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
• NOLHGA Meetings
• Constituency Relationships
• Financial Activities
• Financial Services Modernization
• MPC Activities
• NOLHGA Committee Activities
• Communications
• Legal Activity
• Systems Support/Technology/Website

Introduction

In October 2014, the NOLHGA Board of Directors held its most recent quarterly meeting. Relevant portions of the management report provided to the Board are included in this issue of GA Update Online.

Since the Board met in August, staff has focused primarily on the following matters: (1) coordination and support for insolvency task force activity; (2) detailed planning for the October MPC meeting, Board Meetings, and Annual Meeting; (3) work on initiatives to promote and develop stronger relationships with the health industry; (4) various projects related to financial services modernization; (5) conducting an internal audit: (6) finalizing the 2015 operating budget; and (7) providing support for other Board and MPC committees and subgroups.

Insolvency activity continues to be heavily focused on Penn Treaty Insurance Company (Pennsylvania) and Lincoln Memorial (Texas).

NOLHGA Meetings

2014 Annual Meeting

Work on the 2014 Annual Meeting speaker program has been completed. In addition to several NOLHGA and Board of Director speakers, the following outside speakers are confirmed for the meeting:

• Basketball legend Bill Walton (luncheon speaker)
• Esfand Dinshaw: Chairman & CEO, Sammons Financial Group
• Patricia Guinn: Managing Director, Towers Watson
• Lee Covington: Senior VP for Governmental Affairs & General Counsel, Insured Retirement Institute (IRI)
• Commissioner Sharon Clark: Kentucky Department of Insurance
• John Finston: Deputy Commissioner for Corporate and Regulatory Affairs, California Department of Insurance
• Peter Goldstein: CEO and Co-Founder, LTCG
• Michael Pollack: Towers Watson

In addition, a promotional e-mail was sent to prospective attendees in August, and the Annual Meeting registration brochure was mailed in early September.

Legal Seminar

In addition to follow-up work from the 2014 Legal Seminar (e.g., confirming CLE credit, reviewing/approving invoices, and sending thank you notes to speakers), staff has been working to identify venues to host the 2016 Legal Seminar (possibilities include the Hyatt Regency Hotel or Fairmont Copley Plaza Hotel in Boston) and the 2017 Legal Seminar (the Ritz Carlton in Chicago). Next year’s Legal Seminar will be held at the Ritz-Carlton Hotel in San Francisco on July 23–24, 2015.

Constituency Relationships

Regional GA Meetings

Paul Peterson attended the Southeast Regional GA Meeting in Asheville, North Carolina. Topics included an update on Accounting Issues Committee activities, assessment systems and practices, technology updates, encryption software, disposal of old computers and equipment, public records, health assessments and protests, Medicare C & D premium data, assessing companies while they are in rehabilitation, remote checking deposit usage, electronic storage of records, board meetings, contingency planning, MPC meetings format (task force vs. in-the-round vs. telephonic), role of task force working groups, adoption of the GA Model Act provisions, disclaimer notices, proof of claim reporting, and products (annuities, long term care, and hybrids).

Paul Peterson, Holly Wilding, and Joanna Akiyama attended the Midwest Regional GA Meeting held in Oak Brook, Illinois, on August 27–28, 2014. Topics of discussion included the Health Insurer Study Group report, policyholder inquiries on old insolvencies, Accounting Issues Committee updates, assessment systems and practices, cost allocation methodologies, the work of the GA Best Practices subgroup, insolvency issues, and board meetings. In addition, presentations were conducted on the Affordable Care Act (by the Katie School of Insurance) and on enterprise risk management and own risk and solvency assessment considerations (by representatives of Plante & Moran).

ACLI

On September 9, 2014, Bill O’Sullivan and Kevin Griffith (NOLHGA’s outside counsel on coverage issues) participated in a teleconference of ACLI’s Receivership Committee. Among other matters, the committee discussed:

GA Coverage of Contingent Deferred Annuities (CDAs): Following extensive discussion, the committee decided to support the NAIC RITF’s position on guaranty association coverage.

New NAIC Project to Promote Consistency in State GA and Receivership Acts: Following discussion, the committee decided ACLI staff should collaborate with NOLHGA staff in contacting the NAIC to obtain a better understanding of this project and how it would relate to ongoing efforts by NOLHGA and the ACLI to achieve functional consistency in state guaranty association laws.

Other Topics: The committee also heard reports on and/or discussed the following items: (i) the NAIC Summer National Meeting; (ii) the NAIC Federal Home Bank Loan draft guidance; (iii) the NAIC Project on Guidance for Pre-Receivership Planning; (iv) reports on pending state guaranty association legislation; and (v) the International Association of Insurance Supervisors.

NAIC

Bill O’Sullivan attended the NAIC’s Summer National Meeting, which was held in Louisville on August 16–19, 2014. NOLHGA’s NAIC report was published in GA Update Online, distributed on September 23. In addition to the Summer National Meeting, NOLHGA staff and outside counsel participated in two NAIC teleconferences related to contingent deferred annuities (CDAs):

CDA Working Group: The CDA Working Group met on August 13 to discuss draft Guidelines for Financial Solvency and Market Regulation of Insurers Who Offer Contingent Deferred Annuities (the “Guidelines”). The Guidelines include a section on guaranty association coverage, which states that the working group has found that guaranty association coverage of CDAs would likely vary from state to state. During the call, NOLHGA staff stated it would be premature for the group to reach such a conclusion on coverage since most states had not reviewed the issue. NOLHGA staff also pointed out that most state guaranty association acts had been updated to be substantially consistent with the NAIC Model Act, so significant variation among the states was unlikely. In response, a working group representative indicated that the section on guaranty association coverage was not clearly drafted and that the intent was to state that each guaranty association would need to review the issue of CDA coverage for itself. The Chair agreed and invited NOLHGA to submit written comments so that the language on guaranty association coverage could be clarified. Following the call, NOLHGA staff did submit written comments to the working group consistent with the discussion during the call.

Receivership Insolvency Task Force (RITF): The RITF held a teleconference on September 4 to discuss a draft response to its charge to investigate guaranty association coverage of CDAs. Generally speaking, the draft response found that CDAs would be eligible for coverage under the NAIC GA Model Act and those state laws consistent with the Model Act in relevant respects. The response specified that it was based on the assumption that CDAs would be characterized as annuity contracts for state regulatory purposes and as such would be issued by member insurers of the guaranty associations. The response also explicitly acknowledged that guaranty association coverage can only be determined by each individual association based on the facts and law in existence at the time of triggering. The draft response was generally consistent with NOLHGA’s presentation on CDA coverage during the Louisville NAIC meeting. Following brief discussion by RITF members, the Center for Economic Justice (CEJ) stated its opposition to the draft response on various grounds, including that NOLHGA’s analysis of CDAs was inadequate and did not address various coverage exclusions. In response, NOLHGA staff advised RITF that the Coverage/Claims Committee’s analysis was comprehensive and did account for all possible coverage exclusions. Ultimately, the RITF Chair indicated he would not entertain CEJ’s comments because they were not submitted on a timely basis and called for a vote on the draft response. Following brief discussion, the RITF unanimously approved the response. Following the call, the draft response was submitted to the RITF’s parent committee (Life and Annuity (A) Committee) for its review and approval.

Financial Activities

The Accounting Department has been involved in finalizing the 2015 operating budget; the proposed 2015 operating budget was approved by the Finance Committee on September 22, 2014, and was presented to the Board for approval in October. In addition to routine accounting-related tasks, staff also calculated and mailed the second quarter 2014 quarterly assessments.

Since the last Board meeting, the Accounting Department coordinated the following insolvency-related account distributions: (1) $2.3 million to affected members ($162,000 and $1.8 million in premium collection refunds related to Lincoln Memorial and National States, respectively, and $302,000 due to a quarterly true-up of escrow account activity related to Life & Health Insurance Company of America); and (2) $2.6 million to TPAs and receivers to fund claims and expenses for three active insolvencies.

Assessment Data Survey

A review of responses from member companies that received follow-up letters was completed during the third quarter. Of the 59 top-85 annuity companies requiring follow-up on their 2013 premium data, 21 companies filed corrections to their data survey filings. Of another 89 companies requiring follow-up (these include BCBS, life companies, etc.), 31 companies filed corrections.

Follow-up letters were sent to companies writing Medicare-related business for the first time during the 2013 review process; 78 companies received follow-up letters regarding Medicare deductions they may or may not have taken. Of these, 48 filed corrections to their data survey.

We have also completed the trend test of state-level premium data with no exceptions noted in preparation of releasing the data to guaranty associations and insurance commissioners. Premium data was released to guaranty associations on October 1, 2014. The delivery method for the 2013 data was similar to a new process introduced last year: files were uploaded to Quest, and guaranty associations were notified that the files are available for downloading at their discretion. Also, a letter was mailed to insurance commissioners informing them that the data is available by request by contacting Strohm Ballweg (note: for 2012 data, only two insurance departments requested a copy). Delivery was then made via a secure website link at Strohm Ballweg.

Financial Systems Project

Staff members have been working on a plan to redesign and integrate several of NOLHGA’s legacy financial systems (NIRS, NOLHGAB, SAS, and files used for reporting costs and expenses). The systems have performed adequately to date, but some of the systems are difficult to maintain and information cannot be shared across systems. This quarter, additional documentation was drafted that details the role of each system. Members have met periodically to review the documentation and discuss plans to develop a new system.

Guaranty Association Assessment Information

This annual project entails collecting assessment information by state (assessed, called, and refunded for each account and each insolvency). The data is used to publish assessment-level activity reports in the fall. Compilation of 2013 assessment activity has been completed. Final reports will be produced in November once assessment capacity estimates are completed (awaiting the release of 2013 assessment data survey premium information).

Internal Audit

The 2014 internal audit was performed in September. This audit focused on consultant billing rates and limited testing on escrow account disbursement activity. The review period covered for this audit was January 1, 2013, through July 31, 2014. Only a few minor items were noted, which dealt with documentation of billing rate increases and the timing of disbursement of funds held in the escrow accounts. Recommended testing areas for 2015 include insolvency expense allocation/billings among guaranty associations and detailed testing of consultant billings (including a follow-up on the 2014 report findings). The audit results were reported to the Audit Committee during a September 23 teleconference.

Financial Services Modernization

Staff continued to work with outside consultants from Faegre Baker Daniels and Towers Watson on the project to analyze and compare protections afforded by the Pension Benefit Guaranty Corporation (PBGC) with protections provided by the state receivership and insurance guaranty systems. The project’s analytical work is complete, and the results show that the state receivership/guaranty system protections compare favorably to those provided by the PBGC. The group is in the process of documenting the results in a written report. In addition, a presentation on the project results was made during NOLHGA’s Annual Meeting.

Staff has continued discussions about the possibility of conducting stress testing of the guaranty system.

MPC Activities

Asset Recovery Report

The Asset Recovery Report was made available to guaranty associations on NOLHGA’s website on September 1, 2014. This semi-annual report provides individual estate information such as what assets, if any, have been distributed or are expected for distribution and what outstanding issues must be resolved prior to estate closure.

The Estate Assets report is combined with the Net Cost Summary, a chart that numerically illustrates an estimate of total estate assets remaining for all the open multi-state insolvency cases. Also included is the Closed Estates Summary, a listing of estates that are known to be closed and the dates of closing.

There were a few minor formatting changes made to the report before it was published to make the report easier to read and to provide a better layout of the Financial Summary.

Survey on GA Administrative Practices

Results of a June 2014 survey on guaranty association administrative practices have been compiled and shared with guaranty association administrators. The report was conducted to update results from a prior survey in 1999 and was designed to provide guidance to administrators and various committees.

D&O Subgroup

This subgroup continued to pursue its charge of investigating the availability of cyber breach liability insurance. Following a subgroup strategy call on August 11, 2014, staff commenced discussions concerning cyber liability products with an insurance broker and obtained informational materials, specimen policies, and applications through that broker for several cyber liability carriers. The subgroup is evaluating those materials and expects to coordinate with the broker to meet with one or more underwriters for further information and fact gathering in regard to risk, coverage types, underwriting practices, and pricing.

NOLHGA Committee Activities

Accounting Issues Committee

The committee met on August 26, 2014, at the office of the Illinois guaranty association. The committee reviewed and approved the work products of the Audit Committee subgroup and Investment Guidelines subgroup for inclusion in the Accounting Guidelines Manual. The committee plans to hold its next meeting in conjunction with the January 2015 MPC meeting.

Communications Committee

The committee completed its review of the Coverage/Claims Committee’s revised content for the FAQ sections of the NOLHGA website and the state guaranty association sites hosted by NOLHGA. A redlined document with the committee’s suggestions and comments was sent to the Coverage/Claims Committee in August.

Coverage/Claims Committee

The committee met by teleconference on September 3 to continue its work on 2014 projects.

Communications

GA Update Online

The August 18, 2014, issue of GA Update Online contained details of the management report provided to the NOLHGA Board for its August meeting. A supplemental issue, complete with coverage of the Summer NAIC Meeting, was distributed on September 23, 2014.

NOLHGA Journal

Work on the October 2014 issue of the NOLHGA Journal is complete. The issue, which features coverage of the 2014 Legal Seminar, was distributed at the Annual Meeting and mailed to all subscribers.

Committee Support

We assisted the GA Laws Committee in drafting a letter to guaranty association Board Chairs and administrators updating them on the committee’s progress in helping state guaranty associations update their statutes to bring them in line with the key provisions of the most recent NAIC GA Model Act. The letter also encouraged associations that have not yet updated their statutes to consider doing so.

Legal Activity

Since the last Board meeting, Legal Department staff has been engaged in the following activities:

GA Model Act Initiative: Staff arranged and participated in outreach calls with five guaranty associations that have not yet updated their guaranty association acts. The participants on the calls included the Chair of the GA Laws Committee and the guaranty association administrator and Board Chair from each of the five states. The calls provided a valuable opportunity for the parties to discuss the status of efforts and possible strategies for updating the acts in the relevant states. The next teleconference of the GA Laws Committee is scheduled for October 27.

MPC Security Advisory Committee (SAC): The SAC continued its work to oversee and maintain compliance with the MPC Security Procedures, which included: (1) following up on responses to the 2014 security compliance questionnaire; (2) interviewing outside security consulting firms that could be engaged on a standby basis to assist NOLHGA in the event of a security breach; and (3) communicating with guaranty association administrators on developments with respect to encryption software.

NOLHGA D&O Coverage: Staff completed extensive efforts to obtain replacement D&O coverage for NOLHGA. These efforts included coordinating the efforts of two brokers to obtain quotes, completing three applications to solicit coverage quotes from 27 insurers, and evaluating quotes from four different carriers. Ultimately, NOLHGA management decided to accept coverage from an A+ rated carrier willing to match NOLHGA’s prior level of D&O liability coverage. In addition, the carrier is providing employment practices liability coverage.

Other Matters: Staff provided support on: (i) various engagement letters; (ii) “help desk” requests from members and other constituents concerning receivership and guaranty association legal issues; and (iii) the preparation of the MPC Asset Recovery Report.

Systems Support/Technology/Website

Member Support

The Systems Department continues to provide technical assistance to member guaranty association administrators and staff for a variety of systems-related inquiries.

Network Systems Status

The Systems Department conducted another disaster recovery test with EVault (NOLHGA’s online backup service). EVault was able to quickly recover all of the servers, and all of the services ran as expected. Another disaster recovery test is planned for 2015. We renewed our disaster recovery agreement with EVault for another year, with the new agreement providing NOLHGA with additional backup space at a reduced fee.

An outside consulting firm was hired to assist NOLHGA in determining whether its website has vulnerabilities that could enable a malicious user to gain unauthorized access to confidential information. After completing the test, the firm issued a report that identified several potential vulnerabilities. Staff has addressed most of the issues identified in the report and planned to address the remaining vulnerabilities by the end of the third quarter.

Technical Assistance for Guaranty Association Administrators

The Systems Department continues its member outreach program. At the time of this report, the department has spoken with 29 associations, all of which seem very appreciative of the staff’s efforts.

The Systems Department will host a webinar training session on encryption for interested members. The 30-minute webinar will be performed live in late October, and participants will be able to interact with questions. A recorded version of the webinar will be made available via NOLHGA’s website.

The September edition of the NOLHGAnet was distributed to guaranty association administrators and NOLHGA staff. Additionally, an update on technology guidelines and trends has been drafted and will likely appear in the next issue of GA Update.