risk areas, but some cover types (notably flood) lack sufficient penetration.
- Protection gap definition: the difference between total asset losses in a catastrophic event and the possible insured asset losses.
  - A widening protection gap can cause spillovers into other financial sectors because mortgage-secured property may not be insured against catastrophe loss.
- Evidence of a significant flood protection gap:
  - Only a small fraction of properties outside Special Flood Hazard Area (SFHA) have flood insurance, yet significant flood losses occur outside designated flood zones.
  - Take-up rate for flood insurance in designated flood zones is less than 50 percent according to a range of studies.
  - Losses from Hurricane Harvey and Super Storm Sandy showed less than 20 percent of households that suffered flood losses had flood insurance.
  - McKinsey & Company analysis: in areas most affected by Hurricanes Harvey, Irma and Maria:
    - 80 percent of homeowners in affected areas of Texas lacked flood insurance.
    - 60 percent of homeowners in affected areas of Florida lacked flood insurance.
    - 99 percent of Puerto Rico homeowners lacked flood insurance.
  - As the cost of fire insurance increases in high fire danger areas, a protection gap may also emerge for wildfire perils.
- Balancing affordability and coverage:
  - Risk-based pricing can close protection gaps but higher costs may counteract take-up; mitigation becomes a key lever to make cover more affordable.
  - Effective solutions require cross-government coordination, particularly on mitigation; insurance regulators alone cannot resolve the issue.
- Policy options to address the protection gap:
  - Require more perils to be insured for a borrower to obtain a mortgage, even where risks are low, to limit spillovers into other financial sectors; pooling perceived lower-risk and high-risk exposures improves insurability through diversification.
  - Encourage expansion of the private flood insurance market so consumers can obtain flood insurance from the insurer providing their homeowner’s coverage; private insurers will be incentivized to promote flood cover if profitable, increasing take-up and smoothing transition to all-perils policies.
  - Revisit the role of public pooling bodies (e.g., FHCF) as the private insurance and reinsurance market evolves; public pools can encourage private capital to insure perils that are difficult or volatile to insure.
  - Implement appropriate standards for effective mitigation and credible verification that mitigation has been implemented to make insurance for many perils affordable.
    - Risk-based pricing can incentivize mitigation and create more resilient communities.

*Italic: International Monetary Fund, United States chapter content provided in the supplied PDF excerpt.*

### Appendix I. Status of the Recommendations of the 2015 FSAP

### Appendix I. Status of the Recommendations of the 2015 FSAP

### Regulatory objectives and governance
- All states to adopt the joint statement of the objectives of insurance regulation and review their legislation to ensure that it is consistent with the statement (for example, that any mandate to promote or develop the insurance sector that could conflict with the statement is eliminated.)
  - State regulators have their regulatory objectives outlined on their respective websites.
  - Several (17) state regulators have further clarified these objectives with a joint statement featured on their state insurance department website.

- States to reform arrangements for the appointment and dismissal of commissioners, providing for fixed terms for all, with dismissal only for prescribed causes and with publication of reasons.
  - Staff is not aware of active legislation in a state to change the method and duration of Commissioner appointments.

- States and the FRB to develop appropriate standards for insurance company governance, to be applied at legal entity and/or group level and implement these through the model law process or FRB requirements.
  - States maintain that they have appropriate standards for insurance company governance, which are enhanced by the Corporate Governance Annual Disclosure Model Act describing the corporate governance structure, policies and practices in use.
  - Forty-nine states have adopted the Model Act and were required to adopt the model by January 1, 2020 when it became an accreditation requirement.

### Independence, resourcing, and capacity-building
- State governments to increase the independence of insurance departments in relation to resourcing, enabling them to determine budgets, set and retain relevant fees and assessment income to finance their work and employ appropriate staff as necessary to meet their objectives, subject to continued accountability to state legislatures.
  - State regulators do not believe there have been any significant limitations on their ability to enforce insurance laws and rules in the states because of a lack of specialized skills, either because of funding or staffing.
  - Through the NAIC, updated salary ranges and guidelines for financial analysis and examinations have been established and are currently being implemented.
  - NAIC has established Analysis and Examination Peer Review programs and expanded education and training offerings, including additional online courses and new live training courses at the introductory and advanced levels.
  - Ongoing state leveraging of NAIC centralized resources in the areas of investment, actuarial and risk management expertise.

### NAIC accreditation, guidance, and QA
- The NAIC to review the scope and operation of the accreditation program, including the potential value of an element of external assessment and a quality assurance element to accreditation work.
  - The F Committee undertook an accreditation modernization project which acknowledged that state insurance departments are meeting baseline standards and shifted the focus of accreditation reviews to place greater emphasis on substance and quality of work performed.
  - Additional guidelines were developed to emphasize and assess the role of department senior management.
  - The modernization efforts went into effect in 2017 and the Committee continues to review its impact and any additional action needed.

- The NAIC to continue to pursue the update of the valuation methodology for life insurers based on PBR; captives and insurers have to use the same valuation requirements; the valuation standard is applied consistently across all states; ... state regulators authorities ensure that they have sufficient expertise in-house to cope with principles-based approaches to reserving.
  - All states have adopted the Valuation Manual and life PBR.
  - Life PBR was optional during a 3-year transition period and but is now mandatory for all non-exemption companies for year-end December 31, 2020.
  - A total of 53 companies implemented PBR during the optional transition period.
  - PBR requires companies to file a PBR Actuarial Report annually providing details on their PBR reserves, including asset and liability assumptions and valuation methodology.
  - The Valuation Analysis Working Group (VAWG) was formed to support states in their review of PBR; the VAWG reviewed all of the 2017 and 2018 reports, documented the results in a paper distributed to companies and regulators, and recommended clarifying amendments to the Valuation Manual which have been adopted.
  - Regulatory authorities have access to online PBR training and the American Academy of Actuaries PBR Boot Camps available to regulators and industry.

### Information sharing, confidentiality, and international cooperation
- States and the FRB to review their internal processes and procedures, including staff training, to ensure that supervisors understand the importance of sharing information, including proactive sharing, taking into consideration the need to ensure confidentiality.
  - State insurance regulators maintain that they are able to protect from disclosure confidential information, including confidential information from other regulators; have in place requirements relating to professional secrecy including penalties for breaches of such requirements; and processes for protecting confidential information from attempts at disclosure by third parties.
  - As of June 2019, there were 19 states that are signatories to the IAIS Multilateral Memorandum of Understanding (MMoU) with several more in the validation process and several more interested in the process of applying.

### Licensing, market conduct, and examinations
- States to improve consistency of the licensing requirements among the states both at high level and practical interpretation level.
  - The National Treatment and Coordination (E) Working Group developed Best Practices on how the state should review the following Applications; Primary, Redomestications, and Mergers and Acquisitions.
  - The Best Practices provide recommendations for consistent documentation of the review and post-approval processes.
  - In 2019, the NAIC is expected to adopt revisions to the Best Practices regarding Accreditation Standards for Primary, Redomestications and Form A filings corresponding to a referral to the Financial Regulation Standards and Accreditation (F) Committee to include the Part D Standards in the recommendation for a state’s accreditation.

- States to adopt and implement the Corporate Governance Annual Disclosure Model Act and related regulation and handbooks promptly.
  - Forty-nine states have adopted the Corporate Governance Annual Disclosure Model Act and were required to adopt the model by January 1, 2020 when it became an accreditation requirement.

- State regulators to require examiners and supervisors to state more clearly their observations of properness of key individuals at least in their internal documentations, so that appropriate regulatory actions can be followed up.
  - Guidance was added to the 2017 Financial Condition Examiners Handbook to include a requirement for concluding on the suitability of Senior Management and the Board of Directors, both individually and as a whole.
  - The conclusion should indicate whether any concerns were identified as a result of the assessment performed. If no concerns are found, the examiner is still expected to document a conclusion indicating no concerns noted.
  - The Financial Analysis Handbook includes suitability considerations for both legal entities and groups; regulators will look again at updating the analysis/exam guidance on governance once all states have adopted the Corporate Governance Annual Disclosure Model Act.

- States to review the scope for a higher frequency of examinations or increased targeted examinations between the regular full scope examinations, for the larger groups; and consult on whether they should remove the requirement for examination reports to be published.
  - Guidance was adopted into the 2016 Financial Condition Examiners Handbook related to interim examination work, allowing increased flexibility to conduct examination work during the period between full-scope examinations.
  - States are beginning to implement this practice at a select group of larger, more-complex insurers and continue to conduct limited-scope examinations as needed.
  - State insurance regulators consulted regarding the appropriateness of public exam reports and determined that the practice should continue, albeit with some clarifications; additional guidance was added to the Handbook in 2015 clarifying the purpose and intent of the public report.

- States to review the scope for more coordinated multistate market conduct examinations.
  - Ongoing work of the NAIC Market Regulation and Consumer Affairs (D) Committee and Market Actions (D) Working Group.
  - The Market Actions (D) Working Group has Policies and Procedures to help coordinate collaborative actions, including Collaborative Action Designees in each U.S. jurisdiction.
  - The NAIC maintains a Market Initiative Tracking System to track and share information concerning actions taken in investigating business practices.

### Group supervision, resolvability, receivership, and reinsurance
- States to work closely with federal and international regulators, and resolution authorities to improve resolvability of large and complex insurance groups.
  - Since the 2015 FSAP, the NAIC Receivership and Insolvency (E) Task Force (RITF) considered possible enhancements to the U.S. receivership regime and the states' receivership laws and practices based on international supervisory and advisory developments.
  - In 2017, the Financial Condition (E) Committee encouraged state insurance departments to consider adopting certain provisions of Insurer Receivership Model Act (#555, “IRMA”) addressing recognition of receivership stays, injunctions, and reciprocity to enhance interstate relations, judicial economy and predictability.
  - Updates were adopted in the Financial Condition Examiners Handbook and the Financial Analysis Handbook to guide review of affiliate agreements for receivership provisions outlined in the Insurance Holding Company System Model Act (#440) and Regulation (#450).
  - The Receiver’s Handbook for Insurance Company Insolvencies was updated in 2016 to include guidance related items for SIFI recovery and resolution planning as part of pre-takeover planning. The Troubled Insurance Company Handbook (regulator only) was updated in 2019 for similar guidance on pre-receivership planning.
  - In December 2017, the RITF was requested by the Financial Stability (EX) Task Force to evaluate best practices regarding areas identified as important to financial stability within the U.S. recovery and resolution regime.

- State regulators to analyze the interaction of the web of retrocessions and the group’s or holding’s structure in more depth.
  - The NAIC maintains that the credit for reinsurance laws and regulations, statutory accounting and financial reporting requirements (including all current reinsurance assumptions and cessions) and procedures applicable to reinsurance transactions and retrocessions serve to provide regulators with an effective method of monitoring the reinsurance activities of U.S. companies.
  - The Insurance Holding Company System Regulatory Act (#440) and Insurance Holding Company System Model Regulation (#450) allow states to regulate transactions between insurers and other affiliated entities, including provisions relating to reinsurance between affiliated companies with common ownership or control.
  - The NAIC Financial Analysis Handbook outlines that analysts should consider whether:
    - the insurer has a reinsurance program in place that adequately supports its risk profile;
    - reinsurance between affiliates involves any unusual shifting of risk from one affiliate to another; and
    - pyramiding may be occurring that could cause significant collectability risk to the insurer.
  - The Financial Analysis Handbook emphasizes assessing the financial stability of underlying reinsurers and, if applicable, specific retrocessionairies throughout the chain of reinsurance, using regulatory filings, rating agency reports, and industry analyses.
  - Pursuant to the NAIC Risk Management and ORSA Model Act (#505), insurers provide information regarding reinsurance and risk mitigation within the ORSA filing; analysts will consider effects on liquidity from changes in reinsurance.

### Risk management, ORSA, investment, and capital requirements
- After the introduction of the ORSA regime and requirement for an internal audit function, the states to review the range of their standards on risk management and control functions, assessing whether standards embedded in the ORSA requirement should be applied to a wider population of firms and whether to require at least the larger firms to have risk management, compliance and actuarial functions.
  - States are continuing to gain knowledge and experience in reviewing and assessing the risk management practices of insurers subject to ORSA requirements.
  - Insurers below the ORSA reporting threshold are required to file a Form F disclosure on enterprise risks on an annual basis and are subject to a review of their risk management practices during examination.
  - Regulators feel this approach is appropriate and in line with proportionality considerations but will continue to monitor developments.

- State regulators and the NAIC to consider requiring the ORSA for all insurers, proportionate to the size and complexity of the firms.
  - States continue to gain experience; Form F disclosures and examination reviews apply to insurers below the ORSA reporting threshold; the approach is considered appropriate in line with proportionality.

- State regulators in cooperation with the NAIC, FRB and FIO to continue to analyze investment activities both at legal entity level and group level and address any regulatory arbitrage by improving consistency of investment requirements among states and federal regulations.
  - The NAIC monitors major market and portfolio developments through its Capital Markets group.
  - The FIO continues to monitor these activities through its annual reports and other mechanisms.

- State regulators and the NAIC to develop an RBC requirement for financial guaranty insurers, taking into account their specific exposures to risk.
  - Some consideration was given to modifying the regulatory framework for financial guaranty insurers following the financial crisis, but authorities believe that remaining insurers are more heavily regulated through means beyond RBC and developing such was never considered cost beneficial under the current market.
  - Regulators are developing an RBC for mortgage guaranty insurers.

- State regulators and the NAIC to develop an approach that would allow RBC to capture intra-group transactions (IGTs).
  - IGTs are currently addressed by each state on a transaction by transaction basis under their equivalent authority.

### Other supervisory and reporting areas
- States to review the adequacy of reporting on qualitative issues such as material outsourcing and adopt the proposed new framework for corporate governance reporting.
  - States regularly review reporting requirements, recently enhancing disclosures around the use of investment advisors.
  - Forty-nine states have adopted the Corporate Governance Annual Disclosure Model Act describing corporate governance structure, policies and practices and were required to adopt the model by January 1, 2020 when it became an accreditation requirement.

- Identical investment rules and limits to be imposed on affiliated captives to which insurance liabilities are ceded to.
  - States perform holding company analysis which can consider such risk if the lead state considers asset risk in the area for non-insurers as higher.
  - The proposed GCC is intended to address this risk in a more holistic and cost beneficial way.

*Appendix I. Status of the Recommendations of the 2015 FSAP*

### Section 5 of the NAIC Holding Company Act.

### Section 5 of the NAIC Holding Company Act

### Coordination of capital standards and group supervision
- State regulators, the NAIC and the FRB to coordinate to develop common or consistent capital requirements to avoid regulatory arbitrage between the two capital requirements.
- NAIC is developing its capital calculation for U.S.-based groups, coordinated with the FRB, as appropriate.
- The FRB is developing a separate framework for its supervised entities – BBA.
- Capital standards be put in place in a consistent manner, for groups supervised by state regulators and by the FRB.
  - The NAIC is currently in the process of developing a GCC which is based upon an aggregation and elimination method. This method aggregates the capital requirements for regulated entities and capital factors for non-regulated entities that have a material risk to the insurance group.
  - The FRB is developing a separate BBA.
- Potential conflicts between the objectives of different supervisory authorities be addressed.
  - State regulators believe that they have the tools and resources to address any potential conflicts of different supervisory authorities should they arise.
- A stress testing regime for insurance groups and holding companies be implemented.
  - The GCC expects to consider review or development of proposals for stress testing. The current focus is on the GCC itself, with discussion on stress testing likely beginning in 2020.

### Market conduct, suitability, and consumer protections
- Producers in all states be required to make disclosures to customers of the status under which they are doing business, including which insurance companies have appointed them.
- The NAIC adopted a revised Suitability in Annuity Transactions Model Regulation (#275) that includes a best interest standard of conduct for producers and insurers.
  - With respect to a recommendation to a consumer to purchase an annuity, the standard imposes a disclosure obligation, care obligation, conflict of interest obligation, documentation obligation and a supervision system requirement to ensure compliance with the best interest standard.
- States to further develop market conduct requirements that address the risks of unfair policyholder treatment across the range of insurance products and include requirements to treat customers fairly, to act with due skill and diligence, give suitable advice and to manage conflicts of interest.
  - Authorities maintain that the U.S. insurance regulatory system has well-established market conduct requirements which prohibit the unfair treatment of insurance consumers and policyholders and specific suitability standards for annuity transactions.
- A uniform approach to the regulation of larger business entities, including major commercial lines brokers be developed.
  - The national uniform and reciprocal licensing standards apply to all licensed insurance producers, including major commercial lines brokers. Any specific issues related to commercial lines brokers will be taken under advisement and considered if appropriate.

### Market conduct surveillance, resourcing, and accreditation
- States to develop a risk-focused surveillance framework specifically for market conduct to support proactive, risk-based supervision of market conduct, covering both the supervision of individual firms and of issues that arise across the market.
  - The Market Conduct Annual Statement is used to collect claims and underwriting data on the Private Passenger Auto, Homeowners, Life and Annuity, LTC, Health, and Lender-Placed Home and Auto lines of business.
  - The Market Actions (D) Working Group’s National Analysis Project reviews nationally significant companies with potential market conduct issues. Based on complaints, regulatory actions, premium, market share and other ratios, U.S. insurance regulators, with assistance from NAIC staff, develop a confidential list of potential companies ranked according to level of possible concern.
- States to review staffing and resourcing models for market conduct regulation of insurers and producers, including scope to undertake more examination work using employees rather than consultants (see also ICP2 on resources).
  - The NAIC Market Regulation and Consumer Affairs (D) Committee has developed draft standards for a Voluntary Market Regulation Certification Program.
  - Under the draft requirements, a state insurance department must have either, or a combination of:
    - Its own staff sufficient to perform market regulation work, including market analysis, examinations and other continuum actions.
    - Statutory authority sufficient to engage competent contractors on an as-needed basis and appropriate department staff to oversee and manage such contractors.
    - A pilot program involving 18 jurisdictions has been completed. The draft standards are being revised to incorporate suggestions from the pilot program.
- States to continue to give consideration to developing an accreditation program for market conduct work (initial discussions have already been held), building on the work of the MAWG and on the comprehensive Market Regulation Handbook.
  - The draft program sets forth 12 standards over the following five categories: statutory authority, use of NAIC Market Regulation Handbook, resources and qualifications of staffing, participation in NAIC Market Information Systems and Market Conduct Annual Statement, and interstate collaboration.

### Group-level reporting, consolidated statements, and investment oversight
- Insurance groups and insurance holding systems to be required to submit financial filings also on a consolidated level.
  - The NAIC Group Solvency Issues Working Group considered such changes but determined that doing so was not cost beneficial regulation.
  - Authorities maintain that the NAICs proposed GCC represents a mixed accounting model consolidation of available and required capital.
- Consolidated financial statements be published by all insurance groups.
  - The NAIC Group Solvency Issues Working Group considered such changes but determined that doing so was not cost beneficial regulation. However, note the NAICs proposed GCC represents a mixed accounting model consolidation of available and required capital.
- Investment activities at the group level be carefully monitored to address potential regulatory arbitrage and search for yield at the group level.
  - The Financial Analysis Handbook includes guidance and procedures related to group analysis of credit, market and liquidity risks as part of an assessment of the group’s investment portfolio.
  - A change from a checklist approach to group analysis to a risk-focused approach was implemented beginning with annual 2015 analysis, allowing more flexibility in addressing risks identified. However, analysts are limited to the amount of investment detail they receive in holding companies’ filings as compared to statutory annual statements.

### AML/CFT information sharing and legal authority over holding companies
- To facilitate active and effective information sharing on AML/CFT, FinCEN, state regulators and the NAIC to continue to expand the network of MOUs and speedily implement the ongoing project for electronic information exchange.
  - NAIC and state regulators continue to work with FinCEN on exchanging relevant information where appropriate.
- State regulators to obtain direct legal authority over the insurance holding company (although this is beyond the current ICP).
  - As of June 2017, all 50 states, the District of Columbia and Puerto Rico, have adopted the updated NAIC model holding company act enhancing state insurance regulators’ group supervisory authorities.
  - Additional updates to the NAIC model holding company act relating to powers of a group-wide supervisor (GWS) of an IAIG have been adopted in 48 states and were required to be adopted in all accredited U.S. states and jurisdictions by January 1, 2020. States that have not adopted the model must demonstrate that they are able to achieve the same objective through other means.

### Macroprudential coordination, FSOC representation, and supervisory colleges
- Different authorities and offices to work closer together on macroprudential issues.
  - The NAIC Financial Stability (EX) Task Force is working to enhance the macroprudential toolkit of state insurance regulators.
  - This includes efforts in the NAIC State Ahead strategic initiative to utilize more modern technologies in developing quantitative surveillance and analysis tools as well as policy measures included in the MPI.
  - The MPI addresses four focus areas: developing a liquidity stress testing framework for material life insurance groups, including enhancing disclosures to better assess products with higher liquidity risk potential; capital stress testing to be addressed as part of the NAIC GCC; reviewing existing recovery and resolution processes and disclosures to identify any enhancement needs; and determining if there are material gaps in existing counterparty exposure disclosures.
  - State regulators through FSOC, will work to ensure these initiatives dovetail with the developing system-wide macroprudential surveillance processes such as the activities-based approach guidance for FSOC.
- The representation of the insurance sector be brought into line with that for other sectors on FSOC.
  - Currently state insurance regulators have non-voting membership of FSOC unlike regulators in other sectors. The FIO Director is a non-voting member of the FSOC. The NAIC supports efforts to provide state insurance regulators a vote on FSOC as well as more robust consultation among FSOC and state insurance regulators.
- States and the FRB review how to develop stronger cooperation between U.S. insurance supervisors, which could include increased joint working (e.g., onsite work), secondments and appropriate training; and the FIO and NAIC work more closely together, for example to develop a shared view on priorities for modernization of insurance regulation.
  - The FRB is no longer involved in the colleges for those companies released from SIFI designations. States have enhanced coordinating risk assessments and have formed relevant subgroups (crisis management) for IAIGs.
  - Relevant experts as well as principals from the NAIC, Federal Reserve, and the FIO regularly coordinate including on domestic priorities and international standard setting, (involving the work of the IAIS, FSB, G20 and OECD as appropriate.)
  - FRB and relevant state departments of insurance coordinate on firms they jointly supervise, including sharing exam materials and coordinating onsite activities. FIO serves as the source of insurance expertise in the federal government, and regularly coordinates with state and federal agencies on a variety of issues related to insurance regulation.
- State regulators and FRB to set objectives for colleges to move to the next level of cooperation, including potentially the development of a shared group risk assessment and joint working; and consider whether this may require sub-groups of members or colleges to meet in a core group format to promote efficient working.
  - While the states hold colleges for IAIGs, currently groups where both the FRB and states are supervisors are not IAIGs, so the supervisory colleges are not held as regularly/formally in those instances.
- States to fully and effectively incorporate the state regulators’ collective expectations on international supervisory colleges into the accreditation program.
  - States’ collective expectations relating to international supervisory colleges are outlined in the Financial Analysis Handbook.
  - States convene a Supervisory Colleges best practices meeting at every national meeting (three times a year) to further discuss and refine such best practices.

### Crisis preparedness, contingency planning, and Model Act authority
- The authorities to continue their work in relation to crisis preparedness, giving priority to building on the work of the CMGs (and current work at the FSB and the IAIS) to develop their planning for a crisis and resolution of a major cross-border group.
  - Supervisors should ensure that all internationally active groups have developed contingency plans and are able to deliver information that may be required in a crisis in a timely fashion.
- The NAIC Insurance Holding Company System Model Act (#440)
  - Section 7 provides the commissioner with the authority to develop crisis management plans as part of supervisory colleges. Further, Model 440 Section 7.1, provides for authority for the commissioner to act as the group-wide supervisor of internationally active insurance groups and engage in group-wide supervision activities as outlined in the model.
  - Section 7.0 is a Part A Accreditation standard and Section 7.1 of the Model became a Part A Accreditation standard effective January 1, 2020.
  - Additionally, the NAIC Financial Analysis Handbook contains guidance and a template for a crisis management plan. This holding company authority and guidance provide state insurance regulators with the tools and flexibility to discuss the necessity for crisis management plans within supervisory colleges and/or CMGs groups and to make the determination to develop such plans on a case-by-case basis as deemed appropriate.

*Source: Section 5 of the NAIC Holding Company Act (1usaea2020004 - Section 5 of the NAIC Holding Company Act).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020004.pdf_