The National Association of Insurance Commissioners (NAIC) returned to Washington, D.C. for its Fall meeting – the final national meeting for 2013. Two notable events overshadowed technical work on various NAIC initiatives: the release of the Federal Insurance Office’s long-awaited report on how to modernize and improve the system of insurance regulation in the United States, and unprecedented public display of rancor among regulators on NAIC internal governance. Outside the main spotlight, important state regulatory initiatives regarding corporate governance, reinsurance and mortgage guaranty insurance continued to progress at a notable clip, as well as further discussion of PBR implementation and the use of special purpose captives for life insurance reserve financing.
The following are notable highlights of the meeting.
A. Issues of General Interest
Federal Insurance Regulation
International Regulatory Standards
The Solvency Modernization Initiative—Celebratory End to an Ongoing Effort
Corporate Governance Model Law
Reinsurance—Bermuda, Germany, Switzerland and UK Designated Conditionally “Qualified Jurisdictions” for Certified Reinsurers
Rhode Island Superintendent Raises Treatment of Captives for State Accreditation Review
Private Equity Issues Working Group at Information-Gathering Stage
Investments of Insurers—Note on Possible Future Developments
B. Issues of Particular Interest to Life Insurers
PBR Implementation Task Force / Captive and SPV Issues
Contingent Deferred Annuities (CDAs)
Unclaimed Insurance Benefits
C. Issues of Particular Interest to Property and Casualty Insurers
Terrorism Insurance Implementation (C) Working Group
Mortgage Insurance Modifications to Model Act Continues at Full Push
D. Issues of Particular Interest to Health Insurers
1. Accounting for ACA Fee Causes Tense Debate Among Regulators
A. Issues of General Interest
1. NAIC Governance
The Fall National Meeting concluded with the election of the following insurance commissioners as NAIC officers for 2014:
Adam Hamm (North Dakota) – President
Monica Lindeen (Montana) - President-Elect
Michael Consedine (Pennsylvania) - Vice President
Sharon Clark (Kentucky) - Secretary-Treasurer.
Commissioner Clark was elected Secretary-Treasurer over the competing candidacies of North Carolina Commissioner of Insurance Wayne Goodwin and Tennessee Commissioner of Commerce and Insurance Julie McPeak. By tradition, the Secretary-Treasurer moves up the ranks each succeeding year eventually to become President, and openly contested elections are a rarity.
Another unusual public display of disunity among insurance commissioners emerged when the Executive Committee precipitously closed debate and defeated, by a vote of 12 to 5, a motion by Commissioner Thomas Leonardi (Connecticut) to retain outside consultants to conduct an evaluation of the NAIC governance structure. Earlier, Commissioner Leonardi wrote a letter critical of decision-making processes within the NAIC leadership. The letter became public after the vote. The show of discord stands in stark contrast to the cohesiveness that state insurance commissioners have displayed in recent years as they have worked to defend the state-based system of regulation, and with the workman-like nature of recent NAIC meetings, with decisions largely teed-up by technical working groups for policymakers to act by consensus.
2. Federal Insurance Regulation
The Fall National Meeting began just 48 hours after the release of the FIO Report, but had surprisingly few open discussions of federal insurance legislative or regulatory issues.
During both the Catastrophe Insurance (C) Working Group and the Property and Casualty Insurance (C) Committee meetings, NAIC staff reported on legislative and regulatory developments relating to the implementation of the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012 (BW-12). NAIC staff and regulators from an increasing number of states continued to relay stories of dramatic, unexpected flood insurance rate increases resulting from the latest round of Federal Emergency Management Agency (FEMA) rate regulations that implement BW-12. NAIC staff reported on several federal legislative initiatives to delay or soften the impact of certain BW-12 rate increases, but announced that Congress was set to recess for the year without taking up any particular proposed solution. Commissioner Mike Cheney (Mississippi) led discussions regarding his Federal suit to enjoin FEMA from enforcing BW-12 rate increases until after FEMA has completed an affordability study required in BW-12. Finally, NAIC staff, Florida Office of Insurance Regulation staff and a private insurance broker provided information on the small but growing volume of private flood insurance being written in Florida and 26 other states in response to BW-12 rate increases and a BW-12 provision requiring federally regulated lenders to accept private flood insurance that is no less extensive than the coverage provided by the National Flood Insurance Program.
Consumer Advocate Professor Daniel Schwarcz raised the FIO Report before the Market Regulation and Consumer Affairs (D) Committee to argue that should FIO or another federal financial regulator begin to exercise increased insurance regulatory authority, it would be more appropriate for the federal Consumer Financial Protection Bureau (CFPB) to assume responsibility for insurance market conduct functions so that prudential and consumer protection functions are not the responsibility of one entity. Professor Schwarcz’ suggestion was met with silence from Committee members.
3. International Regulatory Standards
International issues consumed a significant amount of time in discussions – both during meetings and hallway chatter. The international tone was clear before the NAIC’s formal program began when the ongoing EU-U.S. Dialogue hosted a special session on supervisory colleges that included participants from the Federal Reserve, the German Federal Financial Supervisory Authority (BaFin), the European Insurance and Occupational Pensions Authority (EIOPA) and the U.K. Prudential Regulation Authority (PRA). As has become routine for public sessions organized by the EU-U.S. Dialogue, the four-hour session was characterized by repeated assurances that EU and U.S. authorities continue to make progress in identifying and methodically addressing differences and similarities between existing and evolving U.S. and EU insurance regulatory systems.
The following day, international issues dominated the afternoon when the International Insurance Relations (G) Committee met and approved the NAIC’s comments on the International Association of Insurance Supervisors’ (IAIS) ComFrame Consultation Draft. The NAIC’s comments focused on improving the use of supervisory colleges for large international insurance groups to increase regulatory efficiency, while opposing ComFrame’s additional layer of regulation for those groups. The Committee also approved an NAIC policy statement on international capital standards. Among other things, the statement avers there has been no demonstration of the need to develop a global capital standard. Interested parties noted this NAIC policy statement was developed behind closed doors despite requests for an exposure period for public comments. The group also heard IAIS deputy secretary general George Brady report on the IAIS’ plans to restructure and reduce input from observers, and Commissioner Kevin McCarty (Florida) and Chair Thomas Leonardi (Connecticut) strongly protested the IAIS’ decision. Finally, EIOPA Chair Gabriel Bernardino discussed the adoption of a final Solvency II compromise that will enable the EU’s new solvency system to go into effect in 2016 and supported the development of a global group capital standard.
4. The Solvency Modernization Initiative—Celebratory End to an Ongoing Effort
An NAIC chapter came to a close at the Fall National Meeting with the disbanding of the Solvency Modernization Initiative (E) Task Force and the transition of all remaining activities with respect to the Solvency Modernization Initiative (SMI) to the full Financial Condition (E) Committee and other responsible task forces and working groups. In closing the final meeting of the SMI Task Force, Director John Huff (Missouri) lauded the work that had been done by the Task Force in directing the initiative and in finalizing the SMI White Paper adopted by the Financial Condition (E) Committee at the NAIC Spring National Meeting in Indianapolis, Indiana, and by the NAIC Plenary at the Fall National Meeting. The SMI White Paper, The U.S. National State-Based System of Insurance Financial Regulation and the Solvency Modernization Initiative, has been a work in progress since SMI began. The White Paper explains the U.S. solvency regulatory framework, and how and why it works successfully. It also discusses the SMI evaluation process, the strengths of the “national state-based system of insurance regulation,” and the improvements made over the last several years through SMI.
SMI is a critical self-examination of the U.S. insurance solvency regulation framework that began in 2008. SMI includes a review of international developments regarding insurance supervision, banking supervision, and international accounting standards and their potential use in U.S. insurance regulation. SMI’s focus is on five key solvency areas: capital requirements, international accounting, insurance valuation, reinsurance, and group regulatory issues. Significant milestones of the initiative were reached at the Spring 2013 National Meeting in addition to the adoption of the SMI White Paper, including the adoption of the 2010 amendments to the Model Insurance Holding Company System Regulatory Act and Regulation (Holding Company Act Amendments) as a state accreditation standard (effective January 1, 2016), and the release of the Risk Management and Own Risk and Solvency Assessment Model Act (ORSA Model Act) for a one-year comment period (beginning January 1, 2014) for consideration as a state accreditation standard.
With the winding up of the SMI Task Force, the questions now are whether the individual states will do their part to implement SMI’s reforms and also whether the reforms have simply created overlapping, redundant requirements. For example, the Holding Company Act Amendments require the annual filing of an enterprise risk report (Form F) that identifies all of the material risks within the insurance holding company system that could pose enterprise risk to the insurer, and the ORSA Model Act requires the filing of an ORSA Summary Report, which is a summary of an insurer’s self-assessment of the material and relevant risks associated with its business plan and the sufficiency of capital to support those risks. Presumably, there will be significant overlap between the enterprise risk filing and the ORSA Summary Report. In response to these concerns, the Financial Condition (E) Committee has asked the Risk Focused Surveillance (E) Working Group to review any possible redundancies that may exist under the new SMI reporting requirements. The Corporate Governance (E) Working Group will also be considering this redundancy issue as it develops the new corporate governance reporting requirements (see Section A.4 for more details). Some regulators have expressed concerns that these reviews may delay state implementation of the various SMI requirements.
Toward the end of the SMI Task Force meeting, Steve Johnson, Deputy Insurance Commissioner of the Pennsylvania Insurance Department, remarked that the moniker “Solvency Modernization Initiative” is somewhat misleading as the NAIC is constantly modernizing and evolving solvency regulation and has been doing so successfully since the “Failed Promises” report to the U.S. House of Representatives Subcommittee on Oversight and Investigations in 1990. To celebrate the occasion, SMI chocolate bars were passed out at the end of the Task Force’s final meeting.
5. Corporate Governance Model Law
The Corporate Governance (E) Working Group has been working to develop a model law that will require licensed insurers to file an annual report describing their corporate governance practices, and significant developments are expected. During the Spring 2013 National Meeting, the Working Group was presented with a draft model law prepared by industry representatives.
Commissioner Susan Donegan (Vermont), Chair of the Working Group, opened the group’s meeting by noting that corporate governance was mentioned a number of times in the FIO Report and that it appears that the Working Group is on the right track to address concerns and that the FIO Report also contained a number of good recommendations that should be considered. A draft Corporate Governance Annual Filing Model Act and draft Corporate Governance Annual Filing Guidance Manual were presented that were developed by NAIC legal staff with assistance from several member states, utilizing the work previously submitted by interested parties as much as possible.
The drafts contained a number of differences from the interested party submission, most notably the inclusion of an NAIC Guidance Manual to house the detailed annual filing instructions. Commissioner Donegan had stated on an earlier conference call that regulators believe that it is necessary to house the detailed reporting instructions in a guidance manual to ensure that necessary modifications can be made to the instructions—subject to the standard NAIC approval process—to ensure that the reported information remains current and provides a benefit to both regulators and insurers. Industry representatives have been almost uniformly opposed to the use of a guidance manual.
Under the proposed drafts, each insurer, or the insurance group of which the insurer is a member, would be required to submit an annual filing that contains: (1) a description of the insurer’s corporate governance framework; (2) a description of the insurer’s board of directors and committee policies and practices; (3) a description of management policies and practices; and (4) a description of management and oversight of critical risk areas. The insurer is specifically permitted to provide information regarding corporate governance at the ultimate controlling parent level, an intermediate holding company level or the individual legal entity level, depending upon how the insurer or insurance group has structured its system of corporate governance. Finally, the draft guidelines state that in recognition of the fact that an insurer’s corporate governance framework and practices may not vary significantly from year to year, and to facilitate regulatory review of the annual filings, insurers are encouraged to file a redline version of the filing each year to track those items that have changed from the previous year.
The drafts presented at the Fall National Meeting contained revisions that, according to Commissioner Donegan, reflected “a sincere and measured effort” to address the concerns of industry representatives regarding the use of a guidance manual, including provisions to limit the manner of adopting changes to the guidance manual. Specifically, under the revised draft model law, changes to the guidance manual may be initiated only before or in conjunction with the NAIC’s Spring National Meeting each year, must be subject to a 45-day public comment period, and will require approval of a supermajority (75% or more) of the members of the Corporate Governance Working Group at the following Summer National Meeting. Nevertheless, interested parties continued to oppose the drafts in their current form and warned that state legislatures may reject the model law’s incorporation of a guidance manual as an unnecessary delegation of legislative authority. Deputy Commissioner Steve Johnson (Pennsylvania) noted that he “really liked the manual” and believed the revisions were appropriate to address concerns.
The Working Group ultimately decided to move forward with exposing the draft Corporate Governance Annual Filing Model Act and the draft Corporate Governance Annual Filing Guidance Manual and called for industry representatives to submit their specific comments in writing as to which of their concerns have not been mitigated by the revisions regarding the guidance manual. The 45-day comment period on the drafts ends January 31, 2014.
6. Reinsurance—Bermuda, Germany, Switzerland and UK Designated Conditionally “Qualified Jurisdictions” for Certified Reinsurers
The meeting of the Reinsurance (E) Task Force began with a status report on state implementation of the revised Credit for Reinsurance Model Law and Regulation (Reinsurance Models) that allow highly rated non-U.S. reinsurers to reinsure U.S. domestic cedents with reduced collateral requirements. Under the Reinsurance Models, the insurance department in the state of domicile of a ceding insurer may certify an unauthorized reinsurer for collateral reduction if the reinsurer is licensed and domiciled in a “qualified jurisdiction.” According to the report to the Task Force, 18 states representing 53% of direct insurance premiums have adopted the revised Reinsurance Models, 1 and 5 additional states are expected to adopt the models within the next year, bringing the total direct insurance premiums of adopting states to 75% of the U.S. total. The states of Connecticut, Florida, New York and Pennsylvania have already certified reinsurers for reduced collateral, with New Jersey expected to finalize a certification soon and with the states of California and Missouri beginning their review of certified reinsurer applications.
In order for insurers to begin to take advantage of the reduced collateral requirements beginning January 1, 2014, the newly established Qualified Jurisdiction Working Group, headed by Deputy Commissioner John Finston (California), moved quickly with its review of those jurisdictions that had been designated for “expedited review” (Bermuda, Germany, Switzerland and the U.K.) under the so-called “Process Document” adopted at the Spring 2013 National Meeting that sets out procedures to be employed for designating “qualified jurisdictions.” Ultimately, approval of a qualified jurisdiction is left to individual states; however, a list of qualified jurisdictions will be created through the NAIC, and individual states must consider the list when approving jurisdictions.
The Reinsurance Task Force adopted the Qualified Jurisdiction Working Group’s Summary of Findings and Recommendation Reports with respect to adding Bermuda, Germany, Switzerland and the U.K. to the NAIC list of qualified jurisdictions; and, pursuant to the Process Document, the Task Force’s adoption went directly to the NAIC Plenary, where it was confirmed. The conditional qualification lasts for one year, but can be extended; and conditionally qualified jurisdictions may be subsequently upgraded to fully qualified status. Deputy Commissioner Finston stated that the Working Group has also received inquiries from France and Ireland and expects to begin working with their respective insurance regulatory authorities in connection with the Working Group’s review to approve them as qualified jurisdictions within the next year.
The Reinsurance (E) Task Force also received a report of the Reinsurance Financial Analysis Working Group (R-FAWG), which meets in closed, regulator-only sessions due to the company-specific nature of its work. Specifically, R-FAWG is tasked with providing advisory support and assistance to states in their review of reinsurance collateral reduction applications, determinations of “qualified jurisdiction” and “certified reinsurer” status, and coordinating multistate recognition of “certified reinsurers.” Deputy Commissioner Steve Johnson (Pennsylvania), Chair of R-FAWG, reported that R-FAWG has begun or completed its peer review of 30 reinsurers that have been designated as “certified reinsurers” by states to determine whether the Working Group agrees with the states’ determinations. With regard to 21 of these reinsurers, R-FAWG has completed its peer review and given “passport” status, allowing other states to accept the “certified reinsurer” designations of the respective lead states (the Reinsurance Models permit a state to defer to the “certified reinsurer” designations of other states). The applications of two reinsurers are still pending with issues for follow-up; one application is pending initial review; and no action was taken on six applications. According to Deputy Commissioner Johnson, some reinsurers did not desire passport status (for example, those that reinsure risks of primarily one state, such as Florida), and agreement could not be reached with regard to at least one reinsurer. Reinsurers that have not been granted passport status by R-FAWG will be required to submit certified reinsurer applications to each state individually. Ending his report on the work of R-FAWG, Deputy Commissioner Johnson commented on the work his fellow regulators have done with regard to the Reinsurance Task Force and its working groups, stating that “(E) Committee keeps delivering, delivering, delivering.”
7. Rhode Island Superintendent Raises Treatment of Captives for State Accreditation Review
The Financial Regulation Standards and Accreditation (F) Committee considered a letter from Superintendent Joseph Torti III (Rhode Island) to Director John Huff (Missouri), Chair of the Committee, calling for the inclusion of captive reinsurers in the definition of a “multi-state insurer” for state accreditation purposes. Currently, captive reinsurers are generally considered to be outside the definition of a “multi-state insurer” for accreditation purposes. Superintendent Torti’s position has been criticized by the Delaware Department of Insurance in a response memorandum to Superintendent Torti’s letter. At the meeting, Superintendent Torti clarified that he intended to focus on XXX and AXXX captive reinsurers and special purpose entities, not traditional captives, when he penned the letter. Superintendent Torti has long voiced his concern that insurance companies are using XXX and AXXX captive vehicles to avoid statutory accounting requirements and has previously characterized the issues to be considered as specific to adequate reserving and solvency concerns rather than to captive use generally. Superintendent Torti also added that any change to the definition of a “multi-state insurer” would be prospective only and would not impact XXX and AXXX transactions completed before implementation of any changes in the definition. After reviewing Torti’s letter, the Committee passed a motion to direct the NAIC staff to draft language clarifying the definition of a “multi-state insurer.” Given the ongoing work of the Captive and Special Purpose Vehicle Use (E) Subgroup and of the NAIC generally in implementing Principles-Based Reserving (see Section B.1 below), the Financial Regulation Standards and Accreditation (F) Committee seemed an unusual venue for Superintendent Torti to continue press his concerns with certain XXX and AXXX transactions.
8. Private Equity Issues Working Group at Information-Gathering Stage
In response to a May 6, 2013 request from the Financial Analysis (E) Working Group (FAWG), the Financial Condition (E) Committee formed a new working group, the Private Equity Issues (E) Working Group, to consider the development of procedures that regulators can use when considering ways to mitigate or monitor risks associated with private equity and hedge fund ownership or control of insurance company assets. The FAWG referral included a detailed listing of possible best practices, including number of specified actions during the Form A review process (many of these have been used in the past on an ad hoc basis during review of leveraged acquisitions), targeted examinations and possible changes in the Credit for Reinsurance Model Law (to provide regulators additional authority to require review of transactions with non-affiliates), state investment laws (to provide regulators with additional authority to limit risk) and risk-based capital formulas (to capture any risk not already addressed).
Responding to the FAWG referral, Athene Holding Ltd. (Athene), which recently acquired Aviva USA Corp., sent a letter to the Private Equity Issues Working Group stating that many of the best practices discussed in the FAWG referral “have the potential to be effective tools to monitor and mitigate risks—but they should be applied across the board and not just to companies identified as being associated with private equity firms.” The letter posited that “applying the rules in an arbitrary or discriminatory manner may have the ultimate effect of repelling new capital, rather than attracting it, at the very time that the industry is most in need of capital.” At the Fall National Meeting, representatives from Athene and Apollo Global Management, LLC (an affiliate of Athene) gave a background presentation regarding the structure of Athene and Apollo and the recent transaction regarding Aviva USA Corp. The Working Group also exposed the FAWG referral for a public comment period ending January 31, 2014.
9. Investments of Insurers—Note on Possible Future Developments
Some changes may be underway with regard to how insurers report certain investments, how such investments affect solvency metrics such as risk-based capital, and the state investment law limitations on such investments. At the meeting of the Investment Risk-Based Capital (E) Working Group, members heard an update on the C-1 (i.e., life asset risk) factors for corporate bonds project and a presentation on the preliminary output from the corporate bond model under development by a work group of the American Academy of Actuaries. Specifically, the model seeks to use revised default probability and recovery rate assumptions based on recent experience to develop more specific C-1 factors, potentially leading to more refined risk-based capital charges. For example, the current C-1 factors generally map against the six NAIC classes for bonds developed by the Securities Valuation Office (SVO); that is, the investment rating of a bond as SVO1 versus SVO2 affects the C-1 risk-based capital charge. The preliminary results of the model take into account 19 rating classes (AAA, AA+, AA, etc.), and the differences among secured, unsecured and subordinated debt, but note that consolidation in terms of risk charges will likely be justified. Although the presentation stresses that the current results are very preliminary, the study may be an initial step to more favorable risk-based capital charges for highly rated debt that is distinguishable within current SVO investment categories.
Related to the NAIC’s review of its current system of rating the investments of insurers and a possible expansion of that system, at the Valuation of Securities (E) Task Force meeting, members heard a progress report on a study on the impact on the NAIC and the state insurance regulatory process if the NAIC adopted a change to the current SVO designations. The preliminary results of the study concerning the NAIC found that multiple activities of the NAIC would be affected by a change in the SVO designations, including operations, documents and products and information systems. The preliminary report on the impact to state laws evaluated the laws of 19 states (representing 90% of insurers-owned invested assets) to identify and compare the pattern of legislative references to the SVO designations. The preliminary report concluded the impact of changing the number of NAIC designations would vary by state and depend on the interaction of: (1) how a state decides to use designations for statutory objectives; and (2) how the NAIC defines the risk curve resulting from its designations. Noting some inconsistencies in state laws, the preliminary report concludes that, at a minimum, an increase or a decrease in NAIC designations would require changes in any statute that assumes the current NAIC 6-class definition.
B. Issues of Particular Interest to Life Insurers
1. PBR Implementation Task Force / Captive and SPV Issues
The Principle-Based Reserving (PBR) Implementation (EX) Task Force continues to work toward developing PBR standards. In 2009, the NAIC adopted a revised Model Standard Valuation Law, which authorizes PBR and a Valuation Manual that sets forth the minimum reserve and related requirements for certain products under PBR. In 2012, the NAIC adopted the Valuation Manual, despite strong opposition from several key states (including New York and California). More recently, the NAIC has been considering whether states have the resources necessary to implement PBR. PBR will not be implemented until the amended Standard Valuation Law is adopted by 42 states and state adoption reflects 75% of total life insurance premium written in the United States. As of the Task Force meeting, only 7 states—accounting for merely 7.98% of total life insurance premium written in the United States—have adopted the amended Standard Valuation Law.
At the meeting, the Task Force considered reports from its consultant, Rector & Associates, Inc., and the PBR Review (EX) Working Group and the Life Actuarial (A) Task Force regarding the regulatory framework for XXX and AXXX transactions. The Task Force did not take any decisive steps toward furthering PBR at the meeting, but resolved to set up conference calls to further consider the issues presented at the meeting.
2. Contingent Deferred Annuities (CDAs)
In late 2012, the Life Insurance and Annuities (A) Committee charged the Contingent Deferred Annuity (A) Working Group (CDA WG) with evaluating the adequacy of existing laws and regulations as applied to CDAs and whether additional solvency and consumer protection standards are required. The CDA WG submitted its report and findings and recommendations to the Committee at the Spring 2013 National Meeting, finding, among other things, that CDAs do not easily fit into the category of fixed or variable annuities, that review of solvency and consumer protection standards are necessary, and that tools to assist states in their review of CDA product filings and solvency oversight of CDAs should be established. In October and November 2013, the Life Insurance and Annuities (A) Committee adopted charges for the various NAIC groups identified in the CDA WG report as having the specific subject matter expertise to implement its findings and recommendations.
Using its own newly delegated authority from the Committee, the CDA WG set out its plans for considering whether revisions to four model regulations (Annuity Disclosure, Suitability in Annuity Transactions, Advertisements of Life Insurance and Annuities, and Life Insurance and Annuities Replacement) are warranted in order to reference how they would apply to CDAs. The CDA WG expects to present recommendations on whether such revisions are necessary at the Spring 2014 National Meeting and to have discussions on those recommendations before the Summer 2014 National Meeting. The CDA WG also expects to develop a Guidance Document in 2014 that will serve as a reference for states to use on how existing NAIC model regulations apply to the consumer protection issues associated with CDAs. The CDA WG plans to gather more information from consumer groups and regulators at the Spring 2014 National Meeting and adopt the Guidance Document at the Summer 2014 National Meeting. Finally, the CDA WG began developing a work plan with aggressive timelines for five other NAIC working groups that are considering CDAs as part of their respective 2014 charges.
3. Unclaimed Insurance Benefits
The Life Insurance and Annuities (A) Committee adopted without discussion the minutes of its December 4, 2013 conference call during which the Committee adopted a motion made by Commissioner Nick Gerhart (Iowa), seconded by Director Bruce Ramge (Nebraska) and opposed by Director Kevin McCarty (Florida), to “undertake a study to determine if recommendations should be made to address unclaimed death benefits.” Commissioner Julie McPeak (Tennessee), Chair of the Committee, asked for volunteers to participate on the working group that will direct the study, making clear that a state need not be a member of the Committee to participate.
In a related matter, the Committee received a legislative update on the provisions in the bipartisan budget bill that would restrict access to the Social Security Death Master File for three years from the date of death, except to persons who are certified under a program to be established by the Secretary of Commerce. Only those who have a fraud protection interest or other legitimate need for the information and agree to maintain the information under safeguards similar to those of federal agencies under Section 6103(p)(4) of Title 26 of the United States Code, may apply for certification. The NAIC expects to weigh in on the certification process as appropriate.
Also of note on unclaimed insurance benefits was the discussion of the issue between members of the NAIC/State Government Liaison Committee and representatives from the National Conference of Insurance Legislators (NCOIL). NCOIL’s representatives urged the NAIC to review and consider NCOIL’s Unclaimed Life Insurance Benefits Act if and when the NAIC drafts its model unclaimed insurance benefits law. NCOIL’s representatives also noted that they expect between 7 and 15 states to introduce legislation based on the NCOIL Unclaimed Life Insurance Benefits Act in the next 90 days. Eight states have already adopted unclaimed insurance benefits legislation based on NCOIL’s model.
4. Longevity Risk
The Joint Forum is expected to issue its report on longevity risk transfer markets in January 2014. The Joint Forum was created in 1996 to give banking, securities and insurance regulators the opportunity to address cross-sectoral issues that are common among these three financial sectors. The Joint Forum includes the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. Regulators are concerned that an aging population poses serious public policy and financial challenges, especially the risk of paying out on pensions and annuities longer than expected. Commissioner Julie McPeak (Tennessee) expects to ask the Life Actuarial (A) Task Force to address this issue in 2014.
C. Issues of Particular Interest to Property and Casualty Insurers
1. Terrorism Insurance Implementation (C) Working Group
Both the Terrorism Insurance Implementation (C) Working Group and the Workers’ Compensation (C) Task Force met during the Fall National Meeting. Like most stakeholders, the NAIC has little to report or do regarding the Terrorism Risk Insurance Act (TRIA) as Congress has only just begun to seriously consider TRIA reauthorization. As follow-up to the presentation, Sutherland’s Tom Glassic and Bob Woody of the Property Casualty Insurers Association of America (PCI) made to the TRIA Implementation Working Group during the Summer 2013 National Meeting, both groups heard presentations on the importance of TRIA reauthorization and highlighting the unique TRIA reauthorization issues that apply to workers’ compensation carriers. During the TRIA Implementation Working Group meeting, the American Bankers Association (ABA) testified on the growing impact of uncertainty about TRIA reauthorization in the commercial lending market, focusing on the difficultly the policyholder and lending community are having quantifying the adverse impact of TRIA’s possible expiration. Put succinctly, the ABA pointed out that in the absence of TRIA, prospective development projects are not presented to lenders, so lenders are unable to quantify how many projects were not initiated. ACE Group, AIG, American Insurance Association (AIA), the National Council on Compensation Insurance (NCCI), and the Reinsurance Association of America (RAA) all provided testimony during the Workers’ Compensation Task Force meeting. While much of the testimony tracked the information provided before the TRIA Implementation Working Group, data from the New York State Workers’ Compensation Board accentuated the unique character of workers’ compensation cover by demonstrating how, 12 years after September 11, 2001, the workers’ compensation share of the overall loss continues to grow and is likely to continue growing for many years.
Also during both TRIA-related meetings, NAIC staff reported on comments filed by the NAIC and certain individual states in response to a request of the President’s Working Group on Financial Markets for comments on the current state of the terrorism insurance market and on TRIA reauthorization.
Rhode Island’s representative on both panels reported on practical issues that regulators will likely confront as the year-end 2014 expiration of the current TRIA program approaches, including the use of conditional exclusions that cut off terrorism coverage after 2014 if TRIA is not reauthorized or is reauthorized with significant changes. Both panels acknowledged that it was too soon in the reauthorization process to begin drafting model bulletins relating to TRIA reauthorization or expiration, but they explained plans to prepare so that the NAIC and individual states can respond promptly to changes in the absence of TRIA.
2. Mortgage Insurance Modifications to Model Act Continues at Full Push
Prior to the Summer 2013 National Meeting, the Mortgage Guaranty Insurance (E) Working Group obtained the approval of the Financial Condition (E) Committee and the Executive (EX) Committee for a Request for Model Law Development that would amend the Mortgage Guaranty Insurance Model Act to address the changes identified on a list of proposed changes to the regulation of private mortgage insurers (known as the “Concepts List of Potential Regulatory Changes”), as updated to reflect public comments, that are intended to address significant issues facing the Private Mortgage Guaranty Insurance (PMI) market.
The Working Group assigned specific topics to be addressed in the Model Act amendment to member states for their review and consideration. Wisconsin, which chairs the Working Group, was tasked with addressing investment limitations and issues relating to underwriting and quality assurance. Arizona was tasked with addressing dividend limitations, contingency reserve requirements, capital maintenance requirements, and loss reserve estimates. The topic of rescission rights and responsibilities was assigned to North Carolina. Pennsylvania, in turn, was tasked with considering mandatory reinsurance requirements and lengthened periods for contingency reserves. Finally, New York was tasked with considering potential restrictions relating to geographic concentration. The changes to the Mortgage Guaranty Insurance Model Act were exposed on November 25, 2013, for a 45-day public comment period ending January 9, 2014. The draft was slated to be the sole issue discussed by the Working Group at the Fall National Meeting. In exposing the draft, the Working Group noted that it was not the product of debate among the members of the Working Group. Rather, Wisconsin was tasked by the Working Group to prepare a conceptual draft from the Concepts List and the resulting draft was sent to the Working Group on October 4. The exposure summary that mapped the Concepts List references against the relevant sections of the conceptual draft stated that “it is the committed intention of the Working Group that all changes to the NAIC Mortgage Guaranty Insurance Model Act will be reviewed, discussed, and debated in public.”
The conceptual draft Mortgage Guaranty Insurance Model Act contains extensive expansions to the geographic concentration, investment limitations, reinsurance, underwriting standards, capital standards and reserves sections, introduces new sections relating to quality assurance and rescission and proposes the development and adoption of a Mortgage Guaranty Insurance Standards Manual by the NAIC. The Working Group received comprehensive comments to the conceptual draft from the PMI Industry Group by letter dated December 5, 2013. The Industry Group also prepared a presentation for the Working Group’s session at the Fall National Meeting.
After a detailed discussion of the proposed modifications to the Mortgage Guaranty Insurance Model Act contained in the conceptual draft, and before the Industry Group presented their comments to the Working Group, Deputy Commissioner Steve Johnson (Pennsylvania) noted his disappointment with the tone of the Industry Group’s comments and stated he hoped that work on the conceptual draft could be conducted more collaboratively in the future, taking into account the extraordinary steps regulators took to work with the PMI sector during the mortgage crisis, which he characterized as “a perfect storm.” For his part, Commissioner Ted Nickel (Wisconsin), who chairs the Working Group, noted that he was not offended at the tone of the comments and was prepared to work with the industry, despite joking that he had contemplated announcing that the group was disbanded in light of the FIO Report’s recommendations on a Federal role for private mortgage insurance. Commissioner Nickel seemed to particularly appreciate the Industry Group presentation’s characterization of the overlapping regulation of PMI as a number of gears that must coordinate and operate together effectively and efficiently. The Industry Group’s presentation specifically addressed its primary concerns with the conceptual draft’s capital and reserving framework, risk limits, investment limitations and imposition of detailed underwriting, quality assurance and contractual certainty requirements that might better be addressed in examination guides and industry standards manuals.
Birny Birnbaum, on behalf of the Center for Economic Justice, began his comments by talking about the need for introspection on the part of regulators. Deputy Commissioner Johnson, responding on behalf of the Working Group, stated that the development of the conceptual draft represents a great degree of introspection on their part. Mr. Birnbaum also questioned whether the details of the Working Group’s proposals should be included in the proposed standards manual, which could be updated more responsively to address regulatory concerns than the Model Act could be updated. Finally, Mr. Birnbaum noted that the proposed changes appear overly formulaic and that a more principles-based approach may be appropriate. The Working Group extended the period of public comment on the conceptual draft to February 15, 2014.
D. Issues of Particular Interest to Health Insurers
1. Accounting for ACA Fee Causes Tense Debate Among Regulators
Finally, some of the most dramatic moments of the Fall 2013 National Meeting occurred during consideration of appropriate accounting treatment with regard to the federal Patient Protection and Affordable Care Act (ACA) fee. Beginning in 2014, the health insurance industry will be required to pay a health insurance tax imposed under Section 9010 of the ACA. The tax totals $8 billion in the first year, $11.3 billion in 2015, and increasing amounts in subsequent years. The total tax is proportioned among issuers of health insurance based on net premiums written during the preceding year, including premiums written for coverage of certain coverage otherwise treated as excepted for ACA purposes, such as dental, student health, and retiree-only coverage. Accordingly, the fee impacts many insurers that offer little or no comprehensive health coverage.
The Statutory Accounting Principles (E) Working Group (referred to as SAPWG) adopted guidance that provided revisions to Statement of Statutory Accounting Principles (SSAP) No. 35R—Guaranty Fund and Other Assessments and the related Issue Paper No. 148, Affordable Care Act Section 9010 Assessment that prescribe the recognition of a liability and expense for the fee payable under Section 9010 of the ACA beginning in 2014. The guidance proposed to recognize the liability and expense on January 1 of the fee year, when it would be due on September 30.
At the Accounting Practices and Procedures (E) Task Force meeting, Superintendent Torti (Rhode Island) declared his opposition to the SAPWG adoption as the proposal would allow the ACA fee to be carried as a liability by health insurers for the majority of a year but never appear on the insurer’s annual statement, which is a determinate of a multitude of solvency-related indicators, such as risk-based capital, and generally informs other areas of an insurer’s operations, such as dividends and executive compensation. Superintendent Torti implied that the SAPWG proposal reflected the result of intense lobbying by the health insurance industry to inflate surplus. Deputy Commissioner Steve Johnson (Pennsylvania) responded that the SAPWG proposal in fact represented a thorough compromise among the technical members and included the reclassification of the ACA fee as special surplus in the data year that would appear on insurers’ annual statements.
The motion to adopt the SAPWG report narrowly failed by a roll-call vote in which 18 Task Force members voted in favor of the motion, 19 Task Force members voted against the motion and one Task Force member abstained. Recognizing that insurers will need guidance on this issue, the Task Force considered a motion to redraft SSAP No. 35R and Issue Paper No. 148 to require a liability at year-end in the data year with a nonadmitted deferred asset. The fee payable would then be expensed on January 1 of the fee year. Members of the Task Force were deeply divided on the issue of directing the technical members of SAPWG as to accounting practices and of “accounting on the fly,” but the motion passed by a vote of 29 to 7 with 2 abstentions.
The drama continued to play out during the Financial Condition (E) Committee meeting where the report of the Accounting Practices and Procedures Task Force was bifurcated in order to address the ACA fee accounting issue in isolation. In a tense debate where multiple motions, including motions to call debate and motions to postpone motions, vied with one another and where NAIC General Counsel Kay Noonan was relied on to advise as to points of order, Commissioner Dave Jones (California) led the charge to send the SAPWG proposal to the NAIC Plenary for consideration by the organization’s ultimate policymaking body. Deputy Commissioner Johnson agreed that the technical members had reached their conclusion on the issue and that it was ripe for consideration by policymakers. Superintendent Torti, Chair of the Committee, supported by Deputy Commissioner Douglas Stolte (Virginia), continued to argue that the committee had nothing before it to vote on other than to accept or reject a report and that the SAPWG proposal had not been formally passed up to it. Agreeing with California and Pennsylvania, Commissioner Stephen Robertson (Indiana) stated that the committee was authorized to vote for anything in its purview. Ultimately, the Committee voted to reject the Task Force’s action and instead adopted SSAP No. 35R and Issue Paper No. 148 as adopted by SAPWG to recognize the liability and expense on January 1 of the fee year. The decision will likely be addressed by the NAIC Plenary at the Spring 2014 National Meeting in Orlando, Florida.
In many ways, the episode epitomized the angst that appears to be growing within the NAIC with regard to federal regulation. Particularly telling was Commissioner Leonardi’s statement to the effect that if the NAIC does not get this right, it will be another example to which the federal government can point to step in and revoke aspects of state regulatory authority over insurance.
1 The states are Alabama, California, Connecticut, Delaware, Florida, Georgia, Indiana, Iowa, Louisiana, Maine, Maryland, Missouri, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Virginia.
If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed or the Sutherland attorney with whom you regularly work.