This week, legislation was proposed in New York that would significantly change the way an insurer’s capital needs and availability are calculated and reported. The proposed legislation would require capital to be calculated on a group basis using a Group Capital Calculation (GCC) that takes into account the insurer’s comprehensive insurance holding company system. To see, New York Senate Bill 9006introduced on May 3, 2022 and New York Assembly Bill 10226introduced on May 9, 2022.
The GCC would look beyond the insurer’s risk-based capital (RBC) and quantify capital at the level of the insurer’s Holding Company system, which includes the insurer’s affiliates, c ie persons affiliated with a person directly or indirectly controlling the insurer, including through one or more intermediaries. These affiliates include individuals and business entities, regardless of their location or organization as insurers.
The insurer’s holding company would file the GCC on an annual basis, along with an annual liquidity stress test, with the Superintendent of the New York Department of Financial Services (NYDFS). The deposit requirement may, in some cases,, be exempted or otherwise restricted by regulations to be promulgated by the Superintendent.
Stage Regulatory Activity/NAIC
New York is not the only US jurisdiction to consider CCGs. Insurance regulators across the United States have formally engaged in group supervision of insurance holding systems and capital initiatives since at least 2008, primarily through working groups and task forces of the National Association of Insurance Commissioners (NAIC). The objective is to enable regulators to better understand the financial risks for the insurer’s affiliates, as well as the insurer, by applying lessons learned from the 2008 financial crisis. A group capital calculation tool has been first proposed in 2015 by the NAIC’s ComFrame Development and Analysis (G) working group.
Although insurance regulators currently have the power to request financial information about an insurer’s subsidiaries, they currently lack the analytical tools to assess this information. The GCC is meant to serve as a consistent financial measure to identify risks across the insurer’s holding company system. Regulators strive to understand the financial position of non-insurance entities in an insurer’s group, how capital is allocated in the system, and the extent to which insurers could support the operations of non-insurance entities. The NAIC approach consists of aggregating the available and minimum capital of each entity of the insurer’s group so that the calculation applies to all groups, regardless of their structure. Essentially, the RBC aggregation methodology would be used for all entities in the insurance holding company system, including non-US entities.
Another reason for the move to GCCs relates to US group supervision, solvency and reporting obligations for insurers in global holding company systems set out in “covered agreements” signed by the US and other jurisdictions. To 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 corresponding agreement between the United States and the United Kingdom (December 18, 2018) (Covered Agreements). The arrangements covered are intended to address cases where an insurer domiciled in one jurisdiction has a parent company domiciled in another jurisdiction. Where each jurisdiction is a party to the Covered Agreement, the insurer’s jurisdiction would not impose CCG on the global parent if group regulation (by the parent’s jurisdiction) is considered “sufficiently robust”.
In December 2020, the NAIC initiated a “test” of GCCs when its Group Capital (E) Calculation Task Force adopted GCC guidelines and a reporting template, which was later adopted by the entire NAIC. To see2002 update GCC Instructions and Report template. Using the template and instructions, a “trial implementation” phase was conducted in 2021 with selected companies submitting data to their key regulators using the adopted template for feedback.
The NAIC included a GCC mechanism in the December 2020 amendments to its Insurance Holding Company System Act (Model #440) and settlement (Model #450) (Amendments relating to holding companies). The availability of exemptions to GCC requirements has been a hot topic during discussions of the holding company changes. While the Holding Company Amendments, as passed, require a group to file an initial GCC before seeking a subsequent filing waiver, a different version of the changes was presented to the NAIC Credentials Committee (which state legislatures may enact). This alternative version allows regulators to grant exemptions to groups that otherwise meet certain qualifications, even where the group has not yet filed a GCC. So, as states change the statutes of their holding company law, they may decide to apply this alternative and broader exemption.
State legislative activity
The NAIC amendments on holding companies do not become “law” in any jurisdiction, as individual state legislatures have yet to pass corresponding legislation. New York is the first to propose such legislation and we expect other states to follow soon. As noted above, the holding company amendments are currently before the NAIC Accreditation Committee, with an exposure period that ends on December 31, 2022 and an accreditation deadline that would result in a date effective Jan. 1, 2026. However, regulators are encouraging states to adopt the parts of the GCC by Nov. 7, 2022, particularly states that have an insurance group in their domicile affected by the covered agreements. , which provide for appropriate group supervision and group capital calculations by that date.
The New York Senate bill, introduced on May 3, has been referred to the Insurance Committee and is in its second calendar reading (May 10). The Assembly Bill was referred to the Assembly Insurance Committee on the date of its introduction (9 May). No hearing is scheduled at this time. In addition to CCGs and annual liquidity stress tests, the bill would also:
- Allow the Superintendent more flexibility in sharing insurer information with other officials, even if that information includes “trade secrets”. Regulations promulgated by the Superintendent would specify the persons or entities with whom such information may be shared.
- Clarify the confidentiality afforded to reports and information submitted under New York’s holding company law and note that they are not subject to subpoena or discovery or admissible as evidence in a private civil action.
- Authorize the Superintendent to promulgate regulations that:
- Address records, data, premiums and other funds of a controlled insurer that are held by a holding company;
- Requiring a supervised insurer in a dangerous financial situation to post a deposit or bond for certain transactions within the holding company system; and
- In cases where a subsidiary is party to an agreement with a parent company, require that subsidiary to be subject to any proceedings against the parent company under New York receivership laws and that the receiver enforce and oversees the subsidiary’s obligations under the parent service agreement.
The GCC requirements (and relevant exemptions) apply to holding companies reporting to NYDFS under Section 15 of the New York Insurance Law (NYIL) and, to some extent, to filings made by licensed domestic P&C insurers that register with NYDFS under NYIL Section 16. (regarding investments in subsidiaries) and parent company filings under NYIL Section 17. (including national life insurers).
We continue to closely monitor these bills and participate in related NAIC initiatives.