After A Year Of Reacting, NAIC Looks To 2021 Reset Of Focus

State insurance regulators are not known for working fast — but that is changing.

The National Association of Insurance Commissioners continues to respond quickly to the rapidly changing landscape insurers are living in by adapting rules and regulations amid the extended pandemic. It is a theme expected to dominate their 2021 regulatory calendar as well.

“Outstanding,” said Susan Neely, president and CEO of the American Council of Life Insurers, of the response from regulators. “We can’t say enough about how responsive they were to our requests for regulatory accommodations that allowed life insurers to continue to serve their customers and keep operating.”

This year was filled with unexpected issues and emergencies that touched the insurance industry in several ways. First, the COVID-19 pandemic spurred an economic crisis that saw already low interest rates plunge to historic lows. That was followed by the May 25 death of George Floyd in Minneapolis police custody.

The insurance industry responded with a campaign for racial diversity, and NAIC regulators devoted considerable time to the effort. In the meantime, work continued briskly as technical changes to rules brought insurers relief.

Most recently, the Life Actuarial Task Force dropped the nonforfeiture rate from 1% to 0.15% — a technical change that has big financial implications for insurers and their annuity obligations.

Nonforfeiture means the amount an insurer must pay a consumer who surrenders a cash value policy or any policy with such a nonforfeiture benefit. The benefit is based in part on an interest rate to reflect earnings on policyholders’ money.

With interest rates at historic lows and insurers suffering pandemic-related financial losses, executives have pleaded with regulators to drop the nonforfeiture rate to 0%. Regulators didn’t want to go that far but showed a willingness to help companies navigate troubled economic times.

“Nobody could imagine this interest rate environment,” said Rhonda Ahrens, chief actuary of the Nebraska Department of Insurance. “If this continues this way and companies stay in longer and don’t pull products because they think they can make it a little while longer with a 1% minimum, will we have solvency concerns?”

Mona Bhalla, deputy superintendent for life insurance in New York, was not convinced consumers are best served by the change.

“I don’t believe it strikes the right balance between those concerns and consumers’ interest, particularly given that consumers would be depositing a significant amount of premium and not be able to take that premium out without being subjected to very large surrender charges and earn basically nothing on that money,” she said.

Fred Anderson, deputy commissioner of insurance for Minnesota, noted that having a floor does not prevent insurers from competing in the free market.

“I think we’ve seen that the annuity market is fairly competitive at the current time,” he said. “And if the environment is ripe for guarantees in excess of whatever ends up being the minimum being offered, I think companies will be willing to offer those products.”

The rate change moves on to the Life and Annuity Committee for consideration.

2021 Regulatory Calendar

The Life Actuarial Task Force met recently to set its regulatory goals, or charges, for 2021. The task force covers many issues of high importance to the industry — illustration guidelines, for example.

A new charge was added and a contract awarded to Conning to provide “economic scenario generator” services. The data Conning generates will be used for regulatory reserve and capital calculations, regulators said.

“Conning’s ESG tool uses advanced modeling and estimation technology to produce empirically validated, realistic economic behavior, and its financial models are among the industry’s most technologically advanced,” the NAIC said in a news release.

Other charges the task force approved last month include:

Monitor Actuarial Guideline 49A. Approved by the NAIC Executive Committee in August, the amended AG 49 is meant to prevent designs with multipliers or other enhancements from illustrating better returns than those of non-multiplier designs.

Also, the new AG 49A restricts the IUL illustration crediting rate to a limit of 50 basis points higher than the policy loan rate.

The task force changed the effective date of the new AG 49A guidelines to Dec. 14 to reflect schedules delayed by COVID-19.

Recommendations to improve life insurance illustration regulation. The task force charged the IUL Illustration Subgroup with recommending changes to Life Insurance Illustrations Model Regulation (No. 582).

Producing the overall life insurance illustration model was a very lengthy, acrimonious process that took years before the NAIC adopted it in 1995.

Recognition of longevity risk. The Longevity Risk Subgroup will provide recommendations for recognizing longevity risk in statutory reserves and/or risk-based capital by the 2021 Summer National Meeting.

Study accelerated underwriting. The task force itself vowed to “provide recommendations for guidance and requirements for accelerated underwriting.” Regulators will focus on an actuarial perspective.

Other NAIC groups, in particular the Accelerated Underwriting Working Group, have been focused on accelerated underwriting. Insurers are especially interested in creative underwriting solutions because of the pandemic restricting face-to-face meetings.

Annuity Sales Rules

Although regulators finished work early in 2020 on a new best-interest model law for annuity sales, more follow-up is needed.

Revisions to the suitability in annuity transactions (No. 275) model law were adopted in February. Since then, Arizona and Iowa have adopted the rules, which establish a best-interest standard that aligns with rules being considered by other agencies.

Industry representatives predicted swift adoption of the rule in many states and promised aggressive lobbying to nudge others to pass the rules. So far, that hasn’t happened.

To nudge things along, NAIC regulators decided to produce a FAQs document to send to the states. Comments were accepted on the document until early October.

The working group is expected to spend much of 2021 getting the FAQs out to state officials and pushing for universal adoption of the best-interest rules.

The annuity sales model articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

The new regulations will commit the agent to extra work and documentation to establish the consumer’s profile. Agents will need to find out and document things like a consumer’s financial situation, insurance needs and financial objectives.

The rule specifically does not establish a fiduciary duty, nor does it ban agents from recommending products with a higher compensation structure. But the agent must be able to show that such a recommendation is in the consumer’s best interest.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.