Sunday, June 14, 2009

NAIC Day 1—Annuities, Health Reform and PBR For Good Measure

The following are some of the issues that were discussed on June 13 during the summer meeting of the National Association of Insurance Commissioners here in Minneapolis.

Annuity Suitability

A new annuity suitability model was exposed in spite of very vocal opposition from groups including the American Council of Life Insurers, the Insurance Marketplace Standards Association, the National Association of Variable Annuities and the National Association of Insurance and Financial Advisors. Iowa and Ohio declined to vote for exposure saying that the changes were less than a day old and that the draft with the changes had not even been handed out to regulators. Jim Mumford of Iowa declined to vote on a document that he hadn’t seen. Other regulators who voted to expose the changes noted that the draft was being exposed in order to provide everyone an opportunity to offer further comment and that it was not being advanced at this point.

Reasons for the strident opposition included the cost of verifying the suitability of contracts and creating a “bright line” test for age. During the discussion, it was also reiterated from a June 12 working group session that the amended model makes the insurer responsible for each sale of an annuity and the suitability review. So, the previous concept of a ‘red flag’ section within the model is no longer necessary. Joe Musgrove of Arkansas says that the insurer can choose the method to accomplish this end, as long as it gets done.

It was also noted that under the Unfair Trade Practices Act in place in most states, a pattern of abuse has to be established, not just a single instance of misconduct.
There was also a lengthy discussion over whether Section 13 should be removed. The section would require producers to compare the features of an annuity and “any financial product, other than a security that is not an annuity that is replaced or is the source of funds for the solicited sale.” It also would prohibit the sale of an annuity if the source of funding was a reverse mortgage.

Don Walters of IMSA recommended that an interpretive guideline be developed rather than a new model because it would provide “clarity” to a model that is already in place in many states. He noted that U.S. Sen. Herb Kohl, D-Wisc., is promising to revisit the issue and that it is specious to believe that this model will be put in place in states. If the issue is revisited by the senator, Walters asked “What will the NAIC have to report?”

Lee Covington of NAVA said that the draft references FINRA rules and it would be good to get FINRA’s input and see if there should be a discussion about harmonizing FINRA Rule 2821 which addresses VA suitability with the NAIC suitability draft.

National Health Insurance Reform

Sally McCarty, former Indiana insurance commissioner and currently, an NAIC funded consumer representative urged commissioners to support a public health option as Congress develops bills to address health care reform. The request was made during the NAIC Consumer Liaison Committee session. Pennsylvania insurance commissioner Joel Ario explained that the NAIC has not taken a position in the debate because there is no consensus among membership. To speak on an issue in which there is no consensus will diminish the NAIC’s voice when it speaks on issues in which it does have consensus, Ario added.

Credit Scoring

Credit scoring was also addressed during the session. Birny Birnbaum, a funded consumer who is also executive director of the Center for Economic Justice, cited statistics indicating a worsening economy and said that factors such as banks closing credit card accounts are negatively affecting the credit scores of responsible consumers. To use credit scores in underwriting without actuarial proof to justify the use of those scores is wrong, he said. He noted that the NAIC does not have a credit scoring model while the National Conference of Insurance Legislators does, although he noted that the NCOIL model could be improved. Earlier in the day, during the NAIC State Government Liaison Committee, Oklahoma Commissioner Kim Holland said that both consumer reps and insurers had offered cogent arguments regarding the use of credit scoring during a recent NAIC hearing in Washington and insurers had emphasized that it was a legitimate underwriting tool.

Market Conduct Annual Statement

During that session, responding to a question from state Rep. George Keiser, R-Bismarck, and an NCOIL vice president, Holland said that a lengthy survey is being sent to seven states of varying sizes to find out which market conduct ratios they use or don’t use. The survey will help provide clarity and offer consumers valuable information that will help them assess a company before buying a product, Holland says.

Systemic Risk and Principles-Based Reserving

Also during the Government Liaison session, the question of a systemic risk regulator was raised. Terri Vaughan, the NAIC’s CEO, said emphatically lawmakers are “clearly going to create” systemic risk oversight and regulators must now determine how to organize themselves in a national system. But NCOIL’s Keiser said that the constant use of the term “a seat at the table” creates the public perception that NAIC supports federal regulation and it is necessary to get the message out that a “state solution is the right solution.”

The issue of a principles-based reserving system was also raised. The discussion comes on the heels of a critical article in The Washington Post which cites campaign contributions to commissioners involved with the development of PBR received from insurers who support PBR. It notes PBR is being developed at a time when there is great concern about government giving all companies too much freedom and not enough regulatory oversight.

When asked, the NAIC’s Vaughan responded that in the current environment, there is a need to rethink the use of internal models which would change the ability of regulators to oversee what is going on as companies determine reserving. She says that the current project is a combination of principles-based and rules-based reserving that has both a minimum floor and a deterministic approach to reserving that is more conservative. A new system is needed because regulators were spending countless hours creating new actuarial guidelines as new products and product features were developed.

Climate Change and Global Warming Task Force

Industry representatives say that a decision not to develop guidelines to determine how to answer a survey of 8 questions is disappointing because the guidance would have helped create more uniform answers.


The Reinsurance “E” Task Force voted to open up the Credit for Reinsurance Model Act and Regulation for further work. One interested party wondered if it would provide an opportunity to bring national reinsurers and port of entry reinsurers, two new categories for reinsurers for other countries more firmly under the auspices of the NAIC. The two categories were created under the Reinsurance Regulatory Modernization Act of 2009 which seeks to address a global world in which many countries have one insurance regulator rather than a system of many jurisdictional regulators such as the U.S. state-based system of regulation.

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