July 2012 NCOIL Burlington Meeting Report

July 2012 NCOIL Burlington Meeting Report

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Table of Contents

International Insurance Issues Committee — Click here to read this article.

Global Efforts to Influence US Regulation — Click here to read this article.

Resolution on US Trade Activities — Click here to read this article.

Life Insurance & Financial Planning Committee — Click here to read this article.

Contingent Deferred Annuity Regulation — Click here to read this article.

Principle-Based Reserve Initiatives — Click here to read this article.

Roundtable on States and the FIO Report — Click here to read this article.

Financial Services & Investment Products Committee— Click here to read this article.

Dodd-Frank Act Implementation Activity — Click here to read this article.

Force-Placed Insurance — Click here to read this article.

Bond Insurance Market — Click here to read this article.

State-Federal Relations Committee — Click here to read this article.

Update on SLIMPACT — Click here to read this article.

Market Conduct Examinations — Click here to read this article.

Producer Licensing Modernization Resolution — Click here to read this article.

NCOIL-NAIC Dialogue — Click here to read this article.

SLIMPACT — Click here to read this article.

Affordable Care Act — Click here to read this article.

NAIC Model Holding Company Act — Click here to read this article.

NCOIL’s spring meeting was held in Burlington, Vermont on July 12 – 15.  There were 270 attendees, 48 of whom were legislators.  A special election was held to elect a new treasurer to fill a vacancy created when the former president-elect, Senator Vi Simpson (IN), resigned in order to run for Lieutenant Governor in Indiana and, pursuant to the NCOIL by-laws, the remaining officers each moved up a notch.  The new treasurer is Senator Travis Holdman (IN).  The next NCOIL meeting will be held November 15 – 18 at the Grand Hotel in Point Clear, Alabama.

US Representative Peter Welch (D-VT) was the luncheon speaker.  Representative Welch, who serves on the House Oversight and Government Reform Committee, spoke of the gridlock in Congress and expressed his dismay at not being able to pass legislation even when there is bipartisan agreement.  He assured the audience that regardless of how the election goes the Affordable Care Act would not be repealed because there are too many extremely popular things in it.

International Insurance Issues Committee
Senator Travis Holdman (IN) chaired this meeting. 

Global Efforts to Influence US Regulation:  Commissioner Roger Sevigny (NH) stated that the NAIC is working to ensure that international banking regulators understand that insurance is different from banking and to convince them that state-based insurance regulation has been very effective as was demonstrated during the financial crisis. 

Sevigny highlighted some of the initiatives that are going on internationally that have implications for the US.  He reported that the NAIC had been assessed under the Financial Sector Assessment Program (FSAP) being conducted by the International Monetary Fund (IMF.)  The assessment looked at compliance with the 28 Insurance Core Principles (ICP) that were developed by the International Association of Insurance Supervisors (IAIS) and the NAIC was found to be fully adhering to 25 of them.  Sevigny said the report was mostly favorable and had made particular mention of the exemplary data collection capabilities of the NAIC.  He said that the IMF report contained a number of recommendations which are being evaluated by the regulators and that none of them were major.

Sevigny stated that the IAIS is the international standard setting organization for insurance regulation; that it was established by the NAIC as a founding member; that all 50 state insurance commissioners as well as the insurance Commissioner of Puerto Rico are active and influential members of the IAIS; that state insurance commissioners serve on all of the IAIS committees; that two of the 18 IAIS Executive Committee members are US insurance commissioners; and that Michael McRaith, the director of the FIO, is also a member of the IAIS Executive Committee. 

Sevigny was asked "who’s driving the boat" at the IAIS.  He replied that this was a good question and that concern for who would be driving the boat is the reason the NAIC is so heavily involved in the activities of the IAIS, particularly its Executive Committee which drives the agenda of the IAIS.  He added that the US has been the chair of the Executive Committee in the past and that the chair is currently held by Austria.

Doug Barnert (Barnert Global) began his presentation by noting that he had addressed the Committee in Biloxi on the subject of international accounting standards at this meeting he intended to concentrate his remarks on status of the International Accounting Standards Board (IASB) efforts to develop an international accounting standard for insurance contracts and whether that standard might influence and perhaps eventually replace the current insurance accounting standards promulgated by the Financial Accounting Standards Board (FASB) for use by stockholders as well as the statutory accounting standards developed by the NAIC for use in regulatory financial solvency regulation  [See the information on the NCOIL Biloxi meeting at www.Barnert.com.]

Barnert noted that the first question that always comes up is whether the players are talking about developing quality standards or just converging for the sake of convergence.  He said "there is a general agreement around the world that quality standards, like apple pie, are the best answer" but that some cynics have argued that the proponents of quality are simply using that argument to delay the adoption of a converged standard and; therefore in order to prevail, those who are advocating quality standards must continue to point out where proposals do not meet their quality requirements. 

Barnert reported that the International Financial Reporting Standards (IFRS) Trustees had met this week in Washington DC where IASB Chairman, Hans Hoogervorst, had described the continuous transitioning efforts of the IASB over the 11 years the IASB has been in existence.  Hoogervorst told the trustees that during its first five years of operations the IASB had concentrated on developing standards for the European standard setters because the European Commission had voted to require all 25 members of the EU to use IFRS beginning in 2005.

With regard to the FASB standards that were different than IFRS, Barnert said that during this first phase (“the European cooperation years”) the IASB had decided it would deal with the easier issues by taking those IASB and FASB standards that were similar and making any changes necessary to make them the same and, where they were different, the Boards would pick the one that was better. 

Work on all of the more complicated standards was pushed to the 2006 – 2010 timeframe during which the effort to converge US GAAP with international accounting standards (IFRS) got serious, with the two boards and the SEC agreeing to a Memorandum of Understanding that identified the standards that would have to be completed by 2010.  The standards included in the MoU cover financial instruments, financial statement presentation, revenue recognition, pensions, leases, and liability measurement.  The plan was that once developed these converged standards would be marketed around the world.

Barnert reported that Hoogervorst had told the trustees that these projects have been completed and that the next five years would be the "Pacific years" devoted to those countries in the Pacific rim that are kind of but not quite ready to adopt international accounting standards.  However, Barnert said, the problem is that the boards never really finished the work designated for the "American years" because the standards listed in the MoU have not been finalized or adopted. 

Barnert noted that the insurance contracts project, which has been ongoing since the beginning of the IASB, also needs to be completed.  He believes it will continue to move along; that the "bad stuff" will be eliminated and the "good stuff" will be retained.  He noted the two boards had gotten over a major hurdle by agreeing to handle Other Comprehensive Income (OCI) in a similar way.

Barnert was asked whether the NAIC was "at the table" with regard to the development of the insurance contracts standard.  Barnert replied that Rob Esson (NAIC) had chaired the Insurance Working Group at the IAIS for four years and that the current chair is Richard Thorpe (UK) and Esson is now the vice chair.

He said that the IASB has announced that it would be coming out with an insurance contracts review document by the end of this year but that it has not decided whether the document will be a review draft that could be adopted after the review period is completed or a full re-exposure of the proposal with a 90 day comment period.  Barnert thought the latter was highly likely.  He said that the FASB was taking a slower approach and has announced that it might not necessarily converge on this standard.  He stated that the two boards are working together on this project and are sharing papers on the various issues but that it is not an actual convergence project in the sense that the boards are not using the exact same documents and for some areas, in particular the margin.  Some think the boards are not going to agree because the US is concerned that the IASB approach for the margin creates the potential for manipulation of the balance sheet. 

Barnert said that the big fight will be over Asia; whether it will stick with US GAAP or adopt IFRS. 

Barnert concluded his remarks by addressing the question of accountability.  He said there was improving accountability at the IASB.  Those responsible had looked to the highest level organizations in government and had come up with a Monitoring Board that is made up of the SEC, the Japanese FSA, and several other similar bodies that are senior governmental-like operations.  He clarified that the Monitoring Board will not set the accounting standards but that it would review the operations of the accounting standard setting boards.  He said that at the Monitoring Board meeting on July 12th the senior EU financial services regulator, Michel Barnier, had announced that he would like to see more involvement by the regulators, including the state insurance commissioners, and that there should be a more regionalization approach.  Barnert referred the legislators to his website at www.Barnert.com for a full explanation of the regionalization concept provided in the Biloxi meeting report. 

Resolution on US Trade Activities:  After the Barnert presentation, a discussion via telephone conference call with a representative of the United States Trade Representative (USTR,) during which the legislators expressed their dismay that the USTR does not consult with the states on trade issues that may impact them and that way too few state legislators are cleared advisors to the USTR.  The Committee adopted a resolution urging support for state authority in US trade negotiations.

Life Insurance & Financial Planning Committee
Senator Mike Hall (WV) chaired this meeting. 

Contingent Deferred Annuity Regulation:   A contingent deferred annuity (CDA) is a new insurance product which guaranties the continuation of retirement benefits until the policyholder’s death if his/her retirement investment account is exhausted either because the value of the account has dropped below zero because the investment did not perform as expected or because the policyholder has outlived his/her retirement plan.

Commissioner Julie McPeak (TN) stated that the NAIC began looking at this new product to determine if it is a financial guarantee that should be written by property/casualty insurers or an annuity that should be written by life insurers.  She said that a subcommittee of the Life Insurance and Annuities (A) Committee had determined that CDAs are much more like annuities than financial guarantees and therefore should be written by life insurers but that “A” Committee had also appointed a subgroup to look at how the product falls into the existing the existing regulatory structure with respect to underwriting, financial solvency, reserving, and consumer protection, to ensure that CDAs do not have any unique characteristics that are not addressed by the existing annuity regulatory structure.  The first open meeting of this subgroup was just held to solicit input from the industry, the American Academy of Actuaries, and consumer groups. 

Lee Covington (Insured Retirement Institute) stated that the IRI is made up of the insurers that have created these products, broker/dealers, and financial advisors.  He said CDAs were developed to address the retirement income crisis in this country and cited a study done by the Employee Benefit Research Institute which found that nearly half of all workers are at risk of having inadequate retirement incomes due to increases in life expectancy [a.k.a., financial longevity risk].  He said CDAs are living-benefit products that provide income while the policyholder is alive and that the insurer assumes the responsibility to continue retirement income as long as the retiree lives after his/her investment account is exhausted.  He stated that the primary difference between CDAs and traditional variable annuities is that the invested assets are held by the investor or his/her asset manager and the investment strategies are not controlled by the insurer.  He opined that the current regulation of this product is sufficient.

Birny Birnbaum (Center for Economic Justice) noted that CDAs guaranty a minimum lifetime benefit even if the assets perform poorly and for this reason he agrees with the New York Insurance Department that they are financial guarantees.  He said that New York was concerned about the sale of these products by life insurers because they are speculative in that the benefits are payable only if the assets perform poorly or the insured lives beyond his/her life expectancy and they free insureds to invest in the riskiest portfolios because there is no downside.  (He noted later that the "A" subcommittee had concluded that a rational consumer would invest in the riskiest portfolio.)  He said this makes it difficult to determine how to establish reserves which should be based on the performance of the investment portfolio and that, in determining how to reserve for CDAs, the actuaries will have to estimate the portion of benefits that are attributable to market risk versus mortality risk. 

Birnbaum urged the regulators to not approve these products because they could put the solvency of the insurer at risk in the event of a catastrophic market failure and could create systemic risk because the assets are not transferred to the insurer.  He opined CDAs are effectively speculative financial derivatives on the value of investment portfolios; that insurers could potentially issue CDAs covering trillions of dollars in very risky retirement assets; and he compared CDAs to credit default swaps.  

In response to a question from Representative Ron Crimm (KY), Birnbaum stated that the insured pays a fee equal to 1% to 2% of the retirement portfolio.  Representative George Keiser (ND), after determining that the total retirement portfolios covered by CDAs was only in the millions of dollars, questioned how they could be a systemic risk.  Birnbaum responded that the product is new and over time it would grow to cover trillions of dollars.  McPeak added that there are no examples of problems yet but she was concerned because the assets are not controlled by the insurer and insurance regulators will have to rely on securities regulators to ensure that the portfolios are prudently managed. 

Covington noted that this issue is being driven by a small number of regulators who have concerns and he stated that there was no data to support Birnbaum’s position; that the only difference from variable annuities is the custody of the assets; and that insurers have established controls to prevent the creation of risky portfolios.  Hall asked Covington what controls the insurer has over the investor; whether the guaranty could be lost due to speculative behavior; and how the risk is monitored.  Covington responded that the contracts specify particular portfolio profiles and that the broker/dealer has a fiduciary duty to maintain the portfolio. 

Birnbaum countered that the contract gives the insured a choice of investment mixes, for example, 40% stock and 60% bonds or vice versa and repeated that a rational consumer will choose the riskier 60%/40% mix. 

Hall ended the discussion by assuring the audience that this would be continued.

Principles-Based Reserve Initiatives:  McPeak summarized the history of this initiative, stating that when the new model Statutory Valuation Law (SVL) was adopted by the NAIC in 2009 NCOIL had told the NAIC that the legislators should not be asked to consider its adoption until the Valuation Manual referenced in the law was adopted.  She stated that the NAIC expects to adopt the Valuation Manual in December and that the commissioners would begin asking their legislatures to consider enactment of the SVL in 2013 and she would like to begin a robust discussion of the model in order to facilitate its uniform adoption.

Nancy Bennett (American Academy of Actuaries) stated that the Academy has been involved in this initiative since the beginning and supports adoption of the SVL as well as the Valuation Manual but she noted that the manual is not finished and that a regulatory process needs to be put in place that will allow for continuing and ongoing reviews that will ensure that the right reserves are set up by insurers.  She noted that the reserves will be based on each company’s unique set of risks and therefore the regulators will need to have sufficient resources and expertise (meaning budgets) to do the necessary reviews.

Scott Harrison (Affordable Life Insurance Alliance) told the Committee that the reason adoption of the SVL is so important is because the financial crisis had demonstrated the downside of rigid rules that do not respond to the marketplace.  He said that the SVL will allow a dynamic approach to reserving under which an insurer, with appropriate oversight, will be able to make changes to its reserves based on changes in the marketplace that will ensure that the reserves remain appropriate for the risks assumed.  He added that the SVL will provide modern tools to manage risk and it will provide greater transparency in the balance sheet.

Representative Bob Damron (KY) was concerned about the impact on a state’s accreditation should it decide not to adopt.  He is skeptical about the new SVL which he believes “is almost reserving after the horse is out of the barn”.  

McPeak noted that the new reserving methodology would not go into effect until a supermajority of states or states making up a supermajority of premium dollars have adopted the SVL.  However, she confirmed that 50% of the accreditation scoring is based on the states having designated model laws and regulations in effect.  Damron said that his concern was that the SVL would empower the NAIC to change the Valuation Manual and insurers to change their reserves without any input from the legislators.  McPeak replied that the NAIC was pushing for a robust debate at this time in order to address these types of concerns. 

Keiser noted that in 2009 he had asked the NAIC whether it had tested the PBR approach against the existing reserving methodology and that his question has not been answered.  Bennett replied that the financial crisis had presented a field test opportunity of the two methodologies and that the capital requirements for variable annuities, which are already subject to PBR, did go up and the reserves for those products moved in a similar fashion, demonstrating that the PBR approach accomplished one of its key objectives.  She said that the Academy was concerned that the current reserve requirements (for other than variable annuities) are static with every insurer using the same mortality and interest rate assumptions even though it is known that not all companies have the same experience.  She stated that the actuaries believe the PBR approach will strengthen the regulatory process. 

Senator Bill Larkin (NY) noted that Bennett had hedged her support of the new SVL and Valuation Manual and asked her to explain her hesitation.  Bennett replied that in order to properly implement the law the regulators and the NAIC must have more resources to hire and train additional staff and to obtain the necessary tools to monitor the PBR methodology and the Academy was concerned that the state legislatures may not be willing to provide the level of funding needed to obtain and maintain those resources. 

Another Academy representative added that the reason Bennett did not express total support is because the final product is not yet available and the NAIC has not yet committed to the kind of process the Academy feels is necessary to implement and monitor the PBR approach.

Roundtable on States and the FIO Report
This roundtable had been set up under the assumption that the long awaited FIO report would be released prior to this NCOIL meeting but, of course, that did not happen.  Nancy Bennett (American Academy of Actuaries) summarized the comments the Academy had provided to the FIO in December 2011which stressed that the financial strength of the insurance sector had largely remained intact during the financial crisis but acknowledged that under certain conditions it is possible that systemic risk could potentially arise out of an insurer’s operations.  The letter listed several drivers of potential systemic risk including globalization of the industry which may create gaps in regulatory oversight and/or communication between regulators, or uneven regulation; enterprises that include non-insurance financial affiliates; assumptions of insurance risk by non-insurance financial services groups; or that the state-based regulatory system may not have the tools to identify systemic risk.  The Academy also stressed that it was essential that any new regulation not just be a modification of bank regulations.

Birny Birnbaum (Center for Economic Justice) announced that he had been appointed by FIO Director Michael McRaith to FIO’s fifteen member Federal Advisory Committee.  The Committee held its first meeting in June and will meet again on August 6th.  Birnbaum said that McRaith had created two subcommittees, one on affordability and accessibility of insurance and the other on international regulatory bounds, to access the impact of two demographic changes: (1) the aging population in developed countries and increased longevity of those who are aging and (2) the development of middle classes in emerging economies and the impact of economic progress in those countries on international insurance markets. 

Birnbaum reported that the Advisory Committee believes FIO can help modernize and improve state-based regulation and improve the stability of the financial system.  He stressed that the FIO would not be a regulator but that, by developing insurance expertise, it could play a coordinating role between the state insurance regulators and the federal financial regulators.  With respect to systemic risk in the insurance industry, he said the Advisory Committee does not think the state insurance regulators have looked into the potential for systemic risk in contingent deferred annuities [See a summary of Birnbaum’s comments on CDAs before the Life Insurance and Financial Planning Committee.] so it would be appropriate for the FIO to investigate this question; and that it should also look at coordinating the state and federal regulation of credit-related products (credit insurance and related debt cancelation contracts issued by banks, title insurance, mortgage guarantee insurance, and force-placed insurance) and fostering communication between the states and the various federal regulators.  He said these products are at the nexus of insurance and financial products, that there are gaps in their regulation, and that they have proven to provide poor value for consumers.

Birnbaum stated that the Advisory Committee would also recommend that the FIO help develop a coherent national disaster policy by coordinating the many state and federal programs including FEMA, the national flood program, crop insurance, and terrorism.  He said the FIO has the authority and responsibility to take on the issue of availability and affordability of insurance in traditionally underserved communities and to collect the data necessary to examine this issue.  He commented that, since the NAIC has declined to tackle this issue and has said it will not collect the necessary data, it seems reasonable for the FIO to do so.  Finally, he stated that it seems reasonable for the FIO to collect data in situations where it could do so more efficiently than the states but he did not identify areas where that might be the case.

In response to a question from Representative George Keiser regarding what they FIO was doing to determine what impact the European debt crisis might have on the Global and US insurance markets, after acknowledging jokingly that he knew very little about what was going on, Birnbaum stated that McRaith and his staff have been spending most of their time on international issues. 

Kevin McKechnie (ABIA) acknowledged that the optional federal charter proposal was essentially dead but he noted that US Representative Ed Royce (R-CA), who had been a cosponsor of the optional federal charter proposal, has asked the FIO to look into whether the NAIC is regulating and, if it is, to recommend ways to stop it from doing so.  In the past Royce had directly asked the NAIC how is could regulate when its tax status is that of an education body and had noted that the NAIC’s “lobbyists” are not registered.

Bruce Ferguson (ACLI) offered reasons to keep an open mind with regard to the FIO, including that it could play an important coordinating role.  He suggested that life insurers are subject to a hybrid regulatory system consisting of international, federal, and state standards, and he believes that the FIO could ensure that there are no overlaps in those standards. 

He noted that the FIO is now a member of the Executive Committee of the IAIS and that the IAIS is looking into when an internationally active insurance group could be deemed globally significant and that those entities so designated could be subject to higher capital requirements so he suggested that the legislators should at least be aligned with the FIO to ensure that their domestic internationally active insurers are not put at a competitive disadvantage. 

Finally, he noted that the federal regulators have no understanding of insurance and so do not appreciate the impact their rule making may have on the insurance industry.  As an example, he stated that while keeping interest rates low may be good economic policy it could negatively impact insurers that have issued interest rate guaranties.  He said that when his chairman had brought this problem to the attention of the Federal Reserve Board Chairman Ben Bernanke, Bernanke had had no idea that the Fed’s decision could have a very significant impact on the life insurance industry.  To illustrate the important coordinating role the FIO can play, Ferguson noted that when the US’ credit rating was lowered the first thing they FIO did was take steps to find out how the downgrading could impact insurers that must invest in US securities. 

Commissioner Roger Sevigny (NH) agreed with Ferguson that the FIO’s coordinating role was critically important and stated that the NAIC has been regularly interacting with the FIO, with respect to the IAIS, the USTR, the Solvency II EU Dialog, the China Strategic Economic Dialog, the covered agreements, and the financial sector assessment program (FSAP).  He noted that up until now the US Treasury Department has been bank centric and he believes the FIO, which is housed in Treasury, will bring a whole new dimension to Treasury’s thinking. 

Financial Services & Investment Products Committee
Dodd-Frank Act Implementation Activity:  Julie Gackenbach (Confrere Strategies) told the Committee that all of the Dodd-Frank implementing regulations coming from the federal regulators continue to be bank centric and do not recognize the differences between insurance and banking.  She complained that responding to requests for information by insurers with banking operations is very time consuming and intrusive as they cover not just the entities’ banking operations but also their insurance operations.  She asked NCOIL to continue its efforts to educate both Congress and the federal regulators about the business of insurance.

Force-Placed Insurance:  Birny Birnbaum (Center for Economic Justice) provided the Committee with an overview of this insurance product.  He said mortgage servicers, which include many of the largest banks, service mortgages on behalf of the owners of the mortgages who are primarily government-sponsored entities such as Fannie Mae and Freddie Mac.  One of the requirements of the mortgage servicing contracts is maintaining continuous insurance coverage on the properties that collateralize the mortgages.  To ensure compliance with their contracts, the servicers track the insurance on the properties and when they identify a property with no in force insurance they force-place insurance retroactively to when the voluntary homeowner’s policy lapsed.  He noted that force-placed insurance only protects the lender (as the policies do not provide the property owner with liability, contents, or additional living expense coverages that are provided as part of a homeowner’s policy).  Over the last few years force-placed premiums written have increased exponentially; in 2004 it was $1 billion; by 2009 it had grown to over $3.5 billion.  Birnbaum pointed out that force-placed insurance is very expensive, often way in excess of the premium that would be charged for a homeowner’s policy that would protect both the property owner and the lender, even though its loss ratio from 2004 to 2011 averaged only about 25% as compared to 60 to 65% for homeowner’s insurance.

Birnbaum listed some of the issues raised by insurance regulators and in a number of lawsuits: (1) that force-placed insurance is being used as a profit center in that the banks (the servicers) are paid commissions for placing the insurance; (2) the impact of high cost insurance on borrowers who are already under financial distress; and (3) retroactive billing.  He cited a case in Florida of a borrower who was billed $22,000 for the force-placed insurance policy; he was not aware that his homeowner's policy had lapsed and upon learning of the lapse found replacement coverage but still had to pay $10,000 for the force-placed insurance to cover the gap in coverage. 

Birnbaum noted that as a result of a hearing held by New York four states have asked to make new rate filings.  He later stated that in New York the last filing was made in the 90’s and was based on an expected loss ratio of 60%; that the insurers neglected to re-file when those projections did not materialize; and that only two insurers, Assurant and Balboa (formerly a subsidiary of Bank of America and now a subsidiary of QEB), write virtually all of this insurance. 

Kevin McKechnie (ABIA) attempted to downplay the issue by noting that the debate was over reform of the mortgage market and this issue was way down the list.  He attributed the high cost of these policies to the inability of the insurer to underwrite since the servicing contracts require insurance on all subject mortgages.  He noted that only 2% of all mortgages are involved and opined that the homeowner’s insurance was probably allow it to lapse because the homeowner had lost his/her job or the mortgage balance exceeded the value of the property.

Harry Bassett (Assurant) told the Committee his company was the insurer of last resort and that it would be difficult to discuss the issue because it is the subject of lawsuits. 

Birnbaum warned that the state insurance regulators had better step up and assert their authority to regulate this product because the attorney’s generals were beginning to fill the regulatory void by including rating standards in their settlement terms.

Bond Insurance Market:  Bruce Stern (FSA) gave an overview of financial guarantee insurance and its history.  He stated that a the financial guarantee is limited to the schedule of payments due under the bond, which is typically a municipal bond; that insured bonds will pay a lower interest rate than a comparable uninsured bond; and that a portion of the savings is used to pay the premium.  He stressed that financial guarantee insurance is very different from credit default swaps or other derivatives which he called bets. 

Stern said that this business started in the 70’s as purely municipal bond insurance but later expanded to guaranty asset-backed securities.  Prior to the financial crisis there were seven financial guarantee insurers with the highest credit rates, and about 50% of all municipal bonds were insured.  He said their downfall began when these companies became the victims of what he called the “largest insurance fraud in the history of the country” under which they issued guaranties of mortgage-backed securities (and securities based on mortgage-backed securities), which were securitized based on representations that the underlying mortgages were of high quality, and when those mortgages began to default the insurers were obligated to make the bondholders whole.  His company paid out over $5 billion but, he said, it has been able to recover almost $3 billion so far and lawsuits are continuing.  Of the seven companies only two are still writing business. 

Stern stated that his industry is caught up in the Dodd-Frank reforms.  He believes it has been able to persuade the federal regulators that financial guarantees are not derivatives and is trying to convince them that financial guarantee insurers are not systemically important financial institutions, especially now that they are back to only guaranteeing municipal bonds.  They are also trying to avoid being regulated by the banking regulators by arguing that they are already regulated by the state insurance departments.

Senator Travis Holdman (IN) asked Stern whether financial guarantee insurers imposed standards and financial reporting requirements on municipalities and states on an ongoing basis.  Stern replied that his company reviews the financial condition of the municipality or state before issuing its guarantee and then monitors it on an ongoing basis. 

State-Federal Relations Committee
Representative Susan Westrom (KY) chaired this meeting. 

Update on SLIMPACT:  The Committee heard a report given by Dan Maher (ELANY) on the status of SLIMPACT.  The compact has been unable to attract a tenth member and until it does the clearinghouse it would set up for the distribution to the states of premium taxes on excess lines cannot be activated.  The competing approach, NIMA, developed by the NAIC, is also in limbo and in fact recently lost six members.    

Market Conduct Examinations:  Commissioner Sharon Clark (KY) reported that the NAIC is continuing its efforts to improve coordination of market conduct examinations and the market conduct annual statement to facilitate analysis.  However, she said that there will continue to be times when a state may initiate a market conduct examination without coordinating with the other states because an issue requires a prompt response. 

Deirdre Manna (PCI) thanked the Commissioner for her efforts to take a fresh look at the issues raised by industry surrounding market conduct examinations.  She noted that the IAIS has a Market Conduct Subcommittee which is working on a guidance paper based on some of the IAIS Insurance Core Principles.  The target completion date for the guidance paper has been pushed from 2013 to 2014.

Representative George Keiser (ND) suggested putting together a joint NCOIL/NAIC group to conduct an audit of the market conduct examinations done over the last two years.  Later, during the NCOIL/NAIC Dialog, he asked the commissioners to take his proposal back to the NAIC leadership.  The commissioners expressed support for his proposal.

Producer Licensing Modernization Resolution:  Senator Carroll Leavell (NM) introduced a proposed resolution that would urge state legislators and regulators to work together to review existing producer licensing statutes and regulations and to eliminate any unnecessary nonresident licensing barriers.  The resolution would also urge lawmakers to vigorously oppose any efforts to federalize the NARAB association and/or provide the FIO with regulatory authority over producer licensing.  Keiser offered a friendly amendment which was accepted as such to also eliminate any unnecessary “resident” licensing barriers. 

David Eppstein (PIA), Bill Anderson (NIPR), and Wes Bissett (IIABA), all supported the proposal.  Anderson pointed to statistics to demonstrate the fall off of consumers covered by life insurance which he attributed to the shortage of life agents.  He stated that because the current nonresident licensing requirements are so onerous life agents often do not seek a license in order to continue to service a policyholder who moves to another state. 

NCOIL-NAIC Dialogue
This meeting was chaired by Representative George Keiser (ND).  Commissioner Julie McPeak (TN), Commissioner Sharon Clark (KY), Commissioner Roger Sevigny (NH), and Mark Sagat (NAIC) represented the NAIC. 

SLIMPACT:  Keiser asked the commissioners whether there was any potential that NCOIL and the NAIC could work together to resolve the SLIMPACT/NIMA dilemma.  Sagat noted that there is a third option – to do nothing and let the home state rule in NARAB go into effect.  McPeak noted that some states (mostly the larger ones) preferred this third option and would never join either compact.  Keiser replied that the thought of letting Congress decide how the tax should be allocated was problematic.  He was concerned that Congress may decide to go further in taking away the states’ authority. 

Affordable Care Act:  McPeak reported that the NAIC is providing information in the form of white papers and support to the states as they try to implement the Act.  She said that things are moving quickly and by September 30th the states must determine their Essential Health Benefits packages and by November 16th they must notify HHS as to whether they will be operating a state-based health insurance exchange, after which HHS will determine if the state will be able to operate an exchange.  Another deadline mentioned later in the discussion was July 2014 when the states must approve rates for their Essential Health benefits packages. 

McPeak said that the Supreme Court’s Medicaid decision has caused a lot of confusion over how it will impact the exchanges and the subsidies.

With respect to the governors who are now announcing that they will not establish exchanges, Representative Greg Wren (AL) said he was concerned with the growing independence of the executive branches in the various states that are making decisions without consulting there legislatures.  He was particularly incensed with those governors who have accepted federal funds to build their exchanges while at the same time working to overturn the Act and who are now announcing that they will not establish state-based health insurance exchanges; he wants them to be forced to return the federal money their states received to help set up the infrastructure needed to establish an exchange. 

Senator Carroll Leavell (NM) agreed, adding that every state seems to have its own personality.  He said that enabling legislation to establish an exchange in his state had passed last year only to be vetoed by his governor; but that this year that same governor issued an executive order to establish an exchange.  

Both the commissioners and the legislators expressed frustration with the failure of HHS to release its rules.  McPeak stated that the regulators had hoped that following the Supreme Court decision the rules would be quickly released but this is not happening.  She said the regulators particularly needed to get the rules covering the actuarial values and that the NAIC continues to hold weekly conference calls with HHS.

Representative Charles Curtis (TN) urged the legislators and regulators to work together to implement the Affordable Care Act, not for their benefit, but for the welfare of their constituents.

NAIC Model Holding Company Act:  Clark reported that the revised Model Holding Company Act has now been enacted in six states.  She stated that this model law was particularly important because it empowered the regulators to look at the affiliates of their domestic insurers.  She said the Act gives the regulators the ability to review enterprise risk reports and to access the books and records of non-insurance affiliates, and it establishes supervisory colleges.