In 2020, the National Association of Insurance Commissioners (NAIC) revised the Insurance Holding Company System Regulatory Act (the “Model Law”) and the Insurance Holding Company System Model Regulation (the “Model Regulation”) to require that all insurance company holding systems report the system’s Group Capital Calculation (GCC) annually to its Principal State Commissioner. The 2020 revisions also added liquidity stress testing reports for some insurers, which we explore in more detail here.1
According to the NAIC, the benefits of the new GCC reporting requirements include:
- A tool that quantifies risk across the entire insurance group, combined with transparency of capital allocation.
- Key insurance group financial information that assists regulators in comprehensively understanding the financial position of non-insurance entities.
- Information that helps understand whether and to what extent insurance companies can support the operations of non-insurance entities.
- A new tool that can be used to help solve any problem to ensure the protection of policyholders of group insurers.
Generally, the 2020 Model Law and Model Regulations revisions require an insurance holding company system to file a GCC report annually with the system’s Principal State Commissioner as part of its report on business risks, also known as Form F filing, which is a component of the insurance holding company system annual registration statement, also known as Form B. See Article 4(L)(2) of the model law.
Similar to the filing of Form F, the GCC calculation only needs to be prepared and submitted to the Main State of the insurance holding company system. See Section 4(L)(2) of the Model Law (“The report shall be filed with the Principal State Commissioner of the Insurance Holding Company System…”). Therefore, if the lead state of an insurance holding company system has not yet adopted the revisions to the Model Law, the insurance organization is not required to file a GCC report (l adoption status of the 2020 Model Law and Model Regulations revisions is discussed below).
The GCC report must be filed annually along with Forms F and B. The deadlines for filing Forms F and B vary from state to state. Among the states that have adopted the 2020 Model Law and Model Regulations revisions, the filing dates range from March 31 (Iowa and Pennsylvania) to August 1 (New Hampshire).
In April 2022, the NAIC adopted the final version of the GCC Model and GCC Filing Instructions.
Exceptions and Exemptions
There are a few narrow and automatic exemptions from the GCC filing requirement found in the 2020 Model Law Revisions (Section 4(L)(2)(a)-(d)), which each of the enacting states has enacted nowadays. These include:
- An insurance holding company system with a single insurer that writes business only in its home state and does not take on any business from another insurer.
- An insurance holding company system required to perform a GCC by the United States Federal Reserve Board.
- An insurance holding company system with a non-U.S. group-wide supervisor located in a reciprocal jurisdiction that recognizes the U.S. state’s regulatory approach to group supervision and group capital (e.g., the EU and the UK under the Covered Agreements described below).
- An insurance holding company system: (1) with a non-U.S. group-wide supervisor that is not in a Reciprocal Jurisdiction but otherwise recognizes and accepts the regulatory approach of the U.S. State in matters of group supervision and group capital; and (2) that provides information to its lead state that has determined that such information is satisfactory to enable the lead state to comply with the NAIC’s group supervision approach.
In addition to the foregoing narrow and automatic exemptions, nine (9) States (see below) have adopted the 2020 Model Regulations Revisions, which created two additional potential exemptions. The “discretionary” exemption allows a Principal State Commissioner to exempt an insurance holding company system from future GCC filings if the criteria below are met. See Section 21(A) of the Model Rules. Alternatively, Section 21(B) of the Model Regulations allows a Principal State Commissioner to accept a “limited” GCC filing in lieu of the full GCC report required under the Model Law if the criteria below are filled. Both exemptions require that an insurance holding company system:
- Has a direct, unaffiliated annual written premium of less than $1 million;
- Does not include any non-US insurers;
- Does not include a bank, custodian or other financial entity subject to an identified regulatory capital framework;
- Certify that there have been no material changes in the transactions between insurers and non-insurers of the group since the last filing with the CCG; and
- Non-insurers within the system do not pose a significant financial risk to the insurer’s ability to meet policyholder obligations.
Notably, the wording of the 2020 Model Regulations only authorizes a principal state commissioner to grant any of the aforementioned exemptions if the insurance holding company system has already filed an initial GCC filing with its state. principal, which provides the principal state with the information necessary to determine whether a future exemption should apply. See Article 21 of the model regulations. That said, of the nine (9) states that have enacted these additional exemptions, three (3) states (Montana, Nebraska, and Pennsylvania) allow the Chief State Commissioner to exempt an insurance holding company system without requiring insurance organization to first make an initial deposit to the GCC.
Based on NAIC tracking, as of August 1, 2022, twenty-two (22) states have adopted the GCC Model Law Revisions, including: Alabama, California, Connecticut, Delaware, Georgia , Iowa, Illinois, Kentucky, Louisiana, Maine, Missouri, Montana, Nebraska, New Hampshire, New Jersey, Nevada, Ohio, Pennsylvania, Rhode Island, Utah, Virginia and Wisconsin. In addition, three states have pending bills that would enact revisions to the model law: Massachusetts, Michigan, and New York.2
Of the 22 jurisdictions that have adopted the 2020 Model Law revisions, nine (9) have also adopted the 2020 Model Settlement revisions: California, Delaware, Illinois, Missouri, Montana, Nebraska, Nevada, Pennsylvania, and Wisconsin.
States’ adoption of the 2020 Model Law and Model Regulations revisions was driven in part by covered agreements between the United States and the European Union (EU) and the United Kingdom on reciprocity in the insurance regulations. See Bilateral agreement between the United States of America and the European Union on prudential measures relating to insurance and reinsurance (September 22, 2017) and the corresponding agreement between the United States and the United Kingdom (December 18, 2018) (the “Covered Agreements”). US states have until November 7, 2022 to bring their laws into line with the requirements of the covered agreements, or risk the EU or the UK imposing their own GCC requirements on international insurance holding company systems, including included to any US insurer in these systems.
In addition, the NAIC is considering making the adoption of the 2022 Model Law Revisions and Model Regulations an NAIC credentialing standard. Although the NAIC does not have formal authority to make insurance laws, in order for individual states to receive NAIC accreditation, they must (among other things) adopt certain NAIC model laws and regulations that are included in NAIC accreditation standards. Typically, states want to retain accredited status because it allows non-national states to rely on the accredited domestic state to fulfill a basic level of financial regulatory oversight, i.e. States are able to coordinate and build on each other’s work to monitor insurers’ assets. Note that the proposal to make the 2020 Model Law and Model Regulations revisions a standard for NAIC accreditation is open for a one-year comment period, which began January 1, 2022.3 The proposed effective date for making adoption of the 2020 Model Law and Model Regulations revisions a standard for NAIC accreditation is January 1, 2026.