Vol 6 | No. 2
Date:07/01/2023
Highlights From Life Perspectives
Prefer to watch your news? Check out this “Highlights From Life Perspectives” video for a quick recap of what you need to know.
Smith
The C1 Work Group of the Life Capital Adequacy Committee has been working toward a rigorous approach for setting C-1 for collateralized loan obligations (CLOs), including for CLO residual tranches. The work group sent a letter to the NAIC’s Risk-Based Capital Investment Risk and Evaluation (E) Working Group (RBCIRE) in May outlining its basic approaches to the issue, citing its CLO presentation to the working group during NAIC’s Fall National Meeting in December.
Life Perspectives did a Q&A with C1 Work Group Chairperson Stephen Smith about some of the key issues around CLOs.
Why is the CLO issue important for policymakers?
The purpose of risk-based capital (RBC) is to help regulators identify weakly capitalized companies. Two recent developments have raised the salience of C-1 factors for CLOs, causing regulators to question whether the current C-1 framework is sufficient for identifying weakly capitalized companies:
- CLO allocations have increased in recent years, from 1.9% of total U.S. life insurance general account assets in 2017 to 3.9% in 2022. And the average credit rating of life insurers’ CLO holdings has decreased over this period.
- A small number of life insurers hold very large CLO allocations, including to mezzanine tranches.
In our December presentation to RBCIRE, we explained that CLOs use the corporate bond C-1 factors. These factors were calibrated to corporate bond risk and are likely not appropriate for CLOs. Mezzanine and residual CLO tranches have higher loss-given-default than corporate bonds, causing a more positive skew in their loss distribution. As the materiality of this issue has increased over time, regulators’ focus has increased accordingly.
What are the consequences of potential outcomes on this issue?
While RBC is only intended as a tool to help regulators identify weakly capitalized companies, in practice changes to C-1 factors may lead to changes in life insurers’ investment portfolios. The immediate effect of higher C-1 factors on residual and mezzanine tranches of CLOs would likely be a reduction in life insurers’ holdings of these assets.
While the AAA tranche is the largest CLO allocation for life insurers, the proportion of life insurance holdings to total outstanding issuance is highest in the A and BBB tranches. Any significant changes to life insurers’ purchases in the A and BBB tranches may have broader effects on the CLO market.
What if any are the trade-offs between different outcomes?
Two issues are at play here—the level of C-1 factors and the system for assigning C-1 factors.
The trade-offs involved with the level of C-1 factors are straightforward. Higher factors would likely lead to reduced CLO allocations and thus reduced risk from CLOs in life insurers’ portfolios. But the returns generated by CLOs have supported product pricing in recent years, with value being passed on to some combination of policyholders and company owners—a reduction in CLO allocations also reduces this value.
The current system for C-1 factors is simple in its implementation—an NAIC designation can be assigned through the filing-exempt process (using the rating assigned by a rating agency) and the CLO is then assigned the same C-1 factor that a corporate bond of the same rating would draw. The Valuation of Securities Task Force is considering a more complex system for assigning an NAIC designation, where each security would be individually modeled as is currently done for RMBS and CMBS. This process would aim to assess risk more precisely for each security, but at the expense of a more complex implementation.
Does the work group have upcoming presentations planned at the NAIC Summer National Meeting in August, or elsewhere?
At the NAIC Summer National Meeting in August, we plan to present again to the RBCIRE. NAIC staff introduced the concept of “RBC arbitrage” to this discussion last year, which has become a key focus for regulators and interested parties when discussing C-1 factors for CLOs. Our August presentation this year will dig deeper into this concept, aiming to generate discussion among regulators about what should be meant by “RBC arbitrage.”
What other projects are in the pipeline for the C1 Work Group?
CLOs are part of the broader Phase II of the bond project. When bond factors were updated in 2021, there was an expectation of tackling structured securities next in Phase II. While every type of structured security has its own peculiar characteristics, we are working on CLOs within the context of looking for a framework that can be applied across structured securities.
Michael McCarty presents at the June 21 Bootcamp
The 2023 PBR Bootcamp Series, previewed in the previous issue of Life Perspectives, kicked off with webinars in each of the past three months.
The series opened March 15 with an introductory webinar on key principle-based reserving (PBR) issues. Led by Linda Lankowski, chairperson of the PBR Implementation Work Group, the series continued in April and May with two webinars on asset modeling. Slides and on-demand recordings of Asset Modeling Part One and Asset Modeling Part Two webinars are available free as a member benefit.
The latest episode in the series—“PBR Bootcamp: Liability Assumption Development,” was held on June 21. See the online Events Calendar for upcoming sessions.
An April 4 life webinar, “Assets: Regulatory Updates in Life Insurance,” focused on asset risks and how regulators are responding to them.
Speakers were Philip Barlow, associate commissioner with the District of Columbia’s Department of Insurance, Securities & Banking, and chair of NAIC’s Risk-Based Capital Investment Risk and Evaluation (E) Working Group; Carrie Mears, chief investment specialist with the Iowa Insurance Division and chair, NAIC’s Valuation of Securities (E) Task Force; and Dale Bruggeman, chief of risk assessment policy and development, foreign analysis, and administration with the Ohio Department of Insurance and chair of NAIC’s Statutory Accounting Principles (E) Working Group. Academy Senior Life Fellow Nancy Bennett moderated.
They addressed regulatory concerns; statutory accounting; reporting; designation of assets based on risk, with updates on activities from the NAIC’s Valuation of Securities (E) Task Force and Statutory Accounting Principles (E) Working Group; and capital requirements, with updates on activities from NAIC’s Risk-Based Capital Investment Risk and Evaluation Working Group.
Slides and an on-demand recording are available free as a member benefit.
The Life Financial Reporting Committee released a white paper, FASB Long-Duration Targeted Improvements—A Discussion of Enhanced Disclosures, which focuses on certain considerations in implementing FASB’s required enhanced disclosures around LDTI.
Much of the paper is presented in a Q&A format. It concludes that for many actuaries, enhanced disclosures will require more data and model analyses than pre-LDTI generally accepted accounting principles (GAAP) reporting as well as the addition of new judgment areas.
New “roll-forwards” will necessitate numerous successive valuation runs (layered step-by-step) to quantify each movement’s impact on the reserve balance to satisfy LDTI requirements and intent. These enhanced disclosures will require quantifications and qualitative narratives covering new prospective actuarial assumptions and judgments as well as explanations of adverse developments relative to the prior period’s actuarial assumptions.
- The Life Experience Committee released Actuarial Review of Investments in Actuarial Modeling—A Resource & Discussion Guide, which aims to provide an overview of assets in actuarial modeling, relevant resources to further explore, and a number of considerations that may be relevant when modeling assets in relation to the underlying liabilities being projected.
- The Tax Work Group released a white paper, 2017 and 2021 Legislative Changes to the Definition of Life Insurance, that focuses on summarizing changes to the relevant sections of sections 7702 and 7702A of the Internal Revenue Code.
Academy Presents on Life Issues at NAIC Spring National Meeting
Slutsker (left) and Barry-Moilanen present to LATF
Life Practice Council (LPC) volunteers presented at the NAIC’s Spring National Meeting in Louisville, Ky., in March.
Academy Life Vice President Ben Slutsker and Life Policy Analyst Amanda Barry-Moilanen presented to NAIC’s Life Actuarial (A) Task Force (LATF) on current and future workstreams.
Professionalism presentations included virtual updates to LATF by representatives of the Actuarial Standards Board (ASB) and Actuarial Board for Counseling and Discipline (ABCD).
Academy Past President and ABCD member Shawna Ackerman presented on the ABCD’s 2022 Annual Report. ASB Chairperson Rob Damler focused on Actuarial Standard of Practice (ASOP) Nos. 12 and 41, and offered information on life- and health-specific ASOP Nos. 10, 28, and 57.
Life volunteers, and Senior Life Fellow Nancy Bennett, presented to NAIC working groups on a number of issues, discussing matters of importance to the public and to the U.S. actuarial profession.
ASB Approves ASOP No. 40 Revision Exposure Draft
The Actuarial Standards Board (ASB) approved an exposure draft of a proposed revision of Actuarial Standard of Practice (ASOP) No. 40, now titled Compliance with the NAIC Valuation of Life Insurance Policies Model Regulation with Respect to X Factors. The comment deadline is Sept. 15. Details and information on how to submit comments are in the exposure draft.
Life Practice Council committees and work groups commented to LATF and other NAIC groups.
- The Life Reserves Work Group submitted a comment letter to LATF on the extended April 20 exposure of APF 2023-06 and on proposed changes to VM-20 outlined in APF 2023-03 (Part 1).
- The Life Valuation Committee submitted a comment letter to the LATF on the Optional AOM and PBR Actuarial Reporting Template for Interest Maintenance Reserve.
- The Life Valuation Committee submitted a comment letter to the NAIC’s Statutory Accounting Principles Working Group on 2023 Net Negative (Disallowed) Interest Maintenance Reserve (INT 23-01T).
- The Variable Annuity Reserves and Capital Work Group submitted a comment letter to LATF on APF 2023-05; specifically, hedging language to address index credit hedging in VM-21.
- The Life Valuation Committee submitted a comment letter to LATF on the Valuation of Securities Task Force’s referral to LATF on Bond Risk Measures.
- The C1 Work Group submitted a comment letter to NAIC’s Risk-Based Capital Investment Risk and Evaluation (E) Working Group on Exposure 2023-09-IRE—Interim Residual Tranche C1 Factor.
- The Index-Linked Variable Annuity Work Group submitted a comment letter to the ILVA Subgroup of the Product Standard Committee of the Interstate Insurance Product Regulation Commission on 2023 Compact Requirements for Index-Linked Variable Annuity Products.
Plan to Attend
‘Envision Tomorrow’
Registration is open for Academy’s Envision Tomorrow: 2023 Annual Meeting. This year’s event—which will feature high-profile keynote speakers including political columnist George Will and data journalist Mona Chalabi, and life practice-area breakout sessions—will be held Nov. 13–14 at the Omni Shoreham Hotel in Washington, D.C.
Register now for an early discount.
Legislative/Regulatory Activity
Federal
The U.S. Treasury Department issued a notice of proposed rulemaking on May 10 seeking input on potential regulations providing guidance on the application of the transfer for valuable consideration rules and associated information reporting requirements for reportable policy sales of interests in life insurance contracts to exchanges of life insurance contracts qualifying for nonrecognition of gain or loss, as well as to certain acquisitions of interests in life insurance contracts in transactions that qualify as corporate reorganizations. The proposed regulations affect parties involved in these life insurance contract transactions, including with respect to payments of reportable death benefits. Comments and/or a request for a public hearing will be accepted until July 10.
Sen. Kirsten Gillibrand and Rep. Jerry Nadler introduced companions bills S 1384 and HR 2923 on April 27, legislation that would ban life, disability, and long-term care insurance providers from denying coverage or raising the rates of living organ donors. The companion measures have numerous bipartisan cosponsors in both the House and Senate.
State
Nevada Gov. Joe Lombardo signed SB 132 into law on May 10. The new law prohibits insurers from discriminating against a living organ donor with regard to any policy or contract of life insurance, life annuity or health insurance based solely, and without any additional actuarial risk, on his or her status as a living organ donor. The state’s insurance commissioner will be charged with enforcing the new law.
The New York Senate on May 8 approved S 5890, a measure that would allow life insurance providers to establish a wellness program in conjunction with its issuance of life insurance policies. The insurer would be prohibited from increasing policy premiums as a result of participation or non-participation in the wellness program.
The North Carolina House on May 3 approved HB 270, legislation that would set a $50,000 death benefit for workers across the state’s retirement systems. Previously the death benefit varied, with a minimum level in place and an upper range that varied based on years of service and salary.
Texas Gov. Greg Abbott signed HB 1587 into law June 9, which takes effect immediately and makes it easier for life insurance companies participating in a pension buyout to use separate accounts to separate pension obligations from the insurer’s normal operations. The new law exempts from form-filing and approval requirements under state law any group annuity policy, certificate, or contract written or issued by an insurer authorized to engage in the business of insurance in Texas that involves use of a separate account if benefits would also have guarantees from an insurer’s general account.
The South Carolina House on April 18 passed H 3255, which would prohibit life, disability, and long-term care insurance providers from discriminating against living organ donors. The measure further specifies that these policies may not preclude an insured from donating all or part of an organ as a condition for continuation of the policy and authorizes the Department of Insurance to enforce it if enacted.
Risk.net’s reporting on recent NAIC activity on interim capital rules related to certain CLOs mentioned the Academy C1 Work Group’s December presentation to the NAIC Risk-Based Capital Investment Risk and Evaluation Working Group.
A regulatory update in LexologyandMondaqon the NAIC Spring National Meeting reported on the Life Practice Council’s C1 Work Group’s ongoing work on CLOs.
Early Registration Countdown
Is On for 2023 LHQ Seminar
Early registration ends July 31 for the Academy’s Life and Health Qualifications Seminar. This annual seminar is considered to be the best way to get basic education or relevant continuing education (CE) credit necessary to qualify to issue actuarial opinions for either the NAIC Life and Accident & Health (A&H) Annual Statement or the NAIC Health Annual Statement. It also provides the opportunity to earn up to 27 hours of continuing education, including up to 2.7 professionalism hours. The event will be held Nov. 6-9, at the Hyatt Regency Crystal City in Arlington, Va. Register now to lock in your discounted early rate.