Department of Financial Services Issues Guidance on Group Capital Calculation Exemptions

New York-domiciled insurers should consider new guidance from the New York Department of Financial Services (DFS) to determine whether they might be exempt from group capital calculation (GCC) requirements. In its proposed third amendment to 11 NYCRR 82 (Insurance Regulation 203) — the regulation on Enterprise Risk Management (ERM) and Own Risk and Solvency Assessment (ORSA) — DFS sets out certain exemptions to GCC mandates. The exemptions are contemplated by the New York Insurance Law (NYIL) provisions on insurance holding companies, property-casualty company subsidiaries and life company subsidiaries (Articles 15, 16 and 17, respectively).

Public comments on the proposal are solicited for a period of 10 days, expiring March 14, 2024.

By way of background, provisions of Articles 15 – 17 adopted by the New York Legislature in 2023 require New York-domiciled insurers that are part of an affiliated group to annually submit a GCC measuring the capital of the affiliated group as a whole. This is in addition to entity-level risk-based capital (RBC) requirements. The GCC is to be based on instructions published by the National Association of Insurance Commissioners (NAIC).

These statutory provisions contemplated that certain aspects of the requirements would be filled in by DFS regulation. Specifically, the statutes empower the New York Superintendent of Financial Services (the Superintendent) to issue regulations that exempt insurers from GCC requirements (in addition to certain exemptions set out in the statutes themselves). The Superintendent is also authorized to issue regulations that specify criteria for when a non-U.S. insurance regulator is deemed to “recognize and accept” the GCC as the worldwide group capital assessment for U.S. groups that operate in that jurisdiction. (The “recognize and accept” concept is important because it is a prong of certain statutory exemptions to GCC requirements.)

The proposed third amendment to Reg. 203 does both of these things — it specifies additional conditions under which an insurer will be deemed exempt from GCC requirements and it sets forth “recognize and accept” criteria. In addition, the guidance provides for circumstances where an exempt insurer can be again required to file a GCC, effectively losing its exemption.

Exemptions

Under the proposed third amendment, where an entity has previously filed a GCC at least once, the Superintendent, in a case where New York is the lead state, may exempt the entity from filing further GCCs if the Superintendent determines, based on the prior GCC filing, that the affiliated group meets all the following criteria:

• The group has annual direct written and unaffiliated assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of less than $1 billion,
• The group has no insurers with its affiliated group that are domiciled outside the United States,
• The group has no banking, depository or other financial entity that is subject to an identified regulatory capital framework within its affiliated group,
• The affiliated group attests that there are no material changes in the transactions between insurers and non-insurers in the group that have occurred since the last filing of the GCC, and
• The non-insurers within the affiliated group do not pose a material financial risk to an insurer’s ability to honor policyholder obligations.

Where an entity has previously filed the annual GCC at least once, the Superintendent, when New York is the lead state, may accept, in lieu of the GCC, a “limited group capital filing” if

• The affiliated group has annual direct written and unaffiliated assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of less than $1 billion, and
• All of the following criteria are met:
  1. The entity has no insurers within its affiliated group that are domiciled outside the United States,
  2. The entity does not include a banking, depository or other financial entity that is subject to an identified regulatory capital framework, and
  3. The entity attests that there are no material changes in transactions between insurers and non-insurers in the group that have occurred since the last filing of the GCC, and the non-insurers within the affiliated group do not pose a material financial risk to an insurer’s ability to honor policyholder obligations.

Becoming Ineligible for Continued Exemption

For an entity that previously met an exemption with respect to the GCC pursuant to one of the provisions described above, the Superintendent may require the entity at any time to file an annual GCC if any insurer within the affiliated group

• Is in an RBC-level event (or similar event for a non-United States-based insurer),
• Has surplus to policyholders that the Superintendent determines is not adequate in relation to outstanding liabilities or financial needs, pursuant to NYIL Section 1104(c), or
• Otherwise exhibits qualities of a troubled insurer as determined by the Superintendent based on unique circumstances, including the type and volume of business written, ownership and organizational structure, federal agency requests and international supervisor requests.

“Recognize and Accept” Criteria

A non-U.S. jurisdiction is considered to “recognize and accept” the GCC if it satisfies the following criteria:

• The non-U.S. jurisdiction
  1. Recognizes the U.S. state regulatory approach to group supervision and group capital by providing confirmation, from a competent regulatory authority in such jurisdiction, that insurers and groups, whose lead state is accredited by the NAIC under the NAIC accreditation program, shall be subject only to worldwide prudential insurance group supervision, including worldwide group governance, solvency and capital, and reporting, as applicable, by the lead state and shall not be subject to group supervision at the level of the worldwide parent undertaking of the group by the non-U.S. jurisdiction, or
  2. Where no U.S. insurance group operates in the non-U.S. jurisdiction, the non-U.S. jurisdiction indicates formally in writing to the Superintendent, when New York is the lead state, with a copy to the International Association of Insurance Supervisors [IAIS], that the GCC is an acceptable international capital standard, which shall serve as the documentation otherwise required in “a.” above, and
• The non-U.S. jurisdiction provides confirmation from a competent regulatory authority in such jurisdiction that information regarding an insurer and its parent, subsidiaries or affiliates, if applicable, shall be provided to the Superintendent, when New York is the lead state, in accordance with a memorandum of understanding or similar document between the Superintendent and such jurisdiction, including the IAIS Multilateral Memorandum of Understanding or other multilateral memoranda of understanding coordinated by the NAIC. When New York is the lead state, the Superintendent shall determine, in consultation with the NAIC committee process, if the requirements of the information sharing agreements are in force.

If the Superintendent, when New York is the lead state, makes a determination that differs from the NAIC list of non-U.S. jurisdictions that “recognize and accept” the GCC, the Superintendent must provide thoroughly documented justification to the NAIC and other states. Upon determination by the Superintendent that a non-U.S. jurisdiction no longer meets one or more of the requirements to “recognize and accept” the GCC, the Superintendent may recommend to the NAIC that the non-U.S. jurisdiction be removed from the list of jurisdictions that “recognize and accept” the GCC.