GA Update Online is intended for NOLHGA’s guaranty association members only. The contents are confidential and should not be shared with third parties. NOLHGA reserves all rights with respect to applicable privileges from disclosure.

IN THIS EDITION:

• Introduction
• Long-Term Care Insurance (EX) Task Force
• HMO Issues (B) Subgroup
• Restructuring Mechanisms (E) Working Group
• Receivership and Insolvency Task Force (RITF)

Introduction

Peter Gallanis, Bill O’Sullivan, Dick Klipstein, and Joni Forsythe attended the NAIC’s Fall National Meeting in Austin, Texas, on December 7–9, 2019. During the meeting, NOLHGA and the National Conference of Insurance Guaranty Funds (NCIGF) jointly hosted a luncheon for guaranty association representatives and other invited guests to discuss relevant NAIC activities.

Highlights of the meetings attended and other relevant NAIC activities are summarized below.

Long-Term Care Insurance (EX) Task Force

The task force charge includes developing a consistent national approach for reviewing long-term care (LTC) insurance rates that result in actuarially appropriate increases being granted by the states in a timely manner, and identifying options to provide consumers with choices in regard to reduced benefit options where policies are no longer affordable due to rate increases. The task force has identified and begun data collection in furtherance of six workstreams, which have been tasked, respectively, with: 1) evaluating rate review methodologies and developing a consistent national approach to rate review; 2) exploring alternatives to prevent policyholders from being limited in protection only to guaranty association caps, and potential inequities resulting from varying rate increase decisions; 3) review of insurance department practices in regard to approval of reduced benefit options and notices to consumers; 4) valuation of LTC reserves; 5) investigating factors driving non-actuarial variances among states in rate review practices; and 6) exploring additional data and resources that may be needed to support the work of the task force or to refine its understanding of different state practices and the financial impact of those practices.

To date, task force activities with respect to the above six workstreams have been conducted in regulator-only sessions due to the desire to preserve the confidentiality of certain state-specific information. The task force conveyed concerns that public disclosure during the early stages of information gathering could potentially have a chilling effect on sharing information about current practices by state insurance departments. Progress reports on these workstream activities were provided during the December 9 task force meeting, and the task force expects, at some point going forward, to open their meetings for public participation.

In the meantime, the task force has posted a public summary report on the activities related to each of the six workstreams. That report is dated October 25, 2019, and is available on the task force page of the NAIC website under the “Related Documents” tab. Updates since the October 25 report were provided during the December 9 meeting.

The Rate Review Practices Group is working to develop a set of principles and criteria for a recommended multistate rate review structure. During a November 13 called, the group identified nine criteria for consideration, based primarily on current rate review practices in Texas and Minnesota. Regulator comments were due by December 6 and will be taken up for discussion on a future call.

The Restructuring Techniques Group is exploring ways to address inequities between policyholders in different states and alternatives to prevent policyholders from being limited in protection only to guaranty association caps. This group has begun developing a scope of work and discussing some guiding principles. The group was expected to meet again in mid-December to review and consider the scope of work, but no information on that meeting has yet been disclosed on the NAIC’s website.

The Reduced Benefit Options Group is conducting a survey of state practices for reviewing reduced benefit options and expects to use those survey results, at least in part, to aid in the development of recommendations for best practices. The details of the survey and responses have been kept confidential, and evaluation of the results is expected to continue throughout the first half of 2020.

The Reserve Valuation Group is focused on multistate coordination in reviewing the financial condition of LTC insurers and actuarial reviews of LTC insurance blocks, including the balancing of rate increase assumptions with reserving assumptions. This work is being coordinated through the NAIC’s Valuation Analysis (E) Working Group (“VAWG”) and the Financial Analysis (E) Working Group (“FAWG”) with the assistance of regulatory actuaries from nine state insurance departments. The work includes discussion of specific companies and is considered confidential under the NAIC’s Policy Statement on Open Meetings.

The Non-Actuarial Considerations Group is investigating variances among states in the use of non-actuarial considerations in approving rate increases, with an eye toward developing model procedures. The group is gathering information through the multistate insurance department survey. Some of the non-actuarial factors considered by insurance departments that have been identified to date include: 1) the use of phasing for large rate increases; 2) imposing caps for limits on approval amounts (approving smaller increases than requested); 3) the use of waiting periods before additional increases can be requested; 4) the size of the block and number of policyholders affected; 5) the company’s rate approval history; 6) the size of the increase requested; and 7) the impact on policyholders. The group is also considering variations in levels of regulatory discretion and “desk drawer” rules.

The Data Call Design and Oversight Group has been working on developing the scope of work and RFP for a consulting actuary that would be retained to develop a data call. Proposals were due by December 11.

The task force also received comments on its charge from interested parties, including Cantilo & Bennett and the American Council of Life Insurers (ACLI). Both expressed support, offered assistance for the work of the task force, and discussed criteria that they believe should be considered. The task force expects to complete its work and submit its report and proposals to the NAIC Executive (EX) Committee by the 2020 Fall National Meeting.

HMO Issues (B) Subgroup

The subgroup was charged with considering and, as appropriate, developing revisions to the NAIC’s HMO Model Law to conform with recent changes to the NAIC’s Life and Health Insurance Guaranty Association Model Act.

The subgroup held conference calls on September 16 and November 21 to review and discuss comments and suggestions concerning specific changes to the NAIC’s HMO Model Act. During the September 16 call, discussion was focused on a proposal submitted by the Virginia Department of Insurance. The proposal was focused on changes to HMO Model Act sections relating to continuation of benefits, the “Hold Harmless” provision, deposits, and a provision relating to open enrollment and replacement coverages.

Following discussion, the subgroup requested written comments on that proposal. On October 15, technical comments were submitted by NOLHGA and by America’s Health Insurance Plans (“AHIP”). NOLHGA’s comments were focused on a technical correction and clarification of statements in the proposal concerning guaranty association coverage. AHIP emphasized a need to indicate to states that the changes to the HMO Model Act are dependent upon whether they have adopted changes to their guaranty association statutes.

In November, additional suggestions and revisions were submitted by the Virginia and Maine Departments of Insurance. Virginia’s comments suggested leaving the current HMO Model requirements in place but adding drafting notes to raise alerts concerning potential conflicts for states that had adopted the most recent changes to the Guaranty Association Model Act (the Virginia approach). Maine’s comments essentially urged repeal of the HMO Model provisions and replacement with drafting notes alerting states to consider retaining those provisions to the extent they have not adopted the most recent changes to the Guaranty Association Model Act (the Maine approach).

Both proposals favored retaining the “hold harmless” provision with additional explanatory notes commenting on protecting consumers against balance billing.

The subgroup held a call on November 21 to discuss the options presented by Virginia and Maine. Following discussion, the subgroup voted to follow the Maine approach, deleting potentially inconsistent provisions and replacing them with drafting notes (except for the hold harmless provision, which will be retained and explained). NAIC staff was instructed to incorporate those changes into a draft to be circulated to the subgroup in January.

Restructuring Mechanisms (E) Working Group

The working group has been charged with evaluating and preparing a whitepaper addressing the newly emerging Insurance Business Transfer (IBT) and Corporate Division statutes that are being adopted or considered in various states.

During the working group’s in-person meeting in August, the group heard presentations from Paul Brockman (Enstar) and Kelly Superczynski (Aon) concerning the perceived need for restructuring legislation in the United States based on their experience with Part VII Transfers in the U.K. and similar restructuring mechanisms around the world. Following the presentations, working group members raised questions concerning guaranty association coverage and the continuation of reinsurance agreements post-transfer. Due to time limitations, the working group had to end the discussion, but planned to schedule a follow-up call to allow for additional regulator questions. That call was held on October 1.

During that call, discussion and questions focused on the possible use of IBT and corporate division statutes in the context of personal lines and the resulting consumer protection concerns, licensing requirements for companies acquiring business through IBT and corporate division transactions, potential conflicts with state Assumption Reinsurance laws requiring policyholder consent, and the impact of such transactions on guaranty association coverage.

The working group also discussed the recent case in the U.K. (the Prudential Assurance Company (UK) Rothesay Life case) involving the court’s rejection of a scheme transaction for personal lines business (annuities) that had been approved by regulators and the independent expert in the case. Staff was asked to circulate a copy of that decision to subgroup members for discussion at the Fall National meeting in December.

When the working group met on December 8, they received comments from the American Council of Life insurers (ACLI), the National Conference of Insurance Guaranty Funds (NCIGF), and the American Property and Casualty Insurance Association (APCIA) concerning transaction principles for IBTs and corporate division transactions. They also discussed drafting the whitepaper, the use of segregated accounts and protected cells in IBT and corporate division transactions, and the potential impact on guaranty association coverage; received an update from the Restructuring Mechanisms (E) Subgroup; discussed the U.K. High Court’s decision in the Prudential (UK) case; and received comments concerning the approval of the first IBT transaction in Oklahoma.

Richard Bowman and Wayne Mehlman provided an overview of the ACLI’s principles and guidelines on IBT and corporate division legislation. A statement of those principles was included as agenda attachment B on the working group's NAIC page. They reiterated the five guiding principles adopted by the ACLI, which include access to the process for policyholders, robust regulatory review, the use of independent experts, court approval for IBTs, and protections for policyholders and the state-based guaranty association system by requiring that successor insurers be licensed in all states where the dividing or transferring company was licensed so as to ensure that guaranty association coverage remains with the same states after the transaction.

The ACLI further reported that it will support legislation that adheres to those principles but will not support legislation that does not. It was also noted that NCOIL is working to develop IBT model legislation, and the ACLI is coordinating with them to incorporate their guiding principles. Questions from regulators were largely focused on the mandatory use of outside independent experts and the requirement for court approval of IBT transactions.

The working group also heard a presentation from the NCIGF concerning their position statement on restructuring. In short, the NCIGF’s position is that an IBT or corporate division transaction should not reduce, eliminate, create, increase, or otherwise impact guaranty fund coverage for the policies involved. The NCIGF has determined that certain technical changes will be needed to state property and casualty guaranty fund laws to reconcile with IBT and corporate division statutes to achieve that result. A copy of the NCIGF position statement was included as agenda attachment C. The NCIGF is working to develop language to achieve the technical changes needed and expects to have that available within the next 30 days. The NCIGF’s Public Policy Committee will oversee a coordinated national effort to get the necessary changes to guaranty fund laws enacted in every state.

Thereafter, Steven Broadie (APCIA) noted the APCIA’s support for the NCIGF position statement and made a brief presentation of principles adopted by the APCIA for IBT and corporate division statutes. Like those adopted by the ACLI, the APCIA’s principles are focused on: 1) robust due process for stakeholders; 2) no loss or gain of guaranty fund coverage as a result of a restructuring transaction; 3) a robust regulatory review process; 4) use of an independent expert to advise and assist regulators in reviewing IBT transactions; and 5) court approval for IBTs but not corporate division transactions.

There is significant, but not complete, overlap between the APCIA and ACLI principles. The APCIA principles require an opportunity for written comments by stakeholders; consideration of plans for the liquidation, consolidation, merger, or material change in corporate structure and the impact on stakeholders; and an independent expert for IBTs but not corporate division transactions. The ACLI principles include more detailed and explicit requirements for regulatory review and independent expert findings; prohibit plans for liquidation, consolidation, merger, or any material changes in corporate structure; and require specific findings by independent experts in the context of both IBTs and corporate divisions. A statement of the APCIA principles was made available as a handout at the meeting and is posted to the working group page on the NAIC website under the “related documents” tab.

Next, the working group discussed plans for drafting the restructuring whitepaper. It was agreed that NAIC staff would review the minutes of subgroup discussions and the tables of contents included in reports posted to the working group’s page on the NAIC website and develop a list of the issues that the subgroup is reviewing. The list will include a discussion of U.K. Part VII schemes, as well as troubled company versus non-troubled company transactions.

The working group next turned its attention to discussion of the use of segregated accounts and protected cells and the potential impact on guaranty association coverage. Dan Schelp (NAIC) reported concerns that the use of segregated accounts and protected cells in the context of restructuring transactions could result in the loss of guaranty association coverage for policies held within those structures. According to Mr. Schelp, if regulators want to allow segregated accounts and protected cell structures to be used, they will have to address the issue of guaranty association coverage. He further noted that capital standards and RBC requirements are affected by the use of these structures, and that the NAIC will need to identify what accounting standards will and will not be permitted for accreditation purposes where protected cell or segregated account structures are used. The NAIC has a protected cell model law, which was designed for securitization transactions, but it has not been widely adopted. Mr. Schelp suggested expanding that model to address restructuring transactions and accounting standards for segregated accounts and protected cell structures.

Next, the working group received a status update from the Restructuring Mechanisms (E) Subgroup. The subgroup’s charge includes the development of best practices for approval of restructuring transactions. The subgroup is conducting a survey of state insurance departments to gather information about current practices and activities related to restructuring transactions. Survey results are being compiled and will be discussed on a call in January. The subgroup will use this information to begin developing best practices for review and approval of restructuring transactions.

The working group then took up discussion of the recent Prudential (UK) decision rejecting a proposed U.K. Part VII transfer. A copy of the decision was included as agenda attachment D. Carey Child of the law firm Norton Rose Fulbright addressed the working group to respond to various questions raised about this decision during the October 1 call. The court in this case rejected the Part VII transfer over concerns about changing private contract rights over the objections of policyholders simply to further commercial interests and with no benefit to the policyholders. Mr. Child noted that an appeal of the decision was filed in October, and that two additional Part VII schemes involving personal lines have been approved since then.

Birny Birnbaum of the Center for Economic Justice voiced concerns about the role of the independent expert in these transactions, noting that the independent expert is focused solely on capital strength and does not address non-financial considerations such as customer care, which need to be addressed to fully represent policyholder interests. He stated that there needs to be a separate policyholder advocate with access to confidential plan documents to protect policyholder interests in these types of restructuring transactions. The discussion was tabled due to time constraints and will be continued at the next meeting.

The final topic addressed to the working group was a report by Superintendent Combs (Oklahoma) regarding approval of the first IBT transaction in Oklahoma. He reported that Commissioner Mulready approved the IBT transaction on November 26, and it is being presented for court approval. The transaction involves all property and casualty liabilities, and an independent expert was retained to evaluate the transaction. According to Superintendent Combs, a lot of time was spent developing a communications plan, and a hearing was scheduled for mid-December for court approval of the communications plan. He further noted that there are resource documents available on the Oklahoma Insurance Department website describing the process for approval of an IBT transaction in Oklahoma.

Receivership and Insolvency Task Force (RITF)

Following adoption of its Summer National meeting minutes, the task force heard and accepted reports from the Receivership Financial Analysis Working Group (“RFAWG”) and the Receivership Large Deductible Worker’s Compensation (“Large Deductible”) Working Group. RFAWG met on August 4 in a regulator-to-regulator session to discuss the status of individual receiverships and related issues. The Large Deductible Working Group held conference calls on October 24 and December 2 to consider a proposed guideline offered as a compromise alternative to section 712 of the NAIC’s Insurer Receivership Model Act. The proposed guideline was exposed for a 60-day comment period, and comments are due by January 31. The working group will review comments on the proposed guideline following conclusion of the comment period. The working group also proposed revisions to the Receiver’s Handbook for Insurance Company Insolvencies based on the proposed guideline. The proposed revisions were included as an agenda attachment three (see the RITF page) and were adopted unanimously.

The task force then received an update concerning recommendations in response to the Macroprudential Initiative referral. During its last meeting in August, the task force adopted recommendations to address issues related to federal taxes and federal releases in the Receiver’s Handbook. Proposed revisions to the handbook have been developed, and the task force voted to expose the proposed revisions for a 60-day comment period. NAIC staff will post the proposed handbook revisions to the NAIC website. Comments are due no later than January 31.

The task force then took up discussion of methods for addressing continuity of essential services and functions in receivership, particularly where services are provided by non-regulated entities. RITF Chair James Kennedy noted that the NAIC’s Holding Company Model Act has provisions dealing with affiliated entities but may not go far enough to address the issue. It might be possible to amend the NAIC’s Insurer Receivership Model Act to address this issue. However, this NAIC model is not widely adopted and is fairly controversial. On the other hand, the Holding Company Model Act is not within the purview of RITF. The task force will need to discuss this issue with the Financial Condition (E) Committee to consider whether RITF might propose revisions to the Holding Company Model Act. Otherwise, the task force will have to go back to the Receivership Model Laws Working Group to give further consideration to the problem.

The next item discussed was a recommendation for a way to encourage states to adopt certain key provisions of the NAIC’s Insurer Receivership Model Act. Two options were addressed. The first was a tightening of the accreditation standards to require the inclusion of certain key provisions. The second option was a referral to the Receivership Model Law Working Group to identify provisions in the receivership model act that might be considered essential for consistency. Mr. Kennedy noted that the charge would be to focus only on interstate issues and not on the entire model act, which has been done in the past. Once these essential provisions addressing interstate issues were identified, states would be encouraged to adopt them.

The task force then heard a brief update from Wayne Johnson of Risk Regulatory Consulting concerning technical changes made to the IAIR accreditation program in January. The IAIR website will be updated to reflect the new program requirements. Specifics concerning the accreditation program changes are outlined in PowerPoint slides included as agenda attachment five and posted to the RITF page on the NAIC’s website.

James Kennedy and Robert Wake then provided an update on international resolution activity, noting that the Resolution Working Group of the International Association of Insurance Supervisors (IAIS) has just completed an application paper on recovery planning and is beginning work on an application paper on resolution and resolution planning. An additional matter brought before the task force was a concern raised by Fran Semaya regarding the enforcement of stays in a liquidation order. Mr. Kennedy noted that this is one of the issues that will need to be considered in the context of addressing inconsistencies among state laws for the purpose of responding to the Macroprudential Initiative referral.