Two bills were introduced in the New Jersey legislature which address the Group Capital Calculation and the Liquidity Stress Test Framework for insurance holding company systems. These bills revise current New Jersey law on insurance holding company systems to adopt changes recommended by the National Association of Insurance Commissioners (NAIC) in December 2020.
During the summer 2021 NAIC meeting, the Financial Regulation Standards and Accreditation (F) Committee voted to expose for a one-year public comment period beginning January 1, 2022, the December 2020 revisions to Model 440 and Model 450 as an accreditation standard. If adopted, the accreditation standard would be effective for all states on January 1, 2026. The changes to New Jersey law would then be required for New Jersey to maintain NAIC Accreditation.
In December 2020, the NAIC adopted changes to the model Insurance Holding Company System Regulatory Act to enable the requirement for the Group Capital Calculation (GCC) and the Liquidity Stress Test (LST). The GCC requirement is a financial tool that assists state insurance regulators in identifying risks that may emanate from a holding company system. The GCC is intended to comply with the requirements of the “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance,” which was signed on Sept. 22, 2017.
On Dec. 18, 2018, a similar covered agreement was signed with the United Kingdom. The LST was developed to provide state insurance regulators with insights into a key macro prudential risk monitored by the Financial Stability Oversight Council and other jurisdictions internationally. The LST requires the ultimate controlling person of an insurer to provide the results of a specific year’s LST to the lead state insurance commissioner. State insurance regulators currently perform group analysis on all U.S. insurance groups, including assessing the risks and financial position of the insurance holding company system but lack the ability to assess the capital position of the group as a whole. The GCC and LST will provide additional insight and transparency to insurance regulators regarding insurance groups. Confidentiality would be afforded for the group capital calculation, liquidity stress test results and supporting disclosures.
New Jersey bills were introduced in December 2021. On December 2, 2021 (A6168) was introduced in the New Jersey General Assembly and on December 20, 2021 (A6168) passed the Assembly and was received in the New Jersey Senate on that same day. Also on December 20th, the Assembly version was substituted for the Senate version (S4212) which had been introduced in the Senate on December 9, 2021.
A6168 would add to the New Jersey Insurance Holding Company Systems Act, N.J.S.A.17:27A-1 et seq. (Holding Company Act), definitions of “Group Capital Calculation instructions” to track the NAIC instructions as amended from time to time; “NAIC Liquidity Stress Test Framework”, all in accordance with NAIC publication instructions, reporting templates and in accordance with NAIC procedures adopted and amended from time to time; and “Scope Criteria” to mean the designated exposure bases along with minimum magnitudes thereof for the specified data year, used to establish a preliminary list of insurers considered within the scope of the NAIC Liquidity Stress Test Framework for that data year. Additionally, the Holding Company Act’s materiality threshold would be expressly inapplicable for purposes of the Group Capital Calculation or the NAIC Liquidity Stress Test Framework.
For purposes of Enterprise Risk filings, the ultimate controlling person of an insurer subject to registration, unless exempted, shall concurrently file with the annual Enterprise Risk Registration an annual group capital calculation as directed by the lead state insurance commissioner, which report shall be completed in accordance with the NAIC Group Capital Calculation Instructions. Those instructions may permit the lead state commissioner to allow a controlling person that is not the ultimate controlling person to file the group capital calculation. The report shall be filed with the lead state commissioner of the insurance holding company system as determined by the commissioner in accordance with the NAIC’s Financial Analysis Handbook.
New Jersey’s proposed bill does exempt certain insurance holding company systems from the group capital calculation as follows:
(a) An insurance holding company system that has only one insurer within its holding company structure, that only writes business and is only licensed in its domestic state, and assumes no business from any other insurer;
(b) An insurance holding company system that is required to perform a group capital calculation specified by the United States Federal Reserve Board. The lead state commissioner shall request the calculation from the Federal Reserve Board under the terms of information sharing agreements in effect. If the Federal Reserve Board cannot share the calculation with the lead state commissioner, the insurance holding company system is not exempt from the group capital calculation filing;
(c) An insurance holding company system whose non-U.S. 15 group-wide supervisor is located within a reciprocal jurisdiction as described in subsection e. of section 2 of P.L.1993, c.243 17 (C.17:51B-2) that recognizes the U.S. state regulatory approach to group supervision and group capital;
(d) An insurance holding company system:
(i) That provides information to the lead state that meets the requirements for accreditation under the NAIC financial standards and accreditation program, either directly or indirectly through the group-wide supervisor, who has determined such information is satisfactory to allow the lead state to comply with the NAIC group supervision approach, as detailed in the NAIC Financial Analysis Handbook, and
(ii) Whose non-U.S. group-wide supervisor that is not in a reciprocal jurisdiction recognizes and accepts, as specified by the commissioner in regulation, the group capital calculation as the world-wide group capital assessment for U.S. insurance groups who operate in that jurisdiction;
(e) Notwithstanding the provisions of subparagraphs (c) and (d) of paragraph (2) of subsection k. of section 3 of P.L.1970, c.22 (C.17:27A-3), a lead state commissioner shall require the group capital calculation for U.S. operations of any non-U.S. based insurance holding company system where, after any necessary consultation with other supervisors or officials, it is deemed appropriate by the lead state commissioner for prudential oversight and solvency monitoring purposes or for ensuring the competitiveness of the insurance marketplace.
Notwithstanding the exemptions from filing the group capital calculation stated in subparagraphs (a) through (d) of paragraph (2) of subsection k. of section 3 of P.L.1970, c.22 (C.17:27A-3), the lead state commissioner has the discretion to exempt the ultimate controlling person from filing the annual group capital calculation or to accept a limited group capital filing report. If the lead state commissioner determines that an insurance holding company system no longer meets one or more of the requirements for an exemption from filing the group capital calculation, then the insurance holding company system shall file the group capital calculation at the next annual filing date unless an extension is provided by the lead state.
As to the Liquidity Stress test, the ultimate controlling person of every insurer subject to registration under the Holding Company Act and also subject to the NAIC Liquidity Stress Test Framework must file the results of a specific year’s Liquidity Stress Test with the lead state regulator for the insurance holding company system as determined by the procedures within the Financial Analysis Handbook adopted by the NAIC. The Scope of criteria for the framework are detailed in the proposed bill and again track the NAIC procedures, analysis and rules.
Bressler’s Insurance Law Practice Group will continue to track and report on the status of New Jersey Assembly Bill A6168. In the meantime, questions can be directed to Cynthia Borrelli or any member of the Insurance Law Practice Group.