Government Relations Leadership Council (EX) Task Force
Solvency Modernization Initiatives (EX) Task Force
Group Solvency Issues (EX) Working Group
International Solvency and Accounting (EX) Working Group
Principles-Based Reserving (EX) Working Group
NAIC/Consumer Liaison Committee
NAIC/State Government Liaison Committee
NAIC/Industry Liaison Committee
Life Insurance and Annuities (A) Committee
Life and Health Actuarial Task Force
Property & Casualty (C) Committee
Casualty Actuarial and Statistical (C) Task Force
Surplus Lines (C) Task Force
Catastrophe Insurance (C) Working Group
Financial Condition (E) Committee
Capital & Surplus Relief (E) Working Group
NAIC/AICPA (E) Working Group
Accounting Practice and Procedures (E) Task Force
Blanks (E) Working Group
Emerging Accounting Issues (E) Working Group
Statutory Accounting Principles Working Group
Capital Adequacy (E) Task Force
Life Risk-Based Capital Working Group
Reinsurance (E) Task Force
Valuation of Securities (E) Task Force
Financial Regulation Standards and Accreditation (F) Committee
NAIC President Commissioner Roger Sevigny (NH) chaired the meeting which convened immediately following the meeting of the Executive Committee. Plenary adopted the following report of Executive:
Commissioner Sevigny chaired this much abbreviated meeting. The two-hour session originally planned was cancelled in order to allow the Commissioners’ Roundtable to go into overtime. The following actions were taken:
Restructuring of the AIG Task Force: Executive adopted the minutes reporting on an electronic vote approving the restructuring of the AIG Special (E) Task Force to establish a core group of regulators to focus on AIG issues from a state insurance regulator perspective and to coordinate other groups working on AIG issues, specifically the Form A Subgroup and the AIG Life Companies Subgroup. The restructured task force is called the AIG Managing (EX) Task Force and will continue to be chaired by New York.
Executive Working Group Reports: Executive adopted the written reports of its eight EX working groups and task forces that were attached to the handout but were not read out. Sevigny asked for comments or questions; there were none so there was no discussion. Below are highlights from those written reports:
Climate Change and Global Warming (EX) Task Force: This Task Force, chaired by Commissioner Joel Ario (PA), is working on the logistics of filing the Climate Risk Disclosure Survey, the results of which it are anticipated to be posted to the CIS section of the NAIC Web site. The Task Force is considering holding Climate Change and Global Warming Summit attached to an upcoming national meeting. It is investigating green insurance product opportunities and, as part of this initiative, the Task Force has received presentations on new product and program ideas such as Pay-As-You-Drive Insurance intended to incentivize policyholders to reduce their driving. The Task Force also asked for feedback from industry on their product innovations.
Government Relations Leadership Council: The GRLC report consisted of its agenda for the meeting scheduled after the Plenary has met. [See a comprehensive report of this meeting later in this newsletter.]
International Insurance Relations (EX) Leadership Group: The IIRLG did not meet in Minneapolis. It meets weekly via conference call to discuss strategic issues related to the NAIC’s involvement in international activities and is focused on three principal issues:
Military Sales (EX) Working Group: The multi-state regulatory settlement with three life insurers (American-Amicable Life Insurance of Company of Texas and its two affiliates, Pioneer American Insurance Company and Pioneer Security Life Insurance Company) required the companies to provide immediate cash refunds and increased policy benefits totaling $70 million to approximately 92,000 policyholders.
The NAIC has established a new restitution search tool on its web page to help locate over 14,000 policyholders who have left the military and who are owed refunds totally approximately $2.3 million.
The Working Group continues to monitor the marketplace for inappropriate sales activities in coordination with the Department of Defense. Finally, 47 jurisdictions have adopted the NAIC’s Military Sales Model.
Producer Licensing (EX) Task Force: The Producer Licensing (EX) Task Force report consisted of its agenda for the meeting to be held later in the meeting at which it will consider adoption of the NARAB Working Group’s recommendation regarding an updated framework for determining continued compliance by states of producer licensing reciprocity requirements of GLBA, and its recommendations on whether specific requirements imposed on non-resident producers are inconsistent with the reciprocity requirements of GLBA.
In addition, the Task Force will consider the adoption of the revised uniform applications and will specifically discuss the concerns of New York regarding certain background check questions (regarding judgments other than personal bankruptcies, delinquent tax obligations, lawsuits relating to fraud, misappropriation of funds or breach of fiduciary duty, and termination for misconduct) that are not currently included on the renewal applications.
SVO Initiatives (EX) Working Group: The SVO Initiatives (EX) Working Group has not met since the Spring National Meeting and did not meet in Minneapolis. The Rating Agency (E) Working Group is currently addressing several issues that may impact the SVO Working Group’s decision on whether to move forward with the concept of creating a non-profit NRSRO. In the interim, the Working Group is continuing to reach out to governmental entities, underwriters, and insurers for input on the proposed non-profit NRSRO.
Solvency Modernization Initiative (EX) Task Force: [See a comprehensive report of this meeting later in this newsletter.]
Speed to Market (EX) Task Force: This Task Force met in Minneapolis where it adopted minutes of its interim conference call during which it received the Personal Lines Regulatory Framework Whitepaper from the Personal Lines Regulatory Framework Working Group; adopted a motion to reclassify the file and use and prior approval versions of the Property and Casualty Model Rating Law to guideline status; and recommended to “C” Committee that a 2000 draft model on rate regulation be considered for reclassification as a model guideline.
Credit Scoring: The chairs of the “C” and “D” committees held a joint hearing on credit scoring to determine if the current financial climate is affecting personal credit scores. Comments were received on three questions – What is credit scoring; how it is used by insurers; and its impact on policyholders. [More details can be found in the NAIC/Consumer Liaison and “C” Committee reports.]
Update on Model Law Development Efforts: Sevigny stated that there were no new model law requests to consider and this meeting. The Committee adopted, without discussion, a written report on states’ actions since the last national meeting on the following seven models:
EX 1 Report: Sevigny asked the Committee members if there were any questions concerning the written EX 1 report included in their handouts. There were none so the report, which was not provided to the audience, was adopted without discussion.
Interstate Insurance Product Regulation Commission (IIPRC) Report: Commissioner Jane Cline (WV) reported that Mississippi and New Mexico have joined the Compact and that Missouri will become a member as soon as its governor signs the legislation. The addition of these three states brings the total compacting states to 36. Cline also reported that the number of companies filing to participate has been accelerating and that Karen Schutter has been appointed as the new director.
The Executive Committee was closed and Plenary was called to order.
Plenary Session
Plenary adopted the minutes of its April 17th conference call on which it had adopted SSAP 98, Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, An Amendment to SSAP No. 43, Loan Backed and Structured Securities. (During his “E” Committee report to Plenary, Commissioner Al Gross (VA) reported that the version of the SSAP adopted on the conference call had the modified effective date of periods ending on or after September 30, 2009, with early adoption permitted.
Plenary adopted by consent the Committee, Subcommittee, and Task Force minutes of the 2009 Spring National Meeting held in San Diego with the exception of a bulletin adopted by the Producer Licensing (EX) Task Force which was presented and adopted separately.
Director Linda Hall (AK) explained that the bulletin, entitled the Guidance Regarding Use of the NAIC/NIPR Attachments Warehouse for the Electronic Filing of Insurance Producer Licensing Documents Bulletin, streamlines the reporting and recording actions taken by a state against a producer so that it can be forwarded to each state in which the producer is licensed. There was no discussion of the Executive Committee minutes or of the bulletin.
Plenary then heard the following Committee reports:
Life Insurance and Annuities (A) Committee: Gail Keren (NY) reported on the “A” Committee meeting that been held the prior day. [See a comprehensive “A” Committee report later in this newsletter.]
Health Insurance and Managed Care (B) Committee: Commissioner Joel Ario (PA) reported on what “B” Committee would be considering later in this national meeting. Besides hearing reports from its task forces and working groups, “B” Committee will hear a presentation on a report, entitled Coverage When it Counts, prepared by the Georgetown Health Policy Institute about the California and Massachusetts health insurance markets; an update of federal healthcare reform; and pandemic influenza preparedness.
Property and Casualty Insurance (C) Committee: Jack Messmore (IL) gave a report of “C” Committee’s March 2009 meeting. [A detailed report of the March meeting can be found in Barnert Reports newsletter covering the San Diego meeting.]
Market Regulation and Consumer Affairs (D) Committee: Commissioner Kim Holland (OK) reported that on the “C” and “D” Committees’ full-day joint public hearing on the use of credit scoring on April 30th and a two-hour follow-up session at this meeting. She said that the two committees will meet by conference call to decide what action should be taken.
Financial Condition (E) Committee: Commissioner Gross gave a report of “E” Committee’s March 2009 meeting. [A detailed report of the March meeting can be found in Barnert Reports newsletter covering the San Diego meeting.]
Plenary took a separate vote to adopt amendments to the Derivatives Instrument Model Regulation. Gross explained that this model regulation had been unanimously adopted by the Valuation of Securities (E) Task Force and “E” Committee with no opposition by industry. He noted the increased presence of derivatives in insurer investment portfolios and the material role they had played in the current economic financial crisis as the reason deserve uniform national treatment. The model requires insurers who engage in this market to establish written guidelines for derivative transactions stating the objectives for their usage, exposure limits, and credit quality, and to document its internal controls. The guidelines must be approved by the insurer’s board of directors and its state of domicile. The model regulation was adopted unanimously by the Executive Committee and by Plenary.
Financial Regulation Standards and Accreditation (F) Committee: Superintendent Joe Torti reported that “F” Committee had held a regulator-to-regulator session during this national meeting during which it voted to award continued accreditation to Delaware, Louisiana, Massachusetts, and Rhode Island. It also held an open meeting. [See the comprehensive “F” Committee report later in this newsletter.]
International Insurance Relations (G) Committee: Director Christina Urias (AZ) reported on the “G” Committee meeting that been held earlier in the day. [See a comprehensive “G” Committee report later in this newsletter.]
Other Matters: Director Hall, who chairs the NARAB Working Group, reported that during its meeting the prior day the Working Group had adopted a report on continuing compliance with the reciprocity requirements of GLBA by the states. The report will be considered by Plenary in September but she encouraged the commissioners to read the report, especially its executive summary which outlines the additional issues considered by the Working Group and a discussion of some state practices that have been determined to be inconsistent with the intent of GLBA, some of which may require legislative or administrative action to correct.
The Government Relations Leadership Council (EX) Task Force meeting was chaired by Commissioner Roger Sevigny (NH).
Earthquake Coverage Presentation: The Task Force heard a presentation from Glenn Pomeroy (California Earthquake Authority) and John Forney (Raymond James) on a proposal for a federal guarantee of post-event debt that has been introduced in Congress to help states manage catastrophe risk.
Pomeroy said that the CEA is the sole provider of earthquake insurance in California but because the coverage is so expensive and the deductibles so high it insures only 12% of the market. He reviewed the revenues and expenditures of the CEA to highlight the large portion of revenues that is spent to purchase reinsurance in order to increase capacity (it has paid reinsurers $2.3 billion and gotten back only $250,000 in loss payments) and explained how this proposal, which calls for the federal government to provide post-event loans, would greatly decrease the need for reinsurance, increase capacity, and enable the CEA to offer lower deductibles and lower premiums. He suggested it would also be a good deal for the government because it would decrease the need for government assistance after catastrophes occur.
Pomeroy and Forney argued that there is a compelling argument for a comprehensive public/private partnership, which would include a federal component as a backstop and makes the most of private insurance and private reinsurers and properly structured and funded state and regional insurance and reinsurance funds. The proposal was developed by California, Florida, Louisiana, and Texas and was introduced last month by Senator Bill Nelson (FL) as S. 886. It would establish a program to provide guarantees for debt issued by State catastrophe insurance programs. The bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.
Pomeroy was asked what the bill’s chance of passage was. He replied that the proposal is a scaled back version of a bill that passed the House last year; that it has been introduced in both the Senate and the House; and that he was hopeful that hearings would be held in the fall. He also noted that the President had campaigned on this issue in California.
Commissioner Kent Michie (UT) suggested that the states also had an insurable interest because if the properties are insured they will be rebuilt and the owners will continue to pay property taxes. Therefore he felt the states should be willing to subsidize the cost of insurance. Director Michael McRaith (IL) asked Pomeroy if he has considered using CAT futures in place of reinsurance. Pomeroy confirmed that he has and is beginning to explore the CAT bond market.
FTC Model Privacy Notice Form: Sevigny stated that this issue was on the agenda for the purpose of alerting the committee members that it would be taken up by the “D” Committee. Ethan Sonnichsen (NAIC Staff) said that the NAIC had commented on the proposed notice that had been drawn up by a federal interagency group to the effect that the notice was inappropriate for use by insurers as the language used was geared towards banking. The comment letter included proposals for language changes that would address this problem. Sonnichsen reported that most of the suggestions had been accepted by the FTC and that the rule was close to being finalized so the NAIC needed to review the revised proposal. He said that remaining questions were whether this notice would provide a safe harbor for insurers and whether any action was required by the NAIC.
Federal Updates: Staff reported that Senator Herb Kohl (WV) has introduced a bill that provides grants to states to assist in the detection and prosecution of deceptive sales practices perpetrated on seniors. To qualify for a grant a state would have to adopt a senior designation suitability standards law equivalent to the NAIC model. Congressman Paul Hodes (NH) has introduced a companion measure in the House.
Congressmen Gregory Meeks (D-NY) and Tom Price (R-GA) have introduced H.R. 2733, the Indexed Annuities and Insurance Products Classification Act, to nullify the SEC’s rule 151a and to clarify that indexed annuities to be regulated solely at the state level. There is no companion bill in the Senate.
Staff briefed the Task Force on developments regarding healthcare insurance reforms. NAIC Staff has been working with the congressional staff developing three different proposals which are still only very broad outlines. They deal with rating rules, include risk adjustment mechanisms, prohibitions on preexisting conditions and lifetime limits, and would grandfather existing policies. The NAIC has recommended putting a time limit on the grandfathering in order to minimize market segmentation. All the plans would provide subsidies for individuals of 400% to 500% of the federal poverty level and small business subsidies. The plans would also increase eligibility for Medicaid to up to 150% of the federal poverty level and the increase, at least in the early years, would be funded entirely by the federal government.
The Democratic proposals include individual mandates to purchase health insurance (that would be enforced through the tax codes) with exceptions for low income people and people with religious objections. There is a major disagreement as to whether employers should be mandated to provide coverage. All the plans would create an exchange to facilitate the purchase of coverage and to help administer subsidies but the details vary considerably; one would create state exchanges with a federal backup for states that do not create their own exchange and another would have one national exchange. Another major issue of contention is whether there should be a public alternative and if so how it should be designed. Both Senate committees are expected to complete their markups by the end of next week.
The Task Force members had questions about the grandfathering provisions, the exchanges, and funding. Superintendent Mila Kofman (ME) told staff that they should emphasis that there must not be any loopholes that would allow association plans and that the ERISA opt-out right must be eliminated for self insureds. Staff replied that at least one of the proposals addresses fraud prevention.
Sonnichsen briefed the Task Force on non-health related Congressional activities. He mentioned the upcoming House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises hearing on systemic risk [For more on this go to the NAIC/State Government Liaison Committee write-up.] and the Treasury Department’s rollout of its regulatory proposal. [Treasury released the details of this proposal on June 17th.] Sonnichsen doubts that the Senate GOP will have the time or energy to do a piecemeal approach but the House GOP may attempt this approach. He does not anticipate any action until the fall although there has been some push to get something done before the summer recess.
Regarding resolution authority, Sonnichsen reported that the NAIC testimony before the House Subcommittee on systemic risk would highlight the state insurance regulators’ strong system of receivership and guaranty funds and argue that the holding company regulator should not have the authority to pull capital out of is subsidiaries to pay off debt of the holding company. He noted that this has been discussed with Treasury and it seemed to agree. Sonnichsen said that the House version of the consumer protection piece makes no mention of insurance but the Senate bill did although conversations with Senator Chris Dodd (CT) seemed to indicate that he is not concerned with insurance.
He expects that the surplus lines legislation and NARAB II will be considered by the end of the month.
Commissioner Kim Holland (OK) suggested that when it comes to consumer and investor protection the NAIC had a good story to tell and it should advertise it to improve the states’ position on systemic risk. Sonnichsen replied that Congressman Barney Frank (MA), the Subcommittee chair, recognizes the NAIC’s work and he is even thinking of restoring some authority to state bank regulators.
He added that Congressman Brad Miller (NC), who has been tasked with looking at the consumer protection commission proposal, approached the NAIC staff to inquire about how state insurance regulators handle form approval and that Staff had walked him through the prior approval and file and use approaches. Sonnichsen said that Senator Dodd wants to get the consumer and investor protections legislation done this year but Treasury has questions because the SEC claims to be the investors’ protector.
The Solvency Modernization Initiative (EX) Task Force heard a presentation by Terri Vaughan (NAIC CEO) on her Networks Financial Institute paper, The Implications of Solvency II for U.S. Insurance Regulation. The Task Force considered the need for a streamlined process for tracking papers, assigning papers to NAIC groups for comment, and communicating about any recommended ideas to consider for implementation. It adopted interim minutes of an April 16th conference call that included adoption of working group charges.
The Task Force heard and adopted reports of its three working groups:
Director Ann Frohman (NE) and Danny Saenz (TX) co-chaired the first meeting of the Group Solvency Issues Working Group which met to discuss recommended changes to the NAIC Insurance Holding Company System Regulatory Act and the broader issue of group supervision in light of the financial crisis and international developments. Director Frohman referred to these as “in the box” and “outside the box” issues.
The Working Group began by reviewing specific proposals to amend the Holding Company Act submitted by various state regulators and interested parties in response to a questionnaire sent at the end of May. Some of these proposed changes related to practical issues which had arisen under the Model Act including legal authority for access to information and arrangements for sharing of confidential information. The Working Group will ask the Financial Condition (E) Committee for authority to begin work on revisions to the Model Act. The Working Group will hold a conference call in two weeks to continue its review of these issues.
The Working Group then heard presentations from several trade associations, including GNAIE, and state insurance departments related to international group issues. The trade comments stressed the need for group supervision in recognition of the global nature of insurance. Most speakers said that a level playing field needed to be established for both foreign and domestic companies and that group insurance provisions should be based on international standards. Several state regulators mentioned the need to consider a group-wide capital requirement. The trade associations urged the Working Group to develop a set of principles on group supervision before beginning detailed work on amendments to the Holding Company Act.
Director Frohman asked several of the associations whether they felt the creation of supervisory colleges should be viewed as a requirement or a best practice. Generally there was a sense that the colleges were valuable, but not essential. The trades spoke of the need for equivalence and a strong lead supervisor as more important. Jim Armstrong (IA) is developing guidelines for effective colleges for the NAIC. Some regulators asked for financial support from the NAIC for travel to various international colleges.
Staff has compiled background information on international developments on group supervision and will be conducting an educational session this summer for the Working Group.
Ramon Calderon (CA) began the meeting with a review of proposed amendments to the draft paper, Issues for Consideration in the Solvency Modernization Initiative (SMI), based on comments received by the Working Group at and following the March meeting. The paper outlines a direction for the SMI including:
In the discussion of the changes, both the ACLI and PCI said that systemic risk regulation needed to be left to the federal level to avoid duplicate regulation. As a result the section on systemic risk was shortened to focus on the need for the NAIC to be aware of developments in the area of systemic risk. The Working Group adopted the paper and sent it to the SMI (EX) Task Force for consideration.
The Working Group discussed changes at the International Association of Insurance Supervisors (IAIS) to the Insurance Core Principles (ICPs). Under the proposed changes, instead of the current essential criteria, the IAIS standards will become the basic requirements and will be used by the International Monetary Fund in the Financial Sector Assessment Program (FSAP) to assess compliance with IAIS standards. This proposed change would not affect the current FSAP being undertaken in the US. Calderon stressed that the US needs to be involved in the development of the IAIS standards and must ensure in voting for a standard that the NAIC believes this is the preferred requirement. NAIC staff is developing a tracking system to assist in the review of IAIS and Joint Forum documents.
The Working Group considered the NAIC’s position on the planned IAIS standard on Valuation of Insurance Assets and Liabilities for Solvency Purposes. Several drafts of the standard have been circulated with the expressed goal of adopting a standard in 2010. Calderon proposed that the NAIC position be that the IAIS should not develop a standard until the IASB has completed its work on the Insurance Contracts project. Rob Curtis (UK FSA), chairman of the IAIS Solvency Subcommittee, said that it was never his intention to adopt a final standard until after the IASB acted. The Working Group did agree it was valuable to discuss the issues, but still adopted the resolution calling for no action prior to the IASB’s decision on Insurance Contracts. GNAIE spoke to their concerns with the inclusion of “market consistent valuation” in the draft standard. The ISAWG will also develop a joint working group with the LHATF and the CATF to consider valuation issues.
Ron Esson (NAIC staff) asked for comments on the IASB’s Financial Instruments project to be submitted in writing and said that in his capacity as chair of the IAIS Insurance Contracts Subcommittee he would be addressing the joint meeting of the FASB/IASB Boards in July. Written reports were submitted on the IAIS and IASB developments.
Commissioner Hampton (DC) chaired. He began by reviewing the NALC comments on the Valuation Manual (VM). Most of the issues have been address. Concerns remain with the exclusion tests for smaller companies and the statistical agent requirements. One concern expressed was that no statistical agent extant could handle all of the data that would result from the current draft requirements. Norm Hill (NALC) said they were getting good responses from the Working Groups and Hampton thanked them for their work and attention.
Dave Sandberg (AAA) said he was looking to schedule the proposed 90 minute presentation on PBR for the next meeting. They are looking for a completely open slot to maximize attendance.
Larry Bruning (KS) reported that LHATF passed the Standard Valuation Law (SVL). Work continues on the Valuation Manual. The scope has been narrowed to new business and a completed net premium reserve proposal will be needed as well. A Subgroup led by New York is working on the statistical agent issues. The Working Group exposed the SVL for 30 days and will hold a conference call with A Committee and the Solvency Modernization Task Force at the conclusion of the comment period.
The staff will budget for the necessary training program. The regional training model used recently seemed to work well. The AAA will share their certification program changes as a template.
The Task Force also received a report on the LRBCWG’s progress on C3 Phase III.
A second meeting of the Principles-Based Reserving (EX) Working Group was held on Monday, June 15. The only agenda item was discussion of the revisions to the Corporate Governance Requirements for Principles-Based Reserves (Section VM-G for the Valuation Manual). Since the Working Group and interested parties had not had a chance to review the changes, there will be a two-week exposure period ending on Monday, June 29 and a conference call will be scheduled to discuss any additional comments received.
Commissioner Thomas Hampton (DC), chair of the Working Group, cautioned that he would not be receptive to any substantive changes. The Corporate Governance (EX) Subgroup had done a tremendous amount of work achieving what the Working Group wanted to have and addressing concerns from the industry regarding undue constraints on the board. He added that any comments should be about grammatical corrections.
Paul Graham (ACLI) raised concerns that there is confusion about the role of the actuary versus the role of the appointed actuary or chief valuation officer since different titles are used at different companies. Graham suggested that the American Academy of Actuaries investigate where the guidance may overstep. In speaking about process, Hampton said they were looking for the Solvency Modernization Initiative (EX) Task Force and the Life Insurance and Annuities (A) Committee to adopt Section VM-G as soon as possible with global corporate governance as the intended next step.
Scott Harrison (ALIA) asked if Section VM-G would need to be adopted together with the Valuation Manual. Hampton answered that correct protocol would be followed and the Working Group will do whatever is necessary to move this along ; he added that there has been as much discussion as could be had on the subject. In response to Lou Felice’s (NY) question if the Life and Health Actuarial Task Force (LHATF) is handling other elements while the Working Group handles this part, Larry Bruning (KS), chair of LHATF, said that the chapters of the Valuation Manual are being handled separately by different groups.
Superintendent Morris Chavez (NM) chaired this meeting.
Health Insurance: Sally McCarty (National Hemophilia Foundation) and Betty Ahrens (Iowa Citizen Action Network) made a joint presentation in support of the inclusion of a public health insurance option in the national healthcare reform package. McCarty reviewed current market conditions that cry out for a public option, including almost 50 million uninsured; the lack of competition in many markets where only one or two insurers operate; the lack of transparency and prevalence of abuses in private plans; the insurers’ focus on their shareholders rather than their policyholders; the “outrageous” CEO compensation (over $30 million for Edward Hanway of Cigna); premiums rising at twice the rate of family incomes;, and the over 700% growth in profits for the six largest health insurers from 2001 to 2008.
Ahrens listed what she called the strongest arguments for a public option, including that it would be available to all Americans regardless of their ability to pay premiums; that it would force insurers to compete on benefits, price, quality, and consumer services, resulting in lower costs for all; that it would provide a guaranteed safety, ensuring that insurance will always be available to those with preexisting conditions because unlike private insurers the public plan could not withdraw from markets that prove to be unprofitable; and that it would avoid adverse selection; that it would be available in all areas of the country, not just the profitable ones where private insurers operate.
As evidence that costs would go down, she argued that between 1997 and 2006 private health insurance premiums had increase 59% faster than Medicare premiums; that the public option would be able to negotiate for lower costs of drugs and other healthcare products and services; that it would have a vested interest in keeping its members healthy (unlike insurers who have no interest in such investments which they view as unprofitable because their policyholders often change carriers) because they will ultimately be covered by Medicare and that government health plans have demonstrated their superior ability to operate effective health management programs proven records.
McCarty ended the presentation by urging the NAIC to support a public health insurance option. Commissioner Joel Ario (PA) explained that the NAIC has not taken a formal position on this issue because there is disagreement among the members but, he noted, Commissioner Sandy Praeger (KS) had testified (to rebut insurer arguments that the public option would result in unfair competition) that the option could be designed to compete on a level playing field if it used actuarially sound rates.
Credit Scoring: Birny Birnbaum (Center for Economic Justice) offered some comments on the credit scoring and risk classification public hearing the NAIC had held last month. He noted that the credit industry and the insurance industry presented the view that credit scoring works great and that the current economic and financial markets meltdown was not having an adverse impact on credit scores or insurance availability or affordability. He urged the NAIC not to accept these statements without verification and suggested three ways it could follow up:
He suggested the regulators could use the time the moratorium is in effect to study the problem and figure out how to address the issues surrounding the use of credit scoring in rate making.
Birnbaum suggested several sources of publicly available verifiable information that calls into question the veracity of the industry’s testimony at the public hearing. One is Realty Trac which follows home foreclosures and which reported 1.3 million foreclosures in 2006, 2.2 million for 2007, 3.2 million for 2008, and over 300,000 per month so far in 2009. He attributed the continuing rise in foreclosures to the fact prime mortgages are beginning to fail, adding that The New York Times reported that between 2007 and 2009 the number of prime mortgages foreclosures increased 800% (from 100,000 to 800,000).
Another source is TransUnion which issues a quarterly report on the percentage of delinquencies both by state and for the country as a whole and these reports are showing similar trends. Information on credit card charge-offs (currently running at a record 10%) and delinquencies is complied by Moody’s and Fitch.
In addition, an update on a Harvard bankruptcy study reported that 62% of personal bankruptcies were related to medical issues and that most of the victims had health insurance foreclosures. Other sources of information related to credit scores are recent bank cuts in credit limits and unemployment statistics. He suggested that the regulators take this information and plug it into the credit scoring models on file in their departments and see for themselves how they affect credit scores.
Birnbaum had provided the regulators with a copy of a credit scoring model (with the name of the insurer blacked out) filed in Michigan this year that he obtained through freedom of information. He noted that the model is based on policies in effect from 2001 to 2005 and it uses foreclosure and delinquency data from that period but is effective for 2008. He asked how this model, which is its filer stated complies with the NCOIL modal as well as the New Hampshire law, could be relevant to today’s market conditions. He asked the regulators to look at the factors used which he suggested would either lower credit scores based on current economic conditions or should not have anything to do with a persons credit score.
Greg Squires (George Washington University) commented that insurers claim they do not collect information on race and he agreed that they do not do so directly, but he said, there are lots of surrogates for race; he asked, why else an insurer would ask its agent whether the kids in the neighborhood play hockey or basketball. He added that the Community Reinvestment Act Modernization bill that has 43 sponsors in the House covers the non-life insurance industry and he urged the NAIC to not allow the federal government to take the lead on this issue because state regulators are in a better position to identify the precise information needed to effectively monitor insurance markets and without the information they are “flying blind”.
The commissioners questioned Birnbaum on how a moratorium could be put in place without legislation. Birnbaum suggested they could use the rate approval authority that most states have to disapprove the rates and require the insurer to make a new filing that does not include credit scoring. Superintendent Mila Kofman (ME) asked which states prohibit credit scoring. Birnbaum cited California, Hawaii, Maryland, and Massachusetts.
State Representative Brian Kennedy (RI) welcomed the NAIC’s input regarding the proposed amendment to the NCOIL model which he said will be considered at NCOIL’s July meeting. He told the Committee that 26 states have already enacted the NCOIL model and it would be difficult to get changes to the laws enacted anytime soon as the legislative sessions in most states would be ending soon and many state legislatures would not meet at all in 2010.
National Catastrophe Policy: Amy Bach (United Policyholders) and Colleen Repetto (Fair Insurance Rates in Monroe) made a joint presentation arguing for an all perils homeowner’s policy. Repetto represents homeowners in the Florida Keys who face astronomical rates for windstorm and Bach’s organization focuses on post-disaster claims scenarios. Bach supports the adoption of an all-risk policy because policyholders in high risk areas often need to purchase three or even four separate policies (homeowners, earthquake, flood, and wind) in order to fully insure their property and that this is confusing and difficult for the policyholder to manage and is also highly inefficient. She added that availability or the lack thereof is straining the ability of local catastrophe funds that were originally designed to be stop-gaps but are now having to handle large pools of insureds.
Repetto noted that because, in many cases, flood and wind damage (or earthquake and fire) occur simultaneously claim settlements are delayed, sometimes for several years, while insurers argue over who is responsible for what, causing lifestyle disruptions and financial stress for the policyholders. She urged the NAIC to support the H.R. 2555, the Homeowners Defense Act of 2009, which would allow states that choose to participate in a national catastrophe insurance pool to spread the risk of natural disasters across the state lines.
Privacy Notice Form Model: Bonita Kallestad (Mid-Minnesota Legal Assistance) updated the Commissioners on an inter-agency project led by the FTC project to develop a prototype for an understandable annual privacy notice that all financial services companies are required by GLBA to provide. Last year the NAIC provided comments on the draft prototype which, as originally drafted, would be more appropriate for banks than insurers. The FTC has notified the NAIC that if was accepting most of those comments but asked the NAIC for some additional comments. The turnaround time is relatively short and Kallestad stated that she simply wanted to draw attention to the letter. [This issue was later considered by the Government Relations Leadership Council.]
Market Conduct Data and Annual Statement: Birnbaum thanked Commissioner Kim Holland (OK) for her leadership on this issue. He stated that the consumers were willing to separate out confidentiality but this needs to be paired with a commitment to publish insurer specific market information. He urged the NAIC to look at the NCOIL proposed model law which would make all the information collected in the market conduct annual statement confidential. He was concerned that if the NCOIL model is adopted it would eliminate the NAIC’s ability to publish market information or to continue to release information on complaints.
Commissioner Roger Sevigny (NH) chaired the NAIC/State Government Liaison Committee meeting.
Financial Services Crisis: Ethan Sonnichsen (NAIC Staff) gave a brief report on the most recent developments in Washington DC regarding regulatory reform of the financial services industry which he characterized as very much in flux with constant changes in positions. He mentioned the On June 16th hearing on systemic risk and insurance before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises at which Director Michael McRaith (IL) would represent the NAIC. Sonnichsen reported that on June 18th Treasury is expected to release its regulatory proposal. [For details go to the write-up of the Government Relations Leadership Council.]
Sonnichsen also reported that action is expected on the surplus lines and NARAB reforms by the end of June; the optional federal charter proposal has been reintroduced; and the House GOP has released its regulatory reform proposal which provides for a capital adequacy board and would limit the emergency authority of the Federal Reserve by eliminating its bailout authority, and would restrict impact of credit agencies. He noted that the GOP proposal makes no mention of insurance.
NAIC CEO Terri Vaughan added that state regulators and legislators are being challenged to explain how they can fit into systemic risk regulation and the global financial services environment. She said the idea of a systemic risk council is beginning to get traction so the states need to figure out how they would fit in, noting that from a technical perspective there is no question that they have the ability as they have a lot of data and are highly coordinated so they are positioned to help the federal government understand the insurance markets; however, there are structural issues relating to confidentiality and how the states can participate in a federal dialog in a national system as well as internationally.
Representative Brian Kennedy (RI) commented that while the state legislators strongly oppose federal regulation and the optional federal charter proposal, they are warming to the idea of a systemic risk council provided the states are represented. Representative George Keiser (ND) prefaced his remarks by stating they represented his own views. He placed the blame for the financial crisis on Congress, stating that GLBA had created the AIG disaster because AIG could not have gotten into the financial services business if GLBA had not been enacted and credit default swaps could not have been created if the state bucket laws had not been nullified by the Commodities Futures Act. He argued that is was imperative that the states develop a state-based solution. (Vaughan later took issue with attributing the AIG debacle on GLBA, noting that it got into the financial services business via a thrift subsidiary not a commercial bank.)
Representative Bob Damron (KY) was more concerned with the idea of a council but was glad to see that the emphasis in Washington had moved from deregulation to more regulation. He cautioned that Congress needed to remember that it works for consumers not the industry. Regarding why the optional federal charter is a bad idea, he noted that it would allow the insurers to engage in regulatory arbitrage. He wants a seat at the table for the state legislators or perhaps the National Governor Association.
Sevigny agreed that the NAIC, NCOIL, and NCSL [who was not represented at this meeting] needed to coordinate their efforts. Keiser was concerned that the NAIC had decided that some federal intervention is inevitable and so it needed to have a seat at the table, suggesting that the state of health insurance demonstrates the shortcomings of federal regulation. He stated that is was acceptable to participate in the debate but that the states needed to argue that the states are the solution. Damron added that the council should assist the states by making systemic risk information available to them so they can take appropriate action to protect the solvency of the insurers.
Keiser brought up the principles-based reserving (PBR) proposal for life insurance. He asked what happened to the study the NAIC had stated would be conducted to see how the financial condition of insurers would have differed had PBR been in place when the financial crisis struck. Commissioner Tom Hampton (DC) was not there so Keiser’s question could not be answered directly but Vaughan noted that since the crisis there has been a lot of rethinking about the merits of internal models. However, she added, PBR is not model-based; it is based on the extensive amount of work the actuaries have been doing to develop the manual (where the meat is), she is confident that there will be good controls. She stated that PBR was needed because formula driven reserving did not work for the new types of life products and currently the actuaries must adjust the formulas for each new product that is developed; the PBR approach has the advantage of flexibility; and it would result in better reserving if the right safeguards are in place (to be in the manual).
Damron asked what would happen if a state did not adopt the new Standard Valuation Law and stated that Kentucky would not because he was convinced that it would result in the lowering of reserves. Commissioner Susan Voss (IA) stated that Iowa has been testing the PBR approach and the results indicate that many Iowa insurers would have to increase their reserves. Sevigny suggested the legislators could get a better understanding of how PBR will work and be regulated if they could participate in on the weekly LHATF meetings. Keiser was concerned that states that did not adopt the SVL would loose their accreditation. Vaughan replied that this decision has not been made.
Market Conduct Annual Statement: Commissioner Kim Holland (OK), who chairs “D” Committee, noted that there had been a 2003 GAO report that criticized the lack of coordination of market conduct oversight and since then the NAIC has been working to make improvements both for the benefit of consumers and for industry with respect to multi-state examinations. She added that from the perspective of consumers the merit of an insurer is based on how well it pays claims. She summarized the initiatives that the NAIC has undertaken, including consideration of a separate accreditation process for market regulation and the development of a market conduct annual statement (MCAS) which will collect information needed for effective analysis of an insurer’s market conduct. She noted that market regulation must be handled differently than solvency regulation because each state has unique insurance products and rules, however there are areas where data collection can help, particularly for insurers that operate in many states and, she emphasized, effective application of market conduct analysis is totally dependent on having good data.
Holland stated that the purpose of the MCAS is to improve data collection as well as to avoid examinations where the analysis could fulfill the state’s purpose if it had the needed data. In order find out how effective the current market conduct annual statement is “D” Committee has put together a resource team that includes with industry and consumer representatives to evaluate the data now being collected by the MCAS. The team has developed a survey that will be sent to all the states that participate in the current MCAS asking them to provide feedback on how they use the data and how it can be improved. “D” Committee is also looking at other tools regulators currently use to collect data and evaluating which of them are effective.
Regarding confidentiality, Holland said that the regulators needed to balance proprietary issues with the consumers’ need for meaningful insurer specific performance information at the time insurance is purchased. She stated that the issue of what information should be provided to consumers and how it should be provided is being considered separately and that both consumers and industry agree with the process the Committee is following to ensure that the information to be provided to consumers will be accurate and verifiable.
Holland invited the NCOIL representatives to attend the “D” Committee meeting. Kennedy told Holland that NCOIL was developing a model MCAS act, principally to slow down the NAIC and to address confidentiality concerns; he suggested the NAIC review the draft and comment on it during the July NCOIL meeting in Philadelphia. Holland replied that Oklahoma had enacted a MCAS law with industry support that will allow her department to collect the data and pass it on to a statistical agent or the NAIC.
Keiser wanted to know how the NAIC was addressing the problem of duplicative and multiple market conduct examinations of insurers. Holland replied that the NAIC’s goal is to elevate market regulation to the same level of efficacy and credibility as financial regulation and the MCAS and market conduct accreditation projects are designed to make meeting this goal possible but, she stressed, effective market regulation will require additional resources and the regulators must rely on their legislators to provide those resources. She added that now that the steps are in place the NAIC will develop a roadmap to keep the project on track as regardless of the periodic changes in ranks of commissioners because completion of the effort will take some time.
Voss added that there is now a market analysis working group to collectively review national companies where appropriate and the process was first was done for United Healthcare. However, Holland stated that multi-state examinations are unusual and that issues most insurers have are with targeted examinations where a number of states are looking at different state-specific issues at the same time and for these the NAIC can only improve the process by providing the examiners with effective analysis tools, requiring that they do an analysis before beginning an examination, and evaluating whether the issue under review is an aberration to that state or is a national problem.
Credit Scoring: Holland gave a brief report on the public hearing held last month and stressed that the purpose of the hearing was not to reexamine credit scoring but rather to evaluate the quality of the data used to develop the scores, to educate the regulators and interested parties on how credit scores are used; and to address whether the financial credit crisis was having an adverse impact on policyholder credit scores. She stated that both industry and consumer representatives gave creditable testimony.
Holland invited the NCOIL representatives to attend a follow-up two-our hearing to be held later during this national meeting after which “D” Committee will access whether there is a public policy issue that it needs to address. She also noted that NCOIL had been invited to make a presentation to “D” Committee on a proposed amendment to the NCOIL credit scoring model act intended to address concerns with the possible disparate effect of the current economic turndown.
Commissioner Susan Voss (IA) chaired this meeting. The industry was represented by Deirdre Manna (PCI), Dave Synder (AIA), Neil Alldredge (NAMIC), and Steve McManus (State Farm).
Industry Goals for Liaison Meetings: Manna stated that the industry’s goal for these meetings was to engage the NAIC in high-level candid discussions of the issues affecting the insurance industry and how the NAIC proceedings impact the industry. She added that industry views these meetings as an opportunity to build back some trust, explaining that they have concerns that initiatives proposed by the industry are viewed as anti-consumer whereas the industry believes it also represents consumers, that they are its customers, and without them the industry would not exist.
Synder thanked Voss for suggesting that the industry and regulators engage in a more straightforward constructive dialog than has occurred at these meetings in the recent past.
What Constitutes Consumer Protection: Synder views insurance and insurance regulation as a noble enterprise in which the industry and regulators are equal partners; he stated that the liaisons’ objective is to make that enterprise work effectively and efficiently for all parties and that industry was concerned that “consumer protection” has come to mean something that is too narrow.
Synder read prepared remarks asserting that consumers are best served when insurance regulation focuses on uniform and effective oversight of financial solvency and market conduct which allows insurers to compete effectively and aggressively for business by offering products at prices that reflect risk and are subject to free market competition. He opined that some aspects of insurance regulation are diametrically opposed to real consumer protections, leading to reduced profits in the market, the inability of insurers to offer consumers products that they need, unproductive regulatory overhead, prices that fail to reflect risk, and reduced competition. Synder cited industry’s work with the Institute for Highway Safety and its lobbying for legislation that has led to safer highways and workplaces as examples of what it believes consumer protection really means.
Alldredge argued that the cost of regulation is passed on to policyholders so companies should not be expected to just go along with new regulatory requirements, such as the climate change disclosures now under discussion, without a real analysis of cost. He opined that too often regulators focus on the small number of policyholders that may benefit from the implementation of a new regulatory rule without considering the cost that will be passed onto the majority of policyholders that may realize no benefits.
He said that NAMIC believes that the most effective way industry can “stiff arm” for more efficient regulation is to push for federal regulation. He opined that the NAIC’s reform agenda has gotten off track, noting the lack of progress on uniform company or producer licensing. He also would like to see the NAIC tell states to discontinue regulations or data collection that is no longer necessary – more regulation does not always mean better regulation.
Voss noted that recent consumer surveys indicate that consumer satisfaction with the industry is going down and asked why they thought this was happening and where insurers were not doing a good job at addressing consumer concerns. Alldredge replied that the insurers talk about this among themselves all the time and there is little agreement as to the reason. Some believe that it is inherent in the business because policyholders only interact with their insurers when they have a loss. He also thinks insurers do not do a good job of explaining to consumers what they are buying when they purchase insurance, that it’s a transfer of risk, and consumers do not understand the value of that transfer.
With regard to producer licensing, Voss asked if the industry could help in those states where the producers and legislators are standing in the way of uniform licensing. Alldredge conceded that they may need Congressional action to overcome these obstacles.
Synder did not accept Voss’ comments regarding consumer attitudes, citing post-claims settlement surveys that indicate over 90% satisfaction. He suggested consumers may not like the industry in general but they like their own insurers. McManus added that the meltdown of financial markets clearly caused a drop in approval ratings and suggested that the AIG debacle and news reports indicating several insurers were applying for TARP money did not help the industry’s image.
Director Michael McRaith (IL) commented that the regulators need to understand the industry’s perspective on consumer protection but may not agree with it. Alldredge agreed, stating he only wanted the regulators to not only listen to the consumer representatives. Synder added that he does not see agreement on basic principles and that the rift has grown.
Credit Scoring: Synder went over the industry’s arguments in support of credit-based risk assessments and noted that there has been a low level of complaints but there are constant attempts to reopen the credit scoring issue. He argued that the data cited during the NAIC/Consumer Liaison Committee meeting were lending scores which are different from credit scores. Regarding the credit scoring model Birny Birnbaum (Center for Economic Justice) had distributed at that meeting, he argued that there is no evidence it is representative of credit scoring models used in the industry and that regulators can disapprove models if they believe the data is not relevant.
Commissioner Mike Kreidler (WA) noted that some in Congress and some state legislators want to ban the use of credit scores in underwriting so it is hard for him to believe there is no dissatisfaction as Synder has asserted. Kreidler argued that credit scores as well as occupation and education are surrogates for real underwriting and he asked Synder why the industry cannot develop underwriting tools that are directly associated with the policyholders driving instead of using surrogates the public does not understand and does not like. He complained that regulators bear the brunt of the public dissatisfaction and must respond to complaints. He noted that the president of the American Academy of Actuaries spoke in support of pay-as-you-drive insurance and asked why the industry is not developing real underwriting tools based on this approach. He added that he would support industry efforts to stop the expunging of driving records after completion of driver safety courses which he does not believe necessarily result in a better driver.
Synder replied that credit scoring was an improvement over the old broader risk assessment tools but there is constant competition to find better tools. He said vehicle usage is being looked at but cost and the practicality of getting the data are issues that must be overcome.
NAIC as a Rating Agency: Manna raised industry concerns with the lack of information regarding progress on the NAIC’s effort to develop an affiliate organization to act as a rating agency. She understands that the intention is to only rate municipal debt but industry is concerned that the scope would grow. Manna argued that it is not part of the NAIC’s mission and it could cause conflicts with solvency regulation.
Voss was perplexed as to why the industry should be so concerned with this proposal given the lousy job the current rating agencies have been doing but she assured Manna that the idea was still under discussion and that no vote had been taken. The NAIC is still looking into the legal ramifications and how the affiliate could be walled off. McRaith added that they was exploring how the rating agencies collect information and that there was general dissatisfaction among the commissioners over the role the rating agencies played in the demise of several financial guarantee insurers.
Voss said she was appalled at the rating agencies’ response when asked how this happened – they shrugged and said “we blew it so what”. She added that the NAIC was looking into how the agencies wall off their rating function from their marketing. She suggested that industry propose an alternative approach if it does not like the NAIC’s approach. McManus commented that industry was concerned with the additional cost and noted that the municipal market has improved since this idea was first proposed.
Meetings: Manna listed the industry complaints regarding national meetings. She told the commissioners that industry was not happy that the location and dates of the December meeting were changed behind closed doors; that the Gaylord hotels are very expensive for industry; that last minute schedule changes increase travel expenses when they require flight changes; that the three-day meeting schedule is creeping back to four days; with the lack of notification of the reasons for closed meetings; with the scheduling of meetings that conflict with religious holidays; and with the NAIC’s procedure of summarizing comments submitted by interested parties and not providing the commissioners with their entire text.
Voss replied that the cancellation of the Hawaii meeting proved to be more complicated than anticipated and it took some time to negotiate with the Hilton chain and avoid a one-million dollar penalty. She noted that the move to three meetings per year could end up requiring that the meetings be longer in order to avoid meeting conflicts. She cautioned that scheduling mistakes will probably be made in 2010 as the NAIC transitions to three meeting and stated that the leadership was trying to decide when interim teleconference meetings should be used in place of face-to-face meetings. She agreed to comply with the closed meeting notice requirements and to provide the full text of industry comments to the commissioners.
Superintendent Eric Dinallo (NY), chair, called the meeting to order by welcoming everyone to the final episode of Eric Dinallo and the “A” Committee. [Dinallo will be leaving the New York Department effective July 3, 2009.] Dinallo continued to amuse the Committee and interested parties with his wry and self-deprecating humor.
Michael Bartholomew (ACLI) introduced the resolution naming September 2009 as Life Insurance Awareness Month. The Committee adopted the resolution.
Federal Legislative Update: Amanda Yanek, NAIC Government Relations Policy Analyst, gave the federal legislative update. The bills of interest to the Committee are S. 906 (the Senior Investment Protection Act of 2009), H.R. 2733 (the Fixed Indexed Annuities and Insurance Products Classification Act of 2009), and H.R. 2748 (the Retirement Security Needs Lifetime Pay Act of 2009). The NAIC has submitted a letter to Representative Gregory Meeks (NY) in support of H.R. 2733 and is monitoring the actions surrounding this bill. The NAIC is reviewing H.R. 2748 and has not yet taken a position.
Consumer Guides (A) Subgroup: Steve Ostlund (AL) gave the report for the Consumer Guides (A) Subgroup. Ostlund said the Subgroup has not much progress and would like to report to the Annuity Disclosure (A) Working Group instead of the “A” Committee since the Buyer’s Guide for Fixed Indexed Annuities and the Buyer’s Guide for Variable Annuities are appendices to the NAIC Annuity Disclosure Model Regulation. The Committee adopted the report and the Subgroup will now report to the Annuity Disclosure (A) Working Group.
Annuity Disclosure (A) Working Group: Jim Mumford (IA) gave the report for the Annuity Disclosure (A) Working Group, which included discussion of the Guaranty Fund Coverage Disclosure Notice Issue. A draft template will be referred to the Receivership and Insolvency (E) Task Force for its review. Discussions of the Annuity Illustration Issue continued. There will be conference calls in July and August to continue discussions on both these issues. The Committee adopted the report.
Indexed Annuities (A) Working Group: Mumford also reported that the work of the Indexed Annuities (A) Working Group was finished and he asked the Committee to disband the Working Group. He added that Iowa had become the alter ego of the NAIC since it was easier to do the nationwide data call regarding annuity products with indexed annuities through one state. The indexed annuities report will be public and Mumford said there were no highlights or surprises in the indexed annuities report. The Committee adopted the report of the Working Group and the Working Group has been disbanded.
Suitability of Annuity Sales (A) Working Group: Kim Shaul (WI) gave the report for the Suitability of Annuity Sales (A) Working Group. The Working Group is revising the Suitability in Annuity Transactions Model Regulation. A draft will be exposed in the next few weeks. Don Walters of the Insurance Marketplace Standards Association (IMSA) expressed concern with the direction of the Working Group and suggested interpretive guidance as a possible approach. Shaul responded that at its meeting in Minneapolis the Working Group had considered interpretive guidance and the Working Group voted to continue work on the NAIC guidance and model.
There was confusion among NAIC staff, the Committee, and interested parties as to whether other approaches were still on the table or if a vote had actually been held but, after some heated discussion, the Working Group’s vote to exclude other methods was confirmed. Several Committee members weighed in with Commissioner Thomas Hampton (DC) stressing his concern over the varying models and preferring the use FINRA as a guide for uniformity’s sake. Other interested parties agreed that consistency between FINRA and the NAIC were important. Still others urged the Working Group not to change the Model and instead refine the charge.
Birny Birnbaum (Center for Economic Justice) said that uniformity is not a goal within itself and if the Model does not protect consumers it is not helpful. Uniformity comes into play in terms of legislation and enforcement. Birnbaum added that if IMSA wants to do interpretive guidance it could do so without asking that work on the Model be halted. Commissioner Susan Voss (IA) felt there should not be a debate now since the draft is ready for exposure and there is a process in place for comments. The Working Group report was adopted by the Committee.
Dinallo thanked the Committee, LHATF, and vice-chairs Commissioner Sean Dilweg (WI) and Commissioner Adam Hamm (ND) for all their help. He also thanked Yanek for all her work and gave special thanks to Jolie Matthews (NAIC staff) for her hard work, to Kermit Brooks and John Kenny of the New York State Insurance Department, and to Birnbaum. Dinallo said chairing the “A” Committee had been an incredibly satisfying experience.
Larry Bruning (KS) chairs the Task Force. He began with a homily on the Principle Based Reserving process to date, relating the advice of a carpenter/relative - measure twice, cut once.
With regard to the net premium reserve (NPR) method being suggested by the ACLI, he said LHATF is normally indifferent to taxes, but he recognizes that the proposal will not be supported if a solution isn’t found. So, the Task Force will work on it. John Bruins said that the ACLI has been speaking conceptually up to now. They are in the process of testing the details. Bruins said the ACLI does not want to bring a proposal that will not later work. He said that a scheduled premium model was almost complete. For flexible premium, ACLI is still developing the straw-man proposal, and hoping to get the completed proposal to LHATF by October.
With regard to determinations by Treasury, the industry is still waiting for determinations on VACARVM. There is no predicting when a PBR approval would happen. There is a consensus that Treasury would not approve the current VM 20 methodology. Industry would oppose the current VM-20 on that basis.
New York said the NPR needs to be adequate because it will be the reserve in some cases. Bruins said the ACLI is addressing comments in the interim including issues with shock lapse and expense allowance and is trying to structure it so when tables are adopted in the future they can be done retroactively. Once NPR is done VM-20 will need a re-write.
Donna Claire and Mary Bahna-Nolan (AAA) gave a presentation on proposals for new mortality tables and margins. The alternatives were:
After a long data presentation and discussion of pros and cons the LHATF decided to wait until 2012 and work on PBR in the meantime. USAA said it had issues with waiting due to the mix of its business and the XXX requirements.
At a previous meeting New York asked for development of standardized asset default cost projections. The AAA conducted additional discussion and presentation of the current state of the model. It was at pains to say this is not its proposal, but a response to the regulator request. LRWG recommended a prudent estimate of the default cost.
The current model has different effects based on the maturity of the portfolio (though the securities may be from the same issuer). A mature portfolio will react to increases in interest rate; an ongoing basis or new portfolio will assume re-investment at better spreads available in the future, thereby even reducing the reserve. Testing the model will be problematic, a lot of work will be needed, and the AAA needs to know if it is conceptually supported including the effect of future spreads.
There was discussion on how to get the constraints in the model to not add so much to the reserve requirement. It could at this rate wipe out surplus. Protective Life commented that the model does not take asset matching sufficiently into account and that changing reserves based on spreads is not right. Bruning asked if this model would force you to churn the portfolio for uneconomic reasons and if it would have procyclical effects.
There were three requests for further consideration: look at the method without the constraint component (AAA preference); look at Treasury rate + 50bp (SC); and the Treasury rate + ½ the spread to a AAA security (NY).
There was continued discussion on Guaranteed Lifetime Income Benefits (GLIB) and how to use AG 33 to determine the benefit type.
Bruning held a role call vote on the adoption of the proposed Model Standard Valuation Law that will usher in Principle Based Reserving. All but New York voted aye, New York abstained. The Task Force, Bruning, Leslie Jones (SC), Randal Stevenson (former NAIC staff) and John Engelhardt (NAIC staff) are to be commended for a thorough, well-organized effort, executed over the years. Every issue was given its due in a thoughtful, professional way.
The AAA is going through the draft Nonforfeiture report; it should be ready by end of this year. The GRET factors were re-exposed. There will be a webcast on the scenario generator for standard scenarios in the next quarter. The AAA is still concerned with limitations on the development of the stochastic modeling technology.
There is work underway at the AAA on guidance for determining the effectiveness of dynamic hedges (they are measured on a 0-7 scale). C-3 Phase II work on the same issue is underway but there is more needed in that instance than the practice note. The AAA is hoping to be done by the September meeting.
Dozens of issues with regard to VM-20 were discussed. New York withdrew the “working reserve” proposal (for now) (form 22). There was much debate as to whether the amount belonged in reserves or capital. New York’s proposal for proscribed lapse assumptions for business without direct experience was rejected (form 24). Tom Kilcoyne’s (PA) proposal (26) for end of contract boundary was modified and adopted. The definition of “policyholder efficiency” (23) was adopted. New York’s proposal on margin setting and assumptions (7) was withdrawn and there was discussion of (20) and (25) related to credit for diversification. VM-20 was re-exposed.
The SOA is doing a research project on the effect of the current VM-20 using real business. It will hopefully be done by the end of the summer.
The Task Force agreed with the AAA to delete the concept statements in VM-0. The Subgroup made a chart of all the definitions in the VM in an effort to conform them and put them all in VM-1. AG – 33 will be converted to VM language and included. There was a suggestion that a document describing the product selection process be developed and there was agreement.
Blanks and SAPWG are wondering about the progress. There will need to be a change to the Blanks instructions regarding the actuarial opinion and memorandum to handle transition issues. The reinsurance chapter forms 1 and 9 were withdrawn.
The relief proposal, Model Regulation 815 Permitting the Recognition of Preferred Mortality Tables was passed out of LHATF on a tiebreaker by the Chairman. Most observers believed Bruning just wanted it off his agenda and someone else’s problem. There will be a survey in the interim on whether companies intend to use various relief provisions and their potential impact.
At the “Committee meeting, since the “A” Committee, the Solvency Modernization Initiative (EX) Task Force, and the Principles-Based Reserving (EX) Working Group, would be scheduling a joint conference call, Bruning asked to exclude LHATF’s adopted revisions to the Standard Valuation Law (SVL). Hampton recommended that the SVL be exposed.
At the A Committee Meeting Commissioner Ann Frohman (NE) asked that adoption of Model Regulation #815, the Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities, be pulled from the report since the LHATF vote for adoption was a tie that was broken by the LHATF chair. Frohman said there needs to be further discussion before this provision can move forward. There was a long debate and much confusion with everyone in the room about procedure and adopting parts of the LHATF report and deferring other sections.
Birnbaum said his understanding was that Model Regulation #815 and Model Regulation #822, the Actuarial Opinion and Memorandum Regulation, were Capital and Surplus Relief (E) Working Group proposals that had been voted down by the Executive (EX) Committee because of process and because the industry had not made its case. He wanted to know what need existed now that was not present in January. Dinallo responded that the Models were not needed in response to the financial crisis but they are speaking to the long term now.
The Committee voted to expose the SVL for 30 days. The Committee received the LHATF report excluding adopted revisions to the SVL and Model Regulation #815. The received report did include adopted Actuarial Guideline 1(c), adopted Model Regulation #822, and adopted Model Regulation # 830, Valuation of Life Insurance Policies Model Regulation.
Director Michael McRaith (IL) chaired this meeting.
Natural Catastrophe White Paper: The Committee adopted the white paper entitled, Natural Catastrophe Risk: Creating a Comprehensive National Plan, after considering and rejecting a request of Dennis Burke (RAA) that the report be amended to reflect a more balanced view of the pros and cons of the various ideas discussed in the paper. At a minimum the RAA requested that language be added which would include a statement that “the NAIC is not advocating that a federal catastrophe insurance mechanism is needed or is the preferred solution.” McRaith stated that the concerns raised were addressed by the addition of a statement at the bottom of the title page to the effect that the paper contains various views on how to prepare the US for natural catastrophes in order to demonstrate the diversity of views on this topic.
Earthquake Presentation: On a related subject, the Committee heard a presentation from Glenn Pomeroy (California Earthquake Authority) and John Forney (Raymond James) on a proposal for a federal guarantee of post-event debt. [See the report of the Government Relations Leadership Council where the same presentation was given.]
Risk Retention: Eric Nordman (NAIC Staff) reported that corporate governance standards developed several years ago for risk retention groups had been referred to the “E” Committee for incorporation into the financial filing process but the Committee had determined that this approach was not practicable and may be subject to legal challenge. Nordman suggested they could be incorporated into the Risk Retention/Purchasing Group Handbook, which has not been updated since 2000. McRaith stated that he would appoint a working group to address this issue.
D&O Coverage for Guarantee Fund Receivers: Nordman also reported on a referral from the Receivership and Insolvency (E) Task Force regarding contract language contained in D&O policies that excludes coverage for guarantee fund receivers. The Task Force has asked “C” Committee to look into this. Nordman reported that the matter is being reviewed by lawyers at the Illinois Insurance Department and there would be a report on their findings in September.
Credit Scoring: McRaith reported that a joint hearing on credit scoring had been held on April 30th by “C” and “D” Committees and that there had been a two-hour follow-up meeting in Minneapolis at which they heard from industry and consumer representatives as well as an update from NCOIL on its model law on credit scoring. Because of time constraints the Committees did not have an opportunity to discuss how to proceed so McRaith asked the committee members to submit their proposals for next steps by June 30th.
Catastrophe Modeling: Commissioner James Donelon (LA) gave a report on the Catastrophe Model Feasibility Study. The NAIC had commissioned the study to determine if it would be feasible and cost effective for regulators to develop earthquake and hurricane catastrophe models for use in pricing, solvency monitoring, and enhancing RBC formulas by adding a catastrophe factor. Donelon reported that the Pilot States Study Group will issue its final report in July. The feasibility study is being conducted by consultants who are looking at the scope, timelines, study and data requirements, and costs, to build national catastrophe models for earthquake and hurricane. The consultants’ feasibility report was due on June 15th.
The proposal calls for the models to be of commercial grade comparable to vendor models. They would be housed in a central location and have project managers with the appropriate expertise. The components of the models will be pier-reviewed by experts from representative states. Insurers would be able to access the models for analysis using a secure web-based system. The consultants’ final report will estimate costs for assessing losses at both ZIP Code and geocode levels and will include a section detailing possible alternatives to building a national model.
P&C Model Rating Laws: Nordman noted that this issue has been very controversial over the years. Most recently the Speed-to-Market (EX) Task Force adopted a recommendation contained in a white paper developed by its Personal Lines Regulatory Framework Working Group that the two model laws (the prior approval model and the file and use model) would not meet the test for a model law under the current procedures. Those two models have since been reclassified as model guidelines. Speed-to-Market has requested that “C” Committee review a draft model developed by the Committee in 2000 titled, Property and Casualty Rate and Policy Form Model Law, to consider whether it should be designated as model guideline. The Committee will appoint a working group to review this matter.
Task Force and Working Group Reports: The Committee heard and approved reports of its task forces and working groups. Below are summaries of select reports:
John Purple (CT) ended his six year tenure of the Casualty Actuarial and Statistical (C) Task Force at this meeting. Task Force members recognized his contributions with testimonials and a gift. Purple is retiring from the Connecticut Department in July. During this meeting, Mary Miller (OH) presented a potential blanks revision to require an actuarial opinion on premium deficiency reserves. Revisions to the proposal will be drafted by a subgroup (OH, CT, IL, TX, CA and SC) and discussed on the Task Force’s next call. The Task Force will also discuss Note 29 about premium deficiency reserves and whether “not applicable” is an appropriate response.
The Task Force discussed the Actuarial Opinion data reporting requirements and decided to send a letter to annual statement vendors, as well as company reporting contacts, instructing them that the Actuarial Opinion data reporting requirements require the data submission to match the Appointed Actuary’s Statement of Actuarial Opinion data exhibits. The data submission needs to match the Statement of Actuarial Opinion data exhibits submitted by the Appointed Actuary.
The Task Force received a revised draft Part A of the Guideline for Implementation of Medical Professional Liability Closed Claim Reporting. The current draft will be further discussed by the Task Force’s Statistical Subgroup on a June 23 conference call.
Kris DeFrain (NAIC Staff) presented a review of the Solvency Modernization Initiative (SMI) and current international technical work. The creation of a joint subgroup between the Capital Adequacy (E) Task Force and the Life and Health Actuarial (C) Task Force was discussed because of the link between SMI discussions on capital and reserves. Revisions to the RBC will be considered as part of the SMI work. In addition, the IAIS plans to look at valuation of assets and liabilities, although the NAIC is recommending no final action be taken until the IASB is closer to issuing a standard on Insurance Contracts. The NAIC is particularly concerned with the IAIS’ proposal to use a “market-consistent” basis for valuation.
The Task Force heard a report on the American Academy of Actuaries’ work plans on practice notes, ASAP 36, risk transfer, and the updates to the Law Manual. The AAA is also increasing its focus on international developments.
The Task Force identified items for future discussion including: SSAP modifications regarding transfer of run-off business and allowance of prospective accounting and regarding companies trying to interpret their 100% quota share as inter-company pooling; collection and compilation of Actuarial Opinion Summary data; and the need to work with states that still allow a commissioner to approve a specialist (as opposed to a qualified actuary) to sign actuarial opinions. The Actuarial Model Law will become part of the NAIC’s accreditation requirements in 2010.
The Task Force approved the minutes of the May 12 and June 9 conference calls.
Commissioner Donelon reported that the Task Force heard a presentation describing the difficulties surplus lines brokers attributable to the lack of uniformity among the states in regard to the regulation of surplus lines. The areas for which the states have different rules include tax filing dates, allocation standards, licensing, and the payment of premium taxes on multi-state risks. The Task Force discussed federal bill HR 2571, Nonadmitted and Reinsurance Reform Act of 2009; and the potential application of a producer proposal for an interstate compact entitled, the Surplus Lines Insurance Multi-state Compliance Compact (SLIMPACT), to meet the goals of HR 2571. The Task Force approved the distribution of a survey to the Task Force members developed by interested parties designed to obtain input on the operationality of SLIMPACT.
Belinda Miller (FL) reported that the Working Group heard a presentation by Amy Bach (United Policyholders) and Colleen Repetto (Fair Insurance Rates in Monroe) regarding advanced planning for catastrophes and some of the things that insurers and regulators can do to assist. [See report of the NAIC/Consumer Liaison Committee where the same presentation was made.] The Working Group discussed the proposed federal Catastrophe Obligation Guarantee Act of 2009 (S. 886) which would establish a program to provide federal guarantees for debt issued by eligible state catastrophe-insurance programs to assist in the financial recovery from natural catastrophes.
Earthquake (C) Study Group: The Earthquake (C) Study Group discussed its work plan which will include a review and update of the NAIC 2000 report of the Study Group; development of an earthquake brochure; consideration of developing a slimmed down version of video of a preparedness drill made by the California Earthquake Authority for use as a public service announcement; and hosting an Earthquake Education Day event at the Winter National Meeting in San Francisco. It was noted that Commissioner Joel Ario (PA) is also planning a climate change event that could present a conflict with the proposed Earthquake Education Day event.
The Study Group also reviewed recent earthquake research studies, including:
Other Matters: Under other matters, Dave Synder (AIA) asked that the “C” Committee minutes reflect that the industry believes that credit scoring has benefited the personal lines market and it opposes the moratorium Birny Birnbaum (Center for Economic Justice) had recommended during the two-hour follow-up meeting to the April 30th credit scoring public hearing.
McRaith stated that the Committee would add to its agenda the development of a standardized data collection tool regarding floods.
Commissioner Al Gross (VA) chaired this meeting. Gross announced that under new procedures adopted by the NAIC leadership the reports of “E” Committees task forces and working groups would no longer be read out; instead they will be considered in one motion and adopted after inviting comments.
Premium Survey Subgroup: The Committee had requested input from “B” Committee regarding any health insurance issues implicated by the way states determine health premiums for taxation purposes. Specifically “E” Committee wanted to know if there were any jurisdictional issues with respect to health insurance if reporting of premium by state differs from situs of the contract. “B” Committee responded that it could make no recommendations on this question because its surveys of jurisdictional issues surrounding health insurance had not included taxation. The Committee noted that many states have laws that do not give them discretion to change their procedures. “E” Committee decided to take no action other than forwarding “B” Committee’s response to Plenary.
New Procedure for Adopting Technical Changes to Statutory Accounting: The Committee adopted a letter from Gross to the full NAIC membership requesting the implementation of a new process to expedite approval of changes to the Blanks, the Accounting Practices and Procedures Manual, risk-based capital formulas, financial examination and analysis handbooks, etc., in order to provide industry and regulators with the most relevant and timely information.
Under the new procedure, within one week after a national meeting “E” Committee would forward a list of all technical items it had adopted to the Joint Executive/Plenary with a request that they be adopted. After seven to ten days if no objections are raised the items would be considered adopted by the full membership.
Risk Charges for Individual Separate Account Products: Ramon Calderon (CA) reported that there is no regulatory guidance that requires the establishment of risk charges for individual separate account products and the Statutory Accounting Principles Working Group requested that the Committee consider the need for such guidance. Calderon stated that the importance of the issue has been heightened by the economic crisis and its purpose was to make sure that the general account is being compensated for the guarantees it provides.
Gross said that he would appoint a subgroup of “E” Committee to review the issue. There was some discussion of whether this matter should be referred to the Capital Adequacy (E) Task Force but Lou Felice (NY), chair of the Task Force, did not think it needed to be. Another member believed it should be as there was capital risk but Felice did not think there was capital risk. Gross suggested that the subgroup could consider both aspects and at the next meeting the Committee could decide which group the issue should be assigned to.
Mortgage Adjustment Factor: Felice reported that the Capital Adequacy (E) Task Force had adopted an interim change (for 2009 reporting only) to the mortgage experience adjustment factor raising the lower limit to 75 percent from 50 percent and lowering the upper limit to 125 percent from 350 percent. Felice stated the Task Force had come up with this solution, which is intended to be capital neutral, to address the turmoil in the market because it did not yet have a better technical solution. The Task Force intends to look at this issue again in December and if it has not made enough progress towards a long-term solution it will consider extending the change for another year. The modification to the mortgage experience adjustment factor was adopted after hearing comments from industry.
Charlie Breitstadt (Nationwide) was the lone objector to the change. He argued that the change penalized companies that have well managed portfolios. He said his company has had no foreclosures and this change would nevertheless require it to put up millions of dollars in order to maintain its capital level and its rating. He agreed that reducing the size of the range will decrease volatility but argued that well managed companies should not have to comply. He also argued that making temporary changes made it difficult to manage portfolios. As a compromise he asked that the floor be raised to 62.5 percent for 2009 and 75 percent for 2010 if the modification is extended for another year.
Representatives of two other insurers spoke in support of the change the Task Force had recommended.
Revised Health RBC Model Act: The Committee adopted revisions to the Health Risk-Based Capital Model Act to add a new trend test for health organizations subject to the act. The trend test is similar the tests applicable to life and property/casualty insurers.
Task Force and Working Group Reports: Gross announced that under new procedures adopted by the NAIC leadership the reports of “E” Committees task forces and working groups would no longer be read out; instead they will be considered in one motion and adopted after inviting comments. The Committee adopted the reports of its task forces and working groups without discussion. Below are summaries reports of select groups:
Restructuring Mechanisms for Troubled Companies (E) Subgroup
The Restructuring Mechanisms for Troubled Companies (E) Subgroup is waiting for comments from regulators and interested parties on the draft white paper entitled, Alternative Mechanisms for Troubled Companies. The Working Group intends to hold a conference call to discuss possible exposure of the draft to interested parties. The Working Group also discussed which lines of business would be appropriate or not appropriate for mechanisms identified in the White Paper, as well as the benefits, risk, and controls for U.S. Claimants/Policyholders when a non-US reinsurer restructures.
Commissioner Tom Hampton (DC) chaired the meeting. The Working Group received progress reports on the following open items:
The Working Group discussed possible changes to the preamble of the AP&P Manual related to permitted practices. Those issues will be referred to SAPWG. The Chairman will draft a proposed NAIC rule for invoking emergency procedures that would shorten due process in the time of crisis. This is in response to criticism over consideration of the capital relief proposals. Maine requested that the chair consider states that have adoption requirements for various NAIC manuals.
The AICPA reported on SASs on External Confirmations, Quality Control, and FAS 165 Subsequent Events. Twenty-three States have adopted the Model Audit Rule (MAR) and all 28 remaining jurisdictions expect to complete adoption in 2009. The premium threshold in the MAR is consistent with the criteria based on the 2008 data.
The proposed changes to the MAR implementation guide were discussed next. Most of the comments were about the last sentence of the text on Section 14 relating to groups and audit committees. That sentence was deleted, other small changes were made and the changes were adopted.
The Working Group will form a joint industry Subgroup on implementation issues in the interim. The idea will be to share information and provide guidance in a timely manner.
Ramon Calderon (CA), chair of the Task Force, announced a new format. Each working group chair would discuss significant items first and then give their report, and all reports would then be considered for adoption under one motion.
The Task Force received a referral from the Capital and Surplus Relief (E) Working Group regarding the Accounting Practices and Procedures Manual. The three items to be considered are ensuring that regulators are providing the minimum information on permitted practice requests; the need to track the number of requests received by the states; and determining the best way to handle differences of opinion on permitted practices requests between domiciliary and non-domiciliary states.
The Task Force recognized Max McGee (Prudential) on his retirement and Calderon said that, even when he disagreed, McGee’s efforts were appreciated.
The Task Force heard and adopted reports of its three working groups:
Gloria Glover (AK) gave the report of the Procedures Subgroup. Proposed changes to the Working Group procedures include:
Since there have been two open conference calls and input from interested parties, the new procedures will be exposed for two weeks and be considered for adoption at an upcoming conference call so that they can be implemented immediately.
Larry Bruning (KS) gave the Principles-Based Reserves update and reported that the new amendment to the Standard Valuation Law (SVL) was adopted at the Friday Life and Health Actuarial Task Force meeting. The new valuation methodology means there will be revisions to annual statements and proposals that will be submitted to the Working Group. The SVL has to go through the regulatory process and January 2012 is an estimated start date.
At the Task Force meeting, Jake Garn (UT), chair of the Working Group, reported that the Working Group’s significant item was adoption of 2009-16BWG, which revises Schedule DB forms and instructions and eliminates the current forms and instructions for first quarter 2010. The proposal was modified to include additional instructions for when hedge effectiveness could not be calculated.
The following Note 1 quarterly proposal was exposed for a shorter time frame because it is for first quarter 2009:
Action on Items Previously Exposed for Comment:
The following Newly Submitted Items were exposed:
Comment deadline for the newly exposed items is August 21, 2009. All editorial changes were adopted by the Working Group. Both Garn and Glover acknowledged Max McGee (Prudential) and expressed their appreciation for his work these past eight years with the Working Group on behalf of interested parties.
The Working Group made final the tentative conclusions to reject the following interpretations of US GAAP:
The Working Group Exposed the following:
Comment deadline for items exposed is August 7, 2009.
Chairman Jim Armstrong (IA) reported that after the meeting he was approached by interested parties regarding some completed transactions on re-securitization of residential mortgage-backed securities (Re-REMIC). An INT will be drafted and an interim conference call will be held to discuss a possible interpretation.
Joe Fritsch (NY) was unable to attend at the last minute, so Armstrong chaired the meeting.
Hearing Agenda
The tentative conclusions to reject the following GAAP guidance were adopted as final:
Meeting Agenda
PENDING LIST
The Working Group exposed the tentative consensus to reject following GAAP guidance:
SUBSTANTIVE ACTIVE LIST
The Financial Guaranty Contracts Subgroup is reviewing the comments of the disclosures draft and continuing work on FAS 163. The Guaranty Fund Subgroup cancelled their conference call last quarter and will reschedule it for this interim. The Fair Value Subgroup re-exposed the issue paper on adopting FAS 157. It is working on scope exceptions and what to do with Own Credit Risk. The Separate Account Subgroup is working on changes to SSAP 56 and the Model Law. The Model Law form has been referred to the (E) Committee. The Securities Lending Subgroup had three calls in the interim. The Group is waiting for a response from interested parties on questions asked. Work will continue in the interim.
NONSUBSTANTIVE ACTIVE LIST
Under other matters it was mentioned that the referral to VOSTF on Life Settlements was finally completed. The Task Force recommended using only the investment method. There was also an update on PBR activity. The valuation guidance in the AP&P Manual will control until the Valuation Manual (VM) is active. The current proposal is that there should then be a referral from the AP&P Manual to the guidance in the VM. The scope of the VM will be expanded as time go forward. The risk transfer test remains at this time. Blanks changes are also being considered.
The Capital Adequacy (E) Task Force, chaired by Lou Felice (NY), opened its meeting by discussing the C-3 Phase III proposal that had been released for comment. The Life Risk-Based Capital Working Group will schedule a conference call after the Summer National Meeting to go over the 11 comment letters received on the proposal. The American Council of Life Insurers (ACLI) is preparing material on proposed instruction changes for 2009 and calculations for 2010. Year-end 2010 would be the earliest implementation would occur for more permanent changes.
The Task Force adopted the short-term mortgage experience adjustment factor proposal for year-end 2009 life RBC only, which changed the minimum factor to 75% and the maximum factor to 125%. Concerns were raised by ACLI and Nationwide regarding the uncertainty created by only making the change for year-end 2009. The Task Force will monitor market conditions and progress on a long-term proposal for year-end 2010 implementation. If it appears unlikely that a long-term proposal will not be adopted for 2010, the Task Force would review the short-term proposal by the Winter National Meeting and discuss whether it should be modified and/or extended through 2010.
The Task Force discussed the ACLI’s proposal for derivative risk mitigation. A conference call of the Life Risk-Based Capital Working Group will be held after the Summer National Meeting for the ACLI to present the proposal and to address regulator comments received at the May 27 Working Group conference call. The Working Group will need to consider the effect of the proposal on the derivatives collateral issue. A year-end 2009 short-term proposal for the RBC charge for derivatives with collateral was released for comment.
The Task Force adopted changes to the Risk-Based Capital (RBC) for Health Organizations Model Act to implement a health RBC trend test and changes to Medicare Part D factors for the health RBC calculations for all three RBC formulas. Minor changes were made to the underwriting factors for basic coverage differentiating them between large and small companies. A more material change made to the supplemental benefit factors would increase RBC substantially and will be phased in over a two-year period.
The Task Force received an update from the C-3 Results Subgroup. Twelve companies were contacted by Subgroup members to see if the actuarial memorandum would be provided. Once the actuarial memorandums are received, they will be reviewed in conference calls of the Subgroup. A report from the Subgroup is expected by the Winter National Meeting.
The Task Force discussed adding ten years of Schedule P annual statement data for the P/C two-year lines of business. The Property Risk-Based Capital Working Group will be drafting a blanks proposal to add the data as part of the electronic annual statement filing but not for the hard-copy filing. The Working Group will need to consider whether to release the proposal for comment before sending to the Blanks Working Group.
The Task Force adopted the Property RBC annual update of the underwriting risk industry development factors.
The Task Force discussed potential subgroups to address solvency modernization initiative issues and investment issues. Several regulators had volunteered to join the Solvency Modernization Subgroup, which will review charges provided to the Task Force by the Solvency Modernization Initiatives (EX) Task Force, including a review of RBC levels.
The Task Force reviewed letters from the ACLI and Nationwide regarding ratings issues related to residential mortgage-backed securities. The Valuation of Securities Task Force will be taking the lead on the issue, and the Task Force will monitor the issue.
The Task Force received reports provided by NAIC staff regarding year-end 2008 RBC data reported and adopted various minutes.
Phillip Barlow (D.C.) Chairs the Working Group. C3 Phase III will not be ready for 2009 due to drafting problems. The group is aware that it will have to be adopted in September if it is to be effective in 2010. There were two calls in the interim to address comment letters. There were a few comments on calls that were not sent in as letters, so the minutes will be included to reflect those comments in redeliberation.
The Working Group is exposing for two weeks the ACLI’s 2009 proposal to repair the derivatives collateral anomaly. The effected investments will be placed in line 9 this year, and the current idea is to create a new line next year. The permanent solution will get more discussion after this exposure.
There was a conference call May 27th to discuss the ACLI’s derivative risk mitigation proposal. The ACLI is working on the questions raised. At the next call the remainder of the report will be presented, there will be a call after that to address any questions.
The ACLI is looking at a fix for Long-Term Mortgage Experience Adjustment Factors (MEAF). John Bruins (ACLI) said they are considering a NAIC 1-6 bucket approach but are not hopeful; more likely it will be via experience-based adjustments. The ACLI is aware that approval is needed in December for the proposal to be effective 2010.
Nationwide commented that the sunset of the short-term MEAF solution is a bad idea. The Working Group had no desire to remove the provision, however Barlow said the Working Group was aware it may need to extend the short-term solution if a long-term solution is not in place.
The Examination Oversight (E) Task Force adopted new guidance and tools for inclusion in the Financial Condition Examiners Handbook to assist examiners in conducting a risk-focused review of the general IT processes in place at an insurer. It discussed a survey of the states regarding progress toward adopting the revised Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition. The survey found that 29 states plan to adopt the revisions, three states plan to adopt the revisions with minor changes, three states do not plan to adopt the revisions, and six states are undecided. Ten states did not provide a response. Of the states that plan to adopt the revisions, ten plan to complete the adoption in 2009, seven in 2010, one in 2011, and 14 do not yet have a timeline for adoption. None of the responding states anticipated any problems in adopting the model revisions. NAIC staff will continue to update this survey on a quarterly basis and the results will be discussed at each national meeting.
The Receivership & Insolvency (E) Task Force discussed comment letters from regulators and interested parties regarding possible solutions to address concerns with the timing and collection of reinsurance recoverables held by insurers in receivership. It heard status updates on receivership matters, including the following:
Amanda Yaneck (NAIC) gave an update of Congressional activity related to reinsurance. The NAIC is working with Congress to pass enabling legislation for the 2008 reinsurance regulation framework. Federal legislation is contemplated to create a regulatory pre-emption for the reinsurer’s domestic regulator and the credit for reinsurance rules in the framework. It is also contemplated that some enabling legislation will be necessary by the states. Yanick said the bill carrying these provisions will pass out of the House (again) at the end of the month. Senator Evan Bayh (IN) is discussing the issue with the NAIC and there is hope he might sponsor the legislation this session.
The NAIC is also tracking changes to the IRS code (HR 6969) that would disallow the deduction for reinsurance premiums ceded to affiliates that exceed the average that would have been ceded to non-affiliates. The bill has been introduced in the House.
Bob Kasinow (NJ), chairing the Task Force, reported on a two-day interim meeting in New York City to discuss implementation of the framework. The meeting discussed the draft, the framework, and the Constitutional issues (notably the appointments clause and the 10th Amendment.) The NAIC has asked Sidley Austin for an analysis of the issues (there was a closed session immediately following to discuss the firm’s report.) A new draft will be released and there will be a conference call in about 2 weeks.
The Task Force next discussed the framework provision related to collateral requirement changes with respect to “sovereign schemes” that increase the risk to the cedant. Maine asked that the language be changed to increase in “material risk of default” as opposed to requiring a default or downgrade to trigger provisions. Jeff Alton (CAA) objected to the modification of the carve-out for Part 7 trusts. Peter Medley (WI) agreed.
The RAA questioned the extra-territorial application of state laws inherent in the framework and suggested more consideration as to how the states will be authorized to act internationally in mutual recognition/reciprocity relationships when working on the federal legislation. The Chairman requested that those commenting send in a response to the exposure.
There has been a proposal circulating to reduce the minimum nominal capital required for reinsurers when the block of business has been in run-off for three years or more to 30% of reserves. Because the current requirement is $20M, the rule would come into effect when reserves are less than $66M. Marty Carus (AIG) spoke to oppose the proposal, stating there has been no demonstrated need for the reduction, and no benefit, in that it will not increase available capital. He also said experience has shown that the last $60M of a large block in run-off is the most contentious – it contains the longest running unresolved issues. The proposal passed on a split vote.
There was a motion passed to request permission from Executive to open the Model Law for this and the framework issues. There were no comments on the collateral acceptance guidance memo (to be sent to states).
The IAIS Reinsurance Subcommittee met April 21-23. The NAIC gave a summary of progress on the Framework. There will be a survey on market access, work on the core principles revision, and a new securitization paper in the future.
The Risk Retention Group (E) Task Force received an update from Julie Glaszczak (NAIC Staff) regarding risk retention groups licensed as captive insurers. It received a report from the Subgroup on Calling Examinations that concluded that under the federal Liability Risk Retention Act of 1986, an RRG examination does not qualify as an association examination, because domiciliary regulators are not required to allow non-domiciliary states to participate on an RRG examination; and that notification of an RRG examination via ETS should be considered notification of an upcoming examination and not an invitation to participate in the upcoming RRG exam. The Task Force voted to refer the Subgroup's recommended revisions to the Financial Condition Examiners Handbook Technical Group and the e-mail generated by ETS to the Financial Examiners Handbook (E) Technical Group.
The Task Force discussed the results of a survey of its members regarding their ability to share and receive confidential information related to RRGs with regulatory officials of other states, federal agencies, foreign countries, and the NAIC in accordance with the requirements in the Part B: Information Sharing standard and concluded that the first three guidelines under the Information Sharing standard should be applicable to captive RRGs.
The Task Force voted to publicly release its Part B summary memo for a 30-day comment period and will discuss any comments received during an interim conference call.
The Task Force passed as final a change to the P&P Manual to extend the filing exemption for common stock to shares listed on all recognized exchanges, including overseas exchanges. It next finalized the deletion of the redundant list of government securities in Appendix 14 of the P&P Manual.
With regard to re-REMICS, Mike Moriarty described the transaction to re-pool these real estate investment securities. He said the issue is, what should the regulatory treatment be when there is no apparent economic change (all tranches are retained by the issuer). The heavy downgrades of RMBS in response to the risk of a one-dollar loss appear to be motivating the discussion of these transactions. A representative of Promontory Capital Group (an independent financial services company) suggested the Task Force outsource (to them) the task of determining the economic capital value for REMICS for use in determining the proper RBC, thereby mitigating the need for these transactions. He said such an approach would be consistent with Basel II. Moriarty suggested Promontory continue discussions with the SVO. Ed Stephenson (Barnert Global, Ltd) suggested that what Promontory was proposing needed to be referred to the Capital Adequacy Task Force as it sounded like a significant change to the NAIC process for determining RBC.
Chris Anderson (Anderson Solutions) said that the issue merited discussion, that RBC needed to consider both likelihood and severity of loss, and that the rating agencies were not doing that. Mike Monahan (ACLI) presented a letter written to the VOSTF asking it to consider notching up non-agency mortgage backed securities based on one dollar of loss ratings. Peter Medley (WI) asked that the interested persons the Task Force the next time the RBC charge is too low, as well. New York suggested the Task Force wait for a transaction and let the SVO analyze it.
The Invested Asset Working Group is still working on its model of all risks and their regulatory treatment. The VOS Task Force will work to report to the (E) Committee in September on the Executive Committee Recommendations to Strengthen Financial Regulation. The recommendations included structural changes to the SVO primarily to create more market research and investment analysis capacity.
Chris Evangel (SVO) reported that the SVO and NAIC information services are working out the issues raised by the transition to the new valuation process. They are minor and not mission critical. He said the new system was putting pressure on the consistency between insurers (averages are now calculated)and that there were several mistakes being made including, varying designations, decimals in the wrong place in prices, prices not in dollars, failure to identify the source, and failure to identify when it was an SVO price. He said companies would probably take action to correct these things when they hear from examiners.
Evangel next reported on the monoline insurer market. He said that downgrades continue and that the merger of two investment grade insurers will continue to shrink the market. He noted that there had been few efforts to file the underlying municipal bond to acquire a higher rating.
Bob Carcano (SVO) next gave a report on hybrid securities. He stated that they “have not performed like bonds”, but more like common stocks. He based that assertion on percent changes in market price which, since the financial crisis, have tracked closer to equity than bonds. He also noted several issuers have exercised features of their hybrids designed to absorb market shocks. He stated that the current designations (those that were the result of the 2008 regulatory discussion of hybrids) do not appear to match “performance” again based on market price. He also noted that it was not known if the price drop was other than temporary. Moriarty responded that the hybrids also appeared to be performing like hybrids.
There is a project ongoing to re-organize the P&P Manual by consolidating various sections reordering them. The intent is for it to be non-substantive. Work will continue in the interim. Lastly the Chairman scolded companies in general for the poor quality of the data filed on structure securities. He said New York would be pursuing some issues with companies individually
“E” Committee Other Business
Felice stated that New York was putting together a proposal to facilitate insurer participation in the Term Asset-Backed Securities Loan Facility (TALF) program. Felice stated that the life RBC formula requires a charge for collateralized assets but these assets would appear to have little or no risk. The proposal would eliminate the charge in order to not discourage companies from participating. He stated that New York would ask for input from the SVO and would like the Committee to consider it in September. The Committee authorized Felice to proceed.
Mike Monahan (ACLI) stated that industry was putting together a proposal for submission to the Committee regarding SSAP 98 and the issue of bifurcation.
Superintendent Joseph Torti III (RI), chair of the “F” Committee, discussed the comments received on the 2008 revisions to the Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in a Hazardous Financial Condition. The American Council of Life Insurers is concerned that the commissioner is given too much discretion. Wayne Mehlman (ACLI) said that language in Sections 3.P, 3.R, and 3.T is overly broad. Torti explained that every possibility cannot be listed and therefore there needs to be a catch-all. Mehlman respectfully disagreed. The Committee voted to adopt a requirement that the revised regulations to be required for accreditation. The Model Regulation will be exposed for a one-year period beginning January 1, 2010.
The 2006 revisions to the Risk-Based Capital for Insurers Model Act (RBC Model) had been released for a one-year comment period ending on December 31, 2008. No comments were received and there have been no further revisions. A Nationwide representative said his company recently discovered that the new trend test does not work with all companies. Torti replied that risk-based capital does not work with run-off companies and the regulator has the latitude to not apply it. The “F” Committee cannot change the RBC Model; only the Risk-Based Capital (E) Working Group can do that. The Committee adopted the revisions with an effective date of January 1, 2012.
The ACLI prefers that the existing Insurers Rehabilitation and Liquidation Model Act (IRLMA) receivership standard be retained and opposed replacing it with the revised Insurer Receivership Model Act (IRMA) standard. Mehlman said the preference is that the revised standard refers to both IRMA and IRLMA. Torti replied that the reference would be to IRMA since that is the only regulation the NAIC has. States do not have to scrub IRLMA since it is just a name change. The Committee adopted a waiver of procedure to make the revisions effective immediately instead of January 2012. The revisions were adopted as an acceptable receivership scheme.
A waiver of procedure was adopted by the Committee for the Model Regulation Requiring Annual Financial Reports (Model Audit Rule) and the revisions were adopted with an effective date of January 1, 2010.
The two comment letters received on the Proposed Company Licensing Accreditation Standards were read by Julie Glaszczak (NAIC staff). Washington State was concerned that accreditation standards are for primary applications only and wanted the proposal be modified to include foreign applications. A representative from Washington suggested the Committee monitor foreign applications. The Committee adopted the Standards with an effective date of January 1, 2012. Glaszczak said implementation guidance would start on the same date in response to a question from Philip Barlow (DC). At the fall meeting the Committee will discuss implementation guidance with the NAIC staff.
Commission Roger Sevigny (NH) chaired the Committee meeting in the absence of the chair, Steven Goldman (NJ). The meeting began with a review of proposed changes to the NAIC’s International Strategy and Action Plan, including changes to the NAIC’s International Relations Guiding Principles. Much of the discussion focused on whether to retain a reference to “convergence” with international standards in the principles. In the end the language was retained. A revised draft reflecting the discussion will be circulated for further comment before the end of June. The Principles will be finalized at the September meeting.
The International Regulatory Cooperation Working Group is preparing its comments on the strategic plan, especially regarding funding for the intern program. The 2009 interns were introduced.
The Committee discussed the NAIC’s proposal to ask the IAIS to establish a strategic planning task force. This proposal will be discussed at the June IAIS Executive Committee meeting.
Commissioner Christine Urias (AZ) provided an update on NAFTA and issues related to the US Department of Transportation’s proposed rule specifying minimum financial responsibility requirements for Canadian vehicles crossing into the US. The NAIC will be reviewing the proposal with the goal of providing comments by August.
Commissioner Al Gross (VA) reviewed the developments of the Solvency Modernization Initiative Working Group. Commissioner Kevin McCarty (FL) provided an update on Joint Forum activities, including plans to release papers on off-balance sheet liabilities, risk aggregation and regulatory gaps.
The Committee discussed the NAIC’s participation in attending regulatory colleges abroad and in holding its own supervisory colleges on the institutions identified by the Financial Stability Forum.
Staff and Ian Tower (IMF) provided an update on the 2009 Financial Services Assessment Program (FSAP) the IMF is conducting in the US. The US is one of the few large jurisdictions which had not completed the FSAP. Towers said the audit itself will take place in October 2009 and the report will be completed by June 2010. It will include a review of the NAIC laws and accreditation progress and an in-depth look at several states.
In response to a question from GNAIE on the status of the EU-US Dialogues, George Brady (NAIC) responded that he had participated in a recent EU-US Financial Regulatory Dialogue at which equivalence under Solvency II had been discussed and that an NAIC-EU dialogue was planned for September or October. The NAIC is proposing to the EU that it consider equivalence broad enough to include countries with a “national regulatory system.”