PCI Expresses Concerns Regarding NAIC Insurer Receivership Model Act

August 10, 2005

The Property Casualty Insurers Association of America (PCI) expressed serious concerns last week regarding the Insurer Receivership Model Act (IRMA) at the National Association of Insurance Commissioners’ (NAIC) Financial Conditions (E) Committee meeting held last Tuesday in Chicago.

“PCI remains very concerned with the current IRMA model given that it so strongly favors liquidators over policyholders and other parties affected in liquidations,” said Mike Koziol, assistant vice president and counsel for PCI.

The almost eighty page document was released in early May as a final draft for exposure and comment. Industry groups were then given less than two weeks to review the model and to formulate comments before swift adoption by the NAIC’s Receivership and Insolvency Task Force. Subsequently, PCI and other groups submitted a letter expressing thirteen common concerns with the model.

PCI and others are seeking a number of substantive revisions including the inclusion of a large deductible provision, modification of the reinsurance recoverables provisions and modification of immunity provisions to name a few.

On the large deductible provisions, Koziol pointed out to the committee the history of guaranty funds as a safety net for those least able to bear losses caused by insolvency. “Traditionally, commercial lines were included more as an afterthought, but that market has since changed dramatically,” said Koziol. “Large deductible policies are akin to self-insurance for the deductible layer, and guaranty funds should not cover self insurance. A large deductible provision in IRMA would reimburse the guaranty fund the same way the insurer would have been reimbursed by the insured, had the insurer remained solvent. Without a large deductible provision, the guaranty funds effectively pay the estate of the insolvent insurer, adding to the financial pressure on the funds.”

With regard to reinsurance recoverables, PCI is concerned that the current language in IRMA could force reinsurers to pay based on estimated incurred, but not reported losses. Since reinsurance contracts are contracts of indemnity, a reinsurer pays only after the insurer pays. IRMA rewrites reinsurance contracts, potentially increasing payment risk to reinsurers, and since increased risk requires increased return, this could potentially increase the cost of reinsurance to primary writers.

PCI has similar concerns on the issue of immunity. “IRMA grants extremely broad immunity to the receivers and their contractors. “Contractors are professionals who should have their own error and omissions coverage,” said Koziol. “For example, IRMA would prevent a claimant from suing the contractor who released personal information. That goes too far.”

Due to the high volume of interest, another conference call is scheduled to take place in the coming weeks where additional discussions will take place on the matter. PCI said it intends to present comments during the call.

“While we applaud the (E) Committee for taking the additional time to better familiarize themselves with the issue and industry’s concerns, further discussion and collaboration must take place,” added Koziol. “We are hopeful the NAIC can come up with a more balanced model.”

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