Clifford Chance

The National Association of Insurance Commissioners (NAIC), the U.S. insurance standard-setting organization of which all state insurance regulators are members, held its 2025 Spring National Meeting in Indianapolis, Indiana between 23 and 26 March 2025. The following is a summary of some of the developments that may be of interest.

1. Structured Securities Modeling Project

The NAIC continues to develop its own CLO modeling capability that will be used to assign risk designations to CLOs, and ultimately to all structured securities held by U.S. insurers, for the purpose of imposing capital charges on insurer assets. Currently, capital charges on insurers' holdings of structured securities are determined based on the public or private ratings assigned to each security by commercial credit ratings agencies (e.g., Moody's, S&P). The NAIC's two-year effort is intended to eliminate insurers' reliance on ratings agencies, and instead to require insurers to submit such securities to the NAIC's Investment Analysis Office to be modeled and assigned an NAIC designation, which insurers holding such security will use to report the capital charge associated with each designation.

As part of this effort, the NAIC is working with the American Academy of Actuaries (AAA) to determine whether and how the CLO model, once developed, may be expanded to model other structured securities. The AAA also is working to develop risk-based capital (RBC) factors to be used for structured securities based on the existing corporate bond RBC model but applied to CLOs. For its analysis, the AAA reported that it had received access to all of the CLO deals available from Moody's, comprising 3,309 deals, 1,871 of which are currently owned by U.S. insurers. By analyzing this dataset, the AAA's goal is to identify and assess potential attributes, such as tranche ratings, underlying collateral rating, subordination, and amount of leverage, that can reliably predict the risks of CLOs.

There is no deadline for the AAA or the Investment Analysis Office to complete their respective workstreams, but under NAIC rules, new capital charges usually must be adopted no later than June 30 for them to be effective for reporting by insurers in the same year. Until the model is completed and new RBC factors for CLOs are developed, the current system (using commercial ratings) remains in place.

2. International Insurance Relations

The International Insurance Relations Committee discussed the NAIC's continued monitoring of the implementation of the Insurance Capital Standard (ICS). The Committee noted that, at the end of 2024, the IAIS finalized the ICS and concluded the process to assess whether the U.S. Aggregation Method (AM) provides comparable outcomes, concluding that the U.S. AM provides a basis for implementation of the ICS to produce comparable outcomes.

The Committee also heard a presentation from IAIS Secretary General Jonathan Dixon, who also took questions on the 2025-2026 Roadmap and the IAIS Core Objectives. Mr. Dixon noted the recent publication of an IAIS Issues Paper on Structural Shifts in the Life Insurance Sector, which was based on analysis conducted through the Global Monitoring Exercise (GME) and other inputs.

The Issues Paper seeks public comment (by May 19, 2025) primarily on (1) the increasing allocation of investments to alternative assets, defined as assets which display a high degree of either valuation uncertainty, illiquidity or complexity, or a combination of these, (2) the growing adoption of cross-border asset-intensive (funded) reinsurance, whereby a material part of the investment risk is also transferred to the reinsurer. The IAIS noted that these trends have been associated with increased involvement of private equity firms in the life insurance sector (through ownership of insurers or asset management of insurer assets).

3. Asset Adequacy Testing for Life Reinsurance
The NAIC has been developing an actuarial guideline that would have required U.S. life and annuity insurers to test the adequacy of assets held in support of life reinsurance transactions by both the ceding and assuming insurers. The NAIC noted that certain reinsurance activity may lead to less transparency regarding the amount and types of assets supporting the reserves of ceded business. Specifically, insurance regulators have seen cases where, due to reinsurance, the total reserves supporting business – including those held by both the ceding company and the assuming company – are less than the original reserves held by the direct writing company. The concern regulators identified is the possibility that the reduction in reserves may be based upon questionable assumptions about asset returns, mortality and/or policyholder behavior.

The proposed actuarial guideline was intended to provide state regulators with additional information about the reserves supporting life and annuity business for U.S. policyholders, without intruding on the Covered Agreements. Most recently, the NAIC decided to make the guideline "informational only" for 2025, which means that regardless of the results of assets adequacy testing, no actual additional reserves would have to be posted. It was recognized, however, that either the involved insurer or its domestic state regulator may decide to require additional reserves based on such results.

The prosed guideline was further limited so that a recent estimate of the number of reinsurance treaties that will eventually come within the scope of the cash flow analysis requirement will be around 100. The proposed guideline will also have a risk-based assessment, i.e., reinsurance transactions with higher risk will require more analysis than lower risk transactions.

The current version of the proposed guideline was exposed for a public comment period, which ended on 4 April. The NAIC expects to have two more meetings to discuss comments and potential revisions and hopes to adopt at the Summer National Meeting in mid-August.

4. Artificial Intelligence

The Big Data and Artificial Intelligence Working Group heard an update on the regulatory framework for the use of AI systems. Insurance regulators from Iowa and Virginia outlined a road map for ensuring the responsible use of AI by insurers, and the Working Group heard comments from state insurance regulators, consumer representatives, and industry representatives. Its plan for 2025 is to discuss evaluation tools, including a standardized self-assessment questionnaire, to help assess how AI is used within insurance companies.