NAIC New Orleans – March 2 – 6, 2012
Download Full PDF Here.
Table of Contents
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.
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 and Health Actuarial 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.
Emerging Accounting Issues (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.
Examination Oversight (E) Task Force — Click here to read this article.
Reinsurance (E) Task Force — Click here to read this article.
Solvency Modernization Initiative (E) Task Force — Click here to read this article.
Principles-Based Reserving (E) Working Group — 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.
Executive (EX) Committee
The Executive (EX) Committee, chaired by Commissioner Kevin McCarty (FL), the 2012 NAIC president, held a brief meeting on Sunday and met jointly with Plenary on Tuesday. [See separate report of the joint meeting later in this newsletter] On Sunday Executive adopted the report of its joint meeting with the Internal Administration (EX1) Subcommittee held the previous day. McCarty reported that during that meeting a joint working group of the "C" and "D" Committees had been formed to review issues related to low income households and the auto insurance marketplace and to make recommendations as may be appropriate.
The Committee adopted the minutes of its February 4th meeting which included designating the NAIC president and its CEO, Terri Vaughan, to participate in ongoing discussions with representatives of the European Union and the Federal Insurance Office (FIO) concerning Solvency II.
The Committee also adopted the minutes of its January 26th conference call without discussion. It is noted that the minutes of the call indicate that its purpose was to adopt the license and service agreement between the NAIC and its affiliate, the NIPR.
The Committee adopted a restructuring of the Executive Committee task forces which included disbanding the Surplus Lines Implementation (EX) Task Force, transferring the Professional Health Advisors and the Investigation of Life/Annuities Claims Settlement Practices (EX) Task Forces to "D" Committee and transferring the AIG Managing and Solvency Modernization Initiative (EX) Task Forces to "E" Committee. The restructuring also included a recommendation that no proxies be permitted when votes are taken by "F" Committee because of the sensitive nature of accreditation.
The Committee adopted the minutes of the following EX task forces without comment:
- Government Relations (EX) Leadership Council
- International Insurance Relations (EX) Leadership Group
- Producer Licensing (EX) Task Force
- Speed to Market (EX) Task Force
Superintendent Joe Torti (RI) presented the next two items on the agenda, which had to do with ORSA. The first was a motion to adopt the NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual. Torti explained that large insurance companies or groups of insurance companies are required to do an annual internal assessment of its risks and the sufficiency of its capital resources to support those risks and to provide a high-level summary report if requested by the domiciliary regulator. The second item was a request for authorization to develop a model law, the Own Risk and Solvency Assessment Model Act. Both items were adopted.
The Committee heard oral reports from the Board of Directors of the NIPR and SERFF. Commissioner Linda Hall (AK) reported that the NIPR made significant progress in its efforts to electronically register licensed surplus lines brokers as required by Dodd-Frank, with an 83% success rate. She emphasized the importance of compliance with this provision of Dodd-Frank because after July 21, 2012 states will be prohibited from collecting fees related to the licensing of surplus lines brokers unless it is participating in the NIPR.
Commissioner Roger Sevigny (NH) reported that SERFF had elected a new Board of Directors as well as a new set of ex-officio members. Sevigny reported that SERFF had participated in the Health Insurance Exchange Forum held during this national meeting and that it is gearing up to become the clearinghouse for forms and rates for health policies to be sold through the exchanges. (SERFF currently performs this function for the IIPRC.) A follow-up forum will be held at the end of April.
Sevigny also gave the report of the IIPRC which now has 41 members (40 states and Puerto Rico) and over 130 insurers, representing 55% of the asset-based premium volume, are registered to file their insurance products with the Commission. He stated that the Commission has adopted a rule to require it to conduct a review of its rules and uniform product standards every five years.
Joint Executive (EX) Committee/Plenary
Commissioner James Donelon (LA), the NAIC president-elect, chaired this meeting. Plenary adopted minutes of the Executive Committee meeting held on March 4th [See a full report of this meeting in this newsletter.] and minutes of its December 20, 2011 conference call. Plenary and Executive adopted the Uniform Business Entity Licensing Standards developed by the Producer Licensing (EX) Task Force.
Plenary adopted by consent the committee, subcommittee, and task force minutes of the fall 2011 national meeting held on November 3 – 6, 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 Sandy Praeger (KS). [See a comprehensive report of “A” Committee’s meeting later in this newsletter.]
- A report of the meeting of the Joint Working Group of the Life Insurance and Annuities (A) Committee and the Financial Condition (E) Committee, presented by Commissioner Eleanor Kitzman (TX). The Joint Working Group, which is a Commissioner level working group, was formed to develop a satisfactory unified regulatory approach concerning statutory reserving requirements for insurers offering Universal Life with Secondary Guarantee (ULSG) products. The Joint Working Group adopted the following revised Phase 1 Decisions of the Sequence of Key Decisions of the draft Framework as follows: (1) Adopt a bifurcated approach to in-force and prospective business in concept; and (2) The NAIC will retain one or more independent consulting actuaries to advise the Joint Working Group with respect to the issues identified in the Framework and Appendix 1. The actuaries will be selected with input from LATF/regulatory actuaries and interested parties. Kitzman stated that decisions on all of the issues discussed in the Framework document will be made after a thorough vetting process.
- A report of the Health Insurance and Managed Care (B) Committee meeting, presented by Commissioner Sandy Praeger (KS). Plenary took separate votes to adopt the Health Carrier Grievance Procedure Model Act and the Utilization Review and Benefit Determination Model Act, and a Consumer Alert regarding Limited Medical Benefit Insurance Plans and Mini-Med Plans which was developed to address concerns about misrepresentations in the sales and marketing of these products.
- A report of the Property and Casualty Insurance (C) Committee meeting, presented by Director Merle Schreiber (SD). [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).
- A report of the Financial Condition (E) Committee meeting, presented by Superintendent Joe Torti (RI). Plenary took a separate vote to adopt the NAIC Own Risk and Solvency Assessment (ORSA) Guidance. [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 Commissioner Eleanor Kitzman (TX). Plenary took separate votes to adopt as accreditation standards in the 2008 revisions of the Model Regulation to Defined Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition and revisions to the capital and surplus Part A Standard applicable to Risk Retention Groups. [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 Susan Voss (IA). [See a comprehensive report of “G” Committee’s meeting later in this newsletter.]
- A report of implementation by the states of NAIC adopted laws and regulations.
Government Relations (EX) Leadership Council
Commissioner John Doak (OK) attempted to have a vote on a resolution urging all states to protect religious liberties in healthcare adopted by Plenary but it failed for lack of a second.
Commissioner Kevin McCarty (FL) chaired this meeting which opened with an appearance by Senator David Vitter (R-LA). Vitter is a member of the Senate Committee on Banking, Housing and Urban Affairs, which has jurisdiction over insurance matters.
Remarks of US Senator David Vitter: After some introductory remarks, which included praise for Louisiana Commissioner James Donelon, Senator Vitter expressed his opposition to Dodd-Frank, stating that most or all of it should be replaced with legislation that focuses on the real problems: reforming government-sponsored enterprises (GSEs), meaning Fannie Mae and Freddie Mac, and replacing the super-regulator approach taken by Dodd-Frank to address the too-big-to-fail problem with a strong resolution mechanism that would ensure that failed financial institutions are liquidated. He was concerned that Dodd-Frank had institutionalized to-big-to-fail.
Regarding the National Flood Program, Vitter stated that there was a good chance for a long-term reauthorization of the Program as both parties have reached a consensus for a five-year reauthorization. He said the House had already passed a reauthorization bill and the Senate Committee is trying to schedule a vote on the floor on its Flood Insurance Reform and Modernization Act. The version of the bill being considered by the Senate has moved closer to the House bill and the Committee is working on the remaining differences. In response to a question from Donelon, he stated that the reforms to the National Flood Program will make it more fiscally sound and that there will be rate increases. In addition, he mentioned his efforts to reform the levee recertification procedures of the US Army Corps of Engineers so that costs will not be shifted to the localities.
With respect to the prospects for the creation of optional federal charters, he stated that as a conservative he finds this proposal suspect and the good news for the NAIC is that, although it is still being discussed, it does not enjoy much support.
Commissioner John Doak (OK) asked Vitter to comment on the failed amendment to the Affordable Care Act sponsored by Senator Roy Blunt (R-MO) that would have overridden the Administration’s contraception coverage rule. Vitter stated that he had been a strong advocate for adoption of the Blunt amendment and alleged that the Administration’s rule crosses a "serious line never crossed before" in that it requires consumers to purchase products that they have moral objections to. He added that President Obama's compromise is really no compromise at all because in the end the consumer still pays and it does not in any way address the dilemma for self-insurers. Doak noted that he has put forth a resolution in support of the Blunt amendment that will be voted on Tuesday during the Plenary session. [Doak was unable to get a second on his motion.]
Commissioner Susan Voss (IA) commented that the federal government is very bank-centric and believes that it should have a more active voice in the regulation of insurance. She stated that Treasury must be made to understand that insurance is not banking and she requested Vitter’s help in getting this point across. Vitter replied "absolutely", adding that he had not wanted Dodd-Frank to cover insurance. He warned the regulators to beware of attempts by the new Consumer Financial Protection Bureau (CFPB) as well as the Federal Insurance Office (FIO) to encroach upon state insurance regulation.
McCarty noted that the NAIC is waiting for the FIO report to be released and that the tone of wording in Dodd-Frank which directed FIO to issue the report suggests that the states have not done a good job and that insurance regulation needs to be modernized. He questioned why it was written this way when, during the crisis, it was obvious that state regulation of insurance was effective, especially when compared to banking regulations, and he asked Vitter what his view would be if the FIO report suggests more federal intervention in the regulation of insurance.
Vitter did not actually answer McCarty’s question; he said he agreed with his assessment of the wording in Dodd-Frank, stating that it is no accident that the report would be given to Treasury which has long attempted to get its foot in the door and he repeated his objection to the institutionalization by Dodd-Frank of too-big-to-fail. McCarty suggested that a better approach would be to take away the authority of financial services entities to engage in the activities that had caused the failures.
Dodd-Frank Implementation Update: Mark Sagat (NAIC staff) gave this update. He stated that the NAIC is working with the federal agencies on the implementation of Dodd-Frank; that it is closely watching the activities of the Financial Solvency Oversight Council (FSOC) and has been attempting to educate FSOC members on the business of insurance and why insurance companies do not present systemic risk but it has also given recognition to the possibility that non-insurer entities affiliated with insurers may pose risk. He stated that the NAIC had commented on the proposed rule on the designation of systemically important financial institutions.
Sagat noted that the Federal Reserve has issued a rule providing for mutual holding companies to be liquidated pursuant to state receivership laws and that the NAIC has adopted a new chapter in its Receivership Handbook to address dissolution of an insurer that is subject to the Orderly Liquidation Authority (OLA) provisions of the Dodd-Frank. He noted that the NAIC continues to be concerned that the definition of swaps could be interpreted to include insurance products.
Health Care Update: Josh Goldberg (NAIC staff) stated that HHS has issued Essential Health Benefits guidance that requires each state to select a benchmark plan and supplement that plan as needed, if it is missing any of the ten categories of essential health benefits provided in the Patient Protection and Affordable Care Act. Goldberg stated that the NAIC has held two conference calls with HHS to clarify the guidance but that several questions are still outstanding, including how HHS will interpret the prohibitions on discrimination, whether association health plans could be included in the benchmarks, and how to do the actuarially equivalent calculation.
Goldberg stated that final regulations are expected soon on establishment of the insurance exchanges, student health plans, and MLR rebates. He also noted that US Senator Mary Landrieu (D-LA) has introduced legislation that would specifically exclude agent compensation from the MLR formula for individual and small group markets.
Other Matters: Peter Kochenburger (University of Connecticut School of Law), an NAIC consumer liaison representative, requested that the NAIC take the lead in addressing the force-placed insurance issue. He stated that force-placed insurance is issued under a group policy to a lender when a mortgagor fails to its pay insurance premiums on the mortgaged property. He stated that the premiums for this coverage must be paid by the borrower and that they are generally two to four times higher than homeowners’ premiums even though the policies only protect the lender and their loss ratios are generally under 25%. [Kochenburger made a similar request during the Consumer Liaison Committee and “C" Committee meetings.]
NAIC/Consumer Liaison Committee
Commissioner Neal Gooch (UT) chaired this meeting at which the consumer representatives made 11 presentations, the first five of which concerned implementation of the Patient Protection and Affordable Care Act.
Rate Review: Under the Affordable Care Act states are required to provide access to the preliminary justifications insurers make to support their rate increase requests of 10% or more on the day the filings are made and to provide a mechanism for receiving comments. Public comments must be submitted within 30 days of submission of the preliminary justification. States are also required to provide a link to each product specific consumer disclosure available on Healthcare.gov.
Kathleen Gmeiner (UNCAN Ohio) presented examples of well-designed consumer friendly websites set up for this purpose by Colorado, Oregon, Connecticut, and New Mexico. She made several recommendations, including that the states avoid lag time between submission of the rate increase justification and its posting so that the public will have sufficient time to comment and that the states maintain an e-mail listing of interested parties and send them notification as soon as a filing meeting the threshold is received.
Mini-Med and Limited Medical Benefits Insurance Plans: Timothy Jost (Washington and Lee University) thanked the NAIC for issuing a consumer alert regarding limited medical benefit insurance plans following his presentation during the November 2011 meeting but he stated that more needed to be done. He said that the consumer representatives question the belief of some that any health insurance product is better than none and noted that a Consumer Reports article had suggested that in some cases the benefits provided under these plans, which the article referred to as skimpy junk plans, are so limited that the consumer would be better off banking the premiums. He urged the regulators to issue a model law that would require the states to review these plans to ensure that they are adequate to protect consumers and are in fact better than having no insurance at all.
Meeting the Needs of Consumers in 2014: Sabrina Corlette (Georgetown University Health Policy Institute) stated that the purpose of her presentation was to highlight other provisions of the Affordable Care Act that, in 2014, will impact all consumers not just those who will utilize the exchanges. She listed four reforms that go into effect in 2014: establishment of single risk pools, new rating rules for community rated policies, guaranteed issue (which she called the most critical reform), and the elimination of waiting periods for pre-existing conditions.
She stated that most states will need to go to their legislators to implement these reforms which will apply to all non-grandfathered plans; that all players need to be on a level playing field and, if a state cannot or will not implement these reforms, the Act requires the federal government to put them in place.
Jennifer Mishory (Young Invincibles) spoke about catastrophic health plans which will be marketed mainly to young adults and the importance of ensuring that these young adults know that they have the option to purchase more comprehensive plans through the exchanges. She said young adults will also have more issues with transitioning from one plan to another because they are more mobile and often move from state-to-state and many will have to transition from college plans or from CHIP/Medicaid to the exchanges. She noted the very low insurance literacy of most young adults to emphasize the importance of outreach to them.
Essential Health Benefits: Lynn Quincy (Consumers Union) stated that beginning in 2014, all health plans sold in the individual market or small group markets (except those that are grandfathered or self-insured) must cover "essential health benefits". HHS guidance provides that essential health benefits are to be determined (for 2014 and 2015) during the third quarter of 2012 by each state selecting one health plan among 10 options to be its “benchmark plan”. If a state does not act, the largest plan in the state’s small group market becomes the benchmark plan.
Quincy said that this presented the regulators with an opportunity to shape the quality of health care benefit plans. She argued that the reason that has been so little progress in fighting cancer is the lack of access to healthcare and under insurance. To demonstrate what she meant by under insurance, she used a real life example of a woman fighting breast cancer who was told by her doctor she needed to have chemotherapy every week for year and found out when she received a very large bill for uncovered treatment that her policy only provided for 35 treatments per year. Quincy encouraged the regulators to have a robust discussion about what is insurance.
Consumers Union's Effort on Health Insurance Literacy: Quincy also gave this presentation. She said that Consumers Union has developed a new tool to help consumers. She began with a working definition of health insurance literacy: “Health insurance literacy measures the degree to which individuals have knowledge, ability, and confidence to find and evaluate information about health plans, select the best plan for their own (or their family’s) financial and health circumstances, and use the plan once enrolled."
Quincy said this tool is needed because consumers do not understand the basic concept of insurance and, in particular, cost-sharing, and therefore cannot confidently shop for health insurance or effectively compare plans and therefore often find themselves underinsured which may cause them to delay needed care. She used two plans to demonstrate the difficulty of making comparisons.
Quincy wants the NAIC to participate in this project and asked the regulators to read the Consumers Union roundtable report.
Federal Insurance Office Update: Peter Kochenburger (University of Connecticut School of Law) reported that the FIO had received 147 letters regarding what should be in its report to Congress and that the comments of the consumer representatives stressed that while solvency regulation was essential, insurance regulation must also focus on market conduct issues such as the fulfillment of the promise to pay the covered claim, competition, disclosures, and transparency. He said the consumer comments also pointed out that modernization of insurance regulation does not equate to deregulation and that presence of some duplication of effort in a federalist regulatory system is not a reason to abandon state-based regulation. The comments also pointed out that the federal regulators’ reliance on market competition, state preemption, and disclosures did not prevent the financial crisis.
The comments listed the specific concerns of the consumers with respect to the recent reforms, including that FIO should concentrate its efforts on international cooperation and that the insurance industry should not be included in systemic risk regulation. The consumer representatives also commented on market conduct concerns most of which had to do with the lack of transparency, that is the inability of consumers to access to policy forms, credit score models, policy language for comparison purposes, and market conduct data.
Update on Force-Placed Property Insurance: Birny Birnbaum (Center for Economic Justice) and Kochenburger made this presentation. They told the regulators that force-placed insurance (also known as creditor-placed insurance and lender-placed insurance) is a group policy that lenders purchase to ensure mortgage property when the consumer does not purchase homeowners insurance and pass on the cost to be consumer. Birnbaum stated this type of insurance has grown rapidly in the last few years and that it has very low loss ratios, very high commissions, and premiums that are 2 to 4 times premiums charged for homeowners’ insurance. Kochenburger stated that over 99% of this business is written by only two companies; in 2010 Assurant wrote 65.5% of total gross premiums written and Balboa (a subsidiary of QBE) accounted for 34.2%, for a total of 99.7%.
Kochenburger stated that there may be a need for this product but the way it is currently sold is abusive. He added that it is even being sold retroactively and questioned how there could possibly be a need for retroactive coverage. He said that the state regulators have jurisdiction over loss ratios and should impose a minimum because there is reverse competition in this market. He noted that in 1996 the NAIC adopted a model which set the minimum loss ratio at 60% but few states have enacted the model. [Kochenburger made a similar request during the Government Relations (EX) Leadership Council and “C" Committee meetings.]
Texas Office of Public Insurance Counsel New Policy Comparison Tool: Deeia Beck (OPIC) demonstrated a tool developed by the Texas Office of Public Insurance Counsel that allows consumers to compare policy coverages, both between companies and between different policies offered by the same company. The tool can be used to compare auto, homeowners’, condominium, and renters insurance policies. She said that the website is kept up-to-date and all new form filings are uploaded and she offered to help any state that was interested in developing a similar tool.
Shrinking Coverage for Water Damage: Amy Bach (United Policyholders) told the commissioners that water damage is the second most common homeowners’ claim and the third most costly. She stated that the exclusion language in the policies is very confusing, that the coverage is constantly shrinking. She cited a report to the Texas Legislature in 2009 which concluded that "some of the most prominent national insurers employ policy language that is systematically less generous than that provided by the standard ISO policy […]. [These downward deviations] include unambiguous and purposeful reductions in coverage." Bach gave several examples of how changes in policy language have reduced the coverage for water damage.
She recommended some possible solutions, including regulatory disapproval of water damage and anti-concurrent cause exclusionary clauses that defeat the policyholder's reasonable expectation of coverage; standardized exclusionary language; or standardized mandatory disclosures that show what could be, is, and is not, in the specific policy the consumer is purchasing.
Data Mining and Predictive Analytics/Publications of MCAS Data: Brendan Bridgeland told the commissioners that consumers currently have difficulty distinguishing insurers based on their treatment policyholders and therefore all insurers get treated with the same brush. He recommended that changes be made so that companies that provide good customer service will succeed and grow and those that do not will languish.
Bridgeland recommended that the Market Conduct Annual Statement be made available to the public and to consumer intermediaries; an expansion of the NAIC's Consumer Information Source to include links to the complaint information page for each state; and links to or copies of the market conduct examination reports, enforcement actions, and other orders issued by regulators against insurer companies.
NAIC/State Government Liaison Committee
The meeting of the NAIC/State Government Liaison Committee was chaired by Commissioner Kevin McCarty (FL). McCarty alluded to a meeting [apparently a closed one] at which the NAIC leadership and the state legislators had discussed issues that should be addressed during 2012. State Senator Carroll Leavell (NM) expressed his appreciation for the meeting. [The audio for this meeting was extremely poor and many times what was being said could not be deciphered by the audience. Therefore this report is rather limited.]
Dodd-Frank Implementation: Superintendent Joe Torti (RI) reported that the NAIC is closely watching the activities of the Financial Stability Oversight Council (FSOC), particularly with respect to the potential for insurers to be designated as systemically important financial institutions. He stated that while the NAIC does not believe that insurers present systemic risk it does recognize that non-regulated affiliates of an insurer can pose risk. He reported that the FDIC had published a proposed rule to implement its orderly liquidation authority provided for Title II of Dodd-Frank and that the proposed rule clarifies that a mutual insurance holding company will be treated as an insurance company and therefore mutual insurance holding companies will be subject to the various states' receivership procedures for insurance companies.
He stated that the NAIC is also seeking clarification that insurance products would not be subject to the rule implementing Title VII of Dodd-Frank. [Title VII gives the SEC and the Commodities Futures Trading Commission (CFTC) additional authority to regulate over-the-counter derivatives.] Finally, he said that the NAIC is seeking clarification that the Volcker Rule exempts the business of insurance.
Regarding the Federal Insurance Office (FIO), Torti reported that there was no new information as to when the now overdue report to Congress on how to improve and modernize the regulation of the business of insurance would be released.
State Representative George Keiser (ND) stated that there may be opportunities for the NAIC and state legislators to work together to develop a response to the report when it is released and he recommended that a small group made up of legislators and insurance commissioners be put together now so that it can begin work immediately after release of the FIO report. Leavell noted that they had reached agreement on setting up a working group during the prior day's meeting but that the working group had not been appointed.
McCarty stated that he shared Keiser’s concerns that there is potential for bias at FIO towards federal regulation but he noted that history is on the side of the state regulators because the effectiveness of state solvency regulation was clearly demonstrated during the financial crisis. McCarty added that they did need to be candid about some weak points, mainly market conduct and producer licensing, and admit that while the state regulatory system is good it can be made better but he cautioned that while making the state system more efficient it is important that it should not be done at the expense of reducing protection for consumers.
Affordable Care Act Implementation: Commissioner Sandy Praeger (KS) reviewed the work being done to implement the Affordable Care Act. She stated that, while everyone is waiting to hear what the Supreme Court has to say in June, the deadlines are fast approaching so implementation work should not be suspended. She listed the various deadlines and, with respect to the establishment of state insurance exchanges, she invited the state legislators to participate in an upcoming forum on how to update SERFF so that it can be used for the filing of forms and rates by all state exchanges as well as by the federal exchanges.
International Issues: Before reporting on international issues, Commissioner Susan Voss (IA) alerted the state legislators that "A" Committee is actively working on principle-based reserving and a model law may be adopted relatively soon.
Voss is the new chair of "G" and said that she is trying to engage the commissioners on international issues that impact the states and to that end “G” Committee will be holding open monthly conference calls. She stated that, while the US has the largest insurance market, it must still interact with insurance regulators around the world. She reported that the NAIC is very involved with the IAIS on many of its projects, including standard-setting, implementation of the IAIS core principles and ComFrame, which is a framework for regulating internationally active insurance groups. She noted that three US members sit on its Executive Committee (McCarty, NAIC CEO Terri Vaughan, and FIO Director Michael McRaith).
Voss stated that "G" Committee is also involved with standard-setting going on at FSOC with respect to a review by the International Monetary Fund (IMF) of the US financial insurance regulatory system. Voss said that the NAIC recognizes that there are areas where the states need to improve and that there are issues coming from other countries on which the states must work collaboratively with their international counterparts, including Solvency II (the yet to be implemented European framework for solvency regulation of insurers) with which the US has serious concerns.
She said the NAIC has initiated a US/EU dialog to talk about common issues. The first meeting was held last week in Basel where they put together a list of issues that they would like to work on together and hopefully resolve their differences. In summary, she said that, in light of the financial crisis, her Committee was trying to develop a better understanding of where international coordination is warranted.
Amendments to the Credit for Reinsurance Models: Commissioner Michael Consedine (PA) reviewed the changes to the Credit for Reinsurance Model Law and Regulation that were adopted last year. He explained that the now superseded model required that in order to receive credit for reinsurance placed with a non-licensed reinsurer that reinsurer had to post 100% collateral. The revisions reduce the collateral requirements for reinsurers domiciled in “qualified jurisdictions”.
Consedine reviewed the next steps; he stated that implementation of the changes requires that the NAIC revise the credit for reinsurance accreditation standards, conduct reviews to identify qualified jurisdictions, and establish a working group to provide support to the states on enactment of the model legislation.
He said that compliance with the revised credit for reinsurance accreditation standard will be somewhat different from the requirements for other model laws. (Normally, the state must adopt the model or something that is substantially similar to the model.) Implementation of the revised model law and regulation will be voluntary in that a state will have the option of reducing its collateral requirement by adopting legislation that would implement the key elements of the revised law and regulation (to be drafted by “E” Committee) or retaining the 100% collateral requirement.
He noted that Dodd-Frank bestows powers upon FIO that could potentially impact credit for reinsurance. McCarty made some comments about qualified jurisdictions, most of which were inaudible. In response to a comment from State Representative Brian Kennedy (RI), Consedine stated that it was very important to implement these revisions to the credit for reinsurance model because FIO is watching and if it is not implemented industry will use the inaction to support its push for federal regulation of insurance.
Keiser stated his concern for potential country defaults in Europe and asked whether this possibility had been taken into account in developing the revised model. Consedine replied that the NAIC has been closely monitoring exposures of US insurers to defaults in Europe and assured Keiser that while US insurers do hold some of the EU debt securities that are at risk their exposures are limited and do not pose threats to solvency. In addition he stated that part of the accreditation standards require that the states continually monitor concentration of risk.
Market Conduct Issues: McCarty told the legislators that modernization of market conduct regulation is a priority for the NAIC. Commissioner Sharon Clark (KY) reported that the Market Regulation and Consumer Affairs (D) Committee is focusing on enhancing coordination of market conduct actions of the states. She stated that consumer protection is the market conduct guiding principle and that each state has appointed a collaborative action designee and going forward there will be proactive notification to the domestic regulator before a market conduct investigation begins. She stated that her Committee will develop a plan of action on how to improve the market conduct examination process for consideration at the next national meeting in August.
Leavell stated that he appreciated what "D" Committee was trying to do but he noted that during the prior day's meeting he had informed the NAIC of the legislators’ concerns with the number of market conduct examinations that an insurer is subjected to, which, for some companies, is onerous. McCarty commented that he wants market conduct oversight to focus on consumer protections and he agreed that examining a company's files for late filings of policy forms that may not be harmful for consumers or a good use of resources.
Kennedy asked the NAIC to take a fresh look at the "NCOIL” model to see if specific changes are needed in order to get the support of the regulators. He believes that parts of it are been adopted by the states and that they could isolate those sections that needed to be concentrated on.
NAIC/Industry Liaison Committee
This meeting was chaired by Commissioner James Donelon (LA) and the chairs of the three relevant committees were present. Industry made the following three presentations:
Health Insurers Affordable Care Act Implementation Update: Candy Gallaher (AHIP) spoke about the enormous challenges the health insurance industry faces in order to implement the Patient Protection and Affordable Care Act. She stressed that the regulators and industry share common goals to have an efficient, effective, robust, and financially solid health insurance industry and both face an unprecedented amount of work in order to meet the many deadlines contained in the Act. She listed the many things the health insurers will have to do in order to comply with the Act, including completely overhauling their products, making significant data filings with healthcare.gov that will be accessible by consumers, overhauling their appeals and grievance procedures, complying with a new rate review process, implementing the NAIC Supplemental Health Care Exhibit, and possibly having to issue rebates if their rates are determined to not meet the MLR requirements.
She noted that implementation has all been further complicated by the late issuance by HHS of final rules which has left less time for implementation by the many deadlines that have not changed. She added that the industry is also trying to gear up for the 2014 market reforms which will include an unprecedented level of form and rate filings in order to comply with the Essential Health Benefits package as determined by each state. With respect to form and rate filings, Gallaher acknowledge that the SERFF system has helped.
Joan Gardner (BC/BS) noted that her companies insure one in three Americans. She stated that implementation of the Affordable Care Act by 2014 depends upon getting the final federal rules now and that it is also critical that the NAIC Health insurance Exchange Plan Management report be finalized in order to ensure that they will be efficient and effective operation of the state-based insurance exchanges. She noted that most people think of the implementation date for the market reforms as January 1, 2014 but, in fact, insurers must be ready to go live on October 1, 2013 when open enrollment begins. She noted that the health insurers need to have their products developed and priced by March of 2013 because the states will need at least six months to do their reviews.
Gardner also expressed appreciation for the efforts being made by the NAIC to ensure that SERFF will be able to handle the expected volume of form and rate filings and she complimented the openness of the process.
Chris Peterson, representing dental insurers, explained the uniqueness of the dental insurers’ situation with respect to the Affordable Care Act. He stated that dental coverage is part of the essential benefits package and therefore dental products must be developed for sale on the exchanges either as a stand-alone product or as part of a comprehensive health product. He asked for the NAIC’s help, stating that the dental benefit needs to be designed and priced, that forms needed to be developed and filed, and the plans needed to be certified before they may be sold on the exchanges. He noted that the rules for how a plan gets certified have not yet been released.
Commissioner Sandy Praeger (KS) thanked the industry representatives for their strong support of SERFF. She asked Gallaher to convey to HHS that SERFF can handle the form and rate filing tasks. Gallaher replied that during its first meeting on this issue with HHS, HHS went away thinking that SERFF was not ready to handle this undertaking but during an all-day meeting last week HHS saw an outline of a very coordinated process and now she believes it sees how SERFF will be able to perform they necessary functions but it remains concerned as to whether SERFF will be ready to interface with the federal system by the deadline. She noted the irony of HHS’s concern given its inability to finalize the rules on time.
Praeger noted that the system being developed will allow states to initially let the federal government operate their state health insurance exchanges and have the option to move to their own exchanges at a later date. Donelon asked Gallaher to provide the regulators with the implementation timeline she had included in her remarks.
International Developments: Dave Snyder (AIA) stated that until recently international developments that impact the US insurance markets have been happening at a slow pace and were not perceived to be of direct importance; however, since the financial crisis all that has changed and we now have the Dodd-Frank Act which included the creation of the Federal Insurance Office (FIO) and the Financial See Oversight Council (FSOC); the NAIC has embarked on its Solvency Modernization Initiative (SMI); Solvency II is being implemented; the G-20 has given the Financial Stability Board directions that impact insurers and insurance regulators; the IAIS has developed core principles and is working on ComFrame, the global approach to supervising internationally active insurance groups; and new trade agreements have been approved that include language dealing with protectionism of insurance markets masked as regulation, which Snyder hopes will open up insurance markets in Brazil, China, and India, among others to the US insurance industry.
Snyder said these developments pose many new opportunities as well as challenges, such as how to assure both effective and efficient US and global insurance regulatory regimes while avoiding duplicative and inconsistent regulatory mandates and ensuring confidentiality protections as are in place in the United States will be emulated worldwide, and how to assure mutual recognition between well-functioning regulatory systems.
Snyder recommended that in order to represent the interests of US consumers, insurers, and employers there needed to be cooperation and coordination in all regulatory discussions by all federal representatives including Treasury and FIO, the NAIC, the states, and the industry. In addition he said there needed to be advocacy for more effective and efficient regulation; insistence on a cost-benefit assessment of all regulatory proposals; and a focus on protecting the competitiveness of US insurers and opening up foreign markets through coordinated activity with the USTR and other trade related entities. Finally, he advocated for maintaining and focusing on a dialogue between industry and the regulators.
Morag Fullilove, representing the Group of North American Insurance Enterprises (GNAIE) and the PIA, stated that the changing globalization affects all facets of life and, combined with technology changes and increasing resource capabilities, has resulted in a very dramatic environment that is being reflected in the international deliberations Snyder had referred to which are being driven in part by attempts to find a common language and comparability among the various regulatory systems.
With respect to international accounting standards, Fullilove said, their development has been going on for over ten years and was originally driven by investors attempts to understand the different financial reporting formats around the world and she believes that it is possible that a common exposure draft of international accounting standards applicable to insurance will be released by the end of the year. She reported that at a recent meeting, the SEC had indicated it would be making its decision regarding international accounting standards and their application to US GAAP in a few months, "more than a couple and less than many".
Regarding solvency capital requirements, Fullilove stated that the focus is on risk because the risk-based capital approach initiated by the NAIC has proved to work and has been adopted by countries around the world, including Australia, Canada, Chile, the EU, Mexico, and South Africa. She noted that since risk-based capital was first introduced the technology has changed allowing the NAIC to undertake its SMI project which she said she should not be impeded by outside interference. She encouraged the NAIC not be defensive and to have as its objective a constructive dialogue with foreign regulators with the goal of arriving at points of comparability so that the US can understand the systems in other countries and they will understand ours. Fullilove noted that the NAIC had started the IAIS with the goal of improving insurance regulation around the world and thereby opening foreign markets to US insurers and she felt that the tremendous amount of resources the regulators are voting to the IAIS and other global endeavors are worthwhile.
Snyder thanked the commissioners for scheduling this meeting but suggested that a multi-hour meeting should be scheduled to take place at each national meeting to deal with international issues. Commissioner Susan Voss (IA), who chairs International Insurance Relations (G) Committee, replied that she recognized the need for additional meetings but there are time constraints and "G" Committee will be holding regular open calls for this purpose.
Discussion of Market Conduct Regulation Issues: Justin Ailes (ALTA) limited his remarks to work on the examinations conducted by outside contractors. Ailes and the problems his members have encountered in dealing with these outside contractors, which he stated are very costly and often know very little about what they are examining, which requires the title companies to educate them before they can conduct examination. He requested that the NAIC develop guidelines for these examiners regarding examination costs with penalties for exceeding budgets and timeframes, limit the charges to actual costs incurred, set standards for transparent and itemized invoices, assess fines for violations in accordance with state laws, develop a certification and accreditation program for these contracts examiners and require that when they signed in violation in their reports they also cite the statute that was violated.
Neil Alldredge (NAMIC) discussed the findings of the survey of his members regarding market conduct actions they had been subjected to over an 18 month period. The results were compiled from responses from 24 of NAMIC’s largest members. He said the average number of market conduct actions was 42, the average number of comprehensive examinations each had undergone for targeted exams was six, and finally that the average number of days the examination took was 618. He noted that in a wall of the examinations included in the study only one was a coordinated exam and that the average cost for each exam as done by department staff was $143,000 and is done by outside contractors $115,000. (He noted this particular finding was surprising.)
Lisa Brown (AIA), stated that there have been some positive results from the NAIC's efforts to reform the market conducts system but there was still issues, mainly related to the lack of coordination by states. She requested that it be a wider use of the tracking system and noted that the course of targeted exams and analyses is going up because of the increased articles. She also noted that there was an overlap of information being collected by financial examinations and market conduct examinations and she requested that they be that they be better coordinated.
Lee Covington (IRI) suggested that the regulators employ the lead state approach and that especially for life companies where the products sold are similar there is great opportunity for coordination of market conduct examinations. He stated the industry was pleased with the efforts of the Market Regulation and Consumer Affairs (D) Committee under the leadership of Commissioner Sharon Clark (KY).
Life Insurance and Annuities (A) Committee
Commissioner Julie Mix McPeak (TN) chaired the meeting of the “A” Committee. Since past chairs had had their own personal greetings, McPeak gave a “Howdy, y’all” to the crowd. Once again the “A” Committee was standing room only because it was held in one of the smaller ballrooms and chairs had to be brought in throughout the meeting to accommodate the crowd.
The Committee appointed its 2012 working groups, which are the Annuity Disclosure (A) Working Group and the Viatical Settlements (A) Working Group.
The “A” Committee had received a referral from the Life Actuarial (A) Task Force (LATF) regarding the proper classification of contingent deferred annuities (CDAs). The Contingent Deferred Annuity (A) Subgroup determined that CDAs are similar in structure and risk profile to the guaranteed living withdrawal benefit (GLWB) rider inside variable annuities and should be sold by life insurance companies. The Subgroup recommended that the Committee form a working group to consider appropriate consumer protections and to determine if there are solvency issues in CDAs and GLWB riders.
Commissioner Eleanor Kitzman (TX) thought that not enough work on GLWBs had been done by the Subgroup. Felix Schirripa (NJ), chair of the Subgroup, said that the charge was limited to CDAs but the Subgroup felt it would be disingenuous to separate the two. Birny Birnbaum (Center for Economic Justice) said that the LATF letter referred to regulatory treatment of the product and if regulatory issues are the concern then sales of the product should be suspended until the regulation goes into place. Birnbaum said the problem with merging GLWBs and CDAs is that GLWBs have a regulatory framework but CDAs have no guidance. Birnbaum added that the review could take a year or two and in the meantime the product would continue to be sold.
Tomasz Serbinowski (UT) responded that the work is not done yet because the focus of the Subgroup was the threshold issue. Serbinowski said that Birnbaum was invited to the calls but did not attend. Lee Covington (Insured Retirement Institute) said the industry is prepared to assist the new working group. “A” Committee adopted the Subgroup report, accepting the finding that CDAs are life insurance products and annuities, and established a Contingent Deferred Annuity (A) Working Group. McPeak asked Ted Nickel (WI) to chair the Working Group.
Jolie Matthews (NAIC staff) read the report of the Viatical Settlements (A) Working Group, which was adopted by the Committee.
Mike Boerner (TX) reported on LATF. “A” Committee adopted the report, which included adoption of the modifications to the Standard Nonforfeiture Law (#808) to coordinate with the Valuation Manual and the Standard Valuation Law (#820) so that all three documents can be presented to the states’ legislatures as a package.
Kitzman gave the report for the Joint Working Group of the Life Insurance and Annuities (A) Committee and Financial Condition (E) Committee. “A” Committee adopted the report, which included adopting revised Phase I Decisions of the Sequence of Key Decisions from the Draft Framework document. This means that the Committee
- Adopted the bifurcated approach to In-Force and Prospective Business in concept; and
- The NAIC will retain one or more independent, consulting actuaries to advise the Joint Working Group with respect to issues identified in the Framework and Appendix I – Issues to be Addressed. Actuaries will be selected with input from LATF/regulatory actuaries and interested parties. Because independent consulting actuaries may be deemed necessary for subsequent issues, a pool of consultants should be identified.
The Committee received an update from the Principles-Based Reserving (E) Working Group from Commissioner Susan Voss (IA). The Working Group received a summary report from Towers Watson. The Working Group will have a timeline from LATF and the technical groups for the NAIC summer meeting and expects to wrap-up its work by the end of the year.
Professor Peter Kochenburger (Insurance Law Center) urged other states to adopt a rule similar to New York’s circular on retained-asset accounts (RAAs) and he asked the NAIC to look at this issue in the future. Superintendent Benjamin Lawsky (NY) thanked Kochenburger for his comments and said that he thinks that requiring life insurers to pay beneficiaries of life insurance claims immediately, thereby prohibiting the use of RAAs, will become law in all the states.
Life Actuarial (A) Task Force
The face of the LATF looked very different at this meeting following leadership changes. The new chair is Mike Boerner (TX) and the vice chair is Pete Weber (OH). As perhaps an indication of the NAIC’s desire to give greater direction to LATF, former chair Leslie Jones (SC) and vice chair Katie Campbell (AK) are no longer even on the task force.
The Task Force meeting began at 8:00 am Thursday with Commissioners Julie McPeak (TN), chair of the Life Insurance and Annuities (A) Committee, and Eleanor Kitzman (TX), nominal chair of LATF, setting the tone for the meeting by saying, “PBR is our top priority; it is Commissioner McCarty’s top priority.” “Since we hope to introduce the Model law in the 2013 legislative sessions,” Kitzman said, “it is just time we get PBR done. Commissioner Voss is chair of PBR Working Group. This is her swan song to deliver PBR. We are all committed to getting this done.”
Kitzman added that “A” Committee will be more proactive in what LATF is doing. “We want to make sure to have adequate guidance and direction on expectations. We need to focus more on setting and meeting deadlines and planning how to meet them. We are looking for ideas and input, but at some point we need to move forward. We know where we want to end up; but we do not need to know all the answers before we start down the path. We are here to support you, but we will also let you know when to pick up the pace. This is a unique task force. You have important and hard work to do.” McPeak reiterated that she wants to have PBR adopted this year but is not expecting a perfect SVL Manual. Work on the Manual will continue after the initial adoption. “It is time to put this on the books, even if we have to revisit it as we do the APP Manual. We want the best product we can get, but recognize the work will continue past the initial adoption.”
Given this introduction, Chairman Boerner said that the plan for the Valuation Manual was to set LATF adoption for early June. LATF will expose the Valuation Manual in mid-May. That leaves the Task Force two months to settle the two open issues: mortality development and Net Premium Reserve. Boerner said his goal was to expose the Valuation Manual at this meeting. The Task Force would then finish the two remaining issues by May. The Task Force might address other issues only if there is time. Boerner reminded the members of this schedule throughout the meeting.
Mortality Table Development: Mary Bahna-Nolan (PwC) reported on the two going-on projects: preferred mortality tables and payout annuities. The Society of Actuaries will begin reviewing the new data submissions on mortality in April; then it will build mortality tables. The preferred mortality tables will not be ready until after the June meeting, but will be presented in August. The payout annuity table is in an exposure period until April 6. The NAIC was asked to publicize the exposure since only two comments had been received.
Principles Based Reserving VM-20: Peter Weber (OH) led discussion on several areas related to the Valuation Manual.
- Mortality Assumptions: The Academy revisions were handed out at the meeting. Several clarifying amendments have been made to the Manual. The Society of Actuaries and the Academy asked for direction from the NAIC regarding the margin table. The margin is too high for a company using its own experience, but the intent is that the 2014 VBT will be in place when PBR is actually implemented. It is better suited for this structure of VM-20. The Academy wanted to know whether to spend more time trying to improve the margin for 2008. Although there was a sense from some to wait, it was not clear there was a definitive answer given to the question.
There was considerable discussion regarding the number of claims needed in an exposure period for company data to be considered credible. LATF decided to expose the number as undefined and to discuss it on a future conference call based on AAA recommendations.
- Net Premium Reserve: John Bruins (ACLI) provided an update on ACLI’s work to develop principles behind the development of the net premium reserve. He said a well-crafted deterministic reserve is the best indicator of an appropriate level of reserves. Net premium reserves should be consistent with the deterministic reserve, but a deterministic reserve is based on a company’s data whereas the net premium is based on industry mortality assumptions. The ACLI’s studies show for term insurance a deterministic reserve will be negative for the first several years because of the high level of acquisition costs so net premium reserve is higher. The stochastic reserve was generally lower than NPR. For Universal Life with Secondary Guarantees (ULSG) the results were mixed as to which was higher. This needs to be the area of focus. Other changes are needed to address tax issues as well as reserving.
The goal is to have a proposal by mid to late April. Boerner said they need an earlier recommendation so there can be a mid-May exposure. The ACLI said the details will need to readjusted in June, even if the framework is ready earlier and there will need to be maintenance adjustments at the same time the Manual is being finished. The LATF members asked for a closer collaboration with the ACLI in its review of NPR. ACLI agreed this might improve understanding.
VM-20 Impact Study Final Results: Jason Kehrberg and John Dieck of Towers Watson presented the results of the Impact Study. The goal of the impact study was to help the NAIC understand the impact of the new valuation approach on US life insurance companies. The study was based on the Standard Valuation Law adopted in 2009. Sixty-six companies were invited to participate; 42 companies participated; and 26 companies ultimately submitted results. No reinsurers submitted information. The final report which details the results is posted on the on the NAIC website, www.naic.org.
Towers Watson made several recommendations for changes based on its research:
- That regulators keep in mind that the level of reserves under PBR will respond to changes in the environment and will lead to some volatility in the results.
- That LATF consider requiring companies with products that pass the exclusion test to run the stochastic test periodically to make sure exclusion in accurate.
- That LATF clarify the term ‘product gross premiums’.
- That LAFT modify the term ‘NPR calculation’ so it works more effectively (This is being done.) andthat LATF consider making deterministic reserve a requirement in all cases and eliminate the exclusion test.
- That LATF review the effectiveness of ESG (exclusion test) on a regular basis.
- That LATF consider whether margins should be applied to Yearly Renewable Term (YRT) reinsurance rates.
- That LATF recommend a mortality blending process. (This is being addressed.)
- That LATF allow the documentation requirements for VM-20 to be similar to actuarial reports and formats to reduce duplication.
- That LATF simplify VM-20 calculations by increasing the corridor of the starting assets in the deterministic and stochastic reserve calculation form 2% to 5%.
- That LATF expand and clarify some of the guidance the Manual.
LATF discussed the recommendations. Pete Weber (OH) identified three recommendations as easy to do quickly before June, including clarification of the term product gross premium (3) and the applications of the margins (6). The recommendation regarding increasing the corridor (9) was thought to be harder and raised some concerns. John Bruins (ACLI) said recommendations 4 and 7 are being done and that recommendation 5, regarding the exclusion test, was partly addressed.
Because of the timeframe for the Manual, Boerner said that LATF will address recommendation 3 and try to addresses 6 and 9. Others will have to be addressed after June.
The Task Force exposed the Valuation Manual, as amended at this meeting, for comment by May 1.
PBR Reporting and Review (VM 31) Amendments: The Task Force exposedfor comment modifications to the Reporting Requirements for Business Subject to PBR.
Annuities: The Task Force released for comment modifications to the NAIC Model Rule for Recognizing a New Annuity Table for Use in Determining Reserve Liabilities for Annuities (#821).
Non-Forfeiture Improvement Working Group: John McBain (AAA) provided a report on the AAA’s work on the basis for the non-forfeiture assumptions. He said the goal is to provide an appropriate value for the consumer. The issue will be addressed after June and a LATF subgroup may be appointed to work with the AAA at that time.
Standard Non-Forfeiture Law: The Task Force adopted modifications to the Standard Non-forfeiture Law (#808) to coordinate with the Valuation Manual.
Actuarial Guidance XXXIII: Jim Lamson (AAA) reported on the work of the Annuity Reserve Working Group. The Academy is developing a stochastic exclusion test and looking at a tax-friendly deterministic reserve for AG-33. A conference call will be held to address problems encountered related to interest rates and reserves.
Interest Rates: Larry Bruning (NAIC) raised concerns regarding the impact of the low interest rate environment and suggested there should be a change to the interest rate calculation in the Model Law and Valuation Manual. The chair said this change would have to approved by the Executive Committee. LATF will draft a recommendation for “A” Committee and/or the PBR Working Group that LATF explore the implication of extended low interest rates and a possible change to the law.
VM 50/51 – PBR Experience Reporting: Tom Rhodes (AAA) reported on the AAA Experience Reporting Working Group looking at the use of statistical agents. McBain said the principle cost difference between statistical agent and compiler is that the statistical agent does the validating versus volunteers. McBain said the New York pilot first data call is completed and planning has begun for the second call. 80% of companies have data that is ready to be used. The Task Force exposed the report on VM-50 Experience Reporting for comment to July 19.
One of the goals of the VM50 Experience Reporting Requirements was to codify SOA’s role in the process since concerns were expressed about Society of Actuaries members having special access to data. Recommended changes to replace references to the SOA and AAA with “other organizations” were reviewed and adopted. There was an extensive discussion regarding confidentiality and disclosure. In the end the ACLI proposed language to 4F1 on treatment of confidential information was adopted. The Task Force will have a conference call on the other recommended changes.
International Issues: Larry Bruning (NAIC staff) provided an update on international developments.
Minutes: The Task Force approved the minutes from December 2011 and January and February 2012.
Property and Casualty Insurance (C) Committee
This meeting was chaired by Commissioner Mike Chaney (MS). The Committee reappointed its task forces and working groups and adopted their charges. It also adopted the new charge to hold a public hearing and consider developing a model guideline, white paper, or compilation of best practices, to reduce post-disaster insurance recovery obstacles for insurance consumers. The Committee adopted without comment written reports of its various working groups and task forces. It considered the following issues:
Formation of a Coastal Coalition: Commissioner Eleanor Kitzman (TX) presented an idea to address coastal property risks which she said was still being formulated. Her conceptual idea was to form an interstate compact that would be open to the 18 coastal states, from Maine to Texas, to address their coastal property insurance needs by attracting and facilitating a more efficient flow of capital into their distressed markets. She believes this could be accomplished by developing streamlined licensing standards that would allow insurers to write coastal property insurance only in the coastal territories in each state belonging to the compact, as defined by the state. The insurer would need to be licensed for this limited purpose in only one of the compacting states in order to write business in all the others but would be subject to all the laws and regulations of the state in which the risk is located. Kitzman stressed there would be no risk sharing between the states.
Update on Lexis/Nexus Insurance Exchange: John Fielding (Council of Insurance Agents & Brokers) stated that the purpose of this Exchange, which has been operating for a little over a year, is to improve the transparency of the independent agents’ distribution systems by better identifying and matching risks to underwriters. He stated the Exchange was now focusing on development of a regional program; and, to give an idea of how quickly the exchange taken off, he stated that the Exchange has so far received over 20,000 submissions and that approximately 3,000 agents and underwriters are participating.
Presentation on Catastrophe Modeling Trends: The Committee heard a presentation by Ryan Oggard (Risk Management Solutions - RMS) on the emerging trends in the development of catastrophe models. He described Version 11 of the RMS model as enabling an insurer to better understand the implied bets in the risks it underwrites, to take a broader view of its risk, to test and validate its assumptions, and to create its "own view" of risk.
Oggard said that 2011 broke all loss records but that RMS’s analysis indicates that this was not because there were many more catastrophes but rather because the cost to settle losses has greatly increased and he seemed to suggest that this was in part due to the pattern of storms moving further east. He concluded by stating that RMS is now offering more modeling options and sensitivity tests, is creating a more open environment, is investing in better approaches and faster technology, and has begun reaching out to state insurance departments and the rating agencies. Finally, he stated that RMS is developing educational offerings that it plans to bring to the states to enable them to better understand catastrophe modeling.
With regard to RMS’s outreach to the rating agencies, specifically A. M. Best, Chaney asked Oggard how rating agencies were using the models to require insurers to increase their capital in order to avoid being downgraded. He was concerned that the result was essentially rate increases for consumers. Oggard opined that A. M. Best was evaluating the information gleaned from an insurer in order to determine whether the company had been blindsided by the severity of its losses.
Commissioner James Donelon (LA) noted the dramatic changes in projected risk following the replacement of Version 10 with Version 11.
National Flood Insurance Program Reauthorization Efforts: Eric Nordman (NAIC staff) briefed the Committee on the status of reauthorization of the National Flood Insurance Program which is scheduled to expire on May 31st. Nordman stated that two different bills have passed in the House and Senate and efforts are now underway to resolve their differences. He noted that a four-hour session on the Program will take place during the summer national meeting in Atlanta.
Referral Regarding Producer-Controlled Insurers and RRGs: Jill Jacobi (CA) explained that the Risk Retention (E) Task Force had recommended that the Business Transacted with Producer-Controlled Property/Casualty Insurer Act be amended to remove the exemption for risk retention groups. She stated that the Risk Retention (C) Working Group agrees with this recommendation. The report was adopted by the Committee.
Presentation Regarding Building Codes in Hurricane Prone Regions: Debra Ballen (Insurance Institute for Business & Home Safety - IBHS) made a presentation regarding a report recently released by her organization entitled Rating the States: An Assessment of Residential
Building Code and Enforcement Systems for Life Safety and Property Protection in Hurricane Prone Regions. Ballen stated that after Hurricane Andrew, Florida imposed strong statewide building codes and as a result there was a 40% decrease in frequency and a 60% decrease in severity following Hurricane Charlie. She opined that these dramatic decreases demonstrate that mitigation works.
IBHS has rated the effectiveness of building codes and their enforcement in the coastal states. She explained IBHS’s rating methodology, which used 47 rating factors, and presented a chart of the results. On the scale of 0 to 100, Florida ranked the highest with a score of 95 and Mississippi ranked the lowest with a score of 4.
Donelon complimented IBHS for its work because after Katrina Louisiana had used its research on effective building codes and had enacted a statewide building code and, he said, the difference was evidence following the most recent hurricanes.
Proposed Auto Insurance Study: Chaney announced that a joint “C” and “D” working group was being formed to conduct a study of the availability of affordable auto insurance for low income households following a demonstration by the Consumer Federation that low income households often pay much more for the same products than is paid by more well-off households.
International Insurers Department (IID) Plan of Operation for Listing of Alien Non-Admitted Insurers: The Committee adopted amendments to the IID Plan of Operation. Donelon stated that the changes were needed to comply with the Dodd-Frank Act and had been adopted earlier in the day by the Surplus Lines (C) Task Force. He said the revisions include moving the Surplus Lines Financial Analysis Working Group to the "E" Committee; posting the schedule of fees and other charges on a separate IID page on the NAIC website; increasing the minimum capital and surplus requirements incrementally from $15 million to $45 million by the end of 2013 and establishing an appeal process for an exemption from the increased capital requirements; increasing the maximum trust fund requirements from $100 million to $150 million by July 2013; prohibiting dual recognition of US branch offices of non-US insurers; and requiring Lloyd’s incidental syndicates applying for admission to the Quarterly Listing of Alien Insurers to establish a trust fund and commit to IID reporting requirements.
Force-Placed Insurance Issues: Peter Kochenburger (University of Connecticut School of Law), an NAIC consumer liaison representative, requested that the NAIC take the lead in the regulation of force-placed insurance (also known as creditor-placed insurance and lender-placed insurance) which he said was already being investigated by the new Consumer Financial Protection Board (CFPB). He stated that two insurers dominate this market, accounting for over 95% of premiums written; that a group policy is sold to a lender to ensure the collateral backing up a mortgage when the owner of the property has dropped its homeowners’ coverage; that the premiums are paid by the property owner and are typically two to four times homeowners’ insurance premiums; and that the loss ratios are less than 25%. [Kochenburger made a similar request during the Consumer Liaison Committee and Government Relations (EX) Leadership Council meetings.]
Chaney stated that the Committee would take a more in-depth look at force-placed insurance during its meeting in Atlanta in August. He also noted that there is a model law on force-placed insurance but he was not sure how many states have enacted it.
Other Business: Chaney noted that the material for the meeting included a copy of a resolution that had been adopted by NCOIL last week in Biloxi opposing a rule proposed by HUD; the resolution alleges that the rule would impede the regulation of insurance. He stated that no action would be taken at this meeting on this resolution and that it was attached for information purposes only.
Birny Birnbaum (Center for Economic Justice), a consumer liaison representative, told the Committee that he had opposed adoption of this resolution in Biloxi because it is factually incorrect and bad policy. He stated that the courts have consistently ruled that the Fair Housing Act applies to insurance and that the resolution’s description of disparate impact on minorities is incorrect.
Appointed Actuary Practice Requirements: Richard Marks (CT) brought forward recommendations regarding the self-certification of appointed actuaries, which had been raised at the November 2011 meeting of the Task Force. Kris DeFrain (NAIC) had been asked to research requirements in other jurisdictions. In the US self-certification is an increasingly common practice. At the November meeting, Marks had raised concerns about actuarial qualifications to sign regulatory actuarial opinions.
At this meeting, Marks presented recommended changes to the Property and Casualty Actuarial Opinion Model Law similar to those in the Life Standard Valuation Law and Actuarial Opinion Regulation banning the appointment of an actuary who has been removed for acts of omission or had his report rejected in the past five years. Several members of the Task Force supported the proposal saying that they had encountered problems in the past with certain actuaries.
Although some members supported the flexibility in the AAA standards of practice, they acknowledged that they might not be sufficient for regulatory purposes. There was general agreement that it was not the role of the NAIC to adjust the AAA standards of practice so any regulatory solutions should remain separate.
The Task Force appointed a subgroup to explore the issue further and to develop specific recommendations for the “C” and Executive Committees. Task Force members were asked to let staff know of their interest in serving on the subgroup. Dave Sandberg (AAA) said the Academy would be happy to discuss the issues further.
Financial Statement Reporting: The industry was asked to provide suggestions regarding ways to improve the process of submitting financial statements. The Task Force may hold a hearing on the topic. The Task Force will ask the industry for comments on future conference calls. Because the issue is very broad, the discussions will begin with the actuarial statement but if broader issues are raised it could be referred to Blanks. Mark Birdsall (KS) said he was looking for best practices to improve the reports.
The Task Force received reports from its working groups:
Profitability (C) Working Group:The Working Group adopted the Report on Profitability by Line by State in 2010. The report was distributed at the end of 2011. There has been no action since then.
Risk-Focused Surveillance (C) Subgroup:The Subgroup is examining the role of the property/casualty actuary in the enhanced risk-focused surveillance process. The Subgroup wants to develop training programs to improve the risk-focused examination process. The Subgroup is working with the Chief Financial Regulators Forum. Steve Broadie (PCI) said that improving the examination process is a top priority for PCI. He said the Examination Oversight (E) Task Force is also working on improvements.
Statistical (C) Subgroup: The Task Force approved the Subgroup’s recommendation to change the second Paragraph in Section 16 of the NAIC’s Statistical Handbook regarding reports on medical liability closed claims.
Report of the American Academy of Actuaries: The Task Force received a report from Dale Ogden (AAA) regarding education efforts and practice standards.
The Group Solvency Issues (E) Working Group (GSIWG) and the Solvency Modernization Initiative (E) Task Force (SMI TF) adopted guidance for Own Risk and Solvency Assessment (ORSA) at the NAIC fall meeting, which will be considered for adoption at the next day’s Joint Executive (EX) Committee/Plenary meeting. [It was adopted by Plenary.]
The GSIWG will be drafting a model law for ORSA.
The “E” Committee has four new subgroups:
- Solvency Modernization Initiative (E) Task Force (effective at the 2012 spring meeting)
- Captive and Special Purpose Vehicle Use (E) Subgroup
- Own Risk and Solvency Assessment (E) Subgroup (formed in December 2011 to handle implementation and guidance)
- Surplus Lines Financial Analysis (E) Working Group (moved from Property and Casualty Insurance (C) Committee)
The Committee adopted the minutes of the December 19, 2011 conference call, during which it formed the Own Risk and Solvency Assessment (E) Subgroup.
Torti joked that this would be the 77th time at the spring meeting that Commissioner Eleanor Kitzman (TX) would be giving a report on the Joint Working Group of the Life Insurance and Annuities (A) Committee and Financial Condition (E) Committee. “E” Committee adopted the report, which included adopting revised Phase I Decisions of the Sequence of Key Decisions from the Draft Framework document. This means that the Committee:
- Adopted the bifurcated approach to In-Force and Prospective Business in concept; and
- The NAIC will retain one or more independent, consulting actuaries to advise the Joint Working Group with respect to issues identified in the Framework and Appendix I – Issues to be Addressed. Actuaries will be selected with input from LATF/regulatory actuaries and interested parties. Because independent, consulting actuaries may be deemed necessary for subsequent issues, a pool of consultants should be identified.
The revised Draft Framework document would be added to the spring meeting’s Joint Executive (EX) Committee/Plenary agenda.
Lou Felice (NAIC staff) gave the report of the Health Reform Solvency Impact (E) Subgroup. Felice said that initial feedback from interested parties was positive. The Committee adopted the report, which included the following additional charge for the Subgroup:
- Develop a reconciliation between the Supplemental Health Care Exhibit and the Department of Health and Human Services Medical Loss Ratio rebate form for analysis/audit purposes for 2012 reporting year, and further determine whether a supplemental reconciliation reporting form should be developed for 2013 and beyond.
Jill Jacobi (CA) gave the report for the National Treatment and Coordination (E) Working Group. The Committee adopted the report, which included the following additional charge:
- In collaboration with the GSIWG, develop procedures to implement a consolidated public hearing for acquisitions involving multiple jurisdictions under the NAIC Insurance Holding Company System Regulatory Act (#440) and Insurance Holding Company System Model Regulation (#450)
Torti said that the SMI TF would be considering a similar charge but it is meeting later in the day so the SMI TF will ask the “E” Committee to adopt its additional charge at a later meeting.
Doug Slape (TX) gave the report for the Captive and Special Purpose Vehicle Use (E) Subgroup. The Committee adopted the report, which included revisions to the Subgroup’s charge. The charge now reads:
- Study insurers’ use of captives and special purpose vehicles to transfer insurance risk other than self-insured risk, in relation to existing state laws and regulations, and establish appropriate regulatory requirements to address concerns identified in this study. The appropriate regulatory requirements may involve modifications to existing NAIC model laws and/or generation of a new NAIC model law.
Torti asked if risk retention groups (RRGs) were excluded and Slape responded that RRGs were not included in the scope. Torti said the Subgroup is just gathering information now so he wanted to assure everyone that there would be ample time for input from interested parties.
Pat Hughes (IL) gave the report from the IRMA 711 (E) Subgroup of the Receivership and Insolvency (E) Task Force. Hughes said that all comments were positive. The “E” Committee received the report and deferred action on any items.
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
- Solvency Modernization Initiative (E) Task Force [See a full report of this meeting in this newsletter.]
- Valuation of Securities (E) Task Force [See a full report of this meeting in this newsletter.]
- Captive and Special Purpose Vehicle Use (E) Subgroup
- Financial Analysis (E) Working Group
- Health Reform Solvency Impact (E) Subgroup
- National Treatment and Coordination (E) Working Group
- Own Risk and Solvency Assessment (ORSA) (E) Subgroup [See a full report below.]
- Risk Focused Surveillance (E) Working Group
- Surplus Lines Financial Analysis (E) Working Group
David Vacca (NAIC staff) gave an update on Committee efforts regarding separate accounts. Vacca said “E” Committee has a document on its website to track this and it will be maintained. Torti asked that the Committee be kept apprised of updates and hoped that the work could be consolidated to a few groups.
ORSA Subgroup: The newly formed ORSA subgroup chaired by Danny Saenz (TX) met to review the pilot project on the ORSA. Staff reported that between 12-15 companies had volunteered to participate in the project. These volunteers included life, non-life, reinsurance, health, and title insurance companies and included mid-sized as well as larger companies. The subgroup will issue guidance to the participants and expects to receive the ORSA submissions by June 30. At that point the Subgroup will meet to review the material.
There will be an education session on ERM at the May 30-June 1 Financial Summit and the chair asked regulators to submit ideas for topics to be covered. This training will be part of a multi-year program. Several consulting firms at the meeting and in advance offered to assist in the training, including KPMG, Deloitte, PwC, the North American CRO Council, the American Academy of Actuaries. Suggestions for topics included: risk classes, risk identification, governance, infrastructure, processes, risk and data systems, and disclosure.
The NAIC announced that it was posting a position for an ERM specialist and reviewed the position requirements.
The NAIC also wants to develop a glossary to include with the ORSA Guidance Manual. An early draft for that glossary prepared by the North American CRO Council was distributed and exposed for a 45-day comment period.
Accounting Practices and Procedures (E) Task Force
The meeting of the Accounting Practices and Procedures (E) Task Force was chaired by its Vice Chair, Jim Armstrong (IA). The minutes from the interim meetings had already been approved and were listed for information purposes only.
- 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. This item was withdrawn.
Action on Items Previously Exposed:
- 2011-37BWG MOD – 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. Milum Livesay (Genworth Financial), speaking for interested parties, said the modification may address the comment that the revision would have to be shown in every note. Robin Marcotte (NAIC staff) explained that the proposal is to keep companies from adding something to the PDF that is not in the electronic filing. This item was adopted as modified.
- 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 adopted.
- 2011-39BWG MOD – 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. Livesay said all interested parties’ comments were addressed. Marcotte said there were some minor modifications on crosschecks. This item was adopted as modified.
Action on Newly Submitted Items:
Garn said that since all the new proposals would be voted on during a June conference call, it would be good to introduce each item individually.
- 2012-01BWG – Add an illustration for Note 21F(4) to be data captured and modify the illustrations for 21F(1), 21F(2) and 21F(3) to reflect the inclusion of non-transferable state tax credits in the disclosure. This item was exposed.
- 2012-02BWG – For Question 15 of the General Interrogatories, Part 1, replace the reference to letters of credit with a NAIC rating of 3 or below with a reference to the issuing or confirming bank being on the SVO Bank List. This item was exposed.
- 2012-03BWG – Modify question 3.1 in the General Interrogatories Part 1 to reflect that Schedule Y, Part 1 is now required to be completed quarterly. Add question 3.2 asking for description of nature of changes to the schedule. This item was exposed.
- 2012-04BWG – Add Exhibit 5 Interrogatory disclosures for contingent deferred annuity contracts and lifetime income benefit contracts. This item was exposed.
- 2012-05BWG – Add definition to the Investment Schedules General Instructions for Other Loan-Backed and Structured Securities. This item was exposed.
- 2012-06BWG – Add a new Column 4 to the Long Term Care Form 5 blank with instructions crosschecking to Form 1, Column 7. This item was exposed.
- 2012-07BWG – 1. Add Structured Securities (SSAP No. 43R) Flow Chart to the Investment Schedules General Instructions.
2. Eliminate “SM” reference from the instructions for the NAIC Designation Column in Schedule D, Part 1 in the annual statement and Schedule D, Parts 3 and 4 in the quarterly statement.
3. Add note to annual statement schedules instructions (Schedule D, Part 1; Schedule D, Part 2, Section 1; Schedule D, Part 2, Section 2; Schedule D, Part 3; Schedule D, Part 4; Schedule D, Part 5; Schedule DA, Part 1; Schedule DL, Part 1; Schedule DL, Part 2; Part; and Schedule E, Part 2) and quarterly statement schedule instructions (Schedule D, Part 3; Schedule D, Part 4; Schedule DL, Part 1; Schedule DL, Part 2; and Schedule E, Part 2) to refer to the Investment Schedules General Instructions for the following as appropriate for the schedule:
- • Category definitions for bonds and stocks.
• Foreign Column code list and matrix for determining code.
• Code Column list of codes and definitions for securities not under the exclusive control of the reporting entity.
• Flow Chart for determining the NAIC Designation for structured securities.
• List of stock exchange names and abbreviations.
4. Add specific reference in the NAIC Designation Column referring back to the Structured Securities (SSAP No. 43R) Flow Chart in the Investment Schedules General Instructions in the annual statement schedules instructions (Schedule D, Part 1; Schedule DL, Part 1; and Schedule DL, Part 2; Part) and quarterly statement schedule instructions (Schedule D, Part 3; Schedule D, Part 4; Schedule DL, Part 1; and Schedule DL, Part 2.
5. Add “S” designation to the bond matrix for Schedule D, Part 1 of the annual statement and to Schedule D, Parts 3 and 4 of the quarterly statement. This item was exposed as amended.
- 2012-08BWG – Modify the definition of what is included in U.S. Governments and U.S. Special Revenue and Special Assessment Obligations and all Non-Guaranteed Obligations of Agencies and Authorities of Governments and Their Political Subdivisions in the Investment Schedules General Instructions. This item was modified and exposed.
- 2012-09BWG – Add instruction to the LTC Form 2 for Column 3, Last Year Issue. This item was exposed.
- 2012-10BWG – Add the words “in force” to the instructions and “of In Force Policies” to the headings for Line 1 (Columns 7 and 8) and Line 2.4 (Columns 5 and 6) of the Director and Officer Insurance Coverage Supplement. This item was exposed.
- 2012-11BWG – Remove instruction for Lines 1 to 3 that is duplicated in the instructions for Lines 1 to 4. Modify the instruction for Type of Rate Code to clarify what should be reported on the individual state pages and what is to be reported on the Grand Total page. This item was exposed.
- 2012-12BWG – Add a Column 9 to the Statement of Beneficial Ownership of Securities page within the SIS Schedule for the Percentage of Voting Stock Directly and Indirectly Owned or Controlled at the End of the Current Year. Also add an interrogatory regarding the granting of an exemption or disclaimer of control by the state of domicile for any officer or director. This item was exposed.
- 2012-13BWG – Add instructions to the IEE Part II and the Instructions for Uniform Classifications of Expenses of Property and Casualty Insurers for the reporting for commissions and fee allowances received from FEMA. This item was exposed.
- 2012-14BWG – Add new crosschecks to the U&I Part 1, U&I Part 2, state page, IEE Part II and IEE Part III. This item was exposed.
- 2012-15BWG – Move Question 3 of the Schedule DL, Part 2 footnote to the General Interrogatories for annual and quarterly reporting. Also add Interrogatory question that shows the securities lending liability amount from the liability page. Crosschecks are being added between the new interrogatory questions and the appropriate schedules. This item was exposed.
- 2012-16BWG – Instruction changes are proposed for the P&C Actuarial Opinion, P&C Actuarial Opinion Summary, and Title Actuarial Opinion. This item was exposed.
- 2012-17BWG – Modify the instructions for code to use in the Domiciliary Jurisdiction columns to indicate that the two-character U.S. postal code will be used as the abbreviation for U.S. states, territories and possessions and the Alpha 3 (three-character code) from Nations Online will be used as the abbreviation for foreign countries.
Modify the instructions for Schedule T to indicate that the Alpha 3 (three-character code) from Nations Online will be used as the abbreviation for foreign countries in the Aggregate Write-ins for Other Alien in addition to including the name of the country. This column will be two separate electronic columns (a column for the country code and a column for the country name) in the database but displayed in the blank as if it were one column similar to how the CUSIP numbers are handled in the investment schedules.
The Blank for Schedule T and Schedule T, Part 2 will be modified to change the code shown for Canada from “CN” to “CAN”.
Add a new column to Schedule T Part 1 – Premium and Annuity Consideration to indicate if the insurer has any direct premium written in an alien jurisdiction via Branch operations. The column is electronic only and results will be made available to regulators via NAIC solvency tools.
Replace the Nations Online Alpha2 country code list in the Appendix with the Nations Online Alpah3 list. This item was exposed.
- 2012-18BWG – Add an additional line to the Five Year Historical Data page(s) to require companies to specifically identify which amounts of investments reported in the current Investments in Parent, Subsidiary, and Affiliates section are in an immediate or indirect parent. This item was exposed.
- 2012-19BWG – Add instruction for Certified Reinsurer Identification Number to Schedule S General Instructions.
Add line number categories for certified reinsures to Schedule S, Part 3, Section 1 and 2 remaining lines will be renumbered.
Add new Schedule S, Part 5 to the blank and instructions.
Renumber Schedule S, Part 5 to Part 6 and add lines for certified reinsurance to the blank and instructions remaining lines will be renumbered.
Renumber Schedule S, Part 6 to Part 7 and add lines for certified reinsurance to the blank and instructions remaining lines will be renumbered.
Add inset to annual and quarterly liability page for certified reinsures for Lines 21.2 and 21.3 also modify the instructions for those lines. Livesay asked when the process would go through for proposals 2012-19BWG through 2012-23BWG. Steve Johnson (PA) said that the regulators know there are certified reinsurers out there and the Reinsurance (E) Task Force will have to decide about jurisdictional model law. Livesay told Johnson that he might want to think about communication from those who have not gotten to that step yet. Johnson said he would put it on the to-do list. Johnson added that the Task Force is aware of these Blanks Working Group changes and Statutory Accounting Practices (E) Working Group (SAPWG) and the Task Force will want to comment. This item was exposed.
- 2012-20BWG – Add instruction for Certified Reinsurer Identification Number to Schedule S General Instructions (Annual Statement and Life Supplement).
Add line number categories for certified reinsures to Schedule S, Part 3, Section 1 (Annual Statement) and Schedule S, Part 3, Section 2 (Life Supplement) remaining lines will be renumbered.
Add new Schedule S, Part 5 to the blank and instructions.
Renumber Schedule S, Part 5 to Part 6 and add lines for certified reinsurance to the blank and instructions remaining lines will be renumbered.
Renumber Schedule S, Part 6 to Part 7 and add lines for certified reinsurance to the blank and instructions remaining lines will be renumbered.
Add inset to annual and quarterly liability page for certified reinsures for Lines 19 and 20 also modify the instructions for those lines. This item was exposed.
- 2012-21BWG – Add instruction for Certified Reinsurer Identification Number to Schedule S General Instructions.
Add line number categories for certified reinsures to Schedule S, Part 3, Section 1 and 2 remaining lines will be renumbered.
Add new Schedule S, Part 5 to the blank and instructions.
Renumber Schedule S, Part 5 to Part 6 and add lines for certified reinsurance to the blank and instructions remaining lines will be renumbered.
Renumber Schedule S, Part 6 to Part 7 and add lines for certified reinsurance to the blank and instructions remaining lines will be renumbered.
Add inset to annual and quarterly liability page for certified reinsures for Lines 24.02 and 24.03 also modify the instructions for those lines. This item was exposed.
- 2012-22BWG – Add instruction for Certified Reinsurer Identification Number to Schedule F General Instructions.
Add line number categories for certified reinsures to Schedule F, Part 3 and Part 4 remaining lines will be renumbered.
Add new Schedule F, Part 6, Sections 1 and 2 to the blank and instructions.
Renumber Schedule F, Part 6 to Part 7
Renumber Schedule F, Part 7 to Part 8
Renumber Schedule F, Part 8 to Part 9
Add inset to annual and quarterly liability page for certified reinsures for Line 16 also modify the instructions for that line. This item was exposed.
- 2012-23BWG – Add instruction for Certified Reinsurer Identification Number to Schedule F General Instructions.
Add line number categories for certified reinsures to Schedule F, Part 2 remaining lines will be renumbered.
Add new Schedule F, Part 4 to the blank and instructions.
Add inset to annual and quarterly liability page for certified reinsures for Line 15 also modify the instructions for that line. This item was exposed.
- 2012-24BWG – Split Expatriate Column in Parts 1 and 2 into two separate columns (Expatriate Plans Small Group and Expatriate Plans Large Group) and renumber remaining columns.
For Part 3 Separate Section 7 Expatriate Plans Expenses into two new sections (Expatriate Plans Small Group Expenses and Expatriate Plans Large Group Expenses) and renumber remaining sections.
Add informational line for community benefit expenditures to Part 1 as Line 10.4a
Add informational line for ICD-10 implementation expenses to Part 1 as Line 16a.
Add new instructions and clarifications to the existing instructions along with the appropriate new crosschecks and changes to existing crosschecks to reflect the additions previously stated above. Livesay said he had provided comments to the Health Reform and Solvency Impact (E) Subgroup and he will reiterate the comments for Working Group. Livesay thought it would be beneficial to finish the HHS work on the MLS form before making any changes. Garn said that exposing the proposal would take a lot of time so maybe the timing would work out. If it does not then the proposal could be deferred. This item was exposed.
- 2012-25BWG – Require insurers filing separate account statements to file separate statements for “Insulated Separate Accounts” and “Non-Insulated Separate Accounts”. The change results in multiple filings by insurers with both insulated and non-insulated separate account products and the creation of a new filing ID to differentiate the filings.
Modify the separate accounts Jurat page by adding indicator of whether the separate accounts reported in the filing are insulated or non-insulated. Also modify the first question of the separate accounts general interrogatories to indicate reporting of “Product Mix”, deleting Question 1.1, renumbering Question 1.2 to 1, replace column 3 of the table with a column to indicate whether the product is guaranteed.
Modify the separate account instructions in the Life and Fraternal Annual Statement instructions by adding paragraph to Separate Account General instruction regarding distinct filing for insulated and non-insulated separate accounts and add instructions for indicating which type of separate accounts are being reported in the filing to the Jurat Page instructions.
Add a new code indicator to the Code column in investment Schedules A, Part 1; B, Part 1; BA, Part 1; D, Part, 1; D, Part 2, Section 1; D Part 2, Section 2; DA, Part 1; DL, Part 1; and E, Part 2 to identify assets that are comingled between an insulated product and a non-insulated product.
NOTE: Property, Health and Title are included as part of the proposal due to the Investment Schedules being uniform schedules.David Vacca (NAIC staff) said that the proposal has the support of several NAIC committee and working group chairs. Johnson thought the item should go through SAPWG before it is brought to the Blanks Working Group. Vacca replied that SAP guidance already gives the Blanks Working Group the authority. Johnson suggested that the proposal be referred to SAPWG to see if SAPWG is okay with the disclosure. Livesay, speaking for the ACLI, said Superintendent Joseph Torti (RI), Chair of the Financial Condition (E) Committee, had sent a memo to the Blanks Working Group, which Garn then read to the Working Group. The memo acknowledged the process and the serious concerns of “E” Committee and interested parties. Livesay said that this is not a disclosure change but it creates Blanks for insulated and non-insulated products. This item was referred to SAPWG and exposed.
Comment deadline for the newly exposed items is May 14, 2012.
The Working Group adopted all the editorial changes.
Garn informed the Working Group of the new C-1 Factor Review (E) Subgroup of the Valuations of Securities (E) Task Force and said that people could contact Michele Wong of the NAIC Capital Markets Bureau for more information.
Emerging Accounting Issues (E) Working Group
Armstrong reported to the Task Force on the Emerging Accounting Issues (E) Working Group. The Working Group adopted revisions which nullify some of the 2000 series interpretations and incorporate the guidance into SSAPs and also agreed to propose an additional change to SSAP No. 97 which references two retained interpretations. The proposed revisions were referred to the Statutory Accounting Principles (E) Working Group for consideration.
The Working Group considered revisions to move guidance from the “2001” series INTs into SSAPs in accordance with the adopted initiative “Incorporate Interpretation Guidance into the SSAPs.” The item identifies the interpretations proposed to be nullified, with guidance included in a SSAP, as well as those interpretations proposed to be retained within Appendix B of the NAIC Accounting Practices and Procedures Manual.
The Task Force adopted the report of the Emerging Accounting Issues (E) Working Group. The deadline for submitting new items or comments is May 18, 2012.
During the meeting the Working Group took the following actions.
- Adopted the minutes from a February 16 email vote, during which the Working Group agreed to expose the SSAP No. 101—Income Taxes – A Replacement of SSAP No. 10 and 10R implementation guidance.
- Adopted the following substantive revisions to statutory accounting:
- Issue Paper No. 129—Share-Based Payment (Issue Paper No. 129). This issue paper adopts, with modification, FAS 123(R): Share-Based Payment, with guidance proposed for inclusion in a substantively revised SSAP No. 13—Stock Options and Stock Purchase Plans (SSAP No. 13R). The Working Group also exposed for comment the proposed substantively revised SSAP, reflecting the conclusions of Issue Paper No. 129 with modifications to the guidance for consolidated/holding company plans as proposed by interested parties. (Ref #2006-13)
- SSAP No. 92—Accounting for Postretirement Benefits Other Than Pensions (SSAP No. 92) and SSAP No. 102—Accounting for Pensions (SSAP No. 102). These SSAPs adopt, with modification, FAS 158: Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) and supersede SSAP No. 14—Postretirement Benefits Other Than Pensions and SSAP No. 89—Accounting for Pensions, A Replacement of SSAP No. 8, respectively. SSAP No. 92 and SSAP No. 102 were adopted with a Jan. 1, 2013, effective date, with early adoption permitted. Additionally, it was noted that the revised guidance reflected in the adopted SSAPs have the potential to significantly impact surplus; however, transition guidance has been incorporated to mitigate the impact over a possible 10-year period. (Ref #2006-30)
- SSAP No. 103—Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP No. 103). This SSAP adopts, with modification, FAS 166, Accounting for Transfers of Financial Assets and supersedes SSAP No. 91R—Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SSAP No. 103 has an effective date of Jan. 1, 2013, with prospective application. (Ref #2009-14)
- Adopted the following nonsubstantive revisions to statutory accounting:
- SSAP No. 1—Disclosure of Accounting Policies, Risks & Uncertainties, and Other Disclosures: Revisions, with modifications incorporated during the meeting, reference the stress liquidity questions and templates captured within the Financial Condition Examiners Handbook, noting that the disclosures may be confidential and not included in the statutory financial statements. (The Working Group also adopted a referral to the Financial Examiners Handbook (E) Technical Group as detailed in item #5a below.) (Ref #2004-27)
- SSAP No. 27—Disclosure of Information with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk: Revisions, with modifications incorporated during the meeting, clarify that financial instruments that contain embedded derivatives that are not separately recognized as financial instruments with derivatives under SSAP No. 86, and that expose the holder to the possibility (however remote) of making future payments are captured in SSAP No. 27. (Ref #2011-19)
- SSAP No. 86—Accounting for Derivatives and Hedging Activities: Revisions, as modified during the meeting: 1) incorporates disclosures of embedded credit derivatives that expose the holder to the possibility of making future payments; 2) adopts GAAP guidance in ASU 2010-11 to clarify that seller credit derivative disclosures do not apply to embedded derivative features related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another; and 3) rejects all other GAAP revisions from ASU 2010-11, as embedded derivatives are not separately recognized as derivatives under SSAP No. 86. (Ref #2011-19)
- Various SSAPs: Adopted recommendations from the Emerging Accounting Issues (E) Working Group to incorporate guidance from the “2000” series of interpretations into SSAPs, as well as to include reference in SSAP No. 97—Subsidiary, Controlled and Affiliated Entities to INT 00-24 and INT 04-10. (Ref #2012-07)
- Adopted changes to the Maintenance Agenda to move agenda item #2011-29: Move Retained Assets Disclosures to Exhibit 7, to the nonsubstantive disposed listing. This item was adopted by the Working Group during the 2011 Fall National Meeting; however, it was referred back to the Working Group by the Accounting Practices and Procedures (E) Task Force based on comments received identifying that these disclosures had been explicitly included into the National Conference of Insurance Legislators (NCOIL) model law titled, “Beneficiaries’ Bill of Rights.” In reconsidering this item, the Working Group agreed to retain the retained asset disclosures in SSAP No. 52—Deposit-Type Contracts, rather than incorporate them into a financial statement exhibit, and moved this item to the nonsubstantive disposed listing.
- Adopted referrals to the Financial Examiners Handbook (E) Technical Group and to the NAIC/AICPA (E) Working Group:
- Financial Examiners Handbook (E) Technical Group – Referral to consider inclusion of a statement within the liquidity section of the Examination Planning Questionnaire of the Financial Condition Examiners Handbook indicating that “the regulator shall use the strongest legal means available to protect the information provided that the insurers consider competitively sensitive or otherwise confidential” or provide a response pursuant to the consideration of this revision. (Ref #2004-27)
- NAIC/AICPA (E) Working Group – Referral to review the proposed disclosures exposed to SSAP No. 34—Investment Income Due and Accrued and SSAP No. 37—Mortgage Loans and communicate whether the proposed disclosures will satisfy the GAAP disclosures that may be requested by auditors in accordance with Other Comprehensive Basis of Accounting (OCBOA) provisions under Generally Accepted Auditing Standards (GAAS). (Ref #2011-22)
- Exposed the following substantive revisions to statutory accounting:
- Substantively revised SSAP No. 61—Life, Deposit-Type and Accident and Health Reinsurance (SSAP No. 61R): Proposed revisions incorporate the concept of certified reinsurers into statutory accounting principles and provide explicit accounting treatment for these reinsurers. An issue paper will be developed subsequently to document the changes for historical reference. (Ref #2012-10)
- Substantively revised SSAP No. 62R—Property and Casualty Reinsurance (SSAP No. 62R): Proposed revisions incorporate the concept of certified reinsurers into statutory accounting principles and provide explicit accounting treatment for these reinsurers. An issue paper will be developed subsequently to document the changes for historical reference. (Ref #2012-11)
- SSAP No. 77—Real Estate Sales, An Amendment to SSAP No. 40: This SSAP is proposed to be nullified, with the guidance incorporated into SSAP No. 40—Real Estate Investments. This is a placement change and is not intended to impact the application of existing guidance. (Ref #2012-06)
- Potential new SSAP to supersede SSAP No. 100—Fair Value Measurements: This agenda item reviews the GAAP guidance in ASU 2011-04, Fair Value Measurements and initially proposes adoption, with modification, of the GAAP guidance for statutory accounting. (Ref #2012-14)
- Exposed the following nonsubstantive revisions to existing statutory accounting guidance:
- SSAP No. 11—Postemployment Benefits and Compensation Absences: Revisions propose to adopt GAAP guidance from EITF 06-2: Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FAS 43, and incorporate specific statutory guidance for sabbatical leave and other similar benefits. (Ref #2012-01)
- SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities: Revisions propose to delete the annual audited report disclosure reference to credit tenant loans currently included in paragraph 18e. (Ref #2012-13)
- SSAP No. 34—Investment Income Due and Accrued and SSAP No. 37— Mortgage Loans: Revisions propose to incorporate disclosure requirements from the GAAP guidance in ASU 2010-20 for mortgage loans. (The Working Group also adopted a referral to the NAIC/AICPA Working Group as detailed in item #5b above.) (Ref #2011-22)
- SSAP No. 35R—Guaranty Fund and Other Assessments: Received comments on the proposed modifications to prescribe accounting provisions for the annual fee mandated by the federal Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act and re-exposed the agenda item until March 30 to receive additional comments on the proposed guidance, comments on the interpretation and application of the Act, and to receive information from the industry and the Health Insurance and Managed Care (B) Committee on specific questions requested by the Working Group. A conference call to discuss the comments and information received is anticipated within the first two weeks of April. (Ref #2011-38)
- SSAP No. 36—Troubled Debt Restructuring: Revisions propose to adopt GAAP guidance from ASU 2011-02 to provide additional guidance on whether a restructuring constitutes a troubled debt restructuring, as well as to adopt, with modification, the troubled debt restructuring disclosures for creditors from GAAP guidance in ASU 2010-20. The disclosures proposed for adoption from ASU 2010-20 are modified to eliminate the scope reference to “financing receivables”. It is proposed that the proposed disclosures be applicable to trouble debt restructurings within the scope of SSAP No. 36. Industry information on prevalence was requested. (Ref # 2011-25)
- SSAP No. 48—Joint Ventures, Partnerships and Limited Liability Companies, SSAP No. 68—Business Combinations and Goodwill, and SSAP No. 97—Investments in Subsidiary, Controlled, and Affiliated Entities: Revisions propose to clarify guidance on the amortization of the basic difference for entities owned through a minority-ownership interest, as well as the amortization of goodwill. (Ref # 2012-05)
- SSAP No. 57—Title Insurance: Revisions propose to revise guidance in Paragraph 19g for determining admitted assets with explicit language from Paragraph 16 of Appendix A-628, Title Insurance. (Ref # 2012-03)
- SSAP No. 86—Accounting for Derivative Instruments and Hedging Activities: Revisions propose to move guidance currently reflected in Paragraph 21e as criteria for a “hedged forecasted transaction” and incorporate it as a new Paragraph 19f to reflect criteria for a “fair value hedge.” (Ref #2012-08)
- SSAP No. 90—Accounting for the Impairment or Disposal on Real Estate Investments and SSAP No. 95—Exchanges of Nonmonetary Assets: Revisions propose placement changes to move the current guidance in Paragraph 18 of SSAP No. 95 into SSAP No. 90. (Ref # 2012-09)
- Appendix A-785, Credit for Reinsurance: Revisions propose changes to Appendix A-785 to reflect the NAIC-adopted changes to the Credit for Reinsurance Model Law (#785) and the allowance for certified reinsurers. (Ref #2012-12)
- Exposed nonsubstantive revisions to reject EITF 07-1, Accounting for Collaborative Arrangements as not applicable to statutory accounting. This exposure requests comments on the prevalence of collaborative arrangements within the insurance industry. (Ref #2012-02)
- Received an update on the following projects and referrals:
- SSAP No. 62R—Property and Casualty Reinsurance: Received comments on the CNA proposed modifications to SSAP No. 62R regarding the minimum credit provisions for reinsurance. The Working Group provided a deadline of April 27 to receive responses on information requested from industry regarding additional Schedule F information, or alternatives. (Ref #2011-45)
- SSAP No. 101—Income Taxes – A Replacement of SSAP No. 10 and 10R: Discussed initial comments on the proposed implementation guidance, which was exposed February 16. The Working Group set a comment deadline of March 23. (Ref #2011-42)
The deadline to submit comments on exposed items, unless otherwise noted, and to submit new items is May 18, 2012.
Comment deadlines for specific items include:
- Exposed agenda item #2011-38 and request for information: March 30.
- Information request on agenda item #2011-45: April 27.
- Exposed SSAP No. 101 Implementation Guide and Q&A (agenda item #2011-45): March 23.
Mike Monahan (ACLI) was recognized for interested parties and asked about the progress of the formation of the 43R Subgroup. Fritsch responded that there have been four volunteers to serve on the Subgroup but with no one asking to be Chair, he would assume those duties for the time being.
Capital Adequacy (E) Task Force
Peter Medley (WI) chaired the meeting of the Capital Adequacy (E) Task Force, which began by adopting the minutes of its calls on December 8 and 13, 2011, and February 15, 2012.
The Task Force then received reports from its various Subgroups:
Health Risk-Based Capital (E) Working Group:The Working Group continues to examine health catastrophe risk and health care reform requirements which may require adjustments to the RBC formula.
Life Risk-Based Capital (E) Working Group:The Working Group met during the NAIC meeting to discuss two priority areas: the commercial mortgage exposure adjustment factor and changes to C3 Phase II. The Working Group received a report from Nancy Bennett (AAA) regarding the Academy’s work on the economic scenario generator and the C1 factor review, which is to be completed by May. The Working Group discussed the weight for each component of the RBC calculations. C1 is 48% of Life RBC. C2 is the next highest at 18%. The Subgroup discussed adding a C2 (age/mortality) review to the 2013 agenda. There was agreement to complete C3 before looking at C2.
John Bruins (ACLI) provided an update on the long-term commercial mortgage experience adjustments which the ACLI hopes to complete by mid-March. Mark Birdsall (KS) suggested that the AAA assist in evaluating the modeling work on mortgages.
Larry Bruning (NAIC) provided an update on the Own Solvency and Risk Assessment (ORSA) and the need to look at the target capital reports to be included. The Working Group also added to its priority list implementation of the ORSA Guidance Manual.
Property Risk-Based Capital (E) Subgroup:The Subgroup continues to consider modifications of the RBC formula for Risk Retention Groups. The proposal for changes to the credit charge for reinsurance is still under review by an actuarial working party. The Subgroup will continue to work on the underlying methodology for determining the Underwriting Risk factors in the RBC formula.
Catastrophe Risk-Based Capital (E) Subgroup: The Subgroup is continuing to work on the catastrophe risk formula and appropriate disclosures. It is the goal of the Subgroup to have a draft formula submitted for approval by the end of 2012.
C-1 Factor Review (E) Subgroup:The Subgroup said the project was on track to develop new factors, but the project will take time.
The Task Force also received reports on:
Task Force Working Agenda: The Task Force approved its agenda for 2012 with some changes and clarification in expected completion dates.
Callable Assets: The Task Force adopted the proposed updates to the NAIC RBC Instructions for the LR025 Schedule to calculate the required capital for interest rate risk and market risk.
Life RBC Trend Test Blank: The Task Force adopted the Life RBC Trend Test Blank Proposal.
Deferred Tax Assets: The Task Force received comments from Milum Livesay (Genworth) and Ken Copman (Liberty Mutual) in support of the proposal related to risk-based capital on deferred tax assets. The speakers recommended that the NAIC develop similar RBC calculations for health, property & casualty, and life. The proposal was not presented for adopted at this meeting. It is a 2012 effective date item.
The Task Force discussed a survey of the states regarding progress towards adopting the revised Model Regulation to Define Standards and Commissioner's Authority for Companies Deemed to be in Hazardous Financial Condition (#385). The survey results indicated that at least 17 states have completed the process of adopting the 2008 revisions to the model.
The chair moved to the Working Group reports, which began by hearing summaries and receiving the report, beginning with the Climate Change and Global Warming (E) Working Group. Various trade groups, federal, and international organizations are taking part in a series of meetings to address climate change. California announced that it will be joining Washington and New York in a non-NAIC survey to address the climate change issues. Accounting Practices and Procedures (E) Working Group chair Joe Fritsch (NY) pointed out that the climate change survey was the same referred to by both groups.
The chair adjourned the meeting so that a special presentation could be made from the Risk-Focused Surveillance (E) Working Group (RFSWG). Its chair, Jim Hattaway (AL), distributed the Industry Survey Results. There will be a conference call covering this matter on April 11, 2012. There were both positive and negative comments regarding the use of private firms to conduct the examinations. Time management and cost savings were noted as positives in using private companies. There were other comments reflecting the dissatisfaction of some states with the presence of some of those conducting examinations by some who felt inhibited by their conduct or manner.
Steve Johnson (PA) made comments about the quality of the survey, but expressed his disappointment regarding the lack of direct responses from the companies (26 direct survey responses from 22 companies). Hattaway pointed out that some information was indirectly gathered from over 200 firms, but Johnson’s sense of the matter was that direct responses were much more valuable. Johnson also asked the Working Group to consider getting the participation of “G” Committee. Jenson said that the Working Group will be looking for appropriate places to make changes in the handbook. Jenson added that the individual company results were being kept confidential to encourage participation.
Keith Bell (Travelers), representing interested parties, told the Working Group that he did not see how interested parties’ views were reflected in the work product. According to Jenson, all of the companies responding to the interested parties request were listed under only one company responding. Jenson and Hattaway attempted to answer the question and after an exchange it was agreed that NAIC staff would research this matter and correct the survey results accordingly.
Revised Credit for Reinsurance: The major focus of the meeting was the implementation of the Revised Credit for Reinsurance Model Law and Regulation adopted in 2011. Consedine described it as imperative to put the accreditation standards, the process for evaluation of non-US jurisdictions, and the NAIC support structure in place as soon as possible. The Task Force then went on to examine activity in each area.
Accreditation Standards: The Task Force reviewed the key elements of the accreditation proposal to be sent to the Financial Regulation Standards and Accreditation (F) Committee. Consedine stressed that the changes to the accreditation standard would not require a state to reduce its reinsurance collateral requirements. If a state did decide to do so, though, it must demonstrate that its laws result in solvency regulation that is similar in force and no less effective than the standard. Superintendent Joe Torti (RI) said that "F" Committee might discuss the degree to which the specific provisions in the model law needed to be adopted. He said “substantially similar” is the highest standard in the NAIC for accreditation. Joe Fritsch (NY) said consistency was important. Bill Marcoux (DLA Piper) agreed, saying he hoped all states adopted the Model Law.
There was some discussion about this optionality with Fritsch pushing for mandatory adoption of the Model Law. He said that a majority of states had indicted in a recent NAIC survey on model laws their intent to adopt the Credit for Reinsurance Model Law, even though New York and Florida are the only states to have acted thus far. Steve Johnson (PA) said that accreditation standards were focused on solvency. As a result it was hard to claim that adopting the Credit for Reinsurance Model Law as solvency related. Fritsch said he could debate that point and argued as well that mandatory adoption would send a strong signal internationally. Bob Wake (ME) reminded the group that the vote to adopt the Model had been based on the agreement that it would not be a mandatory part of the accreditation process.
Consedine pointed out that Part A included several changes not related to the collateral issue. These addressed reinsurance run-off and concentration risk changes. He suggested that the language on concentration risk be mandatory.
The Task Force exposed the draft Part A language for a 30-day comment period. There will be an open conference call following the exposure period to discuss the changes and to send the Part A language to "F" Committee.
The accreditation standards are divided into two parts. Part A is the standard related to accreditation and Part B relates to regulatory practices. At this meeting the chair asked the Task Force to finalize Part A for exposure. Part B will be discussed on a future conference call. The Task Force reviewed a staff prepared draft of the Part A standards.
Evaluation of Non-US Jurisdictions: The Task Force will appoint a drafting group to develop a process to review non-US jurisdictions, to determine which jurisdictions will be initially reviewed, and to develop a timeline for implementation. Director John Huff (MO) will chair the drafting group. Other members will be announced next week. The FIO will be involved as appropriate. Consedine said that states would be required to use this approved list unless they have a very good reason not to do so. The NAIC would like to avoid a variety of decisions on qualified jurisdictions. Consedine said there were provisions to encourage uniform adoption because failure to do so might put a state at a competitive disadvantage.
Establishment of an NAIC Group to Provide Advisory Support and Assistance: The NAIC will form a new group to provide advisory support and assistance to the states in the review of reinsurance collateral reduction applications. Consedine said a subgroup of the Task Force would be appointed to carry out this role. He referred to this as the Reinsurance FAWG. Johnson will lead this group. The membership will also be finalized next week.
Develop Reporting Instructions for forms CR-F and CR-S: The revised Credit for Reinsurance Model Regulation provides that Forms CR-F (property/casualty) or CR-S (life/health) must be filed annually with the domiciliary state. The NAIC staff will be working with the Reinsurance FAWG to develop the instructions for these forms.
Other Working Group Action: Johnson informed the Task Force that the Blanks (E) Working Group has also exposed draft changes to Schedule F for comment until May 14 and the Statutory Accounting Principles (E) Working Group had exposed changes to related to certification for reinsurance.
Reinsurance Recoverables: The Task Force received an update on a referral from the Financial Condition (E) Committee regarding the collection of undisputed reinsurance recoverable balances held by ceding reinsurers in receivership.
IAIS Reinsurance Subcommittee: Ryan Couch (NAIC), chair of the IAIS Reinsurance Subcommittee, provided a report on the last meeting. Commissioner Consedine will serve as the NAIC representative on the Subcommittee. The Subcommittee is discussing ICP9, captives, and ComFrame. Specifically, the Subcommittee has been asked to give its opinion regarding whether affiliate reinsurance transactions need to be standardized. Couch reported that the Global Reinsurance Market Reports would now become part of a broader market report prepared by the IAIS Macro-Prudential Surveillance Working Group.
Solvency Modernization Initiative (E) Task Force
The SMI (E) Task Force, chaired by Director Christina Urias (AZ), exposed for comment until April 30 a revision to the paper The US National State-Based System of Insurance Financial Regulation. Urias said that Chapters 3,4, and 5 were newly added sections. The Task Force discussed key questions related to comments provided by regulators. Steve Johnson (PA) asked that the section on the Analyst Team System be expanded. Larry Bruning (NAIC) will expand Paragraphs 65-86 on group supervision. Morag Fullilove (GNAIE) suggested that this section address the role of the lead supervisor and suggested that Paragraph 61 on principles include efficiency issues. Lou Felice (NAIC staff) suggested adding more reasons to justify the conclusions reached by the NAIC on its solvency system.
Commissioner Susan Voss (IA) thanked Director Urias, who is completing her term as Arizona Commissioner in May, for her leadership on the solvency modernization project.
The Task Force received reports from its various working groups as follows:
Principles-Based Reserving (E) Working Group
Under the new leadership of Commissioner Susan Voss (IA), the Working Group added its commitment to other NAIC Commissioners to complete the Valuation Manual by June 2012 in order to allow final adoption by the end of the year.
The Working Group heard a report from Towers Watson on the VM-20 Impact Study including recommendations. Forty-two companies participated in the impact study. The full results of the study are available on the NAIC website, but some of the major observations were:
- For many products tested the VM-20, reserves were similar to current CRVM reserves; however, reserves were lower for term products and the results on Universal Life with Secondary Guarantees (ULSG) were thought to be misleading.
- Except for some term products, the exclusion tests appeared to be effective.
- Net Premium Reserve (NPR) seemed ineffective as a floor for the minimum reserve.
- The AAA Economic Scenario Generator seemed to be effective.
- The inclusion of reinsurance did not change the direction of the impact of the VM-20 reserves.
- Setting the margins was reported by participants to be very difficult.
- Reducing the number of scenarios did not have a material impact on the stochastic reserve.
- Documentation requirements are redundant with other documentation requirements, especially actuarial opinions.
- It is difficult to establish benchmarks to determine compliance.
- Implementing VM-20 for the first time is a significant exercise.
Towers Watson made several recommendations to address these concerns, some of which have already been incorporated in the Manual, others are being considered by the Life Actuarial Task Force (LATF) as detailed in the report on LATF. LATF continues to work on mortality development with the AAA and the Net Premium Reserve (NPR) methodology with the ACLI. Paul Graham (ACLI) said there would be weekly calls with LATF until the NPR work was completed. Voss suggested that other recommendations stemming from the Impact Study be addressed after June as clarification items.
LATF provided revised timetables for completion of the Valuation Manual, including referrals from other working groups. Voss asked that all the referrals be answered by the August NAIC meeting.
Corporate Governance (E) Working Group: The new chair of the Corporate Governance Working Group Deputy Commissioner Susan Donegan (VT) reported that the Working Group has completed its review of the federal and state laws related to corporate governance and has appointed seven subgroups to begin a comparative analysis between US requirements and international standards, especially the IAIS Insurance Core Principles. The subgroups, organized along the lines of the seven principles in the analysis paper, will meet in bi-weekly conference calls with the goal of completing the analysis and recommendations by the end of 2012. The Working Groups plan to meet at the NAIC’s summer meeting as well.
In the review of the next steps, Nat Shapiro (representing NAMIC) argued that conducting a “gaps analysis” presupposed that there were gaps. After some discussion, the working Group chose to call the assessment a “comparative analysis.”
The Working Group also heard an update on the recent meetings of the IAIS Governance and Compliance Subcommittee which is working on ComFrame and revisions to supervisory reporting requirements. The Subcommittee will be meeting in Chicago April 16-17. Director William White (DC) will be the NAIC’s representative to the Subcommittee.
The Working Group received a referral from the Blanks Working Group, which was referred to the subgroup working on Principle 1 (reporting) issues.
Group Solvency Issues (E) Working Group: The Working Group, co-chaired by Danny Saenz (TX) and Fred Heese (MO), adopted a new charge to address the implementation of Section 3D3 of the Insurance Holding Company System Regulatory Act that allows for a consolidated hearing on an acquisition of control in multiple jurisdictions. The Working Group will work with the National Treatment and Coordination (E) Working Group.
The Working Group received an update from Christie Neighbors (NE) regarding the status of the confidentiality agreement for states receipt and sharing of the Form F- Enterprise Risk Filing. The agreement is ready for states to begin signing.
The Working Group received an update from David Vacca (NAIC staff) regarding issues pending before the IAIS Insurance Groups Subcommittee. One of these issues was the development of an issues paper on branches. The IAIS has surveyed supervisors regarding their laws and practices. Three US states responded to the survey. Saenz asked if there were any concerns on the Working Group about regulatory arbitration stemming from differences in the treatment of branches. Working Groups members said they were not concerned about the branches in the US which were well regulated. Fullilove expressed concern that the paper and the chair’s question focused on the negative issues related to branches and pointed out that there are many positive reasons for using branches as well which she hoped the paper would include.
In terms of the current work on the Common Framework for the Assessment of Internationally Active Insurance Groups (ComFrame), there were several issues on which the staff was looking for guidance, including:
- The definition of companies to be included in ComFrame and whether premium written through branches should be included. The Working Group generally thought it should be even if a company only wrote through branches and was not technically a group. Saenz said that many of the discussion on scope took place in closed meetings although the NAIC has said the discussions should be public.
- The requirement in Module 4 that a group profile be required. The Working Group agreed that this was too prescriptive and the reports should be left up to the colleges to decide and ComFrame should be more outcomes focused. Esson (NAIC staff) said the IAIS Accounting Subcommittee agreed.
- A proposal has been made that ComFrame require emergency plans to be developed. The Working Group said this was a financial stability issue not a ComFrame issue. Saenz said the IAIS was building a “Taj Mahal of regulatory regimes.” Johnson said the focus should be on communications in a crisis. Doug Slape (TX) said that it is hard to understand why a company should spend time on a plan it will never execute because once a risk is identified it should be addressed.
- The requirement that supervisory colleges meet in person. Most members of the Working Group did think the colleges should meet annually in person to build the necessary relationships, but were willing to accept some flexibility in the language.
- The decision as to which jurisdiction will be the group supervisor may be determined by the group headquarters if there is no agreement for an alternative supervisor. Vacca says the US might want co-group supervisors in some cases.
The Working Group also received an update on the IAIS’s revisions of ICP9 on supervisory review and reporting which will be completed this year, the IAIS survey on the effectives of supervisory colleges, and the Joint Forum work on Principles for the Supervision of Financial Conglomerates. Rob Esson (NAIC staff) said that the Principles would in all probability be the basis for future assessments and needed to be reviewed carefully. The comment deadline is March 16. Esson also suggested that the IAIS delay any work on financial conglomerates until this paper was complete to avoid conflicts.
International Solvency and Accounting Standards (E) Working Group: The Working Group, chaired by Mel Anderson (AR), received an update on the IASB’s progress on both the Insurance Contracts and Financial Instruments projects. Esson said that with the decision to consider changes to the Financial Instruments standard to allow insurers to use a Fair Value through Other Comprehensive Income (OCI) option, a joint exposure draft of the Insurance Contracts standard was more likely. Esson said the issues related to non-life have been harder to resolve. Most recently the discussion has focused on the definition of the Premium Allocation Approach. The IASB and FASB are now saying that the decision on releasing the exposure drafts will take place in the second half of 2012. That delay on the part of the IASB may allow for a joint draft to be released.
The NAIC has been asked to provide data on claims variability to help the IASB judge the likely size of risk margins. The NAIC is trying to determine how best to respond.
In the open comment period, Mike Monahan (ACLI) said he thought it was unlikely that the SEC would make a decision on convergence this year. Doug Barnert (GNAIE) said GNAIE is firmly committed to a converged standard.
Ramon Calderon (NAIC staff) provided an update on developments at the IAIS Solvency and Actuarial Issues Subcommittee. He said a small drafting team has been trying to resolve issues around the question of the need to have a common group capital requirement or just a group capital assessment in Module 3 of the Common Framework for Internationally Active Insurance Groups (ComFrame). This issue has been the subject of debate at the IAIS Technical Committee, which is pushing for a narrowing of the options for group solvency controls. The NAIC has said that the ComFrame should not overly rely on single group capital requirement. That drafting group will meet again in early April in Washington, DC. Calderon invited comments from Interested Parties on the revised draft of Module 3 on solvency by March 23 and promised to hold a conference call on March 28 to review the comments.
In response to a question from Dan Daveline (NAMIC) regarding IFRS requirements, Esson said that ComFrame calls for the use of IFRS or a reconciliation to IFRS. He said he hopes that by the time ComFrame is active, that there will be an IFRS Insurance Contracts standard. A single standard will make it easier to reconcile to a single accounting standard. Keith Bell (Travelers) asked whether the IAIS was referring to IFRS as adopted or as implemented in various jurisdictions.
Jeff Alton (CNA) asked for an opportunity to have a constructive dialogue on the ComFrame issues. He encouraged specific discussion on Module 3 before the IAIS subcommittee meetings in mid-May. Alton said it was important to ensure that there was a level playing field for international writers that ensured consistency and comparability and avoided burdensome duplicative regulation. He said the format of the current NAIC meetings has not allowed time for an inter-active dialogue on these issues. Alton added, “The NAIC talks about collaboration, but we would also like to discuss comparability and efficiency.”
SMI/RBC Subgroup of the Capital Adequacy Task Force: The subgroup held a regulator-to-regulator meeting on February 28 to review its work to date and response to referrals.
SMI Roadmap: Director Urias asked the various working groups to provide updates to the Roadmap.
Other matters: At the SMI Task Force,Fullilove again raised the need for more comprehensive dialogue between industry and the NAIC on the IAIS’ ComFrame project as discussed in the International Solvency and Accounting Standards (E) Working Group meeting. She said several industry proposals have been raised including a series of meetings prior to the May IAIS Subcommittee meetings and an open dialogue at the NAIC’s summer annual meeting. Director Urias said the discussions would be helpful and asked that the interested parties present their proposals for consideration as soon as possible.
Valuation of Securities Task Force
Chair Kevin Fry (IL) began the meeting by asking the Task Force to adopt the meeting minutes. During the Interim Conference Call, the New York proposal was adopted on the Modified FE. Another proposal adopted on the interim call was the 43R methodology motion which addressed capital arbitrage. The motion to accept was passed.
Invested Asset (E) Working Group: Invested Asset Working Group Chair, Elaine Wieche (CT), gave the report of the Working Group which mentioned the Working Capital Finance Notes project. The motion was made and passed which also included the approval of interim call minutes for the Working Group.
The Chair addressed a proposed change of the Purposes and Procedures Manual—To Conform Part Six, Section 2 (e)—(List of Securities that are Considered “Exempt Obligations” for Purposes of Determining the Asset Valuation Reserve and the Risk-Based Capital Calculation) to Part Two, Section 4 (the Manual). Some changes discovered by Vice Chair Matti Peltonen (NY) were determined to require more than a friendly amendment so the chair recognized a motion to expose.
The substance of agenda item 4 was a revision of the Purposed and Procedures Manual which would provide new wording to update the Manual: “To Revise NAIC Policy and Create New Procedures to Govern Acquisition of NRSRO credit ratings.” The Task Force also considered several strike and replace changes as friendly amendments.
The Task Force considered another change in the Manual to adopt language to modernize the Classification Methodology and Change How Classification Decisions are implemented. Fry asked Chris Evangel, Managing Director of SVO, if these changes would be automatically included. Discussion took place regarding the nature of the amendments and the consensus was that this would be considered a friendly amendment which could be voted on today.
Regarding the term, “Non-issue related credit agency”, the chair recognized Evangel to clarify that it described “individual ratings for investors would be different than major agencies.”
Chris Anderson (Anderson Insights), speaking for interested parties, spoke to the timing of the review of Kroll and asked that negotiations be started immediately, as he did not see that this Task Force had a charge to review business practices. Fry stated that he had planned to instruct staff to address this process later during this meeting and that the process would not be delayed.
Laurie Armstrong (NASVA) asked about a few other changes that the Working Group might make, suggesting that Schedule D might be removed or that other schedules might be added. The Chair asked Evangel if there further review was needed and if it could be handled in either the SVO review process or as a friendly amendment.
Ed Toy, Director, Capital Markets Bureau (NAIC) contended that there may need to be additional revisions during this process. Toy stated that “AROs and other referrals may need to make changes (and in blanks).” Peltonen mentioned that Robin Marcotte, Accounting and Reporting Manager (NAIC), had pointed out that the Schedule D mention is specific to activity that already takes place. Hearing no objections, the motion to amend the language to accommodate AROs passed.
The Task Force considered “Proposed amendments to the Purposes and Procedures Manual to modernize Classification Methodology and Change How Classification Decisions are implemented.” Evangel described the process of what a bond is, when it is due, and how exceptions of securities that are “not bond-like” may have to be dealt with at this point in time. He delineated vertical vs. horizontal risks, with an offer to attempt to “cure” this reporting which might take place. Evangel gave the foundation of the creation of the “S” subscript, where the credit of the issuer could understand that the rating is not “full credit risked” but still may not trigger a default. Evangel admitted that there may be pitfalls, because the notch may not be transparent, but in cases where deferrals are seen, Evangel explained that the “notch is not in the NAIC categories, but in the traditional rating categories.” However, he said, the SVO would return to VOS with some solutions. Fry asked Evangel to describe some of the proposed options, such as the “common bucket” solution, pointing out that a notch might have been better at the time.
Evangel described it as a “very small basket,” stating that at least 75% of securities were FE, and that the number is very small. He said that in some cases, the SVO will go directly to the issuer for clarification on this issue. Fry asked if there were cases where some companies had a large number of these Schedule D issuances. Fry beckoned back to SVO;s history of addressing “risk other than credit”. Fry asked that the proposal be exposed for 60 days.
Peter Medley (WI) asked “Would the companies just find out on September 30 about these securities? How much lead time, if any, would you anticipate?” Medley expressed the concern that this process could “affect a company’s capital planning.”
Evangel agreed that this would be excepted and identified as “not in this calendar year.” Therefore, this will be used in 2013. He said that it would also have to be changed within the system and this could not even be changed before July, “even if they rushed it.” There may be a “2” and a “2s” within the same issuer, according to Evangel. The Task Force continued to discuss the common stock bond rating and the capital charges accompanying it and how that might affect the rating. Evangel said that any bond seen as a common stock by SVO would get a (NAIC) 6 rating.
Tomoko Stock (CA) mentioned that the C-1 Factor Review (E) Subgroup is looking at additional charges, and asked if that could create a “double hit.” Fry responded that he did not see that as an issue. Evangel answered a second question by Stock by stating that the SVO could not foresee the likelihood of the exercise of options, that it cannot give a subscript that predicts the notches, and “that will always be the challenge.”
Peltonen stated his concerns, agreeing that the Subgroup wants to create a framework for companies, but alluded to unintentional consequences created by multiple appearances in the NAIC hierarchies—reporting, manual, and how bonds are treated. Peltonen summarized the discussion by offering that “Preferred stocks and bonds are well-defined in SAP so why not use those definitions?” He then asked, “Secondly, the recent Subgroup work on ‘risks other than credit’ was extensive, so will that be taken into account?” Evangel agreed that “Preferred” would be standard in SAP and other areas. The Task Force continued discussion on the differences between terminologies, varying in the reporting language as either a bond or a security.
Fry recognized Max McGee (McGee Consultants) to comment for interested parties. McGee disclosed that his comments were not in connection with a current client on this issue, but he had reviewed the previous work he had contributed to as chair of a subgroup on Risk Other Than Credit and he “wondered what conditions may have changed.” Fry specified deferral as one condition that the subgroup had considered and explained that that is why the subscript was created, to which Evangel added that the SVO is considering only non-payment risks and features in that transaction that make it look like a preferred stock. “How do we translate this back to regulators and the companies?” Evangel asked.
McGee asked for specifics on how the SVO does the notching. The answer was that if it is a pre-rating, it is discussed with the issuer and, if it occurs later, with the insurance company. Evangel expressed the view that he likes to explain how they perform these processes but stated that the manual is “not a reporting guide.”
Anderson asked that this issue be sent back to the Invested Asset (E) Working Group rather than be exposed today. He did not feel it was appropriate to have language ready for the manual. Despite Anderson’s request, Fry proceeded with the motion, which passed without further discussion from the Task Force.
Agenda item 6 addressed earlier Task Force actions which had excluded Modified FE and how it might affect the Methodology Review for Loan-Backed and Structured Securities (Modeled and Non-Modeled). Fry gave a narrative of how modeling had become part of the landscape in the past few years, and asked how this can be reviewed. Fry challenged the SVO staff to see how this can be adjusted. He mentioned that this is simply a report from staff, with Eric Kolchinsky providing a report from SVO, which can be discussed at a later date.
Fry was surprised that there was such volatility and mentioned that they may need to adjust the process to provide more RBC for some asset classes. He said they would complete the study and organize the data for the future. Fry said part of the advantage of undergoing this process was to examine how Modified FE actually works. The possibility of appointing a subgroup was mentioned. Fry said that 43R securities, both modeled and non-modeled, would be discussed more in the future.
Evangel gave the staff reports. He told the Task Force that 2011 was an active year for SVO, with more than 5,000 reports being filed (in perspective—he added that there was a high of reporting in 2007 and a low in 2009.) He was very satisfied with the turnaround time; there were only 88 filings of corporate bonds and three-quarters of the reports were completed in 30 days or less. Evangel also noted a “significant increase in the advance rating service.”
Fry mentioned a few other matters, including the review of performing mid-year reports. The chair asked the members of the Task Force if they wanted to do a mid-year run at the model. Fry stated his view that “For practical purposes, it is very expensive…we all understand the mortgage market more these days…” Fry’s guidance was that as all the companies do this on their own, he felt that the SVO does not have to do a midyear reporting. He reported that the mortgage security market was not as large as it once had been with approximately $200B US in Commercial Mortgage Backed Securities (CMBS) and only $160B US in Residential Mortgage Backed Securities (RMBS), with RMBS continuing to decline. Members of the group were not aware of any “private label deals coming out.”
Fry suggested that if the market continues to shrink they might consider how valuable modeling actually is. Peltonen agreed that RMBS represents only 0.5% of industry’s holdings and made a motion to discontinue the mid-year report.
Toy will continue to submit to VOS the Capital Markets Bureau’s work on RMBS and CMBS. Fry asked if they were looking at aggregate exposure. Toy replied that they were, specifying general exposure to the industry and by insurer types.
Peltonen gave an update on the work being done on the derivatives schedule. He stated that preliminary discussions with industry are pointing to the lack of need at this point to overhaul the schedule database. Peltonen will report back to the Task Force on the possible need to reconvene the Derivatives Market Study (E) Working Group to deal with technical issues. Toy added that, as inconsistencies had been found by the Capital Markets Group, they would be coordinating with other groups to achieve the proper timing of the expected goal to get through the Blanks (E) Working Group.
With no other matter before the Task Force, the meeting was adjourned.
Joint C-1 Factor Review (E) Subgroup: The Joint C-1 Factor Review (E) Subgroup, continued its work populated with both regulators and industry representatives. The regulators are largely drawn from the parent committee, the Valuation of Securities (E) Task Force, with industry participants representing a wide swath of interests and a deep experience pool.
Chair Matti Peltonen (NY), vice chair of VOS, began the meeting by providing a high level summary of the Subgroup’s activities, including the most recent conference call. Other regulator-members of the Subgroup are: VOS chair Kevin Fry (IL), Invested Asset (E) Working Group chair Elaine Wieche (CT), Phil Barlow (DC), Blaine Shepherd (MN), and Perry Kupferman CA). Representing industry were: Nancy Bennett (American Academy of Actuaries), Jerry Holman (AAA), John Bruins (ACLI), Jim Olsen, (PCIAA), Dan Daveline (NAMIC), and Joe Celentano (Pacific Life).
Peltonen reviewed the charges of the Subgroup, a primary one being the examination of Risk-Based Capital (RBC) factors for different types of investors. The goal is to make updates on a more frequent basis. Risks for bonds are being considered as well as durations that are affected by the C-1 factor. Attempts at achieving the proper level of granularity is another primary goal of the Subgroup.
Nancy Bennett (AAA) gave a report on modeling. Bennett described the process of recruiting the necessary resources to conduct effective, yet cost-sensitive modeling. The first hurdle to cross is “building out the basic bond model.” Bennett updated the group on how both basic assumptions and default assumptions, properly identified at the outset of the project, would go a long way toward making it successful. For now, the decision has been made to utilize a cumulative model. This model will project out a 10-year timeframe for modeling projections.
Talking about assumptions: The Subgroup has narrowed down some choices regarding assumptions, with the option of utilizing cumulative or default assumptions. For now, the Subgroup will be using a cumulative model. The model will use 10-year timeframe for modeling projections. Composition of the model for each rating category will be the start, and then, using the same engine, they may use fewer (categories) at the end of the process.
The next choice to be made was “how to populate that model.” If there are 600 bonds, (being modeled) do you use real CuSIPs? Should they all be issued on the first day of the modeling? The output and how it will be applied is driving these decisions. The stated goal is to bring a working construct or “discussion model” to the C-1 Subgroup. “Nothing will be set in stone, but preliminary assumptions will be made,” offered Bennett.
After these initial exchanges, that will take approximately six months, Bennett said they will move forward. She shared the details of contributing activities, citing the fact that “one group is writing a white paper using Basel II and other factors and a list of pros and cons will be assembled to see what makes sense, with the possibility of moving away from a historical model.” The group will survey what vendor products are out there and how some of those technologies can be used.
Peltonen pointed out that they will start with corporate bonds. He said that they would start with more granularity than first attempted. The goal, as stated previously, is to expand the six NAIC rating categories. Ed Toy, Director, Capital Markets Bureau (NAIC), beckoned back to the original work performed by this Subgroup which had not been active for the past 17 years. Blaine Shepherd (MN) asked about the time frame to which Bennett responded that it will be a few months before the first modeling information becomes available.
Toy asked if the modeling horizon would have an impact on how to construct the model. Bennett responded that rather than an average, the C-1 Charge might be specific to different holding times. Toy acknowledged that the holding period for the industry has shifted over the past few years, but also held to the point that “there are still standards in the marketplace.”
The next agenda item considered by the Subgroup is the granularity that the group will seek. The question of whether there was a sufficient amount of data was considered by the group. Peltonen gave a nod to foreign debt and foreign governments as one of the factors to be considered, qualifying that this concern as probably coming more into focus as the group progresses.
Agenda item 3, the NAIC recalibration project, encompasses expanding the six category rating system. Peltonen re-emphasized the need for a more detailed breakdown to adapt to a more complex market. The existing framework will be used to reduce complications, as there many places where more granularity might be helpful.
Michelle Wong (NAIC staff) gave a report on the rating agencies. The full report included data on default rates and asset classes. Wong also told the group that all the data is available in cumulative form as well as featuring a slice-and-dice capability, by sectors, with financials, and with representative selection of consumer products. Moody’s has a general and non-general obligation category. The Subgroup has been in touch with the rating agencies who have agreed to cooperate.
The next item considered by the Task Force is Bond Duration. Toy referred to the Invested Asset (E) Working Group as facilitating an exchange about duration. Actual vs. maturity in bonds have been looked at as to which is appropriate. Toy maintained that the data will describe this process. “If the data does not reveal any material difference, that will describe a path to pursue,” he stated. Toy also pointed to market signs of higher risk of default as one of several portfolio management approaches. Toy used the extreme viewpoint of, hypothetically, buying “one-day paper as having almost no exposure” to risk and then continuing out in time. Peltonen agreed that finding a justification for a higher RBC was of concern to avoid any mismatches.
John Bruins (ACLI) questioned the higher default notion as perhaps only being tied to liquidity. Toy agreed that longer dated bonds trade at a higher yield. Toy said he had not seen a different application based on term. Peltonen offered the market rationale of “punish for credit risk or reward for duration.”
Loss-given default was the next item on the agenda. This data will be, perhaps, harder to get, according to Peltonen, than in other areas, asking Bennett what had been used for loss given default and recovery. Bennett recalled 40 to 60%. She asked Wong what the recovery rates were in the corporate side. Wong said that public information was limited. Both Bennett and Wong agreed that Moody’s had more detailed information on this matter.
Toy asked the audience if they were aware of any data on assumptions. Chris Anderson (Anderson Insights) spoke for interested parties. Anderson told the group that “RBC is all based on loss-given default” and he pointed out that “it is the severity the counts.” Anderson went on to explain that one aspect that impacts the issue is that “recovery changes all the time.” He explained that a high level of default reflects a low level of recovery. Anderson felt that this is a very important issue and that it will be very challenging to define. The last time it was performed it only provided somewhat of a co-relation. Toy agreed that, considering Anderson’s comments, it would be a good time to go out into the marketplace and see what is out there. The consensus was that there may have to be another place to look besides the rating agencies.
Peltonen asked the Subgroup to consider meeting with the rating agencies to see what their practices were. Toy said that Fitch is publishing more information. Toy alluded to Congressional looks at RMBS and how they were downgraded. These were related to expected loss at that time.
In a light-hearted wind-up to a productive meeting, Peltonen handed out “homework assignments.” Peltonen referred the question to staff to consider other asset classes and then asked Fry if he would consider working with Daveline on this topic. Peltonen then volunteered Bruins to work with Barlow to look at mortgages. In the area of real estate, Wieche was paired with a representative from the American Academy of Actuaries. Olsen will work with Kupferman on Schedule B/A assets. The meeting adjourned with no further agenda items to discuss.
Financial Regulation Standards and Accreditation (F) Committee
Commissioner Eleanor Kitzman (TX) chaired the “F” Committee meeting.
The Committee adopted its December 14, 2011 conference call minutes.
The Committee adopted the revisions adopted in 2011 to NAIC publications referenced in the accreditation standards. None of the revisions were considered significant and are effective immediately.
The Committee discussed the comments received related to the 2009 revisions to the Standard Valuation Law (#820). Steve Johnson (PA) said the clock needs to be re-set because the Valuation Manual for Principles-Based Reserving has not been adopted yet. The Committee re-exposed the revisions until December 31, 2012. The revisions will be considered in 2013 along with the Valuation Manual.
Johnson gave an informational update to the “F” Committee on the possible addition of the Risk-Based Capital for Health Organizations Model Act (#315) to the accreditation standards. The Committee will vote on the Model Act at the NAIC summer meeting and it will have an effective date of January 1, 2015. No comment letters have been received.
Julie Glaszczak (NAIC staff) reviewed the 2011 revisions to the Credit for Reinsurance Model Law (#785) and Model Regulation (#786) and said that the Reinsurance (E) Task Force will be exposing the Model Law and Model Regulation for comment at the spring meeting.
The Committee discussed 2011 revisions to the Model Risk Retention Act (#705). The Risk Retention (C) Working Group recommended that states that charter risk retention groups be required to adopt the Act for accreditation purposes. The referral from the Working Group was exposed for a preliminary 30-day comment period.
Peter Medley (WI) reported on the revisions to the Risk-Based Capital for Insurers Model Act (#312), which changes the level when the Risk-Based Capital trend test is triggered so that it is the same level that is used for health and P&C companies. The Committee exposed the revisions for a 30-day comment period.
Glaszczak reviewed NAIC staff revisions to the Review Team Guidelines for Changes in the Financial Condition Examiners Handbook. The two proposed additions address all risks identified by examiners and requires notifications if examination reports are not issued within 22 months. The Committee exposed the staff referral for a 30-day comment period.
Jim Armstrong (IA) reported on comments received on the recommendations of the Analysis Timeliness (F) Subgroup. The changes are:
- Analysis of the quarterly financial statements should be completed within 60 days from receipt for priority companies and within 90 days from receipt for non-priority companies.
- Analysis of other supplemental filings (Management’s Discussion and Analysis, CPA Audit, Holding Company Filings, etc.) should be completed within 60 days from receipt for priority companies and within 120 days from receipt for non-priority companies.
The Committee adopted the revisions effective immediately.
International Insurance Relations (G) Committee
The International Insurance Relations (G) Committee met for the first time at this meeting under the leadership of its new chair, Commissioner Susan Voss (IA). Voss committed at the meeting to monthly open calls of the Committee because of the heavy demand of international issues. The first monthly call was held on February 28 at which time the agenda for this meeting was reviewed and the recent IAIS Technical Committee hearing was debriefed. Comments made on that call are reflected in this report where relevant.
EU-US Dialogue: Voss reported on recent meetings with the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA) to improve cooperation and understanding between the Europe and the US. A joint steering committee has been established composed of three representatives from Europe and three from the US, including FIO, to ensure the work plan is implemented. One possible outcome of the work plan may be the granting of transitional equivalence under Solvency II to the US by the European Commission. That decision is likely to take place in mid-2013. Ray Supdeck (FIO) said the work plan with the EU was a top priority for FIO. Voss reported that the NAIC had also recently participated in the EU-US Financial Markets Regulatory Dialogue represented by Director William White (DC).
MMoU: Commissioner Thomas Leonardi (CT) announced that Connecticut is the first US state to join the IAIS’ Multilateral Memorandum of Understanding on Information Exchange. NAIC staff indicated that several other states, including Washington and Nebraska, have also applied to join. Participating in the MMoU is seen as a step in facilitating international colleges of supervisors and Leonardi felt it was a better process that the bilateral agreements signed by many states. The NAIC and Connecticut will offer advice to states who wish to apply to join the MMoU.
IAIS: Commissioner Voss announced that FIO Director Michael McRaith would now be joining Terri Vaughan (NAIC CEO) and Commissioner Kevin McCarthy (FL) as one of the US representatives on the IAIS Executive Committee replacing Director Christina Urias (AZ) who expects to be replaced as Arizona Commissioner in May. Voss thanked Urias for her service to the NAIC as chair of the SMI Task Force and on international issues.
The Committee discussed the IAIS’ project to create a Common Framework for the assessment of internationally active insurance groups (ComFrame). Open issues include the scope of the project, the definition of an international active insurance group (IAIG), and the level of consistency needed in the solvency requirements. Although there will be a public consultation in July, interested parties were invited to submit comments to the NAIC by March 23 prior to an early April drafting committee meeting.
The IAIS Technical Committee held an open hearing on the role of the supervisor in risk assessment. Although there were very consistent comments from the ten observers who spoke at the hearing urging a practical, bottom up approach to risk assessment, the NAIC members indicated that no specific guidance would be sent to the IAIS subcommittees regarding this or other areas including scope and capital requirements.
Doug Slape (TX) provided an update on the work of the IAIS Supervisory Forum which is addressing stress testing and longevity risk. The Supervisory Forum was created last year to add the voice of senior supervisors to the ComFrame debate and IAIS processes.
Commissioner Leonardi reported on the work of the IAIS Financial Stability Committee which is currently developing criteria for the identification of systemically relevant insurers. The IAIS will release a consultation paper on the criteria at the end of March prior to submitting the material to the Financial Stability Board (FSB). A separate consultation on the prudential measures to be taken if any insurers are deemed to be systemically relevant will take place over the summer. The IAIS will submit its recommendations as to systemically relevant insurers, if any, to the FSB and G-20 in November. Leonardi did say there was likely to be a subsequent data call to the one issued last October sometime in the summer. Final recommendations will be based on that data. National regulators will be involved in making any final determination of systemic relevance, but the process was not clear.
Joint Forum: NAIC CEO Terri Vaughan presented a report on activities of the Joint Forum, a group composed of the IAIS, Basel Committee for Banking Supervision, and IOSCO. The Joint Forum has recently posted a paper on Principles for Supervision of Financial Conglomerates. Vaughan said comments were due by March 16 and invited interested parties and regulators to submit comments to the NAIC before then. Rob Esson (NAIC staff) cautioned that it was likely the new standards would become part of the assessable standards so they need to be reviewed carefully.
Vaughan described four new projects being undertaken by the Joint Forum, including work on longevity risk, point of sale disclosures for mutual fund-type products, pre-conditions for effective supervision, and mortgage insurance. A roundtable on the last topic was held at the recent Joint Forum meeting in Florida immediately prior to the NAIC meeting.
OECD: Commissioner Michael Consedine (PA) announced that he will be serving as the regular liaison for the OECD Insurance and Private Pensions Committee (IPPC). He provided a review of the major issues before the OECD, including corporate governance, financial education, natural catastrophes, policyholder protection schemes, effective supervision, and economic growth. Paul Thanos (US Department of Commerce) added that the IPPC was unique in that it was one of the few OECD committees in which the private sector was involved. Dave Snyder (AIA) said the IPPC is a good example of the f federal government, the NAIC, and the private sector coming together.
Updates: Director Urias provided an update on the activities of the SMI Task Force, Commissioner Consedine reported on the reinsurance collateral reform developments, and Esson provided an update on international accounting standards. These updates are covered in the reports on those various working groups.
Regulatory Cooperation: The Committee received a report of the International Regulatory Cooperation Working Group which continues to coordinate the NAIC’s fellows program and the international training program. The Working Group received a report on the IAIS’ peer review which over five years will be assessing compliance with the IAIS Insurance Core Principles (ICPs). A progress report on the first assessments on supervisory powers and group supervision will be released in June.
Trade: Ekrem Sarper (NAIC staff) gave a report on other trade issues including the Trans-Pacific Partnership. The US is focused on eliminating barriers to US companies in foreign markets in its trade efforts.
Meetings: At the meeting the NAIC released the latest version of its International Report which is available on the NAIC website and reminded participants of the NAIC International Forum to be held May 10-11 in Washington, DC. The NAIC also announced plans for the 2012 IAIS Annual Meeting which will be held October 10-12 in Washington, DC. Registration for this meeting will be open on May 1 at www.iais2012.org. Topics for the seminars include: ComFrame, longevity risk, consumer protection, micro-insurance, financial stability, and supervisory effectiveness.