Table of Contents
Financial Regulatory Reform—
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An Hour with US Representative Barney Frank—
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Impact on the States — Three Different Viewpoints—
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The NAIC Perspective—
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Financial Services & Investment Products Committee—
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Credit Default Insurance Model Legislation—
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International Insurance Issues Committee—
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International Accounting Standards — Impact on the States—
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UK Coalition Government — Prospects for Insurance Regulation—
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Life Insurance Committee—
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NAIC Suitability Model Regulation—
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Stranger - Initiated Annuity Transactions—
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Disclosure of Life Insurance Options—
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State - Federal Relations Committee—
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Report on IIPRC Activity—
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MCAS Data Collection / Sharing Model Act—
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NCOIL’s summer meeting was held in Boston where the two hot topics were H.R. 4173, Dodd-Frank Wall Street Reform and Consumer Protection Act, which is expected to become law soon after the Senate returns from its July recess, and implementation of the Patient Protection and Affordable Care Act, which was signed into law by President Obama on March 30, 2010. These two issues are also expected to dominate in the next meeting scheduled for November 18 – 21 in Austin, Texas.
The meeting was well attended; the final head count was 344 of which 55 were legislators or legislative staff. There was a lot of interaction with representatives of the NAIC and recognition by both organizations that they will need to work together on implementation issues concerning both federal reforms. A “summit” meeting has been tentatively scheduled at the upcoming NAIC, which will take place August 14 – 17 in Seattle, to discuss how to get the producer licensing model and the interstate compact enacted in the holdout states and perhaps to coordinate efforts to stop Congress from enacting an OFC in 2011.
Financial Regulatory Reform
An Hour with US Representative Barney Frank
Representative Barney Frank (MA), chairman of the House Financial Services Committee as well as the Financial Reform Conference Committee which crafted the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173), began his remarks with the good news; stating that the financial regulatory reforms would require very little change for state insurance regulation. He stated he generally supports state regulation and understood that the financial crisis at AIG was not caused by its insurance operations; that the problem had emanated from unregulated activities at the top of the organization; but that they were fueled by AIG’s profitable insurance operations. He noted that under H.R. 4173 those previously unregulated activities will now be regulated.
Another piece of good news in H.R. 4173 is that it clarifies that indexed annuities are insurance products to be regulated solely by the states. Representative Frank said this was done in order to resolve a jurisdictional dispute between the state insurance regulators and the SEC.
Frank was concerned that there is very little insurance expertise at the federal level; to remedy this both the Senate and House bills had created a federal insurance office (FIO). Frank said he opposed the Senate version because it would have granted the new office broad powers to preempt any state insurance law that it deemed interfered with international agreements without defining what would constitute an international agreement and would require the courts to give deference to the FIO's preemptions. Frank stated that the conference version narrowly defines the term international agreement and provides for de novo review if a state(s) chooses to challenge a preemption decision; it also gives the insurance commissioners a role (but no vote) in the decision making process of the FIO.
Representative Frank reviewed the “too big to fail” provisions of the law and joked that Congress is providing for death panels after all but with regard to financial reform rather than healthcare reform.
One big piece of bad news concerned the prospects for an option federal charter (OFC). Frank stated that a significant number of House members on both sides of the aisle had wanted an OFC included in H.R. 4173 but he felt the issue was too big to address as part of this bill and convinced them to defer the issue. He said it is very likely that next year his Committee would be holding hearings on this issue during which it is his intention to remain neutral.
He noted that an OFC is already available to banks and that in 2004 federal regulators had taken away states’ rights to enforce their consumer protection laws against banks. He said this preemption had made him very angry and that H.R. 4173 reinstates those state consumer protections as long as they do not conflict with federal law and if an OFC is enacted he would ensure that consumer protection responsibilities remained with the state regulators to the extent that they do not conflict with federal law.
During Q&A Frank was asked whether the states would lose their ability to collect premium taxes from insurers opting for a federal charter if an OFC was created by Congress. He did not believe so but gave no guarantees. He opined that an OFC could be limited to life insurers as their products are closely related to non-insurance financial services products. [During a later discussion of financial regulatory reform with representatives of the NAIC, Representative George Keiser (ND) expressed concern that premium taxes represented an obvious funding source for the FIO.]
Frank stated that members of Congress will decide the OFC issue based on their own personal views and what they hear from their constituents back home, including insurers, producers, state legislators, and consumers, so he recommended that the legislators start talking to their congressional representatives now if they want to stop an OFC from becoming law. He was asked how proponents of an OFC would prevent a “race to the bottom”; Frank responded that this question should be directed to its proponents but he did offer to make their testimony on that question available to the legislators.
Frank explained his reasoning for not supporting the regulation of credit default swaps as insurance. He believes they are more like financial instruments than insurance and he noted that they are issued by entities other than insurers.
He stated that next year’s agenda with respect to financial regulation, regardless of which party is in charge, would include figuring “out what housing financing should look like once … [they] have finished the job of getting rid of Fannie Mae and Freddie Mae.” He added that he has long opposed the idea that everyone should own their own home because not everyone has the wherewithal to handle home ownership and he believes some of the money now going to support home ownership should instead be used to support the building of affordable rental housing. He suggested some of the homes now in foreclosure may be convertible to rental units.
Another item on his agenda is reform the Federal Reserve Board structure. He noted that Dodd-Frank increases the Fed’s transparency by requiring that all transactions with private companies must eventually become public. (Some delays will be necessary to avoid influencing the market.) He wants to go further and change the structure of the Federal Reserve Board. He is satisfied with the Presidential appointment process for the seven members of the Board of Governors but he wants to change the way the regional bank presidents are selected. This is currently done by private individuals representing local banks and Frank believes this process gives the individuals doing the selection too much influence.
Impact on the States – Three Different Viewpoints
Kevin McKechnie (American Bankers Insurance Association) believes the entire approach of H.R. 4173 is flawed and hopelessly naïve because the new Financial Regulatory Oversight Panel will be made up of the same regulators, including the Chairman of the Federal Reserve and the Comptroller of the Currency, whom Congress had blamed for allowing the crisis to happen. The ABIA, together with all the other state banking associations, had signed a letter in opposition to H.R. 4173. The letter asks why it does nothing about the principal causes of the crisis, including unregulated mortgage brokers, unregulated financial institutions who sold financial products to people who could not afford them, securitizations, and Fannie Mae and Freddie Mac; and why auto dealers who engage in the same type of abuses practices were exempted.
McKechnie opined that the reforms directed at credit and debit cards will in all probability result in the disappearance of free checking; and the increased oversight of derivatives would cause that business to move to foreign banks and will push risky activities of US banks offshore. He predicted that the huge grant of authority to the systemic risk regulator will make it the de facto insurance regulator and the role of state legislators and insurance departments will be vastly reduced.
Birny Birnbaum (Center for Economic Justice) suggested that ones take on the bill depends on what one attributes the financial meltdown to. He stated that consumer groups have long thought that the main cause was the sale of abusive mortgages, their packaging and sale as collateralized debt obligations, and all the entities that participated, including the mortgage brokers, banks, non-bank lenders, and credit agencies. Citing Cleveland as an example, he stated these abusive products had devastating effects on consumers and residential neighborhoods even before the financial crisis. He believes these mortgages became so prolific because of gaps in regulation which forced to banks to compete with non-bank lenders coupled with regulators who did not use their authority either because they placed an over-reliance on competition or because they were captives of the lobbyists.
Birnbaum identified the positives for consumers contained in the legislation, namely the new consumer protection agency that will be funded, have resources, and will be focused solely on consumers. Its mission will not be conflicted, as was the case when consumer protection was the responsibility of the financial regulator whose main goal was to maintain the banks’ solvency. This caused McKechnie to mutter "isn’t that great". Birnbaum replied that it is great because creation of this new office eliminates some of the regulatory arbitrage and it creates public accountability.
Birnbaum noted, however, that new regulatory arbitrage has been created because, for example, auto dealers will not be subject to oversight by the new agency so there are still loopholes entities will try to take advantage of. He highlighted another example of regulatory arbitrage – credit insurance has always been regulated by the states plus federal disclosure rules but credit insurance has been partly replaced by debt cancellation coverage and debt suspension agreements which the Comptroller of the Currency ruled were not insurance and therefore can not be regulated by the states even though they are functionally identical to credit insurance. He criticized the state legislators and regulators for allowing this gap to continue. He holds them responsible because they had opposed giving the responsibility for all types of payment protection products to the new consumer protection agency even though, Birnbaum alleged, many states do a very poor job of regulating credit insurance.
Regarding "too big to fail", Birnbaum believes that the bill does a poor job of handling this issue as it codifies the competitive advantage of the largest financial institutions by requiring the medium and smaller regional banks to subsidize them. He noted however that the Financial Stability Oversight Board does have the power through a vote of two-thirds of its members to direct the breakup of a large financial institution if it determines that it poses a systemic risk.
Representative Greg Wren (AL) expressed concern with the growth of federal preemptions. He hoped that Representative Barney Frank will devote his Committee's time to addressing the housing issue rather than the creation of an OFC. He stated that NCOIL has taken the lead by educating other state organizations about the problems of the OFC proposal and the gaping holes in regulation that it would create. He reminded the legislators that Frank had warned them not to wait till January to begin lobbying their congressional representatives to oppose the OFC and suggested that they do so in coordination with state attorneys generals, governors, and the NCSL.
Representative George Keiser (ND), citing his recent experience applying for a second mortgage after having paid off the first, expressed concern that the mortgage market has become too tight. He suggested that a better way to regulate banks’ mortgage practices would be to require them to take a mortgage back if it goes bad within two years and it was determined that they did not do their due diligence. He noted that North Dakota had recently passed such a law. McKechnie replied that finding out that a loan was bad could take years and he attributed treated the problem to the assumption on just about everyone's part that the real estate market would always go up and the problem with the bill was that it did not address Fannie Mae and Freddie Mac. Birnbaum disagreed; he attributed the bad loans to banks granting loans covering the entire cost of homes, the failure to verify income, and other poor underwriting practices.
Senator Jim Seward (NY), who moderated this debate, closed the session by expressing skepticism that Representative Frank believed in state insurance regulation.
The NAIC Perspective
A panel of representatives of the NAIC, consisting of Iowa Commissioner Susan Voss, Ohio Director Mary Jo Hudson, New York Superintendent James Wrynn, Rhode Island Superintendent Joe Torti, and NAIC CEO Terri Vaughan, gave their views on the Dodd-Frank Wall Street Reform and Consumer Protection Act. Voss said the bill was not perfect but in the end some state regulatory authority [regulation of credit insurance] that had been at risk was preserved.
Vaughan opined that the creation of the FIO, which would go into effect the day after the bill is signed into law, was a very significant development; she hoped it would create a healthy connection between state and federal regulators that would result in a better understanding at the federal level of how state insurance regulation works. She was concerned however that there would be a natural inclination at the FIO to search for federal centric solutions, which could [from the states’ perspective] adversely impact its decisions regarding international agreements and future interactions between the NAIC and the IAIS.
Wrynn does not believe that the feds recognize the effectiveness of state insurance regulation which he feels was demonstrated by the fact that only three of the 500 applications for TARP funds came from insurers. He believes they will need to do a lot of work to ensure that the FIO ends up being a connector and not an overseer. Wrynn gave an overview of the surplus lines provisions of H.R. 4173. He stated they will streamline the regulation of surplus lines by relieving the recording burdens faced up until now by surplus line brokers by limiting the authority to require the payment of premium taxes to one state. It also allows the states to enter into a compact for the collection and allocation of premium taxes.
Senator George Keiser (ND) criticized the NAIC's approach of trying to control the impact of H.R. 4173 by seeking a seat at the table. He said the approach did not work and that he did not believe the FIO would become a connector as Vaughan had suggested. Voss replied that the feds are bank centric and that there was a lack of transparency during the development of the legislation with many meetings taking place behind closed doors. She stated the NAIC had to pick its issues and she was disappointed that the state insurance regulators had failed in their attempt to become voting members of the Financial Stability Oversight Board but noted that they had been successful in getting indexed annuities classified as insurance products. Wrynn added that there had been no way to avoid the creation of the FIO because states do not have the authority to negotiate international agreements. He stressed that they now need to ensure that the FIO works as intended.
Representative Bob Damron (KY) disagreed, stating that the vote had been close and by creating the FIO Congress had gotten its nose under the door. He warned that, if they did not get together and collaborate, the OFC would be next. Representative Charles Curtiss (TN) urged both sides to stop pointing fingers at each other and recommended creation of a joint working group.
Voss noted they all have limited resources and opined that they would be more effective if they worked together. She recommended that they also coordinate their efforts and exchange ideas with other interested state associations as well as supporters of state regulation within the industry. Vaughan stated that it was not enough for NCOIL and the NAIC to agree; they need to demonstrate their effectiveness by implementing their ideas in their individual states. She cited the life products interstate compact and producer licensing, both of which have not been fully implemented because of the inability to get the models enacted by some state legislatures.
Representative Brian Kennedy (RI) suggested that they take steps to get the insurance committee chairs of the various state legislatures to the next NAIC meeting (which will take place in Seattle in August) and hold a session devoted to the compact and producer licensing.
Financial Services & Investment PRoducts Committee
Credit Default Insurance Model Legislation
Representative Tommy Thompson (KY) served as acting chair of this committee meeting. He stated that NCOIL believes that credit default swaps are insurance and should be regulated as such. In June NCOIL had written to Representative Barney Frank (MA) detailing its concerns and explaining why NCOIL feels these products should be regulated by the states. However, Frank believes that the entities involved in the issuance of credit default swaps go beyond insurers and the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) provides for their oversight.
Thompson stated that, although H.R. 4173 makes it clear that the states may not regulate credit default swaps, he recommended that NCOIL finish working through the amendments and adopt the model legislation so that it will be on the shelf should Congress subsequently recognize that credit default swaps are insurance and should be regulated by the states. He stated that following approval of the model legislation by the Committee last November comments were received indicating that two of the definitions within the model conflicted with Article 69 of the New York Insurance Law which provides for the regulation of financial guaranty insurance products [and on which Senator Joe Morelle (NY) had based the model].
Mike Humphreys (NCOIL staff) explained the changes needed to remove the conflicts with Article 69 which involved a change to the definition of a credit default swap and the addition of a definition of a consumer debt obligation. He also explained two technical amendments that were needed. The Committee adopted the four amendments and then adopted the revised model legislation. It was subsequently adopted by the Executive Committee.
International Insurance Issues Committee
Representative Susan Westron (KY) chaired this meeting which consisted of a report given by Commissioner Kevin McCarty (FL) on the impact on state regulation of international accounting standards and a report given by Dave Matcham (International Underwriting Association) on the implications for insurance regulation of the newly formed UK conservative/liberal democrats’ coalition government.
International Accounting Standards – Impact on the States
McCarty, who is vice president of the NAIC and vice chair of its International Relations Committee (the committee responsible for evaluating the impact of international accounting standards on the US regulation of insurance), gave a brief report on the status of the development of international accounting standards and his Committee’s charges.
He stated that the NAIC recognizes the importance of this issue and has established a subgroup on statutory accounting and financial reporting that reports directly to the Financial Modernization Initiative (EX) Task Force. The Subgroup’s charge is to make a recommendation regarding the future of US statutory accounting and financial reporting. In 2008, in response to the financial crisis, the Task Force was asked to develop best practices covering the establishment of capital requirements, group supervision, asset and liability valuation, and reinsurance, by reviewing regulatory regimes of jurisdictions around the world, particularly those of Australia, Switzerland, and the UK; and to consider the impact of Solvency II and the work being done at the IAIS on US companies doing business abroad. He noted that the focus has been on capital requirements and how they compare with the RBC requirements in the US.
McCarty stated there is a tremendous amount of global pressure to move ahead on a single set of financial accounting standards and, because the US is a member of the Financial Stability Board (FSB) and has committed to an evaluation by the International Monetary Fund (IMF), the NAIC has just completed a self-assessment to determine how state regulation measures up to the best practices developed by the IAIS. He noted much of this activity is being driven by forces beyond the NAIC’s control and, since the IAIS is advocating a global set of regulatory financial accounting standards, the NAIC must decide whether it should continue to maintain its codification procedures for public reporting purposes.
McCarty reported that in April all the relevant groups within the NAIC were instructed to collaborate on the development of a document addressing these issues. On June 22 a preliminary document was released for comment. It identifies options along a continuum from which the regulators must choose, from the status quo to the full sale adoption of the IASB international accounting standards. McCarty felt that adoption the international accounting standards was not the way to go for regulatory purposes and suggested that one alternative would be a system similar to what the NAIC is currently doing which would involve reviewing each international standard to determine whether it should be adopted as written, modified, or rejected, for statutory purposes. Another option he suggested would be to adopt international standards for large publicly traded companies and to continue the current system for smaller companies and nonpublic companies.
McCarty hoped that, when making a choice, regulators will keep in mind that the current system has worked well because it is more conservative; it requires more capital; and affords state regulators a degree of control over the domestic companies, resulting in greater protection of policyholders. He noted that, if the international accounting standards are not adopted, US insurers may be required under Solvency II to increase their capital in order to continue to operate in Europe because the EU may decide they would otherwise fail to satisfy its equivalency requirements.
UK Coalition Government – Prospects for Insurance Regulation
Matcham summarized the election drama that took place in the UK this spring and opined on how the regulation of insurance would be impacted. Based on a speech given on June 16 by the new Chancellor, George Osborne, Matcham believes that between now and 2012 (when the new regulatory scheme is scheduled to go into effect) the current tripod system of regulation of financial services (under which the FSA is responsible for supervising financial entities, the UK Treasury does the legislation, and the Bank of England is responsible for financial stability) will be replaced. The new framework will put the Bank of England in charge of macro prudential regulation and financial supervision of banks; a new financial policy committee will be established to oversee capital requirements and lending rules; FSA's current responsibilities for consumer protection and the marketplace will be moved to a new authority and FSA’s enforcement arm will go to another new body to be called the Economic Crime Agency.
Matcham stated that his organization and other insurance industry organizations are constantly reminding legislators in the UK, Europe, and the US that insurance did not cause the crisis, that it is the banking regulatory model that is flawed. As a result, the assessment to be levied by the UK to pay for this new regulation has so far been levied only on the banks. He fears that the best and most experienced people now working at the FSA will be tapped to focus on banks. Another of his concerns is that the UK’s regulatory regime for financial services is apparently going to be different from that in the rest of Europe which will be adopting Solvency II (which will also take affect in 2012), leading to multiple regulators, added compliance costs, and confusion.
In response to a question from Representative George Keiser (ND), Matcham stated that the financial crisis is not expected to derail Solvency II in the EU Parliament but compromises are being made which so far have led to a lowering of capital requirements and a debate over how the single regulator rule should be applied.
Life Insurance Committee
The Committee agenda included an update on the NAIC Suitability Model Regulation, stranger-initiated annuities, and disclosure of life insurance options to consumers.
NAIC Suitability Model Regulation
Commissioner Susan Voss (IA) reported that the NAIC has adopted the revised model regulation regarding the suitability of all annuities sales [the earlier version had applied only to sales to seniors] and that the states are in the process of amending their regulations. The revisions place more responsibility on insurers to review the suitability of these transactions, provide for producer training, and establish standards for producers similar to those applicable to broker/dealers. Voss noted that the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) in granting the state insurance regulators authority to regulate indexed annuities required the NAIC to develop a model regulation establishing appropriate consumer protections and required that the states adopt rules that meet or exceed the NAIC model. She asked the legislators to support their commissioners’ efforts to amend their suitability regulations.
Stranger-Initiated Annuity Transactions
Superintendent Joe Torti (RI) and his general counsel Beth Dwyer gave a PowerPoint presentation that detailed the stranger-initiated annuity transactions that took place in Rhode Island in which a sponsor and a broker/dealer arranged for an investor (the annuity owner and beneficiary) to purchase an annuity for a terminally ill annuitant. The annuitant was unrelated to the owner and knew nothing about the purchase of the annuity; he was given a "gift" of approximately $2000 after responding to an ad. The application contained no misinformation but also disclosed nothing about the health of the annuitant and generally annuities for the same annuitant were purchased from several different insurers.
Dwyer stated that the Rhode Island department had identified seven insurers that had been victimized by these scams but only one, a subsidiary of Trans-American, went to court to try to rescind an annuity. The courts did not permit the rescission because the policy had an incontestability clause that went into effect when the policy was written. The courts also ruled Rhode Island’s law suitability rules only apply to life policies. Torti stated that most states have similar laws. His department believes that the fee paid to the annuitant constituted a rebate and may bring an action against the producers.
Torti reported that New Jersey has sent out a bulletin advising companies how these scams can be avoided in the future. He recommended against states changing their insurability statutes as there may be unintended consequences. He believes that now that this practice has become known it can be prevented without legislation; that insurers can amend their applications require disclosure of the proposed annuitant’s health and/or relationship between the owner and the annuitant. Representative Brian Kennedy (RI) stated he wanted to take action to close the loopholes and the Committee chair, Senator Ralph Hudgens (GA), agreed with Kennedy and suggested that the Committee form a subgroup to study the issue. Mike Lovendusky (ACLI) commented that he found himself in the awkward position of agreeing with the regulators; he recommended that the issue be tabled. Another Committee member supported forming a subgroup and the chair so ordered.
Disclosure of Life Insurance Options
This issue concerns whether a life insurance company should be required to disclose that in lieu of letting a policy lapse a policyholder has an option of seeking a life settlement. Hudgens was concerned that agents have been told that they may not even mention that this option exists. Representative Bob Damron (KY) reported that his state had enacted legislation that requires the Kentucky insurance department to develop a notice alerting the policyholder of a policy that is about to lapse of the existence of a life settlement option. Three states, Washington, Oregon, and Maine, have laws requiring disclosure of life settlement options.
Lovendusky stated that insurers object to this requirement. He noted that there are many other alternatives to lapse and notifying the policyholder of the availability of life settlements may prove to be costly for the policyholder because he/she would have to keep the policy in force by continuing to pay the premium while trying, most often without success, to locate a buyer. He argued that there is no market was small policies; that this option only works for older policyholders with high face value policies; that the vast majority of policies would not qualify for life settlements; and the less than 1% of these policies would settle for a value that would be greater than surrender value. Finally he opined that this would be bad public policy.
Michael Freedman (The Coventry Group), representing the Life Settlement Association, stated that requirements to disclose available options exist in seven states and that they require disclosure of all options to lapses, not just life settlement. He noted that five other states are considering taking action on this issue. He argued that policyholders should be made aware of all their options so they can make their own decisions.
A life insurance agent also testified in favor of disclosure. He operates a company assisting approximately 3000 assisted living and skilled nursing facilities around the country in finding funding sources for long-term care. He argued that funding for long-term care is becoming a crisis, especially in the last few years when many seniors’ savings were significantly depleted. Many seniors have been holding life policies for years and there is a danger that these policies could lapse because their owners can no longer afford to pay the premiums. Life settlements represent a private sector solution for funding long-term care that can significantly reduce states’ Medicaid costs. He added that consumers should be fully informed of all their options so they can make the best possible decisions.
Several Committee members questioned each other and Lovendusky trying to clarify how the existing state disclosure rules work. Hudgens ended the debate by noting the Committee’s interest in this issue and deferring action until November.
State-Federal Relations Committee
Report on IIPRC Activity
Director Mary Jo Hudson (OH), chair of the IIPRC, reported that the Compact passed in both houses of the Illinois legislature in May and is waiting for the governor’s signature; in New York the Compact was adopted by the Senate but the Assembly has not yet taken it up; and the New Jersey legislature has begun work on it. The Compact Commission is working on a package of long-term care product standards and the renewal rate standard is an issue. At the request of Alabama, the Commission had considered the creation of an associate membership but rejected the idea after the advisory committees indicated they did not support it. 95 insurers are now registered with the Commission and 200 filings have been received so far this year.
Representative George Keiser (ND), after acknowledging that North Dakota is not a compacting state, commented that he found it unreasonable that the legislative and consumer advisory committee members do not have a vote. He believes that it will be hard to justify their continuing expenses if their views do not carry any weight. Hudson assured Keiser that their comments are listened to and considered but she said that giving them a vote would require a change in the Compact legislation.
MCAS Data Collection/Sharing Model
Mike Humphreys (NCOIL staff) referred the Committee to a summary of the proposed model act provided in the meeting material under Tab 10. He stated that following its spring meeting, the Committee had invited additional comments and that comments were received from AHIP, the Center for Economic Justice, several P/C organizations, and individual companies. The Committee worked through the proposed changes during four conference calls before running out of time with the result that there remains several open items in the purpose and definition sections that needed to be addressed during this meeting.
One of the amendments agreed to during the conference calls expanded the scope so that the model would apply to companies with premiums written of $100,000 nationally instead of $100,000 in the state. Another change clarified that a commissioner has the option to designate an individual or entity (statistical agent) to collect and review the data. Changes were also made to the confidentiality section in the model; Humphreys said its substance was not changed but it should now be clear that the information collected by the Commissioner would remain confidential but may be shared with the other states, the NAIC, and law enforcement entities.
The Committee invited comments from Eric Goldberg (AIA), Director Mary Jo Hudson (OH), Birny Birnbaum (Center for Economic Justice), Marty Mitchell (AHIP), Neil Alldredge (NAMIC), and Deirdre Manna (PCI). Hudson told the Committee that the market conduct annual statement was begun as a pilot project administered by the state of Ohio but, as additional states signed on, the project became too big for Ohio to handle and so the NAIC was asked to take it over. While it was under the auspices of Ohio the data was protected by Ohio's confidentiality rules. Hudson stated that the data collected by the NAIC would continue to be protected under confidentiality agreements states have with the NAIC.
Regarding the proposed NCOIL model, Hudson stated that some of its “well intended” provisions would make the collection process less efficient and would present some hurdles for the regulators. She therefore respectfully requested that it be shelved for now. She recommended that NCOIL monitor the process to see how it evolves. She stated that the NAIC would keep NCOIL fully informed and work with it if any problems developed.
Birnbaum began his remarks by stating that before becoming a consumer advocate he had been the Texas insurance department’s chief economist and had been responsible for his department’s data collection. He told the Committee that consumer organizations opposed the adoption of the model because it does not strike a balance between insurers, regulators, and the public interest. He stated that the model, as currently drafted, is skewed towards the industry and, if adopted, it would have the unfortunate consequence of undermining the promise of market analysis and market regulation.
Birnbaum noted that insurance companies utilize incredibly detailed databases about consumers to mine for marketing, rating, claims, underwriting, and competitive purposes. He stated that market analysis done by regulators is also dependent on collecting large detailed databases that can be analyzed to determine what is going on in the marketplace and whether problems in the market are generic or are related to specific insurers or insurer practices. He argued that market analysis cannot be effective if regulators are precluded from collecting robust data.
Birnbaum told the Committee that, instead of promoting data collection that would improve market analysis, the proposed model would limit data collection and reduce the effectiveness of market analysis; and that it places arbitrary hurdles in front of regulators, such as the once a year limitation on collecting the data and the requirement that the data be kept confidential even when its release could help consumers make better choices. He argued that the proposed confidentiality provisions would serve no public purpose as the data collected does not represent trade secrets and in the event of any of the information collected is privileged there are administrative procedures insurers can use to prevent its release.
He asked why market performance data should not be made available to consumers; why consumers should not be able to find out how long a particular insurer takes to pay a claim or what percentage of claims it denies; and why regulators should be precluded from publishing this type of information which would enhance competition if it was available. Finally he argued that if the data is kept confidential there would be no public accountability for the regulators as there would be no way of knowing if they did anything with the data. On a positive note, Birnbaum stated that he liked the idea of using a statistical agent to collect the data.
Mitchell, Goldberg, Manna, and Alldredge supported adoption of the model and urged the Committee to retain its confidentiality provisions. Mitchell stated that AHIP would like to see a model that is tailored to the needs of regulators so that they are able to do modern market analysis and reduce the frequency of on-site market conduct examinations. He said that AHIP recognizes that there may be a need for consumers to have information but consumers’ information needs would be different from that of the regulators. He added that consumers are already being provided with extensive information related to health insurance. Hudson noted that the MCAS does not ask for information from health insurers although she felt it is something the NAIC should consider.
Goldberg stated the proposal is not a proscriptive model rather is an enabling one that would allow regulators to collect, aggregate, and share market conduct information. He opined that many states that are now participating in this effort lack the legislative authority to do so. He objected to the expanded scope that had been agreed to during an interim conference call (whereby the filing threshold was lowered to premiums written of $100,000 nationally from $100,000 in the state) because the expanded scope would capture some large commercial carriers who write some personal insurance as accommodations for their commercial policyholders. He noted that the NAIC's current threshold is $50,000 in a state and requested that the threshold of $100,000 in a state be restored or alternatively that the NAIC $50,000 threshold be adopted.
Manna noted that a majority of the data items collected in the market conduct annual statement (MCAS) are P/C items so P/C companies have a major stake in this issue. She stated that the original purpose of the MCAS had been to provide the regulators with a tool to collect insurer specific information that would enable them to identify outlier companies and that confidentiality had become an issue several years ago when there was a move within the NAIC to make the MCAS a public document. She asserted that there are a lot of tools available for consumers, including complaint ratios published by the insurance departments and market conduct examinations reports, but it was never intended that the MCAS would become a public document.
Alldredge agreed with everything that had been said by the industry representatives and added that the model was needed to ensure that the confidentiality of the data is maintained because, although the states have entered into confidentiality agreements with the NAIC, they could decide in the future to rescind their agreements.
The Committee then debated the confidentiality question. Representative Gini Milkey (VT) commented that the premise of a marketplace is consumer choice; she asked how consumers could make choices if they were not provided with information. Senator Jim Seward (NY) replied that this information is not now public and the model would simply codify current practice. Birnbaum noted that the Oklahoma law provides that market conduct information is confidential but empowers the Commissioner to publish information if he/she determines that it should be made public.
Senator Keith Faber (OH) noted that the data items collected are of little use to the consumer in the abstract [knowing the number of claims without knowing how many claims a company receives is meaningless]; he asked Director Hudson whether the states could take data that had been submitted with the understanding that it would remain confidential and use it to develop standardized ratios that would provide meaningful information to consumers. Hudson replied that her legal department had told her that information collected on a confidential basis could not be made public in any form and in order to provide the type of information he suggested the regulator would have to collect the data separately with the understanding that it would be made public.
Birnbaum quoted the language in Section 8 of the proposed which would prevent the states from using the data collected in the MCAS to do what Faber suggested: "The making, publishing, disseminating, circulating, or placing before the public, or causing, directly or indirectly, to be made, published, disseminated, circulated, or placed before the public, any information provided to a designee under this Act is prohibited."
The discussion turned to the amendments. The scope issue was revisited and the Committee reverted back $100,000 in a state threshold. The Committee decided to defer action on the model until November. Milkey requested that during the November meeting the Committee consider how to revise the confidentiality provision in a way that would permit the regulators to get meaningful information out to consumers.
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| NCOILBOSTON.pdf | 133.94 KB |