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Date                 July 7, 2010                                                            
Author             Connie Jasper Woodroof
Email                connie.woodroof@stoneriver.com

Summer Break for NAIC? Not Really.

Under the new NAIC National Meeting schedule, there are no meetings between March and August.  So does that mean that the NAIC is observing a summer break?  No, not at all. 

Just take one look at the conference call and interim meeting schedule on the NAIC website (http://www.naic.org/meetings_calendar.htm), and you will find they have been quite active. How busy?  In April there were approximately 46 conference calls; May had 64 calls; and June ended with 49 calls.

But keep in mind a few caveats:  First, these numbers are approximate. Second, these are only the calls that are open to the public. These numbers don’t include calls that are limited to regulators, interested parties, or other working calls between splinter groups.

Some of this activity is normal; that is, some groups almost always meet by phone and rarely at the National Meeting. Other groups, however, have stepped up the number of calls considerably. In turn, many items have been exposed for comments from industry and are being adopted or are in the process of being adopted, making it difficult to keep up with so many activities.

Additionally, not all of the different groups are posting minutes from those calls to their website. Some are opting to wait until the August meeting to make them available to the public through the official meeting minute process. This is unfortunate, as it makes keeping abreast of NAIC activities much harder. I will attempt to bring you up-to-date on some of the happenings of the groups that we normally discuss in the NAIC Focus.

Blanks Working Group
This group met by conference call on June 21 to adopt items that will be incorporated in to the 2010 Annual Statement. Having this call in June is now slated to become a regular item each year. Here is a brief summary of the happenings of that call. Copies of all the adopted proposals are now available at http://www.naic.org/documents/committees_e_app_blanks_adopted_proposals.pdf allowing you access to all the details.

Several proposals were adopted that add a great deal of disclosure regarding security lending programs. Collectively, they result in an additional line being added to the Assets and Liabilities pages, additional General Interrogatory questions, more Note 5E disclosures, changes to the Five-Year Historical pages, and a new Schedule DL – Parts 1 and 2 used to report a detail listing of reinvested collateral.

Additional changes to Note 9, Taxes, were adopted on the June conference call. The disclosure requirements have been expanded and examples have been provided.

Six new codes were added to the bond collateral type column in Schedule D – Part 1. This information will provide regulators with additional detail needed for solvency regulation. Good news! The proposed new bond reporting categories will not be implemented this year, but instead have been postponed until first quarter of 2011.

A new April 1 supplement has been added to the LAH statement for the reporting of annuity information. The supplement includes an Analysis of Annuity Operations by Line of Business, and an Analysis of Increase in Annuity Reserves. The reporting is done in total and by categories of annuities; fixed amounts, equity indexed, variable annuities in the general account, variable annuities in the separate account and other annuities.

New Actuarial Opinion instructions have been added to the Health Instructions. There are several changes that should be reviewed. Additionally, guidance now exists exempting certain companies from some of the requirements.

So that should wrap up the 2010 Annual Statement, right?  Well, not quite. There is still one pending item.  Any company providing health products, regardless of the type of statement being filed, will be affected by a still pending proposal. The newly passed Patient Protection and Affordable Care Act (PPACA of 2009 (J.R. 3590) requires health insurers to calculate a medical loss ratio (MLR) that could result in rebates to insureds.

The calculation of the MLR differs from loss ratios available through current health reporting and accordingly could affect the solvency of the health insurers. Therefore, the NAIC is adding a new Health Care Supplement to all of the various statements that report health business. Normally, the addition of this supplement would have to wait until 2011 for implementation, but the NAIC has initiated “emergency” procedures to adopt the supplement for 2010. On the June 21 Blanks conference call two different health proposals were exposed for comment for a one-week period. On a June 30 conference call, the blanks adopted the “idea” of adding the supplement, but the final decision on the format and instructions was not left up to them. On a July 1 conference call, after making several revisions, the Health Reform Solvency Impact Subgroup adopted the proposal they wanted implemented. There is one final step left, a conference call to be held July 7 by the Financial Conditions Committee. Hopefully everything will be finalized on the call and industry will know exactly what will be required. You have the Federal government to thank for this one.

The NAIC has a new website that addresses the health care reform happening both within the NAIC and on the Federal level. You may want to check it out at http://www.naic.org/index_health_reform_section.htm. It’s quite extensive and fairly up-to-date.

Valuation of Securities (VOS) Task Force
Although it had been rumored that updated valuation material would be posted for the valuing of residential-backed securities, the VOS Task Force decided an update will not be needed at this time. Their reasoning was that the RMBS market has stabilized for now and the expense of re-running the analysis was not justified. There will be updated information posted in time for year-end 2010, which means companies will also have to provide the SVO with a listing of their RMBSs, like they were required to do last year.

Capital Adequacy Task Force
The working groups that support each of the various formulas regularly meet by conference call, so their work has continued in a routine fashion with all of the 2010 formulas subject to adoption by the end of July.

However, there will be an interim meeting of the Capital Adequacy Task Force’s Solvency Modernization Initiative Subgroup July 20 and 21 in Washington, D.C.  The Subgroup has quite an aggressive agenda, but bottom line they are looking at “holistic redesign of standardized RBC models.”  According to their itinerary, this might include merger of the life, health and property/casualty RBC models. It should prove to be a lively two days of discussion. (This possible re-thinking of RBC is a direct result of the Solvency Modernization Initiative I discussed in the March edition of the Focus.)

Investments of Insurers Model Act Revisions Working Group
This group will be doing most of its work via conference call and has started holding their calls. Currently they are seeking some input from industry on possible changes to the NAIC’s Investments of Insurers Model Acts, model #280 and #283. Results of a regulator survey indicated the NAIC needed to make changes to the acts to address securities lending, structured securities, rated credit investments, hybrids, references to rating agencies, control documentation and new limitations on pledged securities for activities outside the ordinary course of business. If their activity is something you want to monitor, their information is being made available at http://www.naic.org/committees_e_iimar.htm.

Solvency Modernization Initiative Task Force
This Task Force is currently juggling quite a few balls in the air.  They have several other groups reporting to them. The list of the groups below should link you directly to their websites:

Corporate Governance Working Group
Group Solvency Issues Working Group
International Accounting Standards Working Group
International Solvency Working Group
Principles-Based Reserving Working Group
Statutory Accounting and Financial Reporting Subgroup

Enjoy the rest of your summer.  The NAIC’s next meeting is scheduled for August, but in the mean time I suspect the work will continue.

Live long and prosper!

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