As we have discussed in prior issues of our newsletter, the National Association of Insurance Commissioners' ("NAIC") Valuation of Securities Task Force is developing a definition of "principal protected securities" that are proposed to be removed from the filing-exempt category – meaning that they will need to be filed with the NAIC's Securities Valuation Office ("SVO") in order to receive an SVO designation.

At its last meeting on October 31, 2019, the Task Force discussed comments that had been received from the American Council of Life Insurers ("ACLI"), the North American Securities Valuation Association ("NASVA"), Kroll Bond Rating Agency ("KBRA"), Security Benefit Life Insurance, Delaware Life Insurance Company and Guggenheim Life and Annuity Company. The minutes of the October 31, 2019 meeting summarize the concerns raised in the comment letters:

  1. . Concern whether the SVO has the capacity and resources to take on the security-by-security evaluation of principal protected securities – the SVO responded it believes it currently has the resources it needs to perform these evaluations, but if it needs more resources, the NAIC will provide them.
  2. Concern regarding the specific methodology the SVO would use to analyze the securities – the SVO responded that it has the latitude to interpret how the instructions and methodologies contained in the Purposes & Procedures Manual apply to specific securities. This discretion is important given that the securities may take different forms, although the SVO is very likely to apply a variant of the look through weighted average rating factor (WARF) methodology because such a methodology permits the SVO to look at each source of risk.
  3. Concern regarding the definition of "principal protected securities" being overbroad and perhaps having unintended effects – the SVO responded that it is happy to work with the ACLI and other interested parties to refine the definition of "principal protected securities" to address such concerns.
  4. Concern about whether the proposal, if adopted, would apply retroactively to already owned securities or would only apply to newly acquired securities – the SVO responded that it is recommending that the new requirements become effective for annual statements for the year ending December 31, 2020, which will give insurers a transition period to adjust their portfolios. The SVO opposes any grandfathering because it believes it has identified a risk to insurers that needs to be addressed with respect to insurers' entire portfolios of these types of securities.

At the conclusion of the October 31, 2019 Task Force meeting, the hope was expressed that a revised definition of "principal protected securities" would be prepared in time for the December 8, 2019 Task Force meeting. However, the agenda and materials for the December 8, 2019 meeting have now been posted, and they indicate that the SVO will only provide an oral update at the meeting on the status of the discussions between the SVO and interested parties, and that a new definition is not yet ready for the Task Force to review. It appears, therefore, that the unveiling of a revised definition will occur at an interim meeting of the Task Force in early 2020.

Originally published in REVERSEinquiries: Volume 2, Issue 11.
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