A.M. Best Hosts Roundtable Webinar Discussion on National Association of Insurance Commissioners Spring 2014 National Meeting

 

As a follow-up to the recent National Association of Insurance Commissioners Spring 2014 National Meeting, A.M. Best Company hosted a live recap of the event via Webinar on April 4, 2014.

Moderator Lee McDonald of A.M. Best was joined by Dave Osborn of Ernst & Young; former Connecticut Insurance Commissioner Thomas Sullivan, now with PricewaterhouseCoopers; Birny Birnbaum, Executive Director of the Center for Economic Justice; Eric M. Goldberg, Vice President of State Affairs for the American Insurance Association; and Jeff Jeffrey, A.M. Best’s Washington Bureau Manager.

Overview

Mr. Birnbaum pointed out that, since this had been the NAIC’s first meeting of the year, the organization’s focus was on setting direction, rather than “big decisions.” 

At the meeting, Mr. Osborn explained, the NAIC outlined its priority areas for the year, which include principle-based reserving (“PBR”) requirements, implementation of the Affordable Care Act and group supervision. 

In regard to PBR, the American Council of Life Insurers presented its plan to exempt small companies from PBR requirements.  Small companies would be defined as those with less than $300 million in ordinary life premiums or $600 million if part of the NAIC’s group of insurers

According to Mr. Osborn, the NAIC ComFrame Development and Analysis Working Group, which has been charged with review and input on the International Association of Insurance Supervisors (“IAIS”) Common Framework for the Supervision of Internationally Active Insurance Groups (“ComFrame”), held its inaugural meeting.  Representatives from the IAIS were on hand to discuss plans for field testing which is expected to start in 2014 and the basis for stated goals out there though 2016. 

Of note, Mr. Birnbaum said, was the Governance Review Task Force meeting in which commissioners discussed reviewing how the NAIC is governed, and whether an outside consultant should review procedures, or if the matter should be conducted internally.  He said that this is an effort by the NAIC to respond to criticism on lack of transparency and that there is a lot of behind-the-scenes internal debate about how the NAIC is governed, the role and power of the president, and other issues. 

Panelists then discussed specific developments from the Spring Meeting.

 

International Regulation

Mr. Goldberg said that no major issues relating to international regulation were resolved at this meeting.  He said that a tension exists between the European approach to regulation and that of the U.S. 

Regulators are saying the “right things” in meetings, such as that the U.S. state-based system has been effective in protecting consumers, but at same time they need to work with European regulators on standards for capital and other issues.   A question going forward is how to respect what the Europeans are proposing and address those concerns within the current regulatory framework. 

Mr. Sullivan said that the biggest walls between the NAIC, the Federal Insurance Office and the IAIS could be over the disparate views on group capital.  The international community has an affinity toward having group capital measures.  State regulators almost universally, not so much, he said.  Internationally, there are “aggressive goals” vis a vis the IAIS.  There are three capital measures to be implemented over the next three years.

“My judgment is [the international community] has aggressive timelines and still-unanswered questions around valuation,” Mr. Sullivan said.  “The skeptic in me wonders how they can get all this done.  It took how long for Solvency II.”

Mr. Jeffrey said that there is a growing effort among outside groups like the NAIC to get more regulators involved on international panels or discussions with the IAIS.  He said that it seems like the FIO has been very hesitant in increasing the number of people on the G20 board.  The NAIC is involved, but FIO Director Michael McRaith been protective of the authority given to the FIO by the Dodd-Frank Act to act as the lead voice for U.S. regulation on the international stage. 

 

Corporate Governance for Insurance Companies

Mr. Goldberg said that the Spring Meeting included discussion on some exemptions from corporate governance requirements for small companies, with the thought that the requirements create redundancies and resource issues for smaller companies. 

A positive development for both small and large companies, he explained, was a notion by Vermont Commissioner Susan Donegan on having some degree of flexibility for redundant filings.  If some documentation has to be filed in a manual report, there might be some exemption from that if an insurer is already filing something similar. 

 

Lender-Placed Flood Data Collection

Mr. Birnbaum explained that the NAIC has been looking at a data collection request to top (??) force-placed insurers for both force-placed hazard and force-placed flood insurance.  It has been in development for six months, with a slightly revised version exposed a week before the Spring Meeting. 

At the meeting, Mississippi Commissioner Mike Chaney proposed “out of the blue” that, instead of the four pieces of the data request, his state would request either one or two items, and collect it for all states, “but there needs to be clarification on what’s going on,” Mr. Birnbaum said. 

Apparently, Mississippi representatives are in conversations with some of the large force-placed insurers on data requests.  The NAIC has voted on it but it’s not quite finalized.  This is an example of the NAIC taking action partly because they want to address the issue and partly because of a fear if they don’t act, the FIO will collect data on availability and affordability issues pursuant to its authority under the Dodd-Frank Act.

The reason this information is so critical particularly for looking at issues of availability and affordability of flood insurance is because force-placed flood is a residual market for the National Flood Insurance Program (“NFIP”), Mr. Birnbaum explained.   Since there is no private market for flood insurance, if someone is required to get flood coverage and that person does not have NFIP, he or she is force-placed.   A policy can also be force-placed if the lender wants more than $250 million in coverage on the property. 

The data request is essential for the NAIC to carry out its charge to examine the current model on lender-placed insurance, and critical for helping the federal government examine affordability and availability of flood insurance. 

 

Model Holding Company Act

The Spring Meeting contained a “very positive development” regarding the Model Holding Company Act, according to Mr. Goldberg.  The NAIC will reopen the Model Act with an eye toward developing uniform language toward group supervision. 

After the Model was enacted in 2010, Pennsylvania was the first state to deviate from the Model with developments on group supervision language.  The state of Connecticut is also examining this topic, but with different language than Pennsylvania. 

Mr. Goldberg explained that the AIA believes that the NAIC ought to develop uniform language on group supervision.  It is an important issue in 16-17 states. 

 

Auto Insurance Study Group

The NAIC Auto Insurance Study Group (“AISG”) adopted a recently-exposed set of policy recommendations despite objections by consumer groups that the report was unbalanced and that there was not enough time to review the 80-page document, Mr. Birnbaum said. 

The AISG also exposed for comment a proposal for data collection from companies on risk classifications and their impact on consumer premiums.   The risk classification survey is important because regulators will know all of the information companies are using for purposes of setting premiums. 

Generally, he said, regulators are behind the curve in terms of tracking how insurance companies are using consumer information.  Nothing “earthshattering” has happened at this point; the survey is still in the study process.

Mr. Goldberg said that the biggest emerging issue on the auto insurance side is transportation network services like Uber and List, which he likened to “hitchhiking using your iPhone.”

There are questions about gaps in coverage between companies’ liability coverage and the individual drivers’ coverage.

 

Commercial Lines

Mr. Birnbaum offered comment on commercial lines issue, with regard to an NAIC proposal from 10 years ago of commercial lines reengineering with a definition of exempt commercial policyholders.  Those policyholders were exempted from a lot of rate form filings. 

“Instead of trying to implement that proposal in uniform fashion across states,” Mr. Birnbaum explained, “the industry went into some states and got more and the result is now there’s a smorgasbord of definitions of exempt commercial policyholders across the states which makes it difficult. “

Something that might be qualified exempt in one state might not be exempt in another, he said.  The Interstate Compact is a model to address greater uniformity, and is a big undertaking.  If the industry were to agree with the NAIC’s definition of exempt commercial policyholder, there would be much greater uniformity and treatment across states. 

He said that included in discussion was the big difference between small business interests and large.  Small interests are more like personal lines, homeowners, auto policy, with the example being a 1-5 person business. 

“We think it’s important to keep that distinction between large commercial policyholders and small,” he said. 

 

Principle Based Reserving Requirements

Mr. Sullivan explained that there is a substantial hurdle to get over with 75 percent of U.S. domestic based written premium or 42 states having to adopt the NAIC Standard Valuation Law, which, in 2009, introduced PBR as a new method of calculating life-insurance policy reserves.  In his judgment, he explained, that won’t come easily.   

“It might be easy to get 30 states,” he said.  “It’ll be more difficult to get 42.  It might be easy to get 50 percent of written premium, more difficult to get 75 percent.”

Mr. Sullivan said that the state of New York has been clear that it will not adopt PBR in its current form.  He advised that New York’s objection would leave a “patchwork” environment. 

“I still think the law itself has a ways to go,” he said.  “It is not there yet in terms of meeting any of the thresholds.”

While there weren’t any major decisions regarding PBR at the Spring Meeting, the New York Department of Insurance announced it was going to reduce the reserve requirements for term life insurance, and modify the XXX and AXXX Regulations and reserve requirements to recognize that those rules required excessive reserves for term life products. 

Mr. Birnbaum explained that this demonstrates that the traditional method of solvency regulation and reserving can accommodate those issues without insurance companies having to resort to captive reinsurers for reserves.

Mr. Birnbaum noted the depth and spread of disagreement over a February 2014 Rector & Associates report to the NAIC on the PBR system and captives.  As an organization, the NAIC has taken on the challenge of dealing with captives used by life insurance companies for what they consider to be excessive reserves from XXX and AXXX requirements.  There is a lot of criticism of those captive reinsurance agreements. 

The Rector report was an interim proposal for greater transparency in terms of the collateral that supported the reserves in these captive reinsurance arrangements. 

Mr. Birnbaum explained, “What’s really interesting was California [representatives] saying ‘We don’t support the report because we want a moratorium on all of these,’ then Delaware [representatives] saying there was no issue at all, ‘…we don’t support the report because no problem exists.'” 

Mr. Birnbaum noted that Vermont representatives spoke in support of the report, while the state of New York did not support it.  Kansas representatives said the major issue with the report was that it said companies should be using a PBR type of reserve analysis, when “no one believes DM20 right-sizes reserves.”

 

Affordable Care Act

Under the Affordable Care Act, there are three rate stabilizing programs effective January 1 of this year, Mr. Osborn explained.  The “Three R’s,” as Mr. Osborn deemed them, are risk adjustment, reinsurance and risk corridors, which are administered by the federal government via the Department of Health and Human Services (“HHS”) or by the states. 

The risk adjustment program is a mechanism to reduce economic impacts of adverse selection of enrollees among carriers.  It is the only permanent program under ACA, and all risk adjustment plans are required to participate.  In 2014, plans with lower than average risk scores compared to the market would transfer premiums to plans with higher than average scores.  This is meant to mitigate the risk of plans enrolling members with higher risks competitive to other members. 

The reinsurance program provides funding to issuers in individual market to mitigate the risk of drawing a disproportionate number of higher-cost patients into exchanges.  This program is scheduled to run until 2016.  There is a $25  billion assessment payable over next three years. 

The risk corridor program, which is also set to run until 2016, protects against inaccurate rate-setting by sharing risk on allowable costs between HHS and qualified health plans to help ensure stable health insurance premiums.  This applies to qualified health plans in individual and small group markets whether in or out of an exchange. 

 

Long-Term Care Issues

The Senior Issues Task Force (“SITF”) last year developed a model bulletin as a result of negotiation between  states and long-term care insurers on how to deal with “massive rate increases” that states were hesitant to approve, Mr. Birnbaum explained. 

Actuaries were charged with figuring out how to implement agreements reflected in the model bulletin.  In exchange for rate increases, some of which could perhaps be phased in over several years, the industry agreed to provide non-forfeiture benefits for older, pre-rate stabilization policies.  Before 2000, policies generally did not have a benefit if the consumer paid in for 20 years and then could not afford a rate increase.  In that circumstance, the consumer would be out of luck. 

A rate stabilization model in 2000 introduced non-forfeiture benefits tied to issue age of borrower and the size of rate increase.  The 2013 SITF model bulletin made the  non-forfeiture benefit available for the pre-2000 policies and made it so anyone who has paid in for 20 years is eligible and that no one would have to encounter a cumulative rate increase of more than 100 before they are eligible for this non-forfeiture benefit. 

Mr. Birnbaum said that there is a difficult situation for regulators because companies are closing off “flocks of business,” asking for 80, 100 or 200 percent rate increases.  Many consumers have been priced out of market.   There is “tremendous disagreement” among states, with some willing to grant increases, while others are very reticent. 

The NAIC has been trying to get regulators to agree on how to treat these rate increases.  This will be an ongoing process, but major decisions have been made in last year and this year in the SITF.

 

NAIC Internal Governance

The NAIC Executive Task Force met and heard from consumer advocates and trade associations.  This was a rare instance where both consumer groups and the insurance industry applauded the NAIC for taking up internal governance.  Representatives from both groups noted that while there might be issues here, there’s not nearly as much transparency into regulatory regimes and requirements abroad.  The U.S. has high marks in transparency disclosure.

 

The discussion then adjourned.

 

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