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
• 2015 Annual Meeting
• Constituency Relationships
• Financial Activities
• Financial Services Modernization
• MPC Activities
• NOLHGA Committee Activities
• Communications
• Legal Activity
• Systems Support/Technology/Website
• Professional Development

Introduction

In February 2015, 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 October Board meeting in San Diego, staff has focused primarily on the following matters: (1) coordination and support for insolvency task force activity; (2) coordination of and support for the January MPC and task force meetings; (3) year-end financial and personnel-related tasks; (4) various projects related to financial services modernization; and (5) providing support for other Board and MPC committees and subgroups, including a recent new Board member orientation session for Director Backe.

Insolvency activity continues to be heavily focused on Penn Treaty Insurance Company (Pennsylvania) and Lincoln Memorial (Texas), and more recently on three new health insurer failures, two of which are summarized below.

One such case is SeeChange Health Insurance Company, a small California-domiciled health insurance company that was placed under an order of conservation by the California Superior Court on November 19, 2014. SeeChange wrote small group and large group health policies in California and Colorado and has certificate holders, employees, and dependents who reside throughout the country, including in the 25 states where SeeChange was licensed to do business. Another case involves CoOportunity, an Iowa-domiciled “consumer operated and oriented plan” established under the Affordable Care Act and involving a total of over 100,000 policy or certificate holders in Nebraska and Iowa. NOLHGA staff is supporting the task forces recently formed for each case.

2015 Annual Meeting

A promotional e-mail announcing that respected journalist Bob Woodward will be the luncheon speaker at the 2015 Annual Meeting was sent in early January.

Constituency Relationships

GA Meetings

Meg Melusen participated in the Arkansas guaranty association’s annual meeting on October 15–16, 2014, and Peter Gallanis participated in the Virginia association’s annual meeting on October 23.

ACLI

On January 27, 2015, Peter Gallanis, Bill O’Sullivan, and Kevin Griffith participated in a teleconference with ACLI Receivership Committee representatives (Wayne Mehlman, Dennis Herchel, and Richard Bowman) to discuss potential amendments to the NAIC GA Model Act to explicitly exclude factoring companies and life settlement companies from being eligible for coverage. In particular, the ACLI representatives were interested in whether guaranty associations would face administrative and technical challenges in implementing these types of exclusions. The NOLHGA representatives shared their experience with life settlement and factored contracts, in particular in the ELNY case.

NAIC

Peter Gallanis, Bill O’Sullivan, and Joni Forsythe attended the NAIC’s Winter National Meeting, held in Washington, D.C., on November 14–18, 2014. NOLHGA’s NAIC report was published in GA Update Online and distributed on December 2, 2014.

In addition to the Winter National Meeting, NOLHGA staff participated in several interim NAIC teleconferences related to unclaimed life insurance benefits, guidance for the treatment of Federal Home Loan Bank (FHLB) contracts in receivership, contingent deferred annuities (CDAs), and enhancing uniformity in receivership and guaranty association laws

Other Events

On November 3, Peter Gallanis spoke on the role of guaranty associations and the resolvability of insurers at a London forum on international macro-prudential regulation of insurers organized by the Geneva Association, an international insurance research “think tank.” On December 5, Gallanis and NCIGF President Roger Schmelzer spoke on guaranty system issues at a conference of the North American Chief Risk Officer Council in Newport Beach. On January 8, 2015, Gallanis, General Counsel Bill O’Sullivan, and Communications Director Sean McKenna joined with ACLI representatives in an informal Washington, D.C., briefing of consumer group representatives on the issue of annuity use in pension “de-risking” transactions.

Financial Activities

The Accounting Department has been involved in overseeing the audit planning process by McGladrey in preparation for the year-end audit of the 2014 NOLHGA operating financial statements.

In addition to routine accounting-related tasks, staff also calculated and mailed the third quarter 2014 quarterly assessments and collected information required to calculate the 2015 annual membership dues. Dues invoices were sent in January 2015.

Since the last Board meeting, the Accounting Department coordinated the following insolvency-related account distributions: (1) $37.3 million to affected members ($24.2 million in estate distributions related to Thunor Trust; $11.4 million in litigation settlements/recoveries related to Lincoln Memorial; and $133,000 and $1.6 million in premium collections related to Lincoln Memorial and National States, respectively); and (2) $4.4 million to TPAs and receivers to fund claims and expenses for three active insolvencies.

Assessment Data Survey

The 2013 premium data was released on September 30. Similar to the 2012 data release, the delivery method was via an upload to Quest and a notification to guaranty associations that it was available for download at their discretion. Also, a letter was sent to insurance commissioners to advise them that they could receive a copy of the data via secure website link at Strohm Ballweg.

Staff continues to assist guaranty associations with reviewing the Medicare-related premium information and the member company health premiums to determine what adjustments, if any, may be required. Staff also has been receiving questions from member companies (many of which serve on guaranty association boards).

Formulas to the 2014 Adjustments Exhibit were provided to the NAIC on November 4.

Financial Systems Project

Staff members have submitted a project plan to NOLHGA management 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. The plan was reviewed and approved by management in January. As a follow-up to the submitted plan, the group has had additional discussions and is drafting procedures to improve the collection and reporting of financial data related to insolvencies.

Guaranty Association Assessment Information

This annual project entails collecting assessed, called, and refunded assessment information by state, account, and insolvency. The data is used to publish assessment-level activity reports. In addition, capacity estimates were compiled in October once the 2013 assessment data survey results became available. Final reports were uploaded to NOLHGA’s website during October and are available as public information.

Insolvency Financial Cost Information

Insolvency cost information, provided annually by NOLHGA each fall, was developed and posted to the public section on NOLHGA’s website in November. The data is used by member companies to establish accruals for guaranty association assessments on insolvency cases that may affect them.

Financial Services Modernization

Guaranty System Stress Analysis

In November 2014, Peter Gallanis and representatives of the NCIGF conducted preliminary interviews of potential providers of financial assistance for a joint 2015 project to analyze the ability of the guaranty system to respond to hypothetical situations that could subject the system to serious financial and operational stress. Following discussions among this group, formal requests for proposal were sent to three potential vendors with an initial requested return date of February 15 (which is likely to be briefly extended). Proposals submitted will be discussed with the Financial Services Modernization Committee, and a vendor will be selected in early 2015, with the intent that the project will then proceed to completion by the end of the year.

Pension De-Risking

Peter Gallanis and Bill O’Sullivan continued to work with outside consultants from Faegre Baker Daniels and Towers Watson to finalize a report comparing protections afforded by the Pension Benefit Guaranty Corporation (PBGC) with protections provided by the state regulatory, receivership, and insurance guaranty systems. A great deal of progress has been made, and the final report is expected to be issued in the March/April timeframe.

On January 8, 2015, Peter Gallanis, Bill O’Sullivan, and Sean McKenna made a presentation to representatives from consumer and labor organizations (AARP, the Pension Rights Center, AFL-CIO, and National Retiree Legislative Network) entitled: “How Do Retiree Protections Compare under Defined Benefit Plans and Annuity-Supported Pension De-Risking Transactions?” The attendees stated their appreciation for the presentation and expressed interest in having follow-up discussions. Following the presentation, NOLHGA and ACLI representatives met with Kara Getz (minority staff, Senate Finance Committee) to discuss the guaranty system as well as pension de-risking issues.

FDIC

On January 20, 2015, Peter Gallanis and Bill O’Sullivan, along with representatives of Faegre Baker Daniels, met with representatives of the FDIC’s Office of Complex Financial Institution Resolutions. The purpose of the meeting was to discuss how the FDIC’s single point of entry (SPOE) strategy for resolving Systemically Important Financial Institutions (SIFIs) might apply in the insurance sector. The FDIC’s consideration of SPOE and other strategies in the context of insurance is ongoing, but the parties agreed it would be beneficial to have further dialogue and coordination when the FDIC’s work is further along.

IMF/Financial Sector Assessment Program

On November 12, 2014, Peter Gallanis, Bill O’Sullivan, and Sean McKenna met with representatives from the International Monetary Fund who were conducting an assessment of U.S. compliance with standards issued by the International Association of Insurance Supervisors. The meeting focused on the guaranty and receivership systems but also included more general topics related to U.S. insurance regulation.

MPC Activities

Cyber Liability Working Group

The working group was appointed by the MPC Executive Committee to provide a report on cyber liability insurance. The group did an extensive investigation of cyber coverage, including reviewing various policy forms and types of coverage and meeting with brokers, agents, and underwriters. The working group presented its final report to the MPC Executive Committee at the January MPC meeting.

MPC GA Expense Working Group

The working group was appointed to respond to proposed NAIC guidelines for guaranty association expense claims. Staff assisted the working group in developing and submitting a comment letter to the NAIC on November 3, 2014, expressing various concerns with the guidelines. Following the submission of NOLHGA’s comments, we were advised that the NAIC intends to approve the guidelines for incorporation into the Receivers Handbook as non-binding guidance. On that basis, NOLHGA submitted another comment letter on January 26, 2015, reserving its concerns for now but noting that it would revisit them to the extent expense issues arise in future insolvencies.

MPC Security Advisory Committee (SAC)

The SAC continued its work to oversee and maintain compliance with the MPC Security Procedures, which included: (1) developing a draft Incident Management Response Plan to serve as a guide for responding to security breaches involving confidential policyholder information; (2) developing a questionnaire to confirm NOLHGA business associates’ compliance with the Security Procedures; (3) conducting a review of emerging legal and technological developments and their implications to the Security Procedures; (4) completing an annual risk assessment; (5) suggesting warning language for NOLHGA and guaranty association websites to discourage website users from sending personal or confidential information via e-mail links provided on the websites; and (6) distributing a year-end report to guaranty associations, NOLHGA staff, and NOLHGA business associates.

NOLHGA Committee Activities

Accounting Issues Committee

An update of the Accounting Guidelines Manual was sent to the guaranty associations and published on the NOLHGA website in mid-October. It included templates to assist guaranty associations in establishing an Audit Committee, current Form 990 samples, and updates to the sections on investment guidelines and internal controls. The committee also held a meeting in conjunction with the January MPC meeting to discuss the group’s goals for 2015.

Administrators Education Steering Committee

In conjunction with the January 2015 MPC meeting in Clearwater, the committee hosted a panel presentation on health assessments, with topics including Medicare C & D premium reporting, assessment mechanics and options, handling and mitigating assessment appeals, and recent survey results contained within the GA Survey on Administrative Practices. Panelists included Bart Boles (Texas), Lowell Miller (North Carolina), Janis Potter (Illinois), Chuck Renn (Missouri), and Paul Peterson (NOLHGA).

Communications Committee

The Coverage/Claims Committee’s revised content for the FAQ section of the NOLHGA website was recently reviewed by the Communications Committee. It was posted on the site on February 3.

Coverage/Claims Committee

The committee met by teleconference on January 27 to review and approve a work plan for 2015.

Health Insurer Study Group

In 2014, the study group published its report to members (Current Trends & Demographics in the Health Insurance Industry and Their Implications for the Guaranty Associations) and confirmed with the Board its desire to have the group continue its initiatives related to outreach to the health insurers, examining the ramifications of the relatively small share of the health insurance industry covered by guaranty associations, and a discussion on the value proposition of the guaranty association system to the health insurance industry.

The study group, chaired by Chuck Gullickson and staffed by Dick Klipstein, held a meeting in Indianapolis on December 2, 2014, to outline a preliminary work plan for 2015, which includes:

1. Update the report based on 2014 year-end numbers, which would provide a basis to compare 2014 (the end of the first full year of all the ACA mandates) to year-end 2011 (the numbers used in the original report). The 2014 year-end numbers should be available by May, and the updated information should be ready by the end of June 2015.

• Analyze 2014 year-end financial information for Co-Ops (a type of nonprofit health insurer created by the Affordable Care Act and capitalized in part with federal grants).

• Determine which Co-Ops are part of the guaranty association system.

2. Consider the revised report, and a report on other developments, as a topic/panel for the 2015 NOLHGA Annual Meeting.

• It was agreed that perhaps the most important role the study group can play over the next two years is an educational role for the guaranty association system so that it is prepared to respond thoughtfully to ACA/health industry questions and developments.

3. Develop a health insurance company outreach strategy, including an approach with AHIP and BCBSA and with larger (the big five) and smaller health insurers.

• Consider how to deal with LTC assessment tension with health insurers.

• Have some sort of outreach to representatives of smaller health insurers that sit on state guaranty association boards (either directly or having those board members identify appropriate contacts at their companies).

• Identify who the health insurance company representatives are on the state boards to get a better feel for which companies are represented, by whom, and in what states.

Legal Committee

Staff organized a teleconference of the committee on October 28, 2014, during which the committee received reports from the following subgroups:

• The Social Security Death Master File (SSDMF) Subgroup reported on its investigation of the legal landscape pertaining to use of the SSDMF by insurers and any potential implications for guaranty associations. The investigation included the review of legislative and litigation developments; new certification requirements limiting access to the SSDMF; and NAIC and NCOIL activity with respect to standards and criteria for use of the SSDMF. The subgroup also conducted a factual investigation of guaranty association experience with using the SSDMF in providing coverage.

• The Electronic Recording Subgroup presented its recommendation that a legend be placed on NOLHGA meeting agendas stating that participants were prohibited from electronically recording NOLHGA meetings without NOLHGA’s consent. The Legal Committee approved the subgroup’s recommendation.

• The Privacy Subgroup presented proposed technical amendments to the MPC Privacy and Security Procedures. The Legal Committee approved the amendments, which were subsequently adopted by the MPC Executive Committee and the NOLHGA President for incorporation into the Privacy and Security Procedures.

Communications

GA Update

The second 2014 issue of GA Update was mailed in December. It featured a technology update by NOLHGA’s Systems Department, a breakdown of the NOLHGA budget and the guaranty system’s financial strength, and other articles.

GA Update Online

Three issues of GA Update Online were published since the last management report. Two provided summaries of guaranty system–related events at the August and November 2014 NAIC meetings, and one contained details of the management report provided to the NOLHGA Board for its October meeting.

IFIGS

The department oversaw the completion of a questionnaire from the International Forum of Insurance Guarantee Schemes (IFIGS) concerning the operations of the U.S. guaranty system.

NOLHGA Journal

The October 2014 issue of the NOLHGA Journal was distributed at the 2014 Annual Meeting in San Diego. The first 2015 issue of the Journal was mailed in February.

Press Relations

The department arranged for two interviews of NOLHGA’s President, General Counsel, and a member of the Coverage/Claims Committee by a reporter from Kiplinger concerning guaranty system coverage of annuities.

Legal Activity

GA Model Act Initiative

Staff continued to provide drafting and/or other support to various states (e.g., Alaska, Florida, New Hampshire, New Jersey, Ohio, and South Carolina) that have expressed interest in updating their guaranty association acts, and also arranged for a telephonic meeting of the GA Laws Committee.

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) MPC authority and process issues.

Systems Support/Technology/Website

Network Systems Status

The Systems Department purchased two Dell PowerEdge servers to prepare for virtualizing NOLHGA’s network. The department’s goal is to gradually start relocating older servers and applications into a new virtualized server environment.

An outside consulting firm was hired to help NOLHGA determine 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. All of the vulnerabilities identified in the report have been addressed, and the firm will be hired to conduct a similar audit in 2015.

Technical Assistance for Guaranty Association Administrators

The Systems Department completed the Member Outreach Program and contacted all of NOLHGA’s members by phone or e-mail. The Member Outreach Program helps us learn more about the IT challenges faced by our member associations and helps to strengthen relationships with NOLHGA’s members.

The December edition of the NOLHGAnet was distributed to guaranty association administrators and NOLHGA staff. Additionally, an update on technology guidelines and trends was published in the latest edition of GA Update.

Technical support was provided continually to administrators during the quarter by phone, e-mail, and remote desktop sessions.

Website Updates

The quarterly request to all insolvency task force staff contacts for updates to their insolvency web pages on the public and password-protected sections of the NOLHGA website was sent out. Guaranty association administrators were also surveyed for information on any single-state insolvencies to keep the NOLHGA website’s list of insolvencies up to date.

In addition, the NOLHGA site was audited to confirm that all content is current and all links remain functional. A number of minor edits were made to the content.

Professional Development

Sean McKenna completed the course Successfully Managing People, conducted by the American Management Association, in December 2014.

Kenny Bullock attended a five-day course on virtualization software called “VMware vSphere: Install, Configure, and Manage v.5.5.” The instructor-led course explained the concepts and benefits of virtualizing a network by providing hands-on training utilizing VMware vSphere software. The goal is to use this software to transition NOLHGA’s servers to a more robust and secure platform offered by virtualization.

Dan Hicks attended a five-day course on ASP.NET MVC, a server side technology for developing web-based applications. Some of NOLHGA’s existing web applications will be transitioned to this new framework.

During October and November, Joni Forsythe participated in a series of educational webinars on cyber security, breach response, and data breach insurance. These educational programs relate to an MPC Executive Committee initiative regarding the availability of cyber liability insurance.

Meg Melusen participated in a webinar entitled: “Don't Be the Next Cyber-Attack Victim: Five Practical Steps Every Company Should Take Now.”

De Gadd completed “Event & Meeting Management Fundamentals,” an online course offered through the Event Leadership Institute.