NAIC Summer 2010 National Meeting Highlights

 

The National Association of Insurance Commissioners held its Summer 2010 National Meeting during August 14-17 in Seattle, Washington.  Below are highlights of the various committee meetings that took place during the event.

To view the NAIC’s official meeting summary page, which includes hyperlinks to audio files, press releases, a roster of attendees and other information, click here (then click the Summer 2010 tab).

Should you have any questions or comments, please contact Colodny Fass.

 

Joint Executive Committee/Plenary

The Joint Executive Committee/Plenary met on August 17, 2010, during which the following actions were taken:

• Adopted:
  • Medical Loss Ratio (“MLR”) Reporting Blank
  • Resolution to Protect the Ability of Licensed Insurance Professionals to Continue to Serve the Public
  • Implementation Commentary to the Guidelines for Regulations and Legislation on Workers’ Compensation Coverage for Professional Employer Organization Arrangements (#1950)
  • Guideline for Implementation of Medical Professional Liability Closed Claim Reporting
  • Property and Casualty Model Rate and Policy Form Law Guideline and Property and Casualty Model Rate and Policy Form Regulation Guideline
  • Part B and Part C accreditation standards for risk retention groups
• Deleted the NAIC Policy Statement on Financial Regulation Standards (#690)

 

Executive Committee

The Executive Committee met on August 14, 2010, during which the following actions were taken:

• A Property and Casualty Insurance Committee request to develop a Model Law on Regulation of Insurance Scoring Vendors was adopted.
• An implementation plan for U.S. Financial Sector Assessment Program recommendations was adopted
• Establishment of a task force to develop and oversee implementation of state-based solutions addressing the surplus lines subtitle of the Non-admitted and Reinsurance Reform Act was approved.

 

Climate Change and Global Warming Task Force

The Climate Change and Global Warming Task Force met on August 13, 2010, during which it discussed the Climate Risk Disclosure Survey, which was distributed by the NAIC to all states on April 23 and again on June 8 requesting feedback on their intentions to participate in the survey.  Of the 38 jurisdictions that responded, 18 indicated that they would be participating in the Survey.  Of those jurisdictions participating, seven indicated that the disclosure would be mandatory and 11 indicated that the survey would be kept confidential.

 

Producer Licensing Task Force

The Producer Licensing Task Force met on August 16, 2010, during which it adopted the Uniform Adjuster Licensing Applications that include the ability for applicants to designate their home state for a resident or nonresident license.

 

International Accounting Standards Working Group

The International Accounting Standards Working Group met on August 15, during which it heard an update from the American Council of Life Insurers, the Property and Casualty Insurers Association of America and the Group of North American Insurance Enterprises in which concern was expressed for the benefits and costs of the building block approach for short-term, short-duration products together with the finer details of the unearned premium approach.  Questions were asked regarding the application of the margin approach and whether it should be composite or risk and residual.  Also discussed was the existence of difficulty and concern with the proposed presentation model including over-extensive disclosure requirements.  NAIC staff had identified the margin and presentation issues as key, together with the choice of discount rate.  A request was made that actuaries should have significant input into the process, and the group heard that the Society of Actuaries and the Casualty Actuarial Society were working on a study on the effects of the proposals on U.S. products, which may be available at the end of September 2010.

 

International Solvency Working Group

The International Solvency Working Group met August 15, 2010, during which it:

• Released the Consultation Paper on the Own Risk and Solvency Assessment for comment. The paper overviews implementations in Bermuda, Canada, the European Union and Switzerland, the International Association of Insurance Supervisors’ (“IAIS”) standards on enterprise risk management and what requirements should be included in a U.S. tool.  Comments are due October 4.
• Heard a presentation on the Florida hurricane data calls and the accompanying risk assessment process.  The value of having annual discussions about risk with companies was discussed.

 

Product Filing Review Handbook Subgroup

While the Product Filing Review Handbook Subgroup of the Operational Efficiencies Working Group did not meet during the Summer National Meeting, it held a conference call  on June 16, 2010, during which it revised and then adopted the June 7 Product Filing Review Handbook in its entirety.  The purpose of the Product Filing Review Handbook is to provide a resource for the rate and form filing reviewer that would be equivalent to what the market conduct examiner and financial examiner have in order to add uniformity and consistency, where appropriate. 

 

Life Insurance and Annuities Committee

The Life Insurance and Annuities Committee met on August 14, 2010, during which it appointed a working group to review and revise the Viatical Settlements Model Regulation (#698) for consistency with the 2007 revisions to the Viatical Settlements Model Act (#697) and also revise Appendix A-Informational Brochure.   The Committee also added a new charge to review two recently issued reports related to life settlements:  the U.S. Securities and Exchange Commission Life Settlements Task Force Staff Report and the U.S. Government Accountability Office Report to the U.S. Senate Special Committee on Aging on Life Insurance Settlements.  The Committee will assess their effect on the functional state regulation of life settlements, if any, and make recommendations.

Also adopted was a recommendation that the Committee develop a model based on the Ohio alert concerning stranger-originated annuity transactions.

 

Senior Issues Task Force

The Senior Issues Task Force met on August 16, 2010, during which it: 

• Heard an update on anticipated revisions to the Medicare supplement model regulation (#651)
• Distributed proposed revisions to a draft state alert and bulletin on Medicare supplement hospital network arrangements
• Received an update from the Centers for Medicare and Medicaid Services (“CMS”) on Medicare supplement issues, including notification of nonrenewal of contracts with CMS and complaints received by consumers who attempt to move back and forth between Medicare Advantage plans and Original Medicare with a Medicare supplement plan
• Received an update from CMS on Medicare Advantage and Medicare prescription drug oversight issues.  Specifically, CMS will be terminating the contract for the Medicare Drug Integrity Contractor for compliance and enforcement and is planning to issue new requirements for Medicare private plans to demonstrate fiscally sound operations and a positive net worth.

 

Property and Casualty Insurance Committee

The Property and Casualty Insurance Committee met on August 16, 2010, during which it:

• Discussed the development of a data call to gain insight into the use of credit-based insurance scores and other risk classifications for personal auto insurance.  The draft document was recently offered for public comment and a related hearing will be scheduled in Kansas City, with a tentative date of September 30.
• Discussed the next steps in developing the model law to regulate insurance scoring vendors
• Was updated on defective drywall activities, which include a defective drywall draft white paper by the Catastrophe Insurance Working Group
• Discussed the status of A Consumer Guide for Auto Insurance draft, which will be considered at the Fall National Meeting

 

Advisory Organization Examination Oversight Working Group

The Advisory Organization Examination Oversight Working Group met August 13, 2010, during which it was updated on the progress of the multi-state examination that recently began on the National Council on Compensation Insurance.

 

Consumer Guides Working Group

The Consumer Guides Working Group met via conference call July 15 and August 5, 2010, during which it resolved to recommend the development of best practices for the design and implementation of Web-based consumer premium comparison guides for personal auto and homeowners insurance by the 2011 Fall National Meeting.

 

Risk Retention Working Group

The Risk Retention Working Group met on August 14 and via conference call on June 22, during which it discussed updates made to the Risk Retention and Purchasing Group Handbook, including a review of legal case summaries compiled by NAIC staff.  A letter from members of the U.S. Congress to the Government Accountability Office (“GAO”) requesting that the GAO to conduct a study examining the treatment of risk retention groups by non-domiciliary states was reviewed.   Also, a model law request to add corporate governance standards to Section 3 of the Model Risk Retention Act (#705) was approved.

 

Casualty Actuarial and Statistical Task Force

The Casualty Actuarial and Statistical Task Force met August 14, 2010, during which it discussed the need for appointed actuaries to improve their Actuarial Reports by clarifying documentation, which expedites the review of reserves in a financial examination.  Changes to the Actuarial Report instructions will be discussed.  The Task Force’s Line of Business Subgroup was disbanded upon its completion of a survey about potential changes to the line of business categorization in annual statements.  While issues were identified, no action will be taken at this time due to low prioritization.

 

Surplus Lines Task Force

The Surplus Lines Task Force met on August 16, 2010, during which it reviewed the Dodd-Frank Act of 2010 as it relates to Title V, the Nonadmitted and Reinsurance Reform Act (“NRRA”).  It was reported that a new executive-level task force has been created to develop and oversee implementation of state-based solutions addressing the surplus lines subtitle of the NRRA.  A report also was given on the completion of a Surplus Lines Uniform Reporting Form.  The Form has been distributed to interested parties for comment.   State utilization of OPT-ins, the NAIC application for the online payment of premium taxes, as it relates to surplus lines was reviewed.

 

Title Insurance Task Force

The Title Insurance Task Force met on August 15, 2010, during which it agreed to host a two-hour public hearing on private transfer fee covenants at the Fall National Meeting.   A proposal to create a Market Conduct / Mortgage Fraud Working Group was discussed.

 

Title Statistical Plan Working Group

Throughout a series of conference calls, the Title Statistical Plan Working Group has been considering various drafts of a Title Insurance Agent Statistical Report, which was later approved by the Title Insurance Task Force.  The report goal is to capture granular data that will be meaningful to regulators and yet not overly burdensome on the industry, particularly to small businesses.  It was agreed that June 1 would be an adequate annual reporting date in order to interfere as little as possible on other annual reports required of larger operations.  Data points that would be included in the statistical plan are:

• General information and agency information – basic information on the reporting entity
• Risk assumption – basic data on numbers of policies issued and closing performed
• Income – general business income
• Expenses – general business expenses
• Loss, loss mitigation – claims experience for title and closing losses not paid by underwriter

Two major issues also were addressed and resolved:

Allocation – Multi-state and direct operations often have support services that cross state lines.  In order to ensure consistent allocation of these resources, instructions were developed to allocate according to percentage of business in each reporting state.

Full Time Equivalency (“FTE”) data – In order to adequately analyze FTE data and employee expense, it is necessary to get numbers of FTE by quarter, rather than only annually.  However, allocating support services quarterly represents a significant burden and cost to multi-state agencies and direct operations.   A resolution was reached in which agencies will collect quarterly data for allocated FTE and annual data for unallocated FTE.

It was agreed that the statistical plan would:

• Allow states to obtain a further understanding and analysis of the role title agents play in title insurance and their expenses relative to their premium retention
• Not be able to collect data on all issues avoided during the search and exam process (title problems avoided) since it would prove to be overly burdensome and costly to small agents, especially since there is no current technology that would make such collection feasible.  Because this information plays a role in determining the value of title insurance, it is recommended that, if such technology be developed in the future, the Task Force should remain open to adding data points to the plan at a later date.

The August 6 draft of the Title Insurance Agent Statistical Report was adopted, along with the accompanying Single State Agent, Multi-State Agent, Attorney Agent and Underwriter Direct Instructions.  The next conference call is scheduled for September 16 at 2:30 p.m. (CT).

 

Title Annual Statement Instructions Subgroup

During various conference calls, the Title Annual Statement Instructions Subgroup agreed to make changes to the Quarterly and Annual Statement Blank – Title after reviewing the Quarterly and Annual Statement Instructions – Title.  Six proposals will be recommended to the NAIC’s Blanks Working Group:  Schedule P & Interrogatories; Actuarial; Assets and related items, including schedules shared by Annual Statement Blank – Property/Casualty; Balance Sheet, Income Statement, Cash Flow, Parts 1 to 4, Investments with related items and Page 4 and Schedule F; Schedule T; and Notes to the Annual Statement Blank.  It will be recommended that annual statement blanks and instructions should be implemented effective with the 2011 reporting year, while the quarterly blanks and instructions should be recommended to begin implementation with the first quarter reporting in 2012.  The August 13, 2010 draft of the Quarterly and Annual Statement Blank – Title and the Quarterly and Annual Statement Instructions – Title was submitted for consideration and comments.

 

Workers’ Compensation Task Force

The Workers’ Compensation Task Force met on August 15, during which it announced that the NAIC’s Twenty-Four Hour Coverage Pilot Project Model Act (#960), originally adopted in 1994, will be deleted from the official list of models.  The purpose of the Twenty-Four Hour Coverage Pilot Project Model Act was to determine whether the costs of the workers’ compensation and health care delivery system could be more effectively managed by combining workers’ compensation medical benefits with the benefits offered under a group health insurance policy or benefit plan.  The Twenty-Four Hour Coverage Pilot Project Model Act was last reviewed in accordance with NAIC standards for model law review in 2005.  At that time, it was determined that this Model Act should be retained in its current form, even though no states had adopted the model in its entirety and only four had enabling legislation.  While a number of states implemented 24-hour coverage pilot programs in the 1990s, results were considered not positive regarding the cost savings achieved.  

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Large Deductible Study Implementation Working Group

The Large Deductible Study Implementation Working Group met on August 14.  During previous teleconference, the Working Group had discussed proposed changes to the Third Party Administrator (“TPA”) Guidelines made by various producer licensing regulators.  These included:

• Definition of “home state”
• Use of “insurance carrier” and “Payor” versus “insurer”
• Exception for business entities performing TPA work on behalf of an affiliated insurer
• Use of “licensing” versus “registration” in the Section 12 heading
• Inclusion of “stop-loss” within the scope of the TPA law
• Refusal to issue a nonresident TPA license based on subsequent information
• Audited financial statements from a TPA in an insurance holding company

During the August 14 meeting, the Working Group adopted the draft TPA Guidelines after largely resolving the aforementioned issues, with the exception of the definition of “home state,” which will later be clarified. 

 

NAIC/IAIABC Joint Working Group

The NAIC/IAIABC Joint Working Group of the Workers’ Compensation Task Force held an interim meeting during the International Association of Industrial Accident Boards & Commissions (“IAIABC”) 2010 All Committee Conference in Nashville, Tennessee on April 21.   Discussed at the meeting was “out-of-state employers’ workers’ compensation compliance,” which largely stems from trucking industry driver complaints after being checked at highway weigh stations in an eastern seaboard state to produce proof of workers’ compensation insurance coverage for that state.  The issue raised the question of how workers’ compensation incidental and/or temporary coverage should be interpreted by states.  For example, it was mentioned during the meeting that, in such situations, jurisdictions often do not seem to recognize which person should be responsible for providing the workers’ compensation coverage.  That is, it might not be the operator of the truck or the construction worker, but would be the employer.

 

Market Regulation and Consumer Affairs Committee

The Market Regulation and Consumer Affairs Committee met on August 16, 2010, during which it:

• Adopted revised Market Conduct Annual Statement (“MCAS”) Attestation Language, which companies will submit to states with the reporting of MCAS data
• Adopted revisions to the Antifraud Task Force’s Guidelines for State Insurance Regulators to the Violent Crime Control and Law Enforcement Act of 1994: 18 U.S.C. 1033 & 1034
• Considered a recommendation to update both the Life and Health Insurance Policy Language Simplification Model Act (#575) and Property and Casualty Insurance Policy Simplification Model Act (#730) for contacts and documents disseminated to consumers, other than disclosures.  It was agreed that these models necessitate a national standard.

The following also was discussed:

• State reporting requirements to the federal Healthcare Integrity and Protection Data Bank and National Practitioner Data Bank
• Monitoring of annuity sales issues
• Development of a white paper to address the use of social media in insurance

 

Retained Asset Account Working Group

The Retained Asset Account Working Group, a joint working group of the Life Insurance and Annuities Committee and Market Regulation and Consumer Affairs Committee, met on August 15, 2010 and discussed what disclosures are given to consumers, whether consumers understand settlement options and whether risk asset accounts are protected by state guaranty funds.

Antifraud Task Force

The Antifraud Task Force met on August 15, 2010, during which it discussed the proposed Antifraud Plan Guidelines, which will be held open for comment until September 10.  NAIC’s assignment from the Patient Protection and Affordable Care Act’s section 6603 to develop a Uniform Fraud and Abuse Reporting Form also was discussed.  The Task Force decided not to make any changes to the existing NAIC Online Fraud Reporting System reporting form until it receives further clarification from the U.S. HHS Secretary.   Comments on Limited Medical Benefit Plans, their utility and related fraudulent schemes will be accepted through September 10, after which a roadmap for the future on this topic will be created and discussions continued.

 

Financial Condition Committee

The Financial Condition Committee met on August 16, 2010, during which it adopted a modified mortgage experience adjustment factor for the 2010 and 2011 life risk-based capital (“RBC”) formula; modified underwriting factors for many lines of business for the property and casualty RBC formula.  The revised Insurance Holding Company System Regulatory Act (#440) and Holding Company System Model Regulation with Reporting Forms (#450) also were adopted.  The Committee will proceed on model law requests that allow for a reduction in the minimum trusteed surplus requirement for a multi-beneficiary trust maintained by an assuming insurer in runoff.  Discussions also will begin on amending the NAIC models on reinsurance credit-Credit for Reinsurance Model Act (#785) and Credit for Reinsurance Model Regulation (#786)-to incorporate key elements of the Reinsurance Regulatory Modernization Framework Proposal.

 

NAIC/AICPA Working Group

The NAIC/AICPA Working Group met on August 15, 2010, during which it:

• Discussed a draft blanks proposal and counterproposal based on new disclosure requirements from the U.S. Securities and Exchange Commission relating to board risk management and executive compensation
• Discussed a proposed interrogatory on audit committee independence.  It was agreed to not pursue an interrogatory requiring the insurer to provide information regarding the compilation of its audit committees, but to instead encourage financial analysts and examiners to verify compliance with audit committee requirements through direct inquiry of the insurer as deemed appropriate.
• Reviewed the premium thresholds contained within the Annual Financial Reporting Model Regulation (#205) and concluded that no adjustments to them are necessary at this time
• Offered a 45-day comment period on proposed changes to the example management reports in the Implementation Guide, including guidance for foreign filers and additions to the addendum

 

Accounting Practices and Procedures Task Force

The Accounting Practices and Procedures Task Force met on August 15, 2010, during which it:

• Nullified INT 00-23
• Rejected guidance on multiple deliverable revenue arrangements and a related prior interpretation, INT 04-18
• Rejected guidance on distributions of stock and cash
• Agreed broader issues regarding accounting for state pools need to be reviewed
• Offered the opportunity to comment on a tentative rejection of guidance on split dollar life insurance arrangements
• Directed NAIC staff to develop an illustration on intercompany pooling for March 2011 discussion

The Statutory Accounting Principles Working Group took the following actions:

• Rejected ASU 2010-10, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements and ASU 2010-03, Extractive Activities – Oil and Gas
• Adopted a minor clarification on recoverability testing for properties occupied by a company
• Adopted new and revised fair value disclosures and defined recurring or nonrecurring fair value measurements 

The following documents have been offered for comment (due by September 16):

• Revisions to incorporate all guidance regarding “software” in SSAP No. 16 R
• Revisions regarding Guarantor’s Accounting and Disclosure Requirements for Guarantees
• Changes to Issue Paper No. 143-Prospective-Based Guaranty Fund Assessments and SSAP No. 35R-Guaranty Fund and Other Assessments
• A policy statement on coordination with Valuation Manual and referred corresponding changes to the Life and Health Actuarial Task Force
• Draft SSAP-Accounting for Pensions and SSAP No. 92-Accounting for Postretirement Benefits Other Than Pensions 
• A one-year extension of the sunset clause in SSAP No. 10R-Income Taxes and additional disclosures
• Clarifications to the definition of loan backed and structured securities.
• Expansion of the fund demand withdrawal disclosures
• Minor terminology changes to the derivatives guidance
• Revisions to move 100 percent superseded SSAPs and interpretations to a new Appendix H
• Rejection of  ASU 2010-16, Accruals for Casino Jackpot Liabilities

The Statutory Accounting Principles Working Group took the following additional actions:

• Began its examination of the use of changes in NAIC designations for IMR/AVR (Interest Maintenance Reserve/Asset Valuation Reserve)
• Received information on the International Accounting Standards Board (“IASB”) exposure draft for the accounting of insurance contracts, which is open for comment until November 30.  The International Association of Insurance Supervisors (“IAIS”) Insurance Contracts Subcommittee is scheduled to meet on September 28-30 in Kansas City, Missouri.   A joint meeting with the International Accounting Standards Working Group will occur on October 18, in conjunction with the Fall National Meeting, to finalize the NAIC comment letter response.

 

Emerging Accounting Issues Working Group

The Emerging Accounting Issues Working Group met on August 14, 2010, during which it adopted as final revisions to several interpretations to ensure that quoted SSAP guidance within the interpretations reflect the SSAP guidance provided in the As of March 2010 Accounting Practices and Procedures Manual.  The adopted revisions also included notation within INT 00-03 to identify that the included 2001 financial statement illustration will not be updated, as well as the nullification of INT 00-23, as the guidance within that interpretation was previously included within SSAP No. 61-Life, Deposit-Type and Accident and Health Reinsurance.

Interpretations revised:

• INT 00-02, Accounting for Leveraged Leases Involving Commercial Airplanes Under SSAP No. 22-Leases
• INT 00-03, Illustration of the Accounting/Reporting of Deposit-Type Contracts in Accordance with SSAPs No. 51, 52 and 56 
• INT 00-23, Reinsurance of Deposit-Type Contracts
• INT 01-28, Margin for Adverse Deviation in Claim Reserve
• INT 01-29, SSAP No. 59 and Application of Credit Life
• INT 03-02, Modification to an Existing Intercompany Pooling Arrangement
• INT 04-01, Applicability of New GAAP Disclosures Prior to NAIC Consideration
• INT 04-02, Surplus Notes Issued by Entities Under Regulatory Action
• INT 06-02, Accounting and Reporting for Investments in a Certified Capital Company (CAPCO)
• INT 07-01, Application of the Scientific (constant yield) Method in Situations of Reverse Amortization

Also adopted as final was the reference inclusion of ASU 2009-13, Revenue Recognition: Multiple-Deliverable Revenue Arrangements (ASU 2009-13) and ASU 2010-01, Equity: Accounting for Distributions to Shareholders with Components of Stock and Cash (ASU 2010-01) within INT 99-00: Compilation of Rejected EITFs (INT 99-00), as these GAAP updates are not applicable for statutory accounting.  Pursuant to the decision regarding ASU 2009-13, the Working Group also adopted as final the nullification of INT 04-18: EITF 00-21: Revenue Arrangements with Multiple Deliverables (INT 04-18), since this interpretation was previously adopted from GAAP guidance revised with the issuance of ASU 2009-13.

A tentative interpretation of INT 10-01: North Carolina Coastal Plan (INT 10-01T) was referred to the Statutory Accounting Principles Working Group in regard to broader issues related to accounting for state pools and assessments.

The Connecticut Insurance Department requested an accounting and reporting illustration for intercompany pooling transactions.  A proposed illustration will be prepared for presentation in March 2011.  

 

Statutory Accounting Principles Working Group

The Statutory Accounting Principles Working Group met on August 14, 2010, during which it adopted the following items:

• SSAP No. 9-Subsequent Events (SSAP No. 9) (Ref # 2010-07, ASU 2010-09)
  SSAP No. 9 was revised to reject ASU 2010-10, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements as not applicable to statutory accounting.   

• SSAP No. 90-Accounting for the Impairment or Disposal of Real Estate Investments (SSAP No. 90) (Ref # 2010-02, Clarification of SSAP No. 90, paragraph 6)
  SSAP No. 90 was revised to clarify that if any of the criteria listed in paragraph 6 are met; properties occupied by the company are subject to recoverability testing.  

• SSAP No. 100-Fair Value Measurements (SSAP No. 100) (Ref # 2010-05, ASU 2010-06)
  SSAP No. 100 was revised on the adoption, with modification, of new and revised disclosures from ASU 2010-06, Fair Value Measurements and Disclosures – Improving Disclosures About Fair Value Measurements.   Revisions to SSAP No. 100 specific to statutory accounting to clarify which fair value measurements are considered recurring or nonrecurring and a wording clarification were also adopted.

• Issue Paper No. 99-Nonapplicable GAAP Pronouncements (Issue Paper No. 99) (Ref # 2010-03, ASU 2010-03)
  Issue Paper No. 99 rejecting ASU 2010-03, Extractive Activities – Oil and Gas was revised to designate it as not applicable to statutory accounting.

The following substantive revisions to statutory accounting guidance were offered for comment:

• SSAP No. 5R-Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R), and SSAP No. 25-Accounting for and Disclosures about Transactions with Affiliates and Other Related Parties  (SSAP No. 25) (Ref # 2003-12, FIN 45)
  Revisions to SSAP No. 5R as discussed during the meeting. SSAP No. 25 was re-exposed, as the revisions to that SSAP correspond to SSAP No. 5R, but has not been revised from the previous exposure. NAIC Staff conducted research and held discussions with interested parties, representatives of the American Institute of Certified Public Accountants (AICPA) and Working Group members to further evaluate issues from previous exposures.  The Working Group did not elect to alter the previously exposed guidance regarding the offset to the liability recognized at inception or the guidance for recognizing a contingent liability.  A revised effective date for SSAP No. 5R of December 31, 2011, was included in the exposure.

• SSAP No. 16R-Electronic Data Processing Equipment and Accounting for Software (SSAP No. 16R) (Ref # 2010-03, ASU 2009-14)
  Revisions to incorporate all guidance on software included within other SSAPs. This is considered a substantive change inasmuch as SSAPs are proposed to be superseded; however, as the changes are placement revisions and not the adoption of new concepts, an issue paper is not considered necessary. In accordance with these revisions, guidance from ASU 2010-14, Certain Revenue Arrangements That Include Software Elements is proposed for adoption as a non-substantive change.

• Issue Paper No. 143, Prospective-Based Guaranty Fund Assessments (Issue Paper No. 143) and SSAP No. 35R-Guaranty Fund and Other Assessments (SSAP No. 35R) (Ref # 2006-14, Modify SSAP No. 35 for Property and Casualty Assessments)
  Revisions to Issue Paper No. 143 and SSAP No. 35R, which primarily propose the elimination of the non-admitted classification for receivable assets derived from accrued guaranty fund assessments and transition guidance for assets once the standard becomes effective.

• Draft SSAP-Accounting for Pensions and SSAP No. 92-Accounting for Postretirement Benefits Other Than Pensions  (Draft Pension SSAP and SSAP No. 92) (Ref # 2006-30, FAS 158)
  Offered draft SSAPs for pensions and other postretirement benefits with revised transition guidance. These draft SSAPs propose adoption, with modification, of FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R) and other related GAAP guidance. In accordance with the initiative to adopt SSAPs in chronological order, the draft SSAP for pensions will be assigned a number on adoption.  The comment deadline is extended to October 1, 2010.

The following non-substantive revisions to statutory accounting guidance were offered for comment:

• SSAP No. 10R-Income Taxes (SSAP No. 10R) (Ref # 2010-09, DTA Admission – SSAP No. 10R Analysis)
  Additional disclosures on tax planning strategies were included for a two-week comment period ending August 27, 2010.

• SSAP No. 43R-Loan-Backed and Structured Securities (SSAP No. 43R) (Ref # 2010-12, Clarify Definitions of Loan-Backed and Structured Securities)
  Revisions were offered to clarify the definitions of loan-backed and structured securities.

• SSAP No. 51-Life Contracts, (SSAP No. 51), SSAP No. 52-Deposit-Type Contracts (SSAP No. 52),and SSAP No. 61-Life, Deposit-Type and Accident and Health Reinsurance (SSAP No. 61) (Ref # 2010-15: Expand Withdrawal Disclosures)
  Revisions were added to expand disclosures to include categories for general accounts, separate accounts and more descriptive totals.

• SSAP No. 86-Accounting for Derivative Instruments and Hedging Activities (SSAP No. 86) (Ref # 2010-13, ASU 2010-08)
  Revisions were offered to change “hedged items” to reflect “related financial assets or liabilities,” as well as to incorporate guidance in paragraph 55 on what guidance has been adopted from ASU 2010-08, Technical Corrections to Various Topics.  With the exception of the revisions to SSAP No. 86, the Working Group did not make other revisions were in response to ASU 2010-08, Technical Corrections to Various Topics.

• Policy Statement on Coordination with Valuation Manual (Ref # 2010-08)
  Revisions were offered to the proposed policy statement on coordination with the Valuation Manual planned for inclusion within Appendix F of the Accounting Practices and Procedures Manual.  A referral will be sent to the Life and Health Actuarial Task Force to incorporate corresponding revisions in the Valuation Manual.

• 2010-11: Superseded Items within the NAIC Accounting Practices and Procedures Manual(Ref # 2010-11)
  Revisions were proposed that would incorporate a process to remove 100 percent of the superseded SSAPs and interpretations from Volume I of the Manual and include these items within a new Appendix H in Volume III.

• Issue Paper No. 99-Nonapplicable GAAP (Issue Paper No. 99) (Ref # 2010-14, ASU 2010-16)
  Revisions to Issue Paper No. 99 were offered that would reject ASU 2010-16, Accruals for Casino Jackpot Liabilities as not applicable for statutory accounting. 

Additional actions and discussions:

• 2010-10: ASU 2010-15, How Investments Held Through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments

• Rating Agency Working Group / Financial Condition Committee Referral
  Analysis will be done on whether it is appropriate to continue using changes in NAIC designations that determine if realized gains or losses are to be classified as interest rate gains or losses.

• Insurance Contracts Project
  The International Accounting Standards Board draft for the accounting of insurance contracts proposes a single International Financial Reporting Standard that all insurers, in all jurisdictions, could apply to all contract types on a consistent basis. The draft is open for comment until November 30, 2010. 

 

Capital Adequacy Task Force

The Capital Adequacy Task Force met on August 15, 2010, during which it:

• Released the Derivatives Risk Mitigation Proposal from the American Council of Life Insurers (“ACLI”) for comment.  The proposal included both the simple and intermediate hedges but was structured so that the intermediate hedges could easily be eliminated. 
• Discussed an ACLI long-term proposal for the RBC treatment of mortgage loans. The ACLI had contacted vendors for modeling the mortgage loan data to determine factors and categories.  It will subsequently provide a public document on the modeling, while the Working Group will consult other experts to decide if a public call is needed before giving guidance on the modeling.
• After lengthy debate, reviewed that the Property Risk-Based Capital Working Group adopted updated underwriting risk factors with a five percent cap.  The annual update of industry average factors for premiums and reserves was also adopted.
• Requested the drafting of a survey to states to get opinions on whether there should be a model act for Fraternal RBC.  A resource plan also was requested to be completed that would capture the Fraternal RBC data on the NAIC database.
• Heard a presentation from Reinsurance Association of America on concerns with the current methodology for calculating the underwriting risk factors, especially for non-proportional reinsurance.  According to the presentation, the resulting capital requirements were felt to be significantly too high. It was determined that an evaluation would be made of how the underlying data is filtered.

 

Solvency Modernization Initiative RBC Subgroup

The Solvency Modernization Initiative RBC Subgroup met on August 14, 2010, during which it reviewed its mission of calibrating RBC.  Considerations included:

• Choosing a statistical safety level and time horizon
• Deciding whether the calibration would apply to authorized control level, company action level or both
• Whether a value or tail value should be used at risk measure 
• How to determine overall capital required from calibration of individual risk components
• Deciding whether to change the current covariance calculation to a correlation matrix or another method
• The RBC calculation needed to properly recognize diversification and risk mitigation
• Deciding to what extent a total balance sheet approach can be used, and how conservatively reserves can be quantified
• The extent to which changes in statutory accounting would impact calibration activities
• The extent to identify missing risks and add asset risk granularity to the RBC formula

Whether a calibration should be selected, or whether the effect of a variety of calibrations should be observed was discussed, along with whether rating agency ratings could be a starting point.  Key risks for each business type will be evaluated, while the appropriate timeframe may depend on the type of company.  It was discussed that a total balance sheet approach would likely need to be accomplished using modeling, which is considered to be the best way to capture the risk profile of a company.  However, this method is also very complex and not suited for small companies.  Legally binding calculation was suggested as a potential additional regulator tool beyond RBC.  Reducing the amount of RBC maintenance being done while the solvency modernization project was underway was suggested.  Possible assessment of current RBC calculation and an examination of historical insolvency rates was mentioned.

 

Examination Oversight Task Force

The Examination Oversight Task Force met on August 15, 2010, during which it discussed a state survey on progress toward adopting the revised Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition (#385).  The survey indicated that 12 states have completed the process to adopt the 2008 model revisions.  A new examination coordination framework for inclusion in the NAIC Financial Condition Examiners Handbook was adopted and recommended examiner compensation rates for 2011 were discussed.

 

Receivership and Insolvency Task Force

The Receivership and Insolvency Task Force met on August 15, 2010, during which it:

• Discussed state activity with the recently revised Life and Health Insurance Guaranty Association Model Act (#520) and the Property and Casualty Insurance Guaranty Association Model Act (#540)
• Received an update on statutory accounting revisions regarding guaranty fund assessments and discussed the identification of any guaranty fund issues related to separate account products and guarantees. The Receivership Consideration for Separate Accounts Working Group was created and will be chaired by Jim Mumford (IA).
• Heard a report on enhancements to the Global Receivership Information Database (“GRID”) and the posting of several Uniform Data Standards records on the Receivership and Insolvency Task Force’s Web site as resources for receivers.  States are now utilizing hyperlinks from their own Web sites to direct consumers to the NAIC GRID Public Access Web site in order to reduce resource burdens.
• Discussed a continued review of solutions to address concerns with the timing and collection of reinsurance recoverables held by insurers in receivership.  To do so, the Task Force created a new Receivership Reinsurance Recoverables Working Group to be chaired by Commissioner Karen Weldin Stewart (DE).

 

Reinsurance Task Force

The Reinsurance Task Force met on August 16, 2010, during which it:

• Offered for comment a draft on recommendations on key elements of the Reinsurance Regulatory Framework to be considered for the NAIC Accreditation Program
• Resolved to begin discussions on amending the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786) to incorporate key elements of the Reinsurance Regulatory Modernization Framework
• Heard an update on model law development for the Tawa Proposal and the incorporation of key elements of the Reinsurance Regulatory Modernization Framework Proposal.  Subsequently approved by the Financial Condition Committee the same day, the Tawa Proposal would amend the Credit for Insurance Model Act (#785) and Credit for Insurance Model Regulation (#786) to potentially reduce the trusteed surplus requirement for a multiple-beneficiary trust maintained for reinsurance collateral purposes by an assuming insurer in run-off.
• Heard a report on IAIS reinsurance-related activities that included an assessment of macroprudential surveillance activities; the Global Reinsurance Market Report Mid-Year Edition 2010; the draft IAIS Insurance Core Principle 13 / Standards / Guidance on Reinsurance and Other Forms of Risk Transfer; and contract certainty with respect to reinsurance agreements
• Heard an update on the Hague Convention on Choice of Court Agreements and the Uniform International Choice of Court Agreements Act, both of which are currently being developed by a drafting group of the National Conference of Commissioners on Uniform State Laws 

 

Risk Retention Group Task Force

The Risk Retention Group Task Force met August 14, 2010, during which it:

• Heard an update on the possible development of a capital adequacy standard regulatory tool that would be applicable to captive risk retention groups (“RRGs”).  As a result of this presentation, proposed updates to the Part A Capital and Surplus standard were developed, along with an additional accreditation interlineation regarding the applicability of RBC to captive RRGs.  This would allow the domestic regulator of an RRG to elect not to take regulatory action as detailed in Sections 3-6 of the Risk-Based Capital for Insurers Model Act (#312) in defined instances (i.e., when an RRG’s members and/or sponsoring organizations are well-capitalized entities whose financial condition and support for that RRG can be adequately established).  However, the domestic regulator of the RRG must, at a minimum, require the filing of annual audited financial statements of the members/sponsors in order to establish the financial ability of the members/sponsors’ support of the RRG.  A second alternative for this interlineation was proposed by Vermont.  This option would again allow the domestic regulator the option of not taking regulatory action against an RRG should an RBC action level occur as a result of certain conditions.  For example, one of the conditions is material reinsurance arrangements that meet the Task Force’s reinsurance guidelines and have been approved by the domestic regulator.   In addition, recommendations for additions to the RBC instructions regarding captive RRGs have been proposed, along with a recommendation that an additional guideline be included in the Part B-2: Financial Analysis accreditation standards applicable to captive RRGs.  This additional guideline would require a domestic regulator to provide documented notification to other states when an election is made not to take regulatory action when an RBC action level is triggered by an RRG.
• Discussed consideration of exemption for certain RRGs from performing all phases of a risk-focused examination (“RFE”) in instances where conducting a RFE would result in no additional measurable benefit.  After some discussion, a subgroup chaired by the District of Columbia was formed to consider this issue in greater depth. 

 

Valuation of Securities Task Force

The Valuation of Securities Task Force met on August 15, 2010, during which it:

• Corrected the minutes of the Task Force’s Spring National Meeting which had incorrectly reported that a security not modeled, but rated by all NAIC AROs at AAA/Aaa would be presumed to have zero loss.  The decision of the Task Force was that a security not modeled, but rated at the NAIC 1 Designation equivalent would be presumed to have zero loss, and thus that designation would not change regardless of the carrying value under the modified FE Rule.
• Discussed an amendment to the Purposes and Procedures Manual to modify the text of the List of Securities Backed by the Full Faith and Credit of the United States (“the List”).  The List is used to identify investments that are exempt from asset valuation reserves and RBC.   It also serves as guidance for the mutual fund exemption lists. The amendment would clarify the purpose and use of the List.
• Considered an amendment to the Purposes and Procedures Manual to clarify the scope of a policy that prohibits insurance companies from using Standard Valuation Office-(“SVO”) assigned NAIC designations as triggers to modify economic terms in private agreements.  The adopted language includes a requirement that companies certify that transactions submitted to the SVO do not contain ratings triggers.  It also grandfathers any existing agreements that refer to changes in RBC as the basis for a rating trigger covenant.  The adopted text delays the effective date of the new text to assist industry to transition to the new Rule.
• Considered an amendment to the Purposes and Procedures Manual to clarify that residential mortgage backed securities (“RMBS”) and commercial mortgage backed securities (“CMBS”) that are subject to financial modeling are no longer eligible for the general filing exemption, but also do not have to be filed with the SVO.

The following items were released for comment:  

• A proposed amendment to the Purposes and Procedures Manual to modernize instructions for structured transactions.  The amendment describes the methodology applicable to RMBS and creates a framework for CMBS and asset-backed securities (“ABS”), retains existing instructions for securities whose cash flow derives from pools of obligations where an Nationally Recognized Statistical Rating Organization (“NRSRO”) rated entity guarantees or insures and identifies other populations of securities assigned to the SVO structured transactions group and the applicable procedures. 

• A proposed amendment to the Purposes and Procedures Manual to add a filing exemption for Certificates of Deposit (“CDs”) issued by rated banks.  Statutory Accounting guidance provides that CDs with a fixed schedule of payments and a maturity date in excess of one year from the date of acquisition are bonds. These CDs are therefore required to be filed with the SVO, however, filing is cost-prohibitive.  The proposed amendment would permit insurers not to file CDs with the SVO when the issuing bank is Acceptable Rating Organizations (“ARO”) rated

• A staff report on FDIC Authority to Guarantee Bonds and the Nature of those Guarantees.  The report raises the issue of whether a small class of structured securities should be granted a filing exemption on the basis that they are guaranteed by the FDIC.  The securities in question are private, unrated structured securities, are issued by a trust, are collateralized by assets sold by the FDIC to the trust and acquired by the FDIC as part of the receivership process for failed banks.  The applicable statute confirms that the FDIC guarantee is backed by the full faith and credit of the United States, but it also limits the amount of obligations the FDIC can create, thus implying that Congress intended to limit the FDIC’s ability to bind the full faith and credit of the United States to an ascertainable amount.

• A proposal to examine approaches to permit insurance companies that own foreign securities held in support of foreign obligations but who are not eligible for the Subparagraph D filing exemption to obtain NAIC Designations for those securities.  Subparagraph D is a filing exemption for foreign securities held by a domestic insurer that holds the securities in support of foreign liabilities and which derives U.S. gross premiums no greater than 20 percent of its gross worldwide premiums.  AFLAC has indicated that a number of NRSROs have withdrawn ratings assigned to its foreign securities, which has required AFLAC to file the affected securities as NAIC 5*.  The Task Force wants to consider how the problem experienced by AFLAC can be addressed.

It was discussed that contingent capital securities had features in common both with hybrid securities and mandatory convertible securities and agreed that no decision is necessary at this time, because technical issues seem to have stalled further development of this asset type.  In particular, there is not yet any agreement on how to structure the events that trigger conversion from debt to equity.  NAIC Staff cautioned that the issue is broader than this specific security, because federal banking regulators are under pressure to recapitalize banks and have been directed by Congress to develop hybrid or contingent regulatory capital.  The SVO was directed to continue to monitor developments and report back to the Task Force.

A regulatory proposal was considered that would expand the duties of the SVO to include monitoring insurance company compliance with filing requirements. The Task Force agreed to form a subgroup to study the issue and develop applicable procedures and to consult with the Chief Examiner’s Forum to obtain input and advice.    

It was further discussed that, as a result of a new reluctance by NRSRO analysts to discuss the rating logic for securities rated via private rating letter, the SVO would no longer be able to assign NAIC Designations to them in the Valuation of Securities database.  As an accommodation to the industry, if and when presented with a rating letter on the letterhead of the NAIC ARO confirming that a private security was rated and monitored, and after examining the nature of the security and the logic supporting the rating, the SVO would it in the Valuation of Securities Database.  This procedure has caused the private security to appear on NAIC systems as a rated security.  In view of a change in rating agency policy, the SVO intends to suspend this practice.

 

Financial Standards and Accreditation Committee

The Financial Regulation Standards and Accreditation Committee met on August 14, 2010, during which it adopted significant 2009 revisions to the Financial Condition Examiners Handbook­­ (“Examiners Handbook”).  These consisted of a new set of 18 examination repositories that were created for examiner use and the new information technology (“IT”) review process to correspond to the risk-focused surveillance approach to financial examinations. The revisions had been released for a 30-day period; however, no comment letters were received.

The Committee voted to release 2009 revisions to the Standard Valuation Law (#820) for a one-year comment period beginning January 1, 2011.  Major revisions to the law relate to authorizing the use of a valuation manual, as well as authorizing a principles-based reserve basis for those policies and contracts specified in the valuation manual. The Life and Health Actuarial Task Force recommends that sections 3A, 3B, 4, 11, 12 and 14 be considered significant elements. These revisions had been released for a preliminary 30-day period; however, no comment letters were received.

Proposed recommendations from the Risk Retention Group Task Force were adopted that suggested clarifications on the Reinsurance Ceded Part A standards RRGs effective January 1, 2011.

The following documents were released for a 30-day comment period:

• Proposed revisions to certain Part A standards applicable to captive RRGs
• The Risk-Based Capital for Health Organizations Model Act (#315) as a possible accreditation standard
• Proposed revisions to the second guideline under the Part B: Financial Analysis “Appropriate Depth of Review”. These revisions are being proposed to include the correct financial solvency tool titles and to require the analysis of a domestic insurer’s Actuarial Opinion Summary (“AOS”). The Property and Casualty Actuarial Opinion Model Law (#745) became an accreditation standard effective January 1, 2010. Model #745 requires an insurer to annually file with its domiciliary regulator an AOS. The Financial Analysis Handbook checklists now include guidance on analyzing the AOS and states will require submission of this filing beginning January 1, 2011.

Also proposed was a review of the new “Part D” standards related to Form A filings, followed by making any appropriate updates to the Form A Checklist that is currently included in the Financial Analysis Handbooks.  This is in conjunction with the Committee’s prior adoption of the Part D standards related to company licensing and change in control of domestic insurers.  Two of the Part D standards are entitled “Scope of Procedures for Form A Filings” and “Use of the Form A Database.”

Released for a 30-day comment period were proposed revisions to one of the Part B: “Scheduling of Examinations” guidelines for the purpose of removing the distinction between multi-state and zone examinations in the Examiners Handbook.  The NAIC’s association “zone” examination concept was originally intended to promote coordination between states in conducting financial examinations.  However, changes in the exam environment and difficulties in administering the zone exam process through the NAIC Examination Tracking System necessitated changes to the Examiners Handbook. The revisions made to the Examiners Handbook remove all references to the “zone examination” concept and replace that with language discussing “multi-state” examinations.  As such, all multi-state examinations would now be required to be called via the NAIC Examination Tracking System for accreditation purposes.

Revisions on seven recommendations proposed as a result of a formal validation study on which current accreditation standards and review team guidelines are valid measures of acceptable performance in financial regulation were released for a 30-day comment period.   A review of the current accreditation guidance related to risk-focused examinations was part of the study.

The Committee also accepted a referral from the Group Solvency Issues Working Group on proposed revisions to the Part B:  “Appropriate Depth of Review” and “Documented Analysis Procedures” standards.  These revisions relate to enhancing group-wide supervision and analysis of holding company filings (e.g., Forms A, B, C, D, E and external filings such as SEC or IFRS filings) where applicable.  The Committee voted to release the proposed revisions for a 30-day comment period. 

 

NAIC/Consumer Liaison Committee

The NAIC/Consumer Liaison Committee met on August 15, 2010, during which it heard presentations on residual markets (which included general principles for state regulators who have growing insurance pools) and the impact of recent reinsurance rate increases on consumers.  Another presentation was given on insurance contract readability, which focused on the differences in the types of coverage provided by homeowners insurance policies that consumers are not aware of because the policy contract is difficult to read and understand.