The National Association of Insurance Commissioners (NAIC) is proposing to add its new group capital calculation (GCC) requirement to the existing Insurance Holding Company Systems Model Act (Holding Company Act). On Oct. 20, 2020, the NAIC's GCC Working Group circulated the latest version of these Holding Company Act amendments to interested parties for review and comment by Oct. 30. These include amendments to the regulations issued under the Holding Company Act (the Insurance Holding Company Systems Model Regulation, or Holding Company Regulation).
Insurers, in particular groups of insurers with operations that straddle the U.S. and other countries, should monitor these amendments and consider the new reporting requirements that could be imposed by them.
Draft Amendments to Holding Company Act
Requirement to File GCC. The new amendments to the Holding Company Act would require the ultimate controlling person of every insurer to file concurrently with the registration an annual GCC as directed by the lead-state commissioner. The GCC Instructions have been the subject of yearslong discussion by the GCC Working Group, against the backdrop of the "ICS 2.0" capital standard currently being developed for international insurance groups by the International Association of Insurance Supervisors (IAIS). NAIC efforts to align the GCC with ICS 2.0 for purposes of international reciprocity are bound to come under even more scrutiny now that the NAIC is poised to formally impose a GCC requirement by means of the proposed Holding Company Act amendments.
Exemptions. Any insurance holding company system (basically, a group consisting of an insurer and its affiliates) described below is exempt from filing a GCC:
- A group containing only one insurer within its holding company
structure, where the insurer writes business only in the
domiciliary state and assumes no business from any other
- A group required to conduct a GCC under Federal Reserve Board
(Fed) requirements (this might apply, for instance, in the case of
an insurer that is a savings and loan holding company). However,
the lead-state commissioner must request the calculation from the
Fed under the terms of information sharing agreements in
effect. If the Fed cannot share the calculation with the
lead-state commissioner, the group is not exempt from the GCC
- A group whose non-U.S. groupwide supervisor is located within a
"Reciprocal Jurisdiction" as described in the state's
credit for reinsurance law that recognizes the U.S. state
regulatory approach to group supervision and group capital.
- This prong is a reference to the Covered Agreements between the
United States and the European Union entered into in September 2017
and between the United States and the United Kingdom in December
2018. These agreements provide for certain reciprocal measures
between the respective jurisdictions in insurance regulation.
- Under the NAIC's revised credit for reinsurance model law,
which reflects the Covered Agreements, not only are the EU and U.K.
treated as Reciprocal Jurisdictions, but so is any other
"Qualified Jurisdiction" (certain non-U.S. jurisdictions
whose insurance regulatory regimes satisfy NAIC criteria) if it
provides written confirmation that it "recognizes and
accepts" the U.S. state regulatory approach to group
supervision and group capital.
- A Drafting Note to the Holding Company Act amendments explains
that the phrase "recognizes and accepts" does not require
the non-U.S. supervisor to require the U.S. insurance groups to
actually file the GCC with the non-U.S. supervisor, but rather
requires that it not apply its own version of a group capital
filing to U.S. insurance groups.
- Additional color on the meaning of "recognize and
accept" is provided in the amendments to the Holding Company
Regulations, summarized below.
- This prong is a reference to the Covered Agreements between the United States and the European Union entered into in September 2017 and between the United States and the United Kingdom in December 2018. These agreements provide for certain reciprocal measures between the respective jurisdictions in insurance regulation.
- A group:
- That provides information to the lead state that meets the
requirements for NAIC accreditation, either directly or indirectly
through the groupwide supervisor, who has determined such
information is satisfactory to allow the lead state to comply with
the NAIC group supervision approach, and
- Whose non-U.S. groupwide supervisor that is not a Reciprocal
Jurisdiction "recognizes and accepts" the GCC as the
worldwide group capital assessment for U.S. insurance groups that
operate in that jurisdiction.
- That provides information to the lead state that meets the requirements for NAIC accreditation, either directly or indirectly through the groupwide supervisor, who has determined such information is satisfactory to allow the lead state to comply with the NAIC group supervision approach, and
- Notwithstanding the two sets of exemptions immediately above
(for insurers in Reciprocal Jurisdictions and other jurisdictions
that "recognize and accept" the GCC), a lead-state
commissioner must require the GCC for U.S. operations of any
non-U.S.-based group where, after any necessary consultation with
other supervisors or officials, it is deemed
"appropriate" for "prudential oversight and solvency
monitoring purposes" or "for ensuring the competitiveness
of the insurance marketplace."
- Notwithstanding the exemptions referred to in the first and
fourth items above (the exemption for single-state insurers and the
exemption for insurers in jurisdictions that "recognize and
accept" the GCC), the lead-state commissioner may exempt an
ultimate controlling person from filing the annual GCC or may
accept a "limited group capital filing or report" as may
be contemplated by regulation.
- If the lead-state commissioner determines that a group no longer meets one or more of the requirements for an exemption from filing a GCC, the group must file the GCC at the next annual filing date unless given an extension by the lead-state commissioner.
Confidentiality. The amendments afford confidentiality protections to GCC information provided to the regulator. As is the case with information provided under the Risk-Based Capital Model Law, the GCC amendments to the Holding Company Act specify that GCC information is a "regulatory tool" and is not "intended as a means to rank insurers." The amendments thus prohibit publishing or disseminating such information (such as in advertising) in a way that constitutes a representation of capital standards.
Draft Amendments to Holding Company Regulation
Exemption for Insurers Previously Subject to GCC Requirement. The amendments to the Holding Company Regulation would permit the lead-state commissioner, where a group has filed a GCC at least once, to exempt the ultimate controlling person from filing the annual GCC if the group meets all of the following criteria:
- The group has annual direct written premium of less than $1 billion.
- No insurers within the group are domiciled outside the United States.
- The group has no banking, depository or other financial entity within the group that is subject to an identified regulatory capital framework.
- The group attests that no material changes have occurred in the transactions between insurers and non-insurers in the group since the last filing of the annual GCC.
- The non-insurers within the group do not pose a material financial risk to the insurer's ability to honor policyholder obligations.
The amendments to the regulation also permit the lead-state commissioner to accept, in lieu of the GCC, a "limited group capital filing" where (i) the group has previously filed a complete GCC, (ii) the group has annual direct written premium of less than $1 billion and (iii) the group:
- Has no insurers within the group that are domiciled outside the U.S.;
- Has no banking, depository or other financial entity within the group that is subject to an identified regulatory capital framework; and
- Attests that no material changes have occurred in the transactions between insurers and non-insurers in the group since the last filing of the annual GCC.
GCC Requirements Where Insurer Was Previously Exempt. For a group that has previously met an exemption described above, the lead-state commissioner may require the ultimate controlling person to file an annual GCC if any of the following criteria are met:
- Any insurer within the group is in a Risk-Based Capital action level event (or a similar standard for a non-U.S. insurer).
- Any insurer within the group is in a "hazardous financial condition" (as defined in the NAIC's relevant model regulation).
- Any insurer within the group "otherwise exhibits qualities of a troubled insurer ... based on unique circumstances including, but not limited to, the type and volume of business written, ownership and organizational structure, federal agency requests, and international supervisor requests."
Additional Guidance on "Recognize and Accept". A non-U.S. jurisdiction is considered to "recognize and accept" the GCC if it satisfies the following criteria:
- The non-U.S. jurisdiction recognizes the U.S. state regulatory approach to group supervision and group capital, by providing confirmation that insurers whose lead state is accredited by the NAIC will be subject to worldwide prudential insurance group supervision only by the lead state and will not be subject to group supervision at the level of the worldwide parent of the insurance or reinsurance group by the non-U.S. jurisdiction; or
- Where no U.S. insurance groups operate in the non-U.S. jurisdiction, that non-U.S. jurisdiction indicates formally in writing to the lead state with a copy to the IAIS that the GCC is an acceptable international capital standard; and
- The non-U.S. jurisdiction provides confirmation that information regarding insurers will be provided to the lead state commissioner in accordance with a memorandum of understanding between the commissioner and such jurisdiction.
A list of non-U.S. jurisdictions that "recognize and accept" the GCC will be published by the NAIC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.