NAIC Winter 2009 National Meeting Summary

The National Association of Insurance Commissioners (“NAIC”) held its Winter 2009 National Meeting during early December in San Francisco.  A systemic risk panel/solvency symposium, the adoption of changes to the Statement of Statutory Accounting Principles (“SSAP”) No. 10-Income Taxes and the consideration of alternative options for troubled insurers were among the highlights of the four-day event.

Selected action items from the various meetings are listed below. 

To view an NAIC meeting matrix (includes summaries, complete minutes and meeting materials via hyperlink), click here.  All meetings took place during the time period of December 4-8 unless otherwise noted.

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

 

Executive Committee

• A Title Insurance Task Force and a Market Information Systems Task Force was created.
• The Financial Condition Committee will assist the U.S. Department of the Treasury’s Financial Crimes Enforcement Network with anti-money laundering examinations.
• A model law development request for a Risk-Based Capital (“RBC”) for Fraternal Benefit Societies Model Act was approved. 

 

Military Sales Working Group

• In 2006, 48 jurisdictions signed a multi-state regulatory settlement agreement with American-Amicable Life Insurance Company of Texas and its two affiliates, Pioneer American Insurance Company and Pioneer Security Life Insurance Company, which were involved in the improper sale of insurance and investment products to U.S. military service members. The settlement required these companies to provide $70 million in immediate cash refunds and increased policy benefits to approximately 92,000 policyholders.
• To help locate service members who have left the military, or those individuals whose policies have lapsed and have not received cash refunds due to them, a search tool has been added to www.naic.org through which individuals can conduct an online search to identify whether they are entitled to restitution.
• Throughout 2009, the Working Group has monitored the marketplace for inappropriate sales activities to military service members. In a May 2009 report titled “Insurance Sales to Military Personnel: Additional Actions Needed to Prevent Improper Life Insurance Sales and Pay Allotment Transactions,” a review of state insurance regulator surveillance and US Department of Defense (“DoD”) oversight over unsuitable insurance products and inappropriate sales practices directed at military service members was made. The Government Accountability Office (“GAO”) recommended that the DoD and the NAIC work together to promote and improve the sharing of information available on enforcement actions taken against insurers and agents. The NAIC has finalized a report to share with the DoD regarding inappropriate insurance marketing and sales activities to military service members reported to the following NAIC databases: the Regulatory Information Retrieval System, the Special Activities Database and the Complaints Database System. Model Regulation Adoption.  As of December 1, the Military Sales Model Regulation (#568) has been adopted in 50 jurisdictions.

 

Producer Licensing Task Force

• Simplification of the business entity licensing process through the elimination of licensing business entities by line of authority and the appointment process was discussed.
• The National Association of Registered Agents and Brokers Working Group, which is in the process of evaluating continuing compliance of states with producer licensing reciprocity requirements subject to the Gramm-Leach-Bliley Act, has received and posted 12 state reciprocity checklists to date.
• A working definition of the “ancillary line of authority” was reviewed and further direction given to develop licensing requirements appropriate for the term “ancillary line of authority,” as well as for “core limited lines.”
• Phase two of the Attachment Warehouse for the Reporting of Actions (“ROA”) was released on September 25, 2009.  The ROA was created to allow the producer an electronic capability to submit the document(s) associated with an administrative, criminal or civil action in order to satisfy the producer’s regulatory duty to report the action within 30 days to all jurisdictions in which the producer is actively licensed.

 

Producer Licensing Working Group

• The Federal Emergency Management Agency (“FEMA”) has offered assistance to state insurance departments on their advanced flood insurance training program. State insurance departments are being encouraged to ask their vendors to waive the fee for filing continuing education credits for National Flood Insurance Program (“NFIP”) training.  FEMA also asked for state insurance departments to consider giving special consideration to NFIP training-related issues.
• State insurance departments were encouraged to issue and promote the model bulletin for the NAIC/National Insurance Producer Registry Attachments Warehouse for ROA.
• The implementation date for the NAIC uniform application will be Jan. 29, 2010.

 

Solvency Modernization Initiatives Task Force

• A motion to form a Corporate Governance Working Group that would report to the Task Force was adopted. The Working Group will be charged with outlining high-level corporate governance principles and determining the appropriate methodology to require insurance company compliance with such principles (e.g., model law).
• The International Solvency Working Group released two documents for comment, with comments due by March 1, 2010:
  • Consultation paper on capital requirements and high-level accounting/valuation issues
  • Consultation paper on corporate governance and risk management
• The Group Solvency Issues Working Group released the documents below for comment, with comments due by January 15, 2010 for the International Association of Insurance Supervisors (“IAIS”) paper and January 29, 2010 for the other papers:
  • Insurance Holding Company System Model Act (#440)
  • Insurance Holding Company System Model Regulation (#450)
  • Holding Company Best Practices
  • Draft Memorandum discussing the concept and perspectives on group-wide supervision
  • IAIS Draft Guidance Paper on Treatment of Non-Regulated Entities in Group-wide Supervision
• The NAIC will be considering the future of statutory accounting, specifically regarding whether to continue to maintain codified statutory accounting or to utilize public accounting (International Financial Reporting Standards or U.S. General Purpose Financial Reporting) and add a secondary structure for regulatory adjustments.

 

Group Solvency Issues Working Group

• Possible enhancements to U.S. group supervision have been outlined in a draft memorandum that recommends a “windows and walls” approach for the regulation of U.S.-based insurers operating within corporate groups.  Enhancements to group supervision were recommended in the following areas: communication among regulators; supervisory colleges; access to and collection of information; enforcement measures; group capital assessment; and accreditation. The memorandum will be available for public comment through January 29, 2010.
• The Supervisory College and Methods of Cross-Border Communication Subgroup reviewed the procedures relative to states’ possible application and accession to the IAIS Multilateral Memorandum of Understanding on Cooperation and Information Exchange (“MOU”).  Development of a survey was recommended that would be forwarded to states for feedback on an initial assessment of their compliance with MOU provisions.
• A supervisory college tracking document is being developed that would enable the NAIC to monitor the U.S. state insurance department participation and attendance at supervisory colleges for U.S. insurers or groups engaged in insurance activity in multiple jurisdictions. The Subgroup released the tracking document for a 30-day comment period.

 

Climate Change and Global Warming Task Force

• An insurer Climate Risk Survey is being developed, along with a draft list of insurer groups (which were selected based on calendar year 2008 direct written premium) that will be required to submit the Climate Risk Survey in 2009. A notification letter for states to send to insurers will be included in the project.

 

International Solvency Working Group

• Released two documents for comment by March 1, 2010:
  • “Consultation Paper on Regulatory Capital Requirements and Overarching Accounting/Valuation Issues”
  • “Consultation Paper on Corporate Governance and Risk Management”

 

Principles-Based Reserving Working Group

• The Life and Health Actuarial Task Force adopted a Valuation Manual that includes five sections.  Work is nearing completion on other, more anticipated sections of the Manual, including VM-20, which is the principle-based valuation approach for life insurance products. While VM-20 currently contains a minimum reserve floor, work is being done by the American Council of Life Insurers (“ACLI”) on a net premium reserve that will serve as a formulaic floor in VM-20. The ACLI has indicated that it will present the details of this floor by January 1, 2010. The Valuation Manual completion date will be extended to no later than August 2010 in order to wait until VM-20 and VM-25 are complete, prior to sending the amendments to the Standard Valuation Law (#820) and Valuation Manual to state legislatures.

 

Internal Administration Subcommittee

• A meeting with NAIC’s independent accountant regarding the scope and plan for the 2009 audit included the following:
  • In relation to health reform legislation, agreement on the need to (1) preserve state review of health insurance rates and (2) collect industry data for enhanced evaluation of market conduct and trends.
• In regard to the NAIC’s modeling and assessment process for non-agency residential mortgage-backed securities (“RMBS”), the assumptions to be used in the RMBS modeling process were adopted on December 2.  A $4.6 million assessment was billed to those 1,621 insurers investing in RMBS.  Details of the project have been distributed to all NAIC members and chief financial regulators.

 

Information Systems Task Force

• A Producer Licensing Reengineering project will be completed by March 2010.
• Suggestions for session topics for the 2010 E-Reg Technology Exchange track were requested.  A proposed process and timeline for development of the NAIC 2010 State Technology Survey was discussed.

 

Life Insurance and Annuities Committee

• The Annuity Disclosure Working Group report was adopted and a one-year extension was granted to complete revisions to the Annuity Disclosure Model Regulation (#245). The most recent draft revisions of annuity illustration guidelines forwarded by American Academy of Actuaries and the ACLI yielded several issues for continued discussion the timeline for comment on all three guides was extended. Finalization is scheduled prior to the 2010 Spring National Meeting.
• Revisions to Actuarial Guideline XLIII-CARVM for Variable Annuities (AG 43) were adopted to add Section IV.G that defines reserves as of January 1, 2009. Appendix 8 was modified to add the required date for filing the management certification, the actuarial certification and the actuarial memorandum.  Additional time (until August 2010) to complete VM-20, the principle-based valuation approach for Life Insurance Products, and VM-25, which provides for a uniform valuation basis for health insurance, was granted prior to sending the amendments to the Standard Valuation Law (#820) and Valuation Manual to state legislatures.

 

Health Insurance and Managed Care Committee

• Four new appendices were added to the Uniform Health Carrier External Review Model Act (#76):
  • A model notice of appeal rights
  • A model external review request form
  • A model independent review organization external review annual report form
  • A model health carrier external review annual report form
• The Senior Issues Task Force reported on the Long-Term Care Partnership program, which now offers partnership policies available for sale in 31 states, with state plan amendments having been approved in five additional states.
• State implementation of revisions to the Model Regulation to Implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act (#651), as required by the federal Genetic Information Nondiscrimination Act (GINA) and the Medicare Improvements for Patients and Providers Act (MIPPA) was discussed. Forty-eight jurisdictions (including Puerto Rico and the District of Columbia) have adopted the revisions. Three states are waived from the federal requirement. One remaining state is moving quickly toward final adoption, pending approval from the state legislature.
• An NAIC Centers for Medicare and Medicaid Services (“CMS”) representative provided an update on Medicare supplement issues, saying that CMS apparently believes that while there is no federal authority to block Medicare supplement hospital network arrangements, states continue to have the authority to disapprove them. Additional guidance for state regulators is being considered. A report on Medicare private plan issues revealed that nonrenewal notices will be sent to 412,000 beneficiaries for Medicare Advantage and Medicare prescription drug plans who are not renewing their contracts for 2010.
• Modifications to the Actuarial Opinion section of the Health Annual Statement Instructions for 2010 were made. The Medicare Supplement Compliance Manual was also modified to state that similar Medicare supplement plans should be pooled for rating purposes.

 

Property and Casualty Insurance Committee

• A revision to Chapter 25 “Conducting the Advisory Organization Examination” of the Market Regulation Handbook was adopted.
• Public policy issues relating to regulatory exclusion in Directors’ and Officers’ (“D&O”) policies were discussed. Certain regulatory exclusions contained in D&O insurance policies pertain to receivers, conservators and liquidators.  Concern was expressed that the use of the exclusionary language would become more common and potentially hinder a receiver’s ability to exercise and enforce all the rights, remedies and powers of any insured, creditor, shareholder or member.  This would result in a limitation of the receiver’s ability to collect all monies due to pay claimants.  There is concern with the practice of D&O insurers including a regulatory exclusion in their policies.  The issue is whether the receiver, conservator, liquidator or state guaranty funds should be afforded coverage for acts of directors and officers of an insolvent insurer. There are financial implications for the public and all insurers through participation in guaranty funds.  A notice will be sent to every jurisdiction informing them of the issue, because each jurisdiction may want to disapprove existing forms.  Further discussion on including language not allowing such exclusions in the Insurers Receivership Model Act also will take place.
• A January conference call has been scheduled to consider a list of questions that will be used for a data call of all companies using credit-based insurance scores in all jurisdictions.  The results of the data call will be compiled and considered further, with the goal of providing legislatures with information and/or drafting a model law or guideline for jurisdictions that have not yet taken a position on the use of credit-based insurance scores.
• A report was given to the Committee on “takaful” insurance, which works on the principle that each participant needing protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund used to support one another, with each participant contributing sufficient amounts to cover expected claims. The objective of takaful is to pay a defined loss from a defined fund. The principles of takaful insurance are: policyholders cooperate among themselves for their common good; every policyholder pays a subscription to help those that need assistance; losses are divided and liabilities spread according to the community pooling system; uncertainty is eliminated in respect of subscription and compensation; and it does not derive advantage at the cost of others.
• The Council of Insurance Agents & Brokers (“Council”) and LexisNexis recently announced they are forming a partnership to build an insurance exchange.  The insurance exchange will automate the insurance intermediary and insurer distribution workflow.  Automation will enable access to key market information and analytics for better decision making.  The exchange allows brokers to see insurance product availability, pricing and coverage differences from multiple insurance carriers, which thereby enables them to place business that best matches their client needs.  The insurance exchange will initially concentrate on commercial lines.  All sizes and lines of property/casualty insurance will eventually be supported and other lines of business to be added thereafter.  A detailed and formal presentation will be made by the Council at an upcoming national meeting.

 

Advisory Organization Examination Oversight Working Group

• A draft MOU is being considered that will allow domestic regulators and lead state(s) to examine advisory organizations and statistical agents with one coordinated exam on an entity for all issues by all jurisdictions. Each of the participating jurisdictions would agree to accept the results from the examination when an examination is conducted.  The draft MOU was sent to all jurisdictions for review in October and is expected to be distributed by the NAIC Legal Division to all jurisdictions during December for signature.
• Plans are being discussed that would coordinate multi-state examinations of advisory organizations and statistical agents.

 

Catastrophe Insurance Working Group

• FEMA reported on the NFIP, which has been actively involved in training agents with online courses, webinars and instructor-led classes.  The NFIP is proving insurance departments with continuing education information for agents on an ongoing basis, but there are associated fees, which FEMA is asking to have waived. FEMA also would like to obtain current e-mail lists of active agents from insurance departments; have flood training included as a requirements in continuing education requirements and would like insurance departments to require advance flood training of all agents.

 

Crop Insurance Working Group

• States have made efforts to avoid federal preemption of crop adjuster licensing.  One of the problems with crop adjuster licensing is that most states require a crop adjuster to obtain a property/casualty license. As a result, there is no proficiency in handling crop insurance claims and a lack of uniformity exists across the states.  In addition, most states do not require the licensing of insurance company personnel.  The U.S. Congress, through the federal Risk Management Agency (“RMA”), could preempt the states’ licensing authority for adjusters handling Multi-Peril Crop Insurance(“MPCI”)on a state-by-state basis beginning as early as July 1, 2011.
• The NAIC previously surveyed all states to assess whether they could allow a third party to test crop adjusters to obtain a crop insurance license.  These results appear to indicate that as many as 14 states could be preempted.  NAIC staff and the Crop Insurance Working Group continue to work with the states to assist those that have questions or problems.  All 14 states plan to implement changes so that federal preemption will not occur.  To avoid preemption, some states are considering the following actions: exempt MPCI adjusters from licensure; exempt MPCI adjusters from examination if they provide proof of completing an RMA-certified program; allow for acceptance of an RMA-certified training and testing program; create a separate license for MPCI adjusters; and develop their own training and testing programs for MPCI licenses.
• The RMA recently released its first draft of the Standard Reinsurance Agreement for the 2011 crop year.  On December 1, 2009, the Crop Adjuster Proficiency Program (“CAPP”) was officially approved by the RMA director.
• The National Crop Insurance Services (“NCIS”) has seen substantial improvement in the uniformity of adjuster licensing and training through CAPP.  The program consists of three parts: 1) 60 hours of initial training and 18 hours annually of company level training; 2) a series of three CAPP online examinations. Once someone has completed the exams, a proficiency card is issued that would be accepted by state insurance departments for licensing; and 3) the annual continuing education requirements of 18 hours of training.
• The NCIS will communicate with insurers about adjusters who have failed to meet the annual requirements. To date, nearly 3,800 adjusters have passed the examination, with approximately 30 adjusters passing on a daily basis. Beginning February 2010, all CAPP examinations will be proctored.

 

Title Insurance Issues Working Group

• Results of a survey of state laws on the collection of title agent data and other information have been compiled and include information on states authorized to require data reporting from title companies and title agents, as well as states being authorized to require title insurers to obtain participants data and report it.  Currently, only eight states collect data on a regular basis and 19 states collect it on an ad hoc basis. Most states that collect data do not aggregate or compile the results.  Also, the survey listed states where data is kept confidential; which states’ data processes are regulated; their rate regulation method and applicable rate standards; the type of participants that are regulated and what duties each performs; where title plants are required; information on closing protection letters; information on escrow and trust accounts; and whether surety bonds are required.
• Creation of a uniform database of title agent data is being discussed, based on survey results indicating that 61 percent of states are authorized to require data reporting by title agents. The purpose and data elements of a uniform database of title agent data also will be considered as part of the database creation.
• American Land and Title Association (“ALTA”) recently decided to start charging title insurers and agents an annual copyright “licensing fee” to use (i.e., issue) their title policies and forms that were developed by ALTA if the title insurer or agent is not an ALTA member.  ALTA is not filing the forms with the insurance departments; it is still the responsibility of the user to file the form(s) as they wish.

 

Casualty Actuarial and Statistical Task Force

• The Catastrophe Modeling Handbook has been updated to reflect advancements in modeling that have occurred since the Handbook was originally created in 2001. Changes include the following:
  • Updated questions a regulator could consider when reviewing a company’s catastrophe model (Section VII)
  • Updated Appendices 11 (hurricane interrogatories) and 12 (earthquake interrogatories), each with two parts – Part A for an insurer or a rating organization and Part B for a modeler
  • A new Section VIII titled, “Regulatory Review and Acceptance” to discuss proprietary information
  • A new appendix to provide an annotated bibliography of resources available about catastrophe modeling
  • Additional terms and corresponding definitions to add to the Working Definitions Section in the Handbook (e.g., demand surge, shake intensity, dip slip faults)
• The cost and feasibility of creating a reporting system suitable for multiple states to receive the data required by the Medical Professional Liability Closed Claim Reporting Model Law (#77) will be studied.

 

Profitability Working Group

• Results of the Report on Profitability By Line By State in 2008 were reviewed by regulators, as was related feedback received from other states.  Discussions on expanding the lines of business reported within the Report are imminent, as well as an examination of the use of Premium Deficiency Reserves in the calculations.

 

Surplus Lines Task Force

• Several states are using the NAIC’s Online Premium Tax for Insurance (“OPTins”) for surplus lines purposes. OPTins, a tool that allows the submission and payment of premium tax filings is believed to have the potential to be more widely used in connection with the surplus lines brokerage market, as well as the domestic insurer market.
• The surplus lines license exemption survey, the result of a research request regarding the commercial lines multi-state exemption provision of the Producer Licensing Model Act as it relates to surplus lines, was created to gauge states’ opinions regarding a possible extension of the non-resident licensing exemption for multi-state risks to apply to surplus lines producers.

 

Workers’ Compensation Task Force

• Development of “Implementation Commentary,” a white paper to assist states in implementing the Guidelines for Regulations and Legislation on Workers’ Compensation Coverage for Professional Employer Organization Arrangements (“PEO Guidelines”) is considered to be important due to the complexity of the PEO Guidelines and the number of challenges regulators currently face pertaining to PEO matters.  The purpose of the draft is to assist states, professional employer organizations and the insurance industry with implementation of a regulatory framework consistent with the Guidelines for Regulations and Legislation on Workers’ Compensation Coverage for Professional Employer Organization Arrangements that was adopted by the NAIC in 2007.  The PEO Guidelines were designed to provide states with a regulatory framework for addressing the most significant workers’ compensation issues that have arisen to date in professional employer organization relationships, with an emphasis on a clear allocation of the respective rights and responsibilities of professional employer organizations, clients and insurers.  Comments on the draft should be submitted no later than February 26, 2010.
• The National Council on Compensation Insurance (“NCCI”) “State of the Line” workers’ compensation 2008 results, in addition to data indicating recent premium drivers, loss drivers and the condition of the workers’ compensation residual market shows that workers’ compensation medical losses are now more than half of 2008 preliminary total losses: (medical 58 percent; indemnity 42 percent)
• HR 635 is a federal bill that would authorize the creation of a National Commission on State Workers’ Compensation Laws.  A number of stakeholders have come forward in opposition to HR 635, including the American Insurance Association, National Association of Professional Insurance Agents, NCOIL, Property Casualty Insurers Association of America and U.S. Chamber of Commerce.  However, there are now 13 co-sponsors of the bill. The bill remains in the U.S. House Committee on Education and Labor.

 

NAIC/International Association of Industrial Accident Boards and Commissions Joint Working Group

• Evaluation is ongoing regarding whether a preferable method could be developed for assessing workers’ compensation large deductible premiums.  States currently base large deductible policy assessments on direct written premiums net of deductible and some states assess based on paid losses that then add back deductible losses.  A Working Group recommendation against the use of direct premiums net of deductible credits is expected.

 

Market Regulation and Consumer Affairs Committee

• The Committee voted to have all consumer complaints received from states posted on the Consumer Information Source. This issue will be discussed in more detail for final resolution in 2010.
• A new working group was formed to oversee the complaint coding project, complaint reconciliation project and a project to consider which complaint information is displayed on the Consumer Information Source.

 

Consumer Connections Working Group

• A public hearing on plain language in insurance contracts and readability will be scheduled in the Spring of 2010 and includes all lines of insurance.

 

Antifraud Task Force

• Written comments on the 1033 Guidelines must be submitted to the Task Force by Jan. 15, 2010, for a tentative conference call scheduled for January 20, 2010.
• Written comments on the Antifraud Plan Guidelines be submitted to the Task Force by Jan. 22, 2010, for a tentative conference call scheduled for January 27, 2010.
• The NAIC will host a public Antifraud Seminar in June 2010 at the NAIC Central Office in Kansas City. Training topic suggestions are being sought.

 

Financial Condition Committee

• A White Paper on Alternative Mechanisms for Troubled Companies and a proposal for the Modeling Process for RMBS to remain in effect for first quarter 2010 were both adopted.

 

Financial Analysis Working Group

• Presentations were given on nationally significant insurers and groups that are exhibiting characteristics of potentially troubled companies.

 

NAIC/AICPA Working Group

• An American Institute of Certified Public Accountants (“AICPA”) report discussed the Auditing Standards Board’s adoption of clarity drafting conventions to six Statements of Auditing Standards related to risk assessment.  The report also discussed new “Statements on Auditing Standards” that have recently been proposed in the areas of audit engagement letters and written representations to be obtained during an audit.
• A survey of states’ progress toward adopting the revised Model Audit Rule shows that 36 states have adopted the revised requirements. Of the remaining states, 13 plan on adopting all of the revisions prior to year-end, with the other two states completing adoption within the first few months of 2010.
• NAIC’s legal department issued an opinion regarding reliance on the Statement of Standards in Attestation Engagements No. 15 (“SSAE 15”) in relation to Model Audit Rule compliance requirements. SSAE 15 provides guidance for auditors in attesting to the effectiveness of a company’s internal controls. As long as an SSAE 15 report complies with and contains the same information that is required in the “Management’s Report of Internal Control over Financial Reporting” outlined in the Model, that the SSAE 15 report could be filed along with an addendum without adjusting the Model language. NAIC guidance to be included in its Implementation Guide will indicate that an SSAE 15 report may be filed with an addendum to comply with the Model Audit Rule requirements regarding Management’s Report of Internal Control over Financial Reporting.
• According to the NAIC legal department, revisions proposed by interested parties to FAQ #5 on audit partner rotation in the Implementation Guide would directly conflict with language included within the Model Audit Rule.  An alternate proposal was adopted to provide guidance for regulators to consider in granting waivers in this area.

 

National Treatment and Coordination Working Group

• Changes to the Form 13 Proformas for Property/Casualty, Life and Health and Title have been proposed to improve the analysis of an applicant’s capitalization, liquidity and expenses.
• Information has been gathered to draft a uniform form for Affidavit of Lost Certificate of Authority.
• Updates on the expansion and corporate amendment UCAA electronic pilot projects can be viewed by clicking here.

 

Rating Agency Working Group

• A final draft report previously released for a comment period ending Dec. 31 outlined the following:
  • The current policy of exclusive and uniform reliance on credit ratings by customizing how credit ratings are used to the specific regulatory use or asset class; i.e., corporate, municipal, structured securities and derivatives. The report also discussed replacing the use of credit ratings in the regulation of structured securities with alternative analytical risk assessment tools, perhaps by including an expansion of Securities Valuation Office (“SVO”) capabilities and responsibilities in this area.
  • Expansion of the use of risk assessment tools for regulators to include the role of the SVO in creating and managing those tools;
  • Replacement or modernization of the existing risk-based capital (“RBC”) formula and process. This is, perhaps, most urgent for structured securities, which have unique volatility and market risk characteristics not captured by the current RBC process (which relies on corporate historical default statistics).
  • Assignment of the SVO responsibility and provision of the necessary resources to monitor rating agencies’ activity and alert state insurance regulators to the need for regulatory intervention when rated instruments incorporate risk that might not be captured by the existing regulatory framework.

 

Accounting Practices and Procedures Task Force

The Statutory Accounting Principles Working Group took the following actions:

• SSAP No. 100-Fair Value Measurements
• SSAP No. 62R-Property and Casualty Reinsurance – Revised (SSAP No. 62R), which expands the exceptions for retroactive reinsurance to include property/casualty reinsurance run-off agreements that meet specified criteria. Although this is less conservative than other methods of accounting for retroactive reinsurance, there are several criteria, including commissioner approval, financial strength of the nonaffiliated assuming entity and unlimited transfer of risk, without the ability to cancel the contract
• Issue Paper No. 140-Substantive Revisions to SSAP No. 43, which provides a historical reference of the guidance superseded by SSAP No. 43R-Loan-backed and Structured Securities – Revised (SSAP No. 43R)
• Updating references to the new Financial Accounting Standards Board (“FASB”) codification and Generally Accepted Accounting Principles hierarchy

The following documents were offered for regulator and public comment: 

• Revisions regarding Guarantor’s Accounting and Disclosure Requirements for Guarantees
• Issue Paper No. 141-Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities on FAS 166, Accounting for Transfers of Financial Assets – an Amendment to FAS 140 (FAS 166). Revisions to statutory accounting reflected in Issue Paper No. 141 include the establishment of new conditions for when a transferred financial asset can be accounted for as a sale, as well as removal of the concept of a qualifying special-purpose entity.  In addition to exposing Issue Paper No. 141, the Working Group also formed a subgroup to review comments and assess the impact of adopting this guidance for statutory accounting.
• Issue Paper No. 142-Variable Interest Entities (Issue Paper No. 142), which proposes adoption with modification of FAS 167, Amendments to FASB Interpretation No. 46R (FAS 167) in a new SSAP to provide guidance on variable interest entities. The subgroup formed to review Issue Paper No. 141 will also be charged with reviewing this item.
• Revisions to the disclosures in SSAP No. 43R to clarify that some are only required for annual audited statutory financial statements with a two-week exposure period
• Revisions rejecting Accounting Standards Update 2009-02: Omnibus Update – Amendments to Various Topics for Technical Corrections (ASU 2009-02) ASU 2009-02 for statutory accounting.
• A proposal from the Securities Lending Subgroup, with a January 29, 2010 comment deadline

The Working Group took the following additional action:

• Formed a subgroup to review identified questions and establish answers to create a “Questions and Answer Implementation Guide” as an appendix to SSAP No. 43R.

 

Blanks Working Group

Action Items:

• Adopted the following blanks proposals that previously were exposed for comment as modified during the meeting:
  • 2009-33BWG – Add instructions to Schedule T, Details of Write-ins for Line 58, Other Alien, to clarify that the reporting entity should list the jurisdiction (country) for the write-in line description and make the instruction consistent for all statement types.
  • 2009-34BWG – Add instructions to Line 24 of the Asset page to include receivables for securities not received within 15 days of settlement date. Modify the “exclude” statement for Line 9 of the Asset page to clarify the exclusion of receivables for securities not received within 15 days of the settlement date
  • 2009-36BWG – Add line categories to Schedule S to group separately U.S. and non-U.S. insurers reported in the schedule. Modify the instructions for the Location column to indicate the use of postal code in the column to indicate domiciliary jurisdiction and change the column description from Location to Domiciliary Jurisdiction. Change Property and Title Schedule F Location Column description to be consistent with Life, Health and Fraternal and their respective annual statement schedules
  • 2009-37BWG – Modify instruction for IMR (Interest Maintenance Reserve) Line 2 and AVR (Asset Valuation Reserve) Line 2 with language for other than temporary impairments to reflect changes initiated by the adoption of SSAP No. 43 Revised-Loan-backed and Structured Securities which superseded the recently adopted SSAP No. 98-Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, an Amendment of SSAP No. 43–Loan-backed and Structured Securities. This proposal amends guidance recently adopted by proposal 2009-14 BWG.
• Deferred action on the following proposal and simultaneously referred it to the Line of Business Subgroup of the Blanks Working Group:
  • 2009-35BWG – Add a new annual statement line 17.4 to the Underwriting and Investment Exhibits, Exhibit of Premiums and Losses (state page), Five-Year Historical, and Insurance Expense Exhibit of the property statement and the property supplement of the health statement for the reporting of director and officer business.
• The comment deadline on all new proposals is February 24, 2010.

 

Emerging Accounting Issues Working Group

The following interpretations were adopted as final:

• INT 09-08-Accounting for Loans Received Under the Federal TALF Program (INT 09-08)

This interpretation indicates that loans received and collateral provided under the Term Assets-Backed Securities Lending Facility (“TALF”) program do not meet the criteria for offset. This interpretation clarifies reporting for such loans received and collateral provided under statutory accounting and indicates that asset-backed securities provided as collateral under the TALF program shall continue to be reported in the same category as previously reported and not moved to the U.S. Government category.

• INT 99-00T-Compilation of Rejected EITFs (INT 99-00)

This interpretation incorporates “rejected” and “non-applicable” FASB Emerging Issues Task Force (“EITF”) that do not provide additional statutory accounting guidance, in a single listing within a designated interpretation. This interpretation will be updated as needed to reference future EITFs that are: a) rejected as not applicable to statutory accounting; b) rejected without providing additional statutory guidance; and c) rejected on the basis of issues rejected in statutory accounting.

The following item was offered for comment:

• ASU 2009-15: Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing

Note:  This item was exposed with a recommendation that ASU 2009-15 be rejected as not applicable to statutory accounting with reference included in INT 99-00.

The following was discussed:

• INT 09-07T-Accounting for Re-Securitization of Loan-Backed and Structured Securities (e.g., ReRemics) (INT 09-07T)

The Working Group rejected the exposed tentative consensus and noted that the issue will be addressed by agenda item 2009-14 on the Statutory Accounting Principles Working Group Maintenance Agenda.

• SSAP No. 43R-Loan-backed and Structured Securities Impairment Guidance

The Working Group noted that the Statutory Accounting Principles Working Group is currently considering a project to establish an Implementation Question and Answer for SSAP No. 43R-Loan-backed and Structured Securities – Revised (SSAP No. 43R). As such, the Working Group agreed to defer this issue until completion of the SSAP No. 43R Implementation Guide.

• The deadline for submission of comments and for new items is February 11, 2010.

 

Statutory Accounting Principles Working Group

The following items were adopted:

• SSAP No. 100-Fair Value Measurements (SSAP No. 100) (Ref # 2007-24)
  SSAP No. 100 provides statutory accounting guidance on defining fair value, establishing a framework for measurement of fair value, and expanding fair value disclosures. This new SSAP applies fair value when required by other statutory accounting pronouncements that require or permit fair value measurements, but does not require any new items to be measured at fair value. Within SSAP 100, a fair value hierarchy is established to increase consistency and comparability in fair value measurements and related disclosures. SSAP No. 100 is effective for December 31, 2010 annual financial statements, with interim and annual reporting thereafter. Early adoption is permitted for December 31, 2009 annual financial statements. Various nonsubstantive revisions to other SSAPs also were adopted to reflect the new fair value guidance within SSAP No. 100.
• SSAP No. 62-Property and Casualty Reinsurance – Revised (SSAP No. 62R) (Ref #2008-28)
  This SSAP expands the exceptions for retroactive reinsurance to include property/casualty reinsurance run-off agreements that meet specified criteria. Although, this is less conservative than other methods of accounting for retroactive reinsurance, there are several criteria, including commissioner approval, financial strength of the nonaffiliated assuming entity and unlimited transfer of risk, without the ability to cancel the contract.
• SSAP No. 60-Financial Guaranty Insurance (SSAP No. 60) (Ref #2009-09)
  The Working Group adopted nonsubstantive exposed disclosures to SSAP No. 60, with minor revisions to footnotes. The adopted disclosures are initially required for 2009 year-end reporting, with annual reporting required thereafter. Interim reporting is also required if a significant change has occurred.
• SSAP No. 43R-Loan-Backed and Structured Securities – Revised (Ref #2009-18)
  Nonsubstantive revisions to SSAP No. 43R update the statutory accounting guidance to reflect the revised “Residential Mortgage-Backed Securities Designation Process” originating from the Valuation of Securities Task Force.
• Issue Paper No. 140-Substantive Revisions to SSAP No. 43 (Issue Paper No. 140)
  Issue Paper No. 140 provides a historical reference of the guidance superseded by SSAP No. 43R-Loan-backed and Structured Securities – Revised (SSAP No. 43R), which was adopted in September 2009. Guidance superseded and referenced within Issue Paper No. 140 includes: SSAP No. 43-Loan-backed and Structured Securities (SSAP No. 43), SSAP No. 98-Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, an Amendment of SSAP No. 43 (SSAP No. 98) and paragraph 13 of SSAP No. 99-Accounting for Certain Securities Subsequent to an Other-Than-Temporary Impairment (SSAP No. 99).
• SSAP No. 9-Subsequent Events (SSAP No. 9) (Ref #2009-12)
  Revisions to SSAP No. 9 adopt FAS 165, Subsequent Events (FAS 165) for statutory accounting. Due to the issuance of both statutory financial statements and audited financial statements for insurers, the adopted revisions include disclosure requirements for both sets of financials that indicate the date for which subsequent events were reviewed and the dates the financial statements were issued or available to be issued.

The following substantive revisions to statutory accounting guidance have been offered for public comment:

• SSAP No. 5R-Liabilities, Contingencies and Impairments of Assets – Revised (SSAP No. 5R) (Ref #2003-12)
  The substantive revisions proposed to SSAP No. 5R adopt, with modification, FASB Interpretation No. 45: Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45) and incorporate a requirement to recognize a liability that represents the fair value of the guarantee at its inception. The modifications discussed during the meeting eliminate the requirement for liability recognition for guarantees provided to wholly-owned subsidiaries.
• Issue Paper No. 141-Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (Issue Paper No. 141) (Ref #2009-14)

Issue Paper No. 141 proposes adoption with modification of FAS 166, Accounting for Transfers of Financial Assets – an Amendment to FAS 140 (FAS 166) in a new SSAP to supersede SSAP No. 91R-Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP No. 91R). Revisions to statutory accounting reflected in Issue Paper No. 141 include the establishment of new conditions for when a transferred financial asset can be accounted for as a sale, as well as removal of the concept of a qualifying special-purpose entity.

• Issue Paper No. 142-Variable Interest Entities (Issue Paper No. 142) (Ref #2009-15)
  Issue Paper No. 142 proposes adoption with modification of FAS 167, Amendments to FASB Interpretation No. 46R (FAS 167) in a new SSAP to provide guidance on variable interest entities. The consolidation concept within FAS 167 has previously been rejected for statutory accounting; therefore, Issue Paper No. 142 does not incorporate consolidation aspects, but has been drafted to require documentation of a reporting entity’s financial interests in variable interest entities.

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

• SSAP No. 43-Loan-backed and Structured Securities – Revised (SSAP No. 43R) (Ref #2009-19)
  Non-substantive revisions to the disclosures in SSAP No. 43R clarify that the disclosures that correspond with SSAP No. 27-Disclosure Information about Financial Instruments with Off-Balance-Sheet Risk, Financial Instruments with Concentration of Credit Risk and Disclosures about Fair Value of Financial Instruments (SSAP No. 27) are only required for annual audited statutory financial statements. Within SSAP No. 43R, these disclosures include paragraphs 48a (fair values), 48b (concentrations of credit risk) and 48k (when it is not practicable to estimate fair value).

The following actions and discussions took place:

• SSAP No. 43R-Question and Answer Implementation Guide (Ref #2009-19)
  A subgroup was formed to review identified questions and establish answers to create a “Questions and Answer Implementation Guide” as an appendix to SSAP No. 43R.
• FSP FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and 124-2) (Ref #2009-07)
  It has been requested that SSAP No. 26 be evaluated and compared to FSP FAS 115-2 and 124-2 with the goal of adopting consistent guidance for all bonds.

Subgroup Updates:

• Guaranty Fund Subgroup (Ref #2006-14) – A Draft Issue Paper has been offered for public comment that re-evaluates the previous conclusion regarding SOP 97-3, Accounting by Insurance and Other Enterprises for Insurance Related Assessments (SOP 97-3 and ACS 405-30) in SSAP No. 35-Guaranty Fund and Other Assessments (SSAP No. 35) and proposes substantive revisions to SSAP No. 35 to incorporate the SOP 97-3 approach for guaranty fund liability recognition. Comments may be submitted until Jan. 15, 2010.
• Securities Lending Subgroup (Ref #2008-14) – The Subgroup discussed their current proposal for securities lending transactions and exposed their recommendations for comments ending January 29, 2010.

The deadline for submission of comments, unless otherwise noted, for new or re-exposed items is February 11, 2010.

 

Capital Adequacy Task Force

• Discussion is taking place on the pursuit of further validation of RBC Schedule P data filed for the two-year lines of business rather than adding 10 years of Schedule P annual statement data to the electronic annual statement filing.
• A long-term proposal for commercial mortgages in the life RBC formula that was received from the ACLI will be discussed during a Life RBC Working Group conference call in January to discuss the proposal and the 2010 mortgage experience adjustment factor calculation.
• A conference call will be held in February to discuss whether to request having the RBC for Health Organizations Model Act (#315) become an accreditation standard.

 

Life Risk-Based Capital Working Group

• An ACLI derivatives risk mitigation proposal has been offered for a comment period of two weeks. The RBC instructions and RBC blanks pages will only include the simple one-to-one hedges and exclude the intermediate one-to-many derivatives transactions if adopted for year-end 2010.  A conference call will be held the last week of December to potentially adopt the proposal for year-end 2010.
• New American Academy of Actuaries’ C-3 Phase 2 and C-3 Phase 3 draft RBC instructions were released for a comment period of 45 days.  The ACLI expects to have proposals for reducing the C-3 Phase 3 scope and for a materiality test finalized by Jan. 4, 2010.

 

Examination Oversight Task Force

• New risk-focused exam repositories for inclusion in the NAIC Financial Condition Examiners Handbook have been adopted. The newly created exam repositories would assist an examiner in identifying the risks that are often inherent within some of the more standard key activities of a typical insurance company.
• A project to create an exam risk alert to be used while conducting financial condition examinations for year-end 2009 will be developed during 2010.
• A survey of states regarding their progress toward adopting the revised Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition (#385) indicated that five states have completed the process to adopt the 2008 revisions to the model.

 

Receivership and Insolvency Task Force

• A matrix highlighting issues and solutions to address concerns with the timing and collection of reinsurance recoverables held by insurers in receivership was discussed.

 

Risk Retention Group Task Force

• The Annual Financial Reporting Model Regulation (#205) and the corporate governance standards for risk retention groups (“RRGs”) licensed as captive insurers were discussed.  Significant revisions to model #205 were adopted in 2006 and require that insurers comply with certain best practices related to auditor independence, corporate governance and internal controls over financial reporting.  Specific sections of model #205 will be required for traditional insurers for accreditation purposes, although some of the requirements related to audit committees and independence conflict with related guidance in the corporate governance standards.  It was agreed that it would be acceptable for a state to adopt either the requirements in model #205 or the corporate governance standards.
• In regard to Part A: Laws and Regulations standards for RRGs, a memo regarding which Part A standards should apply to captive RRGs was adopted.  It was agreed that the Part A Summary Memo should be updated to require RRGs to file an annual RBC report, but it also determined the necessity to develop a regulatory tool for use with RRGs that would more accurately assess the adequacy of capital.  Guidelines to the Information Sharing standard are also needed under which states would require RRGs to file a disclaimer of affiliation with other states in which they are licensed as a change in business plan. Regarding reinsurance, it also was agreed that the required rating agency ratings should be treated prospectively.
• In regard to a letter received from the National Risk Retention Association requesting that the accreditation standards related to RRGs be amended to promote state compliance with the legal requirements of the federal Liability Risk Retention Act, it was agreed that the purpose of the accreditation program is to ensure sufficient state regulation by the domestic state and not to limit the authority of non-domestic states.  For that reason, penalizing non-domestic states for taking certain actions in regard to RRGs was not determined to be within the scope or spirit of the accreditation program.

 

Valuation of Securities Task Force

• RMBS were placed under regulatory review in accordance with the procedure specified in Part Two, Section 3 (e) of the Purposes and Procedures Manual of the NAIC Securities Valuation Office (Purposes and Procedures Manual).
• A statement of interpretation pertaining to SSAP No. 43R was adopted.  SSAP No. 43R refers insurance companies to the Purposes and Procedures Manual for reporting instructions applicable to structured securities.  The Task Force statement clarifies that references in SSAP 43R to the Purposes and Procedures Manual for reporting instructions applicable to structured securities other than RMBS are to the filing exempt rule in Part Four, Section 2 (d). References in SSAP 43R to the Purposes and Procedures Manual for reporting instructions applicable to RMBS are to the interim instructions drafted by NAIC staff and attached to the statement.  The statement will be added to the 12/31/09 publication of the Purposes and Procedures Manual.
• A motion was adopted to have the RMBS modeling process (to be used for year-end 2009) remain in effect until the long-term solution for how to determine the NAIC designation for RMBS has been adopted.
• A proposal to delete the requirement in the Purposes and Procedures Manual that insurers file 6* securities with the SVO when they wish to assign a value greater than zero (0) was released for a 30-day comment period.
• Options for what procedure should be utilized to assign NAIC Designations to hybrid securities not rated by an NAIC ARO are being explored.
• NAIC’s adoption of  Issue Paper No. 139 – Fair Value Measurements will require insurers to identify the valuation technique utilized. The Statutory Accounting Principles Working Group noted that valuation techniques used by an SVO in its operations are not identified.  Whether the SVO can identify the valuation technique used for specific securities and the appropriateness of letting insurers that use SVO values to rely on SVO representations to fulfill their own reporting obligations is being considered.
• What the maximum percentage of second lien collateral should be permitted in the “Defined Multi-Class Residential Mortgage-Backed Securities” and “Defined Multi-Class Commercial Mortgage-Backed Securities” annual statement categories for them to qualify as “Defined” was discussed.

 

Financial Standards and Accreditation Committee

• Proposed implementation guidance regarding the new accreditation standards related to company licensing and change in control will be offered for a 60-day public comment period. The implementation guidance includes revisions to existing documentation or new guidance related to these accreditation standards. These new “Part D” standards would become effective January 1, 2012.  Because they will not be scored, a state cannot fail accreditation based solely on its lack of compliance with them.  If deficiencies are noted, review teams will provide management comments to the state insurance departments similar to the current Part C.
• Applicability of the Part B and Part C standards to RRGs licensed as captive insurers was released for a 60-day public comment period. Whether any additional standards are needed, given the unique nature of captive RRGs also will be considered.  The Committee previously adopted the Part A standards applicable to captive RRGs with a January 1, 2011, effective date.

 

International Insurance Relations Committee

• The North American Free Trade Agreement (“NAFTA”)-U.S. Department of Transportation (“DOT”) Notice of Proposed Rulemaking regarding the access of Mexican-domiciled motor carriers to the United States is ongoing.  The NAIC NAFTA Working Group has sent a letter of response to the DOT.

 

Accident and Health Working Group

• A recommendation was made to work with the Society of Actuaries/American Academy of Actuaries on developing a long-term care experience table.

 

NAIC/Consumer Liaison Committee

The NAIC has one year to respond to the federally mandated Federal Privacy Notice Form. The NAIC can either develop a model bulletin that informs insurance companies regarding the way the new federal form is to be used, or can replace current regulations with the new federal regulation. 

 

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