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IN THIS EDITION:

• Introduction
• Contingent Deferred Annuity (A) Working Group
• Unclaimed Life Insurance Benefits (A) Working Group
• Receivership Model Law (E) Working Group
• Receivership and Insolvency (E) Task Force (RITF)
• Cyber Security (EX) Task Force

Introduction

The following is a report on relevant activities in conjunction with the NAIC’s Fall National Meeting, held on November 19–21.

Contingent Deferred Annuity (A) Working Group

This working group met to review and continue discussion of issues related to the regulation of contingent deferred annuities (CDAs). The focus of the discussion was the working group’s revised draft Guidance for the Financial Solvency and Market Conduct Regulation of Insurers Who Offer Contingent Deferred Annuities, as well as final comments submitted by the ACLI and by the Center for Economic Justice (CEJ).

Questions that arose during the August meeting concerning reserves and risk-based capital requirements for CDAs have been addressed with input from the NAIC’s Life Actuarial (A) Task Force (LATF), and the NAIC’s Life Risk-Based Capital (E) Working Group (LRBCWG). LATF has determined, and recommends, that reserving for CDAs should be done in accordance with AG 43 (Actuarial Guideline 43 for Variable Annuities). The LRBCWG recommends that capital requirements for CDAs be determined using the NAIC’s Life Risk-Based Capital Requirements applicable to variable annuities (C3 Phase II standards). Both of those recommendations were incorporated into the revised Guidance document.

The ACLI confirmed its support for the revised Guidance document, offering primarily technical amendments for purposes of clarifying various features of CDAs. Birny Birnbaum of the CEJ continued to urge that additional guidance and more simplified disclosures are needed and that options for providing cancellation benefits should be limited to cash payments, to the exclusion of replacement annuities, which he argues is simply another method of generating fees for insurers. Conversely, working group members pointed out that a replacement annuity would mirror the benefits the policyholder originally purchased and is therefore appropriate for inclusion as an option for providing cancellation benefits, along with lump sum payments and an option for return of fees.

Following discussion, the working group adopted the revised Guidance document for presentation to the Life Insurance and Annuities (A) Committee. As adopted, the revised Guidance includes the Receivership and Insolvency Task Force’s (RITF) findings that CDAs would fall within the definition of “annuity” in the NAIC Guaranty Association Model Act and would be subject to the same provisions for coverage, group and individual, and subject to the same limitations and broad exclusions as other annuities. This finding was based on the assumption that CDAs are considered annuities under state law and the issuer is a member insurer under state guaranty association law. Subject to final determinations regarding coverage being made at the state level, RITF also found that, in those states that meet the above assumptions, CDAs should be eligible for coverage, subject to all of the statutory limits and exclusions that apply to annuities. With its completion of the Guidance document, the CDA Working Group states that its work on CDA issues is complete unless further charges are received. The Guidance document was adopted by A Committee during its November 20 meeting.

Unclaimed Life Insurance Benefits (A) Working Group

This working group did not meet during the Fall National Meeting, but its drafting subgroup has held nine teleconferences since the August National meeting in an effort to complete a draft of an NAIC model law to address insurer obligations with respect to unclaimed life insurance benefits. Earlier this year, the drafting group heard presentations concerning several options that could be used as a starting point for drafting an NAIC model, including the NCOIL Model, the New York Unclaimed Life Benefits Law, legislation proposed in Oklahoma and Louisiana (largely based on the NCOIL model), and a newly released “Lead States” draft that was designed to track the global regulatory settlement agreements that were reached with 15 of the largest U.S. life insurers between 2012 and 2014 following regulatory audits and investigation of life settlement and escheat practices. Many industry representatives and interested regulators advocated strongly in favor of using the NCOIL Model approach, with certain modifications to eliminate retroactive application and fuzzy match criteria.

Ultimately, the voting members of the drafting group were evenly split as to whether the NCOIL Model or the Lead States’ draft should be used as a starting point for discussions. NAIC staff prepared a section-by-section comparison chart outlining the differences between the NCOIL model and the Lead States’ proposal so that the drafting group could vote on which approach to use for each section of the initial draft of an NAIC model. Discussions progressed slowly, and consensus was rare. Following its November 13 teleconference, the drafting group circulated its initial draft for comments. Comments are due on or before December 14, and a call has been tentatively scheduled for December 18. A copy of the exposure draft is posted on the NAIC website on the Unclaimed Benefits Model Drafting (A) Subgroup page.

In the exposure draft, many important issues remain bracketed as undecided or otherwise include multiple options. Issues that remain undecided include: 1) exclusions for credit life, mortgage life, and accidental death policies; 2) exclusions for health insurance coverages, including disability and long-term care, arising from the reported death of an insured; 3) the scope of “thorough search” requirements; 4) the inclusion of aged, lapsed policies in searches; 5) the mandated frequency of searches; 5) appropriate deadlines for contacting beneficiaries and providing claim forms; and 6) whether search requirements should be retroactive, prospective, or retroactive only where the insurer has performed searches on annuity business but not life or retained-asset accounts prior to the effective date of the act.

The drafting group may hold a vote on the draft following discussion of comments on its upcoming December 18 teleconference. If adopted by the drafting group, the draft model would then be presented to the full Unclaimed Life Insurance Benefits Working Group for their consideration. In the meantime, 19 states have already adopted laws based on the NCOIL Model, and more have legislation under consideration.

Receivership Model Law (E) Working Group

In an ongoing effort to respond to the Financial Sector Assessment Program (FSAP) review and, more particularly, the focus during that review on comparing U.S. receivership laws to the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes), the Receivership Model Law (E) Working Group (RMLWG) developed and distributed a survey to state insurance departments seeking information concerning specific aspects of state receivership laws and how they may correlate to specific Key Attributes.

The survey was finalized and circulated to the states following the NAIC’s Summer National meeting, and states were asked to respond within 30 days so that the results could be reviewed and assembled in advance of the Fall National Meeting. The survey contained 31 questions related to a multitude of issues including grounds for receivership, jurisdictional issues, statutory authority, stays, judicial roles and process, priority schemes, and operational issues impacting receiverships. As of mid-October, 37 states had responded to the survey. A 31-page summary of responses has been posted to the NAIC’s RMLWG web page, along with a much longer (144-page) detailed report of individual state responses. The working group discussed the need to review and prioritize the survey responses in the context of the Key Attributes. Kristine Maurer (New Jersey) suggested that a thoughtful process is needed to consider and determine which Key Attributes should be and can be implemented without doing harm to the strengths implicit in the U.S. system. The working group voted to request comments from regulators and interested parties concerning the survey results, and more particularly, is soliciting recommendations concerning specific areas where existing state receivership laws and practices should be improved and/or made more consistent. Comments are due by February 1.

In addition, Chairman Kennedy commented on the recent Federal Insurance Office (FIO) Annual Report on the Insurance Industry, which was released in September. According to Mr. Kennedy, the FIO Report raises concerns about inconsistencies with respect to benefit limits for both life and health and property and casualty guaranty fund laws. NOLHGA President Peter Gallanis responded briefly, noting that life and health guaranty association coverage limits either meet or exceed the Model Act limits in virtually all states. Moreover, Mr. Gallanis noted that guaranty association coverage is a social good that comes with a social cost, such that it would be neither practical nor appropriate to ask each state to climb to the highest level of coverage of any other state, or to impose mandatory ceilings, precluding any state from providing higher levels of coverage, regardless of differences in the needs and circumstances of their populations.

Receivership and Insolvency (E) Task Force (RITF)

In addition to adopting the reports of its Receivership Model Law Working Group (RMLWG) and Receivership Financial Analysis Working Group, the RITF discussed the following:

Receiver’s Handbook for Insurance Company Insolvencies: The task force adopted proposed changes to Chapter 1 of the Receiver’s Handbook, as developed and recommended by the Receivership Technology and Administration Working Group. The changes supplement a pre-takeover checklist related to pre-receivership information gathering and primarily relate to information regarding group holding company structures, foreign operations, hedging and derivative transactions, information systems, and assets/liabilities. There is no reference to guaranty associations in the revisions.

Comment Period for the Financial Stability Board’s Consultative Document: The task force reported on the November 3 release of the FSB’s Consultative Document titled Developing Effective Resolution Strategies and Plans for Systemically Important Insurers.

According to the commentary posted on the FSB website, the proposed guidance “should assist authorities in developing effective resolution strategies and plans for systemic insure[r]s and should also assist Crisis Management Groups of global systemically important insurers (G-SIIs) in their resolution planning work. It has been developed in consultation with the International Association of Insurance Supervisors (IAIS) and builds on the guidance published in October 2014, on how provisions of the Key Attributes, including resolution powers and the details of recovery and resolution planning, should be interpreted for different types of financial institution[s], including insurers.”

Mr. Finston requested volunteers to review the document and make recommendations as to whether there are issues for which the NAIC should submit comments. A small group, including representatives from California, Illinois, New Jersey, Texas, and Washington, volunteered to review the document and develop recommendations. Comments are due on or before January 4, 2016. A copy of the FSB Document can be accessed here.

Federal Legislative Update: NAIC staff provided a brief update concerning federal legislation, including a pending proposal to clarify the authority of state regulators to wall off insurer assets from failed financial institutions. According to staff, the Policyholder Protection Act (S. 798 and H.R. 1478) includes technical changes to Dodd-Frank that would amend the FDIC’s lien authority in regards to insurer assets to limit the impact on insureds. This bill passed the House on November 16. It was received in the Senate on November 17 and referred to the Committee on Banking, Housing and Urban Affairs.

Cyber Security (EX) Task Force

Federal Legislative Update: NAIC staff reported on the status of pending cybersecurity legislation. The Cybersecurity Information Sharing Act of 2015 (S. 754) passed the Senate in late October and is pending consideration in the House. According to staff, this bill would provide limited liability protections for businesses that cooperate with federal regulators and share information concerning cyber threats and vulnerabilities through a platform provided through the Department of Homeland Security. H.R. 2205, the Data Security Act of 2015, was introduced earlier this year and may be considered in the House before year-end. NAIC representatives have met with bill sponsors to voice opposition based on the level of federal preemption and the imposition of federal standards that would create ceilings for protections, thereby limiting state-based protections in some areas. There are 11 data breach bills pending in the Senate.

FS-ISAC Information Sharing Presentation: The task force heard a presentation concerning a cyber-information-sharing architecture. Presenters included Brian Peretti of the U.S. Department of the Treasury and Rick Lacafta of the Financial Services Information Sharing and Analysis Center (FS-ISAC). Essentially, FS-ISAC is an information-sharing infrastructure with industry-specific membership circles called information sharing councils. According to Mr. Lacafta, the insurance-specific information sharing council currently has 110 member companies.

The purpose of the FS-ISAC is to share information about technology, tactics, and methods that hackers and other cyber criminals are using, including IP sources for bad actors and sources and characteristics of malware and other infiltration and corruption applications. They are also developing an intelligence sharing technology (SOLTRA) that will enable council members to share information about cyber-attacks in real time (type, source, characteristics, etc.). The thinking is that similar tactics are often used to target entities within the same industry, and that sharing this information quickly may help others to recognize and defend against an attack. Additional information about the FS-ISAC and SOLTRA can be found at https://www.fsisac.com/ and https://soltra.com/.

Cybersecurity Bill of Rights: The Cybersecurity Bill of Rights was not addressed at this meeting, except that the task force adopted its October 14 minutes, which in turn reflect adoption of the Bill of Rights Document. The NAIC’s Cybersecurity Bill of Rights Document has been the focus of much controversy and commentary and was adopted by the task force notwithstanding overwhelming opposition by industry citing, among other things, language that purports to create specific rights for consumers that are inconsistent with established state privacy laws. According to the Chair, the standards reflected in the Bill of Rights Document will be incorporated into NAIC privacy and fraud model laws.

Because the Executive (EX) Committee was scheduled to meet before the Cybersecurity Task Force, the Cybersecurity Bill of Rights Document was not presented to the Executive Committee at this meeting.