Life Insurance Comittee—
Secondary Market Takes First Priority Click here to read this article.
US Life Settlements Regulation—
FINRA Says VL Re-sales Are Ours Click here to read this article.
Stranger-Initiated Annuity Transactions—
Is the Stranger Back? Click here to read this article.
Federal Life Settlements Developments—
Legislator Speaks Out on Silent Agents Click here to read this article.
IIPRC Annuity Product Standard—
GLB Rider Termination Issue Gets Second Life Click here to read this article.
Financial Services & Investment Products Committee—
We’re No Risk, Really Click here to read this article.
Financial Services Overhaul Developments—
If It Ain’t Broke… Click here to read this article.
State and Federal Credit Default Insurance Swap Activities—
Swapping Notes on Swap Bills Click here to read this article.
State-Federal Relations Committee—
Just Say ‘No’ to ONI Click here to read this article.
Update on Federal Activities including Regulatory Reform, Optional Federal Charter, and NARAB II Legislation—
Tracking A Tracked Industry Click here to read this article.
Update on IIPRC Membership and Standards Activity—
Who’s In, Who’s Not Click here to read this article.
Consideration of MCAS Confidentiality Model Act—
Analyzing MCAS Click here to read this article.
NCOIL-NAIC Dialogue—
Talking Points Click here to read this article.
Deferred Tax Assets—
DTAs To Sunset, Issue Doesn’t Click here to read this article.
Rating of Residential and Commercial Mortgage-Backed Securities—
New Ratings Impact Still Under Review Click here to read this article.
National Insurance Supervisory Commission (NISC) Developments—
Hold The Thought Click here to read this article.
State Producer Licensing Developments—
Reciprocity Review Continues Click here to read this article.
Proposed Resolution on State Insurance Department Funding of NCOIL Legislative Educational Efforts—
Scholarship Money Click here to read this article.
NCOIL held its rather abbreviated 2010 spring meeting at a resort near Charleston, South Carolina. Two of its committees, the International Insurance Issues Committee and the Subcommittee on Natural Disaster Insurance Legislation, did not meet and instead of its usual two general sessions it held a roundtable discussion on annuity suitability. In addition, several agenda items scheduled for the committees that did meet were deferred to its summer meeting to be held in Boston.
Life Insurance Committee
The Committee agenda included an update on principles-based reserving but because of time constraints precluded its consideration.
US Life Settlements Regulation
Larry Kosciulek, Financial Industry Regulatory Authority (FINRA), told the Committee that, since variable life products had previously been determined to be securities, FINRA has taken the position that secondary sales of variable life products are also subject to its rules including rules governing suitability of sales, development of systems and procedures, best execution (meaning that the broker/dealer is obligated to get the best price for the resale), and advertising. In 2009 FINRA ruled that related products such as units of pooled annuities were also subject to its jurisdiction. The Committee had no questions.
Stranger-Initiated Annuity Transactions
Representative Brian Kennedy (RI) presented a video of a news report documenting a scheme, now under federal investigation, to sell variable annuities to Rhode Island terminally ill residents who, in return for a $2000 fee paid out of the agent's commission, named the agent as the owner of the annuity. Kennedy noted that on February 16th an article describing the scam had appeared in the Wall Street Journal.
The perpetrator claims to have done nothing wrong since there is no requirement that the owner of the annuity be related to the purchaser of the annuity or that the agent disclose the terminal condition of the purchaser. In addition he alleged that his actions were for a good course because he had donated a good portion of his profits to charities.
At Kennedy's request the Committee agreed to place this on its agenda for the summer meeting in Boston. John Gerni (ACLI) urged NCOIL and the NAIC to work together on this issue and suggested that they develop a model making prearranged sales of variable annuities illegal.
Federal Life Settlements Developments
The Committee chair, Senator Ralph Hudgens (GA), asked Gerni why certain life insurance companies have ordered their agents to not disclose that life settlements are legitimate transactions. Gerni stated that this was a distribution issue and asked why a life insurer should permit its agents to promote a product (life settlements) the sale of which would be against the interests of the insurer.
Michael Freedman (The Coventry Group) countered that the life insurers were interfering in their agents’ business, noting that the Life Settlements Model Law permits agents to sell life settlement products provided that they have registered as a broker with the insurance department. He stated that one life insurer is requiring its agents to misrepresent to the its policyholder that the policy may not be sold or assigned to a stranger and another insurer is requiring its agents to obtained a signed form acknowledging that their life insurance policies are valuable assets. He added that the state of Washington has promulgated a new regulation requiring disclosure of all options available to the policyholder and he recommended other states do the same.
Senator Jim Seward for (NY) commented that an agent’s license could be at risk if the agent knowingly gives a policyholder false information. Freedman agreed and repeated his suggestion that the agent be required to give a disclosure notice developed by the insurance regulator. This issue will be on the Boston agenda.
IIPRC Annuity Product Standard
Representative Robert Damron (KY) introduced a resolution he would like NCOIL to adopt which would override a standard recently adopted by the Interstate Insurance Product Regulation Commission (IIPRC) which provides that if the annuity is assigned to an investor the guaranteed living benefits would not go along with the assignment. Damron, who serves on the IIPRC, stated that he had voted against this standard and that the consumer representative on the Commission had also opposed it. Director Mary Jo Hudson (OH) explained the IIPRC's rationale for the standard, emphasizing that the guaranteed living benefits would only terminate if the annuity was assigned to an investor. Representative George Kaiser (ND) stated that this issue highlighted concerns he has with the compact that created the IIPRC. The Committee decided more research should be done on this issue before any action is taken and placed it on its Boston agenda.
Financial Services & Investment Products Committee
Financial Services Overhaul Update
Mike Humphreys (NCOIL Staff) gave a brief report on the status of efforts to reform regulation of the financial services industry. He reported that in December the House passed its version of comprehensive financial regulatory reform but that the Senate version remains stalled over the issue of consumer protection. The House bill establishes for a separate consumer protection agency and has the support of consumer advocates. The Republicans on the Senate Banking Committee, which is chaired by Senator Chris Dodd (CT), do not want consumer protection to reside with a separate agency and Senators Dodd and Shelby have been working on a compromise, expected to be introduced the week of March 8th, that would house this function within the Federal Reserve.
Humphreys stated that the proposed financial services reform legislation would affect insurance with respect to systemic risk; consumer protection for title, credit, and mortgage insurance under the most recent version of the Senate bill (although he believes the final version will exempt all lines of insurance); and resolution (wind down) of entities found to present a systemic risk. The NCOIL Committee chair, Assemblyman Joe Morelle (NY), noted that NCOIL had sent letters to House Speaker Nancy Pelosi and Congressman Barney Frank (MA) objecting to certain provisions of HR 4173.
The Committee took testimony from Commissioner Susan Voss (IA), Kevin McKechnie (ABIA), and Julie Gackenbach (Confrere Strategies). Voss reported that NAIC members have been visiting with members of Congress and federal agencies responsible for financial services regulation to explain the need to maintain state-based insurance regulation, explain how it works, and to discuss areas, such as international treaties, where the state regulators need the assistance of the federal government. During these discussions the insurance commissioners have been highlighting their success in managing the impact on the insurance industry of the recent financial crisis, emphasizing that the insurance industry remains financially strong.
Voss believes the commissioners have made some progress with senior Congressional staff; she noted that Dodd and others have been heard making comments that recognize the important role played by the state regulators of insurance.
McKechnie told the Committee that the carve-outs for insurance may not be complete, noting that in the Senate proposal for consumer protection may include a usury cap and that the calculation of the cap would include all ancillary products, meaning it would include any insurance element to an extension of credit. McKechnie stated this was the reason the ABIA is working to defeat the creation of a consumer protection agency.
Gackenbach agreed with McKechnie, noting that the CSCA would have authority over privacy notices and credit reporting and would therefore have a dramatic affect on insurance and allow for federal intervention in the role of the state insurance departments. She also noted that, with respect to resolution authority, the Senate version would include the authority to include insurance companies under extraordinary circumstances. She added that the Administration is proposing a financial crisis recovery fee to cover the cost of resolutions and TARP recoveries and that it would be applicable to a significant number of insurers.
In response to a question from Kaiser regarding why there is no recognition in Congress of the financial stability of the insurance industry, Voss stated that the cause of the failure of AIG continues to cause confusion because it is constantly referred to as the world's largest insurer. She added that the commissioners keep trying to place the blame with the federal agencies responsible for the entities that created the unregulated financial products responsible for the crisis but insurance continues to be lumped together with all other financial products.
Kaiser believes that the non-insurance financial products sold by a financial services enterprise could pose an indirect risk for the insurance companies within the enterprise. He asked how this indirect risk would be managed. Voss replied that communication with the federal regulators needed to be improved and state regulators should meet with the federal regulators regularly. Morelle noted that insurer assets are walled off; he felt that the safeguards that are built into the state regulatory system would protect them and there was no indirect risk.
Humphreys noted that the bills in Congress provide for the creation of a council that would monitor systemic risk; the House bill provides that the council would be made up of financial regulators including a state insurance commissioner, a state banking commission, and a state securities regulator but the current Senate version takes an agency approach that would include an insurance expert rather than insurance commissioner, principally to limit the size of the council.
The Committee adopted a resolution (that was subsequently adopted by the Executive Committee) that was put on the agenda by unanimous consent. The resolution "urges the Senate Committee on Banking, Housing and Urban Affairs to exclude the insurance industry from systemic risk regulation, federal resolution authority and assessments to fund the resolution of systemically risky financial firms in any financial services regulatory reform legislation that it considers" and will be sent to state legislative leaders, other state officials, members of the Senate and House committees responsible for drafting financial services regulatory reforms, and the US Treasury Department.
State and Federal Credit Default Insurance Swap Activities
Humphreys summarized the content of a December 7, 2009 letter to Congressman Barney Frank (MA), chair of the House Committee on Financial Services, and Congressman Collin Peterson, chair of the House Committee on Agriculture. The letter updates the congressmen on NCOIL's efforts to regulate credit default swaps as insurance products. He noted that both the House and Senate bills have sections dealing with derivatives which would require that standardized derivative products be traded on exchanges and go through clearinghouses.
Humphreys stated that before the House bill was voted on it was amended to state that credit default swaps would not be considered insurance or regulated by the states. He noted that a minority of the Senators on the Senate Banking Committee and some members of a consumer group, Americans for Financial Stability, believe that credit default swaps are insurance that perhaps should be regulated at the state level.
Ray Farmer (AIA), representing the Surety and Fidelity Association, stated that the Association was seeking a technical amendment to the NCOIL model to clarify that credit default swaps are not surety. The New York Financial Guarantee Insurance Law and the NAIC Financial Guarantee Model Act, on which the NCOIL model was modeled, both state that financial guarantees are not surety.
Teresa Casey (Mackin & Company) directed the Committee to a proposed amendment to the NCOIL model drafted by Mackin & Company that would allow credit default insurance to continue to be used to provide credit enhancements for assets held by financial guarantee insurers. Larry Diehl (CCIA) asked that credit insurance also be exempted from the model. Morelle replied that these proposed amendments to the model would be considered during the July meeting.
State-Federal Relations Committee
Update on Federal Activities including Regulatory Reform, Optional Federal Charter, and NARAB II Legislation
Mike Humphreys (NCOIL staff) reported that NCOIL was tracking approximately 15 bills that have the potential to impact insurance, including corporate-owned life insurance and the Homeowners Defense Act on which a hearing has been scheduled in the Senate for March 10th. He reported that the proposal for an Office of National Insurance (ONI) within Treasury would empower the ONI to monitor the insurance industry, collect insurance information, coordinate and communicate with the states, represent the US in international insurance matters, and negotiate international agreements.
The House version envisions the ONI would address international insurance by negotiating mutual recognition agreements; the Senate version, which included the ONI in its broader package of financial reforms, would deal with prudential insurance matters and would also give the Office the authority to subpoena information from insurers (similar language was deleted from the version passed by the House). Humphreys noted that NCOIL opposes the proposals dealing with international agreements because they have the potential to preempt state laws.
Representative Greg Wren (AL), the Committee chair, introduced a resolution opposing the ONI as proposed by the Senate Banking Committee. Humphreys noted that this resolution is similar to the one adopted in November opposing the Federal Insurance Office (FIO) included in the House bill. After adopting a technical amendment to the resolution it was adopted unanimously by the Committee and by the Executive Committee on Sunday morning.
The Committee took testimony from Kevin McKechnie (ABIA), and Wes Bissett (IIABA). Bissett stated that while the IIABA believes that state regulation needs improving it generally works pretty well as has been demonstrated during the current financial crisis. The IIABA believes that some in Washington are trying to exploit the crisis to push federal regulation of insurance. He noted the irony of the optional federal charter proposal is that while it is entitled the National Consumer Protection Act, the words "consumer protection" appear nowhere else in the proposal. He urged NCOIL to remain vigilant because state regulation remains under threat, noting that the optional federal charter proposal now has ten sponsors whereas last year it had only two and that the likely incoming chairman the Senate Banking Committee is the leading proponent of an optional federal charter.
McKechnie, citing the experience of the banking industry, warned that the authority of the ONI would be expanded; that one of the first things the head of the ONI would do would be to go to the congressional committees it would report to and argue that it does not have the power to address the problems that the committees have identified.
Update on IIPRC Membership and Standards Activity
Director Mary Jo Hudson (OH), chair of the IIPRC, reported that four states (Florida, Illinois, New Jersey, and New York) have Compact legislation pending and that there has been some movement in California. In addition, three states (Alabama, Nevada, and Oregon), whose legislatures do not meet this year, have plans to consider Compact legislation in 2011. Wren reported that the Alabama trial lawyers continue to oppose the Contract for reasons he has been unable to identify. Hudson replied that the IIPRC is considering an associate membership proposal that would allow Alabama to use the product standards without joining the Compact.
Hudson stated that the IIPRC has adopted a self-certification rule that is intended to help those states that are unable to handle the volume of filings; it is a targeted rule only available for certain products to be decided on a case-by-case basis. Hudson stated that the next set of standards the IIPRC will work on will be for long-term care insurance. It was also reported that 77 insurers had already registered this year as compared to 75 companies for all of 2009 and the number of filings received so far in 2010 is double the number received in all of 2009.
Consideration of MCAS Confidentiality Model Act
This model was introduced by NCOIL in the spring of 2009. During the annual meeting in November the Committee agreed to continue debate and it held two conference calls in the interim. During the first call the Committee considered an Oklahoma law but decided continue to pursue the NCOIL model. On the second call the Committee considered markups of the proposal and focused on its scope and purpose; specifically whether it should be applied on the basis of the amount of business written or on complaint ratios. The Committee had deferred a decision on this question for consideration at on this meeting, however, after taking testimony action on the model was deferred to July.
The Committee took testimony from Commissioner Kim Holland (OK), Birny Birnbaum (Center for Economic Justice), Ray Farmer (AIA), Marty Mitchell (AHIP). Holland, who chairs the NAIC Market Conduct “D” Committee, stated that the NAIC has been dealing with market conduct regulation issues for over 20 years and over the last two years it has significantly escalated its efforts to ensure that regulators have the necessary tools to monitor the market conduct of insurers within their respective jurisdictions to determine whether insurers handle and pay claims fairly and accurately.
Holland stated that the Market Conduct Annual Statement was critical to the regulators’ ability to monitor and analyze companies both with respect to their individual jurisdictions and countrywide trends. In response to criticism from the industry the NAIC developed a team made up of regulators, industry representatives, and consumer representatives and the team spent a year reviewing the data elements and the efficacy of the MCAS process. She stated that the work of this team would be adopted at the Denver meeting of the NAIC after which “D” Committee would begin discussions of how to improve and increase data elements collected in the MCAS. She added that a complaint reconciliation process has been established to ensure that insurers have an opportunity to review the accuracy of the complaint data on file with the insurance department prior to it being made available to other jurisdictions.
In response to confidentiality concerns, the proposed procedures call for each state to collect data under its examination authority using a consistent interface to aid insurers filing in multiple jurisdictions. Each state will transmit the data it collects to the NAIC. The NAIC will be a repository of the data; it will not publish the data; it will simply aggregate the data and make it available to the states who will decide how it should be shared among the jurisdictions. The new procedures will include a validation process by which insurers will be able to ensure the accuracy of the data collected.
Holland stated that the NAIC was somewhat concerned with the direction of the NCOIL model because of its potential to impede the NAIC’s efforts to move the process forward. She expressed the hope that the NAIC and NCOIL could work together to ensure that the regulators are able to obtain the data needed for market conduct analysis. In response to a question from Kaiser, Holland stated at data collected during a market conduct examination was jurisdiction and insurer specific whereas the MCAS would collect data from all insurers that could be aggregated to enable the regulator to track trends and perhaps eliminate the need for some expensive market conduct examinations.
Birnbaum stated that consumer representatives support the NAIC model although they had issues with its confidentiality provisions and the frequency of data collection. He liked its use of the statistical agency framework because it clarifies the rules. He argued that the purpose of collecting market conduct data is not the same as for conducting a market conduct examination and that the NCOIL model confuses market analysis, which would be facilitated by the data collected via a MCAS, with work papers developed during a market conduct examination, which would be confidential. He noted that equating data collected in the MCAS to examination work papers was akin to equating data collected in the financial annual statement to examination work papers and of course financial statement data is public information. Birnbaum further argued that confidentiality of trade secrets is protected by public record laws and that no special law was needed.
Farmer breezed through a PowerPoint presentation in support of the proposed NCOIL model. He argued that maintaining confidentiality of the data was necessary to prevent its misuse and misinformation that could be used in litigation, to make inappropriate comparisons, for anti-competitive purposes, or to facilitate an uninformed public debate. He argued that the public is better served by the information now available to the public regarding the financial strength of individual insurers, closed complaints, and the results of market conduct examinations made available by many states. The AIA has drafted an amended version of the proposal which Farmer recommended the Committee consider for adoption at its July meeting.
Mitchell limited his remarks to the purpose and scope of the proposed model. He noted its stated purpose is to address the confidentiality, collection, sharing, and analysis of the data, although he noted that the bill itself does not talk about analysis. He suggested that the purpose be limited to confidentiality and sharing of the data. With respect to its scope, Mitchell expressed concern that Commissioner Holland had indicated the MCAS might be expanded next year to include health insurers and he recommended that NCOIL consider how this could impact the health insurance debate.
Wren asked all interested parties to submit written comments and recommendations for changes to the proposal within 30 days.
NCOIL-NAIC Dialogue
Accounting Rule Changes for Deferred Tax Assets
Superintendent Jim Wrynn (NY) explained that a deferred tax asset or liability result when SAP or GAAP accounting values differ from tax values. A deferred tax asset would be created when an entity pays more taxes in the current year which could result in it paying less taxes in future years and a deferred tax liability would be created if the opposite were to occur. Wrynn gave an example, stating that tax law generally requires an investment to be recorded at purchase cost with no adjustments while SAP accounting requires that changes in the value of the investment (for example, its fair value or amortized value) be recorded; therefore if the current value of an investment were to go below its original cost a deferred tax asset would be created equal to the tax benefit of the loss.
Wrynn stated that under SAP only a portion of that asset would be allowed as an admitted asset in accordance with a three-part formula. In response to insurers’ requests for surplus relief from the consequences of the current financial crisis the NAIC adopted an amendment to SSAP 10 to provide for a modest change in the formula subject to safeguards for the protection of policyholders. Wrynn reviewed the formula and the revisions to it and described the safeguards which include an additional RBC charge and additional disclosures. He characterized the revised accounting rule as providing temporary capital relief (it will sunset at the end of 2010) from the over-conservative calculation of deferred tax assets and stated that the NAIC is continuing to monitor its impact and considering other changes that may be appropriate.
At the suggestion of Representative George Kaiser (ND), the NAIC will look into the possible impact of the deferred compensation arrangements insurers have made with senior management on the value of insurer assets.
Rating of Residential and Commercial Mortgage-Backed Securities
Iowa Insurance Commissioner Susan Voss reported that, in response to its concern that the ratings provided by the rating agencies for residential mortgage-backed securities may have severely underestimated expected losses from these securities, the NAIC hired an independent group, PIMCO (Pacific Investment Management Company), which evaluated the over 21,000 tranches of the mortgage-backed securities held by insurers following a methodology developed by the regulators. These valuations were used for reporting in the 2009 annual statements in place of the rating agencies ratings. Voss stated that it was too early to know the impact these valuations had on the capital of individual insurers.
The PIMCO evaluations are being paid for by an assessment on insurers based on their holdings of the securities. The NAIC is currently developing a methodology to be used for 2010 valuations. Voss stated that it is considering developing a similar evaluation approach for other structured securities including commercial mortgage-backed securities held by insurers and that the NAIC will continue to evaluate this program to determine its future use.
National Insurance Supervisory Commission (NISC) Developments
Commissioner Kim Holland (OK), who chairs the executive level NAIC task force on state-based regulatory modernization, told the legislators that the NAIC is taking a dual-track approach; it will first try to determine what elements of insurance regulation need to be modernized and why and will then tackle the “how”.
Holland stated the federal tools approach contemplated by the National Insurance Supervisory Commission (NISC) proposal has been tabled for now. She noted that the NISC proposal was being developed in direct reaction to the threat of federal intervention which has now abated and suggested it could be resurrected if the threat should reemerge but if it was it would be with the active involvement of NCOIL, the industry, and other interested parties.
Holland announced that there will be a formal meeting on regulatory modernization during the Denver meeting at the end of this month and she encouraged the legislators to participate.
State Producer Licensing Developments
Voss reported that the NAIC is continuing to review compliance with the reciprocity mandates of NARAB.
Proposed Resolution on State Insurance Department Funding of NCOIL Legislative Educational Efforts
This issue was bumped to the Executive Committee meeting where the proposed resolution was unanimously adopted. The resolution supports the enactment of state legislation that would authorize the funding of dues and travel expenses of NCOIL members through the budgets of the state insurance department.
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