January 3, 2025

By Makenzy Mohrman, Capstone Financial Services Director

Capstone believes insurers will continue to face more scrutiny over investment strategies, reinsurance practices, and the use of data intelligence tools. Exposure to catastrophe risks and extreme weather will likely prod policymakers to balance strengthening property and casualty markets with affordability goals. Firms active in annuities and title segments stand to benefit from the incoming Trump administration’s deregulatory approach.

Outlook at a Glance:

• Scrutiny of PE-Owned Insurers: Regulatory Efforts Become More Invasive, Potentially Suppressing Transaction Volume and Restricting Insurer Investment Flexibility
• Data Intelligence Vendors: Scrutiny of Insurer Use of AI, Predictive Modeling, and Other Products and Services Likely to Heighten as Cyber, Accuracy, and Bias Risks Grow
• P&C Insurance: Increasing Mitigation and Resilience Funding, and Long-Sought Market Reforms, Provide Robust Tailwinds for Carriers in High-Demand Markets
• Life and Annuities: Likely Death of DOL’s Retirement Security Rule Under Trump Mitigates Fiduciary Liability Risks Amid Growing Workplace Allocations via SECURE 2.0
• Title Insurance: Trump Administration Likely to Remove GSE and CFPB Regulatory Overhangs for Title Insurers

Scrutiny of PE-Owned Insurers: Regulatory Efforts Become More Invasive, Potentially Suppressing Transaction Volume and Restricting Insurer Investment Flexibility

Winners	N/A
Losers	PE firms focused on insurance strategies, current PE-owned insurers, offshore reinsurers; insurers engaging in similar capital management practices

Next year, the National Association of Insurance Commissioners (NAIC) will likely maintain and expand its focus on mitigating financial solvency and contagion risks in the insurance industry. Much of its focus is on certain practices traditionally characteristic of private equity (PE) owned insurers, though many of its priorities are broadening to include all US life insurers. These key priorities include more invasive oversight of the investment strategies employed by insurers, insurer use of complex and offshore reinsurance, and increasing transparency surrounding related-party transactions and ownership structures frequently seen within the industry.

The NAIC has signaled several issues it wants to examine closely. These include pursuing a more prescriptive approach to disclosure requirements across a variety of domains, further development of its internal credit ratings capabilities, and examining the efficacy of its current capital requirements and reserve adequacy testing approach. Capstone expects tighter scrutiny of credit ratings, reinsurance transactions, and potential changes to capital requirements, all with potential for meaningful impact on insurers.

Regulators to Focus on Insurer Investment Strategies

Capital charges for insurers will be a critical issue, given that a growing number of firms (particularly  PE-owned insurers) have pursued increasingly risky investment strategies. These strategies are predominantly characterized by the allocation of a growing share of invested assets and cash to collateralized loan obligations (CLOs), other structured and asset-backed securities (ABS), and private-label commercial mortgage-backed securities (Private Label CMBS). The NAIC’s key motivation in increasing its scrutiny of insurer investment strategies is to mitigate macroprudential risk.

Capstone believes it important for investors active in the insurance sector to stay attuned to various NAIC efforts in this domain. These efforts include the continuous review of capital requirements, the potential to establish cash-flow liquidity stress testing for certain asset classes, changes to asset adequacy testing (AAT) of insurer reserves (particularly in the context of asset-intensive reinsurance transactions) amid ongoing field testing of the relevant actuarial guideline, and more granular reporting obligations to inform NAIC capital charges and promote transparency. The NAIC also aims to implement a recently approved amendment to allow its Securities Valuation Office (SVO) to contest certain third-party credit ratings.

More Transparency Sought For Reinsurance

The NAIC is also continuing to develop its draft Actuarial Guideline (AG), which would require cash-flow testing for certain asset-intensive reinsurance transactions. The guideline is part of the group’s effort to increase transparency in the growing and complex reinsurance industry. The Life Actuarial Task Force (LATF) considered the draft reinsurance asset-adequacy testing guideline at the NAIC Fall Meetings in November. At those meetings, there was substantial discussion on when to allow aggregation, the relationship of the guidance to VM-30 (Actuarial Opinion and Memorandum Requirements) and AG 53 (Application of the Valuation Manual for Testing the Adequacy of Life Insurer Reserves), the proposed bifurcation of affiliated and non-affiliated transactions, and other related matters. The effort builds on the establishment of a Reinsurance Worksheet, a discretionary tool for state regulators to assess the reserve adequacy and solvency risks of a domestic ceding insurer resulting from asset-intensive reinsurance transactions.

The NAIC has signaled that the guideline will be adopted, pending a vote next year, with an anticipated effective date of year-end 2025. Focused on mitigating risks associated with declines in reserves following reinsurance transactions, NAIC’s approach appears to operate more as an intensive disclosure regime, though cash-flow testing outputs and heightened disclosure may lead to more prescriptive requirements, such as requiring additional reserves for insurers. Capstone will continue to monitor developments as state insurance regulators take an increasingly invasive and prescriptive approach to reinsurance transactions.

More Scrutiny From States on Affiliation and Control

The NAIC is also implementing updates to its Financial Analysis and Financial Condition Examiners Handbooks in 2025 reflecting its intense focus on affiliation and control between insurers, reinsurers, and private equity firms. The new guidance for regulators is focused on investment management agreements (IMAs) and other affiliated services agreements, disclaimers of affiliation, and acquisitions of control (Form A). It also indicates the increasingly prescriptive and invasive approach of the NAIC and state regulators as it relates reviewing control transactions, PE-insurer relationships, and other efforts to “obscure” ultimate control. Such efforts are motivated in substantial part by the perception that strategic investments in insurers by asset managers (including PE firms) and related-party transactions may give rise to conflicts of interest and shifts in insurer risk tolerance with the effect of influencing insurer investment decisions. The effort dovetails with the NAIC’s broader focus on the relationship between increasingly risky insurer investment strategies and broader financial system risk.

We believe more extensive disclosure obligations, as well as a more prescriptive and invasive supervisory approach by state regulators, could be a disincentive for PE funds weighing whether to enter or expand into insurance in the coming years. However, anticipated synergies could increase PE’s tolerance for a burdensome compliance environment. Capstone will continue to monitor developments in this domain throughout the coming year as the handbook updates take effect.

Data Intelligence Vendors: Scrutiny of Insurer Use of AI, Predictive Modeling, and Other Data Products and Services Likely to Heighten as Cyber, Accuracy, and Bias Risks Grow

Winners	Incumbent data intelligence and modeling vendors
Losers	Technology-forward insurers, reinsurers, and insurtechs; new entrant data intelligence, modeling, and AI vendors

AI and Model Scrutiny: NAIC and States Maintain Focus on Insurer Use of Advanced Data Tools

Capstone expects the NAIC to continue weighing how best to regulate the use of third-party data intelligence solutions across insurance markets, including how the industry uses artificial intelligence (AI), throughout 2025. In December 2023, NAIC adopted the Model Bulletin on the Use of Artificial Intelligence Systems by Insurers, which 17 states have since adopted. Four others, Colorado, New York, California, and Texas, have their own guidance that applies to how insurers use AI. While these states differ in how prescriptive they are (Colorado and New York have a heavier hand than Texas), guidance across states continues to hold insurers responsible for having accurate data in their decisions about rating, underwriting, claims handling, and other issues. This puts a substantial premium on governance, audit, data verification, and other controls.

The Innovation, Cybersecurity, and Technology Committee’s broad remit across the most innovative plane in the insurance domain—the use of data, models, and other advanced data solutions to inform insurer decisions—comes with significant risks to technology-forward insurers and reinsurers, third-party vendors, and insurtechs. The focus of regulators on third-party vendors, and the specter of registration or licensure requirements, could create barriers to entry for new insurtechs or model vendors, protecting incumbent vendors with more mature insurer relationships and sophisticated internal governance controls.

Adopting guidance on AI will be an important goal for insurance regulators in the coming year. This could happen through state-specific regulation or if states adopt the NAIC Model Bulletin. Capstone expects regulators to potentially increase their scrutiny of third-party vendors.  For example, Pennsylvania’s Insurance Department outlined its draft regulation at the NAIC’s November meeting, documenting the significant stakes associated with maturing the regulatory approach in this area. The department highlighted the potential need to have third-party vendors register as an advisory organization with the state insurance regulator, which requires consent to examinations. This dovetails significantly with the work of the NAIC’s Task Force on Third-Party Data and Models, which will continue working to develop and propose a framework for overseeing third-party data and predictive models, including assessing whether licensing requirements are necessary. Capstone will continue monitoring this highly active area throughout 2025.

P&C Insurance: Increasing Mitigation and Resilience Funding, and Long-Sought Market Reforms, Provide Robust Tailwinds for Carriers in High-Demand Markets

Winners	P&C and specialty insurers, including but not limited to Allstate (ALL), Travelers (TRV), and Chubb Ltd. (CB); specialty construction companies
Losers	N/A

P&C Market Reforms and Growing Mitigation Funding Create Tailwinds for Insurers

Catastrophe-prone states have increasingly focused on property and casualty (P&C) insurance market reforms as homeownership affordability and insurance availability challenges have accelerated. For example, states including California, Florida, and Louisiana have tried to reform their regulatory regimes to reduce litigation costs, promote greater pricing flexibility, streamline rate approvals, and limit potential distortions resulting from state insurer of last resort pricing decisions. These reform efforts are intended to encourage insurers to write policies in states exposed to catastrophes, and many were advocated for by insurance lobbies. Capstone expects such efforts to continue throughout next year, creating more favorable regulatory conditions for P&C insurers across these states.

In addition to P&C market reform efforts, Capstone notes the proliferation of mitigation and resilience funding programs. These programs exist at both the federal and state level in the form of grants, loans, tax incentives, and other subsidy-like programs. They include, for example, large, public resilience efforts supported in part by $1 billion in authorized funding through FEMA’s BRICS program, as well as funding programs for individual homeowners, now authorized in 20 states, that generally allocate funding for improvements to various structures (for example, stronger roofs, elevating homes with stilts) with the aim of mitigating a structure’s exposure to perils such as wildfire, flood, and wind. This funding offers direct tailwinds to insurers by reducing risks associated with entering or expanding into high-risk, catastrophe-prone geographic markets. Absent such efforts, an insurer might be unwilling to write business in particular areas due to the concentration and correlation of catastrophe risks. Capstone believes these reforms effectively expand P&C insurers’ addressable markets.

We believe these types of funding programs, often paired with mandating insurance premium discounts for consumers with stronger and more resilient structures, will continue to proliferate across the US next year and beyond. Regulators, industry, and other stakeholders are increasingly emphasizing the essential value of pre-emptive mitigation and resilience initiatives over-reactive and expensive recovery and reconstruction efforts. The increase in extreme weather events and stubbornly hard P&C insurance markets in catastrophe-exposed areas, including large and growing markets like Florida, Texas, and California, create fertile conditions for these programs (and other property and casualty reform efforts), offering new growth opportunities for P&C and specialty insurers in 2025.

Market Reforms From California’s Sustainable Insurance Strategy Add Stability

In September 2023, California Governor Gavin Newsom (D) and Insurance Commissioner Ricardo Lara (D) introduced the Sustainable Insurance Strategy to address key challenges facing California’s troubled P&C market, including the exit of major insurance companies such as  State Farm, Farmers, Allstate Corp. (ALL), and Travelers Cos. Inc. (TRV) following wildfires in 2017 and 2018. Growing wildfire risks and a restrictive regulatory environment under Proposition 103 limited insurer profitability and flexibility in pricing decisions, leading seven of the largest twelve insurers in the state to stop renewing or issuing new policies across the state in 2022. The Sustainable Insurance Strategy aims to stabilize California’s P&C market and encourage insurers to re-enter and/or resume underwriting across the state. It includes four main initiatives: 1) strengthening the California Fair Access to Insurance Requirements (FAIR) Plan (complete), 2) introducing and allowing insurer use of forward-looking climate catastrophe models (pending finalization), 3) allowing insurers to price in net reinsurance costs in rate-filings (not yet proposed), and 4) streamlining rate filing procedures and timelines (complete).

Capstone expects the Sustainable Insurance Strategy to be finalized in whole by June 2025. The full suite of reforms will benefit insurers in the market by accelerating rate-filing approval timelines and allowing insurers to more accurately reflect wildfire exposure in premium prices. Pending reforms permitting insurers to leverage forward-looking catastrophe models and incorporating reinsurance costs into rate proposals are significant wins for insurers operating in or contemplating (re)entry into the market. The reforms are likely to provide meaningful capital relief for P&C insurers in California and significant growth opportunities as insurers gradually re-enter and write more business across the nation’s largest insurance marketplace.

NAIC Pushes For Progress on Catastrophe Coverage

Catastrophe risks and their impact on access to affordable insurance will continue to be a subject of intense focus for the NAIC and state insurance regulators in 2025, especially in climate-exposed geographies. At its Fall National Meetings, the NAIC held multiple joint meetings focused on catastrophe risk, paying special attention to protection gaps for wildfire and flood insurance amid burgeoning risk exposure. The association also exposed its catastrophe modeling primer to the public.

Capstone believes there is momentum for evolution in the flood insurance regulatory domain in 2025, though political and legal challenges remain. Litigation, filed in 2023 by ten states and other impacted parties in the Eastern District of Louisiana, continues against the National Flood Insurance Program’s (NFIP) Risk Rating 2.0 program. NFIP provides a public option for flood insurance coverage for homeowners across the United States but has historically pressured the ability of private insurers to compete due to non-competitive pricing. Risk Rating 2.0, a key change in FEMA’s premium pricing methodology that created opportunity for substantial growth in the private flood insurance industry in recent years (and a rise in the cost of NFIP policies), has been widely criticized. Some members of Congress with constituents in impacted states and consumer advocates argue the reforms have increased the costs of homeownership and reinforced stubborn flood insurance protection gaps. A request for an injunction was dismissed by the Court in late March 2024, though the litigation is ongoing.

Other factors signal potential changes to the program in 2025. Growing calls in Congress (notably by Senator Bill Cassidy, R-LA) for comprehensive reform of NFIP, its history as a political football characterized by numerous short-term reauthorizations (with another one likely in December 2024), and the drama over Risk Rating 2.0 reflect a composition of forces with the potential to encourage meaningful legislative action. Indeed, NAIC staff suggested momentum for Congress to deliberate over potential reform bills in Spring 2025.

Capstone thus believes the flood insurance regulatory environment is ripe for near-term evolution, with impacts on the private flood insurance market contingent on the direction of changes. We will monitor this space extensively throughout 2025.

Life and Annuities: Likely Death of DOL’s Retirement Security Rule Under Trump Mitigates Fiduciary Liability Risks Amid Growing Workplace Allocations via SECURE 2.0

Winners	Insurers, annuity providers, broker-dealers, and other wealth management firms, including Prudential Financial Inc. (PRU), Voya Financial Inc. (VOYA), American International Group Inc. (AIG), MetLife Inc. (MET), Lincoln National Corporation (LNC), LPL Financial Holdings, Inc. (LPLA) and Ameriprise Financial Inc. (AMP)
Losers	N/A

Trump Administration Likely to Refuse to Defend DOL Retirement Security Rule

Earlier this year, the Department of Labor (DOL) finalized the Retirement Security Rule, which sought to define an “investment advice fiduciary” under the Employee Retirement Income Security Act (ERISA). It applies to certain investment advisors, broker-dealers, and insurance agents that provide advice to retirement investors. The rule, intended to displace a 1975 rule and reinstate regulation along similar lines as a vacated Obama-era rule, would have broadened the definition of an investment advice fiduciary under ERISA, closed the one-time advice “loophole,” and amended prohibited transactions exemptions fiduciaries rely on to receive potentially conflicted compensation, among other things. The rule substantially aligned with SEC’s Regulation Best Interest, though penalties for noncompliance would have been steep, given the obligations attached to being a “fiduciary.” It also would have established more stringent standards than the NAIC’s Suitability in Annuity Transactions Model Regulation (#275).

The controversial Retirement Security Rule was challenged in federal courts in Texas by the Federation of Americans for Consumer Choice (FACC) and the American Council of Life Insurers (ACLI). The courts stayed the rule in July, and granted a nationwide injunction, halting the rule’s September 23 effective date. The DOL appealed the stay in the Fifth Circuit Court in September. The cases have been consolidated, with a deadline for initial briefs set for December 20, 2024.

While the future of the Retirement Security Rule remains uncertain, we believe it is unlikely that the Trump administration will defend the rule in court. At the outset of Trump’s first term, he issued a Presidential Memorandum ordering the DOL to reexamine the (very similar) 2016 Fiduciary Rule, claiming that it “may significantly alter the manner in which Americans can receive financial advice and may not be consistent with the policies of [his] Administration.”  Moreover, in the unlikely event that the Trump administration continues to defend the rule, we believe it will be vacated as it closely resembles an Obama-era rule that the Fifth Circuit vacated in 2018. The court held that the rule was inconsistent with the statutory text of ERISA as well as arbitrary and capricious.

Potential rollback of the Retirement Security Rule under a new Trump administration, whether rescinded or vacated, would likely signal greater reliance on state insurance regulators for the supervision and enforcement of NAIC Model Regulation 275 as applied to fixed annuity brokers, adopted in substantially similar form across all states other than New York. Capstone will continue to monitor developments in this domain throughout 2025.

Tailwinds from SECURE 2.0 Continue to Drive Increased Workplace Allocations

Capstone believes that the enactment of SECURE 2.0 in 2022 created a more favorable environment for including annuities in workplace retirement plans. The law addresses some of the previous barriers to adopting annuities, including the complexities of required minimum distributions and investment limits.  According to survey data from Alight, a large recordkeeper, 12% of employers had annuities in their defined contribution (DC) plan in 2023, with another 38% of employers demonstrating interest in offering annuities in the future.

SECURE 2.0 would also make it easier for plans to purchase pension-like annuities, such as qualifying longevity annuity contracts (QLACs). The law raised the cap on how much money individuals can allocate to their retirement accounts to purchase QLACs to $200,000, indexed for inflation, up from the previous limit of $125,000 or 25% of the account’s value. This increase makes QLACs more attractive and accessible for retirees seeking guaranteed lifetime income.

As annuities come to represent an increasing share of retirement plan assets, we expect participation in workplace retirement plans will also grow. Several provisions of SECURE 2.0 that boost plan access will go into effect in 2024, and beginning in 2025, employers will be permitted to automatically enroll participants when they become eligible, though employees may opt out of coverage. The initial automatic enrollment amount must be at least 3%, but not more than 10% of a participant’s compensation, with at least 1% increasing each year until it reaches at least 10%. We believe this, paired with previously implemented provisions and a reduction in fiduciary liability risk for annuity providers, will provide robust tailwinds for participation in workplace retirement plans throughout 2025.

Title Insurance: Trump Administration Likely to Remove GSE and CFPB Regulatory Overhangs for Title Insurers

Winners	Title insurers including Fidelity National Financial Inc. (FNF), First American Financial Corp. (FAF), Old Republic International Corp. (ORI), and Stewart Information Services Corp. (STC)
Losers	N/A

Capstone believes that housing regulators in the incoming Trump administration will be less aggressive in cracking down on housing closing costs than during the Biden administration. Amid record-low housing supply, the Biden administration sought to use administrative tools to achieve “wins” on housing with the goal of incrementally bringing down the costs of homeownership. (One reason Biden turned to this strategy is the narrow Democratic majorities he governed with in his first two years, and Republican control of the House in his last two meant major housing supply legislation was politically unfeasible.) Among the Biden administration’s targets were title insurance companies and credit reporting agencies. We believe the Trump administration will sideline these efforts, as detailed below.

GSE Pilot Program Likely Sidelined Under New FHFA Leadership

Title insurance costs have been in the crosshairs of the government-sponsored enterprises (GSEs) for several years. In May 2020, Freddie Mac began permitting the use of title insurance alternatives—specifically attorney opinion letters (AOLs)—that meet its requirements. In April 2022, Fannie Mae followed suit, announcing that it would also accept AOLs in lieu of title insurance as long as the letters satisfied specific criteria. Since then, at the direction of the FHFA, the GSEs have intensified their focus on reducing closing costs for borrowers as part of their goal of making homeownership more attainable in an increasingly expensive market.

In June 2022, FHFA said it had approved the GSEs’ Equitable Housing Plans. The plans, published by Fannie Mae and Freddie Mac, were designed to tackle housing affordability and accessibility. Each outlined action the GSEs intend to take over the next three years to reduce the cost of title insurance, including setting up pilot programs to promote the use of AOLs and to explore other alternatives to title insurance that could lower closing costs. In March 2024, FHFA announced that it approved a new Fannie Mae “Title Acceptance Pilot” that will let participating lenders bypass the GSEs’ title insurance requirement on certain refinances where the loan-to-value ratio was at or below 80% and the property is “free and clear of any prior lien or encumbrance.” While we believe the pilot program will be relatively small and have a muted impact, it represents the GSEs’ continued focus on title insurance and the risk that future action by the GSEs could have on the industry.

We believe the FHFA, in the incoming Trump administration, will reverse course on the GSEs equitable housing finance plans and other activities that FHFA deems outside the GSE’s chartered missions. Capstone will continue to track the priorities set by new FHFA leadership and examine how they will affect initiatives like Fannie Mae’s Title Acceptance Pilot.

CFPB Likely to Reverse Course on Closing Costs Scrutiny

Capstone believes that the incoming Trump administration in unlikely to continue the Biden administration’s efforts to rein in what it has referred to as “junk fees” charged by financial services companies which the CFPB claims are excessive and, in some instances, predatory. In March 2024, the CFPB published a blog post titled, “Junk fees are driving up housing costs. The CFPB wants to hear from you.” In it the CFPB identified high closing costs as a hurdle to homeownership and indicated it believes certain closing costs are “junk fees.” In the post, the CFPB names title insurance and credit reporting fees as two costs borrowers pay at closing that could be problematic. The CFPB argued that both of these costs are high due to “little competition” in the market, and argued that borrowers “cannot pick the provider and do not benefit from the service.”  

On May 30^th, the CFPB released a request for information (RFI) seeking input on the costs imposed on borrowers through the home-buying process. In it, the CFPB again highlighted title insurance costs as excessive and burdensome to homebuyers. The RFI is the first step to rulemaking, which likely would have been promulgated under a second Democratic administration. However, given Republicans’ disdain for the CFPB’s supposed overreach—and broad expectations that the CFPB will be curtailed under a second Trump administration—we believe a rulemaking is unlikely to occur. Abandonment of the rule is a boon to title insurance companies and other service providers who would have likely been subject to a new regulation.

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