Two bills have been introduced to the New Jersey legislature that deal with the calculation of group capital and the liquidity stress test framework for insurance holding company systems. These bills revise the current New Jersey Insurance Holding Company Systems Act to adopt the changes recommended by the National Association of Insurance Commissioners (NAIC) in December 2020.
During the NAIC’s summer 2021 meeting, the Financial Regulation and Accreditation Standards Committee (F) voted to expose for a one-year public comment period starting January 1, 2022, the revisions of December 2020 models 440 and 450 as accreditation standard. If passed, the accreditation standard would take effect for all states on January 1, 2026. Changes to New Jersey law would then be necessary for New Jersey to maintain NAIC accreditation.
In December 2020, the NAIC adopted changes to the Insurance Holding Company System Regulation Model Law to allow for the requirement of Group Capital Calculation (GCC) and liquidity stress test ( LST). The GCC requirement is a financial tool that helps state insurance regulators identify risks that may arise 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 in Insurance and Reinsurance”, which was signed on September 22, 2017 .
On December 18, 2018, a similar covered agreement was signed with the United Kingdom. The LST was developed to provide state insurance regulators with insight into a key macroprudential risk overseen by the Financial Stability Supervisory Board and other jurisdictions internationally. The LST requires that the person in ultimate control of an insurer provide the LST results for a specific year to the chief state insurance commissioner. State insurance regulators are currently performing group analysis on all U.S. insurance groups, including assessing the risks and financial condition of the insurance holding system, but lack the capacity to assess the financial situation of the group as a whole. The GCC and LST will provide additional information and transparency to insurance regulators regarding insurance groups. Confidentiality would be guaranteed for the calculation of the group’s capital, the results of the liquidity stress tests and the supporting information.
New Jersey bills were introduced in December 2021. December 2, 2021 (A6168) was presented to the New Jersey General Assembly and December 20, 2021 (A6168) was passed by the Assembly and was received in the New Jersey Senate the same day. Also on December 20e, the Assembly version replaced 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, NJSA17: 27A-1 et seq. (Holding Company Act), the definitions of “group capital calculation instructions” to follow the instructions of the NAIC as amended from time to time; “NAIC Liquidity Stress Test Framework”, all in accordance with the NAIC Publishing Instructions, Reporting Templates and Procedures adopted and amended from time to time; and “Scope criteria” to refer to the designated exposure bases and their minimum magnitudes for the specified data year, used to establish a preliminary list of insurers considered under the liquidity crisis testing framework of the NAIC for that year of data. In addition, the materiality threshold of the Holding Company Act would be expressly inapplicable for the purposes of calculating group capital or the NAIC’s liquidity stress test framework.
For the purposes of business risk statements, the person having ultimate control of an insurer subject to registration, unless exempted from doing so, must file together with the annual business risk registration a annual group capital calculation as directed by the Senior State Insurance Commissioner, which report must be completed in accordance with the NAIC group capital calculation instructions. These instructions may allow the Chief State Commissioner to authorize a controlling person who is not the ultimate controlling person to file the group capital calculation. The report should be filed with the State Senior Commissioner of the Insurance Holding Company System, as determined by the Commissioner in accordance with the NAIC Financial Analysis Manual.
The New Jersey bill exempts certain insurance holding company systems from calculating group capital as follows:
(a) An insurance holding company system which has only one insurer within its holding company structure, which only writes business and is licensed only in its national state, and ” does not undertake any activity of another insurer;
(b) An insurance holding company system that is required to perform a group capital calculation specified by the United States Federal Reserve. The Chief State Commissioner will request the calculation from the Federal Reserve Board under the terms of the information-sharing agreements in force. If the Federal Reserve Board cannot share the calculation with the state’s senior commissioner, the insurance holding company’s system is not exempt from the group capital calculation filing;
(c) An insurance holding company system with a non-US group-wide supervisor 15 located in a reciprocal jurisdiction as described in subsection e. section 2 of PL1993, c.243 17 (C.17: 51B-2) which recognizes the regulatory approach of US states to group supervision and group capital;
(d) An insurance holding company system:
(i) who provides information to the Pilot State that meets accreditation requirements under Financial Standards and the NAIC Accreditation Program, directly or indirectly through the group-wide supervisor, who has determined that this information is satisfactory to enable the Pilot State to comply with the NAIC group supervision approach, as detailed in the NAIC Financial Analysis Manual, and
(ii) whose non-U.S. group-wide supervisory authority that is not in a reciprocal jurisdiction recognizes and accepts, as specified by the statutory auditor in the regulation, the calculation of the group’s capital as a global valuation of the group capital for US insurance groups operating in that jurisdiction;
(e) Notwithstanding the provisions of subparagraphs (c) and (d) of paragraph (2) of paragraph k. of section 3 of PL1970, c.22 (C.17: 27A-3), a senior state commissioner shall require the calculation of group capital for the US operations of any non-US insurance holding company system when, after any necessary consultation with other supervisors or officials, it is deemed appropriate by the Chief State Commissioner for the purposes of prudential supervision and solvency control or to ensure the competitiveness of the insurance market.
Notwithstanding the filing exemptions from the group capital calculation set out in subparagraphs a) to d) of paragraph (2) of paragraph k. of article 3 of the PL1970, c.22 (C.17: 27A-3), the chief state commissioner has the discretionary power to exempt the person having ultimate control from the filing of the annual capital calculation of the group or to accept a limited deposit report of the group’s capital. If the lead state commissioner determines that an insurance holding company system no longer meets one or more of the conditions for exemption from filing the group capital calculation, the holding company system Insurance files the group capital calculation on the next annual filing date, unless an extension is provided by the lead state.
With respect to the liquidity stress test, the person having ultimate control of each insurer subject to registration under the Holding Companies Act and also subject to the liquidity stress test framework of the NAIC must file the results of a specific year’s liquidity stress test with the state’s primary regulator for the insurance holding company system as determined by the procedures of the Financial Analysis Manual adopted by the NAIC . The scope of the framework criteria is detailed in the bill and again follows the procedures, analysis and rules of the NAIC.
Bressler’s Insurance Law Practice Group will continue to monitor and report on the status of New Jersey Assembly Bill A6168.