Small Talk–Regulatory and Industry Update 2009 July Edition

Alice Fontaine, President of Fontaine Consulting LLC attended the NAIC Summer 2009 National Meeting in Minneapolis, MN, and provided the following summary for Smaller Insurance Company Section members, including the section "Key Developments." This summary is based on attendance at various meetings, as well as Meeting Summaries posted on the NAIC Web site. Fontaine can be reached at alice@fontaineconsulting.com. The Council would also like to recognize the valuable insights and contributions of Norm Hill, president of Noralyn, Ltd. and Chris Hause, president of Hause Actuarial Solutions, Inc. Hill can be reached at nhill@noralyn.com. Hause can be reached at chrish@hauseactuarial.com.

Key Developments

The Revised Standard Valuation Law was adopted by LHATF at the meeting and was exposed by the Life Insurance and Annuities (A) Committee for a 30–day comment period. A revised provision relating to corporate governance is also exposed with a comment deadline of June 29, 2009. The stated intent of LHATF was that the NAIC would only send up to legislatures a package of the Law and Valuation Manual. The Standard Valuation Law, including the governance provision, will be considered during a joint call of the A Committee, the Principles–Based Reserving (EX) Working Group and the Solvency Modernization Initiative Task Force scheduled for July 28, 2009. States could potentially start adopting the Law which enables principle–based reserves during their 2010 sessions. Certain industry groups have indicated they will undoubtedly oppose legislative adoption, if the Law and Valuation Manual is still largely incomplete or contains objectionable components.

The Valuation Manual (VM) is not yet complete, with many significant issues remaining. An aggressive target completion date is still set for the end of this year. The main issue discussed at the meeting was the asset default rates (and the impact on the discount rate). There were no new details on the ACLI net premium reserve proposal, although these are expected to be provided in two stages (traditional life, flexible premium life) and completed by November. LHATF's report to the PBR EX Committee indicated that "initially it was expected to cover all life insurance, but the Task Force is considering narrowing the scope to only include universal life with secondary guarantees and term insurance." No discussion of these or other alternatives took place.

RBC Phase C–3 Phase III was postponed and will not be effective Dec. 31, 2009 due to outstanding issues raised during the comment period. A conference call will be held on July 29, 2009 to outline an action plan to address all outstanding issues for adoption late this year and implementation Dec. 31, 2010. This affects all in–force life policies and potentially requires significant amounts of modeling. For products with a four percent or less ratio under the Stochastic Exclusion Test, current C3 factors would be retained. This test and its appropriateness for more traditional products will also require substantial work and analysis.

Principles–Based Reserving (EX) Working Group

This Group, under Chairman Hampton, adopted LHATF's Standard Valuation Law. Also, it confirmed the LHATF recommendation that only a package of the Law and Valuation Manual be submitted by the NAIC to legislatures.

Strategy was discussed for further presentation of the PBR status to NCOIL legislators, possibly at the July 2009 NCOIL meeting. One Commissioner stated that, at the earlier meeting between Commissioners and legislators, one of the legislators stated that PBR, as currently structured, could not pass in his state. There was further discussion about a possible joint panel of Working Group members, Academy members, and trade association members to present to NCOIL in July 2009.

Follow up to ACLI's Nov. 11, 2008 ("Surplus Relief") Proposal:

Although none of the proposals were adopted for 2008, the Market Disruption Subgroup was created and will consider the proposals for 2009. Status of the proposals:

Adopted by "A" Committee (not Plenary):

• Actuarial Guideline 1c (Clarifies that when using the Preferred Structure Tables of the 2001 CSO for basic reserves, the original smoker or nonsmoker tables, respectively, may be used for determining segments under XXX.)
• Valuation of Life Insurance Policies Model Regulation (Model Regulation #830) Revisions. This change eliminates artificial constraints in Regulation XXX on the calculation of X factors.)
• Actuarial Opinion and Memorandum Regulation (Model Regulation #822) Revisions. (This change increases required disclosure in the RAAIS regarding interim results.)
• A short–term mortgage experience adjustment factor proposal for year–end 2009 life RBC only. (Changes the minimum factor to 75 percent and the maximum factor to 125 percent.) The Task Force will monitor market conditions and progress on a long–term proposal for year–end 2010 implementation. If it appears unlikely that a long–term proposal will not be adopted for 2010, the Task Force would review the short–term proposal by the Winter National Meeting and discuss whether it should be modified and/or extended through 2010.

Deferred:

• Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities (Allows the 2001 CSO preferred mortality tables to be used with contracts based on the 2001 CSO and issued prior to Jan. 1, 2007). One very controversial limitation involves products with direct modal premiums and annual premium coinsurance where final net reserves turn out negative. Revisions precluding such negative reserves were adopted by LHATF by a 5–4 vote. At the last minute, due to a request from one commissioner, the Life Insurance and Annuities (A) Committee agreed to defer and hear additional comments.
• SSAP No. 10 (This increases the admissible Deferred Tax asset subject to various restrictions.)
• The Capital Adequacy (E) Task Force is working to review the Standard Scenario for RBC C3 Phase II (Variable Annuities). Results due June 15, 2009.

Solvency and Modernization Initiative Working Group

This new group met and discussed a number of issues that could eventually be of concern to small companies. These concepts included economic capital and systemic risk. Neither term is as yet precisely defined. Risk–based capital has been stressed, as amounts intended to identify weakly capitalized insurers. However, economic capital seems to mean some ideal or goal capital for each company, depending on its mix of policies and assets. Systemic risk is even less well defined, but seems to refer in some way to risks in one company that, if actualized, could spread to other companies.

The key unknown to watch is any proposals from any organization for projections, suggested or required, to derive economic capital or measure systemic risk.

NAIC Summer 2009 National Meeting Summary

Life and Health Actuarial Task Force (LHATF):

Standard Valuation Law:

• The Task Force adopted a revision to the Standard Valuation Law to enable the principle–based approach to valuation and implement the framework of a valuation manual. They also recommended that the law and the Valuation Manual be adopted together.

Mortality Tables:

• The Task Force decided to delay development of a new commissioners' standard ordinary (CSO) mortality table until 2012. The Task Force asked the Society of Actuaries (SOA) and the American Academy of Actuaries (AAA) to collect two more years of experience data for the 2012 table. The Task Force asked the SOA and the AAA to investigate the development of standard valuation mortality tables of guaranteed–issue and simplified–issue life insurance products, as well as annuities in payout mode.

2008 Capital and Surplus Relief:

• The Task Force discussed the company survey results on the Capital and Surplus Relief Life proposals.
• The Task Force adopted the following:
• Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities (Model Regulation #815)
• Actuarial Guideline 1c
• Actuarial Opinion and Memorandum Regulation (Model Regulation #822)
• Valuation of Life Insurance Policies Model Regulation (Model Regulation #830)

Valuation Manual:

VM–20 items:

• The AAA presented additional examples and a somewhat refined methodology for setting prescribed default cost on existing fixed–income investments. This would be part of the prescribed assumptions in VM–20. The methodology is formulaic and would result in limited spreads on low–rated assets, as well as adjusting for the current spread environment. Some members of the Task Force questioned the sensitivity of results. A Task Force member made a request to compare these results with a methodology that would cap "date of purchase" spreads and the impact if a company "rolled" its portfolio to capture current spreads. The Task Force released the revised VM–20 for comment.
• The American Council of Life Insurers (ACLI) presented a timeline for their proposal regarding the inclusion of a net premium reserve methodology within VM–20. Testing is being performed by companies prior to refining the proposal. The Traditional Life proposal is expected by the fall meeting. The Flexible premium life proposal should be available by early November 2009.
• The Task Force removed the Reinsurance risk transfer rules in VM–20.

VM–50/51 Experience Reporting:

• The Task Force presented a report that indicated the New York prototype project is near implementation.

Other Items:

• The Task Force exposed the 2010 GRET table for comment.
• The AAA presented a status report from the Nonforfeiture Improvement Work Group. No one presented any specific proposals.
• The Task Force discussed the application of Actuarial Guideline XXXIII to a new type of guaranteed lifetime income benefit in a fixed annuity.

Life Risk–Based Capital Working Group (LRBCWG):

• The Group did not discuss the AAA C–3 Phase III proposal comments. There were enough outstanding issues with the proposal that adoption could not occur for year–end 2009 Life RBC. Work will continue, so the proposal can be adopted for year–end 2010.
• The Group adopted a temporary "fix" for the Mortgage Experience Adjustment (MEA) Calculation for Dec. 31 2009 RBC. The ACLI is still working on the details of a long–term solution. The proposal would need to be adopted by the Winter National Meeting in order to meet the goal of going into effect for year–end 2010.
• The Group exposed the ACLI RBC proposal for derivative instruments for comment (due June 27). For 2009, the collateral would be treated as an NAIC class 1 asset. A long–term proposal is still under discussion.
• The AAA was asked to do a high–level review of the issue of having a decrease in reserves increase capital.

Accident and Health Working Group of the Life and Health Actuarial Task Force (Meeting Summary from NAIC Web site)

The Accident and Health Working Group of the Life and Health Actuarial Task Force met Friday, June 11, 2009.

During this meeting, the Working Group:

• Discussed the project to update the refund calculation in Appendix A of the Model Regulation to Implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act and requested an extension of time to work on the project.
• Discussed and recommended changes to the health Financial Analysis Handbook to reflect the changes to the Actuarial Opinion section of the annual statement instructions for the health Annual Statement Blank.
• Adopted an updated version of the Medicare Supplement Insurance Model Compliance Manual with a new section on innovative benefits and included information on the new Medicare supplement plans to be issued in 2010.
• Discussed the survey of state experience to address the question of closed blocks of long–term care insurance.
• Appointed a subgroup to review the Actuarial Opinion section of the health Annual Statement Instructions for 2010.
• Discussed prospective principle–based reserving issues for health insurance. Received a status report from the American Academy of Actuaries (AAA) Long–Term Care Principles–Based Work Group. Absolutely nothing definitive in terms of proposed methodology is ready for any discussion.
• Discussed a memo sent to the Statutory Accounting Principles (E) Working Group in response to their request for guidance on incurred dates.
• Formed a subgroup to discuss long–term care provisions under the federal Pension Protection Act of 2006.
• Discussed component rate increase analysis and appointed a subgroup to study the issue. Among the considerations discussed were:
• whether loss ratio standards are "minimum standards," rather than "maximum" or "appropriate" standards and
• the professional responsibilities of an actuary certifying a rate increase.

International Solvency and Accounting (EX) Working Group

This group monitors movement in the International Accounting Standards and coordinates the NAIC response to this movement. In general, the group is reviewing the standards and developing an issues paper to point out differences or concerns between the U.S. accounting standards (FASB) and the International Standards (IFRS). It is anticipated that IFRS will be adopted for international reporting effective 2011. This may end up replacing U.S. GAAP ... stay tuned. As with previous reports, no assertions were made that the U.S. statutory framework would necessarily be affected by any change to U.S. GAAP.

Suitability of Annuity Sales (A) Working Group

• This workgroup has exposed a draft of a revised Suitability in Annuity Transactions Model Regulation. These changes are proposed in order to provide insurers uniform guidance in developing agent training, supervision and monitoring standards. Many comments were received and discussed prior exposure.

Annuity Disclosure (A) Working Group

• The Group discussed the guaranty fund coverage disclosure notice. A draft guaranty fund coverage disclosure template was developed reflecting several iterations of comments. The Working Group will hold a conference call in July to discuss the revised draft and any comments received on the revised draft. The Working Group agreed to refer the draft template to the Receivership and Insolvency (E) Task Force for its review and comment.
• The Group discussed and are making progress on the proposed annuity illustration guidelines. The Working Group anticipates holding one or two conference calls in August to complete its work on the guidelines.

Indexed Annuities (A) Working Group
(Meeting Summary from NAIC Web site)

The Indexed Annuities (A) Working Group met at 2:30 p.m. on Sunday, June 14, 2009.

The Indexed Annuities (A) Working Group of the Life Insurance and Annuities (A) Task Force had the primary task this year of conducting a coordinated, nationwide data call and issuing a public report regarding annuity products with a specific focus on the sales and marketing practices of indexed annuities.

The State of Iowa, on behalf of the Working Group, issued a nationwide data call on Dec. 1, 2008, to assist all states in identifying issues and trends in the fixed indexed annuity marketplace. The data call was issued to 69 companies domiciled in 22 states. Companies were required to complete and return the data to Iowa by Feb. 13, 2009. Ultimately, 50 responses were received. As a group, these insurers wrote in excess of $67 billion in fixed annuity premium for the years 2005, 2006 and 2007.

There is at least one significant finding in the report. Since the issuance of the data call, significant changes have taken place within the annuity industry. Since the call was issued in December 2008, 12 of the companies have either left the annuity business or have gone into rehabilitation. Sales of variable annuities have decreased beginning last year, while sales of fixed annuities have increased, making the information gathered in this data call of what is being sold not as relevant as if the market had not changed. Also, the top 10 index writers have changed because of some pulling back from the market or capping of their sales for 2009. The top 10 writers in the data call may not reflect the top writers in the current market environment. It is anticipated that the market will continue to change throughout 2009.

The data call covered the calendar years of 2005, 2006 and 2007 and contained 43 elements broken into the following five broad categories:

1. Premium volume by type (fixed and variable, including both new and replacement as well as surrendered annuity policies).
2. Premium volume by distribution channel.
3. Premium volume by age group.
4. Company procedures/rules to surrounding oversight of suitability recommendations by producers.
5. The use of suitability forms.

The report addresses each category and the results obtained from the data call.

The Working Group has completed its charges with the issuance of this report and, as such, may now be disbanded.

Senior Issues (B) Task Force
(Meeting Summary from NAIC Web site)

The Senior Issues (B) Task Force met June 14, 2009.

During this meeting, the Task Force:

• Adopted revisions to the Long–Term Care Insurance Model Act and Regulation that provide for independent review of benefit trigger decisions and prompt payment of claims.
• Appointed a small subgroup to be chaired by Randy Moses (SD) to revise Appendix E of the Long Term Care Insurance Model Regulation to standardize claims reporting definitions.
• Received an update on the implementation of the long–term care partnership program. Twenty–nine states have had state plan amendments approved by the Centers for Medicare and Medicaid Services (CMS) since the enactment of the Deficit Reduction Act of 2005. Twenty–three states are certifying partnership policies. One state, Wyoming, has a state plan amendment pending at CMS. Of the new states participating in the partnership, only one state–Wisconsin–has opted–out of reciprocity due to language in their enabling legislation, which they plan to correct. Of the four original partnership states, Connecticut and Indiana have opted–in to reciprocity. The Department of Health and Human Services (HHS) is collecting data from companies selling partnership policies and is committed to analyzing and posting data in very short order. A representative from HHS, Hunter McKay, is planning to attend the Fall National Meeting and hopes to have data to share.
• Received an update on state adoption of revisions to the NAIC model regulation on Medicare supplement insurance, as required by the Genetic Information Nondiscrimination Act (GINA) and the Medicare Improvements for Patients and Providers Act (MIPPA). Forty–seven states responded to a joint survey by the NAIC and CMS. As of May 8, 2009, 13 of the 47 responding states have completed final adoption of the new rules. Of the responding states that have not yet completed adoption, all have taken substantial steps toward adoption, including holding public hearings, undergoing legislative review, publishing draft regulations or submitting legislation to the governor for signature. Several more states are expected to complete their adoption this month as GINA's July 1 deadline approaches. The majority of responding states (40 out of 47) do not require approval by their state legislatures. Of the seven states that do require legislature approval, three have already received such approval. Of the 40 states able to adopt the changes through their regulatory process, 10 have already completed that process. NAIC staff will continue to track state legislative and regulatory activity concerning implementation of these changes.
• Received a report from the Accident and Health Working Group on their work on Medicare supplement and long–term care issues.
• Received revisions to the Medicare Supplement Compliance Manual from the Accident and Health Working Group. These revisions include a new section on new or improved benefits, which was originally drafted by the Task Force, and changes to include new 2010 standardized plans. The Task Force voted to accept and forward these revisions to the Health and Managed Care Committee with a recommendation that they be adopted.
• Discussed issues regarding implementation of revisions to the Medicare supplement model regulation: rating and pooling issues, the five–year prohibition on discontinuance and transition standards. The revisions to the Compliance Manual made by the Accident and Health Working Group include pooling of 1990 and 2010 standardized plans for the purposes of refund calculation and as otherwise necessary and appropriate. Otherwise, rating and pooling decisions are generally left up to state laws and regulations.
• Distributed a memorandum from the Task Force's subgroup on Medicare supplement implementation concerning the five–year prohibition from filing the same letter plan upon discontinuance of the plan as contained in Section 15E(b) of the NAIC model regulation on Medicare supplement insurance. The Subgroup suggests that states consider utilizing the commissioner discretion included in the model regulation to provide a one–year grace period to issuers of 1990 Medicare supplement plans who fail to file to offer the same letter plan by June 1, 2010, before making the five–year prohibition effective. Issuers should confirm with state departments of insurance that it is allowing the one–year grace period. This grace period would not apply to Medicare supplement plans K, L, M and N.
• Discussed a concern that SERFF is not currently prepared to accept filings for new 2010 Medicare supplement plans. It was reported that new codes have been created for the 2010 plans, but that SERFF was not on track to accept filings until mid–2010. This is a concern, as states will need to accept numerous filings for 2010 Medicare supplement plans as early as possible.
• Received a report from CMS staff on a number of Medicare supplement and Medicare private plan issues. CMS provided an update on developments concerning Medicare private plan agent compensation reporting requirements. CMS reported that they have begun an effort to consolidate low enrollment and duplicative Medicare Advantage plans for 2010. They have also revised their Medicare Marketing Guidelines, which are expected to be finalized in the next month. They also provided information about a proposal to send joint letters with state departments of insurance to directors of facilities with residents at high risk for agent marketing abuses.
• Received a federal update on issues of importance to the Task Force, including new changes to Medicare supplement plans being considered by the Senate, potential Medicare reforms and new long–term care legislation.

Action Items:

• Adopted revisions to the Long Term Care Insurance Model Act and Regulation that provide for independent review of benefit trigger determinations and provide for the prompt payment of claims.
• Accepted revisions to the Medicare Supplement Compliance Manual and forwarded to the Health and Managed Care Committee with a recommendation that they be adopted.

Interstate Insurance Product Regulation Commission (IIPRC)

• Adopted Standards (effective date June 25, 2009):
• Amendment To Individual Immediate Non–Variable Annuity Contract Standards
• Held hearing regarding the proposed Amendments for Operating Procedure for the Filing and Approval of Product Filings [to remove Mix & Match time frame and modify Appendix A].

NAIC/AICPA (E) Working Group

• NAIC/AICPA (E) Working Group Page
• Joint Executive (EX) / Plenary Committee Summary Report
• Summer 2009 Meeting Summaries Index

The NAIC/AICPA (E) Working Group of the Financial Condition (E) Committee met June 14, 2009.

During this meeting, the Working Group:

• Adopted the minutes from its April 28, 2009 conference call, during which the Working Group discussed revisions to the Implementation Guide as a result of questions received about Section 14 of the Annual Financial Reporting Model Regulation (#205), also known as the Model Audit Rule. During the call, the Working Group agreed to expose the proposed revisions for a 30–day public comment period.
• Received a report from the American Institute of Certified Public Accountants (AICPA) regarding projects that affect state insurance regulators and the insurance industry. The AICPA report discussed new Statements on Auditing Standards on external confirmations and on quality control that have been exposed for public comment. In addition, the report discussed the newly issued Financial Accounting Standards Board Statement No. 165, Subsequent Events, which replaces guidance previously contained in AU Section 560, Subsequent Events.
• Discussed a survey of the states regarding progress toward adopting the revised Model Audit Rule. Based on the results of the survey, 23 states (Alabama, Connecticut, Delaware, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, New Hampshire, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Virginia, West Virginia, Wisconsin and Wyoming) have adopted the revised requirements. In addition, six other states (California, Indiana, Kansas, Nevada, Pennsylvania and Tennessee) have publicly exposed revised statutes or regulations that incorporate the new requirements. The remaining 22 states plan on adopting the revisions prior to year–end. NAIC staff will continue to update this survey on a quarterly basis and the results will be discussed at each national meeting.
• Performed the annual review of premium threshold amounts included within the Model Audit Rule, noting that approximately 90.6 percent of total U.S. direct insurance premiums at Dec. 31, 2008, appear to be subject to either Sarbanes–Oxley reporting requirements or the $500 million threshold requirement in the Model Audit Rule.
• Discussed comments received on proposed changes to the Implementation Guide for the Annual Financial Reporting Model Regulation. Based on comments received, the Working Group agreed to amend the proposed changes to the Implementation Guide by clarifying regulators' expectations of the parent company's independent audit committee and its role in overseeing the financial reporting of its insurance legal entities. The amended changes to the Implementation Guide were then adopted by the Working Group.

Action Items:

• Adopted the minutes from the Working Group's April 28, 2009 conference call.
• Adopted changes to the Implementation Guide for the Annual Financial Reporting Model Regulation (#205).