NAIC summer '23: Regulators eye 'opaque' investments, algorithmic bias

The National Association of Insurance Commissioners (NAIC) brought regulators from across the country together to discuss industry and economic challenges during their summer national meeting in Seattle.

The following is a roundup of meeting highlights:

Life Risk-Based Capital

The NAIC adopted a change to the life risk-based capital (RBC) formula during the meeting. The change requires that residual tranches of structured securities receive a 30% factor for year-end 2023 RBC filings and a 45% factor for year-end 2024 RBC filings.

The adopted change applies sectorwide to any firm with such investments, but according to the NAIC, the estimated change in the RBC ratio of the life insurers that own these residual investments is "very small."

The change was made to improve the oversight of some of the "increasingly opaque investment structures" that some insurers are using.

A news release from the NAIC noted that the group has observed a growing trend with life insurers owning more structured securities, including private debt securities.

"Regulating for insurer solvency and marketplace stability is core to the mission of state insurance commissioners in protecting policyholders," the release said. "A key aspect of solvency supervision, as highlighted by the recent banking sector turmoil, is assessing the risk financial institutions take on in their investment portfolios."

Special Committee on Race and Insurance

During a meeting of the Special Committee on Race and Insurance, regulators gave updates on how its workstreams dealing with life insurance, property and casualty insurance, and health insurance are progressing.

Vermont Commissioner Kevin Gaffney, who serves as co-chair of the special committee's property and casualty workstream, said the committee has been focusing on engaging with a collaboration forum related to algorithmic bias, looking at potential bias in marketing, access to insurance, underwriting, rating, claims handling and fraud detection.

Gaffney shared that the committee has met with several insurers regarding their marketing and advertising and more recently met with insurers to discuss underwriting and rating. Gaffney's group has plans to continue investigating additional areas of the product life cycle and has been looking at recent reports and studies concerning the possibility of unfair bias in underwriting and rating.

Judith French, director of the Ohio Department of Insurance, gave an update on the life workstream's efforts, noting that they are zeroing in on marketing, distribution and access to life insurance products, including the role of financial literacy. The group is moving forward with the development of a resource guide to address issues in this area in conjunction with the NAIC's diversity, equity and inclusion division as well as state diversity leaders.

The health workstream met in a regulator-only session and is focusing on education around benefit design, particularly looking at preventative care and mental health coverage and disparities.

Long-term care

The Long-term Care Actuarial Working Group hosted a conversation where regulators alongside consumer advocates discussed the best way to develop a methodology for a single, multistate long-term care insurance rate review.

"It's kind of a time sensitive issue that we don't want a broken multistate actuarial approach that leads to illogical results and untimely approvals," Fred Andersen, chief life actuary for the Minnesota Department of Commerce said. "We want to get something done sooner rather than later."

One of the issues the group is trying to address is how to handle rate increases for long-term care policyholders who have been paying in to programs for 20 to 25 years. The current multistate rate review methodology results in higher rate increases for this small segment of policyholders than the NAIC group's leaders are happy with.

Negative interest maintenance reserve

The Statutory Accounting Principles Working Group adopted Interpretation 23-01, its Net Negative (Disallowed) Interest Maintenance Reserve, which provides optional, limited-time guidance allowing the admittance of net negative interest maintenance reserve up to 10% of adjusted capital and surplus.

The interpretation will be effective until Dec. 31, 2025, and automatically nullified Jan. 1, 2026, although the effective date could be subject to change.

The proportion of US life insurers with negative interest maintenance reserve balances more than doubled in 2022 as interest rates rose.