United States Continues to Adopt NAIC Liquidity Stress Test Updates | Foley & Lardner LLP
In December 2020, the National Association of Insurance Commissioners (the NAIC) has adopted revisions to the Insurance Holding Company System Regulation Act (the “Model Law”) that require large life insurers to report the results of a Liquidity Stress Test (“LST”) for a specific year. The 2020 revisions also added group capital calculation reports for all insurance company holding systems, which we explore in more detail here.1
According to the NAIC Financial Analysis Manualthe main objectives of the LST and the specific stress scenarios used are:
- First of all, for macroprudential uses allowing the Financial Stability Task Force (E) identify the amounts of asset sales by insurers that could impact markets in stressed environments. Thus, the selected stress scenarios are consciously focused on industry-wide stresses that may impact many insurers in a similar timeframe.
- Second, the LST is also intended to assist regulators in their microprudential oversight, in the context of being useful to home and major state regulators to better understand the LST programs of the insurers and insurance groups of these legal entities.
In addition, the NAIC clarified that while liquidity risks exist in other insurance segments, the task force focused on large life insurers due to the long-term liquidity buildup involved in many contracts insurance companies and the potential for large-scale asset liquidations.
Generally, the 2020 Model Law revisions to the Enterprise Risk Filings section require all insurers that are included in the NAIC’s Liquidity Stress Testing Framework to file a specific year’s LST results to the Principal State Commissioner of the Insurance Holding Company System, as determined by the procedures within the Financial Analysis Manual adopted by the NAIC. See Article 4(L)(3) of the model law.
Similar to filing Form F, LST results only need to be prepared and submitted to the Main State of the Insurance Holding Company’s system. See Article 4(L)(3) of the Model Law (“The case must be filed with the Principal State Commissioner of the insurance holding company system . . .”). Therefore, if the pilot state of an insurance holding company system has not adopted the 2020 Model Law revisions, it is not required to perform and file the LST for entities. (the adoption status of the 2020 Model Law revisions is discussed below).
In addition, the performance and filing of results for a specific year’s LST must comply with the NAIC LST framework. instructions and reports models for that year. See Article 4(L)(3)(b) of the Model Law. The deadline for filing LST results is also listed in the annual NAIC LST Framework instructions.2
As outlined in the NAIC 2021 LST framework, the scope criteria apply minimum thresholds to the following six activities: (1) fixed and indexed annuities, (2) funding arrangements; (3) Derivatives, (4) Securities Lending, (5) Repurchase Agreements and (6) Borrowed Money. See NAIC 2021 LST framework p. 10 and Annex 1. The scope criteria applicable to a specific data year are reviewed at least annually by the Financial Stability Task Force (E) and any changes to the LST framework or data year for which the scope criteria are to be measured shall be as of January 1 of the year following the calendar year in which such amendments are enacted. See Article 4(L)(3)(a) of the Model Law.
Any life insurance legal entity or life insurance group that exceeds at least one threshold of the scope criteria is considered included in the LST framework for the specified data year, while those that do not trigger at least one threshold of the scope criteria are considered excluded. Identifier. As such, for entities included in the scope, a report on the sources and uses of liquidity must be generated for each legal entity in the group that is subject to stress tests, using the templates of the NAIC, and these results are aggregated to report at the group level. . See NAIC 2021 LST framework p. 30. Moreover, according to the Financial Analysis Handbook, “[a]Although P&C and health insurers are not subject to the scope criteria in 2021, if a P&C insurer or a health legal person is considered by the group of insurers to present a significant liquidity risk for a group that triggered the scope criteria in a future year, the property and casualty insurer and corporate entity within the group will perform the LST. »
Notwithstanding these fairly mechanical thresholds for inclusion or exclusion from the LST framework, the 2020 model law revisions allow a senior state commissioner to make a discretionary decision, in consultation with the NAIC’s Financial Stability Task Force , that an insurer should or should not be included in the framework for the data year. See Article 4(L)(3)(a) of the Model Law. This helps prevent insurers from frequently entering and exiting the LST framework. See Article 4(L)(3)(a)(i) of the Model Law.
Based on NAIC tracking, as of August 1, 2022, twenty-two (22) states have adopted the LST Model Law revisions, including: Alabama, California, Connecticut, Delaware, Georgia, Iowa, Illinois, Kentucky, Louisiana, Maine, Missouri, Montana, Nebraska , New Hampshire, New Jersey, Nevada, Ohio, Pennsylvania, Rhode Island, Utah, Virginia and Wisconsin. In addition, three states have pending bills that would enact revisions to the model law: Massachusetts, Michigan, and New York.3
States’ adoption of the 2020 model law revisions was driven in part by covered agreements between the United States and the European Union (EU) and the United Kingdom on reciprocity in insurance regulation. See Bilateral agreement between the United States of America and the European Union on prudential measures relating to insurance and reinsurance (September 22, 2017) and the corresponding agreement between the United States and the United Kingdom. (December 18, 2018) (the “Covered Agreements”). US states have until November 7, 2022 to bring their laws into line with the requirements of the agreements covered, or risk the EU or UK imposing their own LST requirements on international insurance holding company systems, including any US insurer in these systems.
In addition, the NAIC is considering making adoption of the 2022 Model Law revisions a standard for NAIC Accreditation. Although the NAIC does not have formal authority to make insurance laws, in order for individual states to receive NAIC accreditation, they must (among other things) adopt certain NAIC model laws and regulations that are included in NAIC accreditation standards. Typically, states want to retain accredited status because it allows non-national states to rely on the accredited domestic state to fulfill a basic level of financial regulatory oversight, i.e. States are able to coordinate and build on each other’s work to monitor insurers’ assets. Note that the proposal to make the 2020 Model Law revisions a standard for NAIC accreditation is open for a one-year comment period, which began January 1, 2022.4 The proposed effective date to make adoption of the 2020 Model Law Revisions an NAIC credentialing standard is January 1, 2026.
2 Note that the NAIC 2021 LST framework dated February 4, 2022 has a filing date of June 30, 2022; however, the NAIC 2020 LST framework dated May 2021 had a filing date of September 30, 2021.