State insurance laws generally regulate the kinds and amounts of investments in which an insurer may invest. There are two NAIC model laws relating to the regulation of insurer investments – the NAIC Investments of Insurers Model Act (Defined Limits Version) and the NAIC Investments of Insurers Model Act (Defined Standards Version).
The defined limits version, adopted in 1996, is rules-based and includes specific limits on the kinds and amounts of investments permitted for property/casualty insurers, based upon various characteristics, categories, and groups of investments. The defined standards version, adopted in 1998, is more principles based. It sets standards such as authorization and prudence and provides for very broad classes of permitted investments subject to aggregate limitations for some categories. The alternative model offers principles for state regulators to use in determining the quality of an insurer’s investments.
The NAIC has encouraged states to use the models as a basis to their rules. Of course, individual states can enact and enforce their own regulations and limitations for insurers. The model Acts do not have specific requirements in terms of asset and liability matching, but NAMIC supports the position that investment funds must be available to support the company’s mission, which means determining the optimal asset mix to manage key risk factors on an insurer’s balance sheet. NAMIC also supports that investments shall be valued in accordance with the valuation standards of the NAIC, including the NAIC Purposes and Procedures of the Securities Valuation Office, the NAIC Accounting Practices and Procedures Manual, and the NAIC Annual Statement Instructions.
Regulation of insurance companies’ investment activities is a feature of every state’s regulatory regime but such regulation varies greatly from state to state. NAMIC supports the NAIC Accreditation Program that requires the state to statutorily mandate that securities owned by insurance companies be valued in accordance with those standards promulgated by the NAIC Securities Valuation Office. NAMIC has no issue with the need for independent verification of the quality of securities in insurers’ portfolios and acknowledges such independent verification as part of appropriate solvency regulation.