IN THIS EDITION:

• Introduction
• NOLHGA Meetings
• Constituency Relationships
• Financial Activity
• NOLHGA Committee Activity
• Communications
• Legal Department Activity
• Systems/Technology/Web Site/Other

Introduction

In October 2010, 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 August Board meeting in Reston, the focus of staff has primarily been on the following responsibilities and activities: (i) insolvency management and support of insolvency task force activity; (ii) finalizing the program and details for the Board, MPC, and Annual Meetings; (iii) FSMC Education Project initiatives; (iv) constituency relationship work, especially relating to ACLI and NAIC matters; and (v) providing support for Board committees and subgroups.

Current insolvency activity continues to be focused on Penn Treaty Insurance Company (Pennsylvania); Executive Life of New York; Standard Life of Indiana; Lincoln Memorial (Texas); Shenandoah Life (Virginia); American Community Mutual Insurance Company (Michigan); National States Insurance Company (Missouri); Executive Life Insurance Company (California); Imerica Life and Health Insurance Company (Arkansas); and Booker T. Washington (Alabama).

NOLHGA Meetings

2010 Annual Meeting

Details for NOLHGA’s 27th Annual Meeting were finalized, including the addition of final speakers; development of programs for the New Board Member Orientation session and Major Rehabilitations/Insolvencies Briefing; development and coordination of meeting and registration materials for the Board, MPC and Annual Meetings; and other miscellaneous activities.

Constituency Relationships

Guaranty Association Meetings

Peter Gallanis attended the Virginia Association’s Annual Meeting at the Homestead on September 16, where he updated the association’s Board of Directors on developments on Capitol Hill and in major insolvency cases.

Paul Peterson attended both the Midwest and Southeast Regional Meetings in August and September. Topics of discussion at these meetings included expense allocation methods, handling funds after a liquidation case has closed, scope of authority delegated the guaranty association administrators, Model Act adoption, tax offset issues, retained asset accounts, records retention policies, association liability insurance coverages (e.g., general liability, fidelity, etc.), succession planning, security policies, organization and makeup of guaranty association Boards of Directors, conflicts of interest with consultants, coverage questions, assessment issues, advertising disclosure (of guaranty association) during sales process, multiple trigger dates, long-term-care rate increases, IRS Forms 990 and 1099, centralized membership databases, independent contractor status, and NOLHGA’s new Quest.

Meg Melusen attended the Western Regional Meeting following the NOLHGA Annual Meeting.

ACLI

Peter Gallanis and Bill O’Sullivan attended a telephonic meeting of the ACLI’s Steering Committee on Financial Services on August 28. Among other matters, the Steering Committee considered possible improvements to the current guaranty and receivership mechanisms and the options for achieving those improvements. The following were identified as priority improvements: (1) obtaining uniformity of coverage limits (especially for annuity contracts); (2) enhancing consumer understanding of guaranty protection without risking moral hazard or compromising market discipline; (3) ensuring that regulators are taking prompt corrective action with respect to financially troubled companies and that receivers are pursuing least cost resolutions to minimize insolvency costs for consumers and the guaranty system; (4) achieving uniform interpretations of key guaranty association act provisions, in particular with respect to the coverage of complex products, that can be readily understood by consumers; and (5) addressing the “orphan” policy issue (it was recognized that this was only an issue in new York). Subsequently, the ACLI’s Insurance Guaranty Working Group (which reports to the Steering Committee) met to discuss a work plan for seeking the priority improvements. The Working Group is planning another call at the end of October.

Staff also provided premium database and market share information to the ACLI’s CEO group to assist in developing cost estimate calculations for member companies potentially affected by pending cases.

NAIC

The August 2010 NAIC Summer National Meeting in Seattle was attended by NOLHGA President Peter Gallanis and Senior Counsel Joni Forsythe. Updates on the principal guaranty association–related meetings appear below.

(1) The Retained Asset Accounts Working Group, a joint working group of the Life Insurance and Annuities (A) Committee and the Market Regulation and Consumer Affairs (D) Committee, was very recently formed to review the use of retained asset accounts by insurance companies and to make recommendations as may be necessary, including whether consumer disclosure is adequate. The joint working group met on August 15 and conducted an initial hearing to gather information concerning industry practices with respect to retained asset accounts. Testimony was provided by representatives from MetLife and Prudential, concerning their use of retained asset accounts, and by NOLHGA President Peter Gallanis, concerning guaranty association coverage for these products. Additional comments were provided by NAIC-Funded Consumer Representatives and the National Conference of Insurance Legislators (NCOIL) concerning disclosure criteria. NCOIL also requested that the NAIC consider NCOIL’s proposed “Beneficiary Bill of Rights” as a potential model for states that do not currently regulate retained asset accounts. The joint working group met via conference call on August 27 to discuss the working group’s charge and a proposed action plan, which includes review of state guaranty association laws as well as liquidity risks with respect to retained asset accounts.

(2) The Receivership and Insolvency Task Force (RITF) met on August 15. Discussion items included: 1) an update on federal legislative initiatives; 2) the status of state adoption of the NAIC’s revised Guaranty Association Model Acts; 3) possible solutions for concerns with respect to the timing and collection of reinsurance recoverables in receivership; 4) accounting issues with respect to reporting of guaranty association assessments; and 5) a status report concerning activities of the Receivership Technology and Administration Working Group. In addition, the Task Force briefly discussed a new referral in which it is being asked to identify any guaranty association and receivership issues related to separate account products. RITF Chairman Jim Mumford has appointed a subgroup to respond to the referral.

(3) The NAIC’s Long-Term Care (EX) Task Force met on August 13. The discussion was focused on pricing data and the implementation of price stabilization measures. The Task Force received briefings from the Interstate Insurance Product Regulation Commission (IIPRC) concerning proposed long-term-care insurance standards and a recent state survey on long-term-care rate review practices, as well as a report concerning a proposed IIPRC resolution to create a national program to address rating problems. The Task Force also received a report from the Accident and Health Working Group concerning their review of data gathered on post rate-stabilized rate increases, as well as certain recommendations with respect to the NAIC’s Long Term Care Insurance Model Regulation. The Task Force expects to schedule a series of conference calls to continue discussion on the following matters relating to rates, state reviews of increases, the assumption of future rate increase in premium deficiency reserves, the definition of “moderately adverse” in initial rate filings, annual caps of future rate increases, and reporting of actual to expected future losses.

(4) NOLHGA and the NCIGF jointly hosted a brunch and briefing on August 15 to review NAIC activities impacting guaranty associations and to update attendees on recent insolvency-related activities.

Financial Activity

Accounting

The Accounting Department has been involved in finalizing the 2011 operating budget; the proposed 2011 operating budget was approved by the Finance Committee on September 13 and was approved by the Board at its October meeting. In addition, staff calculated and mailed the second quarter 2010 assessments, distributed to affected members approximately $13.1 million received in connection with four insolvencies, and distributed $12.9 million to the TPAs and receivers of five insolvencies.

GA Assessments

The collection of the 2009 guaranty association assessment activity was completed. The guaranty associations were asked to submit activity in three categories for each insolvency and each account: (1) amounts assessed, (2) amounts “called,” and (3) amounts refunded. Staff anticipates updating NIRS, generating reports, and uploading to the NOLHGA Web site by the end of November.

NOLHGA Committee Activity

Accounting Issues Committee

The committee completed its review of the updated Form 990 and anticipates incorporating a revised version into the Accounting Issues Guidelines Manual by year-end. In addition, the committee developed an Excel workbook to assist guaranty associations in tracking time and allocating indirect costs to insolvencies. The Excel program also compiles information for the proof of claim reporting mechanism currently used by member associations on NOLHGA’s Web site. It is expected that the Excel file will be finalized in time to demonstrate its use at the January 2011 MPC meeting.

Administrators Education Steering Committee

The Director of Communications and Manager of Information Systems conducted a presentation on the NOLHGA Web site and QUEST, NOLHGA’s new online receivership library, at the September MPC meeting.

Assessment Data Survey

The committee completed its review of the 67 companies that required follow-up, which resulted in 22 companies filing corrections to their data survey filings. All data underwent final trend tests and were released to guaranty associations and insurance commissioners in October.

Communications Committee

The committee completed work on the 2010 Edition of The Nation’s Safety Net, a brochure that explains the foundation of coverage offered by state guaranty associations. The brochure, which is now in its fourth edition, was distributed at the Annual Meeting.

GSMTF Accounting Subgroup

A request was sent to all guaranty associations to complete the annual online survey to collect financial information and to provide copies of their audited financial statements to the Manager of Insurance Services. The financial information was compiled and summarized in a GA Update article prior to the Annual Meeting.

Legal Committee

Staff organized a teleconference of the Legal Committee on August 9 for the purpose of reviewing a draft of the MPC Security Procedures. In addition, staff organized an in-person meeting of the committee on September 16 in Herndon, Virginia.

MPC Executive Committee Business Continuity Subgroup

The subgroup finalized an Interim Service Agreement Appendix to the Business Continuity Plan that can be used to arrange for one guaranty association to provide interim emergency or backup services for another guaranty association.

The next step is to create a Web page on the NOLHGA Web site to provide access to all guaranty associations, especially those that need to establish their own business continuity plans. The documents include an Overview, a Concepts and Guidelines document, a detailed template Business Continuity Plan, a scaled-down plan intended for use by a small guaranty association, and the appendices: an Appendix on Pandemic Influenza Issues and the Interim Emergency Services Agreement.

The Business Continuity Subgroup will also focus on a second phase of this project, which is to coordinate the guaranty association plan with the NOLHGA business continuity and disaster recovery plan. The subgroup plans to meet with NOLHGA staff to gain an understanding of NOLHGA’s plans regarding continuation of its services to membership in the event of a disruption due to an emergency or disaster. If necessary and appropriate, an appendix may be developed to enhance the model BCP to provide additional guidance to the member guaranty associations.

MPC Executive Committee Asset Recovery Report Subgroup

The September Asset Recovery Report was made available to guaranty associations on NOLHGA’s Web site on September 1. The semi-annual report sets forth 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 report also includes: The Estate Assets & Net Cost Summary, a chart that provides an estimate of assets held by all open multi-state insolvency cases, and the Closed Estates Summary with the closing dates.

Communications

GA Update

Work on the second 2010 issue of GA Update was completed. The issue features an article on MPC Chair Mike Marchman’s first year as Chair and an overview of the guaranty system’s financial status. It was distributed at the 2010 Annual Meeting and mailed to subscribers.

GA Update Online

The August 12, 2010, issue of GA Update Online included relevant portions of the management report on NOLHGA activities provided to the NOLHGA Board of Directors at its August 2010 meeting.

Media Relations

In July and August, the Communications Department assisted NOLHGA management in drafting several responses to questions concerning guaranty association coverage of retained asset accounts. The department also compiled information for requests from various media outlets.

NOLHGA Journal

The third and final 2010 issue of the NOLHGA Journal was mailed to subscribers in September. It featured an analysis of the Dodd-Frank Act and its likely effects by Charles T. Richardson (Baker & Daniels), the adapted text of NOLHGA President Peter Gallanis’ August 2010 testimony to an NAIC working group studying retained asset accounts, and coverage of the 2010 Legal Seminar.

Legal Department Activity

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

Model Act Initiative: Staff organized a teleconference of the Board GA Laws Committee on September 20 for the purpose of reporting on efforts to update guaranty association laws across the country, and to discuss possible priority states for 2011. In addition, staff continued to provide support to the ACLI and individual states on updating guaranty association laws and worked on redesigning the Model Act section of the NOLHGA Web site.

Privacy/Security: The following was accomplished with respect to developing security procedures for adoption by the MPC: (1) the MPC Executive Committee and Legal Committee approved draft security procedures in August; (2) the Working Group continued to hold teleconferences with small groups of guaranty association administrators to obtain input and to respond to questions; (3) the draft security procedures were presented to the MPC in September; and (4) an open call for guaranty association administrators, board members, and counsel was held on September 15. As a result of these efforts, a final draft of the security procedures was presented and received approval from the MPC and NOLHGA Board in October.

NAIC: Staff participated in a teleconference of the NAIC’s Receivership Insolvency Task Force on September 21. The purpose of the call was to discuss the RITF’s new project to investigate the status of separate account products in receivership proceedings. NOLHGA has been asked to brief the RITF on the availability of guaranty association coverage and the assessment-related implications.

Other Matters: Staff also engaged in the following activities: (1) provided support to the MPC Asset Recovery Working Group; (2) conducted research to update case law annotations for NOLHGA’s Annotated Model Act; (3) supported the Communication Department’s efforts to update The Nation’s Safety Net brochure; (4) worked with a Legal Committee subgroup to provide input on a model emergency services agreement being developed by the MPC Business Continuity Working Group; (5) provided “help desk” support to members and other constituencies regarding guaranty association legal questions; (5) provided support with respect to MPC/insolvency authority issues and drafted engagement and other agreements; and (5) organized a staff “purge” day pursuant to NOLHGA’s document retention procedures.

Systems/Technology/Web Site/Other

Computer Hardware & Equipment Replacements

In August, staff purchased a new 48-port network switch to replace a damaged switch. In addition, a damaged hard drive on NOLSP1 server (SharePoint/Quest) was replaced. As a precaution, a spare/backup hard drive was purchased to ensure that if another hard drive fails, the replacement would be readily available.

Network Systems Status

The contract with our Internet Service Provider, Atlantech, was renewed for another year. In addition, bandwidth capacity was increased from 1.5 mbps to 3.0 mbps by installing a second T-1 line. The additional bandwidth has greatly improved NOLHGA’s Internet access speed.

Currently, NOLHGA and its members are developing security procedures that will effectively protect information stored on electronic devices. In preparation for this new policy taking effect later this year, the Systems Department initiated testing PGP encryption on laptops. Installation and training of staff are scheduled for completion in the fourth quarter.

Technical Assistance for Guaranty Association Administrators

The September edition of the NOLHGAnet was distributed to the administrators and the NOLHGA staff. It featured the article “15 Things Every PC User Should Know.” In addition, the Systems Department has continued to assist the guaranty association administrators by answering technical support calls and responding to e-mails.

Web Site Redesign

The Communications, Insurance Services, and Information Systems Departments met with NOLHGA management to discuss a new design for the password-protected section of the NOLHGA Web site, with the goal of making the most useful information on the site easier for members to access. Several options were considered, and a mock-up of a new design was submitted to NOLHGA management for evaluation.

Web Security

A team from the Web security firm SystemExperts is conducting a security audit of the NOLHGA site and QUEST. The team is employing a variety of tactics that online intruders often use to try to break into or damage password-protected sites. The team will submit a written evaluation to the NOLHGA Systems Department describing any potential vulnerabilities they find. All findings will be addressed by the NOLHGA Systems Department before year-end. Later in the year, the SystemExperts team will conduct a security audit of NOLHGA’s network.

NOLHGA’s Manager of Information Systems developed a security dashboard that illustrates the level of access each access group has within the password-protected area of the NOLHGA Web site. The dashboard currently reveals section-level access. It also lists which users belong to each access group and lists access by user in situations where only part of an access group is given access to a section. Document level access will be added to the dashboard later in the year.

The Systems Department has developed a new backup approach that will enable the Web site to more quickly recover in case NOLHGA’s database server fails. Any changes made to the production database server are being sent to NOLHGA’s backup database server on a nightly basis. In the event of a failure, requests can quickly be rerouted to NOLHGA’s backup server.

Development activity is underway to eliminate the requirement for multiple passwords for NOLHGA.com and Quest users. This should provide the required security for our password-protected systems and data while making them a little more user friendly. Implementation is scheduled for year-end 2010.

Document Retention/Purge Day

Staff participated in another successful document purge day on August 18. This was the sixth purge day held. These designated purge days are set so that staff can review and purge both electronic and hard copy files to be in compliance with the Document Management Policy and Procedures. The next purge day is scheduled for November 17.