Joint Executive (EX) Comittee/Plenary—
Divided Commissioners Spar Over Climate Related Risk Disclosure Click here to read this article.
Government Relations (EX) Leadership Council—
Implementation of Health Care Reforms; Financial Regulatory Reform Coming Click here to read this article.
International Insurance Relations (EX) Leadership Council—
Special Presentation on Systematic Risk and Insurance Click here to read this article.
Regulatory Modernization (EX) Task Force—
The Latest Attempt at Modernization — Legislators Want a Role Click here to read this article.
Solvency Modernization Initiative (EX) Task Force—
The Globalization of SAP Click here to read this article.
NAIC/Consumer Liason Committee—
All About Health Care Reform Click here to read this article.
Life Insurance and Annuities (A) Committee—
Feds May Require Adoption of NAIC Suitability Standards Click here to read this article.
Life and Health Actuarial Task Force—
Priciples-Based Reserving Rules — Guardrails or Fences? Click here to read this article.
Property and Casualty Insurance (C) Committee—
Model Rating Law/ Guideline Adopted Click here to read this article.
Casualty Actuarial and Statistical (C) Committee—
Task Force Unhappy with ASOP No. 41 Click here to read this article.
Financial Condition (E) Committee—
New Group to Work on Health Reform Solvency Issues Click here to read this article.
NAIC/AICPA "E" Working Group—
How Much Should Companies Say On Executive Pay Click here to read this article.
Accounting Practices and Procedures (E) Task Force—
Blanks, Emerging Issues, and SAP Developments Click here to read this article.
Capital Adequancy (E) Task Force—
RBC Formula Maintenance Click here to read this article.
Reinsurance (E) Task Force—
Collateral, Trusteed Assets, & LEtters of Credit Click here to read this article.
Valuation of Securities (E) Task Force—
NAIC Designations for Commercial Mortgage-Backed Securities on the Way Click here to read this article.
Financial Regulation Standards and Accreditation (F) Committee—
New Standard Valuation Law to Become an Accreditation Standard Click here to read this article.
International Insurance Relations (G) Committee—
Big Issues in a Smaller World Click here to read this article.
Around the NAIC
The focus of this meeting was on the just enacted federal Patient Protection and Affordable Care Act. The Act calls on the NAIC to play a significant role in its implementation and to do so under very tight time frames. The NAIC intends to follow the model it used to develop the Medigap policies, meaning it will invite full participation by insurers, producers, consumer representatives, state legislators, and any other interested parties.
Another highpoint of the meeting was a presentation given at a special session of the International Insurance Relations (EX) Leadership Group entitled: Systemic Risk and Insurance: Industry Analysis of Insurance and Financial Stability.
Joint Executive (EX) Committee/Plenary
Executive Committee
The Committee adopted, without comment, the creation of and charges for three new task forces (the Multi-State Enforcement (EX) Task Force, the Regulation Accreditation (EX) Task Force, and the Regulatory Modernization (EX) Task Force) and amended charges to its Solvency Modernization Initiative (EX) Task Force and Speed to Market (EX) Task Force.
The Committee adopted, without comment, written reports of the joint EX-1/Executive Committee meeting and the following Executive level task forces and working groups. [However, see “other matters” under Plenary for a summary of a contentious discussion and vote to change the report of the Climate Change and Global Warming (EX) Task Force]:
• AIG Managing (EX) Task Force
• Climate Change and Global Warming (EX) Task Force
• Government Relations (EX) Leadership Council
• International Insurance Relations (EX) Leadership Group
• Long-Term Care (EX) Task Force
• Producer Licensing (EX) Task Force
• Regulatory Modernization (EX) Task Force
• SVO Initiatives (EX) Working Group
• Solvency Modernization Initiative (EX) Task Force
• Speed to Market (EX) Task Force
Update on Model Law Development Efforts: The Committee adopted, without discussion, written reports of the progress on the following models:
• The Risk Based Capital (RBC) for Fraternal Benefit Societies Model Act;
• Amendments to the Insurance Holding Company System Regulatory Act;
• Amendments to the to Insurance Holding Company System Model Regulation with Reporting Forms and Instructions;
• Amendments to the Annuity Disclosure Model Regulation;
• Amendments to the Suitability in Annuity Transaction Model Act;
• Amendments to the Standard Nonforfeiture Law for Life Insurance;
• Amendments to the Model Regulation to Implement the NAIC Medicare Supplement
• Insurance Minimum Standards Model Act;
• Amendments to the Individual Health Insurance Portability Model Act;
• Amendments to the Nondiscrimination in Health Insurance Coverage in the Group Market Model Regulation; and
• Amendments to the Small Employer Health Insurance Availability Model Act (Prospective Reinsurance with or without and Opt-out).
Plenary
Plenary adopted the oral report of the Executive Committee which had met immediately before the joint meeting. It then adopted by consent the Committee, Subcommittee, and Task Force minutes of the 2009 Winter National Meeting that had been held in San Francisco with the exception of the following items which were presented and adopted separately:
• Amendments to the Suitability in Annuity Transactions Model Regulation: These amendments are intended to better protect consumers from unsuitable and abusive market practices in the sales of annuities. The changes clarify that the insurer is responsible for ensuring compliance with the model even if it contracts out to a third party the marketing and selling of the annuities, require that producers are trained in the products they are marketing, and make the standards consistent with standards imposed by FINRA.
• Amendments to the Actuarial Guideline XLIII CARVM for Variable Annuities: The modifications address several implementation issues with the original draft which established new reserve requirements for variable annuities. One issue concerns an SSAP requirement that if there is a change in reserve method for a life contract the insurer must calculate a new basis for the reserve as of the beginning of the year. Accordingly, a provision was added to the Guideline stating that “The reserve as of January 1, 2009 shall be the sum of the reserves from the asset adequacy analysis requirements in Actuarial Guideline XXXIV and Actuarial Guideline XXXIX.”
• Amendments to the Uniform Health Carrier External Review Model Act: The revision adds four appendices to the Act: Appendix A, Model Notice of Appeal Rights; Appendix B, Model External Review Request Form; Appendix C, Model Independent Review Organization External Review Annual Report Form; and Appendix D, Model Health Carrier External Review Annual Report Form.
• An NAIC White Paper: Alternative Mechanisms for Troubled Companies: This White Paper discusses new mechanisms of run-offs or restructurings that a growing number of troubled insurers are seeking to engage in as alternatives to traditional receiverships. These mechanisms have emerged as a result of improvements in early detection of financially troubled insurers and insureds’ requirements for A-rated coverage. The White Paper was produced to provide guidance to regulators who wish to consider these alternatives for winding down troubled companies. It discusses the pros and cons of these alternative mechanisms.
• Guidelines for Notice of Protection Provided By [State] Life and Health Insurance Guaranty Association.
Plenary adopted the following reports:
Life Insurance and Annuities (A) Committee: Commissioner Tom Sullivan (CT) gave a report of the “A” Committee meeting that been held the prior day. [See a comprehensive report of the meeting in this newsletter.]
Health Insurance and Managed Care (B) Committee: Commissioner Sandy Praeger (KS) gave a report of the “B” Committee meeting held during this national meeting. The Committee discussed implementation of the federal Patient Protection and Affordable Care Act; heard a presentation given by Commissioner Kim Holland (OK) on state regulation of self-insured plans in which she recommended the NAIC revisit its stop-loss insurance model; and heard a presentation by a representation from the Internal Revenue Service concerning changes to the Health Coverage Tax Credit Program.
The Committee adopted a report of the Regulatory Framework (B) Task Force which included adoption of the Rescission Data Call report. It adopted a report of the Senior Issues (B) Task Force which included adoption of changes to the Medicare Supplement Insurance Model Regulation Compliance Manual. Praeger noted that the Senior Issues (B) Task Force will once again have to revise the Medigap policies in order to comply with the federal Patient Protection and Affordable Care Act. The Committee also adopted a report of its Accident and Health (B) Working Group.
Property and Casualty Insurance (C) Committee: Director Michael McRaith (IL) gave a report of “C” Committee’s December 2009 meeting as well as a brief summary of the meeting which took place at this national meeting. [See a comprehensive report of “C” Committee’s Denver meeting in this newsletter.]
Market Regulation and Consumer Affairs (D) Committee: Commissioner Roger Sevigny (NH) gave a report of “D” Committee’s December 2009 meeting, an interim conference call, and the meeting held in Denver.
Financial Condition (E) Committee: Commissioner Al Gross (VA) gave a report of “E” Committee’s December 2009 meeting as well as a brief summary of the meeting which took place at this national meeting. [See a comprehensive report of “E” Committee’s Denver meeting in this newsletter.]
Financial Regulation Standards and Accreditation (F) Committee: Superintendent Joe Torti (RI) gave a report of “F” Committee’s meeting which took place at this national meeting. [See a comprehensive report of the meeting in this newsletter.]
International Insurance Relations (G) Committee: Commissioner Kevin McCarty (FL) gave a report of “G” Committee’s meeting which took place at this national meeting. [See a comprehensive report of the meeting in this newsletter.]
Update on Model Law Development Efforts: The Committee adopted, without discussion, written reports on implementation by the states of the following model laws and regulations:
• Viatical Settlements Model Act
• Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities
• Standard Valuation Law
• Actuarial Opinion and Memorandum Regulation
• Valuation of Life Insurance Policies Model Regulation
• Use of Senior Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities Model Regulation
• Long-Term Care Insurance Model Act
• Long-Term Care Insurance Model Regulation
• Model Regulation to Implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act
• Medical Professional Liability Closed Claim Reporting Model Law
• Derivatives Instrument Model Regulation
• Risk-Based Capital (RBC) for Health Organizations Model Act
• Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition
• Life and Health Insurance Guaranty Association Model Act
• Property and Casualty Insurance Guaranty Association Model Act
Other Matters: Under other matters, Commissioner Scott Richardson (SC) asked for reconsideration of the report of the Climate Change and Global Warming (EX) Task Force. He argued that the question of which version of the climate related risk disclosure questionnaire would be required had never been properly voted on. He had wanted to raise this issue prior to adoption of the report by the Executive Committee but Cline had ruled that any questions regarding minutes should be raised at the end of Plenary.
After the minutes of the meeting where the report in question had been adopted were read to him by Commissioner Kim Holland (OK), NAIC Secretary-Treasurer, Richardson stated that he believed a majority of states did not favor a mandatory disclosure as would be required under Version 1 for companies exceeding the premiums written threshold and he made a motion to substitute Version 3 which specified that submission of the disclosure would be voluntary. There was an extensive debate and when the question was finally called Richardson prevailed on a vote of 27 to 23.
During the debate McRaith, after opining that a re-vote was not in order and thanking the members of the industry and all interested parties for their hard work in developing a survey that would be both meaningful and nonthreatening to industry, announced that Illinois would be issuing the survey and mandate that it be completed and returned.
Government Relations (EX) Leadership Council
The Government Relations Leadership Council meeting was chaired by Commissioner Jane Cline (WV). The Council received Staff reports on the newly enacted federal Patient Protection and Affordable Care Act and on Congress’ progress on financial regulatory reform. Briefings on other pending federal legislation were given during the meeting of “C” Committee.
Health Care Reform: Josh Goldberg (NAIC staff) reviewed provisions of the Patient Protection and Affordable Care Act that involve the state insurance departments or the NAIC. He stated that the Secretary of Health and Human Services (HHS) has 90 days to create a temporary high-risk program under which states could apply for grants to establish high-risk pools for adults with pre-existing conditions. The high-risk program would operate beginning June 21, 2010 until January 1, 2014 when the health insurance exchanges would become operational. In order to ensure timely implementation of the exchanges, on January 1, 2013 HHS will make a determination as to which states will be ready to open their exchanges on January 1, 2014 and for those that may not be ready HHS will establish a federal exchange.
The health benefit provisions will be implemented using the states’ form approval processes and, Goldberg noted, HHS will be responsible for those states that fail to amend their laws to bring them into compliance with the federal minimum benefit standards. Goldberg listed some of the new health benefit requirements that will go into effect immediately or within six to nine months, including first-dollar coverage for preventive and wellness care, a prohibition of preexisting condition exclusions for children, coverage under family policies for children under the age of 26, a prohibition on rescissions (except for fraud or intentional misrepresentation of material fact), lifetime caps, and providing insureds with uniform benefit summaries using standard definitions (to be developed by the NAIC) that will enable consumers to make meaningful comparisons between plans.
Provisions that go into effect on January 1, 2014 include subsidies for individuals with incomes up to 400% of the poverty line; guaranteed issue; and community rating. Penalties for individuals who fail to purchase insurance will also go into effect in 2014 but will be phased in over four years.
Goldberg stated that the “B”, “C”, and “E” committees will be responsible for most of the implementation work that needs to be done and that it is likely that new task forces will be established. The liaison committees will be the principle points of contact for input from consumer representatives and industry. The Government Relations Leadership Council will coordinate the effort and will be the central point of contact with external groups, including HHS, NGA, NCSL, and NCOIL.
Financial Regulatory Reform: Moira Campion (NAIC staff) reported that the NAIC is continuing its efforts to convince the drafters of financial regulatory legislative proposals that one size does not fit all, that insurance should not be lumped in with the other financial services, and that the collapse of AIG was not caused by its insurance operations but rather by an affiliate that was supposed to be regulated by a federal agency. The House passed its bill last year but in the Senate the chairman of the Banking, Housing and Urban Affairs Committee, Senator Chris Dodd (D-CT), released his second proposal on March 22nd after failing to reach agreement on a bipartisan bill, first with Senator Richard Shelby (R-AL) and then with Senator Bob Corker (R-TN).
Campion went through the provisions of the proposal that the NAIC is most concerned with. With respect to consumer protection oversight, in the House bill this function would be the responsibility of a separate agency and in Dodd’s proposal it would be the responsibility of a bureau within the Federal Reserve, which some argue would be significantly weaker than a standalone entity. Both proposals would include oversight for credit, title, and mortgage insurance, but NAIC staff was able to get language inserted that is intended to prevent regulatory arbitrage.
Both bills would also establish a nine-member financial services oversight council; the House version would include an insurance commissioner as a non-voting member; the Senate version would give a person with insurance expertise a vote but that person would not be required to have any regulatory experience.
The NAIC is also monitoring the resolution authority both versions would establish in the FDIC to address “too big to fail” entities. NAIC staff was able to get language into the House bill that retains the states’ receivership authority; this language is also in the Senate version but Corker and Senator John Warner (D-VA) are continuing to push for insurers to be included under the federal authority. Both bills would require financial services companies of a certain size to contribute to a dissolution fund and there is no exemption for insurers even though they are already required to contribute to state guaranty funds.
Another concern to the NAIC is the effort to create a federal office of insurance. The two bills have different versions and the Senate version is much more intrusive into state regulation. The NAIC acknowledges that the federal government should be able to gather information on the insurance industry and that federal involvement is necessary to deal with international issues and it continues to argue for limiting the authority of the office to information to these two functions. Of particular concern is a provision in the Senate version, inserted by Shelby who is a proponent of a federal charter, for the office to conduct a study on how to modernize and improve the regulation of insurance; the NAIC is attempting to get that provision moved to a more neutral place in the bill, however it was also noted that Senator Tim Johnson (D-SD) will be taking over the Committee chair from Dodd in 2012.
In response to a question on timing, Goldberg expressed some optimism that the Senate would pass something by Memorial Day because the Republicans need to show that they are dealing with the bankers, however there was less belief that an agreement on a final bill would be reached by the two houses this year.
Dave Snyder (AIA) stated that the objective for both industry and the regulators was effective and efficient regulation and to that end they share a concern that regulators of other sectors of the financial services industry should not interfere unproductively in the regulation of the insurance sector. Industry wants to avoid collateral damage for the insurance sector by the imposition of duplicative, unproductive, or wrong regulation. To that end, industry is concerned that the definition of systemic risk not bring in property and casualty insurers which Snyder opined does not present any systemic risk. He also agreed with the regulators that the existing receivership system for the resolution of insurers performs well and that the resolution authority should not include insurers. Industry also believes that state insurance regulators are best equipped to handle consumer protection.
Snyder stated that the industry strongly disagrees with the state insurance regulators regarding the appropriate role for the proposed Office of National Insurance and it prefers the Senate language. Regarding credit scoring, Snyder stated that the state insurance regulators have done “an excellent job” that has produced excellent homeowners and automobile insurance markets with very few exceptions.
A representative of NAMIC raised a concern that the Senate bill also provided for an insurance office within Treasury that would have subpoena power and could post information on insurance products and companies without any limitations on what information could be posted. Snyder added that there is a potential that the office proposed for Treasury could have overlapping responsibilities with the Office of Insurance Information. Goldberg replied that he shared this concern.
International Insurance Relations (EX) Leadership Group
Chaired by NAIC Counsel, George Brady, this meeting consisted of a special presentation by Patrick Liedtke, Secretary General and Managing Director of the Geneva Association titled: Systemic Risk and Insurance: Industry Analysis of Insurance and Financial Stability.
Liedtke introduced the Geneva Association and described its mission as “the leading international think-tank” of the insurance industry. Established in 1973, it consists of representatives of 80 of the largest insurance companies. Before proceeding Liedtke commented that “usually the last day of these conferences is on a Friday and they are like a graveyard. I saw the schedule and had assumed that, being on a Sunday, this one would be a ‘graveyard of graveyards…,’ so I was very surprised to see such a wonderful turnout for this session.”
Liedtke began the analysis by describing the role of the G-20 with regard to financial stability “or rather financial instability--was the starting block for this study,” Liedtke began. The effectiveness of the session was heightened by the power point presentation, entitled “Systemic Risk in Insurance: An Analysis of Insurance and Financial Stability”.
Liedtke made the salient point that financial instability was not a subject that most banks or insurers had much experience with due to solid market conditions in the past. Liedtke continued his presentation by making the point that insurance companies gained a new utility in managing systemic risk when much of the regulatory community found itself in the position of addressing the challenge of systemic risk.
The credit loses of banks was three times that of the insurance sector. By examining the stress in insurance, the Geneva Association found there was no serious systemic risk. Liedtke made the point that atypical cases, such as AIG, changed the chart by the size of its activity.
Liedtke was searching for examples of lapse rates which were difficult to assess. He stated emphatically that legislators and decision makers had to be made to understand that this was not an insurance failure, but rather a banking failure, in that AIG was working under an insurance charter rather than a bank-although the greater ratio of their business was banking rather than insurance.
For a complete “Definition of System Risk” the report uses the Financial Stability Board’s (FSB) definition and criteria for identifying systemic risk as supplemented by the IAIS. Liedtke used General Motors and General Electric as examples of companies that contained financial elements in their core company activity.
In the process of identifying systemic risk, the FSB criteria of size, interconnectedness and substitutability was augmented by the addition from the IAIS of timing (“allowing for the fact that systemic risk does not typically generate immediate shock effects, but plays out over a longer time horizon.”)
As the report concluded that interconnectedness was much greater in banking than in insurance, the focus moved to the results of natural disasters. As reinsurance capacity has always reappeared after natural catastrophes, it was observed that Hurricane Andrew inspired a new industry based in Bermuda – greatly increasing the reinsurance field.
“With insurance you are growing in exposure. When two portfolios of distinct risk are combined, you actually reduce risk,” Liedtke continued. When assembled, all classes of catastrophe were dwarfed by the largest accumulation of natural risks. Even the worst years (Hurricanes Andrew, Katrina, and the World Trade Center) did not come close to the $1.7B of the economic failure. Liedtke summed up saying that “There is very little interconnectedness – with the balance heavily on the side of banking.” Timing is a very key element in the banking business – banking events happen with enormous speed whereas insurance events (claims) are slow. Most insurance companies, Liedtke graphically illustrated in his presentation, do not have liquid liabilities, so that payments generally cannot be triggered by policyholders.
The heart of systemic risk is represented by company failure – yet insurer “wind-ups” are a stable process not posing systemic risk. Yamoto Life was the sole example of failure, according to Liedtke, yet that particular company was seen as “walking dead” before the failure was announced.
In developing an approach to assess the relevance of systemic risk activities, the Group created an inverse cone, where the small bottom section of the cone represented Systemic Relevant Risk Activities.
We apply the FSB criteria to the universe of activities potentially carried out by insurance companies. Insurance core activities are not systemically relevant as their size, interconnectedness, substitutability and timing would not create immediate impact on financial stability
Although financial guarantees are small in terms of premiums – it does guarantee US $2.3 TN of financial assets and is thereby connected to the financial system.
In his interpretation of market conditions in the case of AIG, Liedtke stated: “In analyzing AIG – not all activities based on derivatives are bad, but the company should make the risk formation available to regulators.”
Liedtke continued by describing treasury-related activities as “the mismanagement of short-term funding raised through securities lending and commercial paper.”
With factors of Description, Transmission mechanism, Necessary pre-conditions, Aggravating factors, Size/Impact and Speed, Speed, as “In line with term funding in place,… can be immediate, as securities lending transactions can be interrupted at short notice.”
Core insurance/reinsurance business does NOT represent a risk to financial stability…however, some risk activities, IF conducted massively under inadequate risk control and poor supervision, could be of systemic relevance to the wider financial sector.
Only a responsive regulatory framework, according to Liedtke, would be effective in tackling the issue of systemic risk. Potentially driving up the market, allowing “non-systemic players” (to be) pricing aggressively. “We would prefer these risks to remain in the market and NOT remaining with the policyholders.”
The presentation continued by assessing two risks that fall outside of the “current and planned regulatory regimes in Europe and the U.S.”, described as two “non-core” insurance activities, derivatives activity on non-insurance balance sheets and mismanagement of short-term funding raised through commercial papers or securities lending. Liedtke stressed that especially in the emerging markets of “India, China, and Brazil, where markets are growing, [we] must understand the risk concomitant with their growth.”
“We in the insurance need to do something, NOT ANYTHING, but the right thing…”
He described The Financial Stability Board (FSB) as being comprised of 24 banks and one IAIS representative and controlling more that 70% of the world GDP.
In summing up the essence and immediacy of understanding systemic risk, Liedtke concludes by stating that “Insurance, given the right tools, can be huge stabilizer of the economy…” And in seeing the role of international regulation, he offers that we will be enriched by “Not just discussing what the arsonist can do, but what the firefighters can do…”
When asked about a federal solution, Liedtke answered, “In that there is a move to a federal oversight in this country, I think the rest of the world can learn something.” He added that he felt that “We need to have group supervisory structures.”
NAIC CEO Terri Vaughan suggested that “The risk-focused way that we control the industry beyond regulatory capital [is essential].” Liedtke observed that “group supervisory structures make a difference as to what you can do and can’t do” [in the marketplace]. Factors such as cost structure as affected by Sarbanes/Oxley were considered by the group. Vaughan offered that “when a firm has failed, then the regulation has failed.”
Yoshihiro Kawai of the IAIS was complimentary of the presentation, observing: “[you were] very persuasive [in] most of your points. There is a possible systemic concern with CDS (Credit Default Swaps). I totally agree with that point. With the Lehman’s case [it was a] weak regulatory spot.”
Leitdke’s response admitted that “Those analyses were based on the CURRENT crisis.” Kawai replied “All business is based on trust. The insurance industry plays a fundamental role in this economy, so if this trust is broken [and] I hope it will never happen…Maybe I am too skeptical but once this trust is broken…”
The session wound down considering last questions on the philosophy of approach and recommending that two different elements be considered – avoid what is happening and close any gaps.
The entire nature of the insurance business is to be covered for the unforeseen. As to catastrophic coverage and the World Trade Center, Liedtke surmised that “if you had approached Mr. Silverstein (the owner of the buildings) to increase his coverage, he probably would have laughed you out of the building.” The industry was lauded and recognized as not taking the refuge of invoking any war clauses for 9/11, and in fact, it was a demonstration of how the system absorbs risk.
On a relative note, Liedtke contrasted the two institutional perspectives: “If I lose trust in the bank, I will be there in the morning emptying out all my accounts. But if lose confidence in my insurance company; well, if I lost a tremendous amount, I might consider committing suicide to trigger [death benefits]…”
In response to a question about unreliable ratings causing a search for alternatives, Liedtke stated that: “Proper supervision and proper ratings were called for and that the role of regulator/supervisor is to make certain there is enough capital; and with regard to the rating agency, the role that rating agencies play [is essential] and how they were perceived after this crisis.”
On the subject of AIG and balance sheet integrity vs. the income statement, he said AIG was not just a case of unrelated industries bringing it down, it was a case of related industries bringing it down.
On the monolines problems, Liedtke said (responding to a consumer advocate question) that they try to explain the interconnectedness within the industry; that it would be no problem if just one of the largest five reinsurers were to fail; and that it is a question of substitutability vs. interconnectedness.
“I would have liked to have seen lapse rates historically…but what you find is that people generally do not decide to withdraw from their insurance company. I would welcome a study of what have people done.”
Replying to a question from Lou Felice (NY) of whether it is possible that the banks and regulators get his point, Liedtke stated that “[the] strength of the cash flow generations of the insurance companies have saved the other side.”
On the selling of Fortis to the French, Liedtke asked the group to consider “the impact of AIG having a triple-A rating backed by the government had on the market.”
Vaughan commented “you see this is where you run into a solvency issue – [it is] wholesale vs. retail money…in insurance, when you take the model of wholesale and retail, policyholders don’t typically call insurance companies to take their money out.”
Liedtke concluded on a note of accord, “I think the issue that Yoshi [Kawai] raised is a very important one, that you must build on that trust. The moment that it breaks down, we should begin to worry. But [if it is] not a financial stability issue, then the industry will not be able to function as it should. Trust is fundamentally important but not when related to systemic risk.”
Regulatory Modernization (EX) Task Force
The newly formed Regulatory Modernization (EX) Task Force, chaired by Commissioner Kim Holland (OK), held its first meeting in Denver. Holland explained that in 2009 the NAIC had considered the creation of a National Insurance Supervisory Commission (NISC) to address a perceived threat of federal intervention in the regulation of insurance but this proposal had never been formalized. Instead the NAIC decided to establish a formal Executive-level task force. Holland stated that this task force will utilize a dual-track approach; it would first reach consensus on what elements of insurance regulation needed to be modernized and why and would then tackle the “how” which, to the extent possible, will utilize state-based solutions but when necessary will consider options that involve federal assistance. Holland emphasized that all stakeholders would be involved in developing the approach, including state legislators, industry, and consumer representatives. She stated that the panelists invited to testify at this meeting had been urged to make their comments absolutely candid.
The Task Force received testimony from a panel made up of four state legislators and a second panel representing the industry. Time constraints prevented any discussion.
State Senator Delores Kelley (MD), representing the NCSL, suggested that state-based regulators should take comfort that the insurance industry remained strong and solvent during the financial crisis in contrast to federally regulated financial entities. She stated that state regulators and policymakers recognize the need for uniformity of highly portable lines of insurance and that the establishment of the Interstate Insurance Product Regulation Commission for life, disability, and long-term care products demonstrates that the states are able to address this need for uniformity where it is needed. She noted, however, that property and casualty products address regional needs and do not lend themselves to the same type of uniformity.
Kelley acknowledged that there may be a federal role in producer licensing and surplus lines but she argued it would be totally inappropriate for market conduct regulation. She urged the Task Force to remind federal representatives that discussions of these issues should involve state policymakers, namely the legislators.
Senator Carroll Leavell (NM), speaking on behalf of NCOIL, told the Task Force that the states must modernize if they want to maintain state regulation. He identified some areas where NCOIL has taken steps towards uniformity, including market conduct, producer licensing, and rate and form filing, but emphasized that NCOIL does not wish to modernize at the expense of consumers. He stated the NCOIL supports an open rate and form filing system for personal lines and deregulation of commercial lines and that it had developed a flex-band model as an interim step. Leavell offered to work with the NAIC to develop model legislation on implementation of the newly enacted federal health care reform and on surplus lines for which NCOIL has endorsed the SLIMPACT proposal which would create a clearing house for the distribution of premium taxes on multi-state surplus lines placements.
Representative Greg Wren (AL) spoke of his efforts through the Coalition Organized for the Future of Insurance Regulation (COFIR), which he heads, to fight industry proposals for an optional or mandatory federal insurance charter. Wren urged the NAIC to closely monitor the proposals in Congress for financial regulatory reform which he fears could adversely impact state insurance regulation.
Representative Brian Kennedy (RI) mentioned several areas where NCOIL has acted to promote uniformity developed, including adoption of NCOIL Market Conduct Surveillance Model Act and a resolution supporting SLIMPACT. He also noted that NCOIL is developing a model to protect the confidentiality of data provided to regulators in the forthcoming market conduct annual statement. He stated that NCOIL wants to work on regulatory modernization as a co-equal partner with the NAIC.
Dennis Johnson (United Heritage), speaking on behalf of the ACLI, stated that although his industry supported that optional federal charter it also supported the goals of the Task Force. He described some experiences of his company as examples of the kinds of day-to-day difficulties companies confront in order to comply with regulatory requirements. He stated that during the past ten years he has overseen the licensing of his company in 26 states and the time required to complete the process has varied greatly for no discernable reasons. Giving an example of a simultaneous submission of the identical application to two states, he stated that one took five months to complete and the other took three years.
He complained that the filing of financial statements is supposed to be uniform but some states maintain unique filing requirements. One state developed its own filing system which he complied with; however, although he received an automated acknowledgment, the following month he received a demand to file. He was eventually able to convince the state that a timely filing had been made (he was told the new automated system had screwed up) but soon thereafter he was sent a notice of a $10,000 fine which he ended up have to negotiate down in order to avoid a license suspension.
On the plus side, Johnson praised the targeted examination approach as well as the temporary change in the deferred tax accounting rules made in response to the financial crisis. Regarding the Interstate Compact, he said that it had reduced the number of separate filings his company needs to make but that it still had to file separately in those states that have not joined.
SueAnn Schultz (IMA Financial Group) spoke for the producers. She stated that producers want to preserve state regulation but that it needed to become more efficient and eliminate redundancies especially in the area of producer licensing for which states have inconsistent standards and unnecessary duplicative practices. She noted that the increasing use of the internet has resulted in the average producer operating in eight states, making the need for reform ever more urgent.
Schultz urged the regulators to focus on reforming producer licensing in several areas: true reciprocity, meaning the development of clear uniform standards, a full review of each state’s standards and review process to identify and eliminate any that deviate from the uniform standard, and full acceptance of the review of compliance with those standards by the resident state; the establishment of a national database for fingerprints; and the elimination or simplification of the entity licensing requirements in those states that require it.
Schultz identified New York, New Mexico, and North Carolina as having failed to embrace the single producer license concept contained in the model law. She also labeled line-by-line authority requirements and requirements to file of branch and affiliation information as unnecessary and in need of reform.
One regulator noted that much of the difficulty in adopting the model law is attributable to opposition by local agents and Holland added that in Florida the Big I has been blocking passage.
Solvency Modernization Initiatives (EX) Task Force
Chair Director Christina Urias (AZ) opened the meeting by focusing on the goals of the session.
The Task Force reiterated the goal of NAIC model laws in promulgating core principles. The Task Force also confirmed that the US regulatory mission is to maintain the proper regulatory authority to protect the policyholder. The Task Force continues its efforts to develop an SMI Roadmap. Lou Felice’s (NY) comment framed the effort “that we use these guidelines—it’s a solvency framework.”
Commissioner Al Gross (VA) discussed the new charge to create a working group to examine SAP and the unintended consequences and intended consequences of GAAP. Gross acknowledged the challenge inherent in regulating an industry affected by variations in cash flow and discount rates. The Executive Committee will consider the formation of the working group at this meeting. If approved, Gross said the first conference call of the new Working Group would be held in April.
The Task Force received a presentation by Jeff Johnson (John Hancock/Manulife) regarding the consequences of moving to general purpose accounting standards if they are based on IFRS. Johnson said that the discount rate as currently being considered by the International Accounting Standards Board (IASB) would reflect the characteristics of liabilities, not the underlying assets. This would increase volatility; would not provide decision useful information; would increase capital requirements at the transition point; and would impair insurer’s ability to compete. Overall it would increase costs and decrease liquidity. The NAIC will consider these concerns as it moves forward.
Mary Weiss (CIPR) provided an overview of the US Financial Solvency Framework as outlined in the recently completed paper developed by the Financial Condition (E) Committee.
The Solvency Modernization Task (EX) Task Force then heard reports from its working groups in international solvency, corporate governance, and group solvency issues. The International Accounting Standards Working Group met after the SMI Task Force.
International Solvency (EX) Working Group: Urias began the session by giving highlights of the recent Arizona meeting to the attendees, noting that progress in the acceptance of Solvency II initiatives internationally will affect what happens in the US market. She said it was important to establish the priorities, activities, deliverable, and timeframe for the review in a Road Map.
Fritsch cautioned that it was important to avoid overlap among the working groups. The first priority should be to collect information regarding the work underway at the moment. Allen Seely (NM) said that the Working Group should complete its review of the “work of other regimes” including “economic capital and other issues [that] bring to bear on the Working Group.” Center for Insurance Policy Research (CIPR) Director, Ramon Calderon, a presence at both the Phoenix meeting as well as in Denver, observed that “it’s been an educational process – looking at the frameworks in countries like Switzerland and Canada, and Bermuda” and “although not an exhaustive review – it will be helpful with our framework.” A comparison of the US regime and Solvency II is on the NAIC website.
Director Urias admitted that “the group needs to get a handle organizationally” on these issues. She said the SMI Task Force and the working groups should “coordinate their efforts; making a first priority to collect what’s going on among other NAIC task forces.”
Urias then raised a series of questions regarding the priorities for the working group as outlined in the Capital Requirements consultation paper. In response to a question on transparency, Morag Fullilove (GNAIE) suggested “There may be some issues with transparency in regard to some of the ratios used by the NAIC as predictors of solvency.” During an ensuing discussion regarding transparency and opacity, Spudeck responded “if our system is opaque I’d like some evidence.” Doug Stolte, (VA) asked the group “Do companies ask if there is a lack of understanding about [how] RBC calculations are determined.”
Chair Urias urged the group to continue the dialogue started in Phoenix. Interested parties will be invited to comment upon the Road Map document when it is complete. Urias also indicated she will schedule an interim meeting before the August NAIC meeting. The April 28 Solvency Modernization Webinar will provide a forum to review reports based on the legal entity level, along with a plan to publish a document describing what is being accomplished including consultation papers.
Fritsch provided a report on the IAIS Solvency Subcommittee. The US is continuing to work on a paper on supervisory review and reporting and will complete a draft by the June meeting of the subcommittee.
Corporate Governance (EX) Working Group: Acting as Chairman in lieu of Joseph Murphy (MA), Vice Chair Andrew Stolfi (IL) proposed an amended charge of the working group to read: “Outline high-level corporate governance principles. Determine the appropriate methodology to require compliance evaluate adherence with such principles, giving due consideration to development of a model law.”
David Snyder and Phillip Carson (AIA) registered their opinion regarding the necessity of considering corporate governance as discussed earlier this month in Phoenix. Snyder stated that he was “not sure that a case has been made for issuers to develop more or different corporate governance guidelines.” Chair Urias responded by explaining that “charges were given to us by the SMI, but that the NAIC will evaluate best practices to see what is needed.” Bruce Jenson (NAIC staff) and Felice spoke in accord to the point that “an array of choices will be considered.”
In response to some of the interested parties concern regarding language being considered, Urias stated that the term guidance would be used rather than standard. Wayne Mehlman (ACLI) reinforced his comments from the Phoenix meeting regarding “unintended consequences and potential conflicts” brought about by the implementation of standardized corporate governance procedures. The Chair stated that the Working Group will keep these (potential) conflicts in mind.
Director Karen Stewart (DE) invited the Working Group to examine Delaware corporate statutes in an attempt to find a regulatory framework that has been road tested and proven: “With all due respect, the members [of the Working Group] might do well to look at what we’ve done in Delaware due to the large number of holding companies domiciled (in our state), the state of Delaware has highly evolved corporate law.” Staff was directed to review existing law and present its findings to the Working Group.
Jenson reported back on the progress made by the SMI interim meeting in Phoenix, describing the healthy exchange between regulators and interested parties.
NAIC staff was asked to compile a summary of current insurance law regarding corporate governance and to look at a few states’ corporate laws. The Working Group will consider in the future conducting an industry survey as to current best practices in corporate governance, although there was debate on this proposal. The Working Group will also consider a review of recent insolvencies to determine whether corporate governance deficiencies played a role.
Stolfi submitted a report on the IAIS Corporate Governance Subcommittee, delineating the draft review and presentation timeline.
The Working Group plans to hold an April conference call to develop a response to referrals from the Group Solvency Issues Working Group.
Group Solvency Issues (EX) Working Group: This working group hit the ground running with a weighty agenda and reports from subgroups. Co-Chair, Director Ann Frohman (NE) gave a report on her testimony on Capitol Hill to the House Subcommittee on Capital Markets. Director Frohman conveyed to the group that members of the Working Group were expecting more data to be available to them based on a survey on holding companies which has been sent to the states and she commented that there would now be a process wherein the state regulators would share holding company and other information to build a database for use in future testimony. Exception was taken by Steve Johnson (PA) who pointed out that all of the information requested was available and that by representing that it was not, all regulators looked as though they did not have this information, where in reality, it was listed on Form B.
Holding Company Model Act Revisions: The Working Group then discussed proposed changes to the Insurance Holding Company System Act and Regulation. Comments were received from Illinois and ACLI on financial contagion and reputational risk. Wayne Mehlman (ACLI) encouraged the Working Group to consider a “state-by-state effective way to proceed.” The Working Group agreed to proceed with the understanding that it was best to avoid conflict with current state laws. Frohman stated the intention of the Working Group to centralize operations and began the review of the progress made with new forms to be used in the revised Insurance Holding Company System Model Act and Insurance Holding Company System Model Regulation. A hearing will be held June 4 in Florida following the Financial Summit.
Group Supervision: The Working Group has completed its work on its “Walls and Windows” memo to the Task Force and submitted it for consideration. The memo outlines priorities for the Working Group. Robert Neill (ACLI) raised a series of questions including the definition of a group and asked the Working Group to consider what additional information is being sought. Director Frohman responded indicating that she “welcomes specific suggestions, but this thing is not going away.” She added that, in the context of systemic risk, the NAIC needed to be aware of corporate business and capital plans. Johnson reaffirmed the Working Group’s intent, stating “We’re looking for specifics and not broad concepts…these are not new inventive ideas – these are things that companies should be doing already; if not I question their boards and management.”
Rob Curtis (UK FSA) provided a brief report as to how the UK enforces group supervision. He said that the FSA looks at subsidiaries of UK groups and expects them to provide data in Solvency II terms as part of the internal model. He said it is also important for the supervisory of a subsidiary to understand how the subsidiary is managed relative to the group and the group’s expectations of the subsidiary.
Ramon Calderon (CIPR) gave a report on the IAIS Solvency Subcommittee on the definition of groups and methodologies and principles of group capital assessment. He focused on the need to distinguish between groups which operate on a legal entity basis and those which operate on a consolidated basis. Calderon felt the IAIS Capital Requirements standards guidance paper still needed to be clarified on this point. Fritch and Felice agreed to coordinate a review of the papers by the May deadline for comment. They agreed the review was critical since these standards would be the basis of future IMF assessments. David Vacca (NAIC staff) said the Working Group needed direction from the SMI Task Force as to how to approach economic capital at the group level.
The Working Group enjoyed several lively give and takes from regulators and interested parties. Spudeck and David Snyder (AIA) discussed the finer points of what “financial efficient supervision” really means, while Fritsch admitted that “we don’t want to force a company to regulate on a different basis than they already do.”
Supervisory Colleges: Jim Armstrong (LA) moved for the acceptance of report on the Supervisory College Subgroup. The subgroup has reviewed changes to the Insurance Holding Company Model Act regarding the use of supervisory colleges. The Subgroup is also examining the IAIS MMOU on Cooperation and Information Exchange and is developing a tracking document whereby the NAIC would monitor US states’ participation and attendance at supervisory colleges. The Subgroup continues to create best practices for regulators to share information pre-and post-supervisory colleges. Johnson said it was important that the industry support participation in the colleges and fund state regulators’ travel.
IAIS Activities: Spudeck gave his update on the IAIS draft definition of ‘insurance groups’ and the IAIS Common Framework for the Supervision of Internationally Active Insurance Groups. He also reported on the IAIS’s guidance on non-regulated entities and a paper on supervisory cooperation in a crisis.
Accreditation Guidelines: The Working Group directed staff to develop accreditation review guidelines for Holding Company analysis.
International Accounting Standards Working Group: Chairman Mel Anderson (AR) began the meeting with a presentation by Alan Close (ACLI) regarding acquisitions costs.
Acquisition Costs: The ACLI believes that the measurement objective for insurance contracts should take into account all cash flows including acquisition and maintenance costs. Close reviewed a comparison of approaches to treating acquisition costs which had been discussed with members of the Financial Accounting Standards Board (FASB) earlier this year. He pointed out that expensing acquisition costs with no provision in measurement creates a loss at issue. The ACLI is working on a stress test addition to their analysis.
Rob Esson (NAIC staff) reported on the just completed International Accounting Standards Board (IASB) and joint IASB/FASB meetings in London. Esson said the Boards focused on the definition of insurance, deciding to use the IFRS 4 definition modified to describe a form of timing abuse in the description of “significant insurance risk.” The Boards remain split on unbundling and risk margins. Esson expects the Insurance Contracts exposure draft to be released by early June with a 120-day comment period. He said it would be a joint exposure draft but, because of the lack of unity on several key issues, he expects the draft to include several options. [Editor’s Note: Since the Denver meeting, the FASB has indicated a third quarter Exposure Draft, while the IASB continues to press for a second quarter release.]
Risk Margin: The Working Group discussed a paper prepared by the Rob Esson for the Center for Insurance Policy and Research proposing the use of a composite margin within the context of the IASB’s building block approach for measurement of insurance contracts. The advantages of this proposal as outlined in the paper are that it is simple to apply and audit; it uses premium as an observable and objective measure for determining the margin; it eliminates profit at inception; and runs margins off over the life of the business. Fritsch said that the concept was worth further exploration.
The Working Group had received comments letters from Travelers and the Group of North American Insurance Enterprises (GNAIE) expressing continuing concerns with discounting of non-life reserves. The Chairman said that the issue would be discussed further at a special meeting of the Working Group, to be held April 29-30 in New York at the NAIC’s SVO Offices.
IAS 37: The Working Group discussed the need to review the draft IAIS Insurance Contracts Subcommittee comments on the IAS 37, Liability Measurement Exposure Draft. Since the deadline for sending comments to the IASB had been extended to May 12th, the Working Group will discuss the letter at its April meeting. Fritsch asked that the open issues be sent to the Interested Parties, asking for comments prior to the April meeting.
Rob Esson reported on the IASB/FASB exposure draft, Financial Instruments: Amortized Costs and Impairment. The IASB has established an Expert Advisory Panel to examine the practicality of the proposed expected loss impairment approach which met March 24-25. Rob Esson serves on the panel as the IAIS representative. Comments are due on the draft by June 30.
IAIS: The IAIS Technical Committee has released ICP 14 and a draft Standard on Valuation for final comment by April 30. Morag Fullilove (GNAIE) spoke on behalf of six US trade associations who had asked that the standard not be adopted prior to the completion of the Guidance Paper on Valuation because many of the terms in the Standard are unclear. She asked the NAIC to consider taking a position on the standards. Chairman Anderson agreed to address the issue, saying the issue would be discussed either on a conference call or at the April meeting.
NAIC/Consumer Liaison Committee
Superintendent Morris Chavez (NM) chaired this meeting. Since it was the first meeting in 2010 some time was devoted to introducing the 18 funded and 12 unfunded consumer representatives. Much of the meeting addressed the role the NAIC will play in the implementation of the federal Patient Protection and Affordable Care Act.
Role of NAIC in Health Care Reform: Kevin Lucia (Georgetown University Health Policy Institute) stated that there are numerous sections of the Patient Protection and Affordable Care Act that require action or recommendations from the NAIC. [The meeting handout included a summary of those provisions.] NAIC is required under the Act to draft regulations covering such issues as definitions, criteria for uniform disclosures and enrollment forms for the Exchanges, and revisions to Medigap policies. The Act requires Health and Human Services (HHS) to consult with the NAIC on standards and regulations, including those covering disclosures, permissible age bands, implementation of the exchanges, qualified health plans, risk adjustment and reinsurance provisions, interstate insurance compacts governing cross state sales, and standards to govern the interim reinsurance program.
Lucia stated it was essential that the consumer perspective not get lost and that the process must be transparent. He recommended using the process used to develop Medigap model in which all interested parties, including consumer representatives, regulators, and industry, participated fully. Another consumer representative added that this meant the stakeholders should be on the working groups and the goal should be to reach consensus. He added that in order for this to be possible consumer representatives will need funding to attend interim meetings. Director Mila Kofman (ME), noting the expertise of many of the consumer representatives, stated that she appreciated the offer.
Consumer Priorities in Implementation: Georgia Maheras (Health Care for All), who had participated in the design of the Massachusetts exchanges, explained how they worked and offered her expertise. She stated that the Massachusetts exchanges were regulated by a quasi-governmental agency and are funded by fees on the plans sold. Massachusetts provides training for agents selling the plans. Maheras recommended that producers be included in the development of the exchanges and she noted that the Act provides for funding to the states for development and implementation of the exchanges.
Discretionary Clauses in Disability Policies: Deeia Beck (Texas Office of Public Insurance Council) explained that a typical discretionary clause is a provision in the insurance policy that gives the contract drafter full authority to interpret its terms and determine what benefits, if any, are due to the insured. She argued that these clauses create conflicts of interest, alter the way disputes are settled, and are unfair, deceptive, and inequitable. Twenty-two states prohibit these clauses by rule. Beck urged that all states do so and that the prohibition be by statute.
Credit Scoring: Sonja Larkin-Thorne (S L Thorne and Associates) provided an update on the impact of credit scoring on consumers. She noted that the province of Ontario in Canada has just banned the use of credit scoring in rating. She stated that a credit score is a state in time score and that scores have been going down significantly often not due to any adverse action of the consumer but rather to actions by lenders. This is because the scores are lowered when lenders lower the credit limit of a customer or a customer closes a line of credit that he/she is not using because the lender has increased the interest rate that would be charged if the credit line was activated.
Life Insurance and Annuities (A) Committee
Commissioner Thomas Sullivan (CT), chair of “A” Committee, opened the meeting by welcoming new members and thanking old members. The Committee adopted the December 21, 2009 conference call minutes and reviewed its charges for 2010.
Consumer Representative Brenda Cude (University of Georgia) asked the Committee to review the NAIC consumer education material on viatical and life settlements because the information was not current. Interested parties stated that the NAIC brochure developed by the Washington office conflicts with the “A” Committee brochure. Sullivan asked if the charges should be expanded to create a new group to review the educational materials on life settlements and annuities. Commissioner Mila Kofman (ME) thought that was good idea for life settlements. Cude reminded the Committee that she had also mentioned viatical settlements. Michael Lovendusky (ACLI) supported the new charges. The Committee adopted the revised 2010 charges.
Amanda Yanek, NAIC Government Relations Policy Analyst, gave the federal legislative update. The House passed H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009 (which incorporates S. 906 the Senior Investment Protection Act of 2009). The bill requires adoption by the states of the NAIC Suitability in Annuity Transactions Model Regulation or something deemed similar in order to receive grant funds. The Senate’s Restoring American Financial Stability Act of 2010 also requires adoption of the NAIC Suitability in Annuity Transactions Model Regulation or something deemed similar in order to receive grant funds. The NAIC supports the Fixed Indexed Annuities and Insurance Products Classification Act of 2009 (S. 1389), which continues to gain co-sponsors.
The Committee reappointed the Annuity Disclosure (A) Working Group. Jim Mumford (IA) gave the report of the Working Group, which included a request for comments on outstanding annuity illustration guidelines by mid-April. Conference calls will be scheduled to finalize this work before the NAIC summer national meeting. Mumford said that 90% of the content for the illustrations are done. The Working Group also discussed suggestions by SEC lawyers for revisions to the annuity buyer’s guides. Revised drafts will be distributed following the NAIC spring national meeting.
Larry Bruning (KS) read the report for the Life and Health Actuarial Task Force (LHATF), which included releasing for comment modifications to Actuarial Guideline XXV Calculation of Minimum Reserves and Minimum Nonforfeiture Values for Policies with Guaranteed Increasing Death Benefits Based on an Index, amended VM-20 Requirements for Principle-Based Reserves for Life Products, amended VM-31 PBR Report Requirements for Business Subject to Principle-Based Reserve Valuation, VM-50 Experience Reporting Requirements, and VM-51 Experience Reporting Formats.
Sullivan asked about the progress and timing of the Valuation Manual. Bruning replied that LHATF and industry are committed to having the Valuation Manual adopted by June so that the Committee can adopt at the NAIC August meeting. The Committee will schedule an interim conference call to discuss the Valuation Manual.
“A” Committee will hold a public hearing at the Washington Court Hotel in Washington, DC on May 20, 2010 to discuss Stranger Originated/Owned Annuities.
Life and Health Actuarial Task Force
The Life & Health Actuarial Task Force met on March 24-25 during the spring meeting of the National Association of Insurance Commissioners in Denver. LHATF is a task force of both the Life & Annuities “A” Committee and the Health Insurance & Managed Care (B) Committee.
Guardrails or Fences: During the March 24 session, frustration that had been quietly gaining momentum over a period of meetings surfaced when actuaries pointedly raised the issue of whether the intent of principles-based reserving was being circumvented with the layering of prescriptions to what is supposed to be an approach that allows for company-by-company actuarial judgment. The theory behind the principles-based approach (PBA) is that each company has its own risks, risk assessments, and risk mitigation programs and should be required to establish reserves based on that company’s profile.
Regulators say that they recognize the value of PBA but also need “guardrails” to ensure that life insurers remain solvent and healthy. But at the end of the morning session, Donna Claire, who is chairing the effort by the American Academy of Actuaries, Washington, to spearhead the actuarial development of the project, addressed LHATF members. She said that recent decisions such as not to permit aggregation of business lines for reserving purposes is defeating PBA’s purpose. By eliminating aggregation, companies must change how they manage their businesses just to report for PBR, Claire added. By eliminating aggregation, the benefits of hedging offsets can also be eliminated, she continued. For instance, a block of deferred annuities and payout annuities are natural offsets that can be tapped into using aggregation, Claire explained, and if PBR becomes just another regulatory tool its benefit will be marginalized and it will become an expense for companies.
Leslie Jones (SC) asked for specific examples and Academy representative David Sandberg said that one prescriptive requirement was eliminating the ability of a company to use its own stochastic generator to determine different potential economic circumstances. A risk transfer rule for reinsurance that regulators are requiring rather than a company model that would capture real risk was what Sandberg referred to as “a black and white arbitrary in or out transfer rule.”
Tomasz Serbinowski (UT) responded that regulators need to be able to verify data that companies use and not rely too heavily on actuarial judgment. But Sandberg replied that PBA is not just guess work but is anchored in mortality and lapse experience.
During the discussion of VM-20, the impact and potential expense for small companies was an area of concern that was addressed when Katie Campbell (AK) when she proposed an amendment that would make it easier for these companies to participate in PBR. The amendment, which was adopted by LHATF, uses a certification process that these companies perform as a part of asset adequacy analysis. Companies which successfully qualify for certification could avoid stochastic scenario testing and conceivably deterministic testing as well as a proposed net premium reserving test being developed by the ACLI.
The issue of relying on actuarial judgment and just how much weight regulators should give to that judgment threaded through much of the day’s discussion. It had arisen earlier during a discussion of a Credibility Theory Practices report developed by the Society of Actuaries in Schaumburg, Ill. Tom Rhodes, one of the team members who developed the report, discussed the paper and how credibility theory can be applied to life insurance. He noted that there can be different approaches to establishing credibility. For instance, one approach might be to consider small and large values; another approach might just consider small values. There can be differences in credibility factors, so while the number of deaths is important in determining credibility, so are other factors
.
Larry Bruning (KS), the chair of LHATF, said that he thought that mortality in VM-20 would be represented across all age spans and that the credibility factor itself was adding a margin. The discussion continued over whether judgment should be allowed in the VBT table.
The argument was made to regulators that small companies should not be penalized too much for not having more credibility.
The discussion transitioned into an explanation of how real care was needed in the development of VBT in order to avoid tax problems. The potential problem, according to the discussion, is one of nuance and perception. A net premium valuation approach without specific loaded tables to achieve that end would be acceptable but creation of tables would not. Tying deterministic and stochastic reserves to a table loaded with margins would have the potential to become a tax issue and to create harm, according to John Bruins, a life actuary with the ACLI. Consequently, it is better to stay away from this potential problem, he said.
The IRS Code references the CSO Table, explained Paul Graham, chief actuary with the ACLI. If there is a choice of table, the IRS requires that the table producing the lowest reserve be used. The concern is that if the VBT Table is similar to the CSO Table, even though it is called by another name, the IRS may say it is an effort to avoid using tables that create the lowest reserves. The discussion raised the issue of whether a 2012 CSO Table needs to be developed.
The discussion then turned to an update of Actuarial Guideline 25 which addresses non-forfeiture for pre-need contracts and creates exceptions to the rule for small policies. John MacBain gave an update on the Academy’s work. There is a recommendation to increase these limits because they have not been adjusted since 1991. The threshold limit would be linked to the CPI and increase from $10,000 up to $16,845.
But a debate ensued between Steve Ostlund (AL) and MacBain over which CPI should be used. MacBain argued for a general CPI while Ostlund said that one specific to the funeral industry should be used that would bring the threshold up to $23,000. If CPI is 1 % but funeral expenses are rising 10%, the customer is not served if there is only an increase of 1% rather than 10%, Ostlund argued. MacBain countered that there are two reasons to use the non-specific CPI: historical increases in funeral index are very volatile and, for the pre-need market, the funeral director controls prices more than the upper end of the market. Bruning then wondered whether tying the threshold to the funeral industry CPI would be an invitation for that funeral industry to increase funeral costs. A motion was made and passed exposing the current draft of AG 25 for 30 days allowing for changes to be made during a future conference call.
LHATF continued its work on March 25. The body received several reports including a presentation from the actuarial firm of Oliver Wyman on variable annuity statutory accounting and an update on the new federal health insurance law, the Patient Protection and Affordable Care Act, and what it will mean for state regulators who will now be required to implement requirements in the law.
The group also discussed VM-31, a component of the Valuation Manual. The Valuation Manual will act as a roadmap for implementing PBR. VM-31 establishes minimum reporting requirements for policies under the PBR system. LHATF also had a lively discussion on an interest rate generator developed to help establish different scenarios for PBR and how it should work. That discussion returned to a topic that had threaded its way through the March 24 discussion: the degree to which regulators should rely on actuarial judgment.
The Oliver Wyman team presented a report titled Observations on Emerging Variable Annuity Statutory Accounting Results.
The presentation is a prelude to a position paper Oliver Wyman will present next month. The firm’s team started the presentation by looking at issues including potential disincentives to hedge risks particularly interest rates and volatility as well as the standard scenario floor dominating more than might have originally been intended.
Among the results, according to the team, is the possible demand for greater hedging solutions and the need to explain why a company is deploying this program and why the actions are important.
The Wyman research looked at 12 of the largest 20 variable annuity writers, according to the team. It looked at the potential “unintuitive consequences” of hedging strategies, suggesting that further study is needed. For instance, the intuitive impact of the hedging, according to page 7 of the slide presentation, was decreased capital requirements and increased stability of capital requirements. But the unintuitive impact of hedging would be increased total asset requirements and greater instability of capital requirements.
Of the 12 companies that were examined by Wyman, a third did not see a hedging benefit. Four of those companies experienced stagnant or increased TAR [total asset requirement]; two saw an increase in required capital; and six had no capital required. And the team referred to slide 12 of the presentation which indicated that if unhedged, under AG 43 12 of 14 companies would have been driven by the Standard Scenario. (While 12 companies participated the number of responses was 14 as some of the participants had multiple entities.)
The team told regulators that “one dirty secret [of hedging] is regulatory capital arbitrage,” which provides greater regulatory capital but not necessarily greater protection.
LHATF also heard from Brian Webb, NAIC manager of health policy, who gave an update on the work awaiting regulators following the Patient Protection and Affordable Care Act’s passage. Webb told regulators at LHATF that a definition as well as mechanisms for calculating medical loss ratios must be developed right away. As part of that process, the NAIC is going to be arguing methodologies for individual states rather than one methodology for all states, he said.
Regulators will also have to help implement a national reinsurance program. The program brings in any self-insured plans as well as government plans, according to Webb. In addition, regulators are also charged with the task of developing exchanges by 2014. These exchanges, according to Webb, create a marketplace where qualified plans will participate. Failure to develop exchanges will authorize the Secretary of Health and Human Services, Kathleen Sebelius, to develop them. The exchanges create a marketplace for qualified plans, creating standardized enrollment forms and definitions and a place where qualified plans can post their information. The exchanges are informational and have no negotiating power, he added. And, Webb continued, they can be as simple as a Web portal. States will want to ensure that exchanges provide sufficient flexibility, he added.
Following this presentation, LHATF discussed an interest rate generator developed by the Academy which would be used to produce interest rate and Treasury rate scenarios. The focus of the dialogue was whether the generator should rely on more recent rates rather than on a 50-year historical Treasury rate.
Fred Andersen (NY) said that the LHATF should carefully consider the proposal because the generator is producing rates of about 5-5.5% when rates are actually much lower today and that a lag in actual market rates can have a “massive impact” on products such as universal life with secondary guarantees.
Nancy Bennett, representing the Academy, said that the Academy looked at the generator in reference to its ability to look at the past as well as creating a reasonably best method for predicting the future for any product and that it did not consider specific products because it did not want product bias to skew the process. Andersen responded that the fact that the impact on specific products was not considered when the generator was developed is important and one that regulators should consider before advancing it as part of PBR.
Serbinowski noted the reluctance of accepting the actuarial judgment of the Academy when the system of reserving is supposed to be moving to one that relies on more judgment. Andersen disagreed, maintaining that regulators have a responsibility to carefully analyze what is brought before them. Bennett suggested that the fundamental difference may be that the Academy developed the generator on the assumption that there is no way to know what future interest rates will be and consequently, the better approach is to look back over the last 55 years and attempt to replicate what has already happened.
The discussion also raised the issue of volatility. Bruning said that if the generator creates volatility, that would be a good thing because it more accurately reflects the real market.
There was also a discussion of VM-31 and whether it should include information on non-guaranteed elements that is already in VM-20. Campbell said that one approach would be to include all disclosures in VM-31 and then pare down what is included to information that is useful. She noted that if you have 50 pages of information it might not be useful to the user. Campbell also recommended that action be deferred until a future conference call. The one benefit to having disclosures in VM-31 is that it would create a more standardized format, according to the dialogue among regulators. Regulators continued to discuss how a balance could be reached that would include information but not too much information in this component of the Manual.
Property & Casualty (C) Committee
Director Michael McRaith (IL) chaired this meeting.
Presentation on Lessons Learned from the Greenburg, KS Tornado: The Committee watched a PowerPoint presentation demonstrating the significant gap between FEMA coverage and the actual loss from events like tornados and recommended communities consider purchasing parametric insurance which, instead of indemnifying based on the amount of loss, pays an agreed upon amount upon the occurrence of a triggering catastrophic event. The presenter suggested that state insurance regulators should raise awareness of the limitations of coverage available through FEMA.
Property and Casualty Related Federal Legislation: Moira Campion (NAIC staff) summarized insurance related measures under consideration by Congress:
Risk Retention: Representative Dennis Moore (D-KS) has introduced H.R. 4802, The Risk Retention Modernization Act of 2010 which is similar to a bill that died in the last Congress. The bill would add commercial property as a type of insurance that could be written by risk retention groups and would add corporate governance standards. The NAIC has not taken an official position on the bill but Campion opined that its Section 3 was a cause for concern as it gives Treasury authority to resolve disputes between domiciliary and non-domiciliary states and allows Treasury to preempt state laws.
National Flood Insurance Program: Congress has been forced to continue providing for short-term extensions of the National Flood Insurance Program because Senator Jim Bunning (R-KY) has placed a hold on reauthorization of the Program. To make matters worse the Senate failed to act on an extension before going into recess so the Program has expired meaning that almost all real estate closings requiring flood insurance cannot take place at least until the Senate reconvenes.
Financial Regulatory Reforms: [See the report of the Government Relations Leadership Council.]
Medical Malpractice: The Patient Protection and Affordable Care Act authorized HHS to provide demonstration grants for states to develop, implement, and evaluate alternatives, such as mediation or arbitration, to the current tort system for resolving disputes over injuries alleged to have been caused by medical providers.
Discussion of the 2000 Draft Model Rating Law/Guideline: Eric Nordman (NAIC staff) gave an update on this project. This model has been under consideration for quite some time. In 2000 “C” Committee had presented it to Executive and Plenary for adoption together with a statement of intent. The statement of intent and the proposed model were determined to be inconsistent so adoption of the model was tabled. “C” Committee decided to tackle it again and, after years of debate, it decided, in 2009, to convert the three existing model rating laws into a single guideline. Nordman stated that the proposed guideline addresses every type of rate regulation and expresses no preferences so its only purpose would be to provide consistent language. The Committee voted to adopt the guideline subject to a 30-day review period to give the regulators time to read the document.
Update on Defective Drywall Activities: Dr. Ray Spudeck (FL) reported that after the public hearing in December the name of this project was changed from the Chinese Drywall Problem to the Defective Drywall Problem because some of the defective material has been traced to US-based manufacturing plants. He added that there is still no finding linking the defects to health issues but that Louisiana has ruled that the defect is covered under homeowners’ policies. Spudeck stated that the Catastrophe Insurance (C) Working Group is drafting a white paper on this topic which will cover coverage issues, defenses, class certification, reinsurance, recovery opportunities, and risks.
Credit Scoring: The Committee adopted a request to develop a model law to regulate insurance scoring vendors, perhaps by licensing them as advisory organizations, and reviewed its plan to conduct a survey regarding the use of credit-based insurance scores and risk classifications for personal auto.
McRaith commented that this proposal came out of a public hearing in which a vendor representative stated he would welcome oversight. Dave Snyder (AIA) commented that his understanding was that these entities oppose being regulated as advisory organizations as they are concerned with the loss of flexibility. McRaith replied that he was repeating what was said at the hearing and that oversight would be since these entities may be involved in pricing and eligibility for coverage issues. He noted, however, that the recommended oversight may not require licensing.
Sonja Larkin-Thorne (S L Thorne and Associates), a funded consumer representative, applauded the proposal, labeling the credit scoring system a “black box”. [See more on the consumer perspective under the report of the Consumer Liaison Committee.]
Committee Reports: The Committee approved reports of its task forces and working groups. Below are summaries of select reports:
Casualty Actuarial and Statistical (C) Task Force
The Task Force meeting began with an examination of the Guideline for Implementation of Medical Professional Liability Closed Claim Reporting led by Lee Barclay (WA). The work product resulted from twenty months of efforts through conference calls on a monthly basis. The Statistical Subgroup and this Task Force created the Model Law. Barclay commented: “Now we are looking to create best practices. We have been working with a group of very active interested parties. The contributions of the interested parties have been very valuable, even though we may not have agreed on every issue.”
He offered that Part B might be considered as a format for best practices. Part A reflects state-to-state reporting, while Part C describes the outreach method to obtain accurate data. The motion to approve the report was adopted paving the way for “C” Committee consideration.
The Task Force discussed the draft Actuarial Standard of Practice (ASOP) No. 41 regarding actuaries’ communications. Several members of the Task Force are upset that this standard supersedes other actuarial guidance in ASOP No. 9 that they view as critical for the effective regulation of actuarial opinions on insurance reserves. Industry actuaries appear to share this opinion. Kris DeFrain (NAIC staff) was asked by Chair Tom Sullivan (CT) to draft a strong comment letter to the Actuarial Standards Board by the March 31, 2010 comment deadline.
Sarah McNair-Grove (AK) told the Task Force that the Workers’ Compensation Large Deductible Subgroup had no report for the meeting so it was agreed that the report would be posted on the website as well as re-sent by e-mail and voted on during the next month’s conference call.
Rae Taylor, (OR) asked about the status on the Profitability Working Group. Mary Miller (OH) stated that the complexity of the issues facing the Lines of Business Subgroup was, perhaps, stifling any comments or participation. Miller offered that she would be happy to give the Chair of this Working Group to another member of the Task Force.
Barclay was called upon once again by the Chair to update the Task Force on the Statistical Subgroup. Expanding the medical malpractice section of the NAIC Statistical Handbook was something that the Subgroup had been asked previously, so Barclay offered to consider that again. The chair asked Barclay to make suggestions to the Task Force.
Mary Van Sise (ISO) stated that “statistical collection is anomalous in the area of medical malpractice.” ISO puts together Fast Track Reports for companies reporting on a voluntary basis. Van Sise said that “participation had dropped so precipitously to the point were only 3% of the companies are reporting, and in some states, only one company may be reporting.”
Joseph Herbers (AAA) said COPLFR is drafting a white paper encouraging annual communications between the opining actuary and an insurer’s board of directors. Herbers said that AAA has produced a Law Manual, which includes 52 jurisdictions.
Surplus Lines (C) Task Force
The Surplus Lines (C) Task Force received an update on pending federal legislation regarding proposed reforms to the surplus lines market; an update on OPTins, the NAIC application for the online payment of premium taxes; a report of the Surplus Lines Financial Analysis (C) Working Group; and a report of the Surplus Lines Multi-State Premium Tax (C) Working Group.
At the suggestion of the NAIC leadership, the Task Force directed the Surplus Lines Multi-State Premium Tax (C) Working Group to review of an industry proposal to develop a state compact, the Surplus Lines Insurance Multistate Compliance Compact (SLIMPACT), for reporting and collecting multi-state surplus lines premium taxes. Randy Moses (SD) will chair a subgroup charged to identify the pros and cons of a compact approach.
Title Insurance (C) Task Force
The Title Insurance (C) Task Force appointed a statistical plan working group as well as an annual statement instructions subgroup as a step towards development of a blanks proposal. The Task Force reviewed results of a survey of the laws and regulations of all jurisdictions regarding the collection of title agent data and other issues related to title insurance.
The Task Force heard presentations on private transfer fee covenants and mortgage subrogation and learned that banking regulators have joined the Collaborative Enforcement Group, a joint effort of the US Department of Housing and Urban Development and the states formed to provide their combined perspective on current title industry practices that might be prohibited by federal or state law.
Catastrophe Insurance (C) Working Group
Catastrophe Insurance (C) Working Group received an update on the earthquakes disasters that occurred in Haiti and Chile and discussed progress on a white paper on defective drywall which is being drafted by NAIC staff. Although the paper is expected to be informational only, the Task Force plans to delay its exposure until after a court case, which may become a test case, makes its way through the Louisiana District Court. Peg Ising (Nelson, Levine, DeLuca & Horst, LLC) made a presentation on insurance coverage and liability issues related to defective drywall.
Financial Condition (E) Committee
Commissioner Al Gross (VA), chair of “E” Committee, opened the meeting by stressing the importance of the Solvency Modernization Initiative (SMI) and the new working group examining SAP and the consequences to GAAP.
Although the 2009 fourth quarter interim conference call minutes had been adopted by Plenary at the December 2009 meeting when it adopted the “E” Committee report, the Committee did not adopt those minutes at its own December 2009 meeting. The Committee adopted the conference call minutes of October 14, 2009, November 5, 2009, November 6, 2009, November 17, 2009, November 24, 2009, February 17, 2010, and February 19, 2010.
Matti Peltonen (NY) reviewed the recommendations from the Valuation of Securities (E) Task Force related to determining NAIC designations for structured securities, which includes doing the residential mortgage-backed securities (RMBS) modeling semi-annually, if technically feasible, by extending the RMBS solution that was used for December 31, 2009 until the long-term solution for loan-backed and structured securities is adopted and effective. The method that was used for year-end 2009 would also be used for commercial mortgage-backed securities (CMBS) and other security classes where modeling is applicable in determining the expected loss and where the NAIC deems the modeling to be cost effective. Gross asked if all comments had been taken into consideration and Peltonen replied that they had. The Committee adopted the recommendations.
Peltonen read the final Rating Agency (E) Working Group report. The recommendations had been adopted by the Working Group with little disagreement. Gross noted that there were a lot of tasks and charges to be referred to various groups in “E” Committee. He advised the chairs of the groups to review the report and make sure there was no redundant work. The chairs also needed to see if they could do the work within the timeframe. Gross suggested a conference call with the Working Group where chairs could ask questions about intent and wording of referrals. He also asked the NAIC staff to perhaps create a graphic map of the referrals. Gross noted that referrals needed to be segregated between current projects and long-term projects and it might be a good idea to keep the Working Group alive as a coordinating group. The Committee adopted a motion to continue the Working Group and the recommendations included in the Working Group report. A conference call will be held in April 2010 to discuss the additional charge of the Working Group as a coordinating group and the adoption of the remaining recommendations as referrals to various Committee groups.
Lou Felice (NY) reviewed the recommendation from the Capital Adequacy (E) Task Force to make the Risk-Based Capital for Health Organizations Model Act a Part A accreditation standard. The Committee adopted the recommendation and it will be referred to the “F” Committee.
The Committee adopted a motion to form a Health Reform Solvency Impact (E) Subgroup with the following charge:
• Assess the solvency impacts/concerns for health insurers as a result of the recently passed Affordable Health Care for America Act (H.R. 3590) [Now the Patient Protection and Affordable Care Act] and recommend charges for the appropriate Financial Condition (E) Committee groups to address these impacts/concerns.
Felice will chair the new Subgroup and asked for volunteers. Gross suggested that the volunteers also ask their health actuaries to help.
The Committee considered adoption of the written reports of the following groups:
• Accounting Practices and Procedures (E) Task Force
• Capital Adequacy (E) Task Force
• Examination (E) Task Force
• Receivership and Insolvency (E) Task Force
• Reinsurance (E) Task Force
• Risk Retention (E) Task Force
• Valuation of Securities (E) Task Force
• Financial Analysis (E) Working Group
• Investment of Insurers Model Act Revision (E) Working Group
• NAIC/AICPA (E) Working Group
• National Treatment and Coordination (E) Working Group
• Rating Agency (E) Working Group
• Separate Account Risk Charge (E) Working Group
The Risk Retention Working Group report was amended to delete from the third sentence in paragraph two “and incorporate corporate governance standards similar to those adopted by the Property and Casualty Insurance (C) Committee.” “E” Committee was comfortable with the change and adopted the revision and then adopted all the reports.
David Vacca (NAIC staff) discussed the Basel Committee on Banking Supervision Consultative Document Strengthening the Resilience of the Banking Sector and asked that copies of any comment letters be sent to him.
NAIC/AICPA (E) Working Group
The NAIC/AICPA (E) Working Group met on March 27 during the spring meeting of the National Association of Insurance Commissioners in Denver. The meeting started with an update on state adoption of revisions to the Model Audit Rule. To date, a total of 42 states have made revisions to the revised model which was adopted in 2006.
How Much Should Companies Say On Exec Pay? The Working Group then turned its attention to SEC Rule 33-9089, a proxy disclosure rule that focuses on compensation policies which might encourage companies to take on additional risk. Amendments to the rule were finalized on December 16, 2009.
In a summary provided by Dan Daveline (NAIC staff), it is noted that the disclosure requirements examine the compensation in place, how that compensation is overseen, and how management is rewarded for taking risk. The Working Group went through Daveline’s synopsis, noting that enhanced director and nominee disclosures would require more information on the background and qualifications of directors. Disclosure would also be required to be provided about the leadership structure such as whether the positions of CEO and chairman are separated or not. The Working Group also discussed disclosure of compensation to consultants and diversity within the board of directors as defined by both background and experience.
Steve Johnson (PA) said that the Rule is “all about transparency in [the] new age of capitalism and people who are trying to oversee [companies] in new age of transparency.” What will be difficult, according to Johnson, is applying this regulation to the legal entity structure, noting that the issue proved difficult in implementing the Sarbanes-Oxley law (SOX). The reason, Johnson explained, is that many boards of the legal entity are not the real drivers of the entity; rather, the board of the parent company drives policy.
The new Rule allows investors to better understand risk and is important because “certain management people will go crazy and overdo risk because they’ve got $100 million in their pocket already,” he said.
Wally Givler (Northwestern Mutual) representing the ACLI, said that ACLI member companies had a conference call to discuss the new Rule. Members realize that there is good potential in the Rule but need to figure out what may and may not be useful, he added.
Johnson said that if the SEC Rule is to be applied to companies, it is really necessary to start by writing something down and then working with interested parties on the issue. When SOX was being developed for insurance companies, “We really couldn’t get any one focused on getting SOX into the insurance and solvency quilt until we put pen to paper. It got people focused. It may have been a little ‘out there’ on the first draft but it got people stimulated.”
Bill Boyd of NAMIC, a trade group which opposed the SOX model throughout most of its development, agreed. But he noted that mutual insurers do not have many of the “perverse incentives” that public companies such as ENRON and Tyco provided. “We’re mutuals. We don’t have those incentives. Maybe we shouldn’t be tarred with the same brush once again at the outset.” He said that mutual companies are different and have faced fewer insolvencies and that NAMIC hopes for some recognition of that in any attempt to address this issue in the future.
Bill Sergeant (State Farm) suggested that a tool be developed that financial examiners could use rather than creating a whole new set of disclosure requirements.
Accounting Practices and Procedures (E) Task Force
The Accounting Practices and Procedures (E) Task Force met March 27 during the spring meeting of the National Association of Insurance Commissioners in Denver. The Task Force received reports of the Emerging Issues (E) Working Group, the Statutory Accounting Principles (E) Working Group, and the Blanks (E) Working Group.
Among the items received in the Emerging Issues (E) Working Group was the rejection of GAAP guidance on share lending arrangements and tentatively rejecting guidance on multiple deliverables and a GAAP item on distributions of stock and cash. A long discussion on the North Carolina Beach Plan was held with further discussion planned.
The Statutory Accounting Principles (E) Working Group exposed work including revisions to a guarantor’s accounting and disclosure requirements and issued a policy statement on coordinating the work of the Valuation Manual with other NAIC groups including the Life & Health Actuarial Task Force. It also referred Paper No. 1412 on Variable Interest Entities to the FAS 166/167 (E) Subgroup. It deferred action on accounting for life settlement contracts until further review is completed.
Among the items presented to the Task Force by the Blanks (E) Working Group were 12 exposed proposals with a May 21 deadline for comments. These items will be considered for adoption during a June 21 conference call.
And the Task Force acknowledged the retirement of Mike Olson of State Farm.
Blanks (E) Working Group: Jake Garn (UT) chaired the meeting.
Cindy Donovan (IN) gave the report from the P&C Lines of Business Subgroup, which included the minutes from the January 20 and February 3, 2010 conference calls. The Working Group adopted the report.
Action on Items Previously Deferred/Referred:
• 2009-35BWG MOD - Add new annual statement line 17.4 to the Underwriting and Investment Exhibits, Exhibit of Premiums and Losses (state page), Five Year Historical, and Insurance Expense Exhibit of the property statement and the property supplement of the health statement for the reporting of director and officer business. Instructions for the Five Year Historical will also be modified to reflect the new line. Add definition for director and officer liability to the appendix. This item had been referred to the P&C Line Business Subgroup, which submitted replacement proposal 2010-06BWG. Proposal 2009-35 was withdrawn.
Action on Items Previously Exposed for Comment:
• 2009-38BWG MOD – Add question to the General Interrogatories on establishment of an audit committee and their independence. Milum Livesay (Genworth), speaking for interested parties, recommended that the item be deferred and referred to the NAIC/AICPA (E) Working Group. Garn (UT) was concerned that deferring the item would make adoption for 2010 impossible. Livesay said the item could be discussed and adopted at the interim June conference call. He also brought up privacy concerns and felt that Questions 10.7 and 10.8 were sufficient and that 10.9 and the list of board of directors should not be in the annual statement but would be better placed in the supplement. Steve Johnson (PA) suggested that the Working Group adopt the proposal with removal of Question 10.9 and refer Question 10.9 to the NAIC/AICPA Working Group. Philip Barlow (DC) thought the argument for transparency was valid. By a very close vote the item was adopted with Question 10.9 deleted and referred to the NAIC/AICPA Working Group.
• 2009-39BWG – Modify the instruction and illustration for Note 29 Premium Deficiency Reserves. The data for the illustration will be data captured. This item was adopted.
• 2009-40BWG MOD – Add Fair Value column to Schedule DB, Part B, Section 1, Modify Schedule DB Verification, Line 10 to reference the new column and adjust column references as needed due to renumbering of columns as a result of adding Fair Value column. This item was adopted as modified.
• 2009-41BWG MOD – Adds illustrations to Note 5D(4), (5) and (6) and provide for data capture of those disclosures. In addition Note 5D(2) and 5D(3) from the 2009 reporting are being reversed to provide consistency with the AP&P manual. Note 5D(4), 5D(5) and 5D(6) will be data captured. Livesay said he did not think this was the best place for a footnote. This item was adopted as modified.
• 2009-42BWG MOD – Add new disclosures to Note 33 for the life and fraternal statements to satisfy new disclosure requirements adopted for SSAP No. 56, Separate Accounts. 33A(2) and 33A(3) will be data captured. This item was adopted as modified.
• 2009-43BWG MOD – Add General Interrogatories to separate accounts statement with questions to satisfy new disclosure requirements for SSAP No. 56, Separate Accounts. This item was adopted as modified.
• 2009-44BWG – Modify instructions for Note 21, Events Subsequent, to be consistent with the changes adopted for SSAP No. 9, Subsequent Events. This item was adopted.
• 2009-45BWG – Add disclosure to Note 22, Reinsurance of the property statement related to disclosure of the transfer of property and casualty run-off agreements adopted in SSAP No. 62R, Property and Casualty Reinsurance. This item was adopted.
• 2009-46BWG MOD – Add instructions and illustrations to property statement instructions for a new note for financial guaranty insurance. The following parts of the note will be data captured: 35A(1)b, 35A(1)c, 35A(2)b, 35A(3)b and 35B. This item was adopted as modified.
• 2009-47BWG – Add a new Note 20, Fair Value Measurement, to reflect additional disclosures required by the adoption of SSAP No. 100, Fair Value Measurements. All notes following the new Note 20 will be renumbered. Note 20A(1), 20A(2) and 20B(1) will be data captured. This item was adopted.
Action on Newly Submitted Items:
• Garn introduced a new item, which was not on the agenda. He proposed revisions to the Working Group procedures because of the change to a yearly three meeting schedule. Under the proposal, there would be a conference call every June so that the Working Group would continue to meet four times a year. During these interim calls proposals will be exposed and adopted. Any quarterly proposal must be adopted no later than the NAIC summer meeting (August/September) for changes to be effective the first quarter of the following year; they must be filed at least 30 days prior to the June conference call. Changes to the annual statement must be filed no later than 30 days prior to the NAIC spring national meeting (March) and adopted during the interim conference call of the June in the year of the change. This item was exposed.
• 2010-01BWG – Combine current grouping of sub-categories used for mortgage-backed and asset-backed securities from the current five grouping into three for the appropriate Schedule D, DA and E schedules. Instruction modification also done for IMR, AVR and Investment General Instructions. Note: Instruction changes apply to separate accounts and protected cell but no changes to their specific instructions as completion of Schedule D, DA and E follows the general account instructions. This item was exposed.
• 2010-02BWG – Schedule D Part 1 Column 26 – Collateral Type. Expand list of identifiers to identify additional types of “Other Asset-Backed Securities”. Note: Instruction changes apply to separate accounts and protected cell but no changes to their specific instructions as completion of Schedule D follows the general account instructions. This item was exposed.
• 2010-03BWG – Add two columns to Schedule S, Part 4 (Life, Fraternal and Health); Schedule F, Part 1 (Property, Health and Title); Schedule F, Part 5 (Property) and Schedule F, Part 3 (Title) to identify the bank issuing or confirming a letter of credit. The new columns will capture the banks American Bankers Association (ABA) routing number and name. This item was exposed.
• 2010-04BWG – This proposal has several changes to the Actuarial Opinion section of the annual statement instructions for the Health Blank. It adds several exemptions in which the actuarial opinion is not required. It clarifies some items that have to be opined on. It clarifies the required wording if there are different reserve requirement in several states. This item was exposed.
• 2010-05BWG – Remove the first paragraph of the instructions as it applies to C-3 Phase I only and not to C-3 Phase II. Modify the remaining instructions to be consistent with the RBC instructions. Garn teased Barlow by asking if C-3 Phase III will be ready for adoption in 2011 and Barlow responded that of course it will, which generated a lot of laughter. This item was exposed.
• 2010-06BWG – Add supplement to the property annual and quarterly statement to capture premium and loss data related to Director and Officer Insurance. Also adds new interrogatory questions to the Supplemental Exhibits and Schedules Interrogatories page for both annual and quarterly reporting. A new document identifier was added to the list of identifiers. Life, health, fraternal and title only added to proposal due to identifier list being a uniform listing. This item was exposed.
• 2010-07BWG – Add a supplemental exhibit for Analysis of Annuity Operations by Line of Business and Analysis of Increase in Annuity Reserves During the Year that would provide operations information, end of year in force and fund value by annuity type. In addition add a new interrogatory question to the Supplemental Exhibits and Schedules Interrogatories for this new supplement. NOTE: Property, Health and Title are only included in this proposal due to the uniform document identifiers maintained as a uniform list for all statement types. Livesay said this is a lot of data to pull together for 2010. Brendan Bridgeland (Center for Insurance Research) said the Center supports this proposal. This item was exposed.
• 2010-08BWG – Adds new instruction and illustration to Note 5E and makes modifications to the instructions and illustrations of other parts of 5E. The disclosure for Note 5E(4) will be data captured. A new interrogatory is being added to the General Interrogatories, Part 1 and a new code will be added to the investment code list for reinvested collateral from securities lending programs. This item was exposed.
• 2010-09BWG – Add a new Schedule DL, Part 1 and Part 2 to the annual statement beginning in 2010 and to the quarterly statements beginning first quarter 2011. This item was exposed.
• 2010-10BWG – Add a new line to the asset page (Securities Lending Reinvested Collateral Asset) and liability page (Payable for Securities Lending). Update the references to asset and liability page lines changed due to new line additions. Schedules needing update would include Five Year Historical, Cash Flow and Exhibit of Nonadmitted Assets. This item was exposed.
• 2010-11BWG – Add instruction to General Interrogatory Part 2 Question 9.2 (for Life) and 24.2 (for Fraternal) to incorporate the non-binding guidance provided by the Life and Health Actuarial Task Force for the 2009 reporting into the instructions. This item was exposed.
• 2010-12BWG – Add illustrations to the instructions for Note 9, Income Taxes. The amounts for 9A and 9C will be data captured in the electronic notes. This item was exposed.
The comment deadline for the newly exposed items is May 21, 2010. The interim conference call will be held June 21, 2010 at which time the new items will be considered for adoption. All editorial changes were adopted by the Working Group.
Emerging Accounting Issues (E) Working Group: The Emerging Accounting Issues Working Group of the Accounting Practices & Procedures (E) Task Force met on March 26 during the spring meeting of the National Association of Insurance Commissioners in Denver.
The Working Group started the meeting by adopting ASU 2009-15, a non controversial item titled ‘Accounting for Own Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.’
The group continued through its list by recommending that ASU 2009-13, titled ‘Revenue Recognition: Multiple-Deliverable Revenue Arrangements’ be rejected and INT 04-18, which offered prior guidance on the topic, be nullified. The argument behind the motion, which was adopted, was that the activities are largely related to leases for real estate and software and are not usually related to insurance.
The EAIWG then discussed ASU 2010-01, titled ‘Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash.’ The ASU addresses discrepancies in treating these distributions. The Working Group recommended making it not applicable to statutory accounting, a motion that was adopted.
Following these items a lengthy discussion ensued between Tony Riddick (NC) and property casualty companies State Auto Mutual, Columbus, Ohio and Liberty Mutual Group, Boston. State Auto was represented by Cindy Powell and Liberty Mutual, by Ken Copman. Jim Olsen (Property Casualty Insurers Association of America) also spoke on behalf of the companies.
The issue focuses on accounting changes made in 2009 to the North Carolina Beach Plan which affected funding of the plan. The question raised by the P&C panel was whether, if the reinsurance pool/association had better than expected results, distributions of the plan’s assets associated with those better than anticipated results could be made to participating companies in the Plan.
Copman argued that company contributions are not receivables but are in effect equity from a pool. Powell added that she has no disagreement with the statement that there was an agreement to cap assessments in return for not receiving distributions. However, she continued, that still does not address the issue that surplus is not a receivable. In this plan, according to Powell, there were no underlying receivables and payables, just an equity interest. Riddick said that both the North Carolina department and Attorney General maintain that there is no equity interest in this plan. Riddick then read from the North Carolina statute (58-45-b1) which states that no member company is entitled to any portion of surplus.
Powell replied that the citation says that there will no longer be distributions to member companies, not that the surplus does not belong to them.
Members of the working group suggested that this is an issue specific to North Carolina and that further discussion could be held on a regulator-to-regulator call.
Steve Johnson (PA) said that the issue is up for interpretation and could be debated all day by regulators. He added that just because a company is a member of the plan does not mean it has an equity interest. Rather, he continued, it is a prepaid asset for the next storm but it is not an equity interest. A motion was made and passed that an equity interest should be written off.
Statutory Accounting Principles (E) Working Group: The EAI working group business ended and the Statutory Accounting Principles working group convened. The discussion started with 2003-12, ‘Consideration of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees including Indirect Guarantees of Others.’
Keith Bell (Travelers) raised the issue of affiliated company guarantees explaining that there is not really an intercompany guarantee because companies want to avoid gaining an equity interest in an affiliate. Often, the capital contribution would move up to the parent and then back down to the affiliate, he said, and while cash might move directly to the affiliate, the accounting would not work that way. Usually, guarantees are needed for performance reasons such as a requirement by a rating agency or a state requirement for a guarantee if an affiliate is applying for a license, he said.
Johnson said that the accounting should flow with legal documents and Bell concurred. Bell also added that when his company created intercompany guarantees, a list was made and if the guarantees were material, it talked to state regulators about the list.
Following the discussion, a motion was made and passed to re-expose language in paragraphs 16-17 and to receive interested party recommendations on the effective date of the proposal.
Rose Albrizio (AXA Financial) raised the issue of disclosures of variable interest equities in Paper 142 which proposes adopting guidance in FAS No. 167, providing statutory guidance for disclosure of an insurer’s involvement in VIES. Albrizio maintained that such a requirement is not consistent with statutory accounting, and would require “extensive work from companies.” There would be significant work for mutual companies to identify these investments for disclosure purposes, she added. Even public companies that already adhere to 167 at the holding company level would have to apply the requirements on a legal entity basis, Albrizio maintained.
The Working Group discussed ways to achieve the goal of the paper without being too granular and discussed a possible Dec. 31, 2011 effective date. A motion was made to receive comments and refer further work to the subgroup.
Capital Adequacy (E) Task Force
The Capital Adequacy (E) Task Force met under the chairmanship of Lou Felice (NY). It received reports from its Working Groups.
Life Risk-Based Capital (E) Working Group: Philip Barlow (DC) reported that the Working Group had received an update from the ACLI on a derivatives risk-mitigation proposal. Work continues on the proposal, but it will not be completed for year-end 2010 implementation. When the Working Group was focusing on a 2010 implementation, the proposal was cut back to only the basic hedges. For a year-end 2011 proposal, the Working Group will consider intermediate hedges but the proposal will be presented in two parts.
The Working Group also discussed a long-term proposal from the ACLI for the RBC treatment of commercial mortgage loans. The ACLI had added information to its report regarding the treatment of certain loans and it is now working on a statistical analysis of mortgage experience. An educational session to gather more information for both the short-term and long-term mortgage proposals might be held in May.
The Task Force requested that NAIC staff draft a memo regarding the impact of changing the Life RBC trend test percentage from 250% to 300% in the RBC model act language. Steve Johnson (PA) said this would bring the model in line with health RBC requirements.
The Task Force received an update on the C-3 Phase 3 proposals. Because there are outstanding issues still to be resolved, the earliest that C-3 Phase 3 might be enacted will now be year-end 2011. Comment deadlines on two exposures related to C-3 Phase 3 were extended until April 10th. The intention was to put together a plan for items that needed to be addressed before implementation.
The C-3 Phase 2 Results Subgroup had been reviewing company filings for companies who agreed to provide information. After discussion about how to proceed, the Subgroup decided to put forth a report as a starting point to facilitate discussion. Five observations were outlined in the report related to the data. These recommendations were discussed at the Life and Health Actuarial Task Force. Additional conference calls will be scheduled to discuss the report and receive comments from Interested Parties. Oliver Wyman is preparing a report on reserves and capital. Felice said that the approach to capital and reserves needed to be integrated and that the Task Force will re-form the Capital Adequacy Task Force/Life and Health Actuarial Task Force Joint Subgroup during a conference call in two weeks. A chair for the Subgroup will also need to be found.
Property Risk-Based Capital (E) Working Group: The Working Group had released for comment a report from the American Academy of Actuaries (AAA) regarding updating underwriting risk factors. A new study had been done with three more years of data. Factor changes for each line of business had been capped at ±15% for the last two years. Some lines of business would have a 15% increase for three years in a row if the proposed factors are adopted for 2010. The AAA recommended substantial changes to the risk charges, notably for reinsurance lines. The report will be discussed on an April conference call.
The Working Group also discussed validation of RBC Schedule P data filed for the two-year lines of business. The quality of data for short tailed lines is not considered to be sufficient. One state had followed up with its companies regarding the data and the companies had indicated they felt it was a software vendor issue. The Working Group plans to approach the vendors to discuss the situation.
The AAA continues to look at the RBC charge for state deposits related to illiquid assets.
Health Risk-Based Capital (E) Working Group: The Working Group received an update from the AAA regarding the health care receivables project. The AAA had done a sensitivity analysis of the current RBC factor, and the change in overall RBC would be modest. The AAA will review one more year of data. An update will be provided for the June Working Group conference call.
The AAA Stop Loss Work Group continued its work, and a recommendation for the Health Risk-Based Capital (E) Working Group was expected for a June Working Group conference call. The Working Group had discussed its 2010 working agenda. Two items on the agenda had been completed and a new item was added to review the covariance calculation. The AAA will report back on the June Working Group conference call regarding the covariance calculation. A long-term charge for the AAA will then be developed. “E” Committee will consider making the Health RBC Model Law part of the accreditation standard at this meeting. Johnson asked for support for the proposal.
Solvency Modernization Subgroup: The Task Force received an update regarding a Solvency Modernization Initiative Task Force interim meeting held in March. Topics, including capital adequacy, accounting, group supervision, and corporate governance, were discussed. Alan Seely (NM) chairs the Subgroup. Lou Felice (NY) said that the Subgroup would need to focus on the purpose of regulatory capital and the relationship of RBC to economic capital. Larry Bruning (KS) said that there was considerable discussion at the Phoenix meeting on the limits of RBC as a predictor of future solvency and the use of other information such as the FAST ratios for that purpose.
Morag Fullilove (GNAIE) and Steve Broadie (PCI) suggested that the Task Force will need to consider the role of regulatory capital and quantifying the statistical level of the RBC calculations among many other issues. There was some agreement that this comparative information was needed. Johnson said the Framework paper just released by “E” Committee helped explain the US system.
Agenda: The Task Force discussed its working agenda for 2010. A number of items needed further work, especially related to solvency modernization and health care reform. A conference call will be held in about two weeks to adopt an updated the draft of the working agenda.
Fraternals: The NAIC staff was requested to draft a survey to states regarding their current treatment of fraternal societies and get the opinion of the states regarding whether there should be a model act for fraternal RBC. The Task Force may also want to request a resource plan from the NAIC regarding capturing the fraternal RBC data.
Deferred Tax: An update was received from the AAA regarding the deferred tax asset project. The AAA was on track for the June deadline for a preliminary report.
Reinsurance (E) Task Force
The Task Force meeting began with South Carolina Commissioner, Scott Richardson, welcoming everyone and updating the participants on the lobbying effort on Capitol Hill.
Amanda Yanek (NAIC staff) began by updating the Task Force on federal legislation including the Restoring American Financial Stability Act, the Nonadmitted and Reinsurance Reform Act, and the Office of National Insurance (ONI)/Federal Insurance Office (FIO) legislation. Staff advised that the NAIC supports the surplus lines section of the Nonadmitted and Reinsurance Reform Act, but believes the reinsurance section is inadequate. The NAIC also favors the FIO (the House version) over the ONI (Senate version). House Bill 4173 passed the US House of Representatives on December 11.
Senator Chris Dodd (D-CN) began work last year on the Senate version of a financial regulatory reform bill, which was passed by the Senate Banking Committee in late March. The full Senate should take up this legislation after the Spring break.
Members of the Task Force asked Yanek how the legislation was going to deal with the collateral issue. She said Treasury believes the preemption provisions allow for preemption of collateral. Richardson advised that the NAIC is continuing to monitor whether there is any Congressional interest in the NAIC’s Reinsurance Regulatory Modernization Act and will advise the Task Force by conference call if there are any developments. Yanek also reported on the proposed elimination of the federal income tax deduction for excess reinsurance premiums ceded to offshore affiliates with respect to offshore risks. The NAIC had taken no position on the legislation which is included in the 2011 Budget bill.
The Task Force discussed the Tawa Management proposal to amend the NAIC’s Reinsurance Modernization Framework to reduce the trusteed surplus requirement for a multiple-beneficiary trust maintained for reinsurance collateral purposes by an assuming insurer in run-off. In June 2009 the Task Force agreed in principle to make this change in the NAIC’s Credit for Reinsurance Model Law and the change was adopted by the Task Force. The Task Force at this meeting directed NAIC staff to ask the Financial Condition (E) Committee to implement the Tawa proposal on a stand-alone basis by amending the NAIC Credit for Reinsurance Model Law, rather than including the change in the NAIC’s Reinsurance Regulatory Modernization Act.
Robert Kasinow (NJ) gave an update on the IAIS activities on reinsurance. Macro-prudential surveillance activity is a priority for the IAIS and, as a result, the Reinsurance Transparency Working Group may expand its efforts to include broader data collection. The IAIS Mutual Recognition Subgroup is collecting information regarding efforts between jurisdictions to establish recognition arrangements. The IAIS Reinsurance Subcommittee is also working on a rewrite of the standard on reinsurance and the insurance core principles.
A concern was raised as to whether the contract certainty rules in the US would be deemed equivalent by the IAIS. Joe Fritsch (NY) said New York’s work on contract certainty stemmed from the World Trade Center. New York suggested that rather than open up the nine-month rule for reconsideration to address these concerns, the Task Force should initiate discussions with (re)insurers to see how the industry was progressing with respect to achieving contract certainty. The NAIC will be asking industry to provide information on contract certainty.
Director Karen Stewart (DE) asked if the placement slips would be replaced and was told that, “no, the slips will still be in the packet.” Matt Wolf (RAA) said the industry was working closely with the New York department and encouraging companies to use this process. NAIC staff will get back to the industry on questions to be addressed.
Dan Schelp (NAIC) introduced the issue of the proper Letter of Credit form for reinsurance collateral purposes. The International Chamber of Commerce has issued a publication on standby letters of credit for reinsurance capital. Steve Johnson (PA) provided an update on a Blanks Working Group proposal to collect Letter of Credit issuing bank information within Schedules F and S. The Task Force passed a motion to submit a recommendation to the Financial Examiners Handbook Technical Group to explicitly include International Chamber of Commerce Publications 590 and 600 as successor publications to Publication 500 in the Example Letter of Credit Form in the Financial Condition Examiners Handbook.
Valuation of Securities (E) Task Force
The VOS (E) Task Force met on March 27 during the spring meeting of the National Association of Insurance Commissioners in Denver.
The session started with a review of the 2009 RMBS project. Chris Evangel (SVO) discussed how just over 21,000 securities were evaluated. He outlined four steps that were taken when examining these CUSIPS: examining macro economic variables; applying a mortgage valuation model that incorporated the effects of micro economic variables for each loan; adding default rates using a “waterfall model”; and an examination of cash flow based on the valuation of each result.
The valuation work continued, he explained, by comparing VOS results to the results developed by PIMCO, an independent contractor hired to develop a benchmark. A ‘deep dive’ was then conducted to verify those results and to make sure that the model was working as it was supposed to, he added. Finally, according to Evangel, a check was made to ensure that the results were reasonable. “From our perspective, we think that the whole process was successful.” Evangel said. In response to a request from the Task Force, Evangel said that the SVO hopes to come back in late spring with a report that would break out industry ownership of these CUSIPS.
Ed Stephenson (Barnert Associates, Inc.), on behalf of Jackson National Life, praised the SVO and asked whether in the future, results could be released before December 28. While there is not yet a work plan for 2010, there would be more time to complete the project than the six-week time frame the SVO had in 2009, he continued.
Evangel responded that the results will be delivered during the final week in December because if there is an earlier delivery date several months of data might be left out of the evaluation. Stephenson responded that for companies, the earlier it arrives, the better it is for reporting purposes.
The Task Force then discussed the future of the project and its extension into 2010 or until a long-term solution is developed. The discussion focused on performing semi-annual updates, which regulators said would offer a balance between annual updates, which would not be adequate and quarterly updates, which might be unnecessary. A motion to perform semi-annual modeling was made and adopted. The Task Force also instructed the SVO and NAIC staff to examine whether an alternative methodology could be used.
The discussion then turned to how to find a long-term solution for valuing other types of structured assets such as commercial mortgage-backed securities. The Task Force maintained that CMBS would be a logical next step because there are over $200 billion worth of them in the market. As part of that process, the Task Force said it would want rating agencies to provide information about when those structured securities were rated and reviewed.
ARO ratings that are not modeled, according to the Task Force, would be subject to one of several possible strictures: any rating that did not have an effective date or confirmed valuation date of less than 12 months could not be used; anything less than a year old would be notched down by one NAIC designation; all loan-backed and structured securities that are not modeled and are ARO rated would be subject to a modified FE process; and securities that are not ARO rated and not modeled would be subject to the 5-star and 6-star rule as detailed in the SVO Purposes and Procedures Manual.
The discussion turned to how this evaluation system should be modeled. Representatives from the ACLI and individual companies argued that a number of models should be used to evaluate CMBS portfolios. John Fitzpatrick (Allstate) said that the CMBS is the most difficult of structured products to model and can be compared to bathing suits: “what it shows is suggestive but what it conceals is more relevant.” There can be huge differences in outcome depending on the models used, he said.
Francisco Paez (MetLife) cited findings from different models to determine losses for 2007 securities which had ranges that started with an average 5.47% loss on the low end and continued to a 16% loss on the high end of the estimates. While there is consensus that the CMBS market will get worse, Paez continued, there is no sense of how much worse it will get. There might not be a good sense of that for another seven to ten years, he added. For these reasons, he reiterated that it would be a mistake to use a single CMBS modeler.
Rather, life insurers including Prudential and Sun Life Financial argued, there should be a survey approach because it would eliminate overestimation or underestimation of losses. And, according to Fitzpatrick, while RMBS are homogenous in nature, there is more heterogeneity in the CMBS market.
But Matti Peltonen (NY) noted the inconsistencies of different modelers because of different assumptions used. Consequently, there will be different results, he said. Peltonen added that the assumption is being made that the average derived from different modelers is correct.
The Task Force adopted a CMBS recommendation that would begin using financial modeling to determine NAIC designations for CMBS starting at year-end 2010; require that structured securities using an NAIC ARO rating be subject to the filing exempt rule and have an effective date and confirmed evaluation date of less than a year; and use the five-star and six-star rule for securities that are not rated or modeled.
The Task Force also discussed the issue of a rating trigger and the prohibition of its use in private agreements. The discussion broached on whether insurers should continue to be prohibited from inserting clauses in private loan agreements with borrowers that call for a change in terms upon a change in an NAIC designation. Staff believes that the prohibition should be kept. It decided on a 30-day comment period to receive input on the SVO proposal to amend the Purposes and Procedures Manual.
Financial Regulation Standards and Accreditation (F) Committee
Superintendent Joseph Torti III (RI), chair of the “F” Committee, discussed the 2009 revisions to the following publications which are utilized for accreditation:
• Annual Statement Blanks and Instructions
• Life and P&C RBC Formulas
• Purposes & Procedures Manual of the NAIC Securities Valuation Office
• Accounting Practices and Procedures Manual
• Financial Condition Examiners Handbook
Except for two significant items in the Examiners Handbook, the revisions were considered insignificant and were adopted by the Committee. The two significant items in the Examiners Handbook are a new set of examination repositories and an update of the information technology review process. These two items were exposed for a 30-day comment period.
The 2009 revision to the Actuarial Opinion and Memorandum Regulation was adopted as acceptable but not required for accreditation purposes by the Committee.
The 2009 revisions to Standard Valuation Law were exposed for a 30-day preliminary comment period. They will be exposed for a one-year comment period at the August meeting. The revisions include authorizing the use of a valuation manual; authorizing a principles-based reserve basis for those policies and contracts specified in the valuation manual; specifying that the requirements for the actuarial opinion of reserves that are currently in the Actuarial Opinion and Memorandum Regulation, which are required as part of the NAIC Accreditation Standards, must be included in the valuation manual after the operative date of the valuation manual; mandating that companies shall provide experience data so that studies of mortality, morbidity, policyholder behavior, and expenses may be made; and mandating that the commissioner is the final authority on the level of reserves.
The 2009 revisions to the Life and Health Insurance Guaranty Association Model Act and the Property and Casualty Insurance Guaranty Association Model Act were adopted by the Committee as acceptable but not required for accreditation purposes.
Steve Johnson (PA) discussed the Pennsylvania Insurance Department’s comment letter on Company Licensing Implementation Guidance. Torti suggested taking out the word “any” from Pennsylvania’s proposed clarifications and the Committee adopted the implementation guidance with the modified clarifications. The new Part D accreditation standards become effective on January 1, 2012.
There was a discussion of the comment letters received on the referral from the Risk Retention Group (E) Task Force (RRG TF) regarding Part B and Part C Accreditation Standards applicable to risk retention groups (RRGs) licensed as captive insurers. Skip Meyers (National Risk Retention Association), Jim McIntyre (Vermont Captive Insurance), Commissioner Paulette Thabault (VT), and Philip Barlow (DC) all strongly supported the recommendations put forth in the exposure draft. Julie Glaszczak (NAIC staff) said an additional guideline is needed to make sure there is proper sharing of information. Torti thought the comments were inconsistent with LRBC. The Committee adopted the referral and the additional Part B guideline with an effective date of January 1, 2011 in order to be consistent with the previously adopted Part A standards effective date of January 1, 2011.
Glaszczak reviewed a memo from the RRG TF regarding Part A clarifications. The memo recommends revising Part A Capital and Surplus standard to require RRGs to file RBC reports in accordance with Section 2 of model #312, effective January 1, 2012 and to add wording to the Part A Reinsurance Ceded standard in which current cedants are grandfathered in. There were no questions or comments regarding the changes and the Committee exposed the proposed recommendations for a 30-day comment period.
Jeff Loomis (NAIC staff) reviewed the NAIC Policy Statement on Financial Regulation Standards (#690), which is included in the NAIC’s model regulation service. NAIC staff recommended that the policy statement be removed since it is not actually a model. The model was originally included because there was no other reasonable place for the information but now the NAIC Administrative Policies Manual of the Financial Regulation Standards and Accreditation Program contains the information. The Committee adopted to remove model #690.
Johnson wanted the Committee to be aware that an important HRBC standard is making its way from the Capital Adequacy (E) Task Force to the “E” Committee and will be in front of the “F” Committee at the August meeting.
International Insurance Relations (G) Committee
Commissioner Kevin McCarty (FL) chaired the committee meeting which included reports from working groups and representatives to various international organizations.
NAIC International Strategy and Action Plans: George Brady (NAIC staff) reviewed updates to the plan including changes of representation on various international committees. Bob Kasinow (NJ) will serve on the IAIS Reinsurance Task Force. Mike Ridgeway (OK) will serve on Market Conduct. The NAIC will be establishing a Trade Task Force to coordinate the NAIC’s interaction with the US Trade Representative (USTR) and to consider GATS reservations.
Financial Sector Assessment Program: Ray Spudeck (FL) reported that the International Monetary Fund’s FSAP has been completed. A final report is expected to be released by April 30, 2010. Joe Fritsch (NY) said that New York had been one of the states selected for an in-depth review and that the IMF had been surprised by the level of review, especially the stress tests. He added that group supervision was a key issue in the FSAP review and is a focus of much of the global discussion following the financial crisis. Spudeck said that the US will undergo another FSAP in 2012 based on the new IAIS Core Principles.
International Association of Insurance Supervisors (IAIS): Yoshi Kawai, IAIS Secretary General, described the priority areas for the IAIS Executive Committee:
• The Common Framework which has been approved for further development. A concept paper is to be completed by June 2011. Commissioner Al Gross (VA) will serve as vice-chair of the CommFrame Task Force.
• Financial Stability including systemic risk and macro-prudential issues. The IAIS will be preparing a report to the G-20 and Financial Stability Board (FSB) by June, which will focus on the insurance industry as an amplifier of risk, rather than an originator of risk. Kawai said the definition of systemic risk the IAIS is using differs from that in the NAIC’s paper on systemic risk. After June, the IAIS will focus on macro-prudential surveillance issues. The IAIS has been focusing on the differences between banks and insurance companies. Kawai said the key issues for the FSB have been quality, transparency, and consistency of capital, and resolution of cross-border issues.
• Improvements to the IAIS standard setting activities, especially the review of the Insurance Core Principles and increasing the effectiveness of implementation of the standards, including a possible peer review process.
• Resources and staffing to meet these goals. This last area has been a particular concern for the NAIC members of the IAIS Executive Committee. The IAIS will develop a strategic plan for 2011-2015. The plan will look at meeting organization, the structure of committees, and the secretariat.
Solvency Modernization Initiative: Commissioner Christina Urias (AZ) provided a brief update on issues related to the Solvency Modernization Initiative which she described as a critical look at the US solvency regime to ensure that the US maintains a leadership role. Urias indicated that the Financial Condition (E) Committee has completed and released a Framework document describing the US regulatory system. She also said that the NAIC would be appointing a Commissioners only Working Group to examine the role of Statutory Accounting (SAP). Commissioner Al Gross (VA) will chair the Working Group. There was some discussion as to the relationship between the NAIC’s SMI work and the IAIS’ Common Framework. Dave Snyder (AIA) said the goal should be to fill in the gaps, but to avoid unproductive duplication. Spudeck said the US system must focus on its 7000 insurers, whereas the Common Framework was aimed only at internationally active insurance groups.
Joint Forum: McCarty and Spudeck provided an update on the Joint Forum which is changing its focus from financial conglomerates to broader issues and recommendations related to the financial crisis. The Joint Forum has completed its work on the differentiated nature and scope of regulation. The Forum is near completion on a paper on diversification and risk modeling which will include some strong recommendations according to Spudeck. The Joint Forum is now considering its next projects which are likely to include an update of the 1999 paper on financial conglomerates, securitization, the use of ratings in private transactions, and the role of business models in regulated industries.
EU-US Dialogue: George Brady reported on discussions related to equivalence and reviewed the NAIC’s comments on the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) consultation paper regarding the equivalence criteria and process. The NAIC had urged that the evaluation look at an outcomes-based approach. The final advice to the European Commission is expected to be released in early April. Brady described relations with the European Commission and CEIOPS as positive. The NAIC has been asked to speak on the equivalence panel at the May 4 European Commission Hearing on Solvency II. Morag Fullilove (GNAIE) acknowledged the value of the ongoing dialogue between the industry and the NAIC on equivalence. Dave Snyder (AIA) indicated that provisional equivalence was important not to disrupt Trans-Atlantic trade.
G-20: George Brady (NAIC) reported on the Action Plan of the G-20 and the FSB. He said the US and the NAIC feed information to the various standing committees, including those on standards, vulnerability, remuneration, crisis management, data, and supervision.
International Insurance Forum: The NAIC will hold its International Insurance forum in Washington, DC, May 17-18. Topics include global standards for capital requirements, systemic risk, corporate governance, and the role of regulation in market expansion.
International Regulatory Cooperation Working Group: Martha Lees (NY) provided a report on the 2010 internship program. The 2010 interns are coming from the Czech Republic, India, Egypt, Kosovo, Saudi Arabia, Thailand, and Botswana. Representatives of the host jurisdictions were very positive about the experience and the program. There was some discussion in the Working Group of establishing an alumni network. Alan Seely (NM) had suggested that the NAIC consider sending US regulators to work on assignment in other countries as part of the exchange program. The ACLI made a brief presentation regarding its priority country objectives. The Working Group proposed that the NAIC pursue MOUs with Bahrain and the Cayman Islands.
NAFTA Working Group: Commissioner Christine Urias (AZ) provided a brief report on the NAFTA Trilateral Insurance Working Group which continues to focus on an ongoing effort to obtain changes to the Federal Motor Carrier Safety Administration rule which allows Canadian trucks and buses entering the US to present evidence of their Canadian insurance as proof of “financial responsibility.”
Other Business: Dave Snyder (AIA) urged the NAIC to look at the OECD work on the effectiveness and efficiency of regulation.
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