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The highlight of this meeting was an address on healthcare given by Vice President Joe Biden. Biden stated that the Administration felt that the unjustified increases in health insurance rates were unsustainable and unjustifiable, noting that, while inflation in 2008 was a negative 7%, premiums had gone up 5.5%. He asserted that the Administration does not want to do away with private insurers and believes that health insurers should be able to make a profit but, he said, there needs to be accountability and preexisting condition exclusions, life-time caps, exorbitant co-pays and deductibles, cost-sharing for preventive care, rescissions, and gender rate discriminations had to go.

In addition, Biden stated, insurers had to accept all applicants and should extend family coverage to young adults and that policies had to be guaranteed renewable, but to do these things and not be put at a competitive disadvantage all insurers needed to be subject to the same rules. He told the insurers in the audience that in exchange for having to write sicker people they would be gaining a large pool of paying customers – some 30 to 40 million of the currently uninsured, many of whom are young and healthy – which would keep their costs down. He argued that healthcare was a moral issue as anyone who has been denied coverage for treatment because it was deemed to be experimental or maintenance would confirm.

Biden stated that there should be a legitimate debate about the details of what the reform should look like but there is no debate about what reform will happen to the economy and the healthcare system if nothing is done because the status quo is unsustainable. He stated that the government is currently funding 46% of healthcare; that the country could not get its fiscal house in order unless it spends to fix the problem; that in ten years 20% of earnings will be spent on healthcare; and that America’s health and wealth are not separable.

Biden was complementary of state insurance regulators, telling them that their input in the process would be the key to the success of healthcare reform and that they were best equipped to educate consumers and a critical line of defense against fraud.

Joint Executive (EX) Committee/Plenary

The joint Executive/Plenary session was chaired by NAIC 2009 President Commissioner Roger Sevigny (NH). A report of the Executive (EX) Committee held the prior day was adopted by Plenary.

Executive Committee

Commissioner Sevigny chaired this meeting which had a delayed start due to the address on healthcare reform made by Vice President Joe Biden. Under the new procedures for parent committees there is very little to be learned by attending this meeting. In spite of Sevigny’s statement that the material for the meetings are now required to be made available on the NAIC website one hour before the start of the meeting as the reason oral reports would not be given, written reports which he stated were in the commissioners’ meeting material had not been not posted either before or immediately after this meeting for the following agenda items:

· EX-1, updates on amendments under development of ten model laws, and reports from each of the Executive Committee task forces and working groups on the progress on their respective charges. [The EX-1 report was posted the following day]

Executive adopted minutes of two meetings that had been held in August, its 2010 charges, and an editorial change to its by-laws, (all of which were available on line). It also adopted written reports of the June 2009 meetings from each of its task forces and working groups.

Model Law Development Requests: Requests to develop amendments to the following three models were approved:

· Amendments to Long-Term Care Insurance Model Act. Commissioner Kevin McCarty (F) stated that “B” Committee needed to make a change to Section 10 (Authority to Promulgate Regulations) of the model to make it consistent with revisions to the Long Term Care Insurance Model Regulation that established an external review process for benefit rigger determinations.

· Amendments to Insurance Holding Company System Regulatory Act. Commissioner Ann Frohman (NE) stated that this request, as well as the next one, came from the Group Solvency Issues (EX) Working Group, which has recommended revisions to the model act and regulation to address some of the risks to insurers that are part of a holding company that were highlighted during the recent economic crisis.

· Amendments to Insurance Holding Company System Model Regulation with Reporting Forms and Instructions.

Formation of New (EX) Task Forces: The Committee approved the formation of a Broker Compensation (EX) Task Force to address issues concerning settlements reached with the states’ attorneys general by certain producers and insurers with respect to their 2004 through 2007 contingent commission arrangements. It also approved the formation of a Long-Term Care (EX) Task Force. Commissioner McCarty explained that this Task Force will address premium deficiencies and rating issues with certain closed blocks of long-term care business that are causing some insurers to fail. He attributed the premium and reserve issues to persistency and utilization which have exceeded the assumptions used by insurers when pricing their products and stated that seniors are being subjected to significant rate increases at a time in their lives when they can least afford them. McCarty stated that the Task Force would report directly to the Executive Committee because it will address issues that are the responsibilities of different several committees.

Update on Model Law Development Efforts: The Committee adopted, without discussion, written reports of the progress on the following models. The reports were not included in the handout and have not been posted on the NAIC website:

· Amendments to the Standard Nonforfeiture Law for Life Insurance;

· Amendments to the Standard Valuation Model Law;

· Amendments to the Annuity Disclosure Model Regulation;

· Amendments to the Suitability in Annuity Transaction Model Act;

· Amendments to the Long-Term Care Insurance Model Regulation;

· Amendments to the Risk-Based Capital (RBC) for Health Organizations Model Act;

· Amendments to the Nondiscrimination in Health Insurance Coverage in the Group Market Model Regulation;

· Amendments to the Small Employer Health Insurance Availability Model Act (Prospective Reinsurance With or Without and Opt-Out);

· Amendments to the Model Regulation to Implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act; and

· Amendments to the Individual Health Insurance Portability Model Act.

Plenary Session

Plenary adopted by consent the Committee, Subcommittee, and Task Force minutes of the 2009 Summer National Meeting held in Minnesota with the exception of the following items that were presented and adopted separately:

· Report on Continuing Compliance with Reciprocity Requirements of the Gramm-Leach-Bliley Act: Director Linda Hall (AK) stated that adoption of this report will update the standards for determining compliance with the GLBA. She noted that some states will need to make legislative changes by July 1, 2010 in order to remain in compliance. By adopting the report Plenary also adopted the guidelines for determining compliance. California abstained from the vote.

· Revised Uniform Applications for Producer Licensing: Director Hall noted that this item had been considered for adoption at the December 2008 meeting but had been sent back to the Producer Licensing (EX) Task Force for reconsideration of a deletion of certain background questions on the renewal application. The revised applications were adopted over the objections of California, Florida, and New York.

Plenary then heard the following Committee reports:

Life Insurance and Annuities (A) Committee: Commissioner Tom Sullivan (CT) reported on the “A” Committee meeting that been held the prior day. [See a comprehensive “A” Committee report later in this newsletter.]

Plenary took a separate vote to adopt amendments to the Standard Valuation Law. The revised SVL was adopted, with New York and Wisconsin voting no, after an extensive debate and rejection of a proposed amendment offered by Wisconsin which would have required that the Valuation Manual include prescribed floors. New York Superintendent Jim Wrynn stated that New York was unable to commit to the revised SVL because the Valuation Manual was not yet complete and there were too many open questions, that the SVL left too much standard setting authority to the Manual, that testing had not yet been done, and, although it is known that there will be a floor in the Manual, what the floor will look like is unknown and it could turn out to be too low. Wisconsin then offered the amendment and the discussion was tabled so that it could be printed and distributed to the members. After it was distributed it was debated and voted down.

Plenary took a separate vote on a number of actions taken by “A” Committee in response to the financial crisis. It adopted revisions to the Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities. Commissioner Mary Jo Hudson (OH) noted that the use of the mortality tables permitted by the revision were tied to specific accounting treatment for deferred premium assets so she wanted this issue to be specifically addressed in the Accounting Practices and Procedures Manual. Also adopted in response to the financial crisis were amendments to Valuation of Life Insurance Policies Model Regulation, amendments to the Actuarial Opinion and Memorandum Regulation, and the Actuarial Guideline 1c – Interpretation of the Calculation of the Segment Length with Respect to the Life Insurance Policies Model Regulation upon a Change in the Valuation Mortality Rates Subsequent to Issue.

Health Insurance and Managed Care (B) Committee: Commissioner Sandy Praeger (KS) gave this report. Plenary took a separate vote to adopt amendments to the Long-Term Care Insurance Model Act and the Long-Term Care Insurance Model Regulation.

Property and Casualty Insurance (C) Committee: Director Michael McRaith (IL) gave a report of “C” Committee’s June 2009 meeting. Plenary took a separate vote to adopt the white paper, Natural Catastrophic Risk: Creating a Comprehensive National Plan. [See a comprehensive report of “C” Committee’s September meeting in this newsletter.]

Market Regulation and Consumer Affairs (D) Committee: Commissioner Kim Holland (OK) gave a report of “D” Committee’s June 2009 meeting.

Financial Condition (E) Committee: Commissioner Al Gross (VA) gave a report of “E” Committee’s June 2009 meeting. [See a comprehensive report of “E” Committee’s September meeting in this newsletter.]

Plenary took a separate vote to adopt a proposal entitled “Financial Condition (E) Committee Handling of Technical Changes”. Gross explained that the proposal calls for an expedited procedure for the adoption and implementation for the numerous changes to financial solvency handbooks, formulas, and other forms of non-controversial technical guidance that is routinely adopted by “E” Committee (e.g.; changes to the NAIC Blanks, Accounting Practices & Procedures Manual, Risk-Based Capital formulas, Financial Examination & Analysis Handbooks) so that the guidance can be implemented in a timely manner. Under the proposal a list of technical and routine items adopted by the E Committee would be provided to the Joint Executive Committee/Plenary within one week of the completion of the national meeting. The Joint Executive Committee/Plenary would have seven to ten days to review the list and voice objections to any specific item(s). Those items for which no objections were raised would be considered adopted, similar to the current consent agenda process, and would be inserted into the appropriate publication and/or made available to the industry and other parties for implementation. A joint Executive Committee/Plenary conference call would be scheduled to consider adoption of any item(s) for which objections were raised.

Plenary also took a separate vote to adopt amendments to the Risk-Based Capital (RBC) for Health Organizations Model Act.

Financial Regulation Standards and Accreditation (F) Committee: Superintendent Joe Torti reported that New York’s accreditation status was restored during the regulator-to-regulator meeting of “F” Committee and that Maryland and Oregon were reaccredited.

Plenary also took separate votes to adopt four changes to the accreditation standards:

· The 2006 revision to the Risk-Based Capital for Insurers Model Act that incorporates a new trend test for property and casualty companies as a way for the company action level to be triggered was adopted as an amendment to the capital and surplus accreditation standard effective January 1, 2012;

· A revision to receivership accreditation standard to change the model law reference to the Insurer Receivership Model Act (IRMA) as the example of a receivership scheme that regulators should follow was adopted to be effective immediately. Delaware opposed adoption to this change to the receivership accreditation standard;

· The 2006 revisions to the Model Regulation Requiring Annual Audited Financial Reports (aka, Model Audit Rule), that requires insurers comply with certain business best practices related to auditor independence, corporate governance, and internal controls over financial reporting, was adopted effective January 1, 2010. Torti stated that the expedited effective date had been agreed to by industry and regulators when the revised rule had first been drafted and since Model Audit Rule revisions had already been implemented by 31 states and the remaining states are currently in the process of implementing the changes the earlier effective date should not be a problem; and

· A new Part D to the accreditation standards entitled “Organization, Licensing and Change of Control of Domestic Insurers” as well as an addition to the Part A standards requiring that “State law should provide for a regulatory framework for the organization, licensing and change of control of domestic insurers” was adopted effective January 1, 2012. Torti noted that the GAO has issued reports recommending the addition of an accreditation standard for company licensing and changes in control.

International Insurance Relations (G) Committee: Commissioner Sandy Praeger (KS) gave a report of “G” Committee’s June 2009 meeting. [See a comprehensive report of “G” Committee’s September meeting in this newsletter.]

Government Relations Leadership Council

The Government Relations Leadership Council meeting was chaired by Commissioner Roger Sevigny (NH). The Council heard a presentation from State Representative Greg Wren (AL) on behalf of COFIR (Coalition Organized for the Future of Insurance Regulation). Wren reported on the efforts of COFIR which was formed five years ago to meet with members of Congress in order to educate them regarding how the strengths of state insurance regulation have prevented the kinds of financial failures that occurred in the banking industry. COFIR is concerned that some form of federal preemption of state insurance laws may be slipped into the financial services reform bills that are working there way through Congress. He noted that 65% of the current members of Congress had served in state legislatures and stated that COFIR wants to ensure that these past state representatives do not forget their roots. He urged the commissioners to contact their congressional delegations to educate as to why an optional federal charter or any other form of federal oversight of the insurance industry would be disastrous for consumers and to get their governors on board.

The Council voted to allow the Reinsurance (E) Task Force to move forward and attempt to find sponsors for a proposed federal legislation, the Reinsurance Regulatory Modernization Act, which had been drafted by the Task Force. Commissioner Scott Richardson (SC) gave an overview of the proposal; it would establish two types of reinsurers, a national reinsurer and port-of-entry reinsurer, each of which would be subject to regulation by a single state that has been authorized by a federally appointed Reinsurance Supervision Review Board as a home state and/or port-of-entry state supervisor. Domestic reinsurers would be regulated by a home state supervisor and non-US reinsurers that are domiciled in non-US jurisdictions determined by the Review Board to be qualified would be regulated by a port-of-entry state supervisor.

The Review Board would have 15 members appointed by the President with the advice and consent of the Senate; ten members would be state insurance regulators and the remaining five would be representatives of Treasury, Commerce, and the Office of the US Trade Representative. To qualify as a national of port-of-entry state reinsurer, an entity would be required to have at least $250 million in capital and surplus and to post collateral of between 0% and 100% of US premiums assumed as determined by the rating assigned by its state supervisor.

Richardson stressed that only a state’s expertise and capabilities would determine if it qualified as a supervisor, although this could not be explicitly stated in the proposed legislation. A representative from Vermont thanked the Task Force for recognizing that small states may have the expertise and capacity to qualify. It was noted that, because of their constitutions, approximately one-third of the states would not be able to be designated as a supervising state. Sevigny stated that the proposal should be thought of as a framework.

Federal Updates: Staff stated that it was closely monitoring financial services regulatory reform developments in Congress for any potential impact on the insurance industry, particularly with respect insurance company subsidiaries caught up in the regulation of systemic risk of conglomerates deemed too big to fail; the protection of policyholders under any resolution authority Congress may create; the possible dilution of policyholder protections by the new Consumer Financial Protection Agency (CFPA); and the involvement of the proposed Office of National Insurance in insurance regulation. (It was noted that the ONI was designed to have more authority than the Insurance Information Office that was proposed last year.) Concerning the CFPA, Staff is trying to have oversight of the credit aspects of title, mortgage guarantee, and credit insurance removed from the proposal.

Representative Barney Frank (MA), chair of the House Financial Services Committee will be holding hearing over the next few weeks on the Administration’s proposals and has indicated he will follow the Obama model; but Senate Banking Committee Chair Chris Dodd (CT) has introduced a proposal to merge four of the bank regulatory agencies into one.

Rating Agency (EX) Working Group

The Rating Agency (EX) Working Group held a day long hearing to address the issues with the perceived failures of the NRSROs in the credit crisis. Downgrades and failures of RMBS dominated the discussion. Testimony was taken from regulators, industry, and consumer representatives to who described the current use of ratings and criticisms with the current system.

The rating agencies and firms that operate competing business models had been asked to describe what happened in the crisis, what has been done to address the issues, and the potential effectiveness (or ineffectiveness) of those efforts. Several proposed reforms, including broader disclosures, requiring re-rating of prior rated structures whenever the rating agency changes its model, establishing standards for analysts, and closing the analyst’s revolving door for a stated period with respect to firms for which the analyst had rated securities.

Lastly, alternatives were discussed, including expanding the SVO to perform all credit assessments, using additional NRSRO products (such as severity predictions), looking to cash flow analysis from third-party firms to determine RBC for certain complex securities. The hearing will inform efforts in the coming quarters to address the perceived failures.

Solvency Modernization Initiative (EX) Task Force

Commissioner Al Gross (VA) chaired the meeting of the Solvency Modernization Initiative (SMI) Task Force. The main purpose of the meeting was to receive reports from its working groups. Because of the appointment of Ramon Calderon as Director of the NAIC’s Center for Insurance Policy and Research, the International Solvency and Accounting Working Group has been divided into two working groups.

International Solvency: Commissioner Christina Urais (AZ) has been appointed as the new chair of the Working Group. The working group received a report from Kris DeFrain (NAIC) on the activities of the International Association of Insurance Supervisors (IAIS) Solvency Subcommittee. The Subcommittee is currently expanding its capital, ERM, internal models papers to include group issues. The Subcommittee is also working on a standard on investments, supervisory review and valuation. The NAIC wants to ensure that the valuation paper is not released until after the IASB issues its Exposure Draft on Insurance Contracts. The main issue under debate is the use of a market consistent measurement basis and whether general purpose accounting statements should form the foundation of solvency valuation.

The IAIS Solvency Subcommittee will be meeting in San Francisco just prior to the NAIC December meeting so the Working Group will consider holding a joint session on December 5 with the Subcommittee. The IAIS is also in the process of revising its Insurance Core Principles (ICPs); DeFrain said that any changes to the ICPs would affect the standards that form the basis of the International Monetary Fund’s Financial Sector Assessment Program (FSAP). Joe Fritsch (NY), who serves on the IAIS Solvency Subcommittee, said that the principles should remain high level and flexible.

George Brady (NAIC) reviewed the efforts of the IAIS to explore the possibility of a common international assessment framework for internationally active insurance groups. He also reviewed the IAIS Roadmap for 2010-2011, which focuses on financial stability concerns including capital, group supervision, and cross border supervision issues. He suggested that the Working Group should begin to look at the equivalency and mutual recognition proposals being considered.

Ramon Calderon (NAIC) reviewed the NAIC’s draft roadmap on the Solvency Modernization Initiative developed earlier this year. The roadmap calls for “E” Committee to develop a paper on US Solvency Principles within six months, conduct a study over the course of the next year of other solvency systems, and selected research projects. The Working Group approved the Roadmap with the addition of a line on the FSAP evaluation being conducted of the US insurance regulatory system and accepted its charges.

The Working Group will hold a special regulator-to-regulator meeting October 5-6 in New York to hear presentations on the Canadian and Swiss solvency systems. The NAIC is also offering a webinar on the Swiss Solvency Test. Information on this can be found on the NAIC website. There is a non-regulator charge of $99.

Group Solvency: The Working Group, co-chaired by Director Ann Frohman (NE) and Danny Saenz (TX), focused on two issues: the Model Holding Company Act and future action on group regulatory issues. The Working Group circulated a matrix of assignments on its long and short-term efforts. The Working Group’s goal is to complete draft changes to the Model Holding Company Act by the end of October, with a public comment period to follow in November. Specific proposals were discussed by each of the drafting groups including authority over affiliates, fees, and control.

The Working Group discussed areas for future research including data reporting, holding companies, and federal preemption. The Working Group received a report from Jim Armstrong (IA) on the work of the Subgroup on Supervisory Colleges and requested comments in the next two weeks on the IAIS proposed Guidance Paper on the Use of Supervisory Colleges in Group-Wide Supervision. The Subgroup will be developing training materials on colleges.

Steve Johnson (PA) suggested that the Subgroup also look at how to move the colleges beyond introductory issues into in-depth focused topics and he urged the NAIC to address funding issues for travel to colleges. Armstrong said the Subgroup would be developing a white paper. The Working Group discussed the difficulty in getting information from certain Federal agencies related to affiliates. Linda Duzick (OTS) said that protocols for exchange of information had been developed but may be outdated. She added that OTS will be holding a new round of colleges soon.

The Working Group reviewed and accepted its charges and approved the minutes on the interim calls.

International Accounting: Mel Anderson (AR) is the new chair of the Working Group. The Group heard reports from Rob Esson (NAIC) on recent developments at the International Accounting Standards Board (IASB) regarding fair value, financial instruments, and insurance contracts. The IASB last week on a split vote of 8-6 tentatively selected an IAS 37 measurement approach as the basis for measurement of insurance liabilities. Esson regarded this approach as a transfer approach, which is inappropriate for insurance where there is no ability to transfer a liability. Esson said he still expects the Exposure Draft on Insurance Contracts to be released on early 2010. Esson, on behalf of the IAIS and Joe Fritsch (NY), on behalf of the NAIC, have been invited to lead an Education Session on insurance issues with the US Financial Accounting Standards Board (FASB) on September 30.

Esson also reviewed the presentation with the Working Group, which he presented to the IASB in July in his role as chairman of the IAIS Insurance Contracts Subcommittee. In his remarks he stressed the belief of many that it is essential to move quickly to complete the Insurance Contracts Standard. Ed Stephenson (GNAIE) added that it was more important in GNAIE’s opinion to make sure the standard was correct. The Working Group charges were amended to include coordination with the SAP Working Group in responding to FASB.

Principles-Based Reserving: The PBR Working Group received an update from Larry Bruning (KS), chair of the Life and Health Actuarial Task Force (LHATF), regarding the Valuation Manual which the Task Force hopes to complete by December 2009. Bruning reported that members of LHATF wanted the Manual to be completed prior to introducing the Standard Valuation Law into their state legislatures. The Working Group also adopted a revised corporate governance document setting forth the broad responsibilities for a life insurer’s board of directors, senior management, and actuaries. The Working Group exposed for comment a draft memorandum to the Executive Committee discussing the possibility that the NAIC serve as the statistical agency or data repository for regulators regarding data on principles-based reserving. Commissioner Linda Hall (AK) suggested that there be a meeting in December of all the statistical agents to discuss the issue. Finally, the Working Group referred a draft fiscal impact study related to training on PBR to LHATF for input.

Other Business: The Task Force received a report from Lou Felice (NY) on corporate governance issues and the near completion of a section in the Financial Condition Examiners Handbook on corporate governance for Principles Based Reserving (PBR). The Task Force voted to establish a new working group on corporate governance to look at NAIC policy and best practices in corporate governance beyond PBR, with the possible development of a model law. The membership of the working group will reflect the boarder charge. Larry Bruning (KS) asked that the working group look at inter-company transactions between insurance and non-insurance units and training issues for Board members.

The Task Force heard a presentation by Dr. Mary Weiss on the July Symposium the NAIC sponsored on US insurance regulation. Dr. Weiss reviewed the discussion on three main topics: capital adequacy standards, regulatory process/intervention and resources, and holding company/group supervision. She said there was general agreement that state regulation works, but that work needs to be done to incorporate enterprise risk management into the solvency surveillance system, and more emphasis needs to be placed on corporate governance and internal controls.

The Task Force adopted the charges for the Task Force and its working groups with changes as recommended by the working groups and added a charge of International Solvency that it look at emerging developments in various states as part of its review of solvency modernization initiatives. The Task Force expects to recommend charges to other NAIC committees during the course of the year.

NAIC/Consumer Liaison Committee

Superintendent Morris Chavez (NM) chaired this meeting.

Consumer Disclosures: Dan Schwarcz (University of Minnesota Law School) introduced this topic by explaining how consumers’ biases often result in poor economic choices, such as choosing policies with the lowest deductibles or dropping catastrophe coverage based on the infrequency of catastrophes. He stated that effective disclosures that would de-bias consumers (for example, getting them to evaluate their insurance needs over the long term so they would more likely retain catastrophe coverage to cover a once in twenty year event) could be developed by comprehensively applying the principles of behavioral economics but that the NAIC has failed to make use of the wealth of behavioral economics research to develop more effective disclosures because of its fragmented approach in this area.

Schwarcz introduced Jan Pappalardo (FTC) to make a presentation on the FTC’s studies on the effectiveness of disclosures intended to give the NAIC some sense of the types of consumer disclosures that could be crafted if regulators were to adopt a holistic empirically grounded approach to developing consumer disclosures.

Pappalardo stated that the FTC has been studying how to develop disclosures that consumers can understand and use for about 30 years but that her presentation was not based on behavioral economics. She provided some background of the FTC’s information regulation, described some disclosure research the FTC has done to demonstrate how research can and should be used to develop effective disclosures, and summarized principles for designing effective disclosures. She stressed that effective consumer protection requires effective competition and that markets work better if consumers understand what they are buying and what they are paying. She identified tools regulators can use to help consumers make better choices; explained how the regulators could inform, advise, and educate consumers to nudge them to buy more effective products.

Brenda Cude (University of Georgia) told the commissioners that the NAIC’s past efforts to develop effective disclosures has been inefficient and less effective than they could be but that there was a lot of good work going on in this field at the FTC and other federal agencies that the NAIC could benefit from. She asked the NAIC to add a charge to the Market Conduct (D) Committee to develop best practices and guidelines for the development of consumer information disclosures that would be beneficial across all product lines. She stated she has spoken to Terri Vaughan, NAIC CEO, about arranging a conference on behavioral economics at which academics could educate regulators.

Credit Scoring: Sonja Larkin-Thorne (S L Thorne and Associates) reminded the commissioners that in June the industry had told the NAIC [during the Industry Liaison Committee meeting] that there had been no significant changes in credit scores as a result of the economic crisis. To refute this claim, she noted that mortgage default rates are the highest they have been since the 1970’s and, whereas at the onset of the crisis the feeling was that those defaulting had been speculators with sub-prime loans, defaults were now occurring on prime loans held by responsible borrowers who have lost their jobs. She stated that one in eight mortgages are now in foreclosure or are delinquent and the current estimate is that 1.8 million mortgages will be foreclosed in 2009, up from 1.4 million in 2008.

Thorne derided the NCOIL “extraordinary life circumstances” amendment to its credit scoring model act that had been adopted in July in response to this problem. She stated that it would have no impact because it gives the insurers total discretion and requires consumers to make their requests in writing and puts the burden of proof on them. She reminded the commissioners that California prohibits the use of credit scores and that its auto rates keep going down; she had compared the cost of her Connecticut policies (auto, homeowners, life, etc.) and those of friends with what they would cost in California and confirmed that they would all cost less. She recommended the commissioners look at the California website to see announcements of rate reductions. Finally she recommended that the commissioners eliminate the double standard under which insurers are getting federal bailouts but consumers are getting no relief.

Birny Birnbaum (Center for Economic Justice) stated he had done some research on states’ performance on credit insurance and noted a significant increase in forced placement of credit insurance to replace homeowners’ insurance which he opined was caused either by homeowners’ insurance becoming more expensive or by increased unemployment making it unaffordable. Either way he said this will negatively impact credit scores. He asked why the NAIC was supporting the elimination of preexisting conditions for health insurance but not credit scoring for personal lines when both are not within the control of the policyholder. Commissioners Mike Kreidler (WA) and Joel Ario (PA) both agreed but Ario pointed out that the affordability and availability problems were not as severe for auto insurance as they are for health insurance.

Consumer Financial Protection Agency: Birnbaum told the commissioners that the Administration proposal for a Consumer Financial Protection Agency (CFPA) was a core piece of the regulatory reforms needed for financial services and would be similar to the Consumer Products Safety Commission. He described the proposal under which the CFPA would regulate consumer loans and the credit related insurance products of title insurance, credit insurance, and mortgage guarantee insurance. He supported this preemption, noting that all three insurance lines are already subject to federal oversight and that they are all characterized by reverse competition, meaning that insurers compete by bidding up the commission rates paid to lenders. He was concerned that the states have apparently been easing off on their regulation of credit insurance as a reaction to the ruling that debt cancellation contracts are not insurance and can therefore be regulated by the FTC.

Birnbaum presented some statistics on the very low loss ratios for credit insurance and credit unemployment insurance to support his conclusion that consumers need a dedicated consumer advocate that can effectively regulate these products and he urged the NAIC to support the creation of the CFPA. To do otherwise would, he said, could only be interpreted as a desire to protect the states’ turf to the detriment of consumers. Thorne did not agree with Birnbaum; she believes consumer protection responsibility should remain with the states and that Congress should fund the states’ consumer protection efforts.

NAIC/State Government Liaison Committee

Commissioner Roger Sevigny (NH) chaired the NAIC/State Government Liaison Committee meeting. Representative Delores Kelley (MD) was concerned that the NAIC was supporting the creation of a federal consumer protection agency through its Center for Insurance Policy and Research (CIPR) and has proposed the creation of a National Insurance Supervisory Commission (NISC). As reported, the NISC would facilitate uniformity in state insurance regulation where appropriate, and would provide a vehicle that could represent state insurance regulators in interactions with other financial services supervisors, legislators, and policymakers. It would operate under federal authority and states that did not join or enact uniform standards prescribed by the Commission within a certain time period would be subject to preemption.

Terri Vaughan (NAIC CEO) spoke of the difficulty of explaining the state insurance regulatory system to Congress and the Administration and stated that the CIPR hoped to use the NISC to secure a voice in Washington and improve coordination and information sharing so that the state system would be preserved. Representative Brian Kennedy (RI) was annoyed that the Legislators had first learned of the idea for the NISC when it was reported in the press; he wanted to know why the legislators had not been consulted, stating that the NAIC was ignoring the separation of powers and the constitutional role of the legislators and that under the proposal policy decisions that should be made by the legislatures would be delegated to the NISC. The NAIC had apparently begun considering this idea in June but had not intended for it to become public at this point.

Sevigny stated that the NAIC would organize a summit to discuss how to move forward. Vaughan stated that the NAIC had never intended to exclude the legislators. Sevigny asked if the legislators agreed that there are some areas of regulation that should be uniform. Kelley agreed that there were, citing the Insurance Products Compact, but she noted that under the Compact each state gets to decide it if wants to join.

Director Mike McRaith (IL) stated that no one knows what will happen in Congress with regard to financial regulatory reform and that the NAIC’s intent in proposing the Commission was to preserve state regulation. He stated that the state solvency system works well but it has limits in that the US Constitution prohibits states from entering into treaties so there needed to be a means to provide states with representation, noting that the insurance sector is a major participant in the financial service market but its regulators are not now part of the conversation in how to regulate systemic risk. He also argued that the federal government should have access to the data collected by the NAIC and that there needed to be a means to provide data in a way that would protect its confidentiality. With respect to uniformity, McRaith stated that a forum was needed to determine where uniformity would be appropriate, that the proposal would give states five years to adopt the uniform laws developed by the Commission and that nothing would be delegated to the federal government except as a last resort. He also stressed that the proposal is not final, that it is merely a framework for discussion.

In response to a legislator who cautioned that they not give away their “birthright”, McRaith noted that the states’ right to regulate insurance is pursuant to the McCarran-Ferguson Act that could be repealed at any time. He also noted that the preemption mechanism in the proposal was no different than the one now used to implement uniform Medigap policies.

At the suggestion of Representative Kelley, the NAIC will establish a joint working group that would include regulators, legislators, and representatives from the NGA and the NAG.

NAIC/Industry Liaison Committee

Commissioner Susan Voss (IA) chaired this meeting. The industry was represented by Deirdre Manna (PCI), Dave Synder (AIA), Eric Goldberg (AIA), and Reid Edwards (Risk Management Solutions).

State of the Personal Lines Market: Synder made a presentation characterizing the personal auto market as “generally very competitive, and comparably affordable and available” with stable premiums. He made a pitch for avoiding regulatory actions that could prevent innovation and risk-based pricing, such as banning or severely limiting the use of insurance scoring, mandating specific mileage-based insurance schemes, higher limits that could make auto insurance less affordable for lower income consumers, or subsidies that he argued are economically inefficient. He criticized prior approval of rates and forms as potentially increasing risk and instability and advocated the elimination of all price and product controls.

He stated that the AIA has become aware of proposed federal healthcare legislation that would move coverage for all medical payments out of auto and workers’ compensation insurance systems and into the healthcare system. He asked that the regulators and other interested parties oppose this proposal.

Snyder made similar representations with respect to the health of the homeowners market but noted that catastrophe losses have prevented a better picture, especially in states like Florida and Texas, both of which have large residual markets. He stated that one-third of all homeowners losses are attributable to fire and urged the regulators to push for mandated sprinkler systems in residential buildings. Snyder stated he would provide Commissioner Sharon Clark (KY) with data to support a mandate for sprinklers as she had requested.

Center for Insurance Policy & Research: Manna had requested that Terri Vaughan (NAIC CEO) explain the purpose of this new NAIC initiative. Vaughan stated that she had proposed the creation of the CIPR when she accepted the position of CEO and that she was motivated by a recognition that the state regulators needed to be following what was happening in DC with respect to systemic risk and reforms of the financial regulatory system and that there was a lack of understanding in Congress of the role of insurers in financial markets and how insurance is regulated. In particular she believes that Congress is not aware of the high degree of coordination that exists among the states or the extensive amount of data that is available to them through the NAIC. She also believes that the policy makers in DC needed to have a central place to go to with their questions.

In addition she envisions that the CIPR could serve as a research center for both the states and public policy makers in DC. She introduced Ramon Calderon, a former deputy commissioner in California, as the CIPR’s new coordinator for the solvency modernization initiative. She has also hired Ed Toy to serve as the CIPR’s capital markets expert and has contracted with a professor at Temple University for a year to frame the US solvency system into a principles-based framework that could fit into an international solvency system. CIPR has obtained the services of another college professor to work in the area of insurance fraud during his sabbatical. Manna asked Vaughan whether the CIPR would support NAIC working groups and specifically how its development of a principles-based regulatory framework would fit in with the NAIC’s Solvency Modernization Initiative (EX) Task Force. Vaughan replied that most of the work of the CIPR would support the NAIC but she also envisioned its staff members developing independent research papers to be issued under their own names much as is done at some federal agencies, such as the FDIC.

Manna stated that PCI’s other concern has to do with the proposed federal Office of Insurance Information or Office of National Insurance; she noted that the NAIC had been written into these proposals and wanted to know if there was any connection between the CIPR and these proposed new federal agencies. Vaughan confirmed that there was a connection and she envisioned that the OII or the ONI would come to the CIPR to fulfill their information needs.

NAIC Budget and the Catastrophe Model Proposal: Goldberg stated that the industry was concerned with the cost, purpose, use, and the effect on competition of the proposed NAIC catastrophe model. He has heard estimates of the cost to develop a model of $10 to $12 million spread over two years and that several million more would be needed each year to maintain the model. He stated that there was a scarcity of talent available to do this kind of work and that if the NAIC were to get into the modeling business there may not be enough talent to go around. Regarding the proposed model’s purpose, Goldberg stated that he has read that it was trying to address the lack of transparency of the models now used but he believes there is no such problem. He noted that Florida does an extensive review of the models each year and if there is a real issue there are other ways it could be addressed.

The industry is also concerned that there is a political agenda driving this proposal and that insurers might be forced to use the NAIC model. He does not want to be surprised by a large number appearing in the soon to be released 2010 budget. Voss assured him there would be nothing in the budget for this proposal and that the NAIC is still studying the proposal which originated in several states with large catastrophe exposures. She stated that the NAIC has a duty to consider the proposal and determine if there is a better way to monitor models. She assured Goldberg there was no political agenda. Edwards cautioned that maintenance of the model would cost even more than its development and stated that his company would like to work with the regulators to address their concerns and that he is participating in the development of an updated catastrophe model handbook. Eric Nordman (NAIC Staff) stated that the proposal was taking longer to evaluate than anticipated and the research has been further delayed by the recent involvement of the California Earthquake Authority. He assured the industry representatives that if a proposal materializes it would be publicly announced and that in no event should they expect anything to happen this year.

Other Issues: Synder made an attempt to respond to comments made at the NAIC/Consumer Liaison Committee meeting with respect to credit scoring. He stated that the consumer representatives keep trying to equate insurance scoring to credit scoring but that they were different and used different factors. However, he did not state whether mortgage foreclosures, the principle factor the consumer representatives were concerned with, was or was not a factor used to calculate insurance scores.

Life Insurance and Annuities (A) Committee

Commissioner Thomas Sullivan (CT) chaired the meeting of the “A” Committee.

The Committee adopted the July 28 joint conference call minutes with the Principle-Based Reserving (EX) Working Group and the Solvency Modernization Initiative (EX) Task Force and the July 28 and September 9 conference call minutes of the “A” Committee. The proposed 2010 charges were adopted by the Committee.

Jolie Matthews (NAIC staff) gave the federal legislative update. The Senate has introduced S. 1297, Retirement Security for Life, which is similar to H.R. 2748. Commissioner Susan Voss (IA) will be testifying on September 24^th at the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises hearing on “Recent Innovations in Securitization.”

Jim Mumford (IA) gave the report for the Annuity Disclosure (A) Working Group, which included a recommendation to send two versions of the Guaranty Association Disclosure document to the Receivership and Insolvency (E) Task Force. Wayne Mehlman (ACLI) opposed sending the version that included the free-look paragraph. He felt it was redundant and invited buyers to rethink purchases, which is a roundabout way of going around the advertising prohibition. He also said the free-look period language should be part of policy and not linked to guaranty association coverage. Birny Birnbaum (Center for Economic Justice) thought that the other draft was more consumer friendly because of the 30-day free-look paragraph and because it was not written on a graduate school level. The Committee adopted the report.

Kim Shaul (WI) gave the report for the Suitability of Annuity Sales (A) Working Group. The Working Group asked for a one-year extension to complete its work on the revisions to the Suitability in Annuity Transactions Model Regulation. The Working Group report was adopted by the Committee.

Larry Bruning (KS) read the report for the Life and Health Actuarial Task Force (LHATF), which included continuing LHATF’s 2009 charges for 2010 and adding a charge to review some aspects of Standard Nonforfeiture Law for Individual Deferred Annuities and adopting amendments to Actuarial Guideline XXXIII – Determining CARVM Reserves for Annuity Contracts with Elective Benefits. The Committee adopted the report.

Life and Health Actuarial Task Force

The Life and Health Actuarial Task Force met for one day, chaired by Larry Bruning (KS). During the meeting, the Task Force:

· Reported on the progress on the Principles-Based Reserving Standard Valuation Law which was later adopted by the NAIC Executive and Plenary Session at this meeting. On its September 3 conference call, LHATF decided a new Section 12C should be added stating that, “A principles-based valuation may include a prescribed formulaic reserve component.” There was some discussion related to the fact that the Valuation Manual was not completed. Some members of the Task Force felt that the Manual needed to be completed before the Law could be introduced in the various state legislatures. Others said that the Manual would be constantly changing and should not delay final consideration.

· Discussed the appropriate mortality tables and the margins on those mortality tables for the principles-based reserving system and for a net premium reserve system.

· Heard a presentation from the American Academy of Actuaries (AAA) on a study it had completed on the development of a new valuation mortality table for payout annuities which indicated that:

A new payout annuity valuation mortality table is needed
An automatic update should be included in the valuation mortality tables to account for the continuing improvement in mortality.
The tiering of the size of the payout should not be included in a valuation mortality table because of practical issues in doing so.

· Discussed a presentation of the AAA Economic Scenarios Working Group regarding the supporting statistics. Nancy Bennett, chair of the Economic Scenarios Implementing Working Group, described the interest generator released in December 2008 and recent research.

· Discussed a presentation of the American Council of Life Insurers regarding an additional net premium reserve methodology for VM-20, the section of the Valuation Manual for life insurance products.

· Received reports from subgroups on various portions of the Valuation Manual. VM-00 was amended and released for comment.

· Heard a report from Gary Falde, chair of the Life Reserve Working Group, on prescribed default costs for existing investments. The research compared the AAA proposed approach with a methodology proposed at the June NAIC meeting by New York. The research indicted that the AAA approach produced less volatile results. The research will be discussed further on the next interim conference call.

· Discussed the requirements of VM-50, the section of the Valuation Manual regarding the collection of experience data.

· Received a report from the AAA on its work on the Draft Standard Nonforfeiture Law for Life Insurance. The AAA has completed the first draft of a reform proposal.

· Adopted amendments to Actuarial Guideline XXXIII, Determining CARVM Reserves for Annuity Contracts with Elective Benefits. The changes relate to the determination of guarantee duration and plan type, stating that for benefit types incorporating multiple payments paragraphs 4(A), 4(B), and 4 (C) should be applied to each separate payment.

· Received reports for the Accident and Health Working Group and adopted the recommended charges for the Working Group.

· Decided to continue the Task Force’s 2009 charges for 2010 and added a charge to review some aspects of the Standard Nonforfeiture Law for Individual Deferred Annuities.

In a separate morning session Philip Barlow (D.C.), Larry Bruning (KS) and Nancy Bennett (AAA) gave a 90-minute education program designed for non-actuary regulators. The group covered basic mechanics of the PBA proposal but focused much of their energy on the justifications, safeguards and benefits to regulators, consumers and industry. It was a very thorough presentation and there were few questions from the audience.

Property & Casualty (C) Committee

Director Michael McRaith (IL) chaired this meeting.

Presentation on Cost Saving Auto Safety Devices: Peter Goelz (Global Mobile Alert Corp), a former managing director of the National Transportation Safety Board, made a presentation on distracted driving, which he said can have many causes, including animals, children, eating and drinking, but he said the use of cell phones either for calling or texting has greatly increased this problem. He mentioned several surveys that demonstrate the extent of the problem and told the Committee that a summit on distracted driving would be held on September 30 and October 1 and that interested parties could attend or listen in.

Goelz noted that banning the use of hand held cell phones has not been very effective and the purpose of the summit was to learn about emerging technologies that involve using GPS systems to disable phones while a vehicle is moving at a speed of, for example, ten miles per hour and GPS alerts to traffic situations. He predicted that the summit would result in the states taking more aggressive action and stated that support was growing for total bans on cell phone usage, including hands-free phones.

Presentation on Nationwide Enhanced Homeowner Insurance Policy: Craig Zinpher and Craig Barrington of Nationwide and their consultant Larry Mirel (Wiley Rein LLP) described a proposed new product, labeled the Enhanced Homeowners Insurance Policy or EHIP that would enable homeowners to voluntarily purchase homeowners’ policies that would include coverage for flood insurance. The plan is intended to eliminate the confusion caused by the current system which requires a homeowner to purchase a separate flood policy from the NFIP. The presenters argued that it would have the added benefit of eliminating the wind versus water disputes that were spotlighted after Katrina and would address the increasing need for flood coverage resulting from changing weather patterns and growing populations in the coastal areas.

To enable the sale of EHIP Nationwide is proposing a federal law that would bring EHIP policies under the authority of the US Treasury. EHIP policies would not be subject to state rate or form regulation but those states entering into agreements with Treasury would be responsible for consumer protections and resolution of complaints and would be entitled to collect premium taxes on the entire premium, including the portion attributable to NFIP coverage. Policyholders could still opt to purchase traditional homeowners policies and separately purchase flood coverage from the NFIP.

Larry Mirel (Wiley Rein LLP) noted that the National Catastrophe Risk: Creating a Comprehensive National Plan White Paper that Plenary had adopted earlier in the day states there is a need for a comprehensive homeowners’ policy and that the Katrina experience had made both the regulators and the industry look bad and the proposal is Nationwide’s attempt to address this problem.

Commissioner Scott Richardson (SC) found the proposal highly objectionable. He asked why the authority would be given to Treasury, which had no insurance expertise, rather than to the NFIP. He suggested that this program would make things even more confusing and that a simpler approach would be to create a reinsurance program through the NFIP. He objected, as unworkable, delegating complaint handling to the states since they would no longer regulate the policy; and he stated people do not buy flood coverage not out of confusion but because they know that they do not have to as the government always steps in to cover their flood losses.

Commissioner Kevin McCarty (FL) commended Nationwide’s attempt to address the problem but said the proposal missed the mark. Zimpher replied to both commissioners that Nationwide was simply responding to the Committee’s invitation to put forth ideas. Commissioner Jim Donelon (LA) also commended the effort but suggested that much of the problem could be addressed if the NFIP were required to notify both lenders and insurers when flood policies that are required by the lenders are about to lapse.

Scott Gilliam (Cincinnati Insurance Cos.) stated he did not like the proposal because the feds would be regulating a segment of the insurance industry and would thereby get “its foot in the door”. He stated it would not eliminate wind versus water disputes; they would just become government versus insurer disputes.

Birny Birnbaum (Center for Economic Justice), after commending the attempt, stated that it takes an illogical system and layers on more complexity by adding a new federal program. Alluding to the flooding currently occurring in Georgia, he argued that most of the damage is not covered because consumers do not know they need separate flood coverage and the only logical and market-based solution is to require an all-perils policy along with a catastrophe reinsurance program patterned after the terrorism risk reinsurance program.

McRaith invited comments on the proposal by October 31.

Catastrophe Modeling: Eric Nordman (NAIC Staff) gave an update on the Catastrophe Model Feasibility Study. He stated that the consultants had put together a summary of their conclusions on the feasibility of developing models for earthquake and hurricane to present to EX-1 but that EX-1 had deferred action on the report to give Commissioner Kevin McCarty (FL) time to look at another possible approach that surfaced late in the process. He anticipated that EX-1 will take action on the report either by the end of this year or in 2010 but he assured the audience that there would be nothing in the 2010 budget regarding catastrophe modeling.

Title Insurance: The Committee approved a recommendation to be forwarded to the Executive Committee to upgrade the Title Insurance (C) Working Group to a Task Force in recognition of the expanding focus of the group that has decided it should work on modernizing the solvency regulatory structure for title insurance.

Credit-Based Insurance Scoring Activity: McRaith stated that a joint meeting with “D” Committee would be held immediately following this meeting at which the Committees plan to formalize the next steps on this issue which he anticipated would include specific actions to be taken by “C” Committee. McRaith said he hoped “C” Committee would be looking at the variety of factors used in insurance scoring as well as their impact on consumers.

Task Force and Working Group Reports: The Committee approved reports of its task forces and working groups. Below are summaries of select reports:

Casualty Actuarial and Statistical (C) Task Force

The Casualty Actuarial Task Force, which met under the chairmanship of Richard Marks (CT), adopting its 2010 charges with one change, to combine the Commercial and Personal Lines Competition Database reports into one report. The Task Force then looked at the Premium Deficiency Reserves Blanks proposal. Several questions were raised regarding the applicability of the report to life and accident & health and to the wording of the changes. In the end, the proposal was returned to the subgroup for further work and discussion on a revised proposal will take place on the next Task Force conference call.

The Task Force received reports from its various subgroups:

Catastrophe Modeling, which expects to soon propose modifications to the Catastrophe Modeling Handbook;
Line of Business, which has received responses from its survey about property/casualty financial statement line of business definitions. The results have been compiled and will be discussed on an upcoming subgroup call.
Statistical is completing its work on Guidelines for Implementation of Medical Malpractice Closed Claim Reporting. The Task Force then discussed the best practices to be used in Uniform System for Medical Professional Liability Closed Claim Reporting. On a conference call the PIAA had suggested that the NAIC consider establishing a uniform data collection system. The issue will be discussed in more depth on a future conference call.
Workers' Compensation Large Deductible is preparing an outline of responses received on the large deductible proposal and will present a summary conclusion in October. The subgroup is awaiting comments from the industry regarding the impact of accounting changes to SSAP 65 on inconsistencies between credit losses and insurance losses in reference to credit exposure with large deductible losses.

The Task Force received reports from COPLFR and the Casualty Actuarial Society. There was extensive discussion on the issue of whether one needed to issue a qualified actuarial opinion when signing a report which contained the work of another actuary as part of a larger opinion. Staff reported on the Solvency Modernization Initiative efforts.

Under other business, the Task Force heard comments from Ann Kelly (NY) regarding concerns that the catastrophe load might have on homeowners’ rates. New York will detail its concerns in an email.

Surplus Lines (C) Task Force

The Producer Licensing Task Force adopted the Timeline for Reciprocity Certification developed by the NARAB Working Group. Under this timeline, which is similar to the 2002 timeline, states must complete a checklist and self-certify whether they are reciprocal. The checklists will be posted to the NAIC Web site to allow interested party to comments they will be reviewed by the NAIC Legal Division for compliance with NARAB.

The Task Force discussed the business entity licensing process and reviewed a proposal which is intended to simplify the licensing process. It received a report from the Producer Licensing Coalition, which reviewed an update on electronic processing business rules and Uniform Licensing Standards; and an update from the NIPR Board regarding the release of Phase two of the Attachment Warehouse for the Reporting of Actions (ROA) to be released on Sept. 25, 2009. ROA will allow the producer to submit documents associated with an administrative, criminal, or civil action electronically that are required to be submitted within 30 days.

The Task Force adopted the report of the Producer Licensing Working Group, which included the adoption of the background check standards.

Earthquake (C) Study Group

The Earthquake (C) Study Group discussed details of an earthquake education event planned for Dec. 8, that will cover:

· State-of-the-art social sciences on how to educate and motivate the public to prepare for an earthquake;

· The coordination activities involved in producing the 2009 Great American Shakeout drill in California;

· The significant decrease in modeled losses resulting from the incorporation of the latest scientific research into earthquake models; and

· Proposals for mitigation approaches.

The Study Group received a report from the Earthquake Consumer Guide drafting group, which met for the first time September 3. It heard a presentation from Jim Wilkinson (CUSEC) titled “Federal and State Initiatives to Address the Earthquake Threat, Including Details on a 2011 National Level Exercise”. It heard a presentation on FEMA Phase I and Phase II projects from Dr. Teresa Jefferson (Virginia Polytechnic Institute and State University). These projects are intended to enhance readiness for responding to a catastrophic event by providing the most realistic estimates possible of losses and impacts, and guidance on response and recovery planning. The presentation included the impact of a catastrophic earthquake in the New Mexico Seismic Zone, an overview of the scenarios used, and the results found during the projects.

Financial Condition (E) Committee

The Financial Condition Committee was chaired by Doug Stolte in the absence of Commissioner Gross (VA). The entire set of reports sent up to the Committee, with the exception of the DTA issue, was adopted by a consent resolution.

NAIC/AICPA (E) Working Group

The AICPA representative gave a summary of recent activity.

· There will be a new SAS on the objectives of an independent auditor that will replace large chunks of existing guidance and converge with the international auditing standards.

· An SAS on compliance audits of governmental and not for profit entities went to ballot.

· SOP 09-1 will address agreements to perform procedures that ensure consistency with XBRL requirements.

· The AICPA has completed its project to update its guidance to reflect the FASB’s codification (all of the FASB guidance references have changed).

· The AICPA is developing comments to the IASB and FASB from the auditor’s perspective on the Joint Revenue Recognition Project.

The Risk Assessment Implementation Subgroup (RAImS) referred a letter to the NAIC/AICPA Working Group addressing the results of its recent survey of Chief Examiners. The issues presented were timing of receiving auditor’s work papers and the request that auditors and examiners work concurrently at the insurer’s location on the risk assessment portion of examinations and audits. Currently, examiners must go up the auditor’s hierarchy and rely on the companies to help get the firms to cooperate. Debra Whitmore (E&Y) responded that incomplete work papers can be made available, but they require review before they can be released, and that the firms were aware of the concurrent work requests and would look to the results of recent experiments in considering national guidance on their use.

The adoption of the Model Audit Rule (MAR) continues. Staff reported that 31 states have adopted, 19 plan to complete adoption this year, and one, North Dakota will adopt next year. Several interpretation issues were raised:

· The concerns with patchy adoption were deferred until next meeting, given the report by staff.

· There was a suggestion that SSAE 15, Internal Control Attestations (used by non-public companies) be used as the basis for the MAR attestation similar to how SOx 404 attestations are used. SOx 404 is the basis for the AICPA standard. There was concern that this was not in the Model Law. It will be discussed on a conference call.

· The language clarifying “group of insurers” in the implementation guide was exposed for 30 days.

· There was discussion of the reporting of material weaknesses of an insurance entity that were not material for the holding company. Since statutory statements were entity specific the Working Group concluded that reporting everything material to the entity was required.

· There were questions as to what “bookkeeping” meant. The conclusion was that the audit firm could prepare the statement, but that preparing the financials to be audited was not permitted.

· There was a change to the FAQ requested by the firms to allow for staggered insurer audit/group audit transitions for lead partners rotating off of engagements in the transition period around adoption. The language was exposed for 30 days.

· A subgroup will be formed to develop further FAQ’s to address issues not in the implementation guide.

Under Other Matters, the Working Group circulated the SEC proposed rule 33-9052 on compensation and corporate governance disclosures. There will be discussion of what if anything is finally adopted.

Accounting Practices and Procedures (E) Task Force

Kim Hudson (CA) chaired the meeting of the Accounting Practices and Procedures (E) Task Force. It adopted the 2010 proposed charges of the Task Force and its working groups.

Blanks (E) Working Group:

Jake Garn (UT) chaired the meeting. Action on Items Previously Exposed for Comment:

· 2009-25BWG - Add questions to General Interrogatories Part 1 Common Interrogatories related to exemptions granted to the insurer to specified sections of the Annual Financial Reporting Model Regulation or substantially similar state law or regulation. This item was adopted.

· 2009-26BWG – Add two additional interrogatory questions to the Supplemental Exhibits and Schedules Interrogatories for the Communication of Internal Control Related Matters Noted in Audit and Management’s Report of Internal Control over Financial Reporting. These items will be assigned a document identifier and added to the bar code instructions. This item was adopted.

· 2009-27BWG MOD – Add cross checks to the Electronic Notes for Note 1A for state basis net income and surplus. Also add cross check to ensure NAIC SAP income and surplus amounts reported in the note reconcile with detail reported as permitted and prescribed practices used to arrive at state basis income and surplus. The proposal was modified on page 371 changing references to columns 1 and 2 to columns 3 and 4. This item was adopted as modified.

· 2009-28BWG MOD – Add interrogatory question to the Supplemental Exhibits and Schedules Interrogatories for the actuarial opinion required by the Modified Guaranteed Annuity Model Regulation. Modify interrogatory question for actuarial opinions associated with Exhibit 5 interrogatory question 1, 2 and 3 to be consistent with the other actuarial opinion interrogatories. Also adding four additional certifications related to Actuarial Guideline XLIII (CARVM for Variable Annuities) effective December 31, 2009.

Note: Health, Property and Title statements are included in this proposal only due the change in bar code instructions which are uniform for all statement types. The interested parties’ comments were reflected in the modifications and this item was adopted as modified.

· 2009-29BWG MOD – Revise the reporting instructions to title insurance annual statement blank, Schedule T, to include more detailed instructions for “type of rate”, and to make certain editorial changes to the Blank. This item was adopted as modified, which included the removal of the word “Allocated” in the subtitle.

· 2009-30BWG MOD – Add a new “State Page” (and instructions) to the title insurers annual statement immediately following the 5-Year Historical Data. Please see attached prototype. Language was clarified in the proposal and this item was adopted as modified.

· 2009-31BWG MOD – The title insurance “State Page” (and instructions) is expanded to include the reporting of experience by “type of property” and “type of rate”. Implementation of these reporting categories requires considerable lead-time. The American Land Title Association was not convinced that the 2012 date was realistic to implement the additional data reporting. Modifications included clarification in language and this item was adopted as modified.

· 2009-32BWG – Amend Schedule T – Premium by State by adding a note explaining the codes used in column 1 – Active Status.

(L) Licensed or Chartered – Licensed Insurance Carrier or Domiciled RRG; (R) Registered - Non-domiciled RRGs; (Q) Qualified – Qualified or Accredited Reinsurer; (E) Eligible – Reporting Entities eligible or approved to write Surplus Lines in the state; (N) None of the above – Not allowed to write business in the state. Milum Livesay (Genworth Financial) said that interested parties see this proposal as helpful but there has been a move to keep instructions separate and in the statement instructions instead of the reporting formats. He advised the Working Group to monitor that this does not become a slippery slope. This item was adopted.

Action on Newly Submitted Items:

· 2009-33BWG – Add instruction to Schedule T, Details of Write-ins at Line 58 for Other Alien to clarify the reporting entity should list the jurisdiction (country) for write-in line description and make wording of instruction consistent across statement type. This item was exposed.

· 2009-34BWG - Add instruction to Line 24 of the asset page to include receivables for securities not received within 15 days of settlement date. Modify the exclude statement for Line 9 of the asset page to clarify exclusion of receivables for securities not received within 15 days of settlement date are to be excluded and non-admitted. This item was exposed.

· 2009-35BWG - Add new annual statement line 17.4 to the Underwriting and Investment Exhibits, Exhibit of Premiums and Losses (state page), Five Year Historical, and Insurance Expense Exhibit of the property statement and the property supplement of the health statement for the reporting of director and officer business. Instructions for the Five Year Historical will also be modified to reflect the new line. Add definition for director and officer liability to the appendix. Steve Johnson (PA) asked if this proposal should go to the Property and Casualty Line of Business (E) Subgroup. Kim Hudson (CA) replied that the after the comment period the proposal would be referred to the Subgroup if necessary. This item was exposed.

· 2009-36BWG - Add line categories to Schedule S to group separately U.S. and Non-U.S. insurers reported in the schedule. Modify the instruction for the Location column to indicate the use of postal code in the column to indicate domiciliary jurisdiction and change the column description from Location to Domiciliary Jurisdiction. Changing property and title Schedule F Location Column description to be consistent with life, health and fraternal and their respective annual statement schedules. This item was exposed.

· 2009-37BWG - Modify instruction for IMR (Interest Maintenance Reserve) Line 2 and AVR (Asset Valuation Reserve) Line 2 with language for other than temporary impairments. This item was exposed.

All editorial changes were adopted by the Working Group. The comment deadline for the newly exposed items is November 5, 2009.

The Working Group received guidance on two items:

· Annual 2009 Investment Category Guidance. Matti Peltonen (NY) sent an investment category breakout sheet to be listed on the NAIC website as guidance for 2009 annual reporting and 2010 quarterly reporting. A Blanks proposal may be sent requesting that the guidance be incorporated into the 2010 annual statement and 2011 quarterly statement instructions. This guidance was exposed.

· Note 5 – Loan-Backed Securities Disclosure Guidance. SAPWG sent guidance illustration for the assistance in the completion of Note 5 – D(4) and 5 – D(5) to be posted to the NAIC website for the third quarter 2009 reporting, 2009 annual reporting, and 2010 quarterly reporting. A Blanks proposal requesting the data capture elements for 2010 annual and 2011 quarterly reporting will be submitted at the NAIC December meeting. Robin Marcotte (NAIC staff) said that industry had asked for clarification regarding quarterly and annual. This guidance was exposed.

Livesay suggested that 2009-37BWG be exposed alongside the Note 5 – Loan-Backed Securities Disclosure Guidance with the same comment deadline.

The comment deadline for the exposed guidance and 2009-37BWG is October 5, 2009. A conference call will be scheduled to consider the guidance and item for adoption.

During the Task Force meeting Garn said the Working Group’s significant item was adoption of 2009-31BWG, which expanded the Title Insurance “State Page” blank and instructions to include the reporting of experience by “type of property” and “type of rate.” There were concerns regarding the effective date of year-end 2012. The report was adopted by the Task Force.

Emerging Accounting Issues (E) Working Group

· INT 09-05— EITF 08-3: Accounting by Lessees for Maintenance Deposits. The INT adopts, with modification, EITF 08-3, and clarifies that maintenance deposits are non-admitted assets. Costs incurred for maintenance on the leased item that do not increase the value and enhance the usefulness of the leased asset will continue to be expensed in accordance with SSAP No. 19.

· INT 09-06— EITF 08-8: Accounting for an Instrument (or an embedded feature) with a Settlement Amount that is Based on the Stock of an Entity’s Consolidated Subsidiary was rejected as not applicable to statutory accounting.

· INT 09-07—Accounting for Re-Securitization of Loan-Backed and Structured Securities (e.g., ReREMICs) was a controversial item. Staff issued the INT just after the Summer Meeting surprising industry with its contentions that the investment vehicle formed to facilitate the securitization was automatically an affiliate under SSAP 25, and that the insurer would be deemed to have the intent to sell the assets placed into the securitization under INT 06-07, therefore requiring they be marked-to-market. Both interpretations seemed inconsistent with the specific accounting in SSAP-91R.

Brad Hunkler (Western & Southern) spoke for the interested parties. He gave the background for the issue, describing the structural problem with ratings of RMBS in that the severity of losses could differ greatly from those of single corporate credits. He said that a re-REMIC transaction where the insurer uses the QSPE described in SSAP 91R (retains less than 90% of the assets in the transaction) was clearly covered in SSAP 91R. He argued that greater than 90% transactions where it was clearly designed to meet the QSPE qualifications other than the sale of 10% should be considered equivalent. He mentioned the availability of a “springing true sale” opinion to that effect.

Jim Hanson (IL) said he could not see how the insurer did not control the QSPE, and therefore the transaction was subject to SSAP 25. Hunkler responded that the structure was designed to ensure that the insurer did not control the assets after they were securitized and therefore the resulting securities would be marketable. Jim Armstrong (IA) said his opinion was that the fact that the insurer created the QSPE and drafted the trust documents meant it had control.

Doug Stolte (VA) expressed concern with the changes to U.S. GAAP (effective 1/1/10) that eliminate the consolidation exception for QSPEs. He would not like statutory to be less conservative than GAAP. Staff noted that consideration of changes to statutory accounting in response to FAS 166 & 167 were scheduled to begin at the later SAPWG meeting (in fact, the scheduled time ran out and no new SAPWG business was exposed).

John Brown and Andy Hopping (Jackson National Life) testified as well. Brown said that the QSPE transaction was the more obvious path through SSAP 91R, but that other transactions warranted consideration. He described the re-REMIC, in the correct circumstances, as something regulators would want companies to do. He highlighted that the accounting requires filing of the transaction to allow case-by-case review of the questions around control.

The discussion was followed by a series of votes. The eventual result was that the staff draft of the INT failed to be adopted by a 5-7 vote. The Working Group then exposed for comment the amended version of the INT provided by the interested parties. Two issues were described as pending - a complete understanding of the issues around control and affiliation and the potential impact of the changes to GAAP.

Two new tentative conclusions were exposed for comment:

Electronic Prescribing Transaction Service Fees from a consulting firm to say that third-party e-prescription service fees shall be accounted for as hospital/medical claims expenses.

Statutory Accounting for Loans Received Under the Federal TALF Program addressing whether TALF loans received, and the corresponding collateral provided by the reporting entity, should be reported net within the statutory financial statements.

Compilation of Rejected Interpretations would make the compendium of rejected GAAP an interpretation to promote ease of updating.

Statutory Accounting Principles (E) Working Group

The Working Group took the following actions:

· 2003-12: Issue Paper No. 135—Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others. Staff made changes to the issue paper to reflect some of the comments and the transition period. During the meeting, interested parties questioned the deletion of paragraph 21C saying that the value of a guarantee for partially or fully owned enterprises is speculative and therefore it should be a liability rather than an expense. The revised Issue Paper was adopted, and staff will draft an SSAP.

· 2007-24 Fair Value Measurements: Staff has drafted Issue Paper 138 to discuss the adoption of FAS 157 into statutory. Jay Muska (Travelers) presented issues related to the Issue Paper’s rejection of own credit risk and the evaluation of derivatives. Staff suggested revisions to Paragraph 16 to recognize OCR in initial measurement. Muska remained concerned, as the initial value of the derivatives would be near zero. There are other questions related to disclosures for non-separate accounts and where in the hierarchy SVO valuations reside. Staff will draft an SSAP for the next meeting.

· 2007-27 SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and Separate Accounts was adopted with some modifications and a 2010 effective date. A Blanks proposal will be drafted for December.

· 2008-28 Property and Casualty Reinsurance was finally adopted. The changes affect the accounting for P&C reinsurance agreements for the run-off of business. Wisconsin sent the issue to the P&C Reins Study Group at the last meeting and changes were made on interim conference calls to tighten up the guidance. In the end Illinois and Wisconsin voted against the proposal.

· 2009-09 Financial Guaranty Insurance establishing disclosures for this line was revised in the interim and re-exposed.

· 2009-08 FSP SOP 94-3-1 and AAG HCO-1, Omnibus Changes to Consolidate and Equity Method Guidance for Not-For-Profit Organizations was rejected as not applicable to statutory.

· SSAP 10 and deferred tax assets is a proposal discussed in the last few meetings to revise the recognition period of DTAs to three consecutive years and raise the upper limit on the assets from 10 to 15% of surplus. This is a contentious issue among the regulators. The ACLI presented the justifications, including the severe problems with raising capital in the current environment. There were two new developments in the proposal, the addition of a sunset provision at the end of 2010 and a prohibition against companies taking advantage of the change based on their RBC ratios being below a certain (higher than action level) threshold.

Doug Stolte (VA) asked what the principle was that led to three years and 15%. The ACLI responded that it was the result of negotiation with regulators but that it was clear that one year was too short and they were seeking a reasonable balance. Stolte acknowledged there was some auditing, but that the estimation process was highly uncertain. He pointed out that DTAs have always been inconsistent with the definition of assets in statutory, but were recognized in order to maintain surplus neutrality at the time of codification.

Dale Bruggeman (OH) spoke in favor of the proposal. He requested a change to the recognition period to align it to the IRS recognition period, as in circumstances it is less than three years. Industry agreed this would be a good change. Armstrong suggested that the increase in surplus be reflected in the aggregate write-in line as opposed to unassigned funds, so that in some states these amounts would not increase the amount available to be distributed in dividends. Industry was agreeable to that change as well.

During the Task Force meeting Fritsch reported that the Working Group meeting had run long and that the interim conference call minutes had not been adopted. The Task Force adopted the August 5, August 20, and September 14, 2009 interim conference call minutes of the Working Group.

Fritsch said that the significant items were adoption of SSAP 10 and three issue papers. Doug Stolte (VA) had serious concerns about SSAP 10 and did not think the issue had been studied enough. He said that the three-year forecast was difficult in normal times and would be harder in these economic times. Stolte referred to a presentation by CNA about moving more towards FAS 109 and he felt there should be a vote after a 12-month study.

Fritsch replied that there have been at least 15 presentations on SSAP 10 and it had been adopted by the Working Group after a lot of due process. The motion before the Task Force is to put the principle in place for two years and study the item as it is used. Stolte said the forecast by the companies is not independently audited and it is a risk-based capital issue not statutory accounting. Steve Johnson (PA) said that interested parties had brought out a lot of lengthy presentations, which convinced him that regulators need to be flexible at times. He suggested an additional charge for the Capital Adequacy (E) Task Force to consider the risk-based capital of deferred-tax assets.

There were two motions before the Task Force. One was to not make any changes to SSAP 10 and have a study group come back in a year with a report. The second was to adopt the Working Group report, which included adoption of SSAP 10. Hudson reminded Task Force members that they could only vote yes to one of the motions. A roll call was needed after the vote for the first motion. Voting yes were Alaska, District of Columbia, Florida, Indiana, Maine, Maryland, New Hampshire, Oregon, Tennessee, Utah, Virginia, Washington, West Virginia. Casting no votes were Iowa, Arkansas, Delaware, Illinois, Michigan, Minnesota, Missouri, Nebraska, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, and Vermont. Alabama and Wisconsin abstained. Connecticut, Kentucky, and New Jersey were absent. The first motion did not carry. The Task adopted the Working Group report.

At the “E” Committee meeting the discussion of the SSAP 10 DTA issue continued to be long and contentious, with Virginia adding the objection that this meeting was the first opportunity given to review the revised language. The revised language was ultimately adopted on a split vote. The motion included an instruction to schedule a conference call to ratify the new language as consistent with the expressed intent of those who proposed amendments at the prior meetings, the formation of a Subgroup to work on the long-term guidance, and a referral to CAdTF to consider the RBC implications of this and SSAP 43R. Fritsch objected to the latter, as SSAP 43R was more conservative than SSAP 43. Stolte countered that SSAP 98 was not adopted, and it was more conservative than 43R.

Property and Casualty Reinsurance Study Group: Joe Fritsch (NY), chair of the Study Group, reported that a conference call was held to provide technical input to the Statutory Accounting Principles (E) Working Group on the property and casualty reinsurance run-off proposal. The report was adopted by the Task Force.

Capital Adequacy (E) Task Force

The Capital Adequacy Task Force is chaired by Lou Felice (NY). The Term Asset-Backed Securities Loan Facility (TALF) Proposal for P&C and Health was exposed.

Matti Peltonen (NY) discussed the ACLI RMBS (“notching”) proposal released by the VOSTF. The original proposal was to “notch up” certain RMBS up the NAIC designation scale, but the proposal has evolved to consider a method of determining the NAIC designation without using the NRSRO rating. The method would be at the loan level and likely involve a third-party vendor to perform cash-flow analysis. The benefit of the proposal would be more timely analysis and it would be designed to take purchase discounts and write-downs into account. Peltonen said that the re-REMIC would likely be referring to this method to get their RBC amounts but he cautioned that a re-REMIC could be used on any asset-backed securities, as opposed to just residential mortgages.

The P&C RBC Working Group is working on the proposal to extend Schedule P to ten years. Requiring electronic filing only will solve some issues. The aggregate amounts for the Actuarial opinion will remain on a two-year basis. More research needs to be done on the impact to the jurat page. There was a conference call regarding the P&C RBC Catastrophe Risk Proposal, which is being modeled and quantified. There will be more in the interim.

The Task Force adopted its 2010 charges. It also discussed and exposed a procedural change necessitated by the reduction to three meetings starting in 2010. In the future, things that needed to occur by the June meeting will have a June 30deadline, and the December meeting deadline will be December 31. There was a suggestion to look at the new Blanks Working Group rules to get ideas.

Under other matters there was discussion of a letter from the NAIC Officers requesting that the fraternal RBC factors be examined. Steve Johnson (PA) cautioned that there are many small fraternals and regulators should be leery of forcing unnecessary mergers. Staff clarified that the current formulas are updated to conform to life RBC. Implementation and enforcement also needs to be looked at.

There was an appeal made for chairpersons for the Solvency Modernization and Investments Subgroups and a new chair for the CAdTF/LHATF joint group (Sheldon Summers has left the CA department). There is hope for a conference call in the interim to continue the comparisons between C-3 Phase II & III and VM-20.

Steve Johnson (PA) will recommend that the health trend test (see Plenary) be added to the accreditation standards for consideration at the next meeting. Wisconsin would still like to see the ratio moved from 250 to 300.

Johnson would like to see RBC charges for state deposits, complaining that they are in reality some of the most illiquid assets on the balance sheet.

Life RBC Working Group

The Life Risk-Based Capital Working Group is chaired by Phillip Barlow (DC) The AAA discussed changes to its report on C-3 Phase III:

· The proposal will apply to all business including group;

· Adjustments to the C3 amounts to account for current RBC factors will affect the stochastically calculated amounts only;

· The term “guidance” has been removed to prevent confusion with the Actuarial Standards of Practice; and

· There are comments by the Reinsurance Subgroup that are not included. They are not considered major.

Barlow reported on feedback he received from the AAA on several questions the Working Group had raised:

· No one has come forward yet with examples or solutions to the contention that the documentation is too onerous.

· The SOA’s feedback on the exclusion test is expected in a few weeks.

· There were questions, particularly given the direction of international solvency, as to what the best test model was: shock and one year return; TAR-actual; or TAR-stochastic. After looking at the question, the AAA continues to support TAR-actual. After discussing the possible distinctions with reserve methods the LRBCWG agreed.

· There was a question as to whether factor changes would be simpler than this process. The AAA said that the process was no more complicated than was expected and that the burden of the exclusion test in particular was not too great.

Hopefully the scenario generator being worked on by LHATF will be finished in the fall. The same generator will be appropriate for this project. The AAA Working Group will be working on turning the report into RBC instructions. Currently the Phase II instructions reference the Phase II AAA report, the LRBCWG agreed that the AAA group should turn those into RBC instructions as well. The report was re-exposed for 30 days. At the Task Force meeting it was reported that the C-3 Phase II Results Subgroup had several calls. Two companies have reported results and there will be more calls to discuss results from a third.

John Bruins (ACLI) reported that the Mortgage Experience Factor proposal is not yet done. The test did not work as expected, as the volatility was too high. The ACLI group is meeting weekly and expects to have instruction changes exposed by the December meeting. Lou Felice (NY), chair of the Capital Adequacy Task Force, said that his group was not interested in discussing the extension of the short-term adjustments until there was some sense of what was going to replace them. At a minimum there should be completion of one round of comments.

Bruins then described the progress on the derivatives collateral project. The idea is to prevent double counting of the risk for at least cash and net cash. A new draft is expected in two to three weeks, and again there is hope for implementation by year-end.

Wally Givler (Northwestern) gave an update on the ACLI Derivatives Risk Mitigation Proposal. The idea is to correct for the maturity mismatch when the underlying assets are at amortized cost but the derivative is marked-to-market. The group is working on SSAP amendments, RBC instructions and a spreadsheet for RBC. Comments are to be incorporated in the May 1 report. The project is being worked on for the December meeting and 2010 RBC.

Felice suggested that the group divide scenario one (direct hedge) from the other two, as there was universal support for changes in that circumstance, and that proposal would sail through; the more contentious discussions could then go forward on the other parts. Barlow agreed. Givler said the ACLI would definitely consider that.

Under other matters Barlow suggested members follow the RMBS discussions at the EAIWG and VOSTF.

Examination Oversight (E) Task Force

The Examination Oversight Task Force received a report on a survey of the states regarding implementation of the 2006 revision progress toward adopting the revised Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition. Two states have adopted the revisions, 30 states plan to adopt the revisions, eight states plan to adopt the revisions with minor changes, three states do not plan to adopt the revisions, six states are undecided, and two states did not respond. None of the states anticipated any problems with adopting the model revisions.

The Task Force adopted salary rate adjustments for financial examiners; and reports from the Analyst Team System Oversight Working Group, the Financial Analysis Handbook Working Group, the Financial Examiners Coordination Working Group, the Financial Examiners Handbook Technical Group and the IT Examination Working Group.

Reinsurance (E) Task Force

Director Scott Richardson (SC) announced that he has been appointed the new chairman of the Reinsurance Task Force following the resignation of Commissioner Steve Goldman (NJ). The Task Force received a report from the NAIC staff on Congressional legislation related to reinsurance, including the reintroduction of the Surplus Lines Act which has passed the US House of Representatives for the third time.

The Task Force approved the minutes of its September 15 conference call at which it had adopted changes to its proposed Reinsurance Regulatory Modernization Act of 2009. On the advice of counsel, the Act now would create the Reinsurance Supervision Review Board (RSRB) as an agency of the Federal government. Members of the RSRB would be appointed by the President with the advice of the Senate. Ten members would be nominated by the NAIC from among state insurance commissioners and five would be representatives of Federal agencies. Richardson said the changes had been approved by the NAIC’s Government Relations Leadership Council at this meeting.

The Task Force received a report from Robert Meindl (Germany), acting chair of the IAIS Reinsurance and Other Forms of Risk Transfer Subcommittee of the International Association of Insurance Supervisors (IAIS). Meindl said that in the last five years, in response to the development of the IAIS Standard of supervision of reinsurance, most jurisdictions have instituted direct supervision of reinsurance. The Subcommittee as a result is focusing on other forms of risk transfer and revising the standard related to evaluation the ceding company’s reinsurance cover. The IAIS has also expanded the annual report on global reinsurance published each December to include a midyear report on macro-economic issues. This year the report covered securitization. The Subcommittee is also continuing its work on supervisory recognition of other jurisdictions.

The Task Force adopted its charges with two changes, to reflect that the Task Force will now work on implementation of the reinsurance regulatory modernization framework and will expand its work to monitor the development of international reinsurance standards. The Task Force then adjourned to a closed session to discuss the development of model laws for home and port of entry states.

Valuation of Securities (E) Task Force

The Task Force is chaired by Matti Peltonen (NY). It adopted the plan for regulating risks other than credit developed by the Invested Asset Working Group (IAWG) that was exposed during a July 30 conference call of the Task Force. It exposed revised charges for the IAWG.

Peltonen then discussed the development of the proposal to create a new process to determine NAIC designations for RMBS. The proposal started out as a “notching” of the NRSRO ratings up to an NAIC designation level that reflected the severity of the risk. The proposal has evolved to develop a method that does not rely on the NRSROs, but would likely employ a third-party vendor to do analysis of the expected cash flows for the underlying assets. Peltonen said one advantage of this approach would be taking into account write-downs and discounts on the original cost basis – the RBC would reflect the decreased risk in these circumstances.

Joe Celetano (Pacific Life) spoke for the ACLI, outlining the first dollar of loss structural issues with the current ratings and emphasizing the proposal was an effort to get the RBC correct as opposed to providing capital relief. Birny Birnbaum (Center for Economic Justice) criticized both industry and regulators for entertaining the proposal, first saying that it was plainly a capital relief effort and questioning whether the industry is as strong as advertized by the NAIC and state regulators. He questioned the logic of providing the relief, asking if the ratings were right in good times why were they wrong in bad. He then criticized continued reliance on rating agencies, given their inherent conflict of interest.

After discussion of the exposure item, RealPoint, LLC was added to the list of NAIC Approved Rating Organizations (AROs). It focuses on CMBS ratings. The Task Force then discussed two recommendations from the Executive Committee to strengthen financial regulation. The request to consider additional disclosures regarding mortgage loan concentration exposure was referred to IAWG. On the request to increase disclosure on expected duration of life insurance liabilities (asset/liability matching and liquidity issues) the Task Force will await questions forwarded from LHATF and SAPWG.

The Task Force approved the re-organized SVO Purposes and Procedures (P&P) Manual. The old one will be maintained until the end of 2010 to ease the transition. Staff is continuing research on the proposal for the NAIC to provide the converted NRSRO ratings for the universe of rated securities. The proposal is being considered given the large potential expansion of the NAIC ARO list, and the expense for insurers to subscribe to all of the different feeds in order to determine the second lowest designation.

Under other matters, Peltonen discussed a Blanks proposal related to first lien collateral. The SVO was asked to draw up language that would permit immaterial amounts of mixing of the collateral. Chris Evangel (NAIC SVO) warned of the imminent downgrade of AMBAC (security guarantor) and reminded the audience that otherwise unrated municipals could be filed with the SVO and that they had the discretion to look through to the issuer.

International Insurance Relations (G) Committee

Commissioner Sandy Praeger (KS), the new chair of the International Relations Committee, began the meeting with a review of the NAIC's International Strategy and Action Plan, a document which summarizes the NAIC's priorities and involvement in international organizations. This Plan is reviewed at each meeting. The Committee then turned to the NAIC International Relations Guiding Principles, which the Committee has been amending for several months. In spite of the previous work, there was still considerable discussion on the Principles. In the end, a revised set of Principles was approved. The Principles reaffirm the NAIC's commitment to be involved internationally and to promote the establishment of global insurance regulatory principles.

Commissioner Christine Urias (AZ) reported on the NAFTA Working group which was to meet immediately following the NAIC meeting. The agenda for the meeting included continued work related to cross-border truck traffic from Mexico and recent changes by the US Department of Transportation which would allow Canadian trucks and buses to present evidence of their Canadian insurance, circumventing US insurance regulations.

Commissioner Praeger reviewed the work begun at the IAIS on a Strategic Plan which will look at financial stability issues in insurance, priorities for the development and implementation of the IAIS standards, and external relations. This work is being undertaken by the IAIS Executive Committee. The Executive Committee has also established a Common Assessment Task Force to look at options for the regulation of internationally active insurance groups. An interim report will be presented to the IAIS Executive Committee in October and final recommendations will be considered in January. Steve Broadie (PCIAA) asked how industry observers would be informed of these developments and whether they would be given an opportunity to comment on the proposals. The topic may be discussed at the dialogue session with observers at the IAIS Annual Meeting.

IAIS Secretary General Yoshi Kawai gave a presentation on the IAIS response to the G20 and Financial Stability Board. Calling them, “our political masters,” Kawai said that the IAIS has added promoting financial stability as a priority for the association. He said that the IAIS is looking at capital requirements, systemic risk, and remuneration. The IAIS is pursuing four major work streams:

Supervisory standard setting, including a restructuring of the IAIS’s Insurance Core Principles which form the basis of the Financial Sector Assessment Program (FSAP) conducted by the International Monetary Fund (IMF);
Financial Stability, especially the development of macro-economic tools and surveillance;
Implementation Assessment, possibly leading to a peer review program; and
External Relations, especially working with the Financial Stability Board and Joint Forum.

Although there was no report on the IMF review of the US insurance regulatory system through the FSAP process, the NAIC International Report released at the meeting indicated that field visits to four states will take place in October and January. The NAIC has completed its own self assessment which indicted a “high level of observance by the US insurance regulatory system” with the IAIS Insurance Core Principles.

Commissioner Al Gross (VA) reported on the activities of the Solvency Modernization Task Force and its working groups on accounting, corporate governance, group solvency, international solvency, and principles based reserving. The Task Force has also developed a process for tracking IAIS drafts and NAIC reviews.

Ray Spudek (FL) reported on the Joint Forum activities. The Joint Forum has completed its work on regulatory approaches to off-balance sheet vehicles and will have completed by the end of the year its work on the differentiated scope of regulation. The Joint Forum will now focus on risk aggregation modeling which will be completed by early 2010. As part of this project, the Joint Forum has been conducting interviews with insurers in North America and Europe.

The NAIC has been approached by the Brazilian health insurance regulatory authority to sign a MOU regarding training and technical advice, similar to that the NAIC has with SUSEP, the Brazilian Superintendent of Private Insurance. The MOU may be completed by December.

The NAIC participated in a recent US-China Regulatory Dialogue in Dalian, China. NAIC representatives discussed the proposed Solvency Modernization Initiative and the Reinsurance Modernization Proposals.

The Committee considered its 2010 charges and decided to delay approval until a future conference call to allow staff time to circulate a marked-up copy with recommended changes. Part of the changes may include a request to review the various trade reservations as part of the US reservation process with the World Trade Organization.

Blogs

NAIC Seattle August 14-18, 2010

July 2010 NCOIL Boston Meeting Report

Financial Regulatory Reform—
Click here to read this article.

An Hour with US Representative Barney Frank—
Click here to read this article.

Impact on the States — Three Different Viewpoints—

2010 NAIC Financial Summit

NAIC Denver March 25-28, 2010

Joint Executive (EX) Comittee/Plenary—
Divided Commissioners Spar Over Climate Related Risk Disclosure Click here to read this article.

Government Relations (EX) Leadership Council—
Implementation of Health Care Reforms; Financial Regulatory Reform Coming Click here to read this article.

International Insurance Relations (EX) Leadership Council—

March 2010 NCOIL Meeting at Wild Dunes near Charleston, South Carolina Report

Life Insurance Comittee—
Secondary Market Takes First Priority Click here to read this article.

US Life Settlements Regulation—
FINRA Says VL Re-sales Are Ours Click here to read this article.

Stranger-Initiated Annuity Transactions—

NAIC San Francisco December 5-8 2009

NAIC San Francisco December 5-8 2009

NAIC National Harbor September 21-24, 2009

Recent Additions

Blogs

Blogs

NAIC Seattle August 14-18, 2010

July 2010 NCOIL Boston Meeting Report

Financial Regulatory Reform— Click here to read this article.

An Hour with US Representative Barney Frank— Click here to read this article.

Impact on the States — Three Different Viewpoints—

2010 NAIC Financial Summit

NAIC Denver March 25-28, 2010

Joint Executive (EX) Comittee/Plenary— Divided Commissioners Spar Over Climate Related Risk Disclosure Click here to read this article.

Government Relations (EX) Leadership Council— Implementation of Health Care Reforms; Financial Regulatory Reform Coming Click here to read this article.

International Insurance Relations (EX) Leadership Council—

March 2010 NCOIL Meeting at Wild Dunes near Charleston, South Carolina Report

Life Insurance Comittee— Secondary Market Takes First Priority Click here to read this article.

US Life Settlements Regulation— FINRA Says VL Re-sales Are Ours Click here to read this article.

Stranger-Initiated Annuity Transactions—

NAIC San Francisco December 5-8 2009

NAIC San Francisco December 5-8 2009

NAIC National Harbor September 21-24, 2009

Recent Additions

Blogs

Financial Regulatory Reform—
Click here to read this article.

An Hour with US Representative Barney Frank—
Click here to read this article.

Joint Executive (EX) Comittee/Plenary—
Divided Commissioners Spar Over Climate Related Risk Disclosure Click here to read this article.

Government Relations (EX) Leadership Council—
Implementation of Health Care Reforms; Financial Regulatory Reform Coming Click here to read this article.

Life Insurance Comittee—
Secondary Market Takes First Priority Click here to read this article.

US Life Settlements Regulation—
FINRA Says VL Re-sales Are Ours Click here to read this article.