Senate Banking Committee Issues Testimony From National Association of Insurance Commissioners
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My name is
The
Property and casualty insurance companies reported
The
Taken individually,
State regulators share a mission to ensure a stable, competitive, and well-regulated insurance marketplace where
As a national system of state-based regulation, we collaborate closely on a regular basis and have long been committed to providing leadership across the entire spectrum of global and domestic insurance issues and activities. The financial strength of our insurance system was tested simultaneously by a global pandemic, historic natural catastrophes, financial volatility, and social unrest, and yet it persevered. In fact, an
That is because as our insurance markets grow and become ever more complex and sophisticated, our regulatory tools and priorities continually evolve. With that, allow me to update you on some of the long-standing and new initiatives state regulators are working on through the open and transparent NAIC process.
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3 https://content.naic.org/capital-markets-bureau
4 Dennis P Sugrue, Down But Not Out: Insurers' Capital Buffers Are Proving Resilient In The Face Of COVID-19,
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Innovation, Cybersecurity, and Technology
State insurance regulators understand that insurers are increasingly using technology, big data, and predictive analytics to reshape the insurance marketplace and the way insurers approach risk and engage with consumers. These technological developments have the potential to improve how an insurer does business and can benefit policyholders. However, we recognize the complexity of these processes and the need to ensure they comply with state insurance laws and regulations designed to protect consumers. Insurance regulators are committed to striking the appropriate balance between encouraging innovation while maintaining the strong consumer protections embedded in our regulatory system.
To this end, last year, we formed a new NAIC Innovation, Cybersecurity, and Technology (H) Committee, which I chair, to address the insurance implications of emerging technologies, cybersecurity, and data privacy. The new committee, and its work, demonstrates our commitment to recognizing the significant impact data and technology is having in the insurance industry and ensures consistent and collaborative coordination among state regulators.
One of the H Committee's key projects is the establishment of a
Additionally, the committee has several specialized working groups, including a
State insurance regulators continue to upgrade safeguards to protect the security of data through standards, the examination processes, and model laws. For example, in 2017, the NAIC adopted the Insurance Data Security Model Law, which updated state insurance regulatory requirements relating to data security, the investigation of a cyber event, and the notification to state insurance commissioners of cybersecurity events at regulated entities. Thus far, 21 states (including the
Race and Insurance
Another area of significant activity for state insurance regulators is the intersection of race and insurance. In 2020, in the wake of a national call to action on race and inequality issues, the NAIC created a
This year we have taken a particular focus on addressing barriers that prevent or limit access to the insurance market. As we identify these barriers, we are formulating targeted strategies that open up the insurance market to diverse and underserved communities. We firmly believe that if more consumers have the benefit of protections provided by quality products they and their families will be better protected and, in a position, to build generational wealth.
We are also pleased to share that the NAIC has formed the New Avenues to
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State regulators believe there should be equal access to insurance markets and products, and we must ensure that insurance companies are not unfairly discriminating at any stage of the insurance process, from underwriting to rate setting, to claims handling. The volume of data being created, combined with ever evolving computational techniques, have resulted in unprecedented data mining capabilities that fuel the development of predictive models used to support decision making by insurers. These AI/ML driven decisional systems can and do incorporate and amplify unfair bias which can result in unfair discrimination when applied to consumers.
Climate Risk, Natural Catastrophes, and Resiliency
Another top priority for the NAIC is climate risk and resiliency. State insurance regulators, through the NAIC, have had a climate-specific working group for more than a decade. In 2020, the working group evolved into our
Our detailed work to address climate-related risks in the insurance sector is highlighted in our letter to the
The NAIC also issued a report titled, "Adaptable to Emerging Risks: The State-Based Insurance Regulatory System is Focused on Climate-Related Risk and Resiliency."/6
Of note, this year, our
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State insurance regulators also continuously monitor the capital adequacy of insurers to ensure their ability to pay claims following catastrophic events. A fundamental tool for monitoring capital adequacy is the
The role that state regulators play with respect to climate risk involves more than just ensuring financially strong insurance companies and a viable market; it also includes ensuring strong and resilient homes and communities. Insurers are risk financers and, as such, are risk managers and risk mitigators. Leveraging that, our members are leaders in the effort to help state and local governments build more resilient communities. State insurance regulators encourage the use of innovative building materials, technology, and mitigation methods to reduce the impact of climate risk across a broad spectrum of natural catastrophe risks, and, most importantly, they work with insurers to design new and innovative products, and to establish partnerships with insurers that can help guide and finance community efforts.
Significantly, the NAIC has established a catastrophe model center of excellence within its
Financial Regulatory Oversight
Turning to our continued efforts to ensure effective insurer financial solvency regulation, we would like to highlight a few specific developments in addition to those already referenced. Over the past decade, state insurance regulators have made many enhancements to group supervision, informed by lessons from the financial crisis. We have expanded and strengthened our holding company statutes, implemented stronger corporate governance requirements, and now require larger insurers to file an Own Risk and Solvency Assessment (ORSA), which is a globally recognized report of all the risks posed to an insurance group, both from within the insurers, and from non-insurance affiliates regardless of their geographic location. Additionally, we have rolled out our Group Capital Calculation (GCC), giving regulators group-wide insight into capital allocation. Those improvements demonstrated their value over the last three years where even in the midst of historic market volatility and stress, the
Group Capital Calculation and Liquidity Stress Test
The NAIC's Insurance Holding Company System Regulatory Act and Insurance Holding Company System Model Regulation have historically provided state insurance regulators with the framework for insurance group supervision. In 2020, the NAIC adopted revisions to these models to create a GCC and Liquidity Stress Test (LST).
The GCC adds another analytical tool to state insurance regulators' toolbox on group supervision. It assists regulators in holistically understanding the financial condition of non-insurance entities. It provides key financial information on the insurance group, quantifies risk across the insurance group, supports transparency into how capital is allocated, and aids in understanding whether and to what degree insurance companies may be supporting the operations of non-insurance entities. The GCC was built to strengthen state regulation, but it also serves to satisfy the group capital assessment requirements of the Covered Agreements with the EU and
The LST was developed to provide state insurance regulators with insights into a key macroprudential risk monitored by the
Credit for Reinsurance Model Law
With regard to reinsurance collateral, in 2017, the
In
Private Equity
Turning to an issue that has generated significant media attention and Congressional interest, state insurance regulators have been actively monitoring the recent growth of alternative asset management companies, private equity (PE) firms among them, in the life insurance sector.
It is important to emphasize that any insurer, regardless of its ownership structure, is subject to a comprehensive regulatory regime that is experienced at both micro-prudential and macro-prudential supervision. These existing regulatory requirements, designed explicitly to protect policyholders, have been refined and strengthened by lessons learned from past recessions, natural disasters, terrorist attacks, the 2008 financial crisis, and most recently the COVID-19 pandemic, all of which put our system to the test. Our system focuses on risks at the individual insurer and group level, with extensive disclosure, analysis, capital requirements, and regulatory authority to protect solvency, while promoting product availability and affordability. The form of ownership is generally irrelevant to the financial oversight and supervision. Where it is considered, it is generally a basis for enhanced supervision and reporting.
The state regulatory approach to PE firm ownership of insurers corresponds to what typically motivates PE investment in insurers and the concerns that arise from those motivations. PE and alternative asset manager interest in the insurance sector is driven by access to a large pool of assets, primarily in the form of mandatory reserves, that are available for investment. A decades long low interest environment has placed pressure on insurers to take more risk in a percentage of their investment portfolios in order to increase yield. PE firms and alternative asset managers believe that they are better equipped to structure investments that will provide that yield and generate better returns that will benefit both the insurer (and, hence, its policyholders) and the PE firm/alternative asset manager. While recognizing that potential, state regulators have also recognized the risks associated with such investments and have been proactive in addressing those risks.
State regulators first came together through the NAIC in 2013 to consider concerns arising from the proposed acquisition of certain insurers by PE firms. In light of what was then a new market dynamic, regulators premised approval of several early transactions on additional stipulations designed to provide greater safeguards in the form of greater regulator optics, oversight, and control with respect to financial transactions, investments, distributions, and reporting. A list of some of these stipulations was published by the NAIC as best practices and, in time, the additional stipulations were included in the NAIC's Financial Analysis Handbook, a process manual that is used by all states in performing their financial analysis of their domestic insurers, including analysis triggered by an acquisition or other significant financial event.
In addition, state regulators are particularly mindful of investment strategies by some PE-controlled insurers that may be more aggressive than traditional insurance asset managers. State insurance regulators continue to review and refine existing guidance to ensure their ability to assess and address the risks to the insurers. It should be noted, however, that some of these affiliated arrangements are not limited to just private equity owned companies. Increasingly, we have seen traditional life insurers also adopt some of these structures.
The
Another noteworthy issue we wrote to this committee about was
While S&P ultimately withdrew its proposed approach and the NAIC typically refrains from commenting on the methodologies of the Nationally Recognized Statistical Ratings Organizations (NRSROs), this proposal compelled us to raise our concerns.
As background, insurer investments typically fall into one of two categories - investments assigned a rating by a NRSRO recognized by the NAIC, and investments that are not rated by a NRSRO and for which the NAIC's Securities Valuation Office (SVO) then performs a credit risk assessment on behalf of state insurance regulators. Most
While this reliance on NRSROs may have benefits in terms of regulatory efficiency, given the extensive nature of the sector's holdings, it has been an area of concern for the NAIC. This concern has grown as discrepancies between various NRSRO ratings for the same security have increased in recent years, introducing greater potential for "rating shopping" by our sector. Indeed, the NAIC's Valuation of
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As outlined in our letter, we had concerns with a key aspect of the S&P proposal. Specifically, for those investments not otherwise assigned a rating by the NRSROs (e.g., private placements, certain asset backed securities, etc.), the NAIC SVO staff do conduct a detailed analysis to evaluate the risk and develop an appropriate NAIC designation for use by state insurance regulators. This, coupled with investment oversight laws, gives state regulators comfort to allow or disallow such investments and ensure they are backed by sufficient capital for claims payment purposes. This is a critical regulatory function that allows the insurance sector to invest its substantial resources in a diverse cross section of the
International Engagement
On the international front, state insurance regulators and the NAIC continue to engage with international colleagues on a variety of important issues at the
On financial stability, we contributed to developing the IAIS Holistic Framework for systemic risk in the insurance sector and welcomed its adoption in 2019, as it provides a variety of tools, fosters better understanding of potential risks and incorporates an activities-based approach rather than relying solely on an entities-based approach. As focus on macroprudential supervision has expanded, we have been pleased to share our domestic experiences on topics such as data collection and analysis, liquidity stress testing, and private equity. Jurisdictions around the globe, including the
In addition to financial stability, another post-financial crisis key area of focus has been improving group-wide supervision. Another important IAIS milestone in 2019 was adoption of ComFrame, the Common Framework for Supervision of Internationally Active Insurance Groups, or IAIGs. IAIGs are defined as groups with more than
One part of ComFrame yet to be finalized is the Insurance Capital Standard (ICS). Additionally, the
The ICS is in the third year of a five-year monitoring period, the purpose of which is to monitor the performance of the ICS over time and inform any potential improvements before finalizing and adopting. Another key decision to be made at the end of the monitoring period is whether the AM provides comparable outcomes to the ICS. If deemed comparable, the AM will be considered "outcome-equivalent" to the ICS. This summer, the IAIS conducted a public consultation on detailed draft criteria that will be used to assess comparability. Such consultations provide transparency, which is something we push for at the IAIS, as well as an opportunity to hear directly stakeholders' views and receive their feedback, which should help shape revised criteria. IAIS members agreed that the comparability assessment should neither give the AM a free pass nor preclude comparability at the outset. Keeping this in mind will be crucial as the IAIS works to finalize the criteria later this year and to ensure a fair path forward for the AM by focusing on the outcomes produced by these two approaches rather than their conceptual differences.
The NAIC, as well as the
We, and hopefully the rest of
While we hope for the best outcome on comparability, as you have heard, this is just one of many projects, topics, and priorities at the IAIS, and we will continue to remain at the table and work together with our international colleagues on this broad array of issues in order to protect policyholders and contribute to financial stability.
Federal Policy Priorities
Finally, while state insurance regulators are putting significant energy into our regulatory priorities this year, we also would like to highlight several federal priorities.
First, we urge
Second, the NAIC and state regulators would like to thank Senator
Finally, the NAIC is working on proposed legislation that would help protect policyholders during insurance receivership proceedings. Current law provides no deadline to the federal government for filing claims in an insurance receivership. This causes the proceedings to drag on for years and reduces recoveries for consumers. The NAIC is working on proposed legislation that would set a deadline for the federal government to file claims it may have against insolvent insurance companies. We encourage members of this Committee to co-sponsor and support the legislation once it is introduced.
Conclusion
As you can see, there is considerable activity by state insurance regulators on a variety of important topics in a variety of venues. The NAIC and state regulators continue our on-going efforts to improve regulation in the best interests of
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Original text here: https://www.banking.senate.gov/download/birrane-testimony-9-8-22
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