NAIC Wrap Up

National Harbor, Md.

When state insurance regulators met this here this week, they accomplished quite a bit. Namely, they adopted a number of major initiatives, advanced an item on deferred tax assets which will now be taken up by the full body of the National Association of Insurance Commissioners, discussed a proposal on residential mortgage-backed securities, market and held a hearing on rating agency responsibility for the financial crisis last year. The last item is part of the process NAIC is undertaking as it considers starting its own ratings initiative.

During the executive/plenary session held on September 23, the full body of the NAIC acted several items that were part of a proposal requested by the American Council of Life Insurers, Washington, last November. ACLI had requested a package of nine items as an emergency request. The NAIC held a public hearing at the end of January 2009 and decided that while some of the items had merit, the items did not need to be advanced on an emergency basis. Consequently, it remanded the request back to appropriate working groups for further consideration.

Among the items that were part of this package and are now fully adopted by the NAIC are:
--amendments to a model regulation permitting the recognition of preferred mortality tables for use in determining minimum reserve liabilities; These amendments allow the 2001 tables to be used prior to January 2007;
--amendments for the adoption to the Valuation of Life Insurance Policies model regulation; These amendments remove restrictions on the use of X-factors. X-factors are experience determinants that the ACLI says allows companies to more accurately reflect actual mortality experience.
--adoption of amendments to the Actuarial Opinion and Memorandum Regulation;
--amendments for adoption of actuarial guideline 1c—interpretation of the calculation of the segment length with respect to the Life Insurance Policy model regulation contingent on adoption of the preferred mortality table changes; The changes are an effort to clarify Regulation Triple-X calculations to prevent technical requirements of the calculation from diminishing the impact of the other requested items.

Another item that is part of the ACLI package is the deferred tax asset request. It has just passed out of the NAIC’s “E” Committee and will now come before Executive/Plenary. The Accounting request concerned the limit on admissible DTAs following GAAP rules for DTAs instead of statutory rules. A DTA is an offset against future taxes. The item that will go before the Executive/Plenary permits increased use of that asset and allows a 3-year carryback. It also prevents DTAs from being used for determining any regulatory triggers that involve admitted assets or statutory surplus. The provision sunsets at the end of 2010 but may be revisited by regulators.

Another financial issue that is working its way through the NAIC is an ACLI request to ease capital requirements for insurers’ holdings of residential mortgage-backed securities. Ratings applied to these “AAA”-rated securities have recently been downgraded, in many cases by several notches. Consequently, the ACLI submitted a Sept. 10 request that NAIC requirements be eased. The issue revolves around whether the rating agencies properly rated them. The ACLI is proposing that an independent third party firm model RMBS losses held by insurers. The results, according to the ACLI letter, will then be applied to a formula which will be applied to determine which of the six NAIC ratings the securities should be assigned.

The issue of the reliability of ratings from rating agencies was delved in a public hearing yesterday. During that hearing, state insurance commissioners repeatedly questioned how meticulous the ratings process of the major ratings agencies.
Representatives for the ratings agencies said that ratings should be used in conjunction with other regulatory tools and that there are various types of ratings that create a broader picture of a company’s strength.

Illinois Director Michael McRaith wondered whether regulators are too reliant on ratings from the major agencies and whether sufficient resources are devoted to the structure to develop these ratings. Grace Osborn of Standard & Poor’s, New York countered that there were ample resources to ensure the robustness of these ratings.

Newly appointed New York Superintendent James Wrynn asked which ratings regulators could rely on and how credibility could be restored to the process. And Connecticut Insurance Commissioner Tom Sullivan asked how regulators can be assured that a herd mentality does not exist putting pressure on analysts to upgrade or downgrade insurers.

Producer licensing and health issues were also finalized during the Executive/Plenary session. Revised Uniform Applications for producer licensing was adopted as was amendments to the long-term care insurance model act and model regulation.

The producer licensing changes proceeded even though New York maintained that renewals should include new background checks because people’s circumstances change. Additionally, New York said that there should be four additional questions included related to: bankruptcy, delinquent taxes, inappropriate use of funds and termination for misconduct.

The changes to the Long-Term Care model are based on laws that Iowa developed on the issue to address prompt-pay and recission issues.