Monthly LRA Update

REGULATORY DEVELOPMENTS

Agencies Extend Comment Period on Proposed Rules to Strengthen Large Bank Capital Requirements

On October 20 the banking regulators announced that the comment period for the so-called Basel III Endgame proposed rule will be extended from November 30 to January 16, 2024.

We have completed an initial review of the proposed rule’s potential implications for BOLI and have shared our findings with affected clients and other interested parties. We anticipate working on a comment letter to seek clarification on a few topics and welcome further discussion on the proposal.

Federal Reserve Board Finalizes Capital Requirements for Supervised Insurance Organizations

On October 6 the Federal Reserve Board finalized a rule establishing capital requirements for insurers supervised by the Board (“Supervised Insurance Organizations” or “SIOs”). The final rule is substantially similar to the proposed rule that was issued in September 2019.

The final rule includes a framework, known as the Building Block Approach, whereby an SIO is required to aggregate its top-tier company’s capital requirements with its subsidiaries’ requirements to determine its enterprise-wide requirement.

At present, there are five SIOs that will be subject to Board supervision:

• Ameriprise Financial, Inc.
• The Auto Club Group
• First American Financial Corporation
• Ohio Farmers Insurance Company
• United Services Automobile Association

We do not expect this development to have any impact on the BOLI/COLI industry.

JUDICIAL DEVELOPMENTS

MOVEit Data Breach Litigation – Update

On October 4 a United States Judicial Panel on Multidistrict Litigation issued a Transfer Order to centralize the litigation regarding a vulnerability in a widely-used file transfer software that resulted in a widespread data security breach.

According to the Transfer Order, the panel has been notified of 91 related actions in 22 districts. Several parties (both plaintiffs and defendants) opposed centralization. The panel elected to centralize the litigation in the District of Massachusetts, primarily because the owner of the MOVEit file transfer software, Progress Software Corp., is headquartered in Burlington, MA.

The Transfer Order noted

All actions can be expected to share factual questions arising from allegations that a vulnerability in Progress Software Company’s MOVEit Transfer and MOVEit Cloud file transfer services was exploited by a Russian cybergang in May 2023, which to date is estimated to have compromised the personally identifying information (PII)4 of over 55 million people.

We will continue to monitor the status of this multi-district litigation.

ACCOUNTING DEVELOPMENTS

IRS Issues Final Regulations to Update Pension Plan Mortality Tables

On October 20 the IRS published final regulations setting new mortality tables to be used for most defined benefit pension plans (88 Fed. Reg. 72,357), relevant in determining minimum funding requirements and minimum lump-sum distributions of such plans as codified in IRS Section 430. These regulations will apply to valuation dates starting January 1, 2024. The last IRS update to these mortality tables occurred in October 2017. The new regulations were initially proposed in April 2022.

The new mortality tables use the Pri-2012 Private Retirement Plans Mortality Tables Report (Pri-2012 Report) published in 2019 by the Retirement Plan Experience Committee (RPEC) of the Society of Actuaries (SOA), scaled with mortality improvements using the Mortality Improvement Scale MP-2021 Report (MP-2021 Report) published by RPEC. The MP-2021 Report is the most recent mortality improvement scale published by RPEC, with historical population data through 2019. RPEC chose not to publish a Mortality Improvement Scale in their 2022 Mortality Improvement Update, due to, as the IRS noted, concerns “it would not be appropriate to incorporate, without adjustment, the substantially higher rates of mortality experience from 2020 into the models RPEC had previously used to project future mortality” (with higher mortality a result both directly and indirectly from the COVID

pandemic). RPEC did recommend some increase in mortality rates in their update without specifying the level of increase.

In their final rules, the IRS adopted the mortality tables it noted above (Pri-2012 Report with mortality improvement using the MP-2021 Report) with two major modifications to the improvement scale to create what it refers to as the 2024 Adjusted Scale MP-2021 Rates:

1. Any mortality improvement rates in the MP-2021 Report in the years 2020, 2021, 2022, and 2023 were eliminated from the IRS final mortality tables.
2. In response to section 335 of the SECURE 2.0 Act, any annual mortality improvement in years 2024 or later was capped at 0.78%.

It is worth noting that RPEC released another annual Mortality Improvement Update (RPEC 2023 Mortality Improvement Update) this month, which was not referenced in the final IRS regulations. RPEC again declined to provide an update to the mortality improvement scale as it continues to review mortality data coming out of the COVID pandemic. In that report, RPEC noted “The first half of 2023 has shown population mortality levels that are close to pre-pandemic trends in aggregate… While there is still considerable excess mortality among working-aged adults during this period, mortality rates for ages over 65 have been below projections based on pre-pandemic trends.” They also noted in the report that mortality for nearly all causes of death was higher in 2020-2021 than in recent prior years (excess mortality was not just from COVID-19 deaths), and that attempting to separate excess mortality due to the pandemic and other excess mortality would both be impractical due to data limitations and not recommended since this other excess mortality is likely inextricably linked to the pandemic.

The impact of the new IRS mortality table rules on funding requirements for defined benefit pension plans will certainly vary, due to the complex nature of modified generational mortality tables and also the actual mortality experience for those plans large enough to blend their own mortality experience with the IRS rule. However, it is important to note that the increase in interest rates in recent years will have a relative effect of decreasing

defined benefit pension plans’ funding requirements, which could in many situations be more impactful than changes in mortality assumptions.

OTHER DEVELOPMENTS

Basel Committee on Banking Supervision Report on 2023 Banking Turmoil

On October 5 the Basel Committee on Banking Supervision released a Report on the 2023 Banking Turmoil. In addition to reviewing what happened at Silicon Valley Bank, Signature Bank, Credit Suisse and First Republic, the report includes “lessons learnt” for both bank supervision and prudential regulation.

On the regulatory front, the report focused on liquidity standards, interest rate risk and the impact of unrealized losses of HTM securities in relation to regulatory capital.