- NAIC Update - Spring 2015
- April 23, 2015 | Authors: Eric A. Arnold; B. Scott Burton; Eric R. Fenichel; Ling Ling; John S. Pruitt
- Law Firms: Sutherland Asbill & Brennan LLP - Washington Office ; Sutherland Asbill & Brennan LLP - Atlanta Office ; Sutherland Asbill & Brennan LLP - Washington Office ; Sutherland Asbill & Brennan LLP - New York Office
The National Association of Insurance Commissioners (NAIC) held its first national meeting for 2015 in Phoenix, Arizona, from March 26 through March 31. Noteworthy new initiatives include cybersecurity, price optimization and the development of a model law for unclaimed life insurance benefits. Other important topics we follow that continue to receive regulatory attention are life reinsurance captives, Own Risk and Solvency Assessment (ORSA) implementation, principle-based reserving, credit for reinsurance, contingent deferred annuities, private equity, corporate governance and international capital standards.
The following are notable highlights of the meeting, along with a summary of subsequent actions taken by the NAIC following the meeting:
A. New Issues of Note
The Cybersecurity (EX) Task Force held its first public meeting in Phoenix. Commissioner Adam Hamm (North Dakota), Chair of the Task Force, began the meeting with an overview of the Task Force’s work plan. The plan includes: (i) issuance of a survey to states on cybersecurity measures; (ii) development of a “Consumer Bill of Rights” to inform consumers of their rights when a data breach has occurred; (iii) staying abreast of information-sharing measures; and (iv) working on certain NAIC model laws, such as the Health Information Privacy Model Act (Model 55), the Privacy of Consumer Financial and Health Information Regulation (Model 672), the Standards for Safeguarding Customer Information Model Regulation (Model 673) and the Insurance Fraud Prevention Model Act (Model 680).
Echoing remarks he made earlier this month, Superintendent Benjamin Lawsky (New York) added that the Task Force will look at multifactor authentication and encryption of data at rest. He also noted that the Task Force will look at regulated entities’ vendor practices, commenting that a company’s cybersecurity is only as good as its worst vendor.
Patrick McNaughton (Washington) provided an overview of the IT Examination (E) Working Group of the Examination Oversight (E) Task Force. Mr. McNaughton, who has served as Chair of the Working Group for nine years, noted that the NAIC’s Financial Condition Examiners Handbook has had a section on IT examinations for 20 years. He noted that every state is required to use certified experts in IT to review data control systems during financial examinations, which is an accreditation requirement for multistate examinations. He also explained the differences between what examiners and security consulting firms do: examiners make sure that the regulated companies hire the right kinds of firms to do the right kinds of audits and testing, while the security firms hired by the regulated entity actually audit and engage in penetration testing.
The Task Force concluded its meeting by receiving comments on its proposed Principles for Effective Cyber Security Insurance Regulatory Guidance. Specifically, there was significant discussion regarding whether a principle should be included that provides for cybersecurity regulatory guidance consistent with the National Institute of Standards and Technology (NIST) framework. Several interested persons noted that the NIST should not be the only standard considered, and instead urged consideration of multiple standards.
In an April 16 conference call, the Task Force formally adopted a shortened list of Principles for Effective Cyber Security Insurance Regulatory Guidance (Principles). Despite the comments received regarding the NIST framework, the Principles reference only the NIST framework as a guiding principle for industry compliance. Superintendent Joseph Torti III (Rhode Island) commented that the NIST Framework will be incorporated into the NAIC’s Financial Condition Examiners Handbook.
The adopted Principles recognize the need for incident response planning, vendor and service provider controls, employee training, timely breach notification, information sharing regarding emerging threats and vulnerabilities, and the engagement of the Board of Directors (or a committee thereof) to review any findings of material risk to a company resulting from an internal audit of a company’s information technology. The Principles also call for incorporation of cybersecurity in a company’s Enterprise Risk Management (ERM) process. In addition, the Principles recognize that state insurance regulators have an obligation to protect all confidential information that they or the NAIC collect, store or transfer and that all affected parties should be timely notified in the event of a breach.
2. Price Optimization
Use of certain “price optimization” techniques for property and casualty insurance has been taken up by the Casualty Actuarial and Statistical (C) Task Force, which is now working on a white paper on the topic. This undertaking was prompted by a referral from the Auto Insurance (C/D) Study Group, which concluded that the topic of price optimization goes beyond auto insurance and requires actuarial or statistical expertise. The Task Force prepared an initial draft white paper for comment before its March meeting. The stated purpose of the white paper is to provide research on price optimization, identify potential benefits and problems with price optimization, and present options for state regulatory responses.
The Task Force appeared challenged by definitions - or the lack thereof. Confusion stemmed from a lack of clarity on whether price optimization means use of rating factors or practices that are not strictly derived from loss costs and expenses, or whether it means use of non-loss cost factors to determine price elasticity and charging consumers based on expected behaviors in response to price increases. Task Force members who viewed it as the former expressed concern with overbroad generalizations about price optimization. Charles Angell (Alabama) said rate filings with price optimization have been approved by regulators, while others have not, noting in particular price caps imposed by regulators that prevent insurers from charging actuarially indicated rates. He then commented that the issue is how far rates can deviate from purely loss-cost pricing and suggested that the Task Force define “adequate,” “not excessive” or “unfairly discriminatory,” or at least come up with a list of examples of things that clearly would or would not be “unfairly discriminatory.” After a brief discussion, the Task Force recognized that efforts to define these terms would be futile, although the idea of developing examples will continue to be explored.
The Task Force also discussed whether the white paper should be limited to personal lines, a view endorsed by one of the trade associations.
Birny Birnbaum, on behalf of the Center for Economic Justice, expressed concern that use of price optimization is unfairly discriminatory and disputed that regulatory caps on price increases are comparable to price increases premised on expectations of individual customer behavior. In response, a Task Force member disagreed that loss costs are the sole rating criteria and noted that expected policyholder behavior is a significant part of life insurance pricing. A Task Force member indicated that he was persuaded on the benefits of using better data in pricing based on webinars presented to the panel by Earnix, Inc. This prompted a request that the webinar be shared with the public in the interests of transparency. The Task Force then agreed to distribute the webinar materials - stripped of proprietary information - and these materials have been distributed in advance of a Task Force conference call scheduled for April 28.
Just prior to the Spring National Meeting, on March 18, 2015, the Financial Fraud and Consumer Protection Division of the New York Department of Financial Services issued an information request to certain New York State licensed insurers pursuant to Section 308 of the New York Insurance Law, seeking information about insurers’ use of price optimization models or considerations as part of their pricing, rate filing or tier placement decisions for any line of insurance in New York. The letter defined “price optimization” as “the practice of varying rates based on factors other than those directly rated to risk of loss, for example, setting rates or factors based on an insured’s likelihood to renew a policy or on an individual’s or class of individuals’ perceived willingness to pay a higher premium relative to other individuals or classes.” The letter clarified that, “in other words, the Department is concerned that insurers are charging higher premiums based on whether a consumer is less likely to notice, shop around, or object.” The letter takes the position that such practices are inconsistent with traditional cost-based rating and could violate the insurance law’s prohibition on the use of rates that are unfairly discriminatory.
The New York letter follows actions in Maryland, Ohio and California, which took a firmer position that price optimization - as each has defined it - is unlawful.
In February, the California Department of Insurance issued a notice announcing that “any use of Price Optimization in the ratemaking/pricing process or in a rating plan is unfairly discriminatory in violation of California law.” It defined price optimization as “any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes.” It contended that price optimization “does not use actuarially sound methods to estimate the risk of loss” and “represents a fundamental threat to fairness in rating.”
The Maryland Insurance Administration issued Bulletin 14-23 on October 31, 2014. The Maryland Bulletin defined price optimization as “varying rates based on factors other than risk of loss, including, but not limited to: (a) the likelihood that a policyholder will engage in activities that result in policy turnover [defined to include shopping with other carriers for a lower premium, cancelling a policy before the expiration of the policy term, or failing to renew a policy at the renewal of the policy term]; and (b) the willingness of a policyholder to pay a higher premium compared to other policyholders.” The Bulletin stated that price optimization, “by its nature,” involves discriminating against policyholders of the same class based on factors other than actuarial risk.
The Ohio Department of Insurance followed Maryland’s lead by issuing Bulletin 2015-01 on January 29, 2015. The Ohio Department defined price optimization as the practice of “varying premiums based upon factors that are unrelated to risk of loss in order to charge each insured the highest price that the market will bear.” The Bulletin took the position that price optimization allowed insurers to set premiums based on factors that were unrelated to the risk of loss or expense. It required insurers using price optimization to rate insurance policies in Ohio to submit a SERFF filing compliant with the Bulletin by March 31, 2015, with proposed effective dates no later than May 31, 2015 for new business and June 30, 2015 for renewal business.
3. Unclaimed Life Insurance Benefits Model Act
The life insurance industry has repeatedly called on the NAIC to develop a framework to govern unclaimed life insurance benefits, especially in light of recent case law that has been favorable to the industry. At the 2015 Spring National Meeting, the NAIC took a step towards answering this call, as the Executive (EX) Committee approved the request from the Unclaimed Life Insurance Benefits (A) Working Group to develop a new model law. Commissioner Julie Mix McPeak (Tennessee), Chair of the Working Group, proposed to title the model law as the “Unclaimed Life Insurance Benefits Act.”
Although the Working Group met in Phoenix prior to the meeting of the Executive (EX) Committee, Commissioner McPeak anticipated the Committee’s approval of the model law request and, therefore, solicited testimony during the meeting from interested persons on what form the model law should take. Commissioner Kevin McCarty (Florida) stressed his opinion that the model law should apply retroactively and that such a model law should be based on the existing settlement agreements with life insurance companies. Commissioner McCarty also suggested that the Working Group look at a previously proposed law in Illinois, which could also be used as a starting point.
Industry representatives, however, expressed their disagreement with Commissioner McCarty. They asked that the Working Group instead begin working with the National Conference of Insurance Legislatures (NCOIL) model law, but with two exceptions. The first exception would be to apply the law on only a prospective basis. Industry representatives noted that applying the law only prospectively would be consistent with the way several states have adopted the NCOIL model, and it would be consistent with recent case law on the issue. The second exception would be to remove the “fuzzy match” language, as industry representatives explained that “fuzzy logic” is not effective and not worth the significant cost to insurers.
The Working Group took the testimony under advisement and explained that a subgroup will soon be created to draft the model law. Commissioner McPeak asked Working Group members to consider whether they are able to participate; California, Louisiana, Nebraska and Wisconsin are among the states that have initially expressed interest in joining the drafting subgroup.
B. Ongoing Regulatory Initiatives
1. Life Reinsurance Captives
The issue as to whether a captive reinsurance company should be included within the definition of a “multistate insurer,” and therefore subject to the NAIC accreditation standards, continues to be a topic of much discussion. As background, the Financial Regulation Standards and Accreditation (F) Committee exposed a proposed amendment last year that would remove the exclusion for reinsurers that are licensed in a single state but assume business written outside the state, and would include “multistate reinsurers” in the definition of a “multistate insurer.” In response to numerous comment letters, Superintendent Torti acknowledged during the 2014 Summer National Meeting that the proposed definition of a “multistate insurer” was too broad. During the 2014 Fall National Meeting, Superintendent Torti directed NAIC staff to prepare new and completely revised Part A and Part B Preambles to clarify the scope of the NAIC accreditation standards, including their proposed applicability to captives engaged in reserve financing transactions, reinsurance of variable annuities and reinsurance of long-term care insurance.
In February, NAIC staff provided the (F) Committee with a revised draft of the Part A Preamble, which the Committee then exposed for public comment. During the (F) Committee meeting in Phoenix, Director Huff, Chair of the Committee, reported that they received more than 50 comment letters on the revised draft of the Part A Preamble. According to Director Huff, the vast majority of these letters asked for more clarification due to the fact that the Part A Preamble could be construed as including pure captive reinsurers within the scope of the NAIC accreditation standards. In response to these concerns, members of the (F) Committee issued a letter to state insurance commissioners on March 17 to clarify that the Committee’s intent remains to subject only those captives that reinsure certain lines of business - reserve financing transactions, variable annuities and long-term care - to the accreditation standards. This letter further stated that “captive insurers that do not reinsure this type of business would not be subject to the accreditation standards, regardless of whether they are conducting business that would otherwise be considered multi-state.” NAIC staff were directed to further revise the Part A Preamble so that it reflects the (F) Committee’s intent, as set out in the March 17 letter. Once completed, this revised draft will likely be exposed again for a short comment period.
Additionally, the Financial Condition (E) Committee created the Variable Annuities Issues (E) Working Group to oversee the NAIC’s efforts to study and address regulatory issues resulting in variable annuity captive reinsurance transactions. The Working Group will be chaired by Commissioner Nick Gerhart (Iowa). Superintendent Torti also noted that an additional working group may be created in the future to study and address regulatory issues resulting in long-term care captive reinsurance transactions.
In addition, work on reserve financing regulations were mentioned, though not fully described, during the meeting of the Reinsurance (E) Task Force. The Task Force mentioned future work to change the Credit for Reinsurance Model Law to provide for a captive reinsurance model regulation. A draft was promised for the Summer National Meeting.
2. Group Solvency Issues - Preliminary Observations from ORSA Pilot Program
The Group Solvency Issues (E) Working Group met on Saturday, March 28, to continue its work on changes to the Financial Analysis Handbook to address group supervision and best practices for supervisory colleges.
Of particular note were preliminary observations by NAIC staff and committee members from the 2014 pilot program for ORSA. NAIC staff reported that a total of 27 insurers participated in the 2014 program, representing all segments of the industry, including both U.S. domestic-only insurers and insurers that are part of international groups. Staff reported the ORSA summary reports were fairly reflective of the maturity of ERM frameworks in place, and that while companies are doing a “good job,” there remain issues about how much is too much or too little for the report, alignment of risk and business strategy, quantifying the risk appetite statement and support for why a company chose a particular solvency capital model. Deputy Commissioner Steve Johnson (Pennsylvania) provided a more favorable assessment of ORSA maturity, observing that the 2014 pilot program reflected a “huge improvement” over the first pilot and citing as specific examples linkage of business strategy to ERM, embedding of ERM in the business and establishing a business owner for each risk. He ended with a prediction that the industry will not experience a large insolvency for a long time because of ORSA, prompting some laughter, including by Mr. Johnson himself, at the ardor of his enthusiasm.
Deputy Commissioner Johnson noted that the Pennsylvania Insurance Department has met with a number of companies that approached the Department on their own initiative to get feedback on initial draft ORSA reports. Deputy Commissioner Danny Saenz (Texas) echoed that companies that are not participants in the pilot program have approached the Texas Department of Insurance for feedback on whether their ORSA reports and ERM work are moving in the right direction.
3. PBR Update
In 2009, the NAIC adopted a revised Model Standard Valuation Law, which authorizes principle-based reserving (PBR), and a Valuation Manual that sets forth the minimum reserve and related requirements for certain products under PBR. The NAIC adopted the Valuation Manual in 2012, although PBR will not be implemented until the revised Model Standard Valuation Law is adopted by 42 states and state adoption reflects 75% of total life insurance premiums written in the United States.
In Phoenix, the meeting of the Principle-Based Reserving Implementation (EX) Task Force kicked off with a report by Superintendent Torti, Co-Chair of the Task Force, on the Valuation Manual operative date. He reported that 21 states have now adopted the revised Model Standard Valuation Law (with Kentucky and North Dakota also expected to adopt the law in the coming days), although he acknowledged that the ACLI reports that 25 states have adopted the revised law. Superintendent Torti believes that the Valuation Manual could go live as early as January 1, 2017, and he expects it will happen no later than January 1, 2018. His report included a reminder to all states to get the revised Model Standard Valuation Law to their legislatures as soon as possible, and he humorously said that this message was specifically intended for New York.
Superintendent Torti also explained that a subgroup will be created to examine the criteria for determining whether a state law is “substantially similar” to the revised Model Standard Valuation Law. Only those “substantially similar” laws are counted for purposes of calculating when the Valuation Manual becomes operative. This subgroup will also reconsider the accreditation standards for state adoption of the revised Model Standard Valuation Law, which were sent back down to the Task Force by the Financial Regulation Standards and Accreditation (F) Committee.
Additionally, the Life Insurance and Annuities (A) Committee adopted an exemption for small companies from having to comply with PBR. The exemption, which is to be included in the valuation manuals, applies to individual companies that have less than $300 million in ordinary life insurance premiums and to life insurance groups that have combined life insurance premiums of less than $600 million. New York voted against the small company exemption, with Deputy Superintendent Robert Easton (New York) arguing that the exemption is unnecessary at this time, with the implementation of PBR still far off. Mr. Easton further argued that the small company exemption is not actuarially justified but rather is politically motivated as a means for getting the PBR framework adopted by the states. California abstained from the vote. The small company exemption is set for final approval by Executive Committee and Plenary at the 2015 Summer National Meeting in Chicago.
4. Reinsurance - Reduced Collateral and Covered Agreements
The meeting of the Reinsurance (E) Task Force began with Director John Huff (Missouri), Chair of the Task Force, providing a status report on state implementation of the revised Credit for Reinsurance Model Law and Regulation (Reinsurance Models). The Reinsurance Models allow highly rated non-U.S. reinsurers to reinsure U.S. domestic cedents with reduced collateral requirements. According to Director Huff, 26 states representing more than 60% of direct insurance premiums have adopted the revised Reinsurance Models. Arizona and Arkansas are also expected to adopt the revised Reinsurance Models, as the bills only need to be signed by their respective governors. Director Huff noted that he expects versions of the revised Reinsurance Models to be introduced in another 11 states during 2015, which, if adopted, would raise the total direct insurance premiums of adopting states to 93%. Director Huff also stated that more than 30 reinsurers have become certified under the Reinsurance Models.
Director Huff further provided an update on actions taken by the Task Force since the 2014 Fall National Meeting. Specifically, the following seven jurisdictions have been approved by the Task Force as Qualified Jurisdictions: Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom. The approval as a Qualified Jurisdiction will last for a term of five years. Additionally, the Task Force adopted the draft application checklist for certified reinsurer applications.
There was also significant discussion regarding the possibility of a “covered agreement” being entered into between the Federal Insurance Office (FIO) and the European Union (EU). Such a “covered agreement” would preempt inconsistent state law. Regulators on the panel expressed doubt that a covered agreement is needed to maintain strong transatlantic cooperation. Several insurance industry representatives commented, urging support for a covered agreement - or at least openness to the idea - but insisted that EU recognition of the U.S. as an equivalent or comparable regulatory jurisdiction be a part of any such agreement.
Deputy Commissioner John Finston (California) provided a brief report on the Qualified Jurisdiction (E) Working Group. Although the Working Group has recently received inquiries from a few additional jurisdictions about the steps necessary to become qualified, the Working Group has not yet received any new formal requests to initiate the process.
Deputy Commissioner Steve Johnson (Pennsylvania) next provided the report of the Reinsurance Financial Analysis (E) Working Group. He explained that the Working Group is concerned that the concept of “passporting” is not being applied consistently among the states. Deputy Commissioner Johnson stressed the need for uniformity, especially in light of recent discussions regarding a “covered agreement.”
5. Contingent Deferred Annuities
In Phoenix, there continued to be considerable progress made with respect to finalizing an NAIC framework for contingent deferred annuities (CDAs). During the 2014 Fall National Meeting, the Life Insurance and Annuities (A) Committee adopted the Contingent Deferred Annuities (A) Working Group’s amendments to four model regulations. During the 2015 Spring National Meeting, these amendments were formally adopted by the Executive Committee and Plenary. The four model regulations that were amended are: (i) the Annuity Disclosure Model Regulation (Model 245); (ii) the Suitability in Annuity Transactions Model Regulation (Model 275); (iii) the Advertisements of Life Insurance and Annuities Model Regulation (Model 570); and (iv) the Life Insurance and Annuities Replacement Model Regulation (Model 613). These amendments seek to afford SEC-registered CDAs the same regulatory treatment that the NAIC affords to SEC-registered variable annuities.
Additionally, in response to the Working Group’s request, industry representatives, including the American Council of Life Insurers (ACLI) and the Insured Retirement Institute (IRI), presented a proposal regarding cancellation benefits for CDAs in the event of a “financial institution initiated cancellation.” During the presentation, it was explained that their proposal included multiple options, so as to “provide insurers the flexibility to protect the policyholder, develop innovative products, meet market needs and manage risk.” The options proposed included annuity benefits, such as a variable annuity with a guaranteed living withdrawal benefit, a variable annuity with a guaranteed minimum income benefit, a single premium immediate annuity or a deferred income annuity. Other options included a lump sum payment of the present value of future guaranteed income or a return of fees, either in a lump sum or in a lifetime income stream. The Working Group was generally receptive to the industry proposal, except for some questions as to what would constitute a “financial institution initiated cancellation.” Ultimately, the Working Group discussed potentially including these proposed cancellation benefits in a checklist template that states can adopt.
6. Private Equity
The Private Equity Issues (E) Working Group was established during 2013 to “consider development of procedures that regulators can use when considering ways to mitigate or monitor risks associated with private equity/hedge fund ownership or control of insurance company assets, including the development of best practices and consideration of possible changes in NAIC policy positions as deemed appropriate.” The Working Group met in Phoenix to finalize changes to the Financial Analysis Handbook to provide guidance to analysts evaluating change-of-control applications. The Working Group concluded, prior to Phoenix, that many of the risks associated with a change of control that are related to private equity ownership can also be applicable to other acquiring parties. As a result, the guidance it prepared is not specifically directed at private equity but is designed to capture many of the “best practices” used by different states that have evaluated transactions involving private equity investors. This includes consideration of nine enumerated risks with respect to the acquiring entity and the entire of group of affiliated insurers and non-insurers under its control. The nine risks are Credit, Market, Pricing/Underwriting, Reserving, Liquidity, Operational, Legal, Strategic and Reputational.
In Phoenix, the Working Group approved a last round of changes that were proposed in response to a presentation by a representative from the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations during the 2014 Fall National Meeting, which identified practices that have the potential for abuse. In particular, new language was added to focus regulators on cost sharing agreements and to encourage them to be on the watch for excessive charges to regulated insurers from service providers that might not be deemed affiliates under applicable holding company rules, but which seem to be engaging in transactions similar to affiliates.
The meeting ended with a statement by Chair Doug Stolte (Virginia) that the Working Group has now completed its single charge. While this suggests the Working Group will now be disbanded, no efforts were made to do so during the ensuing parent committee meeting.
7. Corporate Governance
The Financial Regulation Standards and Accreditation (F) Committee adopted a motion recommending that the Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation (Corporate Governance Models) be added as an accreditation standard. This recommendation will be exposed for a 30-day comment period.
The Corporate Governance Models were adopted by the Executive Committee and Plenary during the 2014 Fall National Meeting as a result of a multi-year project of the Corporate Governance (E) Working Group to study and compare existing governance requirements for U.S. insurers to established best practices, international standards and U.S. regulatory needs. The Corporate Governance Models require that on each June 1, every insurer, or the insurance group in which the insurer is a member, submit a Corporate Governance Annual Disclosure (CGAD) to its lead state or domestic regulator. In the CGAD, insurers must document, in narrative form, highly confidential information about their corporate governance framework, including the structure and policies of their boards of directors and key committees, the frequency of their meetings, and procedure for the oversight of critical risk areas and appointment practices, among other things. Insurers must also disclose the policies and practices used by their board of directors for directing senior management on critical areas, including a description of codes of business conduct and ethics, and processes for performance evaluation, compensation practices, corrective action, succession planning and suitability standards.
C. Briefly Noted
1. NAIC Internal Governance
Following a recommendation from former Connecticut Insurance Commissioner Thomas Leonardi, the Governance Review (EX) Task Force recommended to the Executive Committee that an outside consultant be hired to analyze existing governance procedures within the NAIC. Last summer, the Executive Committee adopted this recommendation and issued a request for proposal.
During the 2015 Spring National Meeting, it was reported that the Executive Committee hired the National Association of Corporate Directors (NACD) as the outside consultant. Representatives from the NACD were present at the Task Force meeting, and they explained that their time in Phoenix was being spent interviewing state insurance commissioners and several key NAIC staff members. The NACD announced that they could have a draft report available within 30 to 45 days, but the Task Force stressed that it was better for the report to be done right, rather than done quickly.
2. Ridesharing White Paper
During the 2014 Summer National Meeting, the Property and Casualty Insurance (C) Committee created the Sharing Economy Working Group, chaired by Commissioner Dave Jones (California), to study the issue of ridesharing and potential gaps in insurance coverage. Ridesharing is the practice of driving for hire using an online-enabled platform to connect drivers who are using their personal vehicles for passengers. These services are provided by transportation network companies (TNCs), the most popular of which are Lyft, Sidecar and Uber. The primary issue with ridesharing is the potential gap in insurance coverage between the driver’s personal automobile insurance policy and the TNC’s commercial policy. State insurance regulators are working with state legislators to determine how best to address these insurance coverage gaps.
In Phoenix, the Working Group adopted a white paper, titled “Transportation Network Company Insurance Principles for Legislatures and Regulators,” that describes insurance issues for legislatures and regulators to consider when adopting laws or regulations regarding TNCs. Topics addressed in the white paper include insurance coverage gaps, coverage amounts and types of coverage. The Working Group also discussed compromise legislation developed by personal lines auto insurers and TNC insurers. Commissioner Jones commended the industry for working out differences and asked for the white paper to be amended to reflect the existence of the model bill and identify its supporters.
At the meeting of the Financial Regulation Standards and Accreditation (F) Committee, industry representatives voiced concern over weakened confidentiality language in state adoptions of the Insurance Holding Company System Regulatory Act and the Risk Management and Own Risk Solvency Assessment Model Act. Industry representatives, including the National Association of Mutual Insurance Companies (NAMIC) and the American Insurance Association (AIA), specifically asked the (F) Committee to address this issue in the accreditation requirements by mandating that states adopt the confidentiality language in these models. Deputy Commissioner Danny Saenz (Texas) agreed that, without the proper confidentiality language, insurers will be discouraged from filing a useful ORSA Report. The (F) Committee will further consider how to address the issue.
4. Receivership Model Law
The Receivership Model Law (E) Working Group was originally created to examine the Insurance Receivership Model Act (IRMA). However, as discussed during the 2015 Spring National Meeting, the focus of the Working Group has expanded. In Phoenix, the Working Group discussed the potential impact of the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes). Certain members of the Working Group recently met with the International Monetary Fund (IMF), and, as a result of this meeting, the members recommended that the Working Group’s focus change from IRMA to the Key Attributes. The Working Group determined to do a survey of state receivership laws to examine how they compare to the Key Attributes. The Working Group acknowledged that the Key Attributes, as currently drafted, are bank-centric. Thus, the Working Group determined to also generate feedback that can be given to the Financial Stability Board on adapting the Key Attributes to the insurance industry.
5. Mortgage Insurance
The Mortgage Guaranty Insurance (E) Working Group continues to work on amendments to the Mortgage Guaranty Insurance Model Act. During the 2014 Fall National Meeting, Deputy Commissioner Finston recommended that the credit for reinsurance provisions of an amended Mortgage Guaranty Insurance Model Act more closely parallel the collateral funding provisions in the Credit for Reinsurance Model Law.
During the 2015 Spring National Meeting, the Working Group discussed a new February draft of an amended Mortgage Guaranty Insurance Model Act. Although the February draft does not contain any revisions to the credit for reinsurance provisions, the Working Group still intends to make the provisions consistent with the Credit for Reinsurance Model Law. The Working Group stated that they want to encourage non-affiliated, third-party reinsurance. Industry representatives promised to provide the Working Group with comments on the February draft and suggested language for the credit for reinsurance provisions by the end of April.
6. International Issues
Various task forces and working groups that met in Phoenix received reports on the progress of work on international regulatory standards for insurers, including the International Association of Insurance Supervisors’ (IAIS) Common Framework for Supervision of Internationally Active Insurance Groups (ComFrame) and development of capital standards for globally significant international insurers (G-SIIs) and Internationally Active Insurance Groups (IAIGs). In addition, regulators also previewed their dissatisfaction with the findings regarding shortcomings of the existing state-based regulatory framework in the Financial Sector Assessment Program (FSAP) assessment of the United States regulation relative to international norms as embodied in the IAIS’s Insurance Core Principles (ICPs). The FSAP report was released shortly after the Phoenix meeting and while it found a reasonable level of observance in the United States of the ICPs, it nonetheless noted several areas for development and gaps in regulation, including the absence of group-level capital standards. We will provide a more detailed summary of the FSAP report and the current state of work on capital standards in a separate Focus on International Standards report.