Economic Growth, Regulatory Relief, and Consumer Protection Act Passes Senate
On March 14, the Senate passed a wide-ranging financial regulatory bill (S. 2155) with significant bi-partisan support. Members of the House have indicated their intention to propose a series of amendments to the bill. It remains unclear if a revised version of the bill will retain the bipartisan support in the Senate necessary to avoid a filibuster.
Noteworthy provisions of the bill:
- Raises the asset-size threshold for enhanced prudential standards (e.g., resolution planning, stress testing, etc.) from $50 billion to $250 billion (Federal Reserve would have discretion to apply standards to bank holding companies with more than $100 billion of assets);
- Exempts banks with $10 billion to $50 billion of assets from requirements to perform company-run stress testing;
- Makes available a simplified capital standard for community banks with less than $10 billion of assets (i.e., a leverage ratio requirement between 8% and 10% would allow these institutions to opt out of risk-based capital requirements);
- Exempts banks with less than $10 billion of assets whose total trading assets and liabilities are less than 5% of total assets from the Volcker Rule; and
- Treats municipal securities as Level 2B high-quality liquid assets under the Liquidity Coverage Ratio rules, provided the securities are a) liquid and readily marketable, and b) investment grade.
We previously reported on this proposal in our November 2017 LRA Update.
COI Class Action Complaint Against Security Life of Denver
On March 27, a proposed class-action complaint was filed against Security Life of Denver Insurance Company (SLD) in Colorado District Court. The plaintiff contends that SLD breached its policy obligations by raising Cost of Insurance (COI) charges despite policy provisions allegedly constraining the carrier to use only the insured’s sex, attained age, rating class, and SLD’s “expectations as to future mortality experience” when determining the COI rates.
As we have reported regularly over the past few years, there are several active lawsuits challenging various carriers’ recent increases in COI charges. The following is a list of carriers and jurisdictions where we are monitoring active litigation:
- Axa Equitable Life Insurance Company (New York Southern District)
- Lincoln National Life Insurance Company (Pennsylvania Eastern District)
- Nationwide Life Insurance Company (Connecticut)
- Security Life of Denver (Colorado)
- Transamerica Life Insurance Company (California Central District)
- Note: On March 28, a new complaint was filed in Alabama Northern District Court.
- USAA Life Insurance Company (Texas Western District)
To date, we are not aware of any policyowners litigating COI increases applied to BOLI/COLI policies.
NAIC Statutory Accounting Principles (E) Working Group Focuses on Private Placement Variable Products
At the NAIC’s Spring meeting in Milwaukee on March 24, the Statutory Accounting Principles (E) Working Group’s agenda included deliberation on the regulatory treatment of Private Placement Life Insurance (PPLI) and Private Placement Variable Annuities (PPVA). Products under consideration include PPLI and PPVA products sold to high-net-worth individuals and COLI, BOLI and ICOLI.
According to the meeting materials, the NAIC staff has learned that insurers considering ICOLI or PPVA investments refer to an existing regulation (SSAP No. 21 ¶ 6) that the NAIC staff believes was not intended for these types of investments. In particular, SSAP No. 21 ¶ 6 allows an insurer who owns an ICOLI policy to account for the net realizable value of the policy as an “Other Than Invested Asset.” Such treatment counts as an admitted asset for capital and surplus purposes and is not subject to any risk-based capital charges.
The NAIC staff has learned that ICOLI investors often choose relatively aggressive investment allocations (e.g., equities, private equity, hedge funds, etc.). The staff has proposed the following regulatory response:
- Modify SSAP No. 21 ¶ 6 to specifically exclude Private Placement Life Insurance and Private Placement Variable Annuities; and
- Add new SSAP No. 21 ¶ 7, which would address PPLI and PPVA products owned by an insurer. The new paragraph would
- Require an insurer to report such an exposure as a “non-admitted Other Long-Term Invested Asset on Schedule BA”; and
- The amount realizable shall be determined based on the fair value of assets attributable to the reporting entity held in an “insurance dedicated fund” that the reporting entity can claim on demand less any fees or penalties (including IRS early-withdraw penalties). (emphasis added)
While we strongly support the NAIC’s objective to correct the regulatory capital arbitrage that ICOLI investors were seeking to exploit, we have reached out to the NAIC with recommendations that we think would present a more appropriate regulatory capital treatment.
Although BOLI owners are largely unaffected by the development described above, the NAIC staff has also suggested that PPLI issuers should be required to separately report the amount of separate account assets that are registered with the SEC versus those that are not registered. Further, the NAIC staff has proposed an additional breakdown of non-registered separate account assets to be categorized between 1) PPVA, 2) PPLI, 3) “Other (Not PPVA or PPLI).”
NAIC Annuity Suitability (A) Working Group – Update
As we’ve reported previously, the NAIC’s Annuity Suitability (A) Working Group continues deliberations on adopting a “best interest” standard for annuities. In advance of the NAIC Spring meeting on March 24, the Working Group released an agenda and materials.
Not surprisingly, recent developments with regard to the Department of Labor’s Fiduciary Rule were on the docket. Additionally, the materials included a summary of comments received on the Chairman’s Draft of Proposed Revisions to the Suitability in Annuity Transactions Model Regulation (#275).