Commissioners Face Long List of Topics in Orlando

March 3, 2006

Reference to the National Catastrophe Insurance Plan is prominently absent from the National Association of Insurance Commissioner’s agenda as NAIC kicks off its March 4-7 Spring National Meetings in Orlando, Fla.

Among the items on the NAIC agenda are, adding certain Sarbanes-Oxley content to state regulation, alien reinsurers, reporting extra contractual obligations, and personal lines rate regulation are just a few of the topics to be discussed by commissioners from across the U.S.

Any direct reference to the National Catastrophe Insurance Plan, the main focus of the NAIC Property and Casualty Insurance committee since last November, is missing from the agenda of the Catastrophe Working Group, which meets between 10 a.m. and noon on March 4. The CAT plan was of great interest to the group when it met in San Francisco for its National Catastrophe Insurance Summit.

The three items on the agenda are: Review Feb. 15, 2006 Interim Meeting minutes; discuss white paper, “Catastrophe Risk Management for the U.S. Economy;” and any other matters brought before the working group.

A National Association of Mutual Insurance Companies spokesperson noted that the white paper referred to in the second agenda item is not the paper that describes the proposed CAT plan, which is titled “National Catastrophe Risk: Creating a Comprehensive National Plan.” Discussion of a revised draft that paper and the plan it describes consumed the working group’s entire Feb. 15 Interim Meeting.

No time is allotted for discussion of the National Catastrophe Insurance Plan white paper, however, numerous interested parties in attendance are expected to comment on the most recent revised version of this paper during the “other matters” portion of the agenda.

The NAIC/AICPA Working Group is expected to vote March 6 to add certain Sarbanes-Oxley content to state regulation, but the vote may not presage such content becoming part of state solvency regulation.

Much mitigated since its debut in February 2004, the current proposal faces more resistance when it reaches its next level of review in the NAIC’s Executive Committee, probably in June.

NAMIC told Insurance Journal that, in its resistance to the Sarbanes-Oxley content, it has repeatedly asserted to the working group that proposed new measures from Sarbanes-Oxley to strengthen internal accounting control cost more for mutual insurers than they save.

NAMIC said state legislators appear to accept its arguments about implementation costs of the internal accounting measures being greater than any resulting saving and may be expected to make more difficult further progress of the proposal.

“The vote during this weekend’s meeting on the compromise, or ‘alternate proposal,’ is not necessarily prologue to passage up the NAIC committee hierarchy and certainly not in legislatures,” William Boyd, NAMIC’s financial regulation manager explained. “Regulators will have to take into account what legislators think about the internal accounting content in the proposal that is derived from Sarbanes-Oxley.”

Other Sarbanes-Oxley content in the proposal includes prescriptions directed toward insuring auditor independence and intended to improve insurers’ audit committees. “We have criticized these, but the real problem, the really irrational part of what is proposed, is the material on internal accounting control,” Boyd said.

Alien Reinsurers

NAMIC asks, “Just how global is the business world, and how much trust should be given alien reinsurers, especially those in western Europe that write very large amounts of business with U.S. primary insurers?”

NAMIC believes that although NAIC deliberations in Orlando won’t be representative of a large and difficult set of issues in this area, it is no secret that key regulators have resolved to try to resolve, or fan away some of the smoke that issues from this area, rules for international insurance.

Alien reinsurers have been indefatigable in their effort to trim a rule requiring 100 percent collateralization for the risks they write with cedents on these shores. Asserting that requirements for full collateralization constitute a trade issue, Lord Levene of Lloyd’s and others still meet resistance from U.S. primary insurers and from U.S.-domiciled reinsurers that do not want alteration of the current requirement for full collateralization.

Three NAIC bodies, the NAIC/Industry Liaison Committee, the International Solvency Initiatives Working Group, and the Reinsurance Task Force, are or will be forums for deliberations on how business should be done with non-U.S. carriers of risk. All meet in Orlando and will be engaged in the international issues.

Collateralization for alien reinsurance, which the aliens regard as costly and discriminatory, has been the matrix for proposals about “white lists” for reinsurers of supposedly superior solvency, joint trusts, and other measures—none of which succeeded. Primary insurers continue to have concerns about differing jurisdictions treatment of solvency problems and availability or convenience of justice in the instance of disputes. NAMIC’s policy-making bodies, like those of other trade associations, have favored maintenance of full collateralization.

Despite the full collateralization—by deposits or letters of credits—the alien reinsurers have managed to service large parts of the U. S. reinsurance market.

The three NAIC committees will try to make judgments on just how global insurance and reinsurance should be.

Blanks Proposal

Expensive systems changes would be necessary for insurers to be able to report what are known as “extra-contractual obligations,” resulting from lawsuits engendered in the claims process, NAMIC and other industry members have told the NAIC Blanks Working Group.

Deferred from the NAIC’s winter meeting in December, a proposal to amend Schedule P of the NAIC Annual Statement to add data on such obligations will return to deliberation March 4 during a meeting of the Blanks Working Group.

The essence of the proposal is to require the extra-contractual losses and related costs to be included in several parts of Schedule P for each line of business’s loss development triangles. Most insurers’ systems are not configured to capture and configure the data, which is otherwise disclosed in the annual statement.

“Industry recommends that this blanks proposal be referred to the NAIC’s Statutory Accounting Principles Working Group for study there,” Boyd said. “Material amounts, subject to confidentiality agreements that may be part of settlements, are already disclosed. This isn’t needed.”

Other blanks proposals objected to by the industry include:

• Limitation of the exhibit of capital gains to invested assets only. Industry believes capital gains from other assets should be included.

• Addition of new columns to identify new reinsurers and type of reinsurance ceded. The proposed new requirements entail more expense than their minimal regulatory utility justifies.

P/L Rate Regulation

NAIC has attempted for years to develop a uniform approach to property/casualty personal lines rate regulation. Those efforts have been largely unsuccessful; regulators have been unable to reach consensus on this rather sensitive issue. Another attempt to reach consensus started in 2004 in the Operational Efficiencies Working Group but never got off the ground.

Now a working group has been formed, with Alabama staffer David Parson as chair, to once more look at the issue and attempt to develop a model law. The group met by conference call for the first time on Feb. 16 and began discussions regarding its mission. They will meet again Sunday afternoon and start with review of a marked-up 2000 draft model law that was the work product of the Commercial Lines Re-engineering Working Group six years ago. The model under consideration is said to provide for a “default” to file and use but with reservation of prior approval of rates for certain less competitive lines, based on individual state determination.

The meeting is expected to include continued discussions by the members as to their charge for developing a model law. The working group may also take preliminary comments from interested parties during their meeting.

NAMIC has stressed in its communications with prior working groups that open competition should be the “default” market environment for personal lines of coverage. NAMIC will continue to work toward rate regulatory modernization at the NAIC and with the NAIC’s individual state regulators.

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