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NAIC Projects In 2008 Spell Real Change For Industry

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For state insurance regulators and legislators, insurers and consumers, 2008 may well be remembered as the year of the acronym, with each one having the potential to significantly change the way business is done.

Whether OFC, OII, MCAS or PBR, there is no shortage of opinion on what issues such as an Optional Federal Charter, the Office of Insurance Information, the Market Conduct Annual Statement and Principles-Based Reserving could do to alter the insurance industry. Not to mention what a company acronym, AIG, may mean for the future of insurance regulation.

In 2008 leaders at both the National Association of Insurance Commissioners, Kansas City, Mo., as well as the National Conference of Insurance Legislators, Troy, N.Y., turned much of their attention to bills in Congress that would whittle away at state authority over insurance regulation.

As Sandy Praeger, NAIC president and Kansas commissioner, notes, “It has been a big year. Needless to say, a lot of it has been responding to external pressures.”

Praeger maintains that work on making producer licensing more uniform as well as “good, solid oversight” of the insurance units of American International Group, New York, when compared with the federal regulation of the holding company make a good case for the continued need of state insurance regulation.

Additionally, she says, work on moving top NAIC brass to Washington and hiring a new executive director as well as establishing an Office of Insurance Information that would act as a resource to both state and federal regulators will also reinforce the need for continued state regulation. Praeger says the interviewing process for a new NAIC executive director is continuing, with interest in the position being expressed by some regulators and a few state legislators.

Also cited by Praeger are advances on the international front with input from the NAIC at the International Association of Insurance Supervisors, Basel, Switzerland, and over 20 memorandums of understanding with foreign countries.

On the issue of market conduct, Praeger cites the decision by the NAIC to proceed with the market conduct annual statement, although she notes that the issue of confidentiality still needs to be worked out in the coming year.

Another major initiative started this year, she says, was the decision to proceed with the development of a not-for-profit NAIC rating agency maintained by the Securities Valuation Office, a New York-based NAIC arm.

Praeger says companies contacted by the NAIC on this are supportive because managements have said that “AAA” ratings encouraged them to invest in credit default swaps, only to have their own ratings penalized when the investments they purchased were downgraded. The competition will be good for the market, she says.

Praeger also says one of NAIC’s achievements this year has been developing closer ties with NCOIL and the National Conference of State Legislatures, Denver. Noting the possibility of greater federal intervention, she stresses that “it serves us all well going forward.”

Rhode Island state rep Brian Kennedy, D-Hopkinton, NCOIL’s immediate past president, concurs that relations between NCOIL and NAIC have improved as shown by the creation of joint legislator-regulator panels during meetings of both organizations. As evidence of the improved relations, he notes that over 30 legislators attended NAIC’s fall meeting in Washington, sponsored with NAIC funding. And that may be repeated at NAIC’s Washington meeting in the future, Kennedy says. Commissioners have also been attending NCOIL meetings in greater numbers, he adds.

The push to create more open meetings at the NAIC was another important NCOIL initiative this year, according to Kennedy. Although he notes improvement on the issue, he says there are still many sessions from which attendees and the press are barred.

NCOIL had more of a presence on Capitol Hill in 2008, testifying on issues such as an optional federal charter and an office of insurance information, he adds.

Roger Sevigny, New Hampshire Commissioner and NAIC president-elect, notes NAIC’s work in 2008 on regulatory modernization and the support for creating an OII through which NAIC could offer access to data to Congress and other functional regulators.

The market conduct annual statement project adopted in 2008 is part of the effort to modernize insurance regulation at the state level, he says. If the data is collected and developed so it is reliable, it is possible MCAS could be part of the data made available through the new OII effort. But, he stresses that this is only a possibility and would need to receive further discussion as to how feasible it is.

Jim Long, North Carolina commissioner, who is leaving his post at the end of the year after 24 years of service, says the most important point made this year and the one state insurance regulators need to remember is that “we are the ones who are closest to the consumers. We are more attuned to what their concerns are.”

He points to FEMA’s botched performance after Hurricane Katrina and the way federal agencies regulated holding companies and banks that led to the current financial crisis as examples of how the federal government failed consumers.

Those who are pursuing federal regulation may be like “the dog chasing the car. Once you get the wheel, what do you do with it?” he notes.

The principles-based reserving project is another major project advancing through the NAIC that will modernize regulation of capital held by insurers and the way regulators assess capital, explains Tom Hampton, commissioner of the District of Columbia.

Among efforts underway are completion of a corporate governance piece of the project as well as financial reporting and financial analysis, he says.

The main focus, however, is developing a new Standard Valuation Law for reserving and an accompanying manual, a roadmap for companies to follow, he explains. Regulators at the NAIC’s Life & Health Actuarial Task Force have been working intensely on these projects, he adds.

Work is also progressing on the creation of a statistical agent to collect data to help companies that are not using their own stochastic modeling but rather need a standard scenario, Hampton explains.

Donna Claire, who is spearheading the effort by the American Academy of Actuaries, Washington, to develop PBR, says hundreds of regulators and actuaries have worked on the project this year and legislators are now being told about the project in information sessions at meetings such as the recent NCOIL annual meeting.

Commissioners also met this year with the Securities and Exchange Commission, Washington, to explain their position that proposed Rule 151A should not be advanced because fixed annuities are insurance products, says Susan Voss, Iowa insurance commissioner and NAIC secretary-treasurer. Work to improve consumer protections such as strengthened suitability requirements, and new annuity disclosure requirements also moved ahead.

New York Superintendent Eric Dinallo, chair of the NAIC’s Life & Annuities “A” Committee, says completion of travel underwriting guidelines, VA-CARVM, which establishes reserving requirements for variable annuities, and other models adopted in 2008 reflect his plan to continually move projects to full NAIC adoption. Of VA-CARVM, he says that while the recent financial crisis may require some points to be revisited, the approach is correct. Another 2008 project Dinallo feels is important is work on senior designations, which he says was needed to prevent seniors from being misled.

Birny Birnbaum, a funded consumer representative and executive director with the Center for Economic Justice, Austin, Texas, says 2008 was a mixed year for regulation, whose accomplishments included the travel underwriting and senior designation initiatives. However, consumer reps were pretty much ignored on issues such as the collection of data under MCAS, a process he says should include more data points. And, a new working group to look at a proposal to offer life insurers capital relief was created without any public comment or input from consumer reps, he adds.

On the issue of annuity disclosure and suitability of life insurance products sold, Birnbaum says that if regulators really want to create strong protections, they will look at producer compensation since “it is clear that compensation is driving sales.”

The American Council of Life Insurers, Washington, and other trade groups also weighed in on regulatory work conducted during 2008.

There has been a strong effort to put the NAIC, NCOIL or a hybrid models in place in states to address stranger-originated life insurance, says Bruce Ferguson, the ACLI’s senior vice president of state relations. The issue has been the most active one for the ACLI’s state relations team, he adds, and the result is that there is a good amount of progress in defining STOLI.

The other major issue, Ferguson says, is a multi-pronged initiative to ensure that annuities are sold properly. That effort includes work on the NAIC suitability model, the senior credentialing model, and disclosure initiatives underway in Iowa, he adds. But there is also a concern, he says, that if the suitability model is opened up again then there would be a lack of uniformity among states and that some states now contemplating adoption of a model may wait until a new model is developed, Ferguson explains.

Eric Goldberg, associate general counsel and manager of state affairs with the American Insurance Association, Washington, expressed concern over the work on MCAS and the ability of the NAIC to keep information in a proposed central data bank confidential. What the project should be focusing on, he says, is the original intent of creating a more efficient system of market conduct examinations.

AIA’s Dave Snyder, vice president and assistant general counsel, says AIA is monitoring the work of the International Association of Insurance Supervisors, Basel, Switzerland, and what new solvency standards will mean for all U.S. insurers. However, he expresses concern that a reinsurance collateral proposal developed by the NAIC will allow hundreds of millions of dollars of business to exit the U.S.

Doug Head, executive director with the Life Insurance Settlement Association, Orlando, Fla., says his organization has been working to advance the NCOIL life settlement model in state legislatures, an effort he says has been successful in 8 of 12 states. He says a California bill that was vetoed should be revisited because it provides all parties with what they feel should be in legislation.

The National Association of Mutual Insurance Companies, Indianapolis, is also expressing concern over MCAS, according to Neil Alldredge, vice president, state and regulatory affairs. The concern is over both process and substance, he explains. Alldredge maintains that the project was voted on without sufficient input from insurers and consequently, issues such confidentiality were never fully vetted.

Financial issues that will impact all insurers, according to Bill Boyd, NAMIC’s financial regulation manager, include determining whether post-retirement benefits for non-vested employees would have to be included on the liability side of the balance sheet. For some companies, this could represent 3%-5% of a company’s total liabilities and raise capital concerns.

And Robert Detlefsen, NAMIC’s vice president-public policy says that a climate risk disclosure proposal will affect both life and property-casualty insurers. Life insurers are being included because of the possibility of a pandemic as a result of climate change, he says. The difficulty with the proposal is that it is difficult to assess the impact of climate change on insurers’ businesses.