2015 YEAR END REVIEW AND FORECAST FOR 2016

Transcription

1 2015 YEAR END REVIEW AND FORECAST FOR 2016

2 2015 YEAR END REVIEW AND FORECAST FOR was a challenging and transformative year for the insurance industry. We saw: More than $200bn in mergers including mega mergers such as Anthem s $55.2 billion acquisition of Cigna, Aetna s $37bn acquisition of Humana and Ace s $29.7bn acquisition of Chubb. Announced plans by some major carriers to dramatically restructure and rescale their businesses, in part due to regulatory changes, activist investors and harsh commercial realities. Further evolution of the regulatory ecosystem. This included the implementation of Solvency II, the adoption of BCR and HLA by the IAIS, changes and challenges to SIFI and G-SII designations, and expanding interest in recovery and resolution plans. Opportunities and challenges presented by big data and technology. Emerging and growing risks such as cyber security and climate change. An adverse commercial and economic environment, with over-capacity, softening rates in many lines, low interest rates and low investment returns challenging profitability for every sector of the business. Our 2015 Year End Review and Forecast for 2016 will review some of the more notable events and trends in the insurance industry over the past twelve months. Our review draws upon the work and observations of our global team of insurance transactional and regulatory lawyers. Our crystal ball is a bit clouded by the scale and speed of changes we see, but we hope this review will provide some useful insights and information as we face the New Year YEAR END REVIEW AND FORECAST FOR

3 TABLE OF CONTENTS Evolution of International Insurance Regulation 04 Federal Legislative and Regulatory Developments 09 The Federal Reserve Department of Labor Issues Proposed Rule Impacting life Insurance Industry NFIP, TRIA, Cybersecurity US Sanctions NAIC and State Regulatory Developments 14 Leadership changes and dynamics Substantive NAIC Actions Big Data Cyber Issues European Regulatory and Legislative Developments 24 Solvency II Implementation EU-US Regulatory Developments Country specific Developments Asian Regulatory Developments 34 Australian Regulatory Developments 40 Commercial and Transactional Issues and Trends 43 Global Trends in Insurance M&A Tax Updates Antitrust Issues Conclusion and Forecast YEAR END REVIEW AND FORECAST FOR

4 EVOLUTION OF INTERNATIONAL INSURANCE REGULATION 2015 YEAR END REVIEW AND FORECAST FOR

5 The International Association of Insurance Supervisors (IAIS) continues to expand its agenda and regulatory reach. Regrettably, as the IAIS has increased its activity it has decreased its transparency and engagement with relevant stakeholders. (See further discussion below.) IAIS Developments: ComFrame, G-SII Regulation and Insurance Core Principles In 2015, the IAIS continued to work on three general subject areas: (i) standards for identifying and supervising Global Systemically Important Insurers (G-SIIs), (ii) the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), and (iii) the Insurance Core Principles (ICPs). Important activity occurred in each of these areas. As discussed further below, some of these could have a significant impact on the insurance industry. G-SII Regulation. The IAIS delivered on its promise to the Financial Stability Board (FSB) and developed its Higher Loss Absorbency (HLA) standards for G-SIIs. These standards were adopted by the FSB in November Based on the IAIS s Basic Capital Requirement (BCR), the IAIS touts the HLA as necessary to reflect the greater risks that G-SIIs pose to the global financial system. Beginning in 2019, G-SIIs will be expected to hold regulatory capital that is not less than the total required by the sum of the BCR and HLA requirements. These capital requirements apply to all group activities, including non-insurance subsidiaries. The combined BCR+HLA required capital is determined in two stages. In the first stage, an uplift is applied to the BCR as it was specified in The uplift is essentially 33%, with a different approach taken for regulated banking activities in recognition of the current global requirements in place in that sector. In the second stage, the HLA is calculated using a combination of a bucket and a factor-based approach. The status of a G-SII, from the perspective of regulatory required capital, is captured by its BCR+HLA Ratio, the numerator of which is the G-SII s total qualifying capital and the denominator is its BCR+HLA requirement. At the end of 2015, the IAIS issued two consultations regarding G-SIIs. The first was aimed at updating its methodology for identifying G-SIIs, by introducing a new phased approach. The intent of the phased approach is to provide firms with a greater input into the G-SII determination process and a better idea of why a firm was designated a G-SII (if not, more importantly, perhaps, direction from supervisors as to how a firm that has been determined to be a G-SII might remove that designation). The second consultation adjusts how supervisors evaluate whether a firm s non-traditional, non-insurance (NTNI) activity presents systemic risk. Analysis of these consultations has continued into 2016, with at least one meeting with stakeholders planned for April before the consultations are finalized. Notwithstanding the ongoing work on the G-SII designation process, the IAIS decided to remove one company (Generali) from and add another (Aegon) to the list of G-SIIs. Furthermore, in November 2016, the IAIS and FSB are expected to announce a revised list of G-SIIs using the methodology from these two consultations. Many will be waiting to see if any reinsurers make it on to the list. ComFrame. With the development of the HLA, the IAIS has now completed two steps in its development of group-wide global insurance capital standards. The third step is the development of a risk-based group-wide Insurance Capital Standard (ICS) to be applied to Internationally Active Insurance Groups (IAIGs). This initiative began in earnest during 2015 with a consultation that closed in February 2015, and was the principal activity of the IAIS related to ComFrame during The IAIS describes the ICS as a group wide, consolidated capital standard applicable to IAIGs and G-SIIs. The ICS aims at comparability of outcomes which the IAIS says can contribute to a level playing field and reduce the possibility of capital arbitrage. A detailed summary of the ICS is beyond the scope of this Annual Report, but simply stated, the ICS as currently proposed has three major components: valuation, capital resources, and the ICS capital requirement. The IAIS received in excess of 1,500 pages of comments to the consultation last year. These ranged from support for the ICS, to acceptance that some form of ICS is inevitable, to relatively hostile criticism of the proposal. The harshest critics contend that the ICS is not realistic. These critics argue, among other things, that comparability is not achievable given the heterogeneity of global insurance businesses and the absence of a global accounting standard. Critics also argue that the ICS has too great a focus on financial stability at the expense of policyholder protection. In addition, certain specifics aspects of the ICS proposal, such as the disqualification of subordinated debt from what will be considered eligible capital, have been soundly criticized. By the end of 2015, the IAIS had announced a somewhat delayed timeline for developing the ICS, potentially indicating that the IAIS may be considering a somewhat less ambitious version of the ICS from the version that was released for last year s consultation (as discussed above). Nevertheless, the ICS remains a main objective of the IAIS. To that end, the IAIS is planning another ICS consultation in the summer of 2016, as well as several stakeholder sessions leading up to the release of the consultation document. These are likely to attract great interest from stakeholders around the world. ICPs. The IAIS s activity also extends broadly to all insurers through the ICPs. In November 2015, the IAIS issued updates for ICPs 4 (Licensing), 5 (Suitability [of Management]), 7 (Corporate Governance), 8 (Risk Management and Internal Controls), 2015 YEAR END REVIEW AND FORECAST FOR

6 HLA required capital formula factors BCR required capital exposure HLA Factors Low Bucket Mid Bucket High Bucket TL BCR 2015 : Traditional Life insurance TNL BCR 2015 : Traditional Non-Life insurance 6% 9% 13.5% A BCR 2015 : Assets NT BCR2015 : Non-Traditional insurance NI-AUM BCR2015 : Non-Insurance Assets Under Management 12% 18% 27% NI-O BCR2015 : Non-Insurance Other NI-RB BCR2015 : Non-Insurance Regulated banking 8.5% 12.5% 18.75% NI-UB BCR2015 : Non-Insurance Unregulated banking 12.5% 18.75% 25% Source: IAIS HLA Capacity for G-SIIs, Public Consultation Document (June 25, 2015) 23 (Group-wide Supervision), and parts of 25 (Supervisory Cooperation). The most significant of these changes probably pertain to ICP 23, because the IAIS established clearer rules for determining which entities are included in an insurance group, and that has important ramifications for many other aspects of insurance supervision, not the least of which is determining whether an insurance group is engaged in non-traditional and non-insurance (or NTNI) activities and the overall group-wide capital requirements. In 2016, the IAIS intends to launch a very significant consultation on ICP 12 regarding resolution planning, which will also serve as a consultation on resolution planning provisions in ComFrame. This consultation should attract widespread attention among interested parties, because although the degree to which any insurer must engage in resolution planning is affected by the IAIS s notion of proportionality, IAIS leadership has clearly indicated it believes all insurers should have some form of a resolution plan (as discussed below). This consultation validates a concern many insurers have expressed over the likelihood that regulatory requirements developed for G-SIIs will trickle down to other insurers and with recovery and resolution plans this seems to be the case. Capital Standards Versus Risk Regulation As noted above, the IAIS s work on the ICS has generated some heated debate. In the US, that has led to a partnership between insurers and US insurance regulators at the National Association of Insurance Commissioners (NAIC), the Federal Insurance Office (FIO), and the Federal Reserve (Team USA, as the regulators refer to themselves) to attempt to develop an alternative to the IAIS s focus on a prescriptive capital standard. Many interested parties were frustrated that Team USA had not made greater progress on developing an alternative to the IAIS s proposed ICS. Indeed it was not until last summer that the NAIC floated three different alternative approaches. After internal debate and opportunity for industry comment, the NAIC settled on an approach it referred to as a Group Capital Calculation, strenuously distinguishing this approach from the standards the IAIS proposes to develop. In the words of a paper the NAIC adopted as a means of launching its efforts to develop this calculation, the NAIC s goal was to construct a US group capital calculation using an RBC aggregation methodology and would build on existing legal entity capital requirements where they exist rather the developing replacement/additional standards YEAR END REVIEW AND FORECAST FOR

7 On February 10, 2016, the NAIC s Financial Condition (E) Committee organized a new Group Capital Calculation Working Group to begin the task of figuring out how to put the NAIC s idea into practice. This will likely be one of the most closely watched initiatives of the NAIC in many years. It remains to be seen whether the NAIC s initiative will be joined by the Federal Insurance Office (FIO) and the Federal Reserve Bank (the Fed) or how pro-active the NAIC decides to be in urging that the IAIS revise its approach to conform with the NAIC s initiative. However these strategic issues are resolved, the juxtaposition of the NAIC proposal with the current ICS proposal, which the IAIS appears to favor, reveals a philosophical divide on the question of whether insurance supervisors should impose absolute capital requirements that insurers must meet exposing them to the risk of adverse actions by their supervisors if they do not, or whether the evaluation of an insurer s capital should be conducted merely as a component of a broader risk assessment and regulation of the insurer. This debate began to emerge during 2015 and is likely to be an important element of the debate on global insurance during Recovery and Resolution Plans In November 2015, the FSB issued a consultative document entitled Developing Effective Resolution Strategies and Plans for Systemically Important Insurers (Guidance). Building on its October 2014 Key Attributes of Effective Resolution Regimes for Financial Institutions II-Annex 2 (Resolution of Insurers) and related iterations, the Guidance was developed in consultation with the IAIS. Although aimed at regulators, regulators, supervisors and resolution authorities of G-SIIs, it provides valuable insight for G-SII Crisis Management Groups (CMGs). As demonstrated below, these plans will not be easy to prepare, but will be subject to an iterative process that will impact corporate governance of G-SIIs and even non-g-siis over time. Key overarching points in the Guidance include: (i) plans should make resolution feasible without severe disruption (continuity of function) and without exposing taxpayers to loss; (ii) a firm s home resolution authority should take the lead in plan development in coordination with CMGs; (iii) plans should be underpinned by institution-specific cross-border cooperation agreements (COAGs); (iv) plans should make it possible for shareholders and unsecured creditors to absorb losses, with the aim of maintaining financial stability and, to the fullest extent possible, protecting policyholders; (v) plans should be firm-tailored and are non-prescriptive guides; (vi) while plans should respect claims priority in liquidation, they (or regulatory authorities) should have flexibility to depart from equal treatment of creditors of the same class; and (vii) policyholders may have to absorb losses that are not covered by policyholder protection schemes (PPSs). The Guidance identifies stabilization and restructuring tools that may be included in resolution plans, such as: sale or transfer of the insurer or its insurance portfolios to a third party, and creditor financed recapitalization (through bail-in, restructuring of insurance liabilities or write down of other liabilities and their conversion into equity). It also identifies wind-down tools that include solvent and insolvent run-off, liquidation and winding-up (with estimation of future claims). Yet another category of helps lies in stays and suspension powers. The nature of highly substitutable life insurance products calls for additional helps in the form of transfers of liabilities to new assuming insurers or bridge insurers until a solvent insurer can be found at a later date. And for property and casualty insurers, liquidation is suggested for insurers with insurance liabilities of short duration, while insolvent run-off is suggested for insurers with liabilities of longer duration. Harking back to 2008, stays are suggested to prevent counterparties from terminating financial products and transfer tools to preserve derivatives portfolios. In order to ensure that a plan is truly fulsome and can be successfully implemented, the Guidance also focuses on identification of critical functions including the ability to write new business, continuing existing cover and continuing payments falling due as well as operational continuity in respect of critical shared services (whether finance-related or operational). Finally, the Guidance outlines the steps that authorities need to have in place to ensure that a resolution plan can be feasibly and credibly implemented, including: developing operational resolution plans, adaptability of such plans to failure scenarios, identification of resolution triggers, cooperation agreements among group wide authorities, information systems and data requirements, and exits from the resolution process. FSB requested comments to the Guidance. The NAIC respectfully but strongly objected, revealing a bit of a culture clash. Their objections reflect the ongoing tension between the developing national regulation of insurance provided under the US Treasury and FIO and the existing state regulatory system. Key objections included that the US has not yet fully implemented the Key Attributes (as FSA expressly assumed), and that the Guidance should recognize jurisdictional differences rather than aspire to theoretical strategies that are unavailable; that the Key Attributes are derived from bank resolution schemes that do not account for important differences in US insurance resolution law and practice; that the US does not have a national legal system of insurance resolution; that PPSs are not just a source of resolution funding but instead are critically important partners in resolution planning and administration; that equal treatment of creditors within classes is a paramount US insurer receivership 2015 YEAR END REVIEW AND FORECAST FOR

8 rule, not an aspiration; that the distinction between home and host regulators is problematic and should be replaced by group-wide supervisors ; that policyholder obligations should not be restructured and PPSs should not be triggered in a solvent run-off; and that an insolvent run-off is functionally equivalent to liquidation and should be distinguished from an orderly run-off. Despite these objections, our experience is that US state regulators are finding pragmatic solutions and developing resolution plans for insurers that operate in US and non-us jurisdictions under legal systems that are not uniform or even easily reconciled. IAIS Searching for Balance between Equal Access and Transparency In addition to the substantive issues discussed above, the IAIS s interaction with stakeholders attracted extra attention during 2015, and into At the end of 2014, the IAIS abolished both its so-called pay to play system of charging interested industry participants significant observer fees, whereby a paid observer was able to attend all but a very limited number of IAIS committee and working group meetings. In 2015, for the first time, the IAIS held stakeholder sessions several times during the year, but banned interested parties from all IAIS member meetings and limited the Annual Meeting to only members and a few invited industry representatives. Interested parties (and at least some regulators, principally from the US) objected strenuously. Those objections intensified over the course of the year, because the stakeholder sessions which had been advertised as being dialogues between stakeholders and the IAIS members and staff were anything but that, as supervisors largely sat in silence in response to industry input, so there was very little dialogue on important policy issues and/or senior IAIS representatives did not attend these stakeholder meetings looks to be different. At the first stakeholder meeting of 2016 in Basel (on the G-SII standards and NTNI consultations discussed above), supervisors were actively engaged with the stakeholders and worked hard to provide meaningful and informative (if not entirely satisfactory) responses to stakeholder questions. Moreover, in early February 2016, the IAIS announced an updated calendar with numerous stakeholder meetings around the world on the ICS, GSII and NTNI, and corporate governance. In addition, the IAIS has said that some form of stakeholder participation will occur as part of its 2016 Annual Meeting. Time will tell if this increased access to supervisors at the IAIS has any meaningful impact on IAIS decision making. As noted above, the reduced transparency and engagement with stakeholders has not only been of concern for industry and consumer representatives, but also some regulators particularly US state insurance regulators. (There has also been sharp Congressional questioning on the openness and operations of the IAIS.) On February 10, 2016, the NAIC International Insurance Relations (G) Committee held a conference call to discuss how the IAIS stakeholder procedures were working in practice and ways in which they could be improved. Interested parties were able to submit ideas on ways to promote open and transparent communication by IAIS members to stakeholders, as well as receive input from all members and stakeholders to present to the IAIS. Many interested parties raised issues such as scheduling global open meetings that conflict with US regulatory meetings, like the NAIC-sponsored meetings. Commissioner McCarty reiterated the NAIC s (and Team USA s) commitment to transparency in the IAIS process, as well as their focus on equity issues and equal access to stakeholder forums, i.e., steering away from winners and losers YEAR END REVIEW AND FORECAST FOR

9 FEDERAL LEGISLATIVE AND REGULATORY DEVELOPMENTS 2015 YEAR END REVIEW AND FORECAST FOR

10 T he federal government continues to be a significant player in insurance regulation in the US The Fed has publicly supported the Team USA concept cooperation among federal government agencies and various state regulators against international regulatory bodies and influence on the US insurance market. Moreover, the Fed continues to evolve as a critical regulator in its own right. The US Congress have passed bills that strengthen the Fed s authority in insurance regulation as well as providing more oversight mechanisms for the various executive agencies that have existing authority to undertake international negotiations on behalf of the US insurance industry also reminded the insurance industry that executive agencies, such as the Department of Labor (DOL), with a tangential but significant authority over the insurance industry, can exercise its authority directly, which could impact the insurance industry to its surprise. Evolution of The Federal Reserve Board Since the adoption of the Dodd-Frank Act, the Fed has had an important insurance regulatory role. The Fed has direct supervisory authority as the consolidated supervisor of certain insurance holding companies those which include insurers which been designated SIFIs by the FSOC, as well as those that own federally chartered thrifts or banks. In addition, it has become an important voice in insurance regulation particularly on international issues and on topics beyond its Dodd-Frank Act mandate. In 2015, the Fed s influence in insurance regulation on both the global and national regulatory stages developed significantly. The development of group capital standards (or the global ICS) brought representatives of the Fed, the FIO and the NAIC together as Team USA to represent the US at the IAIS. As noted above, Team USA began their work on developing capital standards, the thinking being that if they develop a US-based capital standard, the work that the IAIS will do on the ICS will be heavily influenced (if not done in concert). Team USA insists that they would not allow developments on the international stage to undermine the state-based insurance regulatory system in the US, for example, they said that they would walk away from any covered agreements negotiation that would have that effect. Although Team USA indicates that they will work together as global regulators develop various regimes that will affect the US insurance market, it remains to be seen how the three branches of Team USA will continue to cooperate as regulations and negotiations develop. Each branch has their own motivations. The NAIC will always maintain that they regulate 100% of the US insurance market, and further that half of the top 50 insurance markets are individual US states. Nevertheless, as long as the Fed has direct supervisory authority over certain insurance companies as well as SIFIs, the Fed regulates at least one-third of the assets in the US insurance industry. US Department of Labor Issues Proposed Rule Impacting Life Insurance Industry On April 20, 2015, the DOL released a new proposed rule (DOL proposed rule) to change the definition of fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). On its surface, it would have gone unnoticed by the insurance industry; however, the DOL proposed rule could significantly impact certain annuity products (specifically, guaranteed lifetime income annuities). The DOL proposed rule would severely restrict access to information and education about annuities. This has been a priority for Congress and the Obama Administration. While the DOL proposed rule does not outlaw commissionbased investment products, which annuities are generally sold by advisors on commission, some have argued that the DOL proposed rule s Best Interest Contract Exemption will make commission-based sales difficult for advisors. The disclosure requirements and the heightened prospect of private litigation against advisors could force advisors away from marketing annuities altogether. The life insurance industry has reacted strongly against what many believe as a misguided rule, which would actually harm consumers. They have filed voluminous comments in response to the DOL rule making procedures and expect to see changes in the final rule. Beyond the specific policy proposal, the DOL proposed rule demonstrates two important points. First, it is evidence of yet another Federal agency which can have a material impact on the insurance industry. It is probably safe to say that few insurers at the start of 2015 had the DOL on their radar or a possible source of troublesome insurance regulatory proposals. Second, in addition to the myriad of solvency, risk management, regulatory changes that the industry faces, consumer protection laws and regulation is never far off and is likely to increase in importance in the coming year. The DOL published the proposed regulations for comment on April 20, 2015, with the comment period ending July 6, On August 10-13, 2015, the DOL held a four-day public hearing to discuss the proposed rule. Following the public hearing, the DOL reopened the comment period until September 24, DOL is in the process of reviewing the comments it has received on its proposed rule and determining what changes, if any, to make to the proposed regulation. Legislative Outlook Dodd-Frank. On May 12, 2015, Richard Shelby, the Chairman of the Senate Committee on Banking, Housing and Urban Affairs, introduced the Financial Regulatory Improvement Act of 2015 (S.1484). The bill has eight titles and includes a broad range of regulatory relief and other provisions that amend the Dodd Frank Act and several other banking laws. Title IV of the bill includes three sections directly related to insurance. Section 2015 YEAR END REVIEW AND FORECAST FOR

11 401 includes a Sense of the Congress provision that reaffirms McCarran-Ferguson and the system of state-based insurance regulation. Section 402 ensures that insurance policyholders would be protected from having their policies put at risk by their insurance company to shore up a distressed affiliated depository institution (this provision was subsequently included in the Consolidated Appropriations Act of 2016 and signed into law). Section 403 contains language similar to S.1086 (discussed below), which would require an additional reporting requirement and consultative measures surrounding ongoing international negotiations to create insurance regulatory standards. The bill also includes provisions that would reform the process for designating non-bank SIFIs by requiring the Financial Stability Oversight Council (FSOC) to provide more information to companies related to designation criteria and to give them more opportunities to take actions to avoid or reverse SIFI designations. S.1484 passed out of the Senate Banking Committee along party lines with a vote of on June 2, In 2016, we expect to see some attempts by Senate Banking Committee members to jumpstart negotiation on a bi-partisan compromise bill. However, 2016 election politics may hamper efforts to work out a deal. On the other side of the US Capitol, we expect the Republicans on the House Committee on Financial Services to work on an alternative to Dodd-Frank that would repeal huge swaths of the Act and replace it with their vision for financial reform. We expect the Republican alternative bill to be introduced in the Spring of While the reform measure will have no chance to be signed into law this year, Republicans hope to use it to set the financial reform debate in Insurance Capital Standards. The 2014 passage of The Insurance Capital Standards Act gave the Fed the flexibility to develop insurance-specific standards for those insurers subject to Fed supervision. We expect the Fed to release a Notice of Proposed Rulemaking laying out the new capital requirements for Fedsupervised insurers in the spring of At that time, there will be an opportunity for interested stakeholders to provide public comment on the rule before it is finalized. We also expect the House and Senate Committees to conduct oversight over the Fed s rulemaking process to ensure that proposed capital standards are not bank-centric and that they are appropriately suited for the business of insurance. International Capital Standards. In 2015, Senator Dean Heller (R-NV) and Senator Jon Tester (D-MT) introduced S. 1086, the International Insurance Capital Standards Accountability Act. The bill would create an Insurance Policy Advisory Committee on International Capital Standards and Other Insurance Issues comprised of insurance experts to advise federal insurance supervisors and regulators throughout the global capital standard development phase. The bill would also require periodic reports, testimony, updates and studies from the Fed and the Treasury on any regulatory developments at the IAIS as well as the impact of international capitals standards on US policyholders and companies. This bill is also included in Chairman Shelby s regulatory relief bill discussed above. On the House side in 2015, Representative Sean Duffy introduced H.R. 2141, the International Insurance Standards Transparency and Policyholder Protection Act. The bill goes a bit further than S.1086 by setting negotiating objectives for US representatives in international insurance capital standard negotiations at the IAIS. The objectives are largely based on the current approach used in the United States including a focus on protection of policyholders, regulation on a legal entity basis, and use of supervisory colleges in the oversight of insurance groups. The bill would also require notice and consultation with the House Financial Services and Senate Banking Committees before and during the process of international negotiations. In 2016, we expect the House and Senate committees to continue to monitor insurance regulatory developments overseas at the FSB and IAIS. As the IAIS moves ahead with the development of its ICS, we expect Congress to continue to pressure the Fed and FIO to resist any global capital standard that favors the consolidated, banklike approach preferred by European regulators. We also expect bipartisan calls to improve transparency at the IAIS, in particular the opacity of the selection criteria for G-SIIs, the lack of due process to appeal those decisions, and the concern surrounding the IAIS s recent decision to eliminate the observer status at the organization. On the legislative front, we expect S.1086 to be included in any potential compromise on Chairman Shelby s regulatory relief bill mentioned above (S.1484), which could provide an opportunity for the measure to be signed into law. We also expect the House Committee on Financial Services to introduce legislation that will attempt to merge the legislative text of S.1086 and H.R. 2141, with the purpose of passing the measure out of the House and working with the Senate to send a bill to the President. We assign a low probability that the latter strategy will result in a bill being signed into law. Agent and Broker Licensing. The National Association of Registered Agents and Brokers Reform Act was signed into law on January 12, 2015 (passed as Title II of H.R. 26). The bill allows insurance agents and brokers who are licensed in good standing in their home states to apply for membership to the National Association of Registered Agents and Brokers (NARAB), which will allow them to operate in multiple states. NARAB will be a private, non-profit entity that will be overseen by a board made up of five appointees from the insurance industry and eight state insurance commissioners. In January of 2016, President Obama nominated four of the thirteen people needed to fill the board 2015 YEAR END REVIEW AND FORECAST FOR

12 vacancies, including two state insurance commissioners (South Carolina and Minnesota) and two industry representatives. In the remainder of 2016, we expect the President to complete the nomination of the NARAB board. Terrorism Risk Insurance. We expect the House and Senate Committees to oversee the implementation of reforms passed in the Terrorism Risk Insurance Program Reauthorization Act of One reform included in the Act directed the Treasury Secretary to establish and appoint an Advisory Committee on Risk-Sharing Mechanisms to give advice, make recommendations, and encourage the creation of nongovernmental risk-sharing mechanisms to support private market reinsurance capacity for protection against losses arising from acts of terrorism. We expect the first hearing of this Committee to be in February of National Flood Insurance Program. In 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act which reauthorized the National Flood Insurance Program (NFIP) through September 30, With the expiration of the Program approaching, we expect Congress to hold hearings about potential reforms to the NFIP. We expect the House Committee on Financial Services to hold a series of hearings on flood insurance in 2016, many of which will examine ideas and proposals that would increase the role of the private market in underwriting flood risk. Upon completion of a series of hearings, we expect Housing and Insurance Subcommittee Chairman Blaine Luetkemeyer to introduce a comprehensive flood insurance reform measure, which will set the stage for the reform debate in Relatedly, we expect the House to pass H.R. 2901, the Flood Insurance Market Parity and Modernization Act, which was introduced by Representatives Dennis Ross and Patrick Murphy in June of The bill amends the Flood Disaster Protection Act to clarify that flood insurance offered by a private carrier outside of the NFIP can satisfy the Act s mandatory purchase requirement. Passage of H.R may encourage the Senate to act on companion legislation (S.1679 introduced by Senators Heller (R-NV) and Tester (D-MT)). We assign a moderate probability that this bill will be signed into law in Cybersecurity. With the passage of cybersecurity information sharing legislation at the end of December, attention has shifted back to the other cybersecurity priority area -- a national data security and breach notification law. We expect this will continue to be a major focus of the House and Senate committees during the second session of the 114th Congress, although it is far from clear if a compromise can be reached. In the Senate, the sponsors of the primary bills are working to resolve differences over the scope of federal preemption of state data security and breach laws as well as sectoral disputes over the notification and other compliance obligations of the various consumer data handlers including the communications and retail sectors. In the House, although the two committees of jurisdiction have both passed data security and breach bills, significant jurisdictional and interindustry differences remain. US Sanctions Economic and trade sanctions continue to a major tool in the US foreign policy toolbox, often the first and most popular option for policymakers in shaping the US response to world events. The heightened popularity of sanctions continues to generate specific and sophisticated forms of economic restrictions, presenting frequent and new challenges for the compliance departments of insurers. Cuban Sanctions. The year began with the promulgation of significant new regulations by Treasury s Office of Foreign Assets Control (OFAC) implementing President Obama s surprise Cuba sanctions initiative in December The revisions to the Cuba Assets Control Regulations (CACR) significantly reduced the barriers to travel to Cuba by US citizens by generally authorizing 12 categories of travel without the need for a specific license, from professional conferences to educational tours to so-called people-to-people exchange tours. Overall, the loosening of travel restrictions to Cuba produced an astonishing 36% increase in the number of US travelers to Cuba in the first six months of 2015 over the same time period in An important CACR travel liberalization impacting insurers was authorization for any US person insurer, broker, reinsurer to issue coverage and pay claims for global travel insurance policies insuring non-us persons travel to Cuba from a third country. Although this was initially viewed as a significant reform to help level the playing field for US insurers in overseas travel insurance markets, subsequent OFAC Frequently Asked Questions (FAQs) have provided interpretative guidance that gives a narrow reading to the definition of global travel insurance policy. Other significant changes to the CACR impacting insurers involved the removal of limitations on the remittance of death benefit proceeds of life insurance policies to Cuba beneficiaries. While the previous dollar limitation for remittances have been removed, life insurers must still deposit proceeds in a blocked bank account with a US domestic bank so remittances can be made from the bank, not directly by the life insurer. In December 2015, Cuba reached a landmark agreement with foreign creditors to settle disputes involving billions of dollars in unpaid debt dating back 25 years. Although the US was not among the creditor nations participating in the agreement, the first meeting to resolve the longstanding US claims was held on December 8 between the US State Department and the Cuban Ministry of Foreign Affairs. These claims are considered by many to represent the largest single barrier to a removal of the US sanctions against Cuba. Originally the claims amounted to $1.9 billion, but now are considered to be valued at about $8 billion, including interest. US-Cuba claim negotiations is a major step 2015 YEAR END REVIEW AND FORECAST FOR

13 sanctions will continue to apply to US insurers, brokers and reinsurers following Implementation Day. OFAC has pledged to provide guidance on the implementation of the JCPOA sanctions relief provisions before Implementation Day. towards normalization of relations but is also a necessary step towards the lifting of sanctions under the Helms-Burton Act of Iranian Sanctions. On July 14, 2015, the E3+3 (the United Kingdom, France, Germany, China, the Russian Federation and the United States) and Iran reached an agreement on a Joint Comprehensive Plan of Action (JCPOA) with respect to Iran s nuclear program. The JCPOA lifts nuclear-related sanctions against Iran in return for Iran s agreement to suspend, terminate, and allow the monitoring of various nuclear-related activities. Sanctions relief under the JCPOA will not take effect until the International Atomic Energy Agency (IAEA) verifies Iranian compliance with its nuclear-related commitments. Known as Implementation Day, the IAEA announced on January 16, 2016 that Iran curbed its nuclear program enough to begin receiving relief on sanctions. Sanctions relief is limited, however, to removing EU sanctions and only those US secondary sanctions applicable to non-us persons. Primary US sanctions, applicable to US persons and corporations, remain in place following Implementation Day. Moreover, even though EU and US secondary sanctions are repealed, there is a possibility of a snapback of those sanctions if Iran violates its nuclear commitments under the JCPOA. It is important to recognize that US sanctions relief is limited to so-called secondary sanctions : prohibitions on transactions by non-us persons with Iran s banking, energy, petrochemical, automotive and shipping sectors; trade with Iran in precious and other metals; and software for activities consistent with the JCPOA. Insurance, reinsurance and underwriting services for transactions permitted by the JCPOA are specifically authorized, but only for non-us persons. The full range of US primary Russian and Ukrainian Sanctions. The complex and highly specific Russian, Ukraine-related and Crimea Region sanctions first imposed in March 2014 continued to be an important component of US foreign policy in On July 30, 2015, OFAC further expanded US sanctions in three areas, reinforcing the attention OFAC continues to pay to Russian foreign policy initiatives. First, OFAC added 35 new designations to the Sectoral Sanctions Identifications (SSI) List for entities 50% or more owned by the Russian development corporation Vnesheconombank (VEB) and the Russian petroleum conglomerate Rosneft, both Sectoral Sanctions Identified (SSI) entities. OFAC has made clear it considered each of these entities to have already been sanctioned by operation of law under its 50% Rule, but that it was merely providing clarifying guidance to help the public more effectively comply with existing SSI sanctions. OFAC also added 26 persons to its SDN list: 13 individuals and entities found to have supported the evasion of existing sanctions; two entities operating in the Russian arms sector; five former Ukrainian government officials or their close associates or affiliated companies; five Crimean port operators; and, one Crimean ferry operator. Finally, OFAC s July 30 actions included an Advisory to warn the public about certain tactics it had identified as being used to evade sanctions imposed on the Crimea Region. Insurance Enforcement Actions. OFAC continues to be active in scrutinizing sanctions compliance of insurers. In August OFAC announced a $271,815 civil penalty settlement with Navigators Insurance Company, a fixed-premium Protection and Indemnity (P&I) Insurer, for issuing coverage and paying indemnity claims for vessels traveling to Cuba and Iran. The settlement also involved apparent violations for providing P&I insurance coverage for 24 North Korean flagged vessels, a very narrow and little-know prohibition. OFAC eliminated the staff position of a Senior Sanctions Advisor Insurance in 2015, but continues to manage enforcement responses to insurance transactions with personnel in its Sanctions Compliance and Evaluation unit YEAR END REVIEW AND FORECAST FOR

14 NAIC AND STATE REGULATORY DEVELOPMENTS 2015 YEAR END REVIEW AND FORECAST FOR

15 Although there were not many state elections, there were nearly as many changes in senior personnel within insurance departments and NAIC leadership in 2015 as there were in Like 2014, these changes come at a time when state insurance commissioners are responding to a number of significant challenges, including the continuing evolution and the ongoing work of the Fed as an insurance regulator, as well as the FIO, both as strong voices on US insurance regulatory policy. At the same time, US regulators are faced with a number of issues on the international front. Accordingly, at a time when the NAIC could benefit from stability and continuity, it is faced with substantial change and attrition State Elections, Insurance Commissioners and the NAIC Statewide Races. As observers of US insurance regulation know, most commissioners are appointed by governors, so gubernatorial elections can change the make-up of US insurance policy-making bodies, including the NAIC. In Kentucky, Republican Matt Bevin defeated the Democratic candidate, resulting in the Governor s Office changing parties. Accordingly, former NAIC President-Elect Sharon Clark resigned in January 2016 and was replaced by Commissioner H. Brian Maynard on January 21, Commissioners are elected in a number of states. Although Louisiana and Mississippi Commissioners of Insurance were up for reelection in 2015, both Commissioner Jim Donelon (LA) and Commissioner Mike Cheney (MS) were reelected. Insurance Commissioner Resignations. A number of influential commissioners resigned for personal reasons unrelated to election results: Florida. Although surviving public attempts by the Florida Governor to force his resignation last year, Commissioner Kevin McCarty announced in January 2016 that he would resign his position on May 2, A leader in the NAIC and an influential voice at the IAIS, Commissioner McCarty served as the Commissioner of Insurance in Florida for 13 years. He was appointed as chair of the International Insurance Relations (G) Committee in Commissioner McCarty has publicly said that he may be seeking a national insurance position. New York. The New York Department of Financial Services (NYDFS) has been in flux after the departure of its inaugural Superintendent and a significant number of senior employees over the last seven months. In addition to executive level staff, notably Rob Easton, the former head of the Insurance Division, key employees with decades of experience, notably Michael Maffei, a senior insurance examiner, either retired or resigned for positions in the private sector. The NYDFS has been without a permanent general counsel since last February and at one point in 2015, both the head of the Property Bureau and Life Bureau were vacant positions. In late January, Governor Mario Cuomo nominated Maria Vullo, a former partner at Paul Weiss and one of his deputies in the Office of Attorney General, to be the first permanent Superintendent since Benjamin Lawsky left in June Her appointment was greeted warmly by many in the insurance industry who hope that she will bring stability to and rebuild the NYDFS. Rhode Island. Insurance Superintendent Joseph Torti III resigned from the Rhode Island Department of Business Regulation at the end of the year to assume a position with an insurance company. Torti served for more than 25 years with the Rhode Island Insurance Division, beginning his career as a senior examiner. When announced, the news took the industry by surprise. Superintendent Torti s resignation will have a huge impact to the NAIC. He served as chair of the Financial Condition (E) Committee, co-chair of the Principle-Based Reserving Implementation (EX) Task Force and a member of the NAIC Audit Committee, and as well as other committees and working groups. The Insurance Division s Associate Director Elizabeth Kelleher Dwyer was named Rhode Island s Superintendent of Banking and Insurance in mid-january. Pennsylvania. Deputy Insurance Commissioner Stephen Johnson retired at the end of He was appointed in 1998 and ran the Bureau of Company Licensing and Financial Analysis and the Bureau of Financial Examinations for the Commonwealth of Pennsylvania. He also served as a member on many NAIC financial working groups, task forces and committees, including the Statutory Accounting Principles Working Group and Reinsurance Financial Analysis Working Group. Former Deputy Commissioner Johnson was a powerful voice in the NAIC s Solvency Modernization Initiatives. Joseph DiMemmo succeeds former Deputy Commissioner Johnson. DiMemmo previously headed the Pennsylvania Department s Office of Liquidations Rehabilitations and Special Funds. NAIC: Shakeup in the Leadership. History seems to be repeating itself in changes in the NAIC leadership. As was the case in 2015, the most significant change in the NAIC leadership was a vacancy of the NAIC president-elect position as of January 21, 2015, due to the gubernatorial election in Kentucky. A special election for a replacement was held on February 7, 2016, and Wisconsin Insurance Commissioner Ted Nickel was elected. Immediately after, Tennessee Insurance Commissioner Julie Mix McPeak was elected NAIC Vice President, the position previously held by Commissioner Nickel. Members then elected Maine Insurance Superintendent Eric A. Cioppa to the position of Secretary- Treasurer, previously held by Commissioner McPeak. Missouri Insurance Director John M. Huff continues to serve as the NAIC s President YEAR END REVIEW AND FORECAST FOR

16 Additionally, former US Senator and CEO of the NAIC Ben Nelson announced in October 2015 that he would not renew his contract with the NAIC. Therefore, Senator Nelson s term ended at the NAIC on January 31, Currently NAIC Chief Operating Officer and Chief Legal Officer Andy Beal was named as Acting CEO of the NAIC, while the NAIC searches for a permanent CEO. Office President President-Elect Vice President Secretary Treasurer NAIC 2016 OFFICERS Officer Substantive NAIC Actions John M. Huff, Missouri Insurance Director Ted Nickel, Wisconsin Insurance Commissioner Julie Mix McPeak, Tennessee Insurance Commissioner Eric A. Cioppa, Maine Insurance Superintendent In 2015, the NAIC continued and made significant progress in the following areas: Captives and Special Purpose Vehicles (SPVs) Readers will recall that in July 2012 the NYDFS began an investigation into the use of captives in reinsurance transactions by 80 New York life insurance companies and their affiliated entities. In July 2013, the NYDFS issued its controversial report, Shining a Light on Shadow Insurance: A Little-Known Loophole That Puts Insurance Policyholders and Taxpayers at Greater Risk (the NYDFS Captive Insurance Report). The NYDFS Captive Insurance Report took the position that an insurer that reinsures through a captive that is not required to comply with the same reserving requirements applicable to the ceding insurer is an end run around solvency protections, reduces the adequacy of reserves, and fundamentally misstates the ceding insurer s true financial condition. The Report was widely criticized by industry and by other regulators. Concern about the use of captives and SPVs to finance redundant life insurance reserves continued to occupy regulators attention in The NAIC worked on developing Actuarial Guideline (AG) 48 into a Model Law, while various NAIC committees, subcommittees, working groups and task forces worked on the various aspects of formalizing AG 48 and providing for its implementation. AG 48 defines the rules for new term life (XXX) and universal life (AXXX) reserve financing transactions executed after January 1, On January 8, 2016, the NAIC Executive (EX) Committee and Plenary adopted additional revisions to the Credit for Reinsurance Model Law (#785) reflecting the guidance in AG 48. NAIC Develops AG 48-Based Model Law. Actuarial Guideline 48 (AG48) was adopted by the NAIC Executive Committee and Plenary, effective January 1, It was intended to be interim guidance for XXX/AXXX reserve financing transactions through captive arrangements until PBR becomes effective. AG 48 requires a ceding company s appointed actuary to determine, as of a specified date, whether the company s amount of Primary Securities meet the reserve requirements of the NAIC s Valuation Manual Requirements for Principle-Based Reserves for Life Products (also referred to as VM-20), which is the actuarial method for determining so-called economic reserves. This is referred to as the Required Level of Primary Security. The remaining reserves may be backed by Other Security. The Capital Adequacy (E) Task Force adopted three proposals related to the AXXX Reinsurance Framework: Qualified Actuarial Opinion Impact on Interest Rate Risk and Market Risk in the RBC formula. This proposal changes an interrogatory on LR027 Interest Rate Risk and Market Risk. If a company submits an unqualified actuarial opinion, the interrogatory would result in the company receiving a one-third reduction in the Interest Rate Risk and Market Risk factors in the RBC calculations. It was modified to prevent an opinion qualified solely due to the direction in AG 48, which is line of business specific, impacting all lines of business. Primary Securities Shortfall. This proposal adds a new schedule showing the primary security shortfall by individual cession. The cumulative amount of primary security shortfall, with no offset for any surpluses, is then taken as a dollar-for-dollar addition to the reporting company s Authorized Control Level. RBC shortfall. This proposal adds a new schedule which shows the RBC calculation by individual captive, which would apply to the ceding company s RBC calculation. The RBC Shortfall of the captive is the difference between the Total Adjusted Capital and the Benchmark RBC level (which is set at 300% for each captive). The cumulative amount of the captives RBC shortfalls, with no offset for any surpluses, is then taken as a dollar-for-dollar reduction to the reporting ceding company s Total Adjusted Capital. The Task Force must continue work on the consolidated RBC. The consolidated column on the RBC Shortfall schedule will contain an automatic xxx with the exception of the shortfall amount YEAR END REVIEW AND FORECAST FOR