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Thursday, June 5, 2014

New Jersey State Introduces Insurer Financial Solvency Legislation

By: ABIA Outside Counsel Chrys D. Lemon, McIntyre & Lemon, PLLC

New Jersey state Assemblyman Craig Coughlin introduced a bill, A-3271, concerning insurer solvency.  While is would impact insurance groups operating internationally, it appears to have no impact on international banking.

This bill relates primarily to insurer financial solvency, so it should not have any effect on insurance sales or how they are marketed.  With respect to pricing of insurance products and their availability, the bill’s implementation of the principles-based reserving method of valuing reserves is designed to more appropriately tie reserves to risk, so conceivably the change in how reserves are valued could increase required reserving in some cases while reducing it in others.

The bill would incorporate into New Jersey law some recent revisions to three model laws that have been developed by the National Association of Insurance Commissioners (NAIC) and which have been adopted in some states. The revisions to the models relate to the solvency of insurers, including those that are part of a holding company system. New Jersey is acting to adopt these revisions so it can remain accredited by the NAIC. 
Summary of the major issues addressed by the New Jersey legislation:
  • New Jersey has already adopted the NAIC’s Insurance Holding Company System Regulatory Act (Model No. 440-1), which establishes standards for regulating transactions between the insurance entities within an insurance holding company and other affiliated entities.  The revisions give the insurance regulator additional supervisory powers to ensure regulated insurance companies meet a uniform national standard of financial solvency.  There also would be a new requirement for the annual filing of an enterprise risk report, to identify risks within the holding company that could pose enterprise risk to each insurer in the holding company.  The bill also adds some filing and reporting requirements related to changes in control over, or a merger involving, a domestic insurer. 
  • New Jersey would adopt the NAIC’s Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act (Model No. 505), which requires insurers and insurance groups to maintain a risk management framework and to regularly perform their own risk and solvency assessments under normal and severe stress scenarios. 
  • New Jersey would adopt the Principles-Based Reserving (PRB) Revised Standard Nonforfeiture Law for Life Insurance Model Act (Model No. 808) and the PBR Revised Standard Valuation Law (Model No. 802).  Principles-based reserving replaces a formulaic approach to determine life insurance policy reserves that has been used for many years (principles, rather than static formulas, would be used to assess an insurer’s financial status.)  This is needed as insurance products have become more complex.