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
• MPC Activities
• NOLHGA Committee Activity
• Communications
• Legal Activity
• Systems Support/Technology/Website
• Professional Development

Introduction

In August 2016, 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 May Board meeting in Tysons Corner, a significant amount of staff time has been devoted to a number of priorities: (1) coordination and support for insolvency task force activity, including the July MPC and related meetings; (2) finalizing plans for and hosting the NOLHGA Legal Seminar; (3) the Stress Test-related initiative and other Financial Services Modernization Committee activities; (4) providing support for Board and MPC committees; (5) planning for the October MPC and Annual Meetings; and (6) routine operational tasks.

Insolvency activity remains exceptionally heavy for the Penn Treaty/ANIC cases, with petitions for liquidations of both companies filed recently.

NOLHGA Meetings

2016 Annual Meeting

The Annual Meeting website went live, and a number of speaker invitations were sent out. Confirmed speakers for the 2016 Annual Meeting include:

• Mark Shields: Political Commentator
• Commissioner David Mattax (Texas)
• Bob Ewald: Former MPC Chair (Disposition Committee)
• Superintendent Eric Cioppa (Maine)
• Kim Holland: Vice President, States Affairs, Blue Cross Blue Shield Association
• Frank A. Keating: Partner, Holland & Knight

2016 Legal Seminar

The 2016 Legal Seminar was held on July 21–22, 2016, in Washington, D.C. The program featured segments on insurance regulatory modernization (both domestic and international); limits of federal administrative power; the DOL’s fiduciary rule; claim priority disputes between insurance receivers and the federal government; appellate practice; captive insurers; legislative and other responses to the financial crisis; cyber insurance; and recent developments with respect to the Affordable Care Act. Among many others, speakers included former Massachusetts Congressman Barney Frank, Pennsylvania Insurance Commissioner Teresa Miller, District of Columbia Insurance Commissioner Stephen Taylor, Thomas Finnell of the Federal Insurance Office, and attorney Eugene Scalia of Gibson Dunn & Crutcher. The program was attended by 186 people (including 135 paying registrants) and received favorable reviews from attendees.

Constituency Relationships

GA Outreach

Peter Gallanis attended the Washington and Oregon Annual Meeting on June 14–15 and discussed a range of issues, including financial services regulatory matters and Penn Treaty. Also in June, Dick Klipstein attended the Annual Meetings for the Connecticut and Massachusetts associations to participate in discussions on Penn Treaty.

NAIC

Since the May Board meeting, staff has continued to monitor the activities of the Unclaimed Life Benefits Model Drafting Subgroup, which has continued its efforts to complete work on an NAIC model law to address insurers’ obligations with respect to Death Master File searches and the handling of unclaimed life insurance benefits. During its July 29, 2016, call, the subgroup completed work on its proposed “Unclaimed Life Insurance and Annuities Model Act” for submission to its parent working group. The proposed model is not a consensus draft, and we anticipate that there will be further comments submitted by interested regulators and interested parties. The working group is expected to discuss the proposed model sometime after the NAIC Summer National Meeting.

In addition, staff has continued to participate in conference calls with an industry cyber coalition group that is coordinating strategies in response to the NAIC’s efforts to produce an Insurance Data Security Model Law. An initial draft of the proposed model was released in early March. Following receipt of more than 130 pages of comment letters on that draft, the NAIC’s Cyber Security Task Force agreed to hold a two-day in-person meeting in Washington, D.C., on May 24–25 to receive further input from interested parties. NOLHGA staff monitored that meeting via phone. During the meeting, interested party comments were discussed, but no decisions were made as to how the comments would be addressed. Additional comments were received from interested regulators during a June 29 task force call, following which the task force advised that it planned to release its first revised draft of the proposed model in advance of the August NAIC meeting. The Cyber Security Task Force met in conjunction with the NAIC Summer National Meeting on August 27, 2016. It is the task force’s stated intent to submit a proposed model act for formal NAIC adoption by the Fall National Meeting in December.

Finally, staff has been working with the Legal Committee and the NCIGF to monitor and provide input to the NAIC’s Receivership Model Laws Working Group as it seeks to respond to the Financial Stability Board’s report entitled “Key Attributes for Effective Resolution Regimes.” The working group recently conducted a survey of state regulators on the enforcement of receivership court stays and injunctions across state lines. Survey responses were initially due June 30, but the deadline was extended to July 21, 2016. The working group did not meet at the NAIC Summer National Meeting, but held a conference call on August 18 to discuss survey results.

NCIGF Leadership Strategy Meeting

On July 11, 2016, Bill O’Sullivan and Sean McKenna attended a meeting sponsored by the NCIGF for the purpose of coordinating with key P&C trade associations and insurers on public policy and messaging strategies critical to guaranty fund/resolution issues. During the meeting, P&C industry representatives expressed support for the NCIGF’s public policy efforts and noted that the NCIGF and NOLHGA are uniquely qualified to speak on resolution matters both domestically and abroad and in public policy discussions in which the U.S. resolution system could be impacted. The group identified three fundamental goals: (1) strengthening existing relationships with key players; (2) defending against importing bad ideas into the United States; and (3) exporting U.S. resolution-related principles to the international community.

The Colorado GA Act Modernization Initiative

The Colorado Governor’s Office and Division of Insurance have undertaken an initiative to modernize the Colorado Guaranty Association Act in response to the Affordable Care Act and other developments in the health insurance marketplace. Representatives of the Governor’s Office and the Division of Insurance, together with interested parties (including NOLHGA representatives), have participated in a series of meetings to discuss the issues and consider proposed changes to the Colorado Act. To date there have been three meetings, which have dealt with the following issues: (1) the need for the guaranty association to provide continuation of coverage for health insurance policies post-liquidation given the ability of policyholders to obtain replacement coverage under the ACA; (2) the current membership structure of the guaranty association and whether certain entities that are non-members (e.g., HMOs) should be required to be members of the guaranty association or a similar entity; and (3) the coverage and assessment of long-term-care insurance, including a proposal by United Healthcare to reallocate the assessment burden for LTC insolvencies by assessing groups of insurers, up to their maximum assessment capacity, in the following order of priority: first, LTC writers; second, life insurers; third, annuity writers; and fourth, health insurers. [EDITOR'S NOTE: This proposal was made by a coalition of health insurers including AETNA, Cigna, Humana, and Anthem. United Healthcare was the spokesperson for the coalition.]

Additional meetings were scheduled for August 23, 2016 (a smaller working group will meet to continue discussions on LTC) and September 1, 2016 (the full group will consider solvency and risk-based capital issues). If the Governor’s Office and the Division of Insurance agree upon modernization changes, it is likely they will seek amendments to the Colorado Act during the 2017 legislative session.

Financial Activities

The Accounting Department has been involved in the development of the 2017 preliminary operating budget and with preparations for and coordination of materials for the Finance Committee’s August 31, 2016, meeting with representatives of major insolvency task forces. In addition to routine accounting-related tasks, staff also calculated and mailed the first quarter 2016 quarterly assessments.

Since the last Board meeting, the Accounting Department coordinated the following insolvency-related account distributions: (1) $1 million to affected members ($939,000 in premium collections related to National States and $66,000 due to a quarterly true-up of escrow account activity related to Life & Health Insurance Company of America) and (2) $4.7 million to TPAs and receivers to fund claims and expenses for four active insolvencies.

Assessment Data Survey

The review of initial 2015 data survey filings was completed by the task force during May. Of the 85 annuity writers reviewed (the top 75 companies writing annuity business plus an additional 10 companies randomly selected from the next 75 writing companies), 47 required follow-up. This is an improvement over 2014 results, for which 59 follow-up letters were sent.

The primary topics of inquiry dealt with:

• reporting of amounts received on deposit-type contracts
• fee income reporting on separate account business
• certain premiums reported on Schedule T but not reported on the survey
• unallocated annuity premiums related to governmental retirement plans under IRS code sections 401, 403(b), and 457

In addition, the following were conducted regarding company filings:

• 64 companies were sent follow-up inquiries for items dealing primarily with the reporting of deposit-type contracts, separate account premiums, and fee income reporting
• 94 companies were sent follow-up letters related to the reporting of Medicare premiums
• 56 companies were sent follow-up letters related to the reporting of stop-loss premium deductions
• 19 Blue Cross/Blue Shield companies were contacted for missing surveys (these companies failed to file the data survey exhibits as part of their annual statement filings; absent a response, Schedule T premium data will be used)
• 154 P&C companies were asked to confirm the health premiums obtained from the NAIC (confirmation of state page information is requested from the company since the survey exhibits are NOT part of the P&C annual statement)

Also, and new for 2015, the task force is coordinating with certain guaranty associations regarding the appropriateness of “HMO line of business” deductions that have been taken in certain states. This generally involves an indemnity health insurer becoming dually licensed as an HMO.

Financial Systems Project

Integration of NOLHGA’s legacy financial systems (NIRS, NOLHGAB, and SAS) remains under development. The interface of the new secure online system will give authorized users the ability to look up and update information on NOLHGA’s projects and receiverships. Second quarter efforts included the development of the industry report that is posted to the NOLHGA website toward the end of each year. The report provides financial and assessment information for every receivership that NOLHGA tracks.

MPC Activities

MPC CO-OP Task Force

The MPC CO-OP Task Force continues to monitor and track developments with respect to ACA Health CO-OPs, including developments in regard to growing litigation between the various CO-OPs and the federal government. The positions taken by the Centers for Medicare & Medicaid Services (CMS) and the Department of Justice (DOJ) have raised significant issues with respect to the priority of federal loan claims in CO-OP receiverships; the validity of holdbacks and offsets asserted by CMS against payments owed to the CO-OPs and other health insurers under the ACA’s cost-sharing programs; and the methodology for implementing the ACA’s risk adjustment program.

With respect to federal loans, CMS has taken positions contrary to state receivership priority laws by seeking to recover loan amounts through offset against amounts that CMS owes to the CO-OPs. CMS also has failed to pay hundreds of millions owed to the CO-OPs and other health insurers for risk corridor, reinsurance, and other amounts due under the ACA, while at the same time pursuing the collection of tens of millions in risk adjustment payments from these companies.

As of mid-August, 17 ACA CO-OPs had ceased writing business and were in supervised run-off or formal receivership proceedings. Of these 17 companies, 10 have been placed in liquidation. Of the 10 CO-OPs in liquidation, 6 are member insurers for purposes of applicable guaranty association laws.

Only seven of the ACA CO-OPs remain in operation. Five of the seven owe risk adjustment amounts to CMS ranging from $1.86 million (the lowest) to $46.3 million (the highest). Four of the seven are involved in litigation with the federal government. Three have filed lawsuits challenging CMS’s risk adjustment calculation methodology as arbitrary and capricious and are seeking to enjoin CMS collection efforts. A fourth has filed suit to collect about $23 million in risk corridor payments that it is owed.

MPC Electronic Document Management Subgroup

In July, the subgroup worked with Vertafore representatives to host a webinar on the proposed ImageRight electronic records management system. Member associations were subsequently asked to let the subgroup know whether they were interested in participating or would like more information. Preliminary results indicate there is not currently a sufficient level of interest to build a custom group design for member associations.

MPC Security Advisory Committee (SAC)

The SAC continued its work to oversee the guaranty system’s compliance with the MPC Security Procedures. Among other matters, recent work included: (1) conducting an annual survey and follow up with guaranty associations and NOLHGA business associates to confirm their implementation of and compliance with the Security Procedures; (2) negotiating and executing a “stand-by” master services agreement with Mandiant Corporation, a firm that specializes in cybersecurity and computer forensics; and (3) distributing a security breach report to guaranty association administrators and NOLHGA staff to keep them informed about breach activity involving third parties.

NOLHGA Committee Activity

Coverage/Claims Committee

The committee finalized its report on the coverage implications of HMO products issued by member insurers. The report was distributed to guaranty association administrators on July 13, 2016, and was the subject of an MPC presentation on July 20.

Financial Services Modernization Committee (FSMC)

The Stress Test project authorized by the FSMC and the Board continues, as does the long-standing Education Project. In addition, NOLHGA participated in a roundtable discussion of America’s long-term care needs hosted on August 4, 2016, by the Federal Insurance Office and provided technical support for the ACLI’s Ad Hoc Committee on the Guaranty Funds System.

Legal Committee

Committee subgroups have been engaged in the following activities:

Federal Claims Issues: The Federal Claims Issues Subgroup is charged with monitoring and tracking developments with respect to federal claims–related litigation arising out of health insurance insolvencies. This includes disputes with CMS and DOJ concerning the priority of federal loan claims in CO-OP receiverships, amounts due to and from health insurers under the ACA’s risk-sharing programs, and the exercise of federal offset rights pursuant to the ACA netting regulations.

Since the May Management Report, eight lawsuits have been filed in federal courts, five on behalf of ACA CO-OPs (Illinois, Maine, Maryland, Massachusetts, and New Mexico) and three by other health insurers (Highmark, BCBS/NC, and Moda Health). Two additional ACA CO-OPs (Colorado and South Carolina) have initiated Administrative Appeals challenging CMS’s actions.

The lawsuits can be divided into three basic categories. The first involves the Declaratory Judgment Action filed by the Iowa CO-OP in U.S. District Court seeking to determine the priority status of the federal government’s claim for loan repayments under state receivership laws, and to enjoin the federal government’s improper application of federal netting regulations to offset amounts owed to the company under the “3R” cost-sharing programs.

The second category of litigation includes three lawsuits filed by the Maryland, Massachusetts, and New Mexico CO-OPs in Federal District Courts seeking to block CMS from collecting tens of millions in risk adjustment payments pending the release and payment of risk corridor payments that CMS owes to these companies. These lawsuits also have challenged CMS’s risk adjustment calculation methodology as being arbitrary and capricious.

The third category of lawsuits includes six separate actions filed in the Federal Claims Court to collect hundreds of millions in risk corridor payments owed to CO-OPs and other health insurers. Three of these suits were filed on behalf of CO-OPs (Illinois, Maine, and Oregon), and three were filed by non–CO-OP health insurers (Highmark, BCBS/NC, and Moda Health). All of these lawsuits are still in the early stages of proceedings. The government has been successful in getting extensions for answering the complaints, and the parties are not yet fully engaged on the substantive issues.

The subgroup continues to monitor the dockets and substantive developments in the above-mentioned proceedings.

ACA/Form 1095-B: The ACA Form 1095-B Subgroup has continued its investigation of reporting requirements pertaining to minimum essential health insurance coverage under the Affordable Care Act.

Communications

Committee/Task Force Support

The department participated in several conference calls of the Penn Treaty/ANIC Task Force’s External Communications Subgroup. A new set of FAQs concerning Penn Treaty/ANIC were posted on the NOLHGA website in late July, and an update on the Penn Treaty/ANIC receiverships was sent to trade associations (ACLI, BCBSA, and AHIP) and to several insurance commissioners in early August. These materials were first distributed to the member guaranty associations, and some associations opted to notify their insurance commissioner directly rather than have NOLHGA do so.

Also in early August, the subgroup distributed to the associations a draft letter for member insurers notifying them that the rehabilitator had recently filed petitions for liquidations of the two companies. The associations were encouraged to distribute this letter to their member health insurers.

Finally, NOLHGA staff members are exploring the possibility of posting a link to the Penn Treaty/ANIC website page on the homepage of the NOLHGA site to make it easier for users to find.

GA Update Online

The June 7, 2016, issue of GA Update Online contained details of the management report provided to the NOLHGA Board for its May meeting.

NOLHGA Journal

The second 2016 issue of the NOLHGA Journal was mailed to subscribers in June. Work on the third and final issue for 2016 has begun.

Other Projects

The department oversaw the design of Consumer Protection Comparison: The Federal Pension System and the State Insurance System, a report comparing the protections provided to retirees by the guaranty system and the Pension Benefit Guaranty Corporation (PBGC).

Year-End Report to the Membership

The 2015 Year-End Report to the Membership was mailed in May.

Legal Activity

Cyber Liability Insurance

Legal Department staff continued to work with an outside broker and several carriers to evaluate options for cost-effective cyber liability insurance coverage for NOLHGA. Staff is in the process of completing a report to management summarizing the results of its investigation and various possible options for NOLHGA to obtain cyber coverage.

D&O Liability Coverage

Staff arranged for the annual renewal of NOLHGA’s Director and Officer Liability Insurance policy, effective September 1, 2016, with the same insurance carrier (Great American) and on the same terms as the existing coverage.

Other Matters

Legal Department staff has continued to provide “help desk” support in response to requests from members and other constituents on a variety of matters, including claims disputes with receivers, guaranty association laws and legislative history, disclosure notices, and ACA CO-OPS. In addition, staff has provided legal research support on various issues and has worked with the MPC Asset Recovery Task Force to update its report on the asset position in various insolvencies.

Systems Support/Technology/Website

Data Security

The Systems Department moved claims and policyholder in-force files containing confidential personal information (CPI) from the receivership library to a new area of QUEST where enhanced security features and added verification requirements are in place.

Staff completed an automated scan of all files in the receivership library to help identify CPI contained within other files. Targeted searches will be used to identify any remaining CPI that the automated scan may have missed. All files containing CPI will be moved to the new area of QUEST with enhanced security features. Agreements and other files that are not entirely comprised of CPI will be kept in the receivership library in redacted form. A list of files that have been transferred to the new area of QUEST will be posted to the receivership library.

Network Systems Status

During this quarter, and with the assistance of VICOR Business Consulting, the Systems Department upgraded Sage 100 server and client software from version 2013 to version 2016. This upgrade was necessary because version 2013 was not compatible with the Windows 10 operating system.

Security Audit

In July, NOLHGA engaged SystemExperts to perform a security audit of its network, the website, and the new claims portal. Fortunately, the firm was not able to break in or gain unauthorized access to any of the systems, but it did provide some recommendations for strengthening system security. The Systems Department will follow up on their recommendations this month.

Technical Assistance for Guaranty Association Administrators

The Systems Department resumed its annual Members Outreach Program. This program, implemented several years ago, has helped the department familiarize itself with the ongoing IT-related challenges that face NOLHGA’s member associations.

The August edition of the NOLHGAnet was distributed to guaranty association administrators and NOLHGA staff in early September.

The Systems Department is currently working on a new technology brochure to distribute to NOLHGA’s members in October.

Technical support was provided to the members during the quarter by phone and email. The department engaged in several remote-terminal sessions with guaranty association administrators to diagnose and solve more-complex desktop issues.

Professional Development

Dan Hicks attended a Fraud & Breach Prevention Summit in Tysons Corner, Virginia, on May 17–18, 2016. The summit was hosted by the Information Security Media Group.