NAIC National Harbor – November 2 – 6, 2011

NAIC National Harbor – November 2 – 6, 2011

Dowload Full PDF Here.

Table of Contents

Around the NAIC— Click here to read this article.

Executive (EX) Committee— Click here to read this article.

Joint Executive (EX) Committee/Plenary— Click here to read this article.

Government Relations (EX) Leadership Council— Click here to read this article.

Solvency Modernization Initiative (EX) Task Force— Click here to read this article.

NAIC/Consumer Liaison Committee— Click here to read this article.

NAIC/State Government Liaison Committee— Click here to read this article.

NAIC/Industry Liaison Committee— Click here to read this article.

Life Insurance and Annuities (A) Committee— Click here to read this article.

Life Actuarial (A) Task Force— Click here to read this article.

Property and Casualty Insurance (C) Committee— Click here to read this article.

Casualty Actuarial and Statistical (C) Task Force— Click here to read this article.

Financial Condition (E) Committee— Click here to read this article.

Accounting Practices and Procedures (E) Task Force— Click here to read this article.

Blanks (E) Working Group— Click here to read this article.

Statutory Accounting Principles (E) Working Group— Click here to read this article.

Capital Adequacy (E) Task Force— Click here to read this article.

Reinsurance (E) Task Force— Click here to read this article.

Valuation of Securities (E) Task Force— Click here to read this article.

Financial Regulation Standards and Accreditation (F) Committee— Click here to read this article.

International Insurance Relations (G) Committee— Click here to read this article.

 

Around the NAIC
The NAIC elected its 2012 officers; Commissioner Kevin McCarty (FL) is the new NAIC president, the president-elect is Commissioner James J. Donelon (LA), Commissioner Adam Hamm (ND) will be the vice president, and Commissioner Monica J. Lindeen (MT) will serve as the secretary-treasurer.  During the opening session, Danny Saenz (TX) was honored as the 2011 recipient of the Robert Dineen Award.

Sheila Bair, the former chairman of the FDIC, was the main event at the opening session of this meeting.  Bair expressed concern that the financial market reforms currently being implemented will prove to be inadequate and that there exists a potential for another economic crisis.  She considers credit default swaps to be a form of insurance and that therefore naked credit default swaps should be prohibited as against public policy for the same reason it is against public policy for an insurance company to insure a risk for which the policyholder has no insurable interest.  She lamented that her unsuccessful attempts to convince her then fellow bank regulators to ban naked credit default swaps and urged the NAIC to continue to argue for there to be an insurable interest requirement for credit default swaps. 

Bair stated that the FDIC had proposed a loan modification program, which she believes would have lessened the hardships caused by the ongoing foreclosures, but  certain unnamed heads of hedge funds had opposed debt restructuring because, she alleged, such a program would be detrimental to their short positions. 

Regarding capital adequacy requirements for banks, Bair opposed the approach taken in Basel III, stating that models should not be used to drive capital requirements as they can too easily be manipulated in order to increase returns on equity and the compensation packages of management.  She questioned the value of the new 9% capital rule for European banks as she believes it will still allow for very high levels of leverage.

When asked for her opinion of state-based guaranty funds, Bair stated that she would prefer a pre-funded model because it would allow the regulator to adjust premiums based upon the riskiness of the insurer and, when an insurer goes under, it would at least have contributed to the guaranty fund.  Regarding the Financial Stability Oversight Council (FSOC), she noted that it had been her idea and said she would have preferred that its chairman be independent.  She also believes that FSOC will help federal regulators to understand state insurance regulation.

Executive (EX) Committee
The Executive (EX) Committee, chaired by Commissioner Susan Voss (IA), held a brief meeting on Friday and met jointly with Plenary on Sunday.  On Friday Executive adopted, without discussion, the report of its joint meeting with the Internal Administration (EX1) Subcommittee held on November 3rd as well as reports of the following task forces and subgroups:

• AIG Managing (EX) Task Force
• Government Relations (EX) Leadership Council
• International Insurance Relations (EX) Leadership Group
• Producer Licensing (EX) Task Force
• Professional Health Insurance Advisors (EX) Task Force
• Solvency Modernization Initiative (EX) Task Force
• Speed to Market (EX) Task Force
• Surplus Lines Implementation (EX) Task Force

On a separate vote, Executive adopted a report of the NARAB (EX) Working Group which was read into the record by Commissioner Roger Sevigny (NH).  Sevigny stated that the Working Group had determined that 40 states meet the reciprocity requirements of Gramm-Leach-Bliley which had been updated by NARAB II.  He urged the remaining states to come into compliance.

The Committee voted to establish a joint Life (A) and Financial Condition (E) Working Group, comprised of Alaska, California, Florida, Iowa, New Jersey, New York, Tennessee, Texas, and Virginia, to address statutory reserving requirements for insurers offering Universal Life with Secondary Guarantee (ULSG) products.  The charge to the joint working group reads as follows: “The joint working group shall work expeditiously to determine whether it is prudent and necessary to develop interim guidelines and/or tools to be utilized by regulators in evaluating reserves for these products and, if so, to promptly develop such interim guidelines and/or tools. As part of this effort, the working group shall make recommendations regarding whether these interim guidelines and/or tools should be applied to in force and/or prospective ULSG products until such time as the final Valuation Manual is adopted.  The working group shall use as guidance the work completed by the Life Actuarial Task Force with respect to this issue. Finally, the working group may engage resources as necessary to assist with analysis and preparation of necessary guidelines and/or regulatory tools.”

The Committee approved a model regulation development request to amend the Model Regulation for Recognizing a New Annuity Mortality Table for Use in Determining Reserve Liabilities for Annuities.

The Committee received oral reports from the National Insurance Producer Registry (NIPR) board of directors delivered by Commissioner Sharon Clark (KY) and from the System for Electronic Rate and Form Filing (SERFF) board of directors given by Administrator Teresa Miller (OR).  It also received an oral report from the Interstate Insurance Product Regulation Commission given by Sevigny who reported that there are now 41 states in the Compact.

Under other matters, Commissioner Steven Robertson (IN) requested that the NAIC officers consider holding a fourth annual meeting in Kansas City that could be coordinated with staff training.  He noted that the new three meeting structure has necessitated a lot of interim work.  Sevigny suggested holding a second commissioners’ conference because, especially with the cancelation of the Philadelphia meeting, many commissioners have not gotten to know each other.  Voss said that the officers would consider these requests.

Joint Executive (EX) Committee/Plenary
Commissioner Susan Voss (IA) chaired this meeting.  Plenary adopted minutes of the Executive Committee meeting held on November 4th.  [See a full report of this meeting in this newsletter.]  Plenary and Executive adopted a report of the NARAB (EX) Working Group which recommended 40 states be certified as meeting the reciprocity requirements of the Gramm-Leach-Bliley Act.

Plenary adopted by consent the committee, subcommittee, and task force minutes of the summer national meeting business [which due to the cancellation of the Philadelphia meeting had been conducted mostly via conference calls], with the exception of the items presented, voted on, and adopted separately in the following Committee reports: 

• A report of the Life Insurance and Annuities (A) Committee meeting, presented by Commissioner Adam Hamm (ND).  [See a comprehensive report of “A” Committee’s meeting later in this newsletter.] 
• A report of the Health Insurance and Managed Care (B) Committee meeting, delivered by Commissioner Monica Lindeen (MT).  The Committee heard a legislative update on federal bills impacting healthcare, a briefing on an Institute of Medicine report entitled "Essential Benefits – Balancing Coverage and Cost".  It adopted its 2012 charges as well as reports from the various subgroups.  Lindeen noted that the Senior Issues (B) Task Force included adoption of a report on Medicare supplement insurance first-dollar coverage.  
• A report of the Property and Casualty Insurance (C) Committee meeting, presented by Mark Haire (MS).  Plenary took a separate vote to adopt a white paper entitled "Background and Implications of Defective Drywall".   [See a comprehensive report of “C” Committee’s meeting later in this newsletter.]
• A report of the Market Regulation and Consumer Affairs (D) Committee meeting, presented by Commissioner Sharon Clark (KY).  The Committee adopted a complaint reconciliation proposal, its 2012 charges, and reports from its various task forces and subgroups.
• A report of the Financial Condition (E) Committee meeting, presented by Superintendent Joe Torti (RI).  Plenary took separate votes to approve actions taken on four issues reported by Torti – adoption of amendments to the Risk Based Capital for Insurers Model Act regarding the life trend test and fraternal benefit societies; adoption of SSAP 101 which sets out accounting principles for deferred tax assets; adoption of the Model Guideline for Implementation of State Orderly Liquidation Authority; and adoption of amendments to the Credit for Reinsurance Model Law and Regulation to modify collateral requirements for non-US reinsurers domiciled in qualified jurisdictions.  [See a comprehensive report of “E” Committee’s meeting later in this newsletter.]
• A report of the Financial Regulation Standards and Accreditation (F) Committee’s regulator-to-regulator and open meeting, presented by Director Julie Mix McPeak (TN).  [See a comprehensive report of “F” Committee’s meeting later in this newsletter.]
• A report of the International Insurance Relations (G) Committee meeting, given by Commissioner Kevin McCarty (FL).  [See a comprehensive report of “G” Committee’s meeting later in this newsletter.]

The results of the zone elections of officers for 2012 were announced: the Midwestern Zone elected Director John M. Huff (MO) as Chair, Commissioner Stephen W. Robertson (IN) as Vice Chair, and Commissioner Ted Nickel (WI) as Secretary-Treasurer; the Northeastern Zone elected Commissioner Thomas B. Considine (NJ) as Chair, Commissioner Joseph G. Murphy (MA) as Vice Chair, Commissioner Thomas B. Leonardi (CT) as Secretary-Treasurer;  the Southeastern Zone elected Commissioner Jim L. Ridling (AL) as Chair, Commissioner Wayne Goodwin (NC) as Vice Chair, Commissioner Sharon P. Clark (KY) as Secretary-Treasurer; and the Western Zone elected Director Christina Urias (AZ) as Chair, Commissioner Gordon I. Ito (HI) as Vice Chair, Commissioner Eleanor Kitzman (TX) as Secretary-Treasurer.

Under other matters, McCarty, the incoming NAIC president, thanked Voss, the outgoing president, for leading the NAIC though a difficult year.  Voss received a standing ovation from regulators and those in the audience.  It was also announced that the commissioners’ conference will be held in Miami, February 3-6, 2012.

Government Relations (EX) Leadership Council
Commissioner Susan Voss (IA) chaired this meeting. 

Health Care Reform:  Brian Webb (NAIC staff) provided an update on health care issues.  He stated that the NAIC DC office was tracking the debt reduction efforts of the Joint Select Committee on Deficit Reduction with respect to a proposal that would eliminate the option to purchase first-dollar coverage under Medigap and that the NAIC had sent a letter questioning the assumptions underlying the proposal and raising concerns that the proposal would require changes to existing Medigap policies that would cause considerable confusion for seniors and major market disruptions and would appear to conflict with the guaranteed renewability of these policies mandated by state and federal law.  Webb noted that “D” Committee had issued a report on Medigap first-dollar coverage, which details the problems the proposal would create; he recommended that the Government Relations Leadership Council provide a cover letter if the NAIC decides to send the report to the Select Committee.

Webb’s office is tracking the appropriation bills to evaluate whether any proposals would impact the states’ ability to implement the health care reforms.  It is also watching the “Medicaid Fix Bill” which seeks to close a perceived loophole in the Patient Protection and Affordable Care Act that would allow early retirees to qualify for Medicaid.  Webb thought it was doubtful that the bill would pass this year but felt its chances may improve in 2012. 
Webb noted that HHS had recently concluded that the long-term care insurance program that would have been created under the Community Living Assistance Services and Support Act (the CLASS Act) was not financially viable and therefore would not be implemented.

With respect to the Medical Loss Ratio (MLR), Webb stated that the NAIC was waiting for the final reporting forms, which insurers would have to submit, and the final summary of benefits and coverages, which providers of group health plans must provide to applicants and enrollees in a uniform format on March 23, 2012.  Final regulations regarding the operation of the exchanges, as well as regulations effecting MEWAs, are also outstanding.  Under the Act, before a MEWA product may be sold, the MEWA must register with the Department of Labor and a state may issue a cease and desist order to any MEWA that has not registered. 

FSOC:  Director John Huff (MO), who serves as the NAIC nonvoting representative on the Financial Stability Oversight Council (FSOC), gave an update on the activities of FSOC which was essentially the same one Huff had provided during the meeting of the NAIC/State Government Liaison Committee.  Huff thanked the NAIC for providing him with government relations, actuarial, financial analysis, and legal staff support and reported that the FSOC has met seven times since its creation last year, most recently on October 11th during which it has worked on and issued its organizational documents.  He said FSOC has been focusing on three issues - the designation of systemically important (too big to fail) non-bank financial institutions, implementation of the Volcker Rule, and concentration limits for large financial firms. 

Huff reported that during the October 11th meeting FSOC had issued its proposed rule with a 60 day comment period for designating systemically important financial institutions (SIFIs) that would be subject to the supervision by the Federal Reserve and to heightened prudential standards.  Huff described the proposed three stage process for designating a SIFI. 

The first stage consists of a quantitative metric under which $50 billion in total consolidated global assets, together with any of the following five conditions, would be used to identify financial institutions that meet the threshold for further evaluation under Stage 2: $30 billion in outstanding credit default swaps, $3.5 billion in derivative liabilities, $20 million in loans and bonds, a leverage ratio of 15:1 of total consolidated assets to total equity, or a 10% debt ratio of short-term debt to total consolidated assets. 

Under Stage 2 FSOC would, in consultation with the primary financial regulator, analyze the institutions identified under Stage 1 to determine whether they present a potential threat to US financial stability based upon public and regulatory information.  Under Stage 3, each institution that appears to qualify as a SIFI would be further analyzed using information obtained directly from the entity and would be given an opportunity to convince the Council that it should not be designated as systemically important.

Huff referred interested parties to the Treasury Department website for further information: www.treasury.gov/initiatives/financial-stabilityv.

Update on Other Federal Financial Legislation:  Moira Campion McConaghy (NAIC staff) noted that the Federal Insurance Office (FIO) would be issuing a report mandated by Dodd-Frank on the future of insurance regulation and that the NAIC expects to be invited to testify before Congress soon after the report’s release.  She later added that the NAIC anticipates sending a letter to FIO on this issue in late December.

McConaghy also noted that Title VII of Dodd-Frank deals with the regulation of derivatives, but said the NAIC is hopeful that derivatives held by insurers would be carved out of the final regulation.  Finally, she noted that the National Flood Insurance Program has been operating under a series of extensions with the current one set to expire on November 18th.  She reported that a five-year extension of the NFIP had passed the House and had been approved by the Senate Banking Committee but had not been taken up by the full Senate.    

Other Matters:  Under Other Matters, Voss asked for comments on a draft letter to HHS Secretary Kathleen Sebelius regarding HHS’s proposed federal-state partnership to operate the health insurance exchanges.  Under the proposal the federal government would be able to enter into partnerships with the states under which the states would be responsible for the oversight of the exchanges operations. 

Commissioner Roger Sevigny (NH) noted that no plan could be sold on either a state or federal exchange unless both the forms and rates have been approved by the state in which the plan is offered for sale.  He added that the letter also asks HHS whether state exchanges can partner with the federal government if it wants the feds to perform some of the exchange functions.  Commissioner Sandy Praeger (KS) told the Committee that “B” Committee had signed off on the draft letter. 

After a few more clarifying comments, the Committee voted to approve sending the letter.

Solvency Modernization Initiative (EX) Task Force
The Task Force met under the chairmanship of Director Christina Urias (AZ) and began with the adoption of its 2012 charges, which were unchanged from 2011, and the minutes of interim meetings.  Urias confirmed that the goal was still to finish the SMI project by the end of 2012.  The final report would be a documentation of the US system.  The Executive Committee would then decide the next steps to be taken.

The Task Force then discussed six questions posed by Director Urias regarding communication about the US financial regulatory system.  She asked to whom the communication should be made, what topics need to be communicated, how regulatory success can be measured, what works well in the current system and what changes need to be made, and whether is there a different philosophy that underlies the US system compared to international counterparts.  Discussion from the Task Force members included comments about the differences between the legal entity approach in the US and the top down group regulation being developed elsewhere.  There was also a discussion about the cost/benefits of some of the other systems and the limited resources in the state budgets.  Steve Johnson (PA) said that regulators had to be careful not to over burden the companies.  The members indicated their support for “one good idea from abroad” (the ORSA) , but generally saw ComFrame as overbearing and intrusive.  They did think the ORSA would help to better understand how groups are managed.  The Task Force agreed to continue discussion on these issues. 

The Task Force adopted the Own Risk and Solvency Assessment (ORSA) Guidance Manual as proposed by the Group Solvency Issues Working Group, co-chaired by Director John Huff (MO) and Danny Saenz (TX).  The Manual has three sections: a description of the risk management framework, an assessment of risk exposure, and a group risk capital and prospective solvency assessment.  The Manual will now be field tested during the next year.  "E" Committee will be asked to develop the implementation language and an effective date for the ORSA.  Randi Reichel (AHIP), on behalf of the Interested Parties, said the industry would be drafting implementation options for consideration over the next few weeks.

Joel Steinberg (NY Life) presented a proposal by the Capital Initiatives Working Group entitled, “Using Stress Testing as a Supplement to RBC to Determine Minimum Capital Requirements.”  The Capital Initiatives Working Group (CIWG) is composed on Mass Mutual, MetLife, New York Life, Northwestern Mutual, Prudential, Reinsurance Group of America, and State Farm.  Steinberg began by reviewing the CIWG’s principles for a minimum capital standard.  He said the CIWG did not think Solvency II was appropriate for the US life insurance business.  The CIWG felt that stress testing could be used to supplement RBC to capture important risks not currently handled well in RBC.  Under their proposal, all companies would be subject to basic factor-based RBC but companies could elect to do stress testing.  If they did, RBC would be the greater of the stress testing result or RBC based on a lower set of factors.

Larry Bruning (NAIC staff) asked if stress testing would help define the calibration of RBC..  Steinberg said would be difficult to set a calibration.  Allen Seeley (NM) asked whether the proposal applied only to life companies.  Steinberg said the drafters were primarily life companies, but it could be applicable to non-life.  He suggested stress testing might not be as important on the non-life side.  There were concerns expressed about the use of RBC to rank companies.  For this reason it might be a good idea to prevent the release of RBC results. Director Urias said the Task Force might return to the CIWG proposal in the future.

The Task Forced received reports from its Working Groups.  The Working Groups were asked to submit updates to the SMI Roadmap based on the action at the meeting.

Principles-Based Reserving (EX) Working Group:  The Working Group, which was chaired at this meeting by Commissioner Julia McPeak (TN), had received a report from Towers Watson regarding the ongoing impact study evaluating the effect on the life insurance industry of the new PBR Valuation Manual.  Towers Watson reported that phase one, involving producing a baseline reserve, had been completed and that phase two, evaluating and quantifying the sensitivity of the reserves to various assumptions, was nearly complete.  The remaining work involves identifying potential areas of refinement of the PBR requirements and preparing its final report.  (See the report of the Life Actuarial Task Force for more details).

The Working Group adopted its charges for 2012, which remain unchanged from 2011.  

The Working Group received reports on recent activities of the Life Actuarial Task Force and progress to completion of the Valuation Manual.  A detailed written report on the manual was provided.  On the request of the Task Force, the targeted date for completion of the Valuation Manual was extended to March 2012.  The chair called for other committees and working groups to complete their work by March as well.

The Working Group discussed an ACLI comment letter proposing a principles-based framework for verifying reserves under the PBR approach.  The approach consists of an independent review of the reserves, standards of practice for the independent reviewer, an increased centralized review process at the NAIC to identify best practices, and a feedback loop.

Group Solvency Issues (EX) Working Group:  Director Huff and Danny Saenz co-chaired the meeting of the Group Solvency Issues Working Group which as reported earlier amended and unanimously adopted the Own Risk and Solvency Assessment (ORSA) Guidance Manual.  A glossary may be added in the future to clarify some of the language.

The next step will be to conduct a pilot project of the ORSA with a small group of companies (5 -10).  Industry representatives urged that the companies selected reflect a mix of size and type.

The Working Group has prepared a letter to "E" Committee on next steps.  The letter recommends an effective date of a year or two from now, charges to the Financial Analysis and Examination Handbook working groups to develop guidance, and asks the accreditation group to look at enforcement.  Comments on the letter were encouraged.

There was discussion of the role of the lead supervisor in coordinating the ORSA submissions and reviews.  Joe Fritsch pointed out the need to avoid duplication of the reviews and requests.  Steve Johnson said it was important for companies to walk their lead regulators through the ORSA.  Saenz agreed, saying the CRO Council had made this point as well.

The Working Group discussed implementing measures for the ORSA requirement, including the use of Form B of the Model Holding Company Regulation.  Industry representatives expressed strong concerns about the proposal and urged more time for development.  Steve Johnson said that it was important to move quickly.  He urged the industry to present concrete proposals.  The topic will be discussed on a future conference call.
The Working Group received a report on state insurance regulators discussion with the North American Chief Risk Officers Council at the Council’s October 20 meeting.  The co-chairs suggested there may be additional meetings with the Council which they see as the experts in the area.  Danny Saenz urged the trade associations to work with the CRO Council.

The Working Group received an update on the activities of the IAIS Group Issues Subcommittee which will meet in December.  The Subcommittee will work on changes to ComFrame, supervision of branches, and

The Working Group adopted the NAIC Holding Company and Supervisory Best Practices Document for referral to the Financial Analysis Handbook (E) Working Group.

International Accounting and Solvency (EX) Working Group: Joe Fritsch (NY) chaired the meeting of the International Accounting and Solvency Working Group in the chair, Mel Anderson’s (AR), absence.

Ramon Calderon (NAIC staff) presented a summary of the comments received on the IAIS Common Framework for Supervision of Internationally Active Insurance Groups (ComFrame) during the summer consultation.  Calderon said one of the key issues that they need to clarify is the relationship between the ComFrame and the ICPs and existing regulation.  He also said many found ComFrame to be too focused on what companies needed to do and insufficiently focused on what supervisors needed to do.  Observers also said the proposal was too prescriptive.

The IAIS Technical and Executive Committees will be meeting November 10-11 to provide advice to its subcommittees in terms of their review of the comments.  One of the most contentious issues remains whether there needs to be a harmonized capital requirement in ComFrame.  The NAIC is supporting a more evolutionary approach less focused on capital. 

Rob Esson (NAIC staff) provided an update on the activities of the International Accounting Standards Board, especially the recent meeting of the Insurance Working Group.  At that meeting there was strong support for a “current-current through Other Comprehensive Income (OCI)” approach proposed by the HUB Global  Insurance Group..

Esson also commended Kevin Spataro (Allstate) for pointing out to the Working Group that too much time has been spent on minor issues and that the IASB needed to focus on major sources of premium.  He said non-life insurance accounts for more than half the premium volume, yet there has not been a comprehensive look at the issues.  Most of the non-life discussion has focused on a modified approach for pre-claims exposure for short-term contracts called the Premium Allocation Approach.

Esson also provided a report on the IAIS Accounting and Auditing Issues Subcommittee.  He said the issue as to whether to push for re-exposure of the Insurance Contracts standard had been raised at the last meeting, with the Europeans saying “high quality was more important that re-exposure.” Japan, Canada, and the US supported re-exposure and convergence.  Fritsch asked whether the US should consider a letter in support of convergence.

The Working Group received a letter from the ACLI regarding unlocking of the residual margin under the Insurance Contracts draft.  The ACLI’s tentative position is that the margin should not be locked at inception.  The Working Group will discuss the letter on a future conference call.

Corporate Governance (EX) Working Group:  The Corporate Governance Working Group, chair by Acting Director Andrew Stolfi (IL), exposed the summary of US corporate governance requirements for 30-day public comment.  Stolfi said he welcomed additions and corrections.  He urged commenters to send in specific wording changes.  Comments will be discussed on a conference call.

The Working Group discussed the timeline and next steps to correct gaps in existing US corporate governance requirements over the next year.  Conference calls on this topic will begin in January.  The project will be completed by the end of 2012.

The Working Group received an update on the activities of the IAIS Corporate Governance Subcommittee which will meet in November.  The Subcommittee is working on changes to ICP 9 on supervisory reporting and on ComFrame.

SMI RBC (EX) Subgroup: Alan Seeley (NM) chaired the meeting of the SMI RBC Subgroup which issued a report on its progress to "E" Committee.  In its report, the Subgroup stated that it cannot develop a calibration of RBC it so will focus on calibration of specific components.  There remains a desire to have an answer to the question though.  Seeley said the NAIC is considering trying to look at the safety of the entire solvency system as a way of getting a calibration number.  A consultant may be hired to look at this issue.

The report also says the Subgroup completed its review of the identification of missing risks and  has proposed to the Capital Adequacy (E) Task Force a review of several enhancements to RBC, including:

• The introduction of a catastrophe risk charge.
• Improving the methodology to account for the interdependency of risks.
• Enhancing methodologies for deriving the credit charge for asset and investment risk.
• Refining the methodology for deriving the credit risk charge for reinsurance recoverable.

Operational risk will be looked at through the ORSA process.

The report also said there is little interest in the US in using models to set minimum capital requirements, so no further work is planned in that area.

The Subgroup still needs to examine the thresholds of the action and control levels.

At this meeting the Subgroup heard a presentation from Henri Boudreau (OSFI) regarding changes being proposed to the Canadian solvency system.  Canada will allow a standard approach and the use of internal models.  Most changes are to be effective in 2015.
The Subgroup also received a report from the P/C RBC Capital Committee of the AAA regarding covariance issues.  A final report will be prepared by the end of the year.  The Subgroup will discuss these proposed enhancements in 2012.

NAIC/Consumer Liaison Committee
Commissioner Neal Gooch (UT) chaired this meeting.  After presenting the 2011 award to Commissioner Theresa Miller (OR) for her efforts to advance the cause of insurance consumers, the consumer representatives made presentations on the following issues, all but the last of which were related to the Patient Protection and Affordable Care Act:

Value of Consumer Testing:  Patricia McCoy (Consumer Financial Protection Bureau) and Lynn Quincy (Consumers Union) made a presentation on the consumer testing methodology the CFPB had followed in developing its mortgage disclosure forms.  The purpose of the presentation was to encourage the NAIC to utilize consumer testing when developing model disclosure forms.

The forms developed by CFPB are intended to satisfy the requirements of the Truth in Lending Act to disclose the terms (e.g., adjustable rates, balloon payments) and their associated risks and to provide a good faith estimate of closing costs.  In order to develop its forms, the Bureau held roundtables with consumers, lenders, and producers; engaged economists, psychologists, etc. to conduct research; and did extensive qualitative testing, which consisted of one-on-one interviews with consumers, lenders, and producers, as well as input received from the public on the various drafts of the forms that had been posted on the CFPB website.  McCoy stated that the forms were continually revised and retested in response to the feedback received.

Quincy reinforced the benefits and power of consumer testing by showing a video of some actual consumers commenting on draft disclosure forms.  She opined that consumer testing would be extremely helpful in implementing the Affordable Care Act because good disclosure forms would enable consumers to understand the various health insurance plans.

Loopholes in the Patient Protection and Affordable Care Act:Tim Jost (Washington and Lee University) stated that the Affordable Care Act was intended to be comprehensive and it even preempts ERISA; but, he charged, insurers are finding ways to get around the law and to continue to risk select, eliminate or limit the effects of risk pooling mechanisms, avoid consumer protections, offer inadequate coverage, and deceive consumers.  He urged the state insurance regulators to fill the gaps in the Act that are allowing these alleged abuses in order to protect their citizens and the integrity of their insurance markets. 

Jost identified some of the health coverage plans not governed by the Affordable Care Act, including plans not covered by the Health Insurance Portability and Accountability Act (HIPAA) of 1996 such as retiree-only plans, short-term limited-duration plans, and stop-loss plans with very low attachment points.  In addition, according to Jost, theActwould not prohibit insurers from crossing state boundaries to avoid regulation and, he noted, by crossing borders insurers could also avoid paying premium taxes. 

Jost recommended that the NAIC update its model act on stop-loss plans to prohibit their use for small groups.  He noted that New York and Oregon already prohibit the sale of stop-loss to small groups.

Health Insurance Exchanges:  Sarah Lueck (Center on Budget and Policy Priorities) spoke about the federal regulations that will govern the exchanges.  She noted that HHS has recently proposed a partnership model that would allow a state to perform certain exchange functions regardless of whether it has a state or federal exchange.  She stressed the importance of a seamless process with clear lines of responsibilities that will enable consumers to know who to contact. 

Lueck stated that the states have the authority to ensure that the exchange governing boards are free of conflicts of interest and she strongly recommended that representatives of insurers or producers not be permitted to serve on the governing boards but instead be used as advisors to take advantage of their expertise.  She also recommended that the exchanges provide special enrollment periods related to changing income.  [Special enrollment periods were also recommended by the next speaker.]

Aaron Smith (Young Invincibles) made a presentation on designing an exchange that would work for young adults who, he said, present unique mobility and transition challenges.  He stated that a typical young adult changes jobs and places of residence frequently and is under or uninsured.  He recommended that the exchanges be designed to address these issues; that they allow for easy entry, reasonable triggered special enrollment periods (e.g., when a person loses or changes jobs, becomes pregnant, has a dramatic change in income that may make him/her eligible for a subsidy, or moves to a new state), and switching between plans. 

In addition, Smith highlighted the need for outreach and education and particularly stressed that internet access should include social media (Twitter and Facebook) and smartphones.  He emphasized the need to get healthy young people into the pool of insureds in order to lower premiums for everyone.

Life Insurance and Annuity Claims Update:  Brendan Bridgeland (Center for Insurance Research) reported on ongoing investigations of insurers’ use of the Social Security Death Master File (DMF) to conduct “death sweeps” to identify deceased annuity policyholders in order to stop annuity payments, but they fail to utilize the DMF to pay benefits due to beneficiaries of deceased policyholders.  He stated that the California controller had found that, for some individual policies, a large national life insurer not only avoided paying death benefits but continued to collect premiums from the accumulated cash value after its policyholders had died.  California has entered into a settlement with the insurer under which it agreed to take further steps to identify deceased policyholders and notify beneficiaries.  Florida reached a similar settlement with the insurer.

Bridgeland stated that the attorney general and comptroller in New York have just launched a joint investigation of life insurers to determine if there procedures adequately ensured payouts on policies of deceased customers.  He noted that additional moneys may be due to beneficiaries of policies written by companies that had demutualized and that millions of dollars in unclaimed benefits are turned over to the states rather than paid out to beneficiaries because the insurers do not take adequate steps to locate beneficiaries. 

NAIC/State Government Liaison Committee
The meeting of the NAIC/State Government Liaison Committee was chaired by Commissioner Susan Voss (IA).  The agenda for the meeting consisted of briefings by the NAIC of the activities of its various committees and federal activities that impact the insurance industry. 

Health Care Reform Implementation:  Commissioner Sandy Praeger (KS), chair of "B" Committee, briefed the legislators on the topics that will be considered during this national meeting regarding implementation of the Patient Protection and Affordable Care Act, including the group market reforms that will go into effect in 2014, development of a uniform fraud reporting form, health care quality improvement, and an ongoing review of NAIC models for compliance with the pre-2014 requirements.  

Praeger noted that the NAIC had drafted a comment letter regarding HHS’s insurance exchange guideline proposals and that the letter emphasizes that regardless of whether an exchange is run by a state or by the federal government all plans sold by an exchange must be approved by the state in which the exchange is operating.

In response to a question from Commissioner Ralph Hudgens (GA), Praeger announced that HHS is expected to release the essential benefits package in early spring.

International Developments:  Commissioner Kevin McCarty (FL) highlighted the responsibilities of the International Insurance Relations (G) Committee.  He stressed how interconnected insurance markets are around the world and the importance of complying with the International Association of Insurance Supervisors (IAIS) core principles for the regulation of the financial condition of insurance entities; he noted that the International Money Fund had recently audited six states for compliance with the IAIS core standards and that the IAIS is currently working on a Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame).  McCarty stated that the NAIC has entered into twelve memorandums of understanding with developing countries. 

State Senator Dolores Kelley (MD) had several questions for McCarty.  She asked about international standards regarding market conduct and McCarty informed her that the IAIS has not addressed consumer protection.  Regarding the status of memorandums of understanding when governments change, McCarty informed her that an MoU could be terminated at any time.

Insurance Industry Investment Profile:  Ed Toy (NAIC Director of Capital Markets) made a presentation regarding the NAIC analysis of insurer investment portfolios that had been undertaken in response to the financial crisis.  He stated that derivatives exposures were of particular concern but the analysis had determined that, although the portfolios included a significant amount of derivatives, they are used mostly for hedging purposes and so should not be of much concern to the regulators.  He added that insurers have minimal investments in collateralized debt securities, but have significant exposures in municipal debt. 

Toy stated that the current relatively low interest rates, coupled with the flattening of yield curves caused by the Federal Reserve’s "operation twist", are causing some concern but that because of the lifecycles of investment portfolios regulators do not anticipate that these developments will have adverse effects on investment income, at least for the next few years. 

Regarding the impact of the European financial crisis, Toy stated that US insurers do not hold much foreign sovereign debt but that the crisis is also impacting European financial institutions that US insurers are invested in, although the amount of those investments is not great.

Federal Financial Reform:  Voss provided an update on the Federal Insurance Office (FIO) that had been created by Dodd-Frank.   She stated that the NAIC was working with FIO Director Michael McRaith, a former Illinois insurance director, and stressed that the dialogue with McRaith has been positive and that they have a good working relationship.  She reported that in January the FIO is scheduled to release a report required by Dodd-Frank on modernizing and improving the system of insurance regulation in the United States.  Voss noted that the membership of the advisory committee for the FIO had just been named and that seven of its 15 members are state insurance commissioners.  Representative Brian Kennedy (RI) expressed concern that the advisory committee membership did not include any state legislators.

Director John Huff (MO), who serves as the NAIC nonvoting representative on the Financial Stability Oversight Council (FSOC), reported that the FSOC has met seven times since its creation last year and that its focus has been on the designation of systemically important (too big to fail) non-bank financial institutions, implementation of the Volcker Rule, and concentration limits for large financial firms. 

On October 11th the proposed rule for designating systemically important financial institutions (SIFIs) was published with a 60-day comment period.  Huff stressed that the designation would not be based solely on the size of the institution and would be determined in three stages.  He stated that $50 billion in global assets, together with any of the following five conditions, has been established as the threshold in Stage I: $30 billion in outstanding credit default swaps, $3.5 billion in derivative liabilities, $20 billion in loans and bonds, a leverage ratio of 15 to 1 of total consolidated assets to total equity, or a 10% debt ratio of short-term debt to total consolidated assets.  Stage II of the designation process consists of a more granular, institution-specific analysis of the individual company’s risk profile, involving quantitative analysis and qualitative judgment of the potential threat and includes consultation with the primary regulator.  Under Stage III, the institution is provided with written notice that it is being considered for determination as a SIFI and it is given an opportunity to convince the Council that it is not systemically important.

Huff stated that the three insurance representatives on the Council would be meeting periodically and he anticipates they will have a good working relationship since all three have insurance regulation backgrounds.

Commissioner Tom Considine (NJ) reported on revised rules for collateral requirements for non-US reinsurers that had been adopted by the Reinsurance (E) Task Force and "E" Committee at a joint meeting held on September 19th.

State Legislative Agendas:  Commissioner Jim Donelon (LA) gave a status report on efforts to implement the premium tax allocation provisions of NRRA II.  He stated that 12 states had signed on to the NAIC proposal known as NIMA and that nine states had joined SLIMPAC, a state compact which has the support of NCOIL.  He stated that the remaining states were taking various approaches, with the large states preferring the home state approach.  Donelon urge the parties to continue discussions and noted that Kentucky had proposed a compromise which he thought merited consideration.  Hudgens asked for a description of the Kentucky compromise, but no one present could provide the details.
Commissioner Sharon Clark (KY) gave a brief report on market conduct reforms under consideration by the NAIC.

NAIC/Industry Liaison Committee
This meeting was chaired by Commissioner Jay Bradford (AR).  Bradford opened the meeting by suggesting that due to time constraints it was probable that not all of the agenda items would be addressed.  In fact the last two items on the agenda, NAIC interaction with federal entities and issues raised at the NAIC/Consumer Liaison Committee meeting were not discussed.

Before going through the agenda, Commissioner Susan Voss (IA) commented on the data collection requirements of the Patient Protection and Affordable Care Act.  She stated these requirements are significant and will probably add costs, both for health insurers and for the regulators, and, she said, the NAIC was concerned that these increased costs will translate into premium increases and hoped that the federal regulators, state regulators, and industry would work together to make data collection as efficient as possible.  Bradford added that he hoped that the regulators and industry would use this Committee to accomplish this goal. 

Kim Holland (Blue Cross/Blue Shield Association), a former insurance commissioner, stated that her member companies were greatly concerned with the massive IT conversions and new systems that would be required in order to comply with the Act.  Another representative of the Association noted that her members are also directly regulated by HHS and it is her understanding that industry would be invited to a joint NAIC/HHS meeting to discuss how to implement the administrative requirements of the Act and how to streamline them and make them more efficient.

Discussion of Market Conduct Regulation Issues:  Bob Detlefsen (NAMIC) requested that as new regulations are developed consideration be given to amending or eliminating existing regulations in order to take into account the cost of regulation.  He also stressed that new regulation should be subject to cost/benefit analyses. 

Justin Ailes (American Land Title Association) addressed the increasing use of contract workers to conduct market conduct examinations.  He stated that while in-house staff is generally competent, the same is not true with respect to contract examiners and increasing reliance on them is eroding existing relationships with the regulators.  He added that the cost of these examinations is very high; that third-party billing rates are approximately four times what the regulators would charge, that consulting firms have no incentive to keep costs down; that there is a lack of transparency in billing; and that in many instances the contract examiners go beyond the scope of their authority and sometimes accuse companies of violating laws that do not exist because they tend to confuse the laws of different states in which they work.

Ailes requested that the NAIC consider restoring the credibility of market conduct examinations by developing an accreditation program that would certify contract examiners for particular lines of insurance; developing standards for itemized and transparent invoices; and developing reasonable guidelines for third-party examination costs. 

Deirdre Manna (PCI) told regulators that PCI had conducted a study on compliance which surveyed 42 insurers with the goal of developing benchmarks for costs and time cycles.  She separated out the parts of the study that covered market conduct examinations which involved 54% of the 42 insurers that had been involved in a market conduct examination during 2010.  The survey indicated that national firms were more likely to be the subject of a market conduct examination than regional carriers; that on average insurers were involved in 1.7 examinations per year and 2.4 states were covered; that a typical market conduct examination lasted 287 days as compared to 310 days for financial examinations; and on average the examinations called for 1.4 corrective actions of which 0.4 resulted in fines, with the majority related to personal lines.  With respect to cost, Manna stated that the average market conduct examination cost $81,000 and for national carriers the average was $459,000.  She suggested that the NAIC and industry look at how small companies are adversely impacted in terms of cost and the time taken to examine them.

Lee Covington (Insured Retirement Institute) spoke about ways to increase the efficiency and effectiveness of market conduct examinations.  He suggested that the ingredients for success include more commissioner level involvement, adopting the lead state(s) concept, more interstate coordination and the ability of other states to participate, and permitting the state to do an examination outside of the process when appropriate.  Covington noted that the life insurers are best suited for coordinated examinations since they have national business models with very little state-specific differences.

Lisa Brown (AIA) recognized the efforts of "D" Committee and in particular those of its chair Commissioner Sharon Clark (KY).  Brown stressed the need for cost/benefit analysis when developing regulations.  She said that although the trend has been increased reliance on market analysis some of her members have reported an increase in comprehensive market conduct examinations.  Since the focus of market conduct is to protect consumers, she suggested the focus should be on activities that pose the greatest potential for harm and, because of their high cost, on-site examinations should be avoided where possible.  She also recommended that greater coordination could eliminate duplicative data calls of companies in the same group.

Commissioner Clark stated that the contract examiner issue had been discussed at the "D" Committee meeting that had taken place the day before and that the NAIC recognizes that there is room for improvement, for more uniformity and efficiency.  She said that her Committee needed more information on the extent of the problem and that it is conducting a thorough survey of the states to obtain this information.  She added that in January the industry would be receiving the same survey and that action on contract examiners would be a priority for her Committee in 2012.

Discussion of the Role of NAIC Consumer Representatives:  Clark provided some background on the funding of consumer representatives, stating that the program had begun in 1992 with the goal of improving consumer participation in NAIC meetings.  She said that the NAIC/Consumer Liaison Committee provides a forum for consumers to raise issues of concern.  With respect to providing funding to cover their travel expenses, Clark stated that the NAIC reviews the qualifications of applicants and the need for funding before approving the funding.

Jessica Waltman (National Association of Health Underwriters) stated that industry does not dispute the need for or value of consumer representatives but that over the past few years public attention to the activities of the NAIC has grown and industry is concerned with conflicts of interest.  She noted that there have been media reports in which consumer representatives have identified themselves as representing the NAIC or to be speaking on its behalf.  She noted that the NAIC conducts training for consumer representatives and recommended that conflicts of interest be addressed as part of that training.

Wes Bissett (The Bellemore Group) asked the NAIC to consider three issues when revising the consumer representative program: diversity, meaning that the goal should be to solicit alternative views and he specifically recommended considering small business representatives; transparency, meaning that the application form should not just ask for the budget of the consumer organization but also for the sources of funding; and criteria for granting funding, meaning that the NAIC should ensure that there is a need for funding.

Voss noted that for 2011 the NAIC had received the largest number of consumer representative applications ever and that it makes efforts to solicit a range of views.  She suggested that the industry encourage consumer groups that it deals with to apply.

Commercial Lines Regulatory Modernization:  Time had just about run out and Dave Snyder (AIA) was given about a minute to make his presentation in which he argued that lessening the regulation of commercial lines would assist the economic recovery of the country.

Life Insurance and Annuities (A) Committee
Commissioner Adam Hamm (ND) chaired the meeting of the “A” Committee.

The Committee adopted the minutes of its August 3, 2011 conference call.

Amanda Weaver (NAIC staff) gave the legislative non-update.  The grants for the required education programs for the senior investment protection section of the Dodd-Frank Wall Street Reform and Consumer Protection Act still have not been appropriated.  The NAIC DC office will continue to monitor this issue.

Jolie Matthews (NAIC staff) reviewed the 2012 proposed charges.  .  The charge for reviewing model laws has been removed.  The Viatical Settlements (A) Working Group and Annuity Disclosure (A) Working Group and a subgroup to review the issues concerning contingent annuities will be appointed.  The Committee adopted the 2012 proposed charges.

Cande Olsen (AAA) reviewed the American Academy of Actuaries’ letter on contingent annuities and said that from an actuarial perspective a contingent annuity is an annuity and life insurance companies should handle this product.  Commissioner Tom Considine (NJ) reiterated what he had said at the summer meeting conference call that this is an issue that cries out for a deeper look and the AAA report should be referred to the new subgroup, which New Jersey would be happy to chair. 

An interested party from Prudential Financial said the one key issue is whether it is an annuity or a financial guaranty and that he agrees that this is an annuity because payment is made in annuity form.  An interested party from Met Life said he had some concerns because there is an NAIC model on financial guaranty insurance and the new subgroup should look at the work of the Financial Guaranty Insurance Guideline (E) Working Group. 

A staff member from the Kansas Insurance Department said that Kansas’ product review process and legal department determined that contingent annuities do not fit the current regulatory structure.  Hamm said the new subgroup will include members of the Financial Condition (E) Committee along with the “A” Committee and the charges will be expanded.  The new subgroup members will be from Alaska, California, Florida, Iowa, New Jersey, New York, Tennessee, Texas, and Virginia.

Leslie Jones (SC), chair of LATF, gave the report excluding the LATF statement on Actuarial Guideline XXXVIII, The Application of the Valuation of Life Insurance Policies Model Regulation (#830).  The report was adopted by the Committee. Jones said that most of the comment letters received disagreed with the LATF statement. (See the following report on LATF)  The Committee received the Actuarial Guideline XXXVIII statement.  NAIC legal counsel was not sure of the legal force of the statement because it is not the same as a guideline.  The new joint working group made up of members of the “A” and “E” Committees was established to look at the issues surrounding the statutory reserve requirements for insurers offering universal life secondary guarantee products.

 

Life Actuarial (A) Task Force
The Life Actuarial (A) Task Force met for its normal day and a half meeting prior to the NAIC meeting under the leadership of Leslie Jones (SC).  The Task Force adopted the minutes of the September 8 and October 4 and 6 conference calls.

Actuarial Guideline XXXVIII:  The most controversial issue at the meeting was the issue of the interpretation of Actuarial Guideline XXXVIII related to Universal Life Policies with secondary guarantees.  LATF had exposed for comment a draft change to the Statement on Actuarial Guideline XXXVIII regarding the application of Model Regulation 830.  The statement said that LATF believed the requirements in the Life Insurance Valuation Law and Model Regulation were clear and no changes or clarifications were necessary.

The issue arose because some companies were holding reserves for universal life insurance products with shadow secondary guarantees which the NAIC felt did not reflect the benefits of the secondary guarantees as required pursuant to the model laws, regulations, and actuarial guidelines.  The industry spokespeople dispute the assertion saying that there is a difference in interpretations and the language is ambiguous.  John Bruins (ACLI) said that multiple states have examined the calculations and accepted the reserves.

Numerous comments were received and distributed at the meeting.  Testimony was received from ACLI, Principal, the Affordable Life Insurance Alliance, Genworth, Ohio National, and Pacific Life.  Most speakers said that the formulaic approach was inadequate and a principles-based approach was the real solution to the problem.  The ACLI proposed as a stop-gap prospective solution until the PBR proposals are completed, that a gross premium approach with a deterministic floor be established.  The industry was concerned that any action by the Task Force should not be applied retroactively.  Paul Graham (ACLI) said the Task Force was trying to fit a “square peg into a round hole.”

Leslie Jones and others on the Task Force were equally concerned that insurers were gaming the system.  Mark Birdsall (KS) tried to advance the ACLI compromise, but Jones said it did not solve the problem.  Others suggested an interim disclosure approach.

There was considerable discussion as to the legal strength of a statement and whether it would be enforceable.  The NAIC staff gave an informal opinion that the statement would not be part of the accreditation guidelines and therefore its only effect would be that of persuasion.

After a four hour debate, the Task Force adopted the original statement with minor changes and submitted it to the “A” and “E” Committees for consideration.  The vote was 11 in favor, one opposed (Nebraska), and one abstention.  The report was received by those Committees and a joint working group made up of members of the “A” and “E” Committees was established to look at the issues.  [See the Report of the A Committee]

Non-forfeiture Improvement:  The Task Force received a report and presentation from John McBain, chair of the AAA Non-forfeiture Improvement Working Group, which had been asked to study the feasibility of a new non-forfeiture law for life insurance and annuities.  The Working Group concluded that change was needed because of changes in consumer desires, increased competition, and technological advances.  For regulators the changes would be in reduced filing review time and expense and an increased ability to assess the values provided and the risks assumed.  The AAA made three recommendations:

• Current life insurance and annuity minimum non-forfeiture mandates should be replaced with a revised methodology for determining required non-forfeiture values.  The AAA went on to outline a framework for reform which consisted of a set of criteria.
• Required non-forfeiture values for life insurance and annuity policies should be determined using a retrospective methodology meeting the criteria set out in the Working Group’s framework for reform, utilizing actual policy gross premiums and reflecting the funded portion of risks assumed by the company under the policy.  The AAA described a reform methodology.  The report presented the pros and cons of mandating cash surrender values and actuarial equivalence considerations.
• If cash surrender values are required for or provided under a life or annuity policy, such values should be actuarially related to the Required Policy Non-forfeiture Account.

McBain ended the presentation with a series of questions for the regulators as to how to proceed.  He urged the NAIC to move quickly given the level of market activities at the moment.  The AAA had suggested amendments to VM-20 page 10 to address recommendations 1 and 2 and amendments to VM-02 to add a Commissioners Standard Mortality Table.  Members of the Task Force generally said they needed time to examine the report.  Concern was also raised about the tax implications.  The topic will be carried over to a conference call for further discussion.

Mortality Tables:  The American Academy of Actuaries and Society of Actuaries provided a report from the Payout Annuity Table Team.  The Team will have a final report in late 2012.  The Task Force agreed to extend the charge to include 2007-2009 data.

VM-20:  Jason Kehrberg and Todd Erkis of Towers Watson provided a report on the VM-20 Impact Study.  VM-20 Manual is expected to be ready for adoption in March 2012.  Towers Watson reviewed the results of both Phase I and Phase II of the test.  Forty-eight companies participated in Phase I, with fewer in Phase II because of the exclusion tests.

The Phase I research began with the development of a hypothetical baseline against which the various sensitivities could be tested.  Phase II was focused on sensitivities.  Results showed that reserves for term insurance decreased under VM-20 and those for Universal Life with Secondary Guarantees increased in most cases.  Two calculation options were given: layering and forecasting.  The presenters said that none of the companies in the study currently have the ability to forecast stochastic reserves.

The credibility blends were the sensitivities with the biggest impact on the reserves.  The study tested two credibility models.  There was some discussion as to which model should be used.  Alternative One was proposed by the New York and Alternative Two by the AAA.  While Alternative One is easier to apply and is calibrated to an AAA rating, the Task Force had previously selected Alternative Two which is calibrated to a BBB rating.  The pros and cons of each approach were discussed.  New York said they would study the data and consider revisions to its approach.  There was a discussion of using Alternative One for reinvested assets and Alternative Two for existing assets.

Potential areas of refinement are scope and certification, mortality assumptions, net premium reserves, and the stochastic reserve exclusion test.

The NAIC asked for feedback on the additional guidelines, especially from smaller companies.  The ACLI indicated that they would be submitting amendments to the Manual.

The slides are posted on the NAIC website.  Work still needs to be completed on qualifying some data, the analysis, and recommendations.  The final report will be completed by the end of November.

International Developments:  Larry Bruning (NAIC staff) provided an update of international developments related to solvency and accounting and the NAIC’s response to those developments.  He particularly stressed the proposed ORSA being developed by the SMI Task Force.

Report from the IIPRC:  A report was provided on the activities of the IIPRC.

PBR Experience Reporting:  The pilot study in New York on VM-20 and VM-51 is going slowly and will not be completed by March 2012.  Serious concerns were raised about the excessive costs of the study.  Aggregate costs were estimate to be $2,000,000.

Standard Non-forfeiture Law:  Mike Boerner (TX) is chairing a group developing changes to the Standard Non-forfeiture Law.  A draft was exposed in September.  Issues were raised regarding interest rates and the mortality table references.  The amendments will be dealt with on a future conference call.

PBR Process and Coordination:  The Task Force reviewed the status of various aspects of the Valuation Manual.  The Paul Graham (ACLI) presented a proposal for a principles-based framework for certifying reserves.  These issues will be explored on a future conference call.

Property and Casualty Insurance (C) Committee
This meeting was chaired by its vice-chair, Commissioner Merle Scheiber (SD).  The Committee adopted its 2012 charges.  It discussed a request made by consumer advocate Amy Bach (United Policyholders) to add a charge to consider requiring homeowners’ policies to include three coverages related to property losses; the Committee deferred consideration of the request because Bach was not present.  The Committee received an update from Nicole Allen of the Council of Insurance Agents & Brokers (CIAB) on progress toward implementing the Lexis/Nexis Insurance Exchange, which is intended as a tool to streamline the submission process between producers and insurers.

Presentation Recommending Changes to the National Flood Insurance Program:  Professor Howard Kunreuther (Wharton School) made a lengthy presentation on a proposal to modify the NFIP by requiring multi-year (5 to 10 years) fixed-premium flood policies and increasing the role of private insurers.  Under his proposal the multi-year policy would be coupled with a long-term home improvement loan which would finance home improvements that would mitigate any future flood losses; flood insurance would be required for all properties in a flood zone, whether they are mortgaged or not, and the government would provide vouchers on an as needed basis for policyholders currently residing in a flood zone; but future purchasers of properties within a flood zone would not be eligible for subsidies and would be required to pay a premium that reflects the risk.  Kunreuther based his proposal on a study conducted by Swiss Re in Texas that indicated flood insurance could be written at affordable risk-based rates.  He suggested one way to enforce the insurance requirement would be to require the mortgagor to collect escrow and KDE flood insurance premium just as it does for homeowners’ insurance.

Presentation on the Use of Blended Catastrophe Models:  The Committee also heard a presentation given by Patrick Matthews (Aon Benfield) on recent changes in catastrophe models and the impact on rating agency evaluations on insurer capital and pricing. 

Model Risk Retention Act:  The Committee adopted revisions to the Model Risk Retention Act recommended by the Risk Retention (C) Working Group.  The revisions add a new section on corporate governance, as well as a requirement that any material change to the risk retention group’s plan of operation or feasibility study be submitted to the non-domestic regulators of the states in which the RRG does business within 30 days of its filing with the domestic regulator. 

Leslie Jones (SC) noted that the Working Group was only recommending to “F” Committee that only the corporate governance provisions be considered as an addition to the accreditation standards.

National Flood Insurance Program Reauthorization Efforts:  Moira Campion McConaghy (NAIC staff) essentially repeated the report she gave to the Government Relations Leadership Council earlier in the day on the reauthorization efforts of the National Flood Insurance Program, which has been operating under a series of extensions with the current extension set to expire on November 18th.  A bill that would extend the NFIP for five years has passed the House and had been approved by the Senate Banking Committee but it is now stalled in the Senate. 

The Committee adopted reports of the following task forces and working groups:

• Casualty Actuarial and Statistical Task Force [See full report below.]
• Surplus Lines (C) Task Force
• Title Insurance (C) Task Force
• Workers’ Compensation (C) Task Force
• Advisory Organization Examination Oversight (C) Working Group
• Catastrophe Insurance (C) Working Group
• Crop Insurance (C) Working Group
• Earthquake Study (C) Study Group
• Risk Retention (C) Working Group
• Terrorism Insurance Implementation (C) Working Group
• Transparency and Readability of Consumer Information (C) Working Group

Casualty Actuarial and Statistical (C) Task Force
The Casualty Actuarial and Statistical (C) Task Force met on November 5 under the chairmanship of Rich Piazza (LA).  During this meeting, the Task Force adopted its 2012 charges.

Actuarial Opinions:  The Task Force considered the proposed Property/Casualty Actuarial Opinion Instructions.  Significant changes were made to Section 7 regarding the Actuarial Report adding more detail on elements to be included and documentation of the relationship of the actuary with the company’s Board.  The Casualty Practice Council of the AAA raise concerns with some provisions, especially the requirement that estimates be mapped to Schedule P.  The chair referred the Property/Casualty Instructions, the proposed Property/Casualty Actuarial Summary Instructions, and the proposed Title Actuarial Opinion Summary Instructions back to the Actuarial Opinion Subgroup for further review.  The Instructions will be considered for adoption on a December 13 conference call of the Task Force.

Appointed Actuary Practice Requirements:  The Task Force held a broad discussion on practice requirements, including a review of changes taking place in Europe to strengthen existing requirements and introduce certificates.  Concerns were raised that the self-regulation may be insufficient.  Richard Marks (CT) raised concerns about the definition of a qualified actuary.  He felt regulators needed to define their expectations for actuaries.  He suggested the need to develop an independent standard for qualifying actuaries “with teeth in it,” rather than rely on existing entities such as ASB and ABCD.  The chair suggested that the discussion be continued at a future meeting.  Marks said he would distribute his comments in writing and staff was asked to find out more about the qualification process for life actuaries.

International Accounting Standards:  Rob Esson (NAIC staff) provided an update on the development of international accounting standards.  He reviewed the recent IASB Insurance Working Group meeting which he described as “the most positive working group meeting in all my time.” Esson said that the Working Group members were coalescing around a proposal to use Other Comprehensive Income to address concerns with artificial volatility due to interest rate changes.  Although this proposal primarily affected life insurance, there were some implications for non-life.  Esson also commended Kevin Spataro (Allstate) for his comments at the meeting urging that more time be spent on non-life issues since non-life insurance accounted for the larger share of the premiums written.  Esson said that some consensus had been developed at the Insurance Working Group around recommendations for a modified approach for short-term contracts.

Risk Focused Surveillance Subgroup:  Marks reported on the work of the subgroup which is focusing on property/casualty reserve risks.

Statistical Subgroup:  Lee Barclay (WA) said the subgroup was planning future calls to address medical professional liability closed claims reporting and fast track reports.

American Academy of Actuaries:  The Task Force received a report from the AAA regarding its activities.  The AAA is working on training to improve actuarial opinions, the 2011 practice note, and the Law Manual which will be released at the end of November.  This is Joe Herbers (AAA) last meeting as chair of COPLFER.

Recognition:  The chair recognized Mary Miller (OH) for her outstanding leadership and many of years of service in NAIC activities and wished her well in her retirement at the end of the year.  Miller served as Vice-Chair of the Task Force from 2007-2011.

Financial Condition (E) Committee
Superintendent Joseph Torti III (RI) chaired the meeting of “E” Committee.

Separate Accounts:  David Vacca (NAIC staff) reviewed a response from the Life Actuarial (A) Task Force (LATF) regarding a referral on separate account issues.  Many NAIC working groups have been involved in this issue for years.  Several comments on LATF’s memo were submitted to the Committee.  Jim Mumford (IA), chair of the Receivership and Insolvency (E) Task Force (RITF) and Receivership Separate Accounts (E) Working Group (RSAWG), asked that LATF not take any action regarding research of receivership issues since RITF and RSAWG are now looking at preferred class of policyholders, insulation, and guarantees. 

John Bruins (ACLI) said that their letter focused primarily on a review of the history.  Torti said he appreciated the ACLI comments and expertise and promised to keep ACLI in the loop.  Bill O’Sullivan (National Organization of Life and Health Insurance Guaranty Associations) said that the issue of insulation of separate account assets is not relevant for purposes of determining whether a product is eligible for guaranty association coverage and variable products with guarantees, as a class, would be eligible for coverage.  Therefore these two items do not need to be on the list of to-dos.  The Committee directed staff to draft the following charges:

• The Financial Condition Examiners (E) Technical Group to look at the examination procedures.
• The Receivership Separate Account (E) Working Group to consider reporting needs for separate accounts.
• The Separate Account Risk (E) Working Group to compare the GAAP definition with the Statutory Accounting definition of insulated versus non-insulated.

Financial Analysis Handbook:  The Committee received a memo from the Financial Analysis Handbook (E) Working Group regarding referral for enhancement of the NAIC Financial Analysis Handbook related to analysis of separate accounts.

Captives/ SPVs:  The Committee adopted its 2012 proposed charges.  Included in the charges is appointment of the Captive & SPV Use  (E) Subgroup, which will be chaired by Texas and consist of members of the Financial Analysis (E) Working Group, LATF, and the Reinsurance (E) Task Force who are from Michigan, Missouri, South Carolina, New Jersey, New York, and Vermont.  Torti and Steve Johnson (PA) will monitor the Subgroup.  The Captive & SPV Use Subgroup will have open discussion and regulator-to-regulator only meetings. 

AG XXXVIII:  A new Life Insurance and Annuities (A) Committee and “E” Committee joint subgroup looking at Actuarial Guideline XXXVIII, The Application of the Valuation of Life Insurance Policies Model Regulation (#830) will also be appointed.  Representatives from Alaska, California, Florida, Iowa, New Jersey, New York, Tennessee, Texas, and Virginia will make up the new subgroup. 

The Committee adopted reports from the following groups:

• Accounting Practices and Procedures (E) Task Force [See a full report of this meeting in this newsletter.]
• Capital Adequacy (E) Task Force [See a full report of this meeting in this newsletter.]
• Examiners Oversight (E) Task Force
• Receivership and Insolvency (E) Task Force
• Reinsurance (E) Task Force [See a full report of this meeting in this newsletter.]
• Risk Retention Group (E) Task Force
• Valuation of Securities (E) Task Force [See a full report of this meeting in this newsletter.]
• Financial Analysis (E) Working Group
• Health Reform Solvency Impact (E) Subgroup
• National Treatment and Coordination (E) Working Group
• Risk Focused Surveillance (E) Working Group

Danny Saenz (TX), co-chair of the Group Solvency Issues (EX) Working Group, gave an update on the Working Group’s work on ORSA.  Randi Reichel (Mitchell Williams) said there were concerns about the regulatory framework for implementing the ORSA and interested parties would submit options for consideration by December.

On a technical note, Torti authorized all the subsidiary task forces and working groups to continue working after the fall meeting.  Conference calls will be scheduled if any items need to be adopted before year-end.  Joe Fritsch (NY), chair of the Statutory Accounting Principles (E) Working Group, said the Working Group would need to hold a conference call to adopt an item by December 2, 2011.

Torti thanked the group of retirees for all their hard work.

Accounting Practices and Procedures (E) Task Force
The meeting of the Accounting Practices and Procedures (E) Task Force convened for the first time, in person, since the NAIC spring meeting held in Austin, Texas, as the chair, Kim Hudson (CA) gaveled the session to order.

Emerging Accounting Issues (E) Working Group:  Jim Armstrong (IA) reported that the Working Group had adopted one proposal, which is procedural in nature, allowing guidance currently within interpretations to move directly into SSAPs.  Another proposal was exposed, which would move INTs into SSAPs.  In both cases, comments are due by Jan 6, 2012.

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

• 2011-35BWG – Add clarifying instruction to Schedule D, Part 1, Column 11, Book/Adjusted Carrying Value related to exception for Treasury Inflation Adjusted Securities in INT 01-25.  This item was adopted.

• 2011-36BWG MOD – Delete Note 21H, modify instructions for Exhibit 7 to refer to retained assets and add a column to Exhibit 7, Exhibit of Number of Certificates for Supplementary Contracts, Annuities and Accident & Health Insurance and Exhibit of Number of Policies, Contracts, Certificates, Income Payable and Account Values In Force for Supplementary Contracts, Annuities, Accident & Health Insurance and Other Policies for retained asset accounts.  Brendan Bridgeland (Center for Insurance Research and NAIC Consumer Representative) said that he had not been aware of this proposal until the Statutory Accounting Principles (E) Working Group (SAPWG) meeting earlier that day.  Bridgeland felt it was helpful to move the data but it looked like some or most of the relevant data would be eliminated.  Bridgeland suggested that, if the intent is that all the data be retained, the proposal should be re-exposed and the wording changed.  Rhode Island State Representative Brian Kennedy also expressed concern because NCOIL had adopted a Beneficiaries’ Bill of Rights, which would restrict the insurance industry practice of using retained asset accounts (RAAs) to pay policy death benefits.  Rhode Island and Kentucky have passed laws regarding the disclosures of RAAs.  Robin Marcotte (NAIC staff) assured Kennedy that SAPWG was not aware of NCOIL’s work and the deletions were not due to any industry pressure.  Kennedy said he would find out who the NAIC/NCOIL liaison is and have that person contact Marcotte.  Kim Hudson (CA) proposed that the item be re-exposed and referred to SAPWG and Financial Condition (E) Committee but that the technical amendments be adopted immediately.  The modifications were adopted and the item was deferred and referred to SAPWG and “E” Committee.

Action on Newly Submitted Items:

• 2011-37BWG – Modify beginning instructions for the annual Notes to Financial Statements to indicate that certain disclosures data captured in the electronic notes should be presented as shown in the illustration, add instruction to those illustrations indicating reporting entities are to follow illustrations and provide a table indicating which disclosures.  This item was exposed.
• 2011-38BWG – Add new instruction to the annual and quarterly general instructions stating the need to report certain GAAP items that are inconsistent with SAP and where the specific items can be found. Also add new section to the annual instructions for RRGs utilizing GAAP with the specific modifications that would be required.  This item was exposed.
• 2011-39BWG – Modify the instructions and illustrations for Note 9A to reflect the disclosure requirements of SSAP No. 101, Income Taxes – A Replacement of SSAP No. 10R and SSAP No. 10. The illustrations for Note 9A will be data captured.  This item was exposed.

Comment deadline for the three newly exposed items is February 2, 2012.

Milum Livesay (Genworth) summarized the question and answer guidance document that was developed for 2011-32BWG MOD.  Questions 1 to 4 refer to when and how filings should be made.  Questions 5 and 6 discuss guidance.  Questions 7 to 14 speak to specific columns in Schedule Y, Part 1.  There are some editorial changes and one or two more questions to be added and the document should be ready in two weeks.  This question and answer document would be posted on the NAIC website as non-official guidance.  There is a precedent for this.  Any changes should be made through the Blanks Working Group but the current document will get everyone through year-end.  The document was exposed.

A proposed flow chart for SSAP No. 43R Loan-backed and Structured Securities would be unofficial guidance on the NAIC website.  The flow chart was exposed.

Steve Johnson (PA) asked that the SM suffix be deleted from the Schedule D, Part 1 instructions, pending adoption by the Valuation of Securities (E) Task Force.  The proposal was exposed.

Comment deadline for the 2011-32BWG question and answer document, the SSAP No. 43R flow chart, and deleting the SM suffix from the Schedule D, Part 1 instructions is December 2, 2011.

The Working Group adopted the list of editorial changes.
Garn commented on Commissioner Ken McGuckin’s retirement and thanked him for all his work.

Statutory Accounting Principles (E) Working Group
Statutory accounting Principles Working Group chair, Joe Fritsch (NY), reported that the Working Group:

• Adopted its September 28 conference call minutes.
• Adopted the following nonsubstantive revisions to statutory accounting:
• Revisions to incorporate guidance adopted in SSAP No. 101 regarding tax contingencies (Ref #2011-34). This item was moved to the nonsubstantive, active listing during the summer meeting.
• Revisions to clarify the “wholly owned” subsidiary exclusion from the initial liability recognition requirement for guarantees.
• Revisions to define preferred stock as modified during the meeting.
• Revisions to adopt FAS 152, Accounting for Real Estate Time-Sharing Transactions, an amendment of FASB Statements No. 66 and 67 by reference in SSAP No. 40, as modified during the meeting.
• Revisions to delete the weighted average interest disclosure requirement.
• Revisions to add appendices, including a decision-tree for determining the appropriate subsidiary valuation method, as well as the sliding-scale chart for discount percentages based on ownership percentage.
• Various SSAPs - Adopted recommendations from the Emerging Accounting Issues (E) Working Group to incorporate guidance from 1999 interpretations into SSAPs.
• Revisions to add key valuation terms to the glossary.
• Appendix A-001, Investments of Reporting Entities – Revisions to Appendix A-001 to mirror changes already adopted by the Blanks (E) Working Group to the Summary Investment Schedule (Ref #2011-35).
• Appendix A-817, Preneed Life Insurance Minimum Standards for Determining Reserve Liabilities and Nonforfeiture Values, revisions to include a new item within Appendix A of the Accounting Practices and Procedures Manual to reflect the Preneed Life Insurance Standards for Determining Reserve Liabilities and Nonforfeiture Values Model Regulation (#817).  This adoption also includes nonsubstantive revisions to SSAP No. 51, Life Contracts, and existing appendices A-820 and A-830 to refer to the new appendix.
• Revisions to adopt ASU 2011-03, Transfers and Servicing, Reconsideration of Effective Control for Repurchase Agreements, in Issue Paper No. 141.
• The Working Group rejected as not applicable for statutory accounting:
• SOP 04-2, Accounting for Real-Estate Time Sharing Transactions and
• ASU 2011-05, Comprehensive Income - Presentation of Comprehensive Income.
• Moved FIN 48, Accounting for Uncertainty in Income Taxes, to the disposed listing, as it was addressed in SSAP No. 10, Income Taxes, A Replacement of SSAP No. 10 and 10R.
• Adopted referrals to the Financial Condition Examiners Handbook (E) Technical Group and to the Financial Analysis Handbook (E) Technical Group on the stress liquidity risk templates.
• Adopted a referral response to the Rating Agency (E) Working Group and the Financial Condition (E) Committee to advise that research to further assess allocation of realized gains and losses to the asset valuation reserve (AVR) and the interest maintenance reserve (IMR) will not have a material solvency or accounting issue impact.  The Working Group also moved the item to the disposed listing.
• Exposed the following items with a January 6, 2012 comment deadline:
• Draft SSAP, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to Supersede SSAP No. 91R.
• Revisions and disclosures related to embedded derivatives.
• Revisions to reject GAAP guidance from ASU 2011-06 and to prescribe statutory accounting provisions for the annual fee mandated by the federal Patient Protection and Affordable Care Act (PPACA) as amended by the Health Care and Education Reconciliation Act.  This exposure also identifies other PPACA fees not addressed by ASU 2011-06 and directed staff to perform research.
• Revisions to adopt GAAP guidance from ASU 2011-02 to provide additional guidance on whether a restructuring constitutes a troubled debt restructuring.  SSAP No. 62R, Property and Casualty Reinsurance, revisions proposed by CNA Insurance, amended to include reference to the liability recognition requirements of SSAP No. 5R, regarding the minimum reserve provision for reinsurance.  The Working Group exposed this item, noting that it was not taking a position on this proposal, but exposure allows the opportunity to receive additional information (Ref #2011-45).
• ASU 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financial Receivables and the Allowance for Credit Losses.
• Exposed the following items with a December 2, 2011 comment deadline:
• SSAP No. 1, Disclosure of Accounting Policies, Risks and Uncertainties, and Other Disclosures, revisions propose to reference the stress liquidity templates captured within the Financial Condition Examiners Handbook, noting that the disclosures are confidential and not included in the statutory financial statements.  Consideration of adoption will not occur until the disclosure templates are included in the Financial Condition Examiners Handbook (#2004-27).
• SSAP No. 100, Fair Value Measurements, revisions to clarify the reconciliation disclosure requirement for items reported and measured at fair value classified within level 3 of the fair value hierarchy.  These revisions require that all transfers in and out of level 3 shall be captured within the reconciliation, but limits the extent that a security is included in the reconciliations as a transfer in/out of level 3 to once on a quarterly basis.  As such, if a security moved in/out of level 3 multiple times in a single quarter, these transfers would be reflected once within the quarterly level 3 reconciliation.  This process will result with the potential for a single security to be reflected as a transfer in/out of level 3 four times (once per quarter) in the annual reconciliation (#2011-27).
• SSAP No. 68, Business Combinations and Goodwill, and SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities, a replacement of SSAP No. 88 - Placement revisions to move guidance from SSAP No. 97 into SSAP No. 68 (#2011-41).
• SSAP No. 43R, Loan-Backed and Structured Securities, revisions to modify the reporting guidance based on the most recent changes adopted by the Valuation of Securities (E) Task Force (#2011-37).
• Revisions to clarify the accounting for the National Flood Insurance Program (#2011-43).
• Issue Paper No. 145, Accounting for Transferable and Non-transferable State Tax Credits, and a draft substantively revised SSAP No. 94R, Accounting for Transferable and Non-Transferable State Tax Credits, simultaneously exposed to allow for concurrent discussion (#2011-08).
• Revisions to reject ASU 2011-07, Health Care Entities-Bad Debts and Allowance for Doubtful Accounts Comprehensive Income (#2011-39).
• Received an update on the development of the implementation guidance for inclusion within SSAP No. 101, Deferred Income Taxes, A Replacement of SSAP No. 10 and 10R.  After final adoption of SSAP No. 101 during the joint Executive (EX) Committee/Plenary, the intent is to expose in the interim period proposed implementation guidance with a December 2, 2011 comment deadline to allow for year-end adoption. 
• Staff was directed to perform research on the additional reserve under provision for reinsurance submitted by CNA Insurance and on Pharmacy Rebates under Medicare Part D Gap Discount.

Examination Oversight (E) Task Force:  Chaired by Bill Harrington (OH), this Task Force discussed the results of the Hazardous Financial Condition Model Regulatory Survey; recommended Examiner Compensation for 2012 (Table provided); adopted its 2012 charges; and adopted reports from the following working groups:

• Climate Change and Global Warming Working Group
• Financial Analysis Handbook Working Group
• Financial Examiners Handbook Technical Group

Under Any Other Matters, Steve Johnson (PA) pitched the upcoming Analyst Team meetings.  Johnson pointed out to the group that attendees can be either analysts or examiners.  He offered his view that it may be helpful to include a department examiner and noted that there is also a peer review. 

Capital Adequacy (E) Task Force
The Capital Adequacy (E) Task Force met under the chairmanship Lou Felice (NY).  It began by receiving reports from its Working Groups.

Property Risk-Based Capital (E) Working Group:  The Task Force adopted the report of the Property Risk-Based Capital (E) Working Group presented by Anne Kelly (NY).  The Working Group had discussed the catastrophe charge (see below), low income housing credit (see below), and risk retention groups.  The issue of additional guidance for risk retention groups in the RBC instructions will be reviewed on a future conference call.

State Low Income Housing Tax Credits:  The Task Force discussed a memorandum from Phil Barlow (DC) regarding state low income housing tax credits.  The RBC charge for federal low income housing tax credits made by life insurance companies was reduced in 2004.  Insurers are now asking that the NAIC apply the same credit to state low income housing tax credits.  Lou Felice asked staff to prepare a draft document that would apply the life RBC formula treatment for federal low income housing tax credits to property and casualty RBC and to add similar treatment to both formulas for state low income housing investments that are structured in the same way.  The proposal will be discussed on a future conference call and a decision made at that time as to whether to expose the proposal for comment.

Catastrophe Risk (E) Subgroup:  Ron Dahlquist (CA), chair of the Subgroup, reported it is developing a Catastrophe Risk Charge for RBC.  The Subgroup is revising its preliminary determinations regarding the use of one or more of the three commercially available models (RMS, AIR and EQECAT) that may be approved to model companies’ exposure to hurricane and earthquake events.  The modeled loss exposure to these events would become the basis for companies’ explicit catastrophe RBC charge.  The Task Force members discussed two aspects of the proposals which caused some concerns: the validation of the models by state examiners and the codification of three models, recognizing that others may be developed in the future.  The subgroup plans to hold frequent interim conference calls over the next several months to finalize and test this proposal.  The goal of the Subgroup is to have a final framework proposal adopted by mid-2012.

Health Risk-Based Capital (E) Working Group:  The Task Force adopted the report from the Working Group.  The Working Group continues to work on health care reform, medical loss ratios rebate liability for RBC, and segment concentration risk.  The AAA has been asked to look at the latter issue.

Solvency Modernization RBC Subgroup:  The Task Force received an update regarding a Solvency Modernization Initiative RBC Subgroup from its chair, Alan Seeley (NM).  (See the report on the Subgroup in the Solvency Modernization Initiative Task Force section of this report for details.)

C-1 Factor Review:  The Task Force received a report from the C-1 Factor Subgroup which has been working on the data and assumptions needed for modeling the factors.  The Subgroup discussed adding more granularity to the RBC formula for bond categories and designations.  Risks other than credit such as call, exclusion, and duration will be considered. 

Fraternals:  The Task Force discussed the RBC Trend Test for Fraternals.  Staff was asked to develop the test page and instructions that used two columns for both potential trend tests during the implementation period.

Title RBC:  The issue of developing an updated RBC formula for title insurance was deferred to a future conference call.

Life RBC Commercial Mortgage Proposal:  The Task Force discussed a proposal on commercial mortgage loans from the ACLI.  The Task Force will review the proposal on a conference call.  John Bruins (ACLI) said the proposal would require changes to Form F in the RBC in order to implement the changes.  In the meantime, the Task Force exposed for 45 days a proposal to extend the current commercial mortgage treatment to year-end 2012 in case the new proposal was not finalized for year-end 2012.

Deferred Tax Assets:  The Task Force received an update from the AAA regarding the treatment of deferred tax assets, but deferred any action on the issue to a future conference call.

LR025 Schedule:  The Task Force received a letter from the ACLI regarding the need to correct the Life RBC Instructions for the LR025 Schedule related to required capital for interest rate and market risk.  The ACLI proposed updates to the language to clarify that if a company performs a cash flow test, then the callable assets supporting the cash flow test should not be included in the calculation of the factor-based floor.  No action was taken.

Charges:  The Task Force adopted its 2012 charges.  One change adopted provided that the chair of the Task Force will participate in the Invested Assets (E) Working Group of the VOS Task Force.

Reinsurance (E) Task Force
The Reinsurance (E) Task Force met under the leadership of its new chairman, Tim Considine (NJ).  The proposed amendments to the Credit for Reinsurance Model Law and Regulation were not discussed at length at this meeting since the proposal was on the agenda for the Plenary Session.  The Task Force met in July and September to develop the NAIC Revised Credit for Reinsurance Model Law (#785) and Regulation (#786).  Subsequent to that, changes have been proposed by a group of regulators regarding concentration ratings and qualified jurisdictions. 

[NOTE:  NAIC Model Credit for Reinsurance Law and Regulation provides for collateral reduction for qualifying reinsurers from qualified jurisdictions.  In its preamble to the Models, the NAIC says that the Federal Nonadmitted and Reinsurance Reform Act, which became effective July 21, 2011, “preempts the extraterritorial application of state credit for reinsurance law and permits states of domicile to proceed forward with reinsurance collateral reforms on an individual basis if they are accredited.  This federal legislation also does not prohibit the states from acting together, through the NAIC, to achieve the reinsurance modernization framework goals.” These Model changes are part of that effort.

Two amendments were added to the Models just before the vote in Plenary.  They provide that:

• The NAIC will develop a list of approved foreign jurisdictions through a committee process.  If a state commissioner chooses a jurisdiction not on the list, the state will have to provide a written justification for the action to the Committee.
• Cedents must demonstrate they have taken steps to diversify their reinsurance counterparties.  If a ceding insurer cedes more than 20% of gross written premium to a single insurer or to a group of affiliated reinsurers; or has reinsurance recoverables from a single insurer, or group of affiliated reinsurers that exceeds 50% of its surplus, it will have to provide notice to the commissioner within 30 days of what actions it has taken to manage this exposure.

The NAIC’s Reinsurance (E) Task Force has also committed to further work in assisting states with the accreditation process.]

Charges:  The Task Force adopted its 2012 charges which include the development of a process to evaluate the reinsurance systems of non-US jurisdictions in regard to the Revised Credit Model Law and to consider the formation of a new NAIC group to provide high-quality review of reinsurance collateral applications and assistance to the states.  Other charges also relate to the proposed model law, including charges to develop reporting instructions for forms CR-F and CR-S applicable to certified reinsurers and to consider any other issues related to the new law and regulation.

Collection of Undisputed Reinsurance Recoverable Balances:  The Task Force received a referral from “E” Committee regarding solutions to address concerns with the timing and collection of reinsurance recoverables.  The Task Force’s new charges include studying issues related to the collection of undisputed reinsurance recoverable balances.  Staff was asked to research existing laws in the area.

Federal Legislation:  The Task Force received a report from Amanda Yanek (NAIC staff) on Massachusetts Congressman Richard Neal’s bill on taxation of foreign reinsurance which has been reintroduced in the US House of Representatives and introduced for the first time in the US Senate.  Neal claims the reinsurers are using affiliate reinsurance to avoid US taxes.  The bill would deny credit for reinsurance for any policy for which the taxes have not been paid.  Both bills have been referred to committee.  Yanek said the NAIC has no position on the proposed legislation.

IAIS:  The Task Force received an update from Ryan Couch (NAIC staff) regarding the reinsurance activities of the IAIS.  Couch has been appointed chairman of the IAIS Reinsurance Subcommittee.  The Subcommittee is continuing its work on the Global Reinsurance Market Report which will include a section on stress testing.  The Subcommittee is also revising its Guidance Paper on Captives.  The next meeting of the Subcommittee will be in January.

Valuation of Securities (E) Task Force
Chair Kevin Fry (IL) called the meeting to order and asked SVO Managing Director, Chris Evangel, to call the roll for a quorum.  The minutes of all the interim meetings were adopted and Fry recognized Elaine Wieche (CT) who gave the report of the Invested Assets (E) Working Group which was adopted.  The IAWG has been working through a process of comment and analysis of the Working Capital Finance Notes project. 

The Task Force heard brief summaries of three VOS Task Force and three Modified FE Subgroup meetings held via conference calls in September and October.  The Subgroup focused on two areas of activity: 

• Stale ratings, with the recommendation emanating from the Subgroup to remove this facet of review and,
• The scoping out of Credit Tenant Leases (CTLs) and Equipment Trust Certificates (ETCs) and any other securities rated by the SVO from Modified FE.

The Task Force came to consensus on the point that any securities with a trust should not be affected by 43R or Modified FE.  There were no comments by either regulators or Interested Parties and the motion to formally adopt the changes proposed during the interim calls was approved.

The next agenda item addressed the adoption of suggested changes to the money market funds text in the Purposes and Procedures Manual of the NAIC Securities Valuation Office to reflect changes in the federal regulation and changes in methodologies by nationally recognized statistical rating organizations (NRSROs).

The Task Force also adopted a memorandum to the Financial Condition (E) Committee that explains that the Task Force has substantially completed work on the referrals from the Rating Agency (E) Working Group.

The Task Force discussed and modified a proposed amendment to the Purposes and Procedures Manual that would provide analytical instructions for financially modeled and non-modeled securities, subject to SSAP No. 43R, Loan-Back and Structured Securities, and released the modifications for a 10-day exposure period.

The group voted to remove residential mortgage-back securities (RMBS) and commercial mortgage-backed securities (CMBS) from regulatory review status, effective December 31, 2011.

The Task Force received an SVO proposal to expand the NAIC credit risk framework from one to three, create new NAIC designation symbols and definitions, update historical default performance, and create new RBC factors.  The proposal was referred to the C-1 Framework (E) Subgroup.

As an adjunct to the Modified FE Subgroup discussion, a proposal from New York was considered which would amend the guidance to explain how insurers should adjust the breakpoints in the MFE pricing grid for non-modeled securities.  The proposal was received and released for a 60-day comment period.

In a procedural move, the Task force formally instructed the SVO to delete the SM symbol and its definition from a previously adopted amendment when it publishes the next edition of the Purposes and Procedures Manual.

The Working Group discussed a flowchart that visually explains the application of rules for modeled and non-modeled securities that are subject to SSAP No. 43R.  [The flow chart at the meeting was revised and as of this printing, the website still had the first draft.]  The flowchart was received and exposed for a 10 day comment period.

There was a spirited discussion of a request by Kroll Bond Rating Agency to be added to the NAIC Acceptable Rating Organization (ARO) List.  Mike Moriarty was recognized to make a case for Interested Parties.  Moriarty stated that certain of the long-standing prerequisites, such as the stipulation that an Accredited Rating Organization (ARO) must have at least a 10% share of the marketplace, were obsolete.  SVO’s Evangel revealed some of the vagaries that their organization must work through, such as the lack of ability to translate submissions in languages other than English.

The SVO Task Force agreed to set a meeting in approximately two weeks to discuss and expose a New York proposal to revise the ARO policy and procedure expressed in the Purposes and Procedures Manual.

As the meeting wound down, there was a discussion regarding the potential advantages of “cliffs” of data.  Steve Johnson (PA) was not in favor of the motion to adopt the SVO Recalibration of NAIC Designation Framework Proposal made by Matti Peltonen (NY) and stated that he “personally likes ‘cliffs’ – there’s a reason for cliffs…”, so he would prefer to send it to the C-1 Factor Review Subgroup without an implied approval.  Peltonen expressed amenability to this concept, but still asked for the same motion, stating he did “not mind if the minutes reflect that some members were not in favor of this at this time.”  The motion was adopted by acclamation. 

Invested Asset (E) Working Group:  Chair Elaine Weische (CT) called the meeting to order.  She acknowledged submissions by ACLI and Conning, stating that the comment letters were part of the Working Group materials.

Wieche recognized Ed Toy, NAIC Director, Capital Markets Bureau, to begin work by the Task Force on an analysis of the Working Capital Finance Notes Work Plan.  A two-page document, which had previously been received by the Working Group, was explained by Toy and representatives from Interested Parties.

Dave Chellgren (Conning) was recognized and spoke about Schedule D reporting “Our clients have a positive opinion on this (program).”  Chellgren opined that the working capital finance notes (WCFNs) “share characteristics of other asset-backed paper such credit cards.” 

At this point in the presentation, Mike Monahan (ACLI) joined Jeff Johnson (PacificLife) to respond to any questions which Toy and the Task Force members might have.  Monahan stated that ACLI believes that WCFN are valuable and attractive investments. 

Johnson offered his opinion that even in the most difficult market, in 2008 and 2009, these securities have not lost any of their value.  Jim Olsen (PCI ) stated that although PCI did not file a letter, it is supportive of WCFNs.

Weische then asked Toy and Robin Marcotte (NAIC staff) to go through the two-page Work Plan, line-by-line.  The Working Group heard the analysis of approximately half of the Work Plan.  [This Working Group has traditionally only met by conference call.]
The rest of the Working Group’s allotted time was consumed by an in-depth analysis of the Work Plan and reactions by Johnson (Pacific Life) and other members of Interested Parties.  The Working Group will continue this analysis in an upcoming conference call. 

Financial Regulation Standards and Accreditation (F) Committee
Commissioner Julie Mix McPeak (TN), vice-chair of the “F” Committee, reported that no comments were received on the 2010 significant revision to the Financial Condition Examiners Handbook.  The Committee adopted the revision with an immediate effective date.

The proposed significant elements for Part A: Laws and Regulations purposes, regarding the 2010 revisions to the Insurance Holding Company System Regulatory Act (#440) and the Insurance Holding Company System Model Regulation (#450), were exposed for 30 days.  The revisions will be adopted via conference call or electronically since they were not exposed at the spring meeting.

There were no comments received and no further revisions made since 2008, so the Committee adopted the 2008 revisions to the Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition (#385), which are additions to Part A: Capital and Surplus standard.  The effective date is January 1, 2014.

Three technical revisions were proposed to the Review Team Guidelines regarding the Financial Exam Electronic Tracking System and professional designations.  The Committee decided to retain the wording “ultimate controlling person” instead of the proposed revision of “each acquiring party” in Part D: Review of Form A.  The other two revisions were exposed for 30 days.

Jill Jacobi (CA) reviewed a referral from the Risk Retention (E) Task Force regarding the Part A Capital and Surplus standard for Risk Retention Groups (RRGs).  The recommendation of the Task Force is that states with domestic RRGs must apply Risk-Based Capital for Insurers Model Act (#312) to those RRGs, although there may be limited exceptions where these states are allowed not to take regulatory action.  RRGs would be required to file annual RBC reports if Model #312 for RRGs is adopted.  An interlineation has been added to the Administrative Policies Manual of the Financial Regulation Standards and Accreditation Program that would allow the domestic regulator of a captive RRG to elect not to take regulatory action as otherwise required by Sections 3 through 6 of Model #312 if any of three conditions exist.  The referral was exposed for 30 days.

The Committee adopted its 2012 proposed charges, which are the same as its 2011 charges.

International Insurance Relations (G) Committee
The International Insurance Relations (G) Committee met under the leadership of Committee Chair Commissioner Kevin McCarty (FL).

NAFTA:  In its revised charges, the Committee voted to dissolve the NAFTA Working Group, but to continue to work on the issues through “G” Committee.  At this meeting there was an update on solvency developments in Mexico from Gabreila Basurto (Insurance and Surety National Commission – CNSF-Mexico).  She indicated the Mexican Congress is now considering a solvency reform package including a risk focused capital calculation, use of internal models, stress testing, investment limits, corporate governance requirements, and new disclosure requirements.  They hope to implement the new regime in 2014.

International Association of Insurance Supervisors (IAIS):  Chairman McCarty summarized the consultation process on the Common Framework for Internationally Active Insurance Groups (ComFrame) which was completed this summer and the observer hearing on the topic held in Seoul.  McCarty said the NAIC was sympathetic with some of the concerns raised by the industry that the proposals were too prescriptive.  Yoshi Kawai (IAIS Secretary General) said that it was important for ComFrame to help develop a common language for supervision and that some jurisdictions say a single capital standard is essential for that mutual understanding.  McCarty responded that the NAIC is less concerned with a single capital number and more focused on risk identification.  Steve Ferguson (AZ), chair of the IAIS Supervisory Forum, said that the Forum will be looking at the role of the home and host supervisors, stress testing, and providing feedback to the committees working on ComFrame.

The NAIC will be participating in the IAIS peer review regarding the level of implementation of the Insurance Core Principles (ICPs) which were adopted in October.  The initial reviews will cover supervisory powers (ICPs 1 and 2) and group supervision (ICP 23).  The reviews will be summarized in a public report to be released by June.  Detailed reports will be sent to the Financial Stability Board (FSB) and the individual participants in the review process.

Gita Timmerman (NAIC staff) provided an update on the IAIS’ Multilateral Memorandum of Understanding (MMOU) on exchange of information.  Several US states have applied for acceptance into the agreement although none have been reviewed yet.  The IAIS is committed to improve the speed of the review process.

Under pressure from the FSB, the IAIS continues to develop criteria for assessing aspects of insurance which might pose a systemic risk and trigger supervisory actions which might be taken to mitigate that risk.  Next week the IAIS will consider releasing a paper on Insurers and Systemic Risk.  The IAIS is currently collecting data from about 50 large insurers to help in this identification process.  A recommendation is due to the G-20 in June 2012.  The IAIS plans to hold a public hearing in February on its draft methodology and possible supervisor responses in February 2012.

Recently insurers were given an opportunity to respond to questions which are to be discussed on a November 8-9 meeting of the IAIS Financial Stability Committee regarding possible actions which could be taken in a G-SIFI was identified.  Steve Broadie (PCI) said that several insurers had responded but that two weeks had not been sufficient to allow a full discussion of the issues. He stressed the need for more transparency in the process.

The NAIC will be hosting the 2012 IAIS Annual Meeting October 10-12, 2012, in Washington, DC.

EU-US Relations:  McCarty and NAIC staff provided an update on bilateral meetings, including two meetings this year with the European Commission and Members of the European Parliament (EIOPA) on the US solvency system and equivalence.  Both meetings were described as positive.  The Dialogue touched on information sharing, stress testing, internal models, and consumer protection.  The next EU-US Dialogue will be held in April 2012 in Florida.

Joint Forum:  Rob Esson (NAIC staff) gave an update on the activities of the Joint Forum which is completing work on intra-group support, financial conglomerates, asset securitization incentives, and the differentiated nature and scope of financial regulation.  New projects relate to point of sale disclosure, mortgage insurance, and longevity risk.

OECD:  Ekrem Sarper (NAIC staff) reviewed the agenda for the upcoming meeting of the OECD Insurance Committee which will discuss financial stability, its own strategic plans, annuities, and financial transparency. 

International Regulatory Cooperation Working Group:  The Committee heard an update on the NAIC Fellows program and other training programs the NAIC has undertaken during the year from Martha Lees (NY), chair of the Working Group.  The NAIC is looking for industry support in providing speakers for the international education sessions.  A formal request will be issued early next year.

Lauren Scott (ACLI) presented a list of ACLI country specific objectives regarding 15 different jurisdictions and Diana Keegan (Met Life) spoke about the growing importance of the Middle East to insurers.  Met Life is working to develop a task force to focus on capacity building in the area.

Trade Issues:  Sarper reported that the US Congress has approved trade agreements with Panama, Columbia, and South Korea, bringing to 20 the number of free trade agreements in place.  The next area of focus for the US Trade Relations office will be the Trans-Pacific Partnership.  Dave Snyder (AIA) urged the NAIC to continue to work with the industry on reversing proposed anti-competitive changes in Brazil and Argentina.

International Updates:  McCarty announced that the NAIC would hold a series of regular conference calls with the interested parties on international issues over the course of the next year in order to provide updates and obtain feedback.  He will distribute a call schedule.

SMI:  The Committee was provided with updates on the SMI Project by Director Christina Urias (AZ) and on international accounting from Esson.

 

Attachment	Size
11-11 DC Report.pdf	408.62 KB