FINANCIAL CONDITION (E) · PDF fileArtemio B. Ilagan Guam Michael S. Pieciak Vermont ... The Financial Condition (E) Committee met in Philadelphia, PA, Aug. 8, 201. The following 7

© 2017 National Association of Insurance Commissioners 1

Date: 11/30/17

2017 Fall National Meeting Honolulu, Hawaii

FINANCIAL CONDITION (E) COMMITTEE

Monday, December 4, 2017 10:30 – 11:30 a.m.

Hilton Hawaiian Village and Hawaii Convention Center—312 Convention Center—Level 3

ROLL CALL Eric A. Cioppa, Chair Maine Richard J. Badolato New Jersey Ken Selzer, Vice Chair Kansas Jillian Froment Ohio Dave Jones California Kent Sullivan Texas Artemio B. Ilagan Guam Michael S. Pieciak Vermont Nancy G. Atkins Kentucky Jacqueline K. Cunningham Virginia Chlora Lindley-Myers Missouri Allan L. McVey West Virginia Matthew Rosendale Montana Tom Glause Wyoming Barbara D. Richardson Nevada NAIC Support Staff: Dan Daveline /Julie Gann/Bruce Jenson

AGENDA

1. Consider Adoption of its Nov. 9 and Summer National Meeting Minutes Attachment One

—Superintendent Eric A. Cioppa (ME) 2. Consider Adoption of its Task Force and Working Group Reports —Superintendent Eric A. Cioppa (ME)

• Accounting Practices and Procedures (E) Task Force Attachment Two • Capital Adequacy (E) Task Force Attachment Three • Examination Oversight (E) Task Force Attachment Four • Long-Term Care Insurance (B/E) Task Force Attachment Five • Receivership and Insolvency (E) Task Force Attachment Six • Reinsurance (E) Task Force Attachment Seven • Risk Retention Group (E) Task Force Attachment Eight • Valuation of Securities (E) Task Force Attachment Nine • Group Capital Calculation (E) Working Group Attachment Ten • Group Solvency Issues (E) Working Group Attachment Eleven • Mortgage Guaranty Insurance (E) Working Group Attachment Twelve • National Treatment and Coordination (E) Working Group Attachment Thirteen • Risk-Focused Surveillance (E) Working Group Attachment Fourteen • Variable Annuities Issues (E) Working Group Attachment Fifteen

3. Technical Project of the Valuation of Securities (E) Task Force Attachment Sixteen

4. Consider Adoption of Examiner Salary Recommendations––Superintendent Eric A. Cioppa (ME) Attachment Seventeen

5. Consider Adoption of Proposed Changes to the Life and Health Insurance Guaranty Attachment Eighteen

Association Model Act (#520)––Superintendent Eric A. Cioppa (ME) 6. Discuss Any Other Matters Brought Before the Committee—Superintendent Eric A. Cioppa (ME) 7. Adjournment

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Attachment One Financial Condition (E) Committee

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Draft: 11/14/17

Financial Condition (E) Committee Conference Call

November 9, 2017 The Financial Condition (E) Committee met via conference call Nov 9, 2017. The following Committee members participated: Eric A. Cioppa, Chair, and Vanessa Leon (ME); Ken Selzer, Vice Chair, represented by Richard Ramos (KS); Dave Jones represented by Kim Hudson (CA); Artemio B. Ilagan represented by Alice Cruz (GU); Chlora Lindley-Myers represented by John Rehagen (MO); Richard J. Badolato (NJ); Barbara D. Richardson represented by Omar Akel (NV); Jillian Froment, Dwight Radel and Dale Bruggeman (OH); Kent Sullivan represented by Doug Slape (TX); Jacqueline K. Cunningham represented by Doug Stolte (VA); and Tom Glause (WY). 1. Adopted a Request for Extension from the Mortgage Guaranty Insurance (E) Working Group Superintendent Cioppa stated the Committee had received a request for extension on a model law development from the Mortgage Guaranty Insurance (E) Working Group. He stated that as he read the request, it seemed the real issue wasn’t the changes to the model law, but rather that this particular Working Group is proposing a new risk-based capital (RBC)-type capital requirement, which is still being developed, or at least now is being tested by a consultant hired by the NAIC. He said the work seemed to be deliberate, and given the importance of validating this data, he does not see a reason not to accept the request. Mr. Hudson, Commissioner Badolato and Mr. Rehagen agreed. Commissioner Glause made a motion, seconded by Commissioner Badolato, to adopt the request for extension from the Mortgage Guaranty Insurance (E) Working Group (Attachment One-A). The motion passed unanimously. 2. Adopted its 2018 Proposed Charges Superintendent Cioppa stated that during this past year, the commissioners have been discussing the need to make some small changes to the NAIC Committee process as a means to try to keep the organization running as efficiently and effectively as possible. As a result, it was decided that the NAIC needed to instill some discipline in the management of the regulatory issues introduced in committees and task forces, including streamlining the number of groups and adding a requirement for timely deliverables for work that goes beyond the normal maintenance that is a part of so many of the Committee’s work streams. Superintendent Cioppa stated that he and Commissioner Selzer drafted proposed changes to the charges that attempted to meet this objective. He noted that with respect to timely deliverables, they asked NAIC staff to draft proposed dates when the work was non-maintenance related. Superintendent Cioppa indicated they did so with the understanding that the dates that were developed may not be final. He stated they were both very much open to finding different deliverable dates to the extent the chair of such a group could come back to the Committee and describe the status of the work and why a different deliverable would be more appropriate. He noted that as long as the Committee could drive the discipline that the collective commissioners were looking for, all suggestions would be considered. Director Froment made a motion, seconded by Commissioner Glause, to adopt the Committee’s and task forces’ 2018 proposed charges (Attachment One-B). The motion passed unanimously. 3. Continue Discussions on the Interim Investment Detail Project Superintendent Cioppa stated the Committee first began its discussion on interim investment detail during a conference call in May, but at that time the discussion was focused on an actual proposed disclosure for mid-year investment reporting that the Accounting Practices and Procedures (E) Task Force approved. He noted that when that proposal was received, the discussion seemed to be focused on the costs for the industry to produce such investment reporting compared to the benefits it provides state insurance regulators. As a result, the discussions turned to determine if there was another way the NAIC could meet the same objective that was less costly. Superintendent Cioppa stated that at the Summer National Meeting, the discussion was focused on the services that A.M. Best could provide the NAIC where it reviews and corrects the data it receives through a manual process and how this could be applied against existing quarterly data produced by insurers.

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Attachment One Financial Condition (E) Committee

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Superintendent Cioppa noted that at the Summer National Meeting, the Committee requested Ed Toy, director of the NAIC Capital Markets Bureau, to put together summary information following the meeting, and asked Mr. Toy to summarize some of the key points in the material produced for the Committee (Attachment One-C). Superintendent Cioppa asked for clarification on the A.M. Best proposal, noting it seems to provide Committee on Uniform Security Identification Procedures (CUSIP) and par value information only, and questioned the value of paying another company to review and modify the data for accuracy—something that NAIC staff could do. Mr. Toy stated Superintendent Cioppa’s understanding of the A.M. Best proposal was accurate. He agreed that the NAIC receives the transactional information and that it would be possible for NAIC staff to review and modify the data through a “scrubbing process” and develop the schedules using the CUSIP and par value information. Mr. Toy noted it is time-consuming to review and modify this data because it requires a line-by-line review of the data. To the extent it was done “in-house,” it would be the NAIC’s data and could be used in a way that could not be used with the A.M. Best data, which would have to be stored and analyzed in a separate database. Superintendent Cioppa asked the Committee if it should approach the Internal Administration (EX1) Subcommittee about obtaining additional resources for the NAIC to be able to perform this operation instead of A.M. Best. He noted that using A.M. Best does not seem logical given the NAIC would still have to spend about $200,000 just to make the A.M. Best data usable. Mr. Hudson agreed, noting that it would be better if the NAIC and the state insurance regulators could control the data. Superintendent Cioppa stated his appreciation to the American Council of Life Insurers (ACLI) (Attachment One-D) for its estimated quantification of the industry to complete all four columns of original blanks proposal. John Bauer (Prudential) reminded the Committee that A.M. Best was willing to relook at the fair value information. He noted that it did not see any downfall to using the A.M. Best data in 2018. Mike Monahan (ACLI) noted that the estimated costs for the full industry providing this information was very material. Superintendent Cioppa reiterated that he appreciates the point, but he noted that is why he was only considering the A.M. Best proposal at this time. Andrea Keenan (A.M. Best) indicated the data it would provide was a labor-intensive clean-up process and was only CUSIP and Par Value but was quarterly. However, it could develop an alternative that would include fair value. Ms. Froment asked Superintendent Cioppa if the NAIC would still have to use resources to put the existing data into a usable format and asked if this cost had been estimated. He responded that was correct; there are costs that the Committee has not yet been provided. Mr. Toy responded that he has not yet developed such cost estimates, but that it would likely require one full-time fairly senior analyst who could review security descriptions and make judgments where the transactions data was not accurate. Mr. Rehagen responded it would be helpful to see such cost information. Superintendent Cioppa requested Mr. Toy pull together such cost information for the Committee to consider the matter more fully in the future. Having no further business, the Financial Condition (E) Committee adjourned. W:\National Meetings\2017\Fall\Cmte\E\Attachment One 11-9-17 E Minutes.docx

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Draft Pending Adoption


Date: 8/15/17

Financial Condition (E) Committee Philadelphia, Pennsylvania

August 8, 2017

The Financial Condition (E) Committee met in Philadelphia, PA, Aug. 8, 2017. The following Committee members participated: Eric A. Cioppa, Chair, and Vanessa Leon (ME); Ken Selzer, Vice Chair (KS); Dave Jones, Kim Hudson and Susan Bernard (CA); Nancy G. Atkins represented by Sandy Batts (KY); Chlora Lindley-Myers and John Rehagen (MO); Matthew Rosendale represented by Steve Matthews (MT); Richard J. Badolato represented by Peter Hartt and Kristine Maurer (NJ); Jillian E. Froment represented by Dwight Radel and Dale Bruggeman (OH); TBD represented by Doug Slape (TX); Jacqueline K. Cunningham represented by Doug Stolte (VA); Michael Pieciak represented by Karen Murphy (VT); Allan L. McVey represented by Andrew Pauley (WV); and Tom Glause and Linda Johnson (WY).

1. Adopted its July 17, May 12 and Spring National Meeting Minutes

Superintendent Cioppa stated the Committee met July 17, May 12 and April 10. During its July 17 meeting, the Committee adopted a model law development request to consider amendments to the Life and Health Insurance Guaranty Association Model Act (#520). During its May 12 meeting, the Committee, discussed proposed new investment disclosures. Mr. Radel made a motion, seconded by Ms. Bernard, to adopt the Committee’s July 17 (Attachment One), May 12 (Attachment Two) and April 10 (see NAIC Proceedings – Spring 2017, Financial Condition (E) Committee) minutes. The motion passed unanimously.

2. Received a Report from the Long-Term Care Insurance (B/E) Task Force and Adopted its Charges

Superintendent Cioppa provided a summary of the work conducted by the Long-Term Care Insurance (B/E) Task Force during the last quarter, which included two meetings via conference call and a meeting on Aug. 7. He stated that the Task Force held its first meeting via conference call on July 14, during which it adopted its proposed charges. Superintendent Cioppa reported that during its July 19 meeting, the Task Force heard a presentation from two individuals who are suggesting the development of a regulatory structure that would allow for a long-term care (LTC) run-off facility. During its Aug. 7 meeting, the Task Force received status reports on NAIC long-term care insurance (LTCI) activities from various NAIC groups. Superintendent Cioppa stated that there was a great deal of work on LTCI occurring at the NAIC and that the Task Force is focused on being the one single NAIC body that is coordinating all of that work to make sure the various work fits together in a cohesive effort to address LTCI issues.

Superintendent Cioppa made a motion, seconded by Commissioner Selzer, to adopt the Task Force’s charges (Attachment Three). The motion passed unanimously.

3. Adopted the Reports of its Task Forces and Working Groups

Superintendent Cioppa noted that items adopted within the Committee’s task force and working group reports that are considered technical, noncontroversial and not significant by NAIC standards (i.e., they do not include model laws, model regulations, model guidelines or items considered to be controversial) will be considered for adoption by the Executive (EX) Committee and Plenary through the Financial Condition (E) Committee’s technical changes report process. Pursuant to this process, which was adopted by the NAIC in 2009, a listing of the various technical changes will be sent to the NAIC members shortly after completion of the Fall National Meeting, and the members will have 10 days to comment with respect to those items. If no objections are received with respect to a particular item, the technical changes will be considered adopted by the NAIC membership and effective immediately.

Commissioner Glause made a motion, seconded by Director Lindley-Myers, to adopt the following task force and working group reports: Accounting Practices and Procedures (E) Task Force; Capital Adequacy (E) Task Force; Examination Oversight (E) Task Force; Receivership and Insolvency (E) Task Force; Reinsurance (E) Task Force; Valuation of Securities (E) Task Force; Group Capital Calculation (E) Working Group (Attachment Four); Group Solvency Issues (E) WorkingGroup (Attachment Five); Mortgage Guaranty Insurance (E) Working Group (Attachment Six); NAIC/AICPA (E) WorkingGroup (Attachment Seven); National Treatment and Coordination (E) Working Group (Attachment Eight); Risk-FocusedSurveillance (E) Working Group (Attachment Nine); and Variable Annuities Issues (E) Working Group (Attachment Ten).The motion passed unanimously.

Attachment One

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The Financial Analysis (E) Working Group met in regulator-to-regulator session Aug. 5, July 19, June 21, June 7, May 18, May 17, April 26 and April 25 pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings. 4. Adopted Technical Changes to Model #280 Superintendent Cioppa described that an editorial changes needs to Investments of Insurers Model Act (#280) to remove a reference to the Class One bond list since the concept of a Class One bond list no longer exists and to correct the definitions for repurchase and reverse repurchase transactions. Mr. Bruggeman made a motion, seconded by Mr. Matthews, to adopt the proposed changes to the model (see NAIC Proceedings – Summer 2017, Joint Executive (EX) Committee/Plenary). The motion passed unanimously. 5. Discussed a Preliminary Financial Condition Examiners Handbook Salary Update Recommendation Superintendent Cioppa summarized a memorandum from NAIC staff that provides an average recommended increase to the examiner salary recommendations in the Financial Condition Examiners Handbook based on the Consumer Price Index (CPI) for the year ending July 31. He noted that because the July CPI will not be finalized for a month, the memorandum is only a preliminary indicator. He stated that the number is not expected to change significantly once the figures are finalized and asked that state insurance regulators review the memorandum and let NAIC staff know if they have any concerns. Superintendent Cioppa indicated that a final version will be distributed for consideration at the Fall National Meeting. Superintendent Cioppa also reminded the Committee that as a result of discussions by the Committee in 2016, the Risk-Focused Surveillance (E) Working Group was tasked with considering if examination and analysis salaries are consistent with the skills required for state insurance regulators tasked with solvency monitoring responsibilities and that while such work is underway, the NAIC would continue to update the salary recommendations until the Working Group develops an alternative. 6. Consider Mid-Year Investment Reporting Proposal and Comment Letters Superintendent Cioppa summarized a proposal the Committee had received from the Accounting Practices and Procedures (E) Task Force, which was discussed on its May 12 conference call. He noted that during that call, the proposal was presented to the Committee, which includes a requirement to add four new electronic-only columns to the second-quarter financial statement: 1) Committee on Uniform Security Identification Procedures (CUSIP); 2) par value; 3) book/adjusted carrying value (BACV); and 4) fair value. Superintendent Cioppa reminded the Committee that the primary issue raised with the proposal was one of costs versus benefits, where the cost includes the time and effort for the companies to add the data into the filings and the benefits include, among other things, that the information would assist the NAIC Capital Markets Bureau in performing more macro prudential surveillance of the industry. During its May 12 meeting, the Committee decided to defer action and expose the proposal for a public comment period. Comment letters were received from Interested Parties (Attachment Eleven); Vermont Department of Financial Regulation (DFR) (Attachment Twelve); Joint Captive Insurance Companies Association (CICA) and National Risk Retention Association (NRRA) (Attachment Thirteen); and A.M. Best (Attachment Fourteen). John Bauer (Prudential), on behalf of interested parties, reiterated the suggestion that the best approach to addressing the need from state insurance regulators is to use additional data programming to more fully use the existing quarterly information submitted by insurers to the NAIC. Mr Bauer noted that they had recently been made aware of the comments from A.M. Best, and strongly encouraged the Committee to further study the process being suggested by A.M. Best in its comment letter as opposed to the previously exposed policy change. Ms. Murphy stated that their comments were focused on the additional costs to smaller insurers. Ed Toy (NAIC) stated that since the NAIC had received the comment letter from A.M. Best, he and other NAIC staff had held some conversations with A.M. Best. Mr. Toy first recapped some of the previous points made regarding the rational for the proposed reporting change for the Committee to be clear on the purpose of the proposal. He stated that in addition to the idea of increasing macro prudential supervision, recent volatility in the market has increased the need for more periodic reporting for solvency monitoring. Specifically, the ongoing increase in outside investment advisors, particularly for the smallest insurers, has created more actively managed and traded portfolios.

Attachment One

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Mr. Toy described more fully how the NAIC had a number of conference calls with both technical and business individuals from A.M. Best since receiving the comment letter, and that A.M. Best would like to see if there was a way to expand on the existing relationship with the NAIC as it would like to assist the regulatory process. He noted that during their conversations, A.M. Best did confirm some of the things he had noted to the Committee in the past, which suggests that addressing the underlying needs of the proposal is not as simple as having additional programming to accumulate data as suggested by interested parties. Rather, it requires a great deal of manual work to clean up the transaction data. Mr. Toy said that A.M. Best came out with similar metrics regarding the quality of the data they receive, where they note 10% to15% of the transaction data is poor quality, mostly from bad CUSIP numbers. As a result, A.M. Best has relatively senior employees review the details to correct for bad CUSIPs and other problems. He stated that A.M. Best takes a reasonable estimate of BACVs, but they do not have the other-than-temporary-impairment (OTTI) data, as is the case for the NAIC staff. He stated A.M. Best also has problems with the fair value data in that it does not have pricing data on approximately 20% to 25% of the exposures. However, he stated that A.M. Best is very interested in working with the NAIC with what it has. Mr. Toy stated he has had conversations with internal NAIC information technology (IT) staff, who have received a small sample file from A.M. Best, and who noted no issues with the way it was structured. The only issue identified by internal NAIC IT staff was that there would still be a need to consider how to store and service the data different from annual and quarterly statement data received by the NAIC from insurers. He stated the conversations with A.M. Best also suggested they may need to have some limitations on access to this data, but that A.M. Best wants to be as helpful to state insurance regulators as possible. Mr. Toy stated that A.M. Best receives data directly from most of the industry. For the rest of the companies, they acquire the data from the NAIC. The result is that they have data from all of the insurers that file with the NAIC. Once they have the data, it would take them approximately six weeks to process it and provide it to the NAIC. Mr. Toy stated there would be a fairly substantial cost for A.M. Best to provide the data to the NAIC as contemplated within its comment letter, and it would be an annual cost since it is an ongoing cost to analyze and process the data each period. He also noted that to the extent the NAIC obtains this data from A.M. Best, one consideration is if state insurance regulators decide there is a need to take regulatory action based on the data. Since this would be outside data, there may be a desire to confirm the data that comes to the same conclusions. Superintendent Cioppa summarized that while it shows promise, the costs and how those would be funded would need to be addressed by the Executive (EX) Committee and Internal Administration (EX1) Subcommittee. Diane Bullock Heine (A.M. Best) stated A.M. Best has had a long relationship with the NAIC and that it is interested in making the potential relationship specific to this project as beneficial to both parties where possible. Commissioner Selzer asked how the additional data not collected by A.M. Best would be obtained. Mr. Toy responded that for anything missing, A.M. Best obtains data from the NAIC and then begins to clean up all of it together. Mr. Bruggeman noted that BACV sounds like it must be estimated and asked if this would be sufficient. Mr. Toy stated that the impairment data would be missing, but that since the NAIC does receive aggregated BACV by company, that could be used to investigate in those situations where the differences were material. Mr. Hudson asked if fair value could be obtained. Mr. Toy stated there would be holes on the fair value data, and while they may have slightly more pricing data than the NAIC, there would be missing data. Mr. Slape asked how much would be missing on the fair value. Mr. Toy responded that the biggest issue is with structured securities and to a lesser extent municipal bonds, but other areas are better covered and in total it was probably about a 15% gap. Mr. Slape noted that given the focus on macro prudential surveillance, and given the last crisis, this lack of complete fair value data could be an issue. Mr. Slape asked about the timing of data coming in after quarterly filing deadlines. Ms. Heine stated it would likely take A.M. Best about six to eight weeks to provide data to the NAIC. Commissioner Selzer asked the cost of the A.M. Best approach and the funding for such. Mr. Toy stated that it was likely between $250,000 and $300,000 on an annual basis. Ms. Heine stated A.M. Best had discussed a number a bit less than this. Mr. Toy said that while sizeable, it may not be considered large on an individual company basis. He said the question regarding funding was not something that had been addressed. Superintendent Cioppa asked Mr. Toy to develop more information to answer some of the state insurance regulators’ questions regarding whether it would meet the NAIC needs, as well as the cost and funding question. Mr. Slape asked about the cost for the NAIC to perform the same work, including the cost per company. Mr. Toy said it would be hard to determine a cost per company, since that would depend in part on whether the company uses a software vendor that already has the data. From the perspective of the NAIC, there would be costs associated with either alternative since there would be some NAIC programming costs for either approach. Mr. Toy noted that if the NAIC did not use A.M. Best, it would likely require the NAIC to employ two new fairly senior level people

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to analyze the data similar to what A.M. Best does. Mr. Slape noted that he thinks all companies have the data and so the cost per company would involve putting it into the correct format. Mr. Toy stated he could reach out to the software vendors to see if he could get some information to assist in putting together a cost estimate. Commissioner Jones stated he is not opposed to further analysis and consideration of the A.M. Best approach, but he is concerned about data gaps. Therefore, his state would reserve judgment until it sees further analysis. Commissioner Selzer asked about how the A.M. Best proposal would address the concerns of Vermont. Mr. Toy stated he believes the A.M. Best approach does generally address that issue, but the complete answer may depend upon the funding of the approach. He stated that the funding approach would need to be determined by the Executive (EX) Committee and Internal Administration (EX1) Subcommittee. Commissioner Selzer asked what the impact would be with a size threshold as proposed. Mr. Toy stated that he does not have the figures but that there would be a number of property/casualty (P/C) companies that information would not be obtained, and the aggregate number would likely be a decent size figure. Mr. Toy also noted that while he is not disagreeing that smaller companies tended to be more conservative in their investment practices generally, this was changing with the increase use of external investment managers; lacking this data on these companies would diminish the NAIC’s ability to perform some of the solvency analysis on individual companies that may be using external investment managers that might be trading their portfolio more significantly. Commissioner Selzer asked about total assets for companies with a $250 million or $500 million investment portfolio level. Mr. Toy said he does not have the data with him, but he does have industry data by asset size at his office, and he could include that in the follow-up analysis. Commissioner Selzer asked Ms. Murphy if the A.M. Best approach would address their concerns. Ms. Murphy said it would be helpful to have the additional information being discussed. Superintendent Cioppa suggested that once Mr. Toy accumulated the additional information and made it available, a conference call could be scheduled, not for purposes of making a decision but for discussion only. Having no further business, the Financial Condition (E) Committee adjourned. W:\National Meetings\2017\Spring\Cmte\E\4-10-17 E Minutes.docx

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Draft: 11/27/17

Conference Call (In lieu of meeting at the 2017 Fall National Meeting)

Accounting Practices and Procedures (E) Task Force November 14, 2017

The Accounting Practices and Procedures (E) Task Force met in via conference call Nov. 14, 2017. The following Task Force members participated: Dave Jones, Chair, represented by Kim Hudson (CA); Kent Sullivan, Vice Chair, represented by Jamie Walker (TX); Jim L. Ridling represented by Richard Ford (AL); Allen W. Kerr represented by Mel Anderson (AR); Katharine L. Wade represented by Kathy Belfi and William Arfanis (CT); Stephen C. Taylor represented by N. Kevin Brown (DC); Trinidad Navarro represented by Rylynn Brown (DE); David Altmaier represented by Joel Meyer (FL); Doug Ommen represented by Daniel Mathis (IA); Jennifer Hammer represented by Mindy Lucht (IL); Stephen W. Robertson represented by Roy Eft (IN); Ken Selzer represented by Richard Ramos (KS); Nancy G. Atkins represented by Sandy Batts (KY); James J. Donelon represented by Stewart Guerin (LA); Gary Anderson represented by Robert Macullar (MA); Eric A. Ciopparepresented by Vanessa Leon (ME); Patrick M. McPharlin represented by Judy Weaver (MI); Chlora Lindley-Myersrepresented by Leslie Nehring (MO); Mike Chaney represented Chad Bridges (MS); Bruce R. Ramge represented by Lindsay Crawford (NE); Roger A. Sevigny represented by Douglas Bartlett and Patricia Gosselin (NH); Richard J. Badolatorepresented by Steve Kerner (NJ); Barbara D. Richardson represented by Omar Akel (NV); Maria T. Vullo represented byStephen Wiest (NY); Jessica Altman represented by Dale Bruggeman (OH); John D. Doak and representative Diane Carter(OK); Teresa D. Miller represented by Joseph DiMemmo (PA); Elizabeth Kelleher Dwyer represented by Jack Broccoli (RI);Larry Deiter represented by Johanna Nickelson (SD); Julie Mix McPeak represented by Mark Jaquish (TN); Todd E. Kiserrepresented by Jake Garn (UT); Jacqueline K. Cunningham represented by Doug Stolte and David Smith (VA); Michael S.Pieciak represented by Karen Murphy (VT); Mike Kreidler represented by Patrick McNaughton (WA); Allan L. McVey represented by Jamie Taylor (WV); and Tom Glause represented by Linda Johnson (WY).

1. Adopted its Summer National Meeting Minutes

Mr. Hudson directed the Task Force to its Summer National Meeting minutes, which were previously distributed. Ms. Walker made a motion, seconded by Mr. Guerin, to adopt the Task Force’s Aug. 7 minutes (see NAIC Proceedings – Summer 2017, Accounting Practices and Procedures (E) Task Force). The motion passed unanimously.

2. Adopted the Report of the Statutory Accounting Principles (E) Working Group

Mr. Bruggeman provided the Nov. 6 report of the Statutory Accounting Principles (E) Working Group, which met via conference call. The Working Group adopted its Oct. 12 minutes, which included adoption of agenda items, exposure of five agenda items, and adoption of its Sept. 13 and Sept. 7 minutes. He stated that on the Oct. 12 call, the following revisions to statutory accounting guidance were adopted: 1) Issue Paper No. 143R—Guaranty Fund Assessments, which documents for the historical record previous substantive changes adopted to Statement of Statutory Accounting Principles (SSAP) No. 35R—Guaranty Fund and Other Assessments related to assessments for insolvencies of entities that wrote long-term care insurance; 2) a temporary 60-day extension of the existing 90-day rule for policies affected by Hurricane Harvey, Hurricane Irma orHurricane Maria; 3) adopted, with modification, Accounting Standards Update (ASU) 2016-09, Improvements to Share-Based Payment Accounting; 4) adopted, with modification, ASU 2017-10, Determining the Customer of the OperationServices; 5) captured directly issued bank loans in the scope of Statement of Statutory Accounting Principles (SSAP) No. 26R—Bonds for 2017; 6) removed 2009 transition and outdated guidance from SSAP No. 43R—Loan-Backed and StructuredSecurities; 7) rejected five ASUs and included goodwill impairment guidance together in the same section; 8) rejected ASU2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost; 9)consistency clarification that limited statutory adjustments should apply to all foreign insurance subsidiary, controlled andaffiliated (SCA) entities; 10) excluded money market mutual funds (MMMFs) from the wash sale disclosure; 11) adoptedASU 2017-09, Stock Compensation – Scope of Modification Accounting; 12) rejected ASU 2013-08, Financial Services –Investment Companies – Amendments to the Scope, Measurement and Disclosure Requirements; and 13) editorial revisions.

Mr. Bruggeman stated that the Working Group also adopted its Summer National Meeting minutes.

Mr. Bruggeman noted that the Working Group adopted substantive revisions to statutory accounting guidance in SSAP No. 100R—Fair Value and Issue Paper No. 157—Use of Net Asset Value. He noted that these revisions allow the use of net asset value (NAV) per share as a practical expedient to fair value when either specifically identified in an SSAP or when specific conditions exist. He stated that these revisions adopt ASU 2009-12: Investments in Certain Entities that Calculate Net Asset

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Value per Share (or Its Equivalent) and ASU 2015-07: Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent).

Mr. Bruggeman stated that the Working Group adopted the following nonsubstantive revisions to statutory accounting guidance: 1) aggregate disclosures for derivatives with financing premiums for year-end 2017; 2) clarification effective Jan. 1, 2018, that variation margin changes shall not be considered “settlements” until the derivative contract has matured, been terminated and/or expired; 3) new SCA filing deadlines for 2018; 4) federal Affordable Care Act (ACA) risk adjustment program high-cost risk pool guidance effective for 2018, which reports the risk pool claim reimbursements as adjustments to premium with new disclosures; and 5) incorporated a new NAIC Policy Statement on Coordination of the Accounting Practices and Procedures Manual and the Purposes and Procedures Manual of the NAIC Investment Analysis Office along with a corresponding referral to the Valuation of Securities (E) Task Force.

Mr. Bruggeman stated that the Working Group adopted a memorandum to the Blanks (E) Working Group to provide additional instructions on the previously adopted high-deductible disclosures.

Mr. Bruggeman stated that the Working Group exposed a substantive item, which requested comments on proposals under the Investment Classification Project.

Mr. Bruggeman stated that the Working Group exposed the following nonsubstantive revisions to statutory accounting guidance: 1) clarifications that an SCA’s direct or indirect acquisition of a surplus note issued by the parent shall always be eliminated in the SCA’s value reported by the parent insurance company; 2) rejected ASU 2014-09, Revenue from Contracts with Customers, ASU 2015-14, Revenue from contracts with Customers: Deferral of the Effective Date, ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, ASU 2016-08, Revenue From Contracts with Customers Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; 3) requested comments on key concepts identified pertaining to policy loans; 4) revisions collect additional disclosures related to goodwill; 5) individual contract disclosures for derivatives with financing premiums; 6) remove the Level 3 reconciliation disclosure for plan assets; 7) exclude all cash equivalents, all derivative instruments and short-term investments with credit assessments equivalent to an NAIC 1 or NAIC 2 designation from the wash sale disclosure; 8) updated INT 02-22–Accounting for the U.S. Terrorism Risk Insurance Program INT 02-22 to remove the expiration date effective date; 9) nullified INT 09-08—Accounting for Loans Received under the Federal TALF Program; and 10) request for comments on a proposed project to review each SSAP that adopts U.S. generally accepted accounting principles (GAAP) guidance and identify the related Financial Accounting Standards Board (FASB) codification references. Mr. Bruggeman noted that the Working Group directed NAIC staff on the following projects: 1) to review the proposed guidance for leases in and recommend further revisions; 2) to prepare and send referrals to the Valuation of Securities (E) Task Force, the Capital Adequacy (E) Task Force and the Blanks (E) Working Group to inquire whether all entities should have the ability to report NAIC designations on Schedule BA – Other Long-Term Invested Assets, as permitted by life and fraternal insurance companies, to obtain improved risk-based capital (RBC) for certain investments; 3) to work with Working Group and industry representatives, with informal drafting calls, to refine the proposed reinsurance credit guidance for future Working Group consideration; 4) to review the derivative guidance in accordance with current U.S. GAAP requirements, including the guidance in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities; 5) directed NAIC staff to work with Working Group members and industry to review industry comments when drafting proposed revisions and illustrations on Amortization and Accretion of Surplus Notes; and 6) to draft substantive revisions to adopt, with modification, ASU 2016-13, Financial Instruments – Credit Losses and replace the “incurred loss model” with an “expected credit loss” concept in statutory accounting. It was identified that the guidance would likely incorporate U.S. GAAP concepts for recognizing expected credit losses, but that specific exclusions and modifications will need to be considered in developing an approach that is appropriate under statutory accounting.

Mr. Bruggeman noted that the Working Group received an update on the following projects and referrals: 1) NAIC staff are working with representatives of the American Council of Life Insurers (ACLI) to get additional information on prior comments and suggested language for the Special Accounting Treatment for Limited Derivatives; and 2) was informed of an editorial correction in a previously adopted item on intangibles, which did not change the conclusion of the adopted guidance. Mr. Bruggeman noted that the Working Group reviewed U.S. GAAP exposures, noting that no comments by the Working Group are planned. Mr. Bruggeman noted that the comment deadline for new and exposed items is Jan. 19, 2018.

Attachment Two

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Mr. Bruggeman made a motion, seconded by Ms. Brown, to adopt the report of the Statutory Accounting Principles (E) Working Group (Attachment One). The motion passed unanimously.

3. Adopted the Report of the Blanks (E) Working Group

Mr. Garn provided the Nov. 9 report of the Blanks (E) Working Group, which met via conference call and which adopted its Sept. 14 minutes, during which it took the following action: 1) adopted proposal 2017-20BWG to add a question to the General Interrogatories Part 1 to determine if the reporting entity is part of a publicly traded group; 2) added clarifying instructions to Schedule Y, Part 1A as to when a Central Index Key (CIK) is provided; and 3) added a crosscheck between Column 6 and Column 7 of Schedule Y, Part 1A to ensure consistent reporting. Mr. Garn noted that the Working Group also adopted its Summer National Meeting minutes. Mr. Garn stated that the Working Group adopted the report of the Investment Reporting (E) Subgroup, including its Sept. 12 minutes, during which it took the following action: 1) exposed updates to the Summary Investment Schedule; 2) exposed a proposal to add a definition of “supranational”; and 3) reviewed its issues list.

Mr. Garn stated that the Working Group agreed to withdraw Valuation of Securities (E) Task Force proposal 2017-07BWG, which was previously deferred. He noted that this withdrawal was at the request of the sponsor. He noted that a new proposal is planned for later submission.

Mr. Garn noted that the Working Group adopted the guidance document for health companies for annual 2017 filing, and approved posting of the document to the Working Group’s web page.

Mr. Garn stated that the Working Group exposed six blanks proposals for a public comment period ending Feb. 26, 2018. Mr. Garn noted that the Working Group received three memorandums from the Statutory Accounting Principles (E) Working Group on the following topics: 1) high-deductible disclosures – instructional clarification; 2) year-end 2017 disclosures – instructional revisions; and 3) NAIC designation for Schedule BA investments.

Mr. Garn stated that the Working Group adopted the editorial listing, which included updating the designation matrices in the investment schedules instructions and correcting the filing due date of the confidential Regulatory Asset Adequacy Issues Summary (RAAIS), as required by the Valuation Manual, from March 15 to April 1.

Mr. Garn stated the Working Group discussed the state filing checklists

Mr. Garn noted that the Working Group received an update on combining the life and fraternal annual financial statement blanks with no significant concerns noted by interested parties. Mr. Garn noted that the Working Group directed NAIC staff to begin to develop a comprehensive proposal for combining the two blanks and instructions for future discussion. Mr. Garn made a motion, seconded by Ms. Nickelson, to adopt the report of the Blanks (E) Working Group (Attachment Two). The motion passed unanimously. 4. Discussed Other Matters Mr. Hudson noted that the Task Force and its working groups do not plan to meet at the Fall National Meeting in Hawaii and that this call was in lieu of meeting at the Fall National Meeting. Having no further business, the Accounting Practices and Procedures (E) Task Force adjourned. w:\national meetings\2017\fall\tf\app\minutes\apptf 11- 2017 minutes.docx

Attachment Two

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Draft: 11/17/17

Capital Adequacy (E) Task Force Conference Call

November 14, 2017

The Capital Adequacy (E) Task Force met via conference call Nov. 14, 2017. The following Task Force members participated: David Altmaier, Chair, and Joel Meyer (FL); Todd E. Kiser, Vice Chair, represented by Jake Garn (UT); Dave Jones represented by Ron Dahlquist (CA); Katharine L. Wade represented by Wanchin Chou (CT); Doug Ommen represented by Mike Yanacheak (IA); Jennifer Hammer and Kevin Fry (IL); Mike Rothman represented by Frederick Anderson (MN); Chlora Lindley-Myers represented by William Leung (MO); Richard J. Badolato represented by Steve Kerner (NJ); John G. Franchini represented by Alan Seeley (NM); Maria T. Vullo represented by Stephen Wiest and Sak-man Luk (NY); Jillian Froment represented by Tom Botsko and Dale Bruggeman (OH); John D. Doak represented by Joel Sander (OK); Elizabeth Kelleher Dwyer represented by Jack Broccoli (RI); Kent Sullivan represented by Mike Boerner (TX); Mike Kreidler represented by Patrick McNaughton and Ronald Pastuch (WA); and Ted Nickel represented by Randy Milquet (WI).

1. Adopted its Summer National Meeting Minutes

Mr. Seeley made a motion, seconded by Ms. Kerner, to adopt the Task Force’s Aug. 7 minutes (see NAIC Proceedings – Summer 2017, Capital Adequacy (E) Task Force). The motion passed unanimously.

2. Adopted its Working Group and Subgroup Reports

Mr. Seeley made a motion, seconded by Mr. McNaughton, to adopt the reports of the following groups: the Health Risk-Based Capital (E) Working Group, including its Sept. 28 minutes (Attachment One); the Investment Risk-Based Capital (E) Working Group, including its Oct 23 minutes (Attachment Two); the Life Risk-Based Capital (E) Working Group, including its Oct. 31 minutes (Attachment Three); the Operational Risk (E) Subgroup, including its Oct. 12 minutes (Attachment Four); and the Property and Casualty Risk-Based Capital (E) Working Group, including its Oct. 30 minutes (Attachment Five). The motion passed unanimously.

3. Adopted the 2017 Catastrophe Event Lists

Mr. Botsko said the U.S. and non-U.S. catastrophe event lists were updated with 2017 events the Catastrophe Risk (E) Subgroup received from Swiss Re and Aon Benfield. The additions for the 2017 U.S. events include Hurricane Harvey, Hurricane Irma, Hurricane Jose, Hurricane Maria and Hurricane Nate. The non-U.S. event list includes earthquakes, cyclones, typhoons and hurricanes.

Mr. Botsko made a motion, seconded by Mr. Chou, to adopt the 2017 U.S. and non-U.S. catastrophe event lists (Attachment Six). The motion passed unanimously.

4. Received a Status Update on the Affiliated Investment Ad Hoc Group

Mr. Botsko said the affiliate investment ad hoc group has tried to meet on a monthly basis. The Property and Casualty Risk-Based Capital (E) Working Group exposed recommendations from the ad hoc group to: 1) remove affiliated investments from PR003; 2) regroup affiliated investments with the unaffiliated bonds in PR006; and 3) subject affiliated investments to the same risk-based capital (RBC) charge as unaffiliated bonds to make them consistent with the life and health RBC formulas and their treatment of bonds. Mr. Botsko said the ad hoc group will continue their discussions in December.

5. Exposed Proposals for the RBC Blanks and Instructions

a. Proposal 2017-08-CA

Mr. McNaughton summarized proposal 2017-08-CA , the purpose of which is to standardized Medicaid pass-through payments and treat them similarly across all states by creating a separate line item for them in the RBC formula for all business types. The Health Risk-Based Capital (E) Working Group exposed and adopted the changes for the health RBC formula and recommends that those changes be exposed and considered for the property/casualty (P/C) and life RBC formulas. James Braue (UnitedHealth Group) asked for confirmation that this proposal is for all business types. Jane Barr

Attachment Three

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(NAIC) confirmed that the proposal cover page will be updated to reflect that this proposal is being considered for all business types.

b. Proposal 2017-09-CA

Mr. McNaughton summarized proposal 2017-09-CA, which recommends that the risk corridor be removed from the sensitivity test because its purpose was only a temporary program. The risk corridor sensitivity test is in all RBC formulas and should be removed from all RBC formulas. Mr. Bruggeman asked if the risk adjustment would include the addition for 2018 of the high-cost risk adjustment. Mr. McNaughton confirmed that it would. Crystal Brown (NAIC) said the health RBC formula will follow any additions to the statutory accounting principles. She also added that this change is for all business types and inadvertently did not include the draft changes for the P/C and life RBC formulas.

Mr. McNaughton made a motion, seconded by Mr. Milquet to expose proposal 2017-08-H (Attachment Seven) and proposal 2017-09-CA (Attachment Eight) for a 60-day public comment period ending Jan. 15, 2018. The motion passed.

6. Received Referral Regarding XXX/AXXX Captive Reinsurance RBC Shortfall

Jake Stultz (NAIC) said the Reinsurance Security Investment (E) Subgroup was appointed to discuss and consider the need to clarify whether a security linked to a surplus note meets the criteria of a listed security or a regulatory transaction could have an RBC impact. Surplus notes are reported as surplus and not as debt and are part of the Total Adjusted Capital reflected in the XXX/AXXX Captive Reinsurance Consolidated Exhibit that determines if there is an RBC shortfall.

Due to the sensitivity of these investments, details are not provided in the referral (Attachment Nine) and the RBC groups should request that information from the Reinsurance Security Investment (E) Subgroup. Commissioner Altmaier said this referral will be sent to the appropriate RBC working group for review and consideration.

7. Received Referral Regarding NAIC Designation for Schedule BA Investments – All Entities

Mr. Bruggeman said the purpose of the referral from the Statutory Accounting Principles (E) Working Group (Attachment Ten) is to determine if all entities should have the ability to report NAIC designations on Schedule BA.

Life and fraternal companies are able to obtain NAIC designations for certain Schedule BA assets, but health and P/C companies do not. The scope of the request lies within RBC for P/C and health, which have a fixed charge for all Schedule BA assets instead of correlating those assets based on NAIC designations, as with the life and fraternal RBC formulas.

The Working Group does not support or oppose whether all entities should be permitted to report based on NAIC designation and does not expect a response for this referral, because no statutory accounting principle is impacted based on the decision by the Task Force or any of its RBC working groups. Commissioner Altmaier said this referral will be sent to the appropriate RBC working group(s) for review and consideration.

Having no further business, the Capital Adequacy (E) Task Force adjourned.

W:\National Meetings\2017\Fall\TF\CapAdequacy\11-_CapitalAdequacyTFmin_final.docx

Attachment Three

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Draft: 11/27/17

Examination Oversight (E) Task Force Conference Call (in lieu of meeting at the 2017 Fall National Meeting)

November 20, 2017

The Examination Oversight (E) Task Force met via conference call Nov. 20, 2017. The following Task Force members participated: Jillian Froment, Chair, represented by Dwight Radel (OH); Allen W. Kerr, Vice Chair, represented by Mel Anderson (AR); Lori K. Wing-Heier represented by David Phifer (AK); Dave Jones represented by Susan Bernard (CA); Marguerite Salazar represented by Rolf Kaumann (CO); Katharine L. Wade represented by William Arfanis (CT); Stephen C. Taylor represented by N. Kevin Brown (DC); Trinidad Navarro represented by Rylynn Brown (DE); Stephen W. Robertson represented by Roy Eft (IN); Ken Selzer represented by Richard Ramos (KS); Nancy G. Atkins represented by Sandy Batts (KY); James J. Donelon represented by Caroline Brock (LA); Gary Anderson represented by John Turchi (MA); Mike Rothman represented by Kathleen Orth (MN); Chlora Lindley-Myers represented by Leslie Nehring (MO); Mike Chaney represented by Mark Cooley (MS); Roger A. Sevigny represented by Douglas Bartlett (NH); Richard J. Badolato represented by Steve Kerner (NJ); Barbara D. Richardson represented by Omar Akel (NV); John D. Doak represented by Eli Snowbarger and Joel Sander (OK); Elizabeth Kelleher Dwyer represented by Jack Broccoli (RI); Kent Sullivan represented by Ignatius Wheeler (TX); Todd E. Kiser represented by Jake Garn (UT); Jacqueline K. Cunningham represented by Doug Stolte (VA); Michael S. Pieciak represented by Karen Murphy (VT); Mike Kreidler represented by Patrick McNaughton (WA); Ted Nickel represented by Amy Malm (WI); and Tom Glause represented by Linda Johnson (WY).

1. Adopted its Aug. 25 and Summer National Meeting Minutes

Mr. Kerner made a motion, seconded by Ms. Bernard, to adopt the Task Force’s Aug. 25 (Attachment One) and Aug. 7 (see NAIC Proceedings – Summer 2017, Examination Oversight (E) Task Force) minutes. The motion passed.

2. Adopted the Reports of its Working Groups

a. Analyst Team System Oversight (E) Working Group

The Analyst Team System Oversight (E) Working Group met Sept. 14 in regulator-to-regulator session pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings.

b. Exam Coordination (E) Working Group

The Exam Coordination Working group met Nov. 16 in regulator-to-regulator session pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings.

c. Electronic Workpaper (E) Working Group

The Electronic Workpaper (E) Working Group met Nov. 2 in regulator-to-regulator session pursuant to paragraph 4 (internal or administrative matters) of the NAIC Policy Statement on Open Meetings.

d. Financial Analysis Handbook (E) Working Group

Miguel Romero (NAIC) provided an update on the Financial Analysis Handbook (E) Working Group, which met Nov. 2 (Attachment Two) and Sept. 18 (Attachment Two-A).

During these meetings, the Working Group adopted final revisions to the risk-focused analysis approach, including a revised risk assessment worksheet and guidance, introductory chapters, analyst reference guides and other analytical guidance. The Working Group also adopted procedures for amending the Financial Analysis Handbook, revisions to holding company analysis for Form A and Form D transactions, and non-lead state analysis procedures.

e. Financial Analysis Research and Development Working Group

Mr. Romero also provided an update on the Financial Analysis Research and Development Working Group, which met Oct. 4 (Attachment Three) and Aug. 17 (Attachment Three-A).

Attachment Four

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During these meetings, the Working Group adopted procedures for maintaining the Insurance Regulatory Information System (IRIS) Ratios Manual. The Working Group also met Aug. 17 in regulator-to-regulator session, pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings, to adopt revisions to regulator-only tools.

f. Financial Examiners Handbook (E) Technical Group

Ms. Bernard provided an update on the Financial Examiners Handbook (E) Technical Group, which met Nov. 13 (Attachment Four) and Sept. 27 (Attachment Four-A). The Technical Group adopted revisions related to the interaction between the examiner and analyst; revisions to incorporate principle-based reserving into Financial Condition Examiners Handbook guidance; revisions to assist examiners in reviewing affiliated service agreements; revisions to the reinsurance, related party, capital and surplus, and investments repositories; revisions to address insurers in runoff; and revisions to address insurance company redomestications.

g. IT Examination (E) Working Group Mr. McNaughton provided an update on the IT Examination (E) Working Group, which met Sept. 28 (Attachment Five). The Working Group adopted revisions to Section 1-3 and Exhibit C of the Financial Condition Examiners Handbook. These revisions provide new narrative guidance, new procedures and new requests for companies under exam to continue to help regulators improve their ability to address cybersecurity concerns. Ms. Bernard made a motion, seconded by Mr. McNaughton, to adopt the reports of the working groups. The motion passed. Having no further business, the Examination Oversight (E) Task Force adjourned into regulator-to-regulator session pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings, to receive reports on exams open past 22 months. w:\national meetings\2017\fall\tf\examo\eotf 11-20-2017 minutes - tpr.docx

Attachment Four

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Attachment Long-Term Care Insurance (B/E) Task Force

12/3/17


Draft: 11/13/17

Long-Term Care Insurance (B/E) Task Force Conference Call

November 8, 2017

The Long-Term Care Insurance (B/E) Task Force met via conference call Nov. 8, 2017. The following Task Force members participated: Eric A. Cioppa, Co-Chair, and Marti Hooper (ME); Al Redmer Jr., Co-Chair, and Catherine Grason (MD); Mike Kreidler, Vice Chair, represented by Jim Odiorne (WA); Dave Jones represented by Perry Kupferman (CA); Marguerite Salazar represented by Michael Conway (CO); Katharine L. Wade represented by Mary Ellen Breault and Paul Lombardo (CT); David Altmaier represented by Chris Struk (FL); Mike Rothman represented by Fred Andersen (MN); Chlora Lindley-Myers represented by Angela Nelson (MO); Bruce R. Ramge represented by Rhonda Ahrens (NE); John G. Franchini represented by Terry Seaton (NM); Jean Straight represented by Gayle Woods (OR); Elizabeth Kelleher Dwyer (RI); Kent Sullivan represented by Doug Slape and James Kennedy (TX); Todd E. Kiser represented by Tanji Northrup (UT); and Jacqueline K. Cunningham represented by Doug Stolte (VA). Also participating was: Greg Campbell (AK).

1. Adopted its Oct. 2, Sept. 6 and Summer National Meeting Minutes

Commissioner Redmer stated the Task Force met Oct. 2, Sept. 6 and Aug. 7. During its Oct. 2 conference call, it heard a presentation from the chair of the Long-Term Pricing (B) Subgroup, which included a summary of three general methodologies used by the states when considering rate increases. During its Sept. 6 conference call, it heard a presentation from the chair of the Financial Analysis (E) Working Group on the current financial solvency position of the long-term care (LTC) industry. During its Aug. 7 meeting, it received a status report from various NAIC groups that have work streams related to LTC insurance.

Mr. Odiorne made a motion, seconded by Superintendent Dwyer, to adopt the Task Force’s Oct. 2 (Attachment ?), Sept. 6 (Attachment ?) and Summer National Meeting (see NAIC Proceedings – Summer 2017, Long-Term Care Insurance (B/E) Task Force) minutes. The motion passed unanimously.

2. Heard a Presentation from the IIPRC

Superintendent Cioppa indicated he requested a discussion of the work of the Interstate Insurance Product Regulation Commission (IIPRC), as he thought it might help the Task Force to think about whether any practices used by the IIPRC could be useful to the Task Force.

Karen Schutter (IIPRC) stated her appreciation for the opportunity to speak about the IIPRC, as she believes an understanding of the IIPRC’s process of developing uniform standards and approving compliant product filings for individual LTC insurance, as well as its process for handling initial LTC rate schedules and in-force long-term rate increases, might be helpful to the Task Force.

Ms. Schutter summarized the IIPRC processes (Attachment ?) and focused her comments on key aspects of the IIPRC. This includes how the IIPRC creates a legal mechanism through legislation enacted into state law for collectively and collaboratively achieving national product standards and speed-to-market for those insurance products that directly compete with other financial protection products—that is, banking and securities—regulated at the federal level. She also discussed how the IIPRC allows the compacting states to develop and adopt uniform standards that have the force and effect of their respective state laws and are the exclusive product content provisions with respect to products submitted to the IIPRC, provided the compacting states have not opted out of the uniform standard.

She described how one member—the insurance commissioner—from each compacting state sits is part of the IIPRC membership, and the IIPRC has a 14-member Management Committee that manages the affairs of the IIPRC. Six committees and a working group undertake the technical work of the IIPRC, whereby recommendations make their way through the rulemaking and other processes for final action by the Management Committee and/or the IIPRC. Ms. Schutter indicated that, to date, 44 states and Puerto Rico have enacted the Interstate Insurance Product Regulation Compact (#692) and only six states and the District of Columbia have not yet joined the IIPRC.

Attachment Five

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12/3/17


Ms. Schutter indicated the IIPRC has adopted 100 uniform standards since the adoption of its first uniform standard in December 2006. These uniform standards cross all individual product lines and two employer group product lines. She described how some states have opted out in the LTC and disability income product lines. The process to get a uniform standard adopted has several steps and touch points. There is an opportunity for written comment and a public hearing is held. Notice of the intent to consider the uniform standards is sent to state legislative committees of jurisdiction, as well leadership in both houses in the compacting states. A supermajority vote in favor by the entire body of the IIPRC Management Committee and the IIPRC membership is required before a uniform standard is considered adopted. Ms. Schutter stated the specific authority to adopt uniform standards for LTC insurance products, rates and advertising is found in Model #692, Article IV—Powers of the Commission. The drafters of Model #692 included a specific mandate with respect to LTC uniform standards; i.e., they must provide the same or greater protections for consumers, but not less than, those protections set forth in the Long-Term Care Insurance Model Act (#640) and the Long-Term Care Insurance Model Regulation (#641), including subsequent amendments to both models. The IIPRC’s individual LTC Uniform standards were adopted in August 2010 and implemented in December that same year. The filer must submit all components of an individual LTC product for approval, including the policy, riders, application, outline of coverage, forms to be used with the app, rate schedules and advertising. The uniform standard for forms to be used with the LTC application is the only one among the 100 adopted that allow the forms to be filed for self-certification. The IIPRC has a rule governing self-certification. These forms include the suitability forms, the Potential Rate Increase Disclosure Form, the Replacement Notice and the federal Health Insurance Portability and Accountability Act (HIPAA) Medical Authorization, which are all highly prescribed by state or federal law. The uniform standards make it clear that only the states can approve an IIPRC-approved product for partnership. The uniform standards accommodate both issue age and modified rate schedules. The process of “mix-and-match” filing is not allowed for a traditional LTC insurance product, as the whole package must be filed with the IIPRC. What this means is that the IIPRC only sees new business filings as a company cannot file an application or updated rate schedule for use with a previous state-approved LTC product. An LTC rider that is used with an individual life or annuity product can be filed with the IIPRC and is reviewed under the LTC standards. In these cases, because the LTC rider is looked at as a standalone component, it is available for mix-and-match. Ms. Schutter indicated that the IIPRC has never received an “attained age rate filing” where the rates change based on the person’s reaching certain ages. If so, the IIPRC would allow a state to indicate it has a state law that does not permit these schedules and, if that is the case, then they are not permitted to be filed for those states. She noted that the IIPRC publishes a sample assumptions spreadsheet to help actuaries understand the level of drill-down required to support initial rate schedules. Five-year review amendments were adopted in June of this year and become effective Oct. 10. A couple of key changes are that for riders that deduct a dollar of the death benefit to pay a dollar of LTC services, it is now subject to the rate filing standards and actuarial review. Model #640, and likely several state laws, exempt these riders from rate review, but additional requirements were added at the request of the member states. The IIPRC also made updates to reflect the changes made to Model #641, the LTC bulletin and the NAIC Guidance Manual for Rating Aspects of the Long-Term Care Insurance Mode Regulation since 2010. Ms. Schutter stated the IIPRC does a prior review on all product filings, including a review of the self-certified filings that include forms to be used with the LTC application. The IIPRC rules require that the Compact Office review a filing in 60 days or less, which does not include industry response time and assumes the product filing is substantially in compliance with the uniform standards. IIPRC staff work to get a filer to compliance, and LTC filings generally take longer to review because of all the components. All LTC product filings require a full comprehensive form with actuarial review by two qualified actuaries on staff and a secondary review, both form and actuarial, of the LTC filings. Ms. Schutter stated IIPRC-approved products can be submitted for partnership approval in the participating compacting states. The uniform standards apply to the content of the product, but the company must certify it is complying with the partnership requirements of a state. The variability provision of the uniform standards is flexible to permit a company to include state-specific partnership language. Companies wanting to use an IIPRC-approved product for partnership must take the extra step for certification or approval by the state. Ms. Schutter stated, with respect to rate requirements in the LTC uniform standards, the rate filings requirements are detailed both for initial rates and in-force rate increase, with two uniform standards, one for issue age rate schedules and one for

Attachment Five

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12/3/17


modified rate schedules. The review drills down on all the assumptions to make certain they are well documented and reasonable. One of the key reasons for this is if an in-force rate increase is submitted, it will be measured against the original assumptions. The company is also required to demonstrate that margins do not deviate materially across issue ages. The requirements differ between if the form is currently marketed and if it is a closed block. Ms. Schutter indicated that the uniform standards require that the actuarial information and assumptions be updated on an annual basis and requires that this information—an updated actuarial memorandum—be filed every three years, which is referred to as the “triennial certification.” Ms. Schutter explained that, for in-force rate increases, the uniform standards prohibit the introduction of a rating characteristic that was not included in the initial rate filing. For example, if the initial rate schedule was unisex and the in-force rate increase schedule was gender-distinct, this would not be allowed. One of the key compromises in the uniform standards was that in-force rate increase requests on IIPRC-approved product filings that exceed 15% are no longer subject to approval by the IIPRC but, rather, must be approved by each state. If the in-force rate increase request is 15% or less, the IIPRC can review and approve, provided it is compliant with the rate filing uniform standards. The uniform standards explicitly state that the advisory finding is not binding on the compacting states and that state law applies to the review of the in-force rate increase filing. However, the IIPRC’s approval of the initial rates and forms under the LTC uniform standards is still applicable, as it is as binding as each compacting state’s law with respect to the original approval. Mr. Campbell asked for clarification regarding whether the IIPRC only looks at new business. Ms. Schutter responded that a company is not allowed to file a state-approved product with the IIPRC. 3. Received an Update from the Receivership Model Law (E) Working Group Mr. Kennedy described that, in December 2016, the Receivership Model Law (E) Working Group was given two new charges related to LTC. One of those charges was to consider changes to the Life and Health Insurance Guaranty Association Model Act (#520) to determine if any changes were needed. In the first half of 2017, the Working Group held eight conference calls and two meetings, during which it determined changes should be made to the model. At that point, the Working Group developed a Request for NAIC Model Law Development, which was approved by the Executive (EX) Committee at the Summer National Meeting. Shortly thereafter, the Working Group formed a drafting group composed of 12 insurance departments and 35 interested parties, including trade groups, insurers, guaranty funds, consumer groups, health care provider groups and academics. One of the first decisions made was that the work should be completed by the end of 2017, and that even though this was aggressive, a number of legislatures were considering changes in 2018, so they wanted the revisions to Model #520 to be in place. To do so, they held 12 conference calls and one interim meeting and the Working Group has now exposed proposed changes to the model until Nov. 27. Among other things, the exposed draft includes: 1) health maintenance organizations (HMOs) as members of the guaranty fund; 2) assessments split between health insurers and life insurers; 3) benefits, including the conclusion that the “Moody’s adjustment” is not applicable to LTC or health insurance; 4) the guaranty associations have the ability to request rate increases if they are actuarially justified. Mr. Kennedy stated that if the proposed changes to Model #520 are approved on a Nov. 29 joint conference call between the Working Group and the Receivership and Insolvency (E) Task Force, the Financial Condition (E) Committee could consider adoption of the proposed changes to the model at the Fall National Meeting. Superintendent Cioppa expressed his appreciation to Mr. Kennedy and the Working Group for their hard work in drafting the proposed changes to Model #520. 4. Discussed Next Steps Commissioner Redmer described the Task Force’s future plans, noting that its next meeting likely will not occur until January 2018. At that point, the Task Force would like to receive a presentation from members of the industry on the solvency of the industry.

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Commissioner Redmer stated that he and Superintendent Cioppa were both approached by members of the industry, who suggested the Sept. 6 presentation on the solvency of the industry may have left people with the wrong impression. To that end, he indicated they would like to give the industry an opportunity to show the Task Force different data that displays their view of the solvency of the LTC industry. This will occur in January 2018. Commissioner Redmer stated he and Superintendent Cioppa would like the regulatory actuaries to provide the Task Force with their analysis of the new Actuarial Guideline LI—The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves (AG 51) disclosure to see if that provides the Task Force some additional views of the snapshot of the reserve adequacy. However, the due date of that filing will prevent such analysis to begin until after the 2018 Spring National Meeting. Commissioner Redmer suggested the 2018 Spring National Meeting be used to give the industry an opportunity to speak to Task Force about their ideas on how to address some of the LTC issues the Task Force has been discussing. He suggested that between January 2018 and the 2018 Spring National Meeting, the Task Force could receive some information from the regulatory actuaries related to information requested when it comes to rate increase questionnaires, checklists and follow-up questions. He suggested the information be gathered in a way that allows uniformity in the processes used by the states to consider rate increases. Having no further business, the Long-Term Care Insurance (B/E) Task Force adjourned. W:\National Meetings\2017\Fall\TF\Joint LTCI (BE)\09-6_Joint LTCI minutes.docx

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Conference Call (In lieu of meeting at the 2017 Fall National Meeting)

RECEIVERSHIP AND INSOLVENCY (E) TASK FORCE RECEIVERSHIP MODEL LAW (E) WORKING GROUP

November 29, 2017

Summary Report

The Receivership Model Law (E) Working Group and the Receivership and Insolvency (E) Task Force met via a joint conference call on November 29, 2017.

During the conference call, the Working Group:

1. Adopted the Working Group’s amendments to the Life and Health Insurance Guaranty Association Model Act (#520). The amendments address issues identified in the Working Group’s charges, and the Request for Model LawDevelopment. The significant changes to Model #520 involve: (1) broadening the assessment base for long-term careinsurance (LTCI) insolvencies: (2) clarifying the guaranty associations’ coverage of LTCI; and (3) including healthmaintenance organizations (HMOs) as members of the guaranty association to provide coverage for HMO insolvencies,similar to the coverage provided for all other health insurers. On the Working Group’s October 27 conference call, theModel #520 amendments were exposed for a 30-day comment period ending November 27. Comment letters werereceived from Alliance for Community Health Plans (ACHP), American Hospital Association (AHA), joint commentletter from American Council of Life Insurers (ACLI) and Arbor Strategies LLC, Blue Cross Blue Shield Association(BCBSA), Cantilo & Bennett LLP, Health Partners, and Kaiser Permanente. Non-substantive technical edits weresubmitted by members of the Working Group and the National Organization of Life and Health Guaranty Associations(NOLHGA) and NAIC staff. The amendments adopted by the Working Group included the technical edits.

2. Adopted a referral to the Receivership and Insolvency (E) Task Force for a draft memorandum to state insurancedepartments intended to highlight the necessity for states to consider a complete review of its laws and regulationsrelated to adding HMOs as members of the guaranty association to avoid conflicting laws and regulations.

During the conference call, the Task Force:

1. Adopted the Working Group’s amendments to Model #520. The Task Force summarized the significant amendments toModel #520 and the reasoning therefore, and heard discussion of the amendments from interested parties and interestedregulators. The amendments address the Working Group’s charges, and are in accordance with the approved Model LawDevelopment Request Form. The revisions and clarifications include the following:

a. Expanding the assessment base for LTCI insolvencies by adding the life and annuity accounts to the healthaccount as a source of funding for LTIC insolvencies.

b. More equitably allocating the assessments for LTCI insolvencies, which currently fall solely upon memberguaranty association insurers that write lines, including LTCI, that are considered health insurancecoverages in an insolvency. The revised allocation provides for a 50%/50% split of any future assessmentbetween the life and annuity accounts and the health account.

c. Adding HMOs as members of the guaranty association to provide coverage for HMO insolvencies similarto all other health insurers and ensure regulators’ primary mission of protecting policyholders and providersbecause the distinctions between HMO products and health insurer products have diminished or are non-existent in many markets, contractual hold harmless provisions have been ineffective in protectingconsumers from balance billing in HMO insolvencies, and without guaranty association membership HMOinsolvencies expose consumers to access-to-care issues and often result in providers non-payment forrendered medical services and therefore result in harm. This also results in an additional expansion of theassessment base for LTCI insolvencies.

d. Clarifying that the interest limitation in Section 3B(2)(c) is not applicable to the guaranty associations’coverage of LTCI or other health policies.

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2. Exposed a draft memorandum for state insurance departments for a 30-day public comment period ending Dec. 29. Thememorandum is intended to highlight the necessity for states to consider a complete review of its laws and regulationsrelated to adding HMOs as members of the guaranty association to avoid conflicting laws and regulations. Thememorandum, as approved by the Task Force, would be distributed upon adoption of Model #520 amendments by theExecutive (EX) Committee and Plenary.

3. Adopted its Nov. 15 minutes which included:

a. Adopted its Summer National Meeting minutes which included:i. Adopted June 28 and Spring National Meeting minutes,

ii. Adopted its 2018 proposed charges,iii. Adopted reports of the Receivership Financial Analysis (E) Working Group, the Receivership Model

Law (E) Working Group, and the Receivership Technology and Administration (E) Working Group,iv. Heard an international resolution update, andv. Heard a Federal regulatory update.

b. Adopted the report of the Receivership Model Law (E) Working Group, which met via conference call on Oct.27 and Aug. 25. During these conference calls, the Working Group:

i. Adopted its Aug. 25 and Summer National Meeting minutes,ii. Heard a report of the drafting group that developed Model #520 amendments, and

iii. Exposed Model #520 amendments for a 30-day public comment period ending Nov. 27.

c. Adopted the report of the Receivership Technology and Administration (E) Working Group, which met viaconference call on Oct. 19 to expose draft guidance for the Receivers’ Handbook for Insurance CompanyInsolvencies regarding communication and coordination with reinsurers related to challenges some reinsurersface with the proof-of-claims forms and processes.

d. Heard an international resolution update from Texas and New Jersey that highlighted activities of theInternational Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB). The IAISInsurance Core Principle 12–Exit from the Market and Resolution was adopted by both the IAIS FinancialStability Technical Committee (FSTC) and the IAIS Executive Committee in November 2017 and it isscheduled to become effective in 2019. The IAIS Resolution Working Group is still finalizing its resolution ofthe related portions of the Common Framework for the Supervision of Internationally Active Insurance Groups(ComFrame). The FSB revisions to the Key Attributes Assessment Methodology for the Insurance Sectorcontinue. New Jersey and Texas have been working with NAIC staff and federal agencies to coordinate input inthe FSB’s drafting process.

e. Heard a federal regulatory update from NAIC staff. The Federal Reserve issued its final rule Sept. 12 on “Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and theU.S. Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition ofQualifying Master Netting Agreement and Related Definitions.” The final rule does not include recognition ofstate-based stays on termination of netting agreements similar to federal and international laws. Without the recognition of state-based stays by the final rules, insurance companies are left without clarity on how such astay on the counterparties of insurers would function along with the stays found in federal law. The Task Forcewill consider this issue further at a future time. Additionally, the U.S. Department of the Treasury is expected inthe near future to publish its report on orderly liquidation authority (OLA) and the decision-making processes ofthe Financial Stability Oversight Council (FSOC).

W:\National Meetings\2017\Summer\Summaries\Final Summaries\RITF 112917.docx

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Attachment Seven


2017 Fall National Meeting

Honolulu, Hawaii

REINSURANCE (E) TASK FORCE Sunday, December 3, 2017

1:30 – 2:30 p.m.

Meeting Summary Report The Reinsurance (E) Task Force met Dec. 3, 2017. During this meeting, the Task Force: 1. Adopted its Nov. 1 minutes, which included the following action:

a. Adopted its Summer National Meeting minutes. b. Adopted its Oct. 3 minutes, which included the following action:

1. Adopted its 2018 proposed charges. c. Heard an update on the Bilateral Agreement Between the United States of America and the European Union on

Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement). d. Adopted the final memorandum of the Reinsurance Investment Security (E) Subgroup, which included majority

positions and recommendations related to the concepts of “investment security” and “primary security.” The Task Force agreed to send the Subgroup’s recommendations to the appropriate NAIC groups for consideration.

e. Adopted the report of the Reinsurance Financial Analysis (E) Working Group. The Working Group met Sept. 12 and June 29 in regulator-to-regulator session, pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings, to hear a presentation from Kroll Bond Rating Agency and to discuss proposed revisions to modify the Uniform Application Checklist for Certified Reinsurers and to integrate Kroll Bond Rating Agency into the matrix of ratings and collateral levels for certified reinsurers.

f. Exposed a memorandum from the Reinsurance Financial Analysis (E) Working Group proposing revisions to modify the Uniform Application Checklist for Certified Reinsurers and to integrate Kroll Bond Agency into the matrix of ratings and collateral levels for certified reinsurers.

g. Received a report regarding the definition of “covered policies.” h. Adopted a memorandum in response to a referral from the Blanks (E) Working Group proposing that the life

financial statement blank and the fraternal financial statement blank be combined into one single reporting blank for both quarterly and annual reporting.

2. Adopted the report of the Qualified Jurisdiction (E) Working Group. The Task Force directed the Working Group to

continue to postpone further work on its report on European Union (EU) member state implementation of Solvency II and the potential impact on the qualified jurisdiction status of France, Germany, Ireland and the United Kingdom (UK).

3. Adopted the report of the Reinsurance Financial Analysis (E) Working Group. The Working Group met Oct. 26 in

regulator-to-regulator session, pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings, to discuss actions taken with respect to the passporting of certified reinsurers by the states.

4. Adopted a recommendation that the states may consider Kroll Bond Rating Agency as a Nationally Recognized

Statistical Rating Organization (NRSRO) for certified reinsurer purposes, including: a) proposed revisions to the Uniform Application Checklist for Certified Reinsurers, with a clarification that the NRSRO must be recognized by the U.S. Securities and Exchange Commission (SEC) to provide financial strength ratings on insurance companies; and b) the matrix of ratings and collateral levels for Kroll Bond Rating Agency.

5. Discussed the NAIC process regarding the Covered Agreement and heard comments from regulators and interested

parties. The Covered Agreement will eliminate reinsurance collateral requirements for EU reinsurers that maintain a minimum amount of own funds equivalent to $250 million and a solvency capital ratio (SCR) of 100% under Solvency II.

W:\National Meetings\2017\Fall\Summaries\Draft Summaries\ReinsuranceTF.docx

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Attachment XXX Financial Condition (E) Committee

12/4/17


Draft: 10/16/17

Risk Retention Group (E) Task Force Conference Call October 10, 2017

The Risk Retention Group (E) Task Force met via conference call Oct. 10, 2017. The following Task Force members participated: Michael S. Pieciak, Chair, represented by Sandra Bigglestone (VT); Dave Jones, Vice Chair, represented by Jill Jacobi (CA); Stephen C. Taylor represented by Sean O’Donnell (DC); James J. Donelon represented by Bill Werner (LA); Mike Causey represented by Ke Xu (NC); Barbara D. Richardson represented by Omar Akel (NV); John D. Doak represented by Joel Sander (OK); and Raymond G. Farmer represented by Lee Hill and Michael Shull (SC).

1. Adopted its 2018 Proposed Charges

Ms. Bigglestone discussed a memorandum that includes the Task Force’s 2018 proposed charges, noting the proposed charges are unchanged from the Task Force’s 2017 charges. Ms. Jacobi made a motion, seconded by Mr. Akel, to adopt the Task Force’s 2018 proposed charges (Attachment XXX-A). The motion passed unanimously.

Having no further business, the Risk Retention Group (E) Task Force adjourned.

W:\National Meetings\2017\Fall\TF\RiskRetGrp\10-10-17 RiskTFmin.docx

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Draft: 11/27/17

Valuation of Securities (E) Task Force Conference Call (in lieu of meeting at the 2017 Fall National Meeting)

November 13, 2017

The Valuation of Securities (E) Task Force met via conference call Nov. 13, 2017. The following Task Force members participated: James J. Donelon, Chair, represented by Stewart Guerin (LA); Jennifer Hammer, Vice Chair, represented by Kevin Fry (IL); Lori K. Wing-Heier represented Wallace Thomas (AK); Dave Jones represented by Kim Hudson (CA); Katharine L. Wade represented by Kathy Belfi and Elaine Wieche (CT); Trinidad Navarro represented by Rylynn Brown (DE); David Altmaier represented by Joe Erhart (FL); Gordon I. Ito represented by Tian Xiao (HI); Dean L. Cameron represented by Honalee Thomas (ID); Doug Ommen represented by Alan Harder (IA); Ken Selzer represented by Richard Ramos (KS); Al Redmer Jr. represented by Matt Kozak (MD); Bruce R. Ramge represented by Bruce Bornman (NE); Richard J. Badolato represented by John Sirovetz (NJ); Barbara D. Richardson represented by Omar Akel (NV); Maria T. Vullo represented by Jim Everett (NY); John D. Doak represented by Joel Sander (OK); Kent Sullivan represented by Jamie Walker (TX); Todd E. Kiser represented by Jake Garn (UT); Jacqueline K. Cunningham represented by Doug Stolte (VA); Mike Kreidler represented by Timothy Hays (WA); and Ted Nickel represented by Randy Milquet (WI). Also participating were: Vincent Gosz (AZ); Sandra Batts (KY); and Joshua Ammerman (MS).

1. Adopted its Oct. 10, Sept. 27 and Summer National Meeting Minutes

Mr. Milquet made a motion, seconded by Mr. Sirovetz, to adopt the Task Force’s Oct. 10 (Attachment One), Sept. 27 (Attachment Two) and Aug. 7 (see NAIC Proceedings – Summer 2017, Valuation of Securities (E) Task Force) minutes. The motion passed.

2. Adopted a Proposed P&P Manual Amendment to Transfer FE/PL Processes to the SVO

On Oct. 10, the Task Force exposed for a 30-day comment period a proposed amendment to the P&P Manual to transfer the FE/PL processes to the Securities Valuation Office (SVO). The amendment reflected flowcharts developed by a staff-industry team.

Mike Reis (Northwestern Mutual), representing the American Council of Life Insurers (ACLI), said the ACLI, the North American Securities Valuation Association (NASVA) and the Private Placement Investors Association (PPiA) submitted a joint comment letter agreeing with the amendment and offering minor edits to this amendment and to other amendments mentioned in later items.

Robert Carcano (NAIC) outlined where the minor edits fell in the proposed amendment. He also explained the original amendment included text that was later deleted because the Task Force adopted deletions to the text over the course of the exposure period. Mr. Reis said the joint letter originally objected to the now deleted language; the changes discussed by Mr. Carcano achieve the objective of the language in the joint letter.

Because implementation will likely require the commitment of additional NAIC resources, Mr. Guerin asked Charles Therriault (NAIC) to describe the next steps in the NAIC process for this effort. Mr. Therriault explained that, following approval by the Task Force, staff would be submitting a report to the Financial Condition (E) Committee on behalf of the Task Force that describes the technical impacts of the policy change so the Committee can consider that aspect of the request. If the Committee approves the proposed changes, staff will then work with the NAIC’s Enterprise Project Management Office (EPMO) on getting the project prioritized. If additional resources are required, a request would eventually need to go the Executive (EX) Committee for approval of any needed funding. The final timeline for this proposal would be dependent upon these other approvals.

Mr. Everett asked for clarification of the process about whether items still go directly to the Financial Condition (E) Committee from the Task Force, to which Mr. Therriault confirmed they do. Mr. Everett then asked if the Executive (EX) Committee and the Internal Administration (EX1) Subcommittee had approved this new project process, and Mr. Carcano clarified that the process Mr. Therriault described is a new internal NAIC procedure, not one invented by the SVO, and is consistent with the existing approval processes of the Executive (EX) Committee and the Internal Administration (EX1) Subcommittee. Lastly, Mr. Guerin thanked everyone who worked on the FE/PL project.

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Mr. Fry made a motion, seconded by Mr. Hudson, to adopt a proposed amendment, including the ACLI/NASVA/PPiA friendly amendments, to transfer FE/PL processes to the SVO (Attachment Three). The motion passed.

3. Adopted a Proposed P&P Manual Amendment to Delete IAO Authority to Ignore the Credit Rating of NAIC CRPs On Sept. 27, the Task Force exposed for a 30-day public comment period the proposed P&P Manual amendment to delete the Investment Analysis Office’s (IAO) authority to ignore the credit rating of NAIC credit rating providers (CRPs). The ACLI sent one comment letter in favor of adopting the amendment, which had universal support. Ms. Walker made a motion, seconded by Mr. Milquet, to adopt the proposed amendment to delete the IAO’s authority to ignore the credit rating of NAIC CRPs (Attachment Four). The motion passed.

4. Adopted a Proposed P&P Manual Amendment to Delete SVO Authority to Require an Insurer to File a Security Rated

by an NAIC CRP for Evaluation On Oct. 10, the Task Force exposed for a 30-day public comment period the proposed P&P Manual amendment to delete the SVO’s authority to require an insurer to file a security rated by an NAIC CRP for evaluation. No comment letters were received, and staff and the industry universally supported the amendment. Mr. Sirovetz made a motion, seconded by Mr. Milquet, to adopt the proposed P&P Manual amendment to delete the SVO’s authority to require an insurer to file a security rated by an NAIC CRP for evaluation (Attachment Five). The motion passed. 5. Adopted a Proposed P&P Manual Amendment to Retain and Modernize the Z Rule and Create a Carryover Procedure On Oct. 10, the Task Force exposed for a 30-day public comment period a P&P Manual amendment proposed by staff and the industry to retain and modernize the Z rule and to create an alternative year-end carryover procedure. At or near year-end, the SVO would identify properly filed securities that staff would be unable to designate by year-end due to the workload. Staff would mark these properly filed securities by assigning them the new symbol YE to annual updates and new symbol IF to initial filings. The SVO would extend the existing designations for these annual update securities in this carryover population into the next year. The insurer would report the initial filings securities with the IF symbol and self-assign an NAIC designation. This new procedure would thus identify securities awaiting analysis by the SVO or have undergone a recognized transition, thus serving the purpose of the Z rule. The SVO would then compile a list of the entire carryover population for use in its discussions with the Task Force to evaluate whether additional resources are needed. Tracey Lindsey (Nationwide), representing NASVA, said the joint ACLI/NASVA/PPiA joint comment letter previously discussed (Attachment Three) also supported the need to modernize the Z rule, noting that the new proposed suffixes will achieve greater clarity for everyone, especially regulators. Mr. Kozak made a motion, seconded by Mr. Garn, to adopt the proposed P&P Manual amendment to retain and modernize the Z rule and to create a carryover procedure effective year-end 2018, subject to the aforementioned resource issue Mr. Therriault mentioned in item #2 above (Attachment Six). The motion passed. 6. Received a Staff Report on the Project to Amend the P&P Manual for SCA (Related Party) Transactions and Directed

Staff to Work with the Industry to Draft the Amendment In 2016, the Task Force transferred oversight of subsidiary, controlled and affiliated (SCA) transactions to the Statutory Accounting Principles (E) Working Group and deleted SCA instructions from the P&P Manual. In turn, the Working Group recommended revisions to the P&P Manual to clarify that the NAIC designations derived from NAIC CRP credit ratings can only consider credit risk and that the SVO only review affiliated transactions that resemble unaffiliated investments. On Oct. 10, the Task Force voted to allow insurers to continue using previously assigned NAIC designations for 2017 on related party transactions until a new process was devised. The Task Force also exposed the amendment for a 30-day public comment period.

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John Iwanicki (MetLife), representing the ACLI, said suggestions made in the ACLI’s Sept. 27 comment letter were substantially incorporated into the new amendment and said the ACLI’s Nov. 9 comment letter was generally supportive of the amendment except for the “procedure for evaluating filed SCA transactions,” which relates to the more complicated transactions. Mr. Iwanicki emphasized that the ACLI does not object to the language in that section; he opined the text could be further refined and made more robust if it were more descriptive of procedures for assigning NAIC designations for those complex transactions. Mr. Carcano said SVO staff hope to work further with the ACLI to devise new procedures for these complex transactions. He added that staff do not believe it is worth rushing to develop this new procedure for customized or complex SCA transactions. Mr. Carcano added staff may need input from subject-matter experts in order to devise an appropriate methodology for these custom SCA transactions. He requested more time for this project and said staff would report back to the Task Force in 2018. The Task Force directed staff to work with industry representatives to further enhance the proposed amendment and to report back on the Task Force’s next call in early 2018. 7. Adopted a Proposed P&P Manual Amendment for Schedule BA Private Funds On Sept. 27, the Task Force exposed for a public comment period an ACLI-proposed P&P Manual amendment on certain fund investments with fixed-income characteristics reported on Schedule BA. These private funds could be designated by the SVO, and thus receive a less punitive risk-based capital (RBC) charge, and would still fall under Statement of Statutory Accounting Principles (SSAP) No. 48—Joint Ventures, Partnerships and Limited Liability Companies. The ACLI recommended a P&P Manual amendment to add a weighted average rating factor methodology, thus enabling the SVO to produce the designations for Schedule BA funds. The Task Force also directed staff to draft a second amendment for Schedule BA funds with fixed-income characteristics currently reported on other schedules across all financial statement blanks, along with a referral to the Capital Adequacy (E) Task Force, the Blanks (E) Working Group and any other group affected. Mr. Guerin highlighted the latter was a 2018 project. Mr. Iwanicki briefly said the ACLI’s comment letter was supportive of its work with SVO staff. Mr. Hudson asked if the proposal had been reviewed by the Capital Adequacy (E) Task Force. Mr. Guerin said neither of the two proposals had. Mr. Carcano answered staff did not think it was needed because private Schedule BA assets are already recognized in the reporting framework and in the annual financial statement instructions. Mr. Therriault added that the text in bold in the ACLI comment letter further clarified the existing instructions but does not change the treatment permitted; rather, it helps to better define the SVO’s role in this space. Mr. Iwanicki said the ACLI comment letter supported the amendment and the ACLI was pleased to work with staff on the matter. Mr. Fry made a motion, seconded by Mr. Sirovetz, to adopt the ACLI-recommended P&P Manual amendment for Schedule BA private funds (Attachment Seven). The motion passed. 8. Exposed for a 30-Day Public Comment Period a Proposed P&P Manual Amendment to the U.S. Full Faith and Direct

Obligations List The Task Force exposed the original proposed P&P Manual amendment in 2016, but never considered it for adoption. Originally, the issue arose because the SVO added about 40 funds to the U.S. Full Faith and Direct Obligations List (the List) that did not qualify. The List is currently limited to funds that invest 100% of total assets in direct and full faith in credit obligations of the U.S. government or collateral as repurchase agreements by such obligations. The SVO has established that investments in these funds total $6 billion. Although the SVO can reverse errors by not renewing non-compliant funds, staff recommended expanding the List to include securities and issuers identified in Part Two, Section Four of the P&P Manual for government-sponsored enterprises. Mr. Carcano explained the reason for the proposal is the P&P Manual already recognizes that other category of government activity, government-sponsored organization (GSOs), such as entities that issue guarantees or insurance, U.S.-related entities. The Task Force has already recognized them as exempt NAIC 1 securities in the P&P Manual. Mr. Carcano suggested re-exposing the proposed amendment for an additional 30-day public comment period, because the original exposure did not have marked changes due to an error when converting the amendment into a PDF file.

Attachment Nine

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Mr. Everett asked if the expanded List takes into account congressional approval of a new framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Mr. Carcano said no congressional action has taken place to change the current status of Fannie Mae and Freddie Mac. Mr. Guerin said, in the event anything arises at a federal level, the Task Force would take up the matter again. Mr. Everett suggested the Task Force consider adding a methodology or analytical criteria to address the concern. Mr. Guerin said currently such a step is unnecessary, noting that the Task Force can consider it in the future. Mr. Milquet made a motion, seconded by Mr. Hudson, to re-expose the proposed P&P Manual amendment to expand the U.S. Full Faith and Direct Obligations List for a 30-day public comment period ending Dec. 12. The motion passed. 9. Received a Staff Report on Working with the Industry to Develop a Comprehensive Blanks Proposal to Encompass

Reporting Symbols and the PL General Interrogatory The Task Force previously sponsored a blanks amendment that included the PL and RE symbols, which was deferred several times. The proposal was withdrawn during the Blanks (E) Working Group’s Nov. 9 conference call, at which time the Working Group was informed the Task Force would submit a new comprehensive blanks proposal. Mr. Therriault added the project would also be subject to the project prioritization process discussed earlier, because it would entail system changes potentially requiring additional technology resources. The Task Force said the proposal would be picked up in 2018. 10. Heard a Status Report on Projects Before the Statutory Accounting Principles (E) Working Group Related to Task Force

Activities Mr. Carcano updated the Task Force on behalf of Julie Gann (NAIC) regarding the projects before the Statutory Accounting Principles (E) Working Group related to Task Force activities.

a. Bank Loans The Working Group considered the Task Force’s referral response and adopted revisions to SSAP No. 26R—Bonds to include directly issued bank loans within the definition of “bank loan.” The Working Group also agreed to sponsor a blanks proposal to incorporate separate reporting lines on the investment schedule (Schedule D-1 – Long-Term Bonds) for bank loans directly issued and acquired. The revisions to SSAP No. 26R are effective immediately, but the reporting lines will not be in effect until year-end 2018. The Working Group considered the Task Force’s referral response and adopted the NAIC Policy Statement on Coordination of the Accounting Practices and Procedures Manual (APPM) and the P&P Manual. This policy statement will be included in the “as of March 2018” APPM.

b. Use of NAV The Working Group adopted revisions, resulting in a substantively revised SSAP No. 100R—Fair Value, to allow net asset value (NAV) per share as a practical expedient to fair value either when specifically named in a SSAP or when specific conditions exist as adopted from Accounting Standards Update (ASU) 2009-12: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) and ASU 2015-07: Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The revisions were adopted with a Jan. 1, 2018, effective date, with early adoption permitted for year-end 2017. For early adopters, corresponding blanks changes will not be in place until 2018.

c. Wash Sale Disclosures The Working Group adopted revisions to exclude all money market mutual funds (MMFs) from the statutory accounting wash sale disclosure. Furthermore, the Working Group exposed proposed revisions to exclude all cash equivalents, all derivatives and short-term investments with a credit assessment of NAIC 1 or NAIC 2 from the wash sale disclosure. With the exposure, comments were specifically requested on whether investments reported on Schedule D-2-2 (common stock/mutual funds) should be excluded. Investments on Schedule D-2-2 are not reported with an NAIC designation; therefore, they are considered “non-rated” and subject to the current disclosure.

d. NAIC Designations on Schedule BA The Working Group agreed to send referrals to the Capital Adequacy (E) Task Force, the Valuation of Securities (E) Task Force and the Blanks (E) Working Group to inquire whether all entities should have the ability to report NAIC designations

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on Schedule BA – Other Long-Term Invested Assets similar to what is permitted for life and fraternal companies. The referral does not communicate support or opposition, and identifies that there is no statutory accounting impact.

e. Derivative Transactions The Working Group addressed various projects involving derivative transactions with the following key actions:

• Derivatives with Financing Premiums: The Working Group adopted aggregate disclosures for year-end 2017 to capture information on derivatives with financing premiums, future financing premiums due, as well as derivative fair value excluding the impact of discounted future financing premiums. The Working Group also exposed disclosures, and a proposed Schedule DB, to capture information on an individual derivative contract basis.

• Changes in Variation Margin: The Working Group adopted revisions to clarify that changes in variation margin shall not be considered “settlements” (as realized gains/losses or adjustments to the basis of the hedged item) until the derivative contract has been sold, matured, expired or has another closing transaction.

• SSAP No. 86 Review: The Working Group directed NAIC staff to review the guidance in SSAP No. 86—Derivatives in accordance with current U.S. generally accepted accounting principles (GAAP) requirements, including the recently released ASU 2017-12: Derivatives and Hedging. This review is intended to improve the statutory accounting and reporting guidance for derivatives.

f. SCA Filing Deadlines

The Working Group adopted revised filing deadlines for SCA entities effective for 2018 filings. Under the revised deadlines, a Sub 1 (initial filing) is required within 90 days of the acquisition or formation of the SCA. A Sub 2 (annual update) is required by Aug. 31, with provision to allow a company a one-month deadline after the audit date for an SCA entity that regularly receives its audit report after Aug. 31.

g. Investment Classification Project The Working Group exposed a new agenda item requesting comments on suggested proposals to update SSAP No. 30—Unaffiliated Common Stock under the Investment Classification Project. The proposals address the common stock definition, the inclusion of closed-end funds and unit investment trusts, and Task Force referrals on whether NAIC designations could be reported for certain investments to allow risk assessments based on the underlying holdings.

h. Expected Credit Losses The Working Group directed NAIC staff to draft substantive revisions to replace the “incurred loss model” (e.g., probability concept for recognizing impairment), with an expected credit loss concept for statutory accounting. Although the guidance is anticipated to reflect concepts from ASU 2016-13: Financial Instruments – Credit Losses, it is anticipated that various modifications will need to be considered to reflect an approach that works under statutory accounting principles. As the expected credit loss concepts results with more timely recognition of expected credit losses, it is anticipated that secondary revisions—perhaps to RBC or the asset valuation reserve (AVR)—will also need to be considered.

i. Double-Counting of Surplus Notes The Working Group exposed proposed revisions to clarify that SSAP No. 97—Subsidiary, Controlled and Affiliated Entities prohibits the double-counting of surplus notes between a parent and SCA, regardless of which party (parent or SCA) issued the surplus note and which party holds the surplus note. Furthermore, these revisions clarify that this concept applies regardless if the surplus note was acquired directly from the issuer, via the market or a third-party broker. 11. Heard a Report on Potential Projects Related to SSAP No. 43R Mr. Fry said the Task Force may need to review these securities because it has been 10 years since the financial crisis, specifically as it pertains to the carrying value concept and modified FE. He said the Task Force has discussed the matter for the past few years, due to past staff reports on the population of securities left that apply to SSAP No. 43R—Loan-Backed and Structured Securities. Task Force policy regarding SSAP No. 43R securities is to model all residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) and to produce NAIC designations based on the results, coupled with

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carrying value. Ratings are used for other asset-backed securities not modeled and carrying value, as well. The rationale for reviewing how these securities are handled is that the crisis is past, noting that the Task Force put the rules into place during a stressful time. Reports and proposals would need to be drafted framing the issues and offering alternatives, which is something to consider for 2018. Sasha Kamper (PPiA) added a number of PPiA members find the SSAP No. 43R process to be onerous, noting that the PPiA is open to working with staff on the matter. The Task Force directed staff to include the PPiA and any other relevant industry group when the matter is taken up in 2018. Staff agreed. 12. Received the SSG Staff Report on the 2017 Year-End Financial Modeling of RMBS and CMBS Eric Kolchinsky (NAIC) provided the Structured Securities Group’s (SSG) report on the year-end financial modeling process of RMBS and CMBS. Overall, everything is going smoothly, and the final data will be published as usual and as scheduled. Lastly, Mr. Therriault said staff would keep the Task Force updated regarding project resources. Having no further business, the Valuation of Securities (E) Task Force adjourned. W:\National Meetings\2017\Fall\TF\VOS\_Final Minutes\VOSTF 13 Nov. 2017 Minutes FINAL.docx

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Attachment XXX-X Financial Condition (E) Committee

12/4/17


Draft: 11/14/17

Group Capital Calculation (E) Working Group Conference Call

October 30–31, 2017

The Group Capital Calculation (E) Working Group of the Financial Condition (E) Committee met via conference call Oct. 30–31, 2017. The following Working Group members participated: David Altmaier, Chair (FL); Ron Dahlquist (CA); Kathy Belfi and John Loughran (CT); Philip Barlow (DC); Kevin Fry (IL); John Turchi (MA); Leslie Nehring and John Rehagen (MO); Justin Schrader (NE); Peter Hartt and Kristine Maurer (NJ); Sak-man Luk and James Matheson (NY); Dale Bruggeman (OH); Mike Arendall and Doug Slape (TX); and David Smith and Doug Stolte (VA).

1. Adopted its Sept. 25 and Summer National Meeting Minutes

The Working Group met Sept. 25 and took the following action: 1) discussed comments received related to the NAIC staff memorandum on captives; and 2) heard an update on the baseline exercise. Mr. Boerner made a motion, seconded by Ms. Belfi, to adopt the Working Group’s Sept. 25 (Attachment XXX) and Aug. 6 (see NAIC Proceedings – Summer 2017, Financial Condition (E) Committee, Attachment Four) minutes. The motion passed unanimously.

Commissioner Altmaier also stated that the Working Group met Oct. 16 in regulator-to-regulator session, pursuant to paragraph 6 (consultations with NAIC staff members related to NAIC technical guidance) of the NAIC Policy Statement on Open Meetings. No action was taken during the meeting.

2. Exposed an Updated Approach on the Treatment of Captives

Commissioner Altmaier reminded the Working Group that the purpose of the group capital calculation is to develop a tool that assists state insurance regulators in analyzing the financial condition of the group. During the Working Group’s Sept. 25 conference call, comment letters were discussed related to an NAIC staff memorandum regarding the treatment of XXX/AXXX captives in the group capital calculation. The comment letters demonstrated that there are a wide range of opinions on this topic. Some of the commenters said that the use of VM-20, Requirements for Principle-Based Reserves of Life Products, was preferred as it would provide better analytical information because it is a better measure of liabilities. However, others indicated there are issues with that approach since requiring such a valuation could be costly. If the use of VM-20 were allowed—as opposed to required—that would create an inconsistency in valuation among companies. There were also strong views against allowing any assets in the calculation that are not allowed under statutory accounting.

Commissioner Altmaier said it has been difficult to overcome these differences of opinion and find consensus on the topic of XXX/AXXX captives unless we require the assets to be consistent with statutory accounting, but let the liabilities represent the economic valuation. This would only affect the group capital calculation and not what is reported in the statutory financial statements, although there could potentially be some risk-based capital (RBC) adjustments as well. This is a new approach that attempts to achieve what the Working Group has discussed with other types of captives, which is developing a group figure that essentially looks through the captive transaction. For the non-XXX/AXXX captives, the Working Group has tentatively agreed that the captive is to report liabilities consistent with what would have been reported by the direct writer and requiring them to make certain statutory accounting adjustments. For the XXX/AXXX captives, the suggestion is following the same approach or employ some other method of on-top adjustment that puts the statutory allowed assets and statutory required reserves somewhere into the calculation, but consider some type of other on-top adjustment to mimic the result that should show up for the group. Commissioner Altmaier asked NAIC staff to draft a memorandum that documents this conceptual approach as a proposal and expose it for a 45-day public comment period. After further discussion, it was agreed that the memorandum would be exposed for a 60-day public comment period ending Dec. 29.

Ms. Belfi said that she submitted a comment letter that was discussed during the Working Group’s Sept. 25 conference call. Since that time, she has had further conversations and has reconsidered Connecticut’s position on an aspect related to captives. She said she would like to update her position related to the valuation basis of the direct writer to indicate that the direct writer may be allowed to use principle-based reserving (PBR) for both new and inforce business. Further, related to grandfathered policies, she indicated they believe that the valuation used should be VM-20.

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3. Discussed Permitted and Prescribed Accounting Practices Commissioner Altmaier said that the Working Group has discussed the treatment of permitted and prescribed accounting practices on a couple of occasions. Although there is a general consensus that the group capital calculation should include an inventory of the permitted and prescribed practices, there are differing opinions on how these should be treated in the group capital calculation. Some believe that including these as an on-top adjustment promotes comparability between insurance groups and would provide state insurance regulators with a more consistent basis in which to analyze the group capital calculation. However, others believe that these permitted and prescribed practices have been approved by the domestic regulator and should be retained in the spirit of an RBC aggregation approach that respects the accounting policies followed by the insurer. Commissioner Altmaier said that the Working Group may decide to take one approach to permitted practices, but then take a differing approach to prescribed practices. At the Summer National Meeting, the Working Group directed NAIC staff to analyze data from Note 1 of the annual statement related to permitted and prescribed practices and to also consider the effect on the baseline exercise. Julie Garber (NAIC) discussed a spreadsheet that includes aggregate industry from Note 1 of the 2016 annual statements (Attachment XXX), and the purpose of this analysis was to better understand the materiality of permitted and prescribed practices. She said that this information demonstrates that although permitted and prescribed accounting practices are generally immaterial to the industry as a whole, there may be some individual insurers that have material permitted or prescribed accounting practices. Mr. Barlow noted that some of the columns related to the net financial impact of the practice were negative, while others were positive, indicating that some practices increase net income or surplus (as applicable), while others decreases these amounts. Ms. Garber said that is correct, but that within each type of practice, the particular practices may cause an increase for some insurers, while it causes a decrease for other insurers, and that is why the net impact is shown on the spreadsheet. Mr. Barlow said it would be helpful to have further information on the range of fluctuations within each of the practices, and Ms. Garber said she would provide that data. Lou Felice (NAIC) said that round one of the baseline exercise considered entity-level permitted practices but did not collect data on prescribed practices. He said round two of the exercise will include an inventory of prescribed practices. Based on the initial review, Mr. Felice said that it does not appear to make much difference in the overall ratio when the practice is adjusted on-top versus at the entity level. Using an on-top adjustment would highlight the impact on the overall group capital ratio. Mr. Barlow said that the data related to the aggregated Note 1 information seems to indicate that permitted and prescribed practices are so minor that companies should be allowed to continue to report them in the group capital calculation. He did note that this initial impression could change based on NAIC staff research related to the range of the fluctuation in the net impact amounts. Ms. Maurer agreed that based on the aggregated data, the overall impact to the industry as a whole appears to be immaterial, although she said she is concerned that some groups or insurers could have material practices. Commissioner Altmaier asked NAIC staff to review that data further to identify the relative materiality of these practices on individual insurers or groups. James Braue (UnitedHealth Group) said that since there is agreement that the calculation will at least include an inventory of permitted and prescribed practices, he suggested that the field testing phase could calculate group capital ratios that both include and exclude the practices, thereby allowing for greater analytical capabilities. Commissioner Altmaier said he was not opposed to this suggestion. 4. Exposed NAIC Staff Memorandum on Non-Regulated Entities Commissioner Altmaier said the Working Group discussed the topic of non-regulated entities in 2016, and it tentatively agreed to use of a 22.5% charge against the book/adjusted carrying value (BACV), consistent with the treatment of these types of entities in the RBC formulas. Although this is a simple approach rooted in RBC, it is not necessarily risk-sensitive. At the Spring National Meeting, the American Council of Life Insurers (ACLI) presented its proposal related to these types of entities. Commissioner Altmaier suggested that the Working Group consider another option as described in a NAIC staff memorandum (Attachment XXX) that attempts to find some middle ground between the ACLI proposal and feedback from other interested stakeholders. He said he would like to plan on testing this approach, but before doing so, it could be exposed for a 75-day public comment period. Dan Daveline (NAIC) summarized the proposed approach, which is an attempt at a compromise that is driven from the fact that there seems to be a threshold issue with state insurance regulators related to prior proposals that exclude certain entities from the calculation. He said that for many large groups, much of the value of the calculation comes from the information that would be obtained. He said that state insurance regulators have indicated that they do want the legal entity separately

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identified if it is a financially-regulated entity. There may be a willingness to only individually identify the other entities in the group if they pose some sort of material risks to the group, as described in the memorandum. Non-regulated entities meeting some requirements to be determined could potentially be grouped together in the calculation, as opposed to being individually identified. The parameters in the memorandum are intended to be examples, and the Working Group welcomes feedback on specific measures that could indicate whether an individual entity poses risk to the group.

Jeffrey C. Alton (CNA Insurance Companies) asked whether the NAIC staff memorandum is a beginning point for the Working Group to discuss the scope of the group. Commissioner Altmaier said there are two aspects related to the scope of the group. The first is whether certain groups should be required to complete the calculation, and this discussion will take place once the calculation itself is further developed. The second aspect is related to the reporting of individual entities within a group, and the NAIC staff memorandum does touch upon this topic. Mr. Alton expressed concern about releasing a document that included a topic that the Working Group has not yet discussed, and asked if the memorandum could be limited to insurer investments in non-insurance affiliates. A suggestion was made that perhaps Section II of the memorandum could be removed, but Director Hartt said he is not comfortable with that approach. He said that many of the topics the Working Group is discussing naturally overlap, and in order to continue to make progress, it needs to address the issues fully as included in the memorandum. He said any concerns with the information provided in the memorandum could be discussed in a comment letter submitted during the exposure period. After some discussion, Commissioner Altmaier indicated that Section II should not be removed, and the memorandum discusses non-regulated entities, although it tends to overlap some with the scope issue. Commissioner Altmaier said the memorandum will be exposed for a 75-day public comment period ending Jan. 15, 2018.

5. Exposed an NAIC Staff Memorandum on Surplus Notes and Senior Debt

Commissioner Altmaier said the topic of surplus notes has garnered a fair amount of discussion at the international level, and the NAIC staff memorandum is an attempt to be supportive of the positions that state insurance regulators and the U.S. industry have taken at those international meetings. Mr. Felice summarized the NAIC staff memorandum (Attachment XX), stating that the memorandum covers four topics: 1) surplus notes; 2) senior debt; 3) quality of capital; and 4) whether limitations should exist. At the end of the memorandum, recommendations related to these topics are included related to an aggregation approach to the group capital calculation. Commissioner Altmaier said the memorandum will be exposed for a 75-day public comment period ending Jan. 15, 2018.

6. Heard an Update on the Baseline Exercise

Mr. Felice provided an update on the baseline exercise, and they are currently moving forward with round two of the exercise, which will collect data on recent discussion topics of the Working Group. He said round two will be the last round of the baseline exercise, as the hope is that the Working Group would then be able to field test a beta version of the calculation.

Having no further business, the Group Capital Calculation (E) Working Group adjourned.

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Draft: 11/20/17

Group Solvency Issues (E) Working Group Conference Call

November 16, 2017

The Group Solvency Issues (E) Working Group of the Financial Condition (E) Committee met via conference call Nov. 16, 2017. The following Working Group members participated: Justin Schrader, Chair (NE); Doug Slape, Vice Chair (TX); Kim Hudson (CA); Liz Baranauckas (CT); Charles Santana (DE); Robert Ballard (FL); Jim Armstrong and Mike Yanacheak (IA); Cindy Andersen (IL); Roy Eft (IN); John Turchi (MA); Judy Weaver (MI); Leslie Nehring (MO); Kristine Maurer (NJ); Margot Small (NY); Dale Bruggeman (OH); Joe DiMemmo (PA); Doug Stolte (VA); and Steve Junior (WI).

1. Adopted the Report of the ORSA Implementation (E) Subgroup

Mr. Schrader introduced himself as the new chair of the Working Group and recognized Christy Neighbors (NE) for her efforts leading the Working Group over the past two years.

Mr. Schrader stated that the first agenda item is to receive a report from the ORSA Implementation (E) Subgroup. The Subgroup met Oct. 27 and Aug. 23 via conference call to develop a written process for adopting revisions to the NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual (ORSA Guidance Manual) and to discuss the status of enterprise risk management-related projects of various actuarial groups. After drafting, exposing and revising proposed language for the ORSA Guidance Manual, the Subgroup concluded its work referred the proposed draft to the Working Group for its consideration.

Mr. Armstrong made a motion, seconded by Mr. Hudson, to adopt the report of the ORSA Implementation (E) Subgroup, including its Oct. 27 (Attachment XXX-A) and Aug. 23 (Attachment XXX-B) minutes. The motion passed.

2. Adopted Revisions to the ORSA Guidance Manual

Bruce Jenson (NAIC) provided an overview of the proposed changes to the ORSA Guidance Manual to incorporate a formal process for adopting future revisions to the document.

Mr. Jenson stated that the Subgroup drafted, exposed and updated revisions to the ORSA Guidance Manual based on comments received during the exposure period. The process includes language requiring all revisions to be subject to a public exposure period prior to adoption. In addition, the process requires the Working Group to adopt revisions by the Summer National Meeting in order to ensure that they become effective the following Jan. 1.

Jigar Gandhi (American Council of Life Insurers—ACLI) suggested a change to the proposed language in the ORSA Guidance Manual to clarify that all revisions must be adopted through the full NAIC approval process by the Fall National Meeting before becoming effective the following Jan. 1. After some discussion, the Working Group members agreed to edits clarifying this intent.

Ms. Maurer made a motion, seconded by Mr. Bruggeman, to adopt the proposed revisions to the ORSA Guidance Manual (Attachment XXX-C). The motion passed.

3. Exposed the Form F/ORSA Comparison Chart and Proposed Revisions to the Form F Implementation Guide

Mr. Schrader stated that regulators from Connecticut, Illinois, Nebraska and Texas volunteered to form a drafting group for purposes of reviewing and comparing Form F and ORSA Summary Reports received from various insurance groups to get an understanding of their similarities and differences. In addition, as part of this review, drafting group members were asked to consider the regulatory purpose and benefits associated with each report to determine whether they are both necessary and, if so, how they should be utilized. The results of these efforts were summarized and presented in an updated Form F/ORSA comparison chart.

Mr. Schrader provided an overview of the takeaways highlighted in the updated comparison chart. Mr. Schrader stated that the results of the comparison indicated that although there are similarities in the purpose of both reports related to providing information on risk exposures, regulators have found the information in ORSA Summary Reports to be much more effective

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and useful, primarily due to the level of detail provided in the report. However, one clear limitation noted in the ORSA Summary Reports is that the scope of entities covered within the report is often limited.

Mr. Schrader stated that Form F reporting is generally being provided at the ultimate controlling person, or full group level, albeit with limited detail on non-insurance entity exposures. Alternately, ORSA Summary Reports are more commonly filed at an intermediate insurance group level, with limited to no discussion of exposures outside of the defined insurance group. This shows a clear distinction between the two reports in terms of providing coverage to non-insurance operations within the full group.

Mr. Schrader also highlighted findings related to differences in the information being reported within the two filings. The information being reported in Form F is generally limited to brief, high-level descriptions of potential risk factors that relate to the list of specific topics included in the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450). Often, registrants appear to interpret the report as only requiring discussion of exposures that are currently material and unmitigated, which results in limited to no discussion of risks. This is contrasted with information generally provided within ORSA Summary Reports, which generally describes the risk management framework and practices in place at the insurer, as well as provides more detailed information regarding the insurer’s most significant risk exposures.

However, Mr. Schrader stated that regulators have seen a wide range of practices in ORSA Summary Reports, particularly relating to the quantification of risk exposures, the stressing of those exposures and the allocation of capital to the risks being accepted by the insurer. Regardless of the variations in ORSA Summary Reports and opportunities for potential improvement, the information on risk exposures being provided in ORSA Summary Reports is generally determined to be much more valuable to that being provided in the Form F filings.

Mr. Schrader asked if there were any questions or comments related to the updated Form F/ORSA comparison chart. Mr. Gandhi asked if it was the intent of the Working Group to consider adoption of the comparison chart on the call today. Mr. Schrader stated that the comparison chart would be considered for exposure, along with an updated draft of the Form F Implementation Guide.

Mr. Schrader stated that, after completing their work comparing Form F and ORSA filings, drafting group members believe that improvements to the Form F process encouraging additional information to be provided on risk exposures would be beneficial to regulators. In addition, drafting group members believe that more information on the insurers’ risk management framework would be beneficial within the Form F filings, at least for non-ORSA filers. However, drafting group members realize that Form F filings are not intended to be as detailed as ORSA Summary Reports and should not create duplicative or redundant reporting requirements for insurers subject to both requirements.

In considering options for improving the quality of information provided in Form F filings, drafting group members believe that a uniform approach to providing best practice recommendations for insurers in developing Form F filings is the best option for dealing with the issues identified. Therefore, drafting group members went back to the most recent draft of the Form F Implementation Guide to propose extensive revisions with the following goals in mind:

• Reduce redundancy in the reporting requirements for ORSA filers, particularly in relation to insurance riskexposures.

• Clarify that the purpose of the Form F Implementation Guide is to outline best practice recommendations forreducing potential follow-up questions and the scope of additional analysis and exam activities if followed.

• Provide more guidance regarding the regulator’s interest in information on risk management practices for thoseinsurance groups not subject to ORSA reporting requirements.

Mr. Jenson provided an overview of the updated Form F Implementation Guide, which included a number of revisions to soften the language within the guide to clarify its role in outlining best practices, without prescribing additional reporting requirements. In addition, the revisions included recommendations for limited situations where it may be appropriate for certain insurance groups to request a waiver from providing a Form F filing. Finally, other revisions included edits to a table providing examples of the type of information that would be beneficial for regulators to receive through the Form F filing.

Ms. Baranauckas expressed her support for the proposed revisions to the Form F Implementation Guide as a uniform solution to addressing regulatory concerns in this area. Mr. Schrader stated that drafting group members considered other options to address these issues, but agreed that the other options, including single-state solutions, would not address the issues

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consistently and uniformly. Ms. Small indicated that New York would like time to review the revisions in more detail before providing any comments. Ms. Baranauckas made a motion, seconded by Ms. Small, to expose the Form F/ORSA Comparison Chart and the proposed revisions to the Form F Implementation Guide for a public comment period ending Jan. 12, 2018. The motion passed. 4. Discussed Other Matters Mr. Schrader stated that with his assumption of the role of chair of the Working Group, he was also asked to take on the role of NAIC representative to the International Association of Insurance Supervisors’ (IAIS) Insurance Groups Working Group (IGWG), as well as the role of vice chair of that group. Mr. Schrader stated that he is still getting up to speed, but his understanding is that the IGWG met Sept. 13–14 in London to finalize updates to ICP 3, Information Exchange and Confidentiality Requirements, and ICP 25, Supervisory Cooperation and Coordination, which were subsequently adopted by the IAIS. In addition, Mr. Schrader stated that the IGWG plans to meet Dec. 12–13 in Basel, Switzerland, to continue its discussions and work on questions related to scope of group issues and defining the head of an internationally active insurance group (IAIG). Having no further business, the Group Solvency Issues (E) Working Group adjourned. W:\National Meetings\2017\Fall\Cmte\E\GSIWG\GSIWG 11-16-17 Call Minutes.docx

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Attachment ___ Financial Condition (E) Committee

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Date: 8/10/17

Mortgage Guaranty Insurance (E) Working Group Philadelphia, Pennsylvania

August 7, 2017

The Mortgage Guaranty Insurance (E) Working Group of the Financial Condition (E) Committee met in Philadelphia, PA, Aug. 7, 2017. The following Working Group members participated: Ted Nickel, Chair, represented by Steve Junior (WI); Kurt Regner (AZ); Ron Dahlquist (CA); Virginia Christy (FL); John Rehagen (MO); Jackie Obusek (NC); Joe DiMemmo (PA); and Doug Slape (TX).

1. Adopted its 2017 Spring National Meeting Minutes

Mr. Rehagen made a motion, seconded by Mr. Regner, to adopt the Working Group’s April 9, 2017, minutes (see NAIC Proceedings – Spring 2017, Financial Condition (E) Committee, Attachment Seven). The motion passed unanimously.

2. Heard an Update on the Progress of the Mortgage Guaranty Capital Model

Mr. Junior indicated that there has been progress in the completion of a contract with Milliman with respect to assisting the working group with reviewing the capital model, but that some details are still being finalized. He stated once the contract is completed, a predetermined detailed work plan would provide the state insurance regulators the opportunity to work with Milliman in those select areas of interest. He stated that once work begins at Milliman, the project would be completed within five months. Mr. Junior indicated that he will be providing Milliman with a summary of observations regarding the previous work completed on the capital model so they are aware of some of the issues.

3. Heard an Update on the Progress of Model #630

Mr. Junior indicated that because of the amount of work in getting the Milliman contract finalized, little additional work has been completed on the draft Mortgage Guaranty Insurance Model Act (#630) since the NAIC Spring National Meeting. Mr. Junior summarized that work needs to be completed on the dividend section, capital model descriptions, reinsurance section, and a few other matters. He stated that over the next couple of months he would be scheduling conference calls of the Working Group.

Having no further business, the Mortgage Guaranty Insurance (E) Working Group adjourned.

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Draft: 11/15/17

National Treatment and Coordination (E) Working Group Conference Call

November 8, 2017

The National Treatment and Coordination (E) Working Group of the Financial Condition (E) Committee met via conference call Nov. 8, 2017. The following Working Group members participated: Jill Jacobi, Co-Chair (CA); Jeff Hunt, Co-Chair (TX); Cindy Hathaway (CO); Maura Welch (CT); Alison Sterett (FL); Stewart Guerin (LA); Debbie Doggett (MO); Matt Fischer (ND); Cameron Piatt (OH); Joel Sander (OK); Greg Lathrop (OR); Cressinda Bybee (PA); Eric Showgren and Jay Sueoka (UT); Ron Pastuch (WA); and Linda Johnson (WY). Also participating were: Anne Morgan (NC); and Kathy Lamb (NV).

1. Adopted its Sept. 13 Minutes

Ms. Jacobi summarized the action taken on the Working Group’s Sept. 13 call. During this meeting, the Working Group: 1) adopted the Biographical Third-Party Review (E) Subgroup’s Aug. 29 minutes; 2) discussed the seasoning requirements;3) adopted definitions for “state charts” and “state-specific information”; 4) exposed the revised definition of “key persons incontrol functions” to include a cybersecurity contact; and 5) adopted updates to the biographical affidavit to includeadditional instruction and clarification regarding international education.

Mr. Showgren made a motion, seconded by Ms. Johnson to adopt the Working Group’s Sept. 13 minutes (Attachment). The motion passed.

The Working Group also met Oct. 11 via conference call in regulator-to-regulator session pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings

2. Adopted the Biographical Third-Party Review (E) Subgroup’s Sept. 26 and Oct. 11 Minutes

Mr. Piatt summarized the Biographical Third-Party Review (E) Subgroup’s Sept. 26 conference call, during which the Subgroup discussed the accreditation Part D requirements for appointed actuaries and appointed accountants, and determined that a biographical affidavit is not required for a non-employee of the applicant company. The Subgroup has referred changes to the definition of “key persons in control functions” (proposal 2016-13), which is on the agenda for the Working Group’s consideration. Ms. Johnson made a motion, seconded by Mr. Showgren to adopt the Subgroup’s Sept. 26 minutes (Attachment). The motion passed.

Mr. Piatt said the Subgroup also met Oct. 11 and adopted changes to the best practices for third-party vendors and referred two proposals regarding the primary application review checklist (proposal 2017-17) and the application checklists, instructions and frequently asked questions (FAQs) (proposal 2017-04), which are on the agenda for the Working Group’s consideration. He added that discussions will continue on the reconfirmation of background reports that are less than 12 months old and discuss how vendors should communicate when verifications take more than four weeks to complete so as not to impede the state’s review. Ms. Jacobi encouraged other states to participate in the Subgroup’s discussions. Ms. Johnson made a motion, seconded by Ms. Doggett to adopt the Subgroup’s Oct. 11 minutes (Attachment). The motion passed.

3. Adopted Proposal 2017-13

Ms. Jacobi said that with the NAIC membership’s adoption of the Insurance Data Security Model Law (#668), which the Working Group has been monitoring, the Uniform Certificate of Authority Application (UCAA) definition for “key persons in control functions” should be updated to include a cybersecurity contact (proposal 2017-13). The requirement to provide an affidavit would be limited to employees and would not require an employee be hired for this function. This proposal was exposed for a 30-day public comment period ending Oct. 13 and no comments were received.

Mr. Showgren made a motion, seconded by Mr. Lathrop to adopt proposal 2017-13 to add “cybersecurity” to the definition of “key persons in control functions” (Attachment). The motion passed.

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4. Adopted Proposal 2017-16 Mr. Piatt said the purpose of proposal 2017-16 is to add clarifying language to the Best Practices for Background Investigations that background investigation reports should be transmitted in a secure manner to the state insurance department and/or the applicant company. Ms. Doggett asked if the language was intentionally open-ended and whether it should instead define what the secure manner should be. Mr. Piatt said it was intentionally left open-ended, as the method would vary based on the department’s ability to accept encrypted emails or preference for certified mail. He noted that the vendors should be complying with the standard already, but by placing it in the best practices and asking the vendors to reconfirm their ability to comply makes sure they understand that this will be monitored by the Subgroup. Mr. Piatt and Mr. Hunt both reiterated that vendors that are approved and those that request approval to supply background investigation reports should be aware of this requirement. Jane Barr (NAIC) reiterated that because the states are on the receiving end, this language was not included in the Company Licensing Best Practices Handbook. Mr. Showgren made a motion, seconded by Ms. Sterett to adopt proposal 2016-16 to revise the Best Practices for Background Investigation Reports regarding the transmission of reports (Attachment). The motion passed. 5. Adopted Proposal 2017-17 Ms. Hunt summarized proposal 2017-17 to amend the Primary Application Review Checklist, item #2 heading and subsections f and g, which clarify that an opining actuary and accountant not employed by the applicant company do not need to provide a biographical affidavit. The clarifying language provides guidance for opining actuaries and accountants inside and outside the applicant company’s employ. Mr. Showgren made a motion, seconded by Mr. Lathrop to adopt proposal 2017-17 to amend Appendix A, the Primary Application Review Checklist of the Company Licensing Best Practices Handbook (Attachment). The motion passed. 6. Exposed Proposal 2017-04 Mr. Hunt summarized proposal 2017-04 to mirror the primary and expansion applications checklist to the corporate amendment checklist’s description of the biographical affidavit items to be included in an application. Also included in this proposal is additional verbiage on the submission of Disclaimer of Control approval from the domiciliary state. Mr. Hunt provided additional language to include additional key individuals who have a binding authority over the applicant company. Ms. Jacobi asked the Working Group if the proposal should be exposed with the current wording, which removed the language “who will control the operations” from the Corporate Amendment Application Checklist and “who will exercise control over the Applicant Company” from the Expansion Application Checklist. Mr. Showgren said he preferred the exposure include the Texas language. Ms. Barr suggested exposing this proposal for a 30-day public comment period ending Dec. 8, with all comments forwarded to the Biographical Third-Party Review (E) Subgroup to discuss. Ms. Sterett said Florida will not accept a Disclaimer of Control from any state, noting that the applicant company would need to request a disclaimer from Florida. Mr. Hunt suggested amending the wording to “may be acceptable.” Ms. Jacobi reminded the Working Group that the FAQ for the biographical affidavit addresses disclaimers permits reviewing states to request the affidavits. Ms. Barr said that state specific language could be added for Florida’s requirements. Mr. Showgren made a motion, seconded by Ms. Sterett to expose proposal 2017-04 with amended wording for the biographical affidavit submission (Attachment). The motion passed.

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7. Exposed the Proposed Language for Seasoning Requirements

Ms. Jacobi said the proposed expansion and corporate amendment instructions were amended to direct the applicant company to review the seasoning requirements for the applying state. Ms. Sterett asked if the instructions would provide a hyperlink to the “Seasoning Requirements for Authority to Transact Business” chart. Ms. Barr confirmed that the hyperlink would direct the applicant to the appropriate referenced chart.

Ms. Sterett made a motion, seconded by Ms. Johnson to expose the seasoning requirements language for a 30-day public comment period ending Dec. 8 (Attachment). The motion passed.

8. Discussed Other Matters

Ms. Barr said that Guam has expressed an interest in utilizing the UCAA for its licensing, noting that NAIC staff will be working with Guam throughout 2018 to ensure that the UCAA will meet its statutory requirements by year-end 2018.

Ms. Jacobi said that once the wording for the biographical affidavit disclaimer is finalized, notification should be sent to the state chief examiners and the company licensing contacts.

Mr. Hunt said the proforma ad hoc group continues to move forward with the modifications to the financial statements—which consist of the balance sheet, profit and loss statement, and cash flow—which will be uniform across all statement types. He asked for interested party volunteers to beta test the life proforma and provide feedback as the ad hoc group moves forward to the other business type proformas.

The Working Group does not plan to meet at the Fall National Meeting. It plans to meet Dec. 13 via conference call.

Having no further business, the National Treatment and Coordination (E) Working Group adjourned.

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Draft: 8/8/17

Risk-Focused Surveillance (E) Working Group Philadelphia, Pennsylvania

August 6, 2017

The Risk-Focused Surveillance (E) Working Group of the Financial Condition (E) Committee met in Philadelphia, PA, Aug. 6, 2017. The following Working Group members participated: Leslie Nehring, Co-Chair (MO); Justin Schrader, Co-Chair (NE); Blase Abreo (AL); Susan Bernard (CA); Kathy Belfi (CT); Daniel Mathis (IA); Kevin Fry (IL); Roy Eft (IN); Stewart Guerin (LA); Lynn Beckner (MD); Vanessa Leon (ME); Judy Weaver (MI); Tony Riddick (NC); Patricia Gosselin (NH); Steve Kerner (NJ); Mark McLeod (NY); Dwight Radel and Tracy Snow (OH); Diane Carter (OK); Greg Lathrop (OR); Joe DiMemmo (PA); Jack Broccoli (RI); Doug Slape (TX); David Smith (VA); Karen Murphy (VT); Patrick McNaughton (WA); and Rebecca Easland (WI).

1. Discussed Recommendations on Addressing Redundancies in Financial Surveillance

Mr. Schrader stated that the Working Group first received a charge aimed at reducing redundancies in financial surveillance in 2013 and has taken on a number of different projects to address issues identified in this area. For example, revisions were made to the NAIC’s Financial Analysis Handbook and Financial Condition Examiners Handbook, as well as to the NAIC accreditation guidelines, to encourage more consistency, collaboration and communication between the two surveillance functions. Significant changes included the incorporation of branded risk classifications as a common language for communication between the two functions, as well as an ongoing project to develop and implement a risk-focused approach to financial analysis.

In working to develop the new risk-focused analysis process, a joint group of interested parties suggested a project to identify efficiency recommendations for state insurance regulators to consider. The Working Group was receptive to the project, and the interested parties were asked to present their ideas at this meeting.

Jeff Martin (UnitedHealthcare—UHC), Max McGee (America’s Health Insurance Plans—AHIP) and Joe Zolecki (Blue Cross and Blue Shield Association—BCBSA) presented the recommendations of a joint group of interested parties on reducing regulatory redundancy. Mr. McGee stated that a broad group of industry participants with experience in property/casualty (P/C), life and health insurance expertise participated in the project by reviewing and comparing guidance in the NAIC’s Financial Analysis Handbook and Financial Condition Examiners Handbook. Mr. Martin provided several examples of areas within the handbooks where revisions could be made to avoid redundancies and gain efficiencies. Mr. Martin stated that the interested party focused its proposed revisions on the Financial Condition Examiners Handbook as state insurance regulators are still finalizing the risk-focused analysis guidance. Mr. Zolecki provided several examples of other enhancements that could be made to reduce regulatory redundancy, including the collaborative use of software tools, continued reliance on the lead state approach to solvency monitoring, and ongoing training and monitoring through the Peer Review Program and other similar efforts. Mr. Zolecki recommended that the Working Group form a subgroup made up of state insurance regulators and interested parties to work through the identified recommendations.

Mr. Schrader thanked the interested parties for their work in identifying potential areas for enhancement and for their support of the development of risk-focused analysis guidance. Ms. Nehring asked why a separate subgroup would be needed to address the recommendations. Mr. Zolecki stated that the recommendations will require in-depth discussion of handbook guidance in a number of areas that may be inefficient to conduct at the full Working Group level. Mr. Schrader asked if an informal drafting group, similar to what was used to develop risk-focused analysis guidance, might be more appropriate than a formal subgroup. Mr. Zolecki stated his agreement with such an approach.

Ms. Weaver stated her disagreement with a couple of the recommendations, including a recommendation to combine the Financial Analysis Handbook and Financial Condition Examiners Handbook into one publication. Ms. Weaver stated that while it may be appropriate to cross-train staff on both the analysis and examination processes, physically combining the two handbooks is not likely to result in increased collaboration between the processes. Ms. Weaver also expressed concerns over a recommendation to require both the analysis and examination functions to use the same software tools. Mr. Schrader stated his agreement with Ms. Weaver’s comments and recommended that the focus be on cross-training and cross-referencing between the two handbooks, as opposed to combining them.

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Mr. Slape stated that it could be a good idea to encourage both functions to use consistent software tools, but that he was not in favor of requiring it. Mr. Slape also said that state insurane regulators might want to consider combining the handbooks in the future, but agreed that such a step was not likely to increase understanding and collaboration across analysis and examinations in and of itself. Mr. Zolecki stated that enhanced training is critical to reducing redundancy and indicated that revisions to the handbooks could start with cross-referencing and adding an overview of the risk-focused analysis process into the Financial Condition Examiners Handbook. Mr. Schrader asked about the number of total recommendations identified by the interested parties. Mr. McGee stated that there are approximately 35 different recommendations to be considered. Mr. Zolecki stated that interested parties would also encourage state insurance regulators and NAIC staff to develop additional recommendations to be considered by a drafting group. Mr. Schrader asked Working Group members if there is interest in forming a drafting group. Ms. Bernard asked if Working Group members could review the listing of recommendations. Ms. Bernard also stated that there are some logistical limitations that make it difficult to address recommendations provided by interested parties. Ms. Belfi, Ms. Bernard and Ms. Weaver expressed interest in having their states participate in a drafting group. Mr. Schrader asked NAIC staff to reach out to other states to identify those interested in participating in a drafting group. Mr. Schrader also asked NAIC staff to coordinate with the joint group of interested parties to identify industry participants and work on scheduling. 2. Heard an Update on 2017 Peer Review Sessions Ms. Nehring provided an update on the 2017 Peer Review sessions overseen by the Working Group. In February, the Working Group held a session focused on holding company analysis. A total of eight states participated in this session, which resulted in the development of a “Holding Company Sound Practices” document that has been posted to StateNet as a regulator-only tool. A second analysis peer review session will be held in October, with a focus on legal entity analysis. Twelve states are scheduled to participate in the session, including three states that will bring risk-focused analysis files that were created as part of the risk-focused analysis pilot project completed earlier this year.

Ms. Nehring stated that a coordination-themed peer review session was completed in April with nine states in attendance. The session resulted in the development of enhancements to an existing coordination best practices document, as well as the development of a uniform participating state audit program. Another exam peer review session is scheduled for September, with nine states planning to attend.

3. Discussed Other Matters Mr. Schrader gave an update on the Working Group’s efforts to fulfill its charges related to department staffing and compensation. Mr. Schrader stated that a volunteer drafting group was formed to develop, oversee and administer a state insurance regulator survey on analyst and examiner compensation. The drafting group developed a survey that was sent to all states in July to help assess the adequacy of analyst/examiner staffing, compensation and retention on a national basis. After the survey results are received and analyzed, a summary of the results may be shared with the Working Group to support the ongoing work on these charges. Having no further business, the Risk-Focused Surveillance (E) Working Group adjourned. W:\Summer\Cmte\E\SurveillanceWG\SurveillanceWG 8-6-17 Minutes.docx

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2017 Fall National Meeting Honolulu, Hawaii

VARIABLE ANNUITIES ISSUES (E) WORKING GROUP Friday, December 1, 2017

9:00 a.m. – 1:00 p.m

Meeting Summary Report

The Variable Annuities Issues (E) Working Group met Dec. 1, 2017. During this meeting, the Working Group:

1. Adopted its Oct. 10 minutes, which included receipt of an update on the Quantitative Impact Study from the NAICsconsultant.

2. Heard a presentation from the NAICs consultant and exposed until March 2, 2018: a) proposed recommendations fromthe NAICs consultant as shown in a PowerPoint; b) proposed changes to Actuarial Guideline XLIII—CARVM forVariable Annuities (AG43); and c) proposed changes to life risk-based capital (RBC).

W:\National Meetings\2017\Fall\Summaries\Final Summaries\VAIWG.docxx

Attachment Fifteen

49

50

____________________________________________________________________________________ MEMORANDUM

To: Eric A. Cioppa, Chair Financial Condition (E) Committee Members of the Financial Condition (E) Committee

From: Charles A. Therriault, Director, NAIC, Securities Valuation Office

Cc: Stewart, Guerin, Chair, Valuation of Securities Task Force Dan Daveline, Director, NIAC, Financial Regulatory Services Division Robert Carcano, Senior Counsel, NAIC, Investment Analysis Office

Re: SVO Report - Technology Content of Policy Adoptions made by the Valuation of Securities (E) Task Force

Date: November 15, 2017 ___________________________________________________________________________________________ 1. Issue – On Nov. 13, 2017, the Valuation of Securities (E) Task Force adopted three policy initiatives thatwill require changes to NAIC technology systems and they directed the SVO to begin work to implement thesechanges, as described below.

a. The Task Force transferred the production of NAIC Designations for filing exempt securities frominsurance companies to the SVO and required that insurance companies submit evidence that securities subject toprivate letter ratings have been assigned credit ratings and that the SVO produce NAIC Designations for suchsecurities. These initiatives are effective July 1, 2018 for securities issued on or after January 1, 2018. This policywill help ensure uniform assessments for a securities population in excess of $3 trillion of insurer owned assets.Implementation requires immediate enhancements to: 1) activate the VISION functionality developed earlier thisyear to receive and process PDF copies of the private rating letter ratings as FE, 2) incorporate the new NAICDesignation suffix “PL” in VISION, AVS+ and insurer financial statements, and 3) update the processing of ratingagency data feeds that are required to specifically identify privately rated securities. Longer term enhancements willbe required to improve the NAIC’s processing and validation of the CRP data feeds for all FE securities

b. The Task Force repurposed the Z-rule, which previously permitted an insurer to self-designate a security inthe period before the security is filed with the SVO, to identifying securities whose reporting status is in transition.Under a new procedure to replace an aspect of the former Z-rule the SVO will identify securities that cannot beanalytically evaluated in time for year-end; assign the symbol “YE” to properly filed annual update securities andextend the existing NAIC Designation into the new-year and assign the symbol “IF” to properly filed initial filingsecurities to permit insurers to self-designate these securities. The SVO will prioritize the evaluation of thesesecurities in the new-year and the Task Force can use this “carryover” information to monitor SVO resource needs.To be effective by the date requested by the Task Force, year-end 2018, enhancements are required to: 1) modify theyear-end processing functionality within VISION to assign the “YE” and “IF” suffixes to those filings, 2) remove,modify or deactivate year-end processes that would be inconsistent with the “YE” and “IF” policies, 3) incorporatethe new NAIC Designation suffixes “YE” and “IF” into VISION, AVS+ and insurer financial statements.

The Task Force has also directed the SVO to work with American Council of Life Insurers (ACLI), Private Placement investors Association (PPiA) and North American Securities Valuation Association (NASVA) representatives in 2018 to develop a comprehensive blanks proposal to provide for the reporting symbols needed as part of the initiatives discussed above for year-end 2018 reporting by insurers. The Task Force supports the commitment of resources to enable the SVO to implement these directives within the requested timelines.

Attachment Sixteen

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52


MEMORANDUM

TO: Financial Condition (E) Committee

FROM: NAIC Staff

DATE: November 6, 2017

RE: Examiners’ Suggested Salary

For its work in 2017, the Risk-Focused Surveillance (E) Working Group received the following charges from E Committee:

• Consider recommendations to the Financial Regulation Standards and Accreditation (F) Committee for the purposeof valuating the suitability of insurance department staffing in relation to the necessary skillsets.

• Review the Financial Condition Examiners Handbook salary and per diem guidelines to determine the applicability,value and use to the states; consider alternative approaches based on current financial solvency responsibilities.

The Working Group has begun its work to address these charges, but while its work is in progress NAIC staff has continued to provide the update below on Examiners’ Suggested Salary. Importantly, NAIC staff believes the Working Group’s work to address the charges noted may eventually lead to substantive changes to the compensation analysis performed herein. Therefore, future updates on may differ significantly from the update provided in this memorandum.

The Consumer Price Index (CPI), as defined by the U.S. Bureau of Labor Statistics (BLS) is a measure of the average change in prices of goods and services purchased by households over time. The CPI is based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services purchased for day-to-day living. All taxes directly associated with the purchase and uses of items are included in the index. Prices of fuels and a few other items are obtained every month in all 87 locations tracked by the CPI. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas. Prices of most goods and services are obtained by personal visits or telephone calls of the BLS’ trained representatives.

In 2008, it was decided that, because the CPI takes into consideration most costs incurred by the average household, it is reasonable that an increase in salary should be within the same parameters as the increase in the cost of living. It was therefore proposed, and that proposal accepted, that the CPI be used as a basis for examiner salary increases. In years in which the CPI does not accurately reflect market conditions, additional work—including surveys and salary studies—may be completed to ensure proper salary suggestions. For the time period between July 2016 and July 2017, inflation showed a modest increase (driven by increases in the cost of housing, medical care, and education) and, therefore, may not completely represent the current job market warranting some consideration of additional factors.

The following data table shows the average annual salary increases adopted in the previous five years as compared to the CPI, as well as the proposed increase for the following year. The information “as published by BLS” compares the CPI as of July of each year, consistent with the analysis performed in past years.

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2012 2013 2014 2015 2016 2017

As Published in Financial Condition Examiners Handbook 1.5% 2.1% 2.25% 2.00% 2.75% *3.00% As Published by BLS 1.41% 2.14% 2.26% 0.17% 0.83% 1.73%

Difference -0.091% .04% 0.01% 0.83% 1.92% 1.27% * - Suggested change As shown above, in recent years, the rates suggested by the NAIC were consistently comparable to those published by the BLS, regardless of the method used. To supplement this analysis, NAIC staff also obtained the 2017 Robert Half Salary Guide to review and compare to accounting professionals that were determined to be most comparable to insurance examiners. Both Financial auditors and IT auditors were noted to receive, on average, a 4.0% compensation increase between 2016 and 2017. Based upon the current CPI data available (July 2016 – July 2017) the estimated annual change in CPI is approximately 1.73%. As noted before, the salary study obtained by NAIC staff suggests that professionals in comparable positions are receiving approximately a 4.0% increase. As such, if the Committee intends to base salary increases both on changes in the CPI and the results of the salary comparison, we would recommend a 3.0% increase in all classification categories as shown below.

2016

2017

Classification

Daily Rates

Suggested Increase

Daily Rates

Insurance Company Examiner, AFE*

$ 310.00 3.00% $ 319.00

Automated Examination Specialist, AFE (no AES**) $ 380.00 3.00% $ 391.00

Senior Insurance Examiner, CFE***

$ 380.00 3.00% $ 391.00

Automated Examination Specialist, AES

$ 427.00 3.00% $ 440.00

Automated Examination Specialist, CFE (no AES) $ 427.00 3.00% $ 440.00

Insurance Examiner In-Charge, CFE

$ 457.00 3.00% $ 471.00

Supervising or Administrative Examiner

$ 485.00 3.00% $ 500.00 * Accredited Financial Examiner. ** Automated Examination Specialist. *** Certified Financial Examiner. W:\National Meetings\2015\Fall\Cmte\E\Attachment Thirteen-Examiners Sugg Comp.docx

Attachment Seventeen

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Draft: November 29, 2017 Model #520 As adopted by the Receivership Model Law (E) Working Group and the Receivership and Insolvency (E) Task Force on November 29, 2017

Model Regulation Service—1st Quarter 2017

© 2017 National Association of Insurance Commissioners 520-1

LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION MODEL ACT

Table of Contents Section 1. Title Section 2. Purpose Section 3. Coverage and Limitations Section 4. Construction Section 5. Definitions Section 6. Creation of the Association Section 7. Board of Directors Section 8. Powers and Duties of the Association Section 9. Assessments Section 10. Plan of Operation Section 11. Duties and Powers of the Commissioner Section 12. Prevention of Insolvencies Section 13. Credits for Assessments Paid (Tax Offsets)—OPTIONAL Section 14. Miscellaneous Provisions Section 15. Examination of the Association; Annual Report Section 16. Tax Exemptions Section 17. Immunity Section 18. Stay of Proceedings; Reopening Default Judgments Section 19. Prohibited Advertisement of Insurance Guaranty Association Act in Insurance Sales;

Notice to Policy Owners Section 20. Prospective Application Appendix Alternative Provisions Section 1. Title This Act shall be known and may be cited as the [State] Life and Health Insurance Guaranty Association Act. Section 2. Purpose

A. The purpose of this Act is to protect, subject to certain limitations, the persons specified in Section 3A against failure in the performance of contractual obligations, under life, and health insurance policies, and annuity policies, plans, or contracts specified in Section 3B, because of the impairment or insolvency of the member insurer that issued the policies, plans, or contracts.

B. To provide this protection, an association of member insurers is created to pay benefits and

to continue coverages as limited by this Act, and members of the Association are subject to assessment to provide funds to carry out the purpose of this Act.

Drafting Note: The primarybasic purpose of this model act is to protect policy or contract owners, insureds, beneficiaries, health care providers, annuitants, payees and assignees against losses (both in terms of paying claims and continuing coverage) which might otherwise occur due to an impairment or insolvency of an insurer. Unlike the property and liability lines of business, life and annuity contracts in particular are long-term arrangements for security. An insured may have impaired health or be at an advanced age so as to be unable to obtain new and similar coverage from other insurers. The payment of cash values alone does not

Attachment Eighteen

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Life and Health Insurance Guaranty Association Model Act

520-2 © 2017 National Association of Insurance Commissioners

adequately meet such needs. Thus it is essential that coverage be continued. It is also essential that the guaranty association assess insurers in a fair and reasonable manner and that the guaranty association has sufficient assessment capacity for all insolvencies. Section 3. Coverage and Limitations

A. This Act shall provide coverage for the policies and contracts specified in Subsection B:

(1) To persons who, regardless of where they reside (except for nonresident certificate holders under group policies or contracts), are the beneficiaries, assignees or payees , including health care providers rendering services covered under health insurance policies or certificates, of the persons covered under Paragraph (2);

(2) To persons who are owners of or certificate holders or enrollees under the policies

or contracts (other than unallocated annuity contracts, and structured settlement annuities) and in each case who:

(a) Are residents; or

(b) Are not residents, but only under all of the following conditions:

(i) The member insurer that issued the policies or contracts is

domiciled in this State; (ii) The States in which the persons reside have associations similar to

the association created by this Act;

(iii) The persons are not eligible for coverage by an association in any other State due to the fact that the insurer or the health maintenance organization was not licensed in the State at the time specified in the State’s guaranty association law.

(3) For unallocated annuity contracts specified in Subsection B; Paragraphs (1) and (2)

of this subsection shall not apply, and this Act shall (except as provided in Paragraphs (5) and (6) of this subsection) provide coverage to:

(a) Persons who are the owners of the unallocated annuity contracts if the

contracts are issued to or in connection with a specific benefit plan whose plan sponsor has its principal place of business in this State; and

(b) Persons who are owners of unallocated annuity contracts issued to or in

connection with government lotteries if the owners are residents. Drafting Note: It is believed that coverage of unallocated annuities is a policy decision that should be made by each individual State. Attached as an Appendix are alternative Sections 3, 5 and 6, which specifically exclude all unallocated annuities from coverage.

(4) For structured settlement annuities specified in Subsection B; Paragraphs (1) and (2) of this subsection shall not apply, and this Act shall (except as provided in Paragraphs (5) and (6) of this subsection) provide coverage to a person who is a payee under a structured settlement annuity (or beneficiary of a payee if the payee is deceased), if the payee:

(a) Is a resident, regardless of where the contract owner resides; or

(b) Is not a resident, but only under both of the following conditions:

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(i) (I) The contract owner of the structured settlement annuity is a

resident; or

(II) The contract owner of the structured settlement annuity is not a resident; but

• The insurer that issued the structured settlement

annuity is domiciled in this State; and

• The State in which the contract owner resides has an association similar to the association created by this Act; and

(ii) Neither the payee (or beneficiary) nor the contract owner is eligible

for coverage by the association of the State in which the payee or contract owner resides.

(5) This Act shall not provide coverage to:

(a) A person who is a payee (or beneficiary) of a contract owner resident of this

State, if the payee (or beneficiary) is afforded any coverage by the association of another State; or

(b) A person covered under Paragraph (3) of this subsection, if any coverage is

provided by the association of another State to the person; or (c) A person who acquires rights to receive payments through a structured

settlement factoring transaction as defined in 26 U.S.C. 5891(c)(3)(A), regardless of whether the transaction occurred before or after such section became effective.

(6) This Act is intended to provide coverage to a person who is a resident of this State

and, in special circumstances, to a nonresident. In order to avoid duplicate coverage, if a person who would otherwise receive coverage under this Act is provided coverage under the laws of any other State, the person shall not be provided coverage under this Act. In determining the application of the provisions of this paragraph in situations where a person could be covered by the association of more than one State, whether as an owner, payee, enrollee, beneficiary or assignee, this Act shall be construed in conjunction with other State laws to result in coverage by only one association.

Drafting Note: The exclusion from coverage in Section 3A(5)(c) of any person who has purchased from an original structured settlement annuity payee his or her rights to receive structured settlement annuity benefits and the exclusion of such benefits from covered benefits under Section 3B(2)(n) recognize that the protections afforded by guaranty associations are intended for insurance consumers, such as the original payees of structured settlement annuities. Guaranty association protection does not extend to sophisticated investors who acquire rights to receive structured settlement annuity benefits in the secondary market. These exclusions, however, do not apply to structured settlement annuity benefits that are transferred to children, present or former spouses or other dependents as part of domestic relations settlements or orders, or to other transferees (including donees) who acquire rights to receive structured settlement annuity benefits without providing any monetary consideration. Thus, Section

Attachment Eighteen

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3A(5)(c) and Section 3B(2)(n) clarify that guaranty association coverage protects structured settlement annuity benefits to which the original payee and his or her family members retain the rights.

B. (1) This Act shall provide coverage to the persons specified in Subsection A for policies or contracts of direct, non-group life insurance, health insurance (which for the purposes of this Act includes health maintenance organization subscriber contracts and certificates), or annuities,y policies or contracts and supplemental contracts to any of these, for certificates under direct group policies and contracts, and for unallocated annuity contracts issued by member insurers, except as limited by this Act. Annuity contracts and certificates under group annuity contracts include but are not limited to guaranteed investment contracts, deposit administration contracts, unallocated funding agreements, allocated funding agreements, structured settlement annuities, annuities issued to or in connection with government lotteries and any immediate or deferred annuity contracts.

(2) Except as otherwise provided in Paragraph (3) of this subsection, Tthis Act shall

not provide coverage for:

(a) A portion of a policy or contract not guaranteed by the member insurer, or under which the risk is borne by the policy or contract owner;

(b) A policy or contract of reinsurance, unless assumption certificates have

been issued pursuant to the reinsurance policy or contract; (c) A portion of a policy or contract to the extent that the rate of interest on

which it is based, or the interest rate, crediting rate or similar factor determined by use of an index or other external reference stated in the policy or contract employed in calculating returns or changes in value;

(i) Averaged over the period of four (4) years prior to the date on which

the member insurer becomes an impaired or insolvent insurer under this Act, whichever is earlier, exceeds the rate of interest determined by subtracting two (2) percentage points from Moody’s Corporate Bond Yield Average averaged for that same four-year period or for such lesser period if the policy or contract was issued less than four (4) years before the member insurer becomes an impaired or insolvent insurer under this Act, whichever is earlier; and

(ii) On and after the date on which the member insurer becomes an

impaired or insolvent insurer under this Act, whichever is earlier, exceeds the rate of interest determined by subtracting three (3) percentage points from Moody’s Corporate Bond Yield Average as most recently available;

(d) A portion of a policy or contract issued to a plan or program of an employer, association or other person to provide life, health or annuity benefits to its employees, members or others, to the extent that the plan or program is self-funded or uninsured, including but not limited to benefits payable by an employer, association or other person under;

(i) A multiple employer welfare arrangement as defined in 29 U.S.C. §

1144;

(ii) A minimum premium group insurance plan;

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(iii) A stop-loss group insurance plan; or

(iv) An administrative services only contract;

(e) A portion of a policy or contract to the extent that it provides for

(i) Dividends or experience rating credits;

(ii) Voting rights; or

(iii) Payment of any fees or allowances to any person, including the policy or contract owner, in connection with the service to or administration of the policy or contract;

(f) A policy or contract issued in this State by a member insurer at a time

when it was not licensed or did not have a certificate of authority to issue the policy or contract in this State;

(g) An unallocated annuity contract issued to or in connection with a benefit

plan protected under the federal Pension Benefit Guaranty Corporation, regardless of whether the federal Pension Benefit Guaranty Corporation has yet become liable to make any payments with respect to the benefit plan;

(h) A portion of an unallocated annuity contract that is not issued to or in

connection with a specific employee, union or association of natural persons benefit plan or a government lottery;

(i) A portion of a policy or contract to the extent that the assessments required

by Section 9 with respect to the policy or contract are preempted by federal or State law;

(j) An obligation that does not arise under the express written terms of the

policy or contract issued by the member insurer to the enrollee, certificate holder, contract owner or policy owner, including without limitation:

(i) Claims based on marketing materials; (ii) Claims based on side letters, riders or other documents that were

issued by the member insurer without meeting applicable policy or contract form filing or approval requirements;

(iii) Misrepresentations of or regarding policy or contract benefits; (iv) Extra-contractual claims; or (v) A claim for penalties or consequential or incidental damages;

(k) A contractual agreement that establishes the member insurer’s obligations

to provide a book value accounting guaranty for defined contribution benefit

Attachment Eighteen

59



plan participants by reference to a portfolio of assets that is owned by the benefit plan or its trustee, which in each case is not an affiliate of the member insurer;

(l) A portion of a policy or contract to the extent it provides for interest or other

changes in value to be determined by the use of an index or other external reference stated in the policy or contract, but which have not been credited to the policy or contract, or as to which the policy or contract owner’s rights are subject to forfeiture, as of the date the member insurer becomes an impaired or insolvent insurer under this Act, whichever is earlier. If a policy’s or contract’s interest or changes in value are credited less frequently than annually, then for purposes of determining the values that have been credited and are not subject to forfeiture under Section 3B(2)(l), the interest or change in value determined by using the procedures defined in the policy or contract will be credited as if the contractual date of crediting interest or changing values was the date of impairment or insolvency, whichever is earlier, and will not be subject to forfeiture;

(m) A policy or contract providing any hospital, medical, prescription drug or other health care benefits pursuant to Part C or Part D of Subchapter XVIII, Chapter 7 of Title 42 of the United States Code (commonly known as Medicare Part C& D) , or Subchapter XIX, Chapter 7 of Title 42 of the United States Code (commonly known as Medicaid), or any regulations issued pursuant thereto; or

(n) Structured settlement annuity benefits to which a payee (or beneficiary) has transferred his or her rights in a structured settlement factoring transaction as defined in 26 U.S.C. 5891(c)(3)(A), regardless of whether the transaction occurred before or after such section became effective.

(3) The exclusion from coverage referenced in Paragraph (2)(c) of this subsection shall

not apply to any portion of a policy or contract, including a rider, that provides long-term care or any other health insurance benefits.

Drafting Note: Some life insurance policies and annuity contracts covered by this Act provide for interest or other changes in value to be determined by the use of an index or other external reference stated in the policy or contract. Sections 3B(2)(c) and 3B(2)(l) clarify the treatment of such policies or contracts in order to limit increases in interest in a manner that parallels the treatment provided other policies and contracts under this Act. Section 3B(2)(c) explicitly states that the application of the limit on “rate of interest” includes returns and changes in value determined by equity index or other reference. Section 3B(2)(l) excludes from coverage any interest or change in value that, as of the date the member insurer becomes an impaired or insolvent insurer under this Act, whichever is earlier, has not been credited to the policy or contract. It excludes from coverage any interest or change in value as to which the right of the policy or contract owner is subject to forfeiture on the date the member insurer becomes an impaired or insolvent insurer under this Act, whichever is earlier. However, for policies or contracts that credit interest or changes in value less than annually, Section 3B(2)(1) clarifies that crediting will be done according to the procedures set forth in the policy or contract except that the date of impairment or insolvency under this Act, whichever is earlier, will be deemed the final date for crediting interest of changes in value. Section 3B(3) is added to clarify that the interest limitation in Section 3B(2)(c) does not apply to long-term care or any other health insurance benefits.

C. The benefits that the Association may become obligated to cover shall in no event exceed

the lesser of:

(1) The contractual obligations for which the member insurer is liable or would have been liable if it were not an impaired or insolvent insurer; or

(2) (a) With respect to one life, regardless of the number of policies or contracts:

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(i) $300,000 in life insurance death benefits, but not more than $100,000 in net cash surrender and net cash withdrawal values for life insurance;

(ii) In For health insurance benefits:

(I) $100,000 for coverages not defined as disability income

insurance or health benefit plans basic hospital, medical and surgical insurance or major medical insurance or long -term care insurance as defined in [section of State law dealing with health insurance/disability income insurance/long- term care insurance] including any net cash surrender and net cash withdrawal values;

(II) $300,000 for disability income insurance as defined in

[section of State law dealing with health insurance/ disability income insurance], and $300,000 for long- term care insurance as defined in [section of State law dealing with health insurance/ long- term care insurance];

(III) $500,000 for health benefit plans;basic hospital medical and

surgical insurance or major medical insurance as defined in [section of State law dealing with health insurance];

(iii) $250,000 in the present value of annuity benefits, including net

cash surrender and net cash withdrawal values; or

(b) With respect to each individual participating in a governmental retirement benefit plan established under Section 401, 403(b) or 457 of the U.S. Internal Revenue Code covered by an unallocated annuity contract or the beneficiaries of each such individual if deceased, in the aggregate, $250,000 in present value annuity benefits, including net cash surrender and net cash withdrawal values;

(c) With respect to each payee of a structured settlement annuity (or

beneficiary or beneficiaries of the payee if deceased), $250,000 in present value annuity benefits, in the aggregate, including net cash surrender and net cash withdrawal values, if any;

(d) However, in no event shall the Association be obligated to cover more than

(i) an aggregate of $300,000 in benefits with respect to any one life under Paragraphs 2(a), 2(b) and 2(c) of this subsection except with respect to benefits for basic hospital, medical and surgical insurance and major medical insurancehealth benefit plans under Paragraph 2(a)(ii) of this subsection, in which case the aggregate liability of the Association shall not exceed $500,000 with respect to any one individual, or (ii) with respect to one owner of multiple non-group policies of life insurance, whether the policy or contract owner is an individual, firm, corporation or other person, and whether the persons insured are officers, managers, employees or other

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persons, more than $5,000,000 in benefits, regardless of the number of policies and contracts held by the owner;

(e) With respect to either (i) one contract owner provided coverage under

Subsection A(3)(b) of this section; or (ii) one plan sponsor whose plans own directly or in trust one or more unallocated annuity contracts not included in Paragraph (2)(b) of this subsection, $5,000,000 in benefits, irrespective of the number of contracts with respect to the contract owner or plan sponsor. However, in the case where one or more unallocated annuity contracts are covered contracts under this Act and are owned by a trust or other entity for the benefit of two (2) or more plan sponsors, coverage shall be afforded by the Association if the largest interest in the trust or entity owning the contract or contracts is held by a plan sponsor whose principal place of business is in this State and in no event shall the Association be obligated to cover more than $5,000,000 in benefits with respect to all these unallocated contracts.

(f) The limitations set forth in this subsection are limitations on the benefits

for which the Association is obligated before taking into account either its subrogation and assignment rights or the extent to which those benefits could be provided out of the assets of the impaired or insolvent insurer attributable to covered policies. The costs of the Association’s obligations under this Act may be met by the use of assets attributable to covered policies or reimbursed to the Association pursuant to its subrogation and assignment rights.

(g) For purposes of this Act, benefits provided by a long-term care rider to a life

insurance policy or annuity contract shall be considered the same type of benefits as the base life insurance policy or annuity contract to which it relates.

D. In performing its obligations to provide coverage under Section 8 of this Act, the

Association shall not be required to guarantee, assume, reinsure, reissue or perform, or cause to be guaranteed, assumed, reinsured, or reissued or performed, the contractual obligations of the insolvent or impaired insurer under a covered policy or contract that do not materially affect the economic values or economic benefits of the covered policy or contract.

Drafting Note: This section and Section 8 are key sections of the Act. Section 3 identifies who and what are covered and not covered by the Act. Section 8 specifies the responsibilities of the Association toward covered persons with covered policies. Protection of this Act is primarily extended to resident persons but certain nonresidents under specific circumstances will be protected by this Act if the insolvent insurer was domiciled in this State. This model does not apply to reinsurance unless assumption certificates were issued to the direct insureds or enrollees. Furthermore, it applies only to direct individual or group certificate insurance issued or written by member insurers licensed to transact insurance business in this State at any time. Persons to whom coverage is typically provided are resident enrollees, policy or contract owners of policies or contracts, or their beneficiaries, assignees or payees. For group contracts or policies, coverage is provided to resident certificateenrollees, and certificate holders and not to the owners of the group contracts or policies; this avoids the possibility of double coverage and indirect coverage of nonresident enrollees, and certificate holders through resident group policy or contract owners. However, for unallocated annuities, coverage is provided under Subsection A(3) to plan sponsors whose principal place of business is in this State, rather than to contract owners. No coverage is provided to individuals who have or might have an interest in the plan or unallocated annuity contract because there is no contractual guaranty by the insurer to individuals under those contracts. Subsection A(4) provides coverage for structured settlement annuities to resident payees rather than to the contract owners. Subsection A(3) providing unallocated annuity contract coverage to plan sponsors whose principal place of business is in the State and Subsection A(4) providing structured settlement annuity coverage to resident payees are significant changes from previous versions of this Model Act intended to place the coverage in the State of the resident persons to be protected rather than in the

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State where the nominal owner of the contract resides. Subsections A(5) and (6) avoid the possibility of double coverage due to differing approaches for determining the covered persons in different State statutes and provide mechanisms for resolving which State’s statutes will be used to determine the existence and limits of coverage. Policies and contracts covered by the model actbill are life insurance, health insurance and annuity policies and contracts, and policies or contracts supplemental thereto. The use of the term health insurance is intended to include “accident and health” insurance, “sickness and accident” insurance, “disability income” insurance, health maintenance organization contracts, etc. The use of the term disability income insurance is intended to include insurance policies and contracts that cover the loss of income due to a disability. The individual State may want to adjust this language to fit its particular terminology. Subsection B(2) identifies certain types of contracts or policies or portions of contracts or policies that are specifically not covered by this Act. If a portion of a contract or policy is not covered, the remainder of the contract or policy is covered unless excluded otherwise. Subsection B(2) also provides a ready means by which an individual State can exempt from the Act those policies and contracts issued by member insurers or similar organizations deemed appropriate for exemption by the State. Subsection B(2)(h) excludes coverage for any unallocated annuity contract not used to fund a benefit plan for natural persons or governmental lottery. Subsection B(2)(k) is intended to exclude from coverage those products commonly referred to as “financial guaranty” products. Subsection C provides the maximum limitations of the Association’s liability by type of contract or policy or line of business and overall per one life, plan sponsor or owner. The limits may be reached through cash surrender payments, benefit payments, or continuing coverage or a combination thereof. The maximum limits for each type of coverage should be set at an appropriate level after review by each State. Section 4. Construction This Act shall be construed to effect the purpose under Section 2. Section 5. Definitions As used in this Act:

A. “Account” means either of the two accounts created under Section 6.

B. “Association” means the [State] Life and Health Insurance Guaranty Association created under Section 6.

C. “Authorized assessment” or the term “authorized” when used in the context of assessments

means a resolution by the Board of Directors has been passed whereby an assessment will be called immediately or in the future from member insurers for a specified amount. An assessment is authorized when the resolution is passed.

D. “Benefit plan” means a specific employee, union or association of natural persons benefit

plan.

E. “Called assessment” or the term “called” when used in the context of assessments means that a notice has been issued by the Association to member insurers requiring that an authorized assessment be paid within the time frame set forth within the notice. An authorized assessment becomes a called assessment when notice is mailed by the Association to member insurers.

F. “Commissioner” means the Commissioner of Insurance of this State.

Drafting Note: Insert the title of the chief insurance regulatory official whenever the term “commissioner” appears.

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G. “Contractual obligation” means an obligation under a policy or contract or certificate under

a group policy or contract, or portion thereof for which coverage is provided under Section 3.

H. “Covered contract” or “covered policy” means a policy or contract or portion of a policy or

contract for which coverage is provided under Section 3.

I. “Extra-contractual claims” shall include, for example, claims relating to bad faith in the payment of claims, punitive or exemplary damages or attorneys’ fees and costs.

J. “Health benefit plan” means any hospital or medical expense policy or certificate, or health

maintenance organization subscriber contract or any other similar health contract. “Health benefit plan” does not include:

(1) Accident only insurance:

(2) Credit insurance;

(3) Dental only insurance;

(4) Vision only insurance;

(5) Medicare Supplement insurance;

(6) Benefits for long-term care, home health care, community-based care, or any combination thereof;

(7) Disability income insurance;

(8) Coverage for on-site medical clinics; or

(9) Specified disease, hospital confinement indemnity, or limited benefit health insurance if the types of coverage do not provide coordination of benefits and are provided under separate policies or certificates.

JK. “Impaired insurer” means a member insurer which, after the effective date of this Act, is

not an insolvent insurer, and is placed under an order of rehabilitation or conservation by a court of competent jurisdiction.

KL. “Insolvent insurer” means a member insurer which after the effective date of this Act, is

placed under an order of liquidation by a court of competent jurisdiction with a finding of insolvency.

LM. “Member insurer” means an insurer or health maintenance organization licensed or that

holds a certificate of authority to transact in this State any kind of insurance or health maintenance organization business for which coverage is provided under Section 3, and includes an insurer or health maintenance organization whose license or certificate of authority in this State may have been suspended, revoked, not renewed or voluntarily withdrawn, but does not include:

(1) A hospital or medical service organization, whether profit or non-profit;

(2) A health maintenance organization; (32) A fraternal benefit society;

(43) A mandatory State pooling plan;

(54) A mutual assessment company or other person that operates on an assessment

basis;

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(65) An insurance exchange; (76) An organization that has a certificate or license limited to the issuance of

charitable gift annuities under [insert the appropriate section of the State code]; or

(87) An entity similar to any of the above. Drafting Note: States that license Health Care Service Corporations or similar organizations that undertake to provide basic health care services may want to address these entities in this Act.

N. “Moody’s Corporate Bond Yield Average” means the Monthly Average Corporates as published by Moody’s Investors Service, Inc., or any successor thereto.

NO. “Owner” of a policy or contract and “policyholder,” “policy owner” and “contract owner”

mean the person who is identified as the legal owner under the terms of the policy or contract or who is otherwise vested with legal title to the policy or contract through a valid assignment completed in accordance with the terms of the policy or contract and properly recorded as the owner on the books of the member insurer. The terms owner, contract owner, policyholder and policy owner do not include persons with a mere beneficial interest in a policy or contract.

OP. “Person” means an individual, corporation, limited liability company, partnership,

association, governmental body or entity or voluntary organization.

PQ. “Plan sponsor” means:

(1) The employer in the case of a benefit plan established or maintained by a single employer;

(2) The employee organization in the case of a benefit plan established or maintained

by an employee organization; or

(3) In a case of a benefit plan established or maintained by two (2) or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the benefit plan.

QR. “Premiums” means amounts or considerations (by whatever name called) received on

covered policies or contracts less returned premiums, considerations and deposits and less dividends and experience credits. “Premiums” does not include amounts or considerations received for policies or contracts or for the portions of policies or contracts for which coverage is not provided under Section 3B except that assessable premium shall not be reduced on account of Sections 3B(2)(c) relating to interest limitations and 3C(2) relating to limitations with respect to one individual, one participant and one policy or contract owner. “Premiums” shall not include:

(1) Premiums in excess of $5,000,000 on an unallocated annuity contract not issued

under a governmental retirement benefit plan (or its trustee) established under Section 401, 403(b) or 457 of the United States Internal Revenue Code, or

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(2) With respect to multiple non-group policies of life insurance owned by one owner,

whether the policy or contract owner is an individual, firm, corporation or other person, and whether the persons insured are officers, managers, employees or other persons, premiums in excess of $5,000,000 with respect to these policies or contracts, regardless of the number of policies or contracts held by the owner.

RS. (1) “Principal place of business” of a plan sponsor or a person other than a natural

person means the single State in which the natural persons who establish policy for the direction, control and coordination of the operations of the entity as a whole primarily exercise that function, determined by the Association in its reasonable judgment by considering the following factors:

(a) The State in which the primary executive and administrative headquarters

of the entity is located;

(b) The State in which the principal office of the chief executive officer of the entity is located;

(c) The State in which the board of directors (or similar governing person or

persons) of the entity conducts the majority of its meetings;

(d) The State in which the executive or management committee of the board of directors (or similar governing person or persons) of the entity conducts the majority of its meetings;

(e) The State from which the management of the overall operations of the

entity is directed; and

(f) In the case of a benefit plan sponsored by affiliated companies comprising a consolidated corporation, the State in which the holding company or controlling affiliate has its principal place of business as determined using the above factors.

However, in the case of a plan sponsor, if more than fifty percent (50%) of the

participants in the benefit plan are employed in a single State, that State shall be deemed to be the principal place of business of the plan sponsor.

(2) The principal place of business of a plan sponsor of a benefit plan described in

Subsection PQ(3) of this section shall be deemed to be the principal place of business of the association, committee, joint board of trustees or other similar group of representatives of the parties who establish or maintain the benefit plan that, in lieu of a specific or clear designation of a principal place of business, shall be deemed to be the principal place of business of the employer or employee organization that has the largest investment in the benefit plan in question.

ST. “Receivership court” means the court in the insolvent or impaired insurer’s State having

jurisdiction over the conservation, rehabilitation or liquidation of the member insurer.

TU. “Resident” means a person to whom a contractual obligation is owed and who resides in this State on the date of entry of a court order that determines a member insurer to be an impaired insurer or a court order that determines a member insurer to be an insolvent insurer, whichever occurs first. A person may be a resident of only one State, which in the case of a person other than a natural person shall be its principal place of business. Citizens of the United States that are either (i) residents of foreign countries, or (ii) residents of United States possessions, territories or protectorates that do not have an

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association similar to the Association created by this Act, shall be deemed residents of the State of domicile of the member insurer that issued the policies or contracts.

UV. “Structured settlement annuity” means an annuity purchased in order to fund periodic

payments for a plaintiff or other claimant in payment for or with respect to personal injury suffered by the plaintiff or other claimant.

V.W “State” means a State, the District of Columbia, Puerto Rico, and a United States

possession, territory or protectorate.

WX. “Supplemental contract” means a written agreement entered into for the distribution of proceeds under a life, health or annuity policy or contract.

XY. “Unallocated annuity contract” means an annuity contract or group annuity certificate

which is not issued to and owned by an individual, except to the extent of any annuity benefits guaranteed to an individual by an insurer under the contract or certificate.

Drafting Note: Each State will wish to examine its own statutes to determine whether these definitions are applicable and to determine whether some should be deleted and others added. Section 6. Creation of the Association

A. There is created a nonprofit legal entity to be known as the [State] Life and Health Insurance Guaranty Association. All member insurers shall be and remain members of the Association as a condition of their authority to transact insurance or a health maintenance organization business in this State. The Association shall perform its functions under the plan of operation established and approved under Section 10 and shall exercise its powers through a board of directors established under Section 7. For purposes of administration and assessment, the Association shall maintain two (2) accounts:

(1) The life insurance and annuity account which includes the following subaccounts:

(a) Life insurance account;

(b) Annuity account which shall include annuity contracts owned by a

governmental retirement plan (or its trustee) established under Section 401, 403(b) or 457 of the United States Internal Revenue Code, but shall otherwise exclude unallocated annuities; and

(c) Unallocated annuity account, which shall exclude contracts owned by a

governmental retirement benefit plan (or its trustee) established under Section 401, 403(b) or 457 of the United States Internal Revenue Code.

(2) The health insurance account.

B. The Association shall come under the immediate supervision of the commissioner and

shall be subject to the applicable provisions of the insurance laws of this State. Meetings or records of the Association may be opened to the public upon majority vote of the board of directors of the Association.

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Section 7. Board of Directors

A. The board of directors of the Association shall consist of not less than fiveseven (57) nor more than nineeleven (911) member insurers serving terms as established in the plan of operation. The insurer members of the board shall be selected by member insurers subject to the approval of the commissioner. In addition, two (2) persons who must be public representatives shall be appointed by the commissioner to the board of directors. A “public representative” may not be an officer, director or employee of an insurance company or a health maintenance organization or any person engaged in the business of insurance.

Vacancies on the board shall be filled for the remaining period of the term by a majority vote of the remaining board members, for member insurers subject to the approval of the commissioner, and by the commissioner for public representatives. To select the initial board of directors, and initially organize the Association, the commissioner shall give notice to all member insurers of the time and place of the organizational meeting. In determining voting rights at the organizational meeting each member insurer shall be entitled to one vote in person or by proxy. If the board of directors is not selected within sixty (60) days after notice of the organizational meeting, the commissioner may appoint the initial insurer members in addition to the public representatives.

B. In approving selections or in appointing members to the board, the commissioner shall

consider, among other things, whether all member insurers are fairly represented.

C. Members of the board may be reimbursed from the assets of the Association for expenses incurred by them as members of the board of directors but members of the board shall not otherwise be compensated by the Association for their services.

Drafting Note: Subsection A provides that the number and term of the members of the board of directors shall be determined in the plan of operation. To avoid problems in initially selecting the board, this section includes a provision for a start-up meeting which will be called by the commissioner. To determine voting rights at the organizational meeting each member would have one vote. Thereafter the plan of operation will establish the voting procedures, by-laws, etc. governing the conduct of the Association. States that are amending an existing statute should provide for a continuation of the board. States may consider including language in Subsection B to effectuate the fair representation of guaranty association members. Section 8. Powers and Duties of the Association

A. If a member insurer is an impaired insurer, the Association may, in its discretion, and subject to any conditions imposed by the Association that do not impair the contractual obligations of the impaired insurer and that are approved by the commissioner:

(1) Guarantee, assume, reissue, or reinsure, or cause to be guaranteed, assumed,

reissued, or reinsured, any or all of the policies or contracts of the impaired insurer; or

(2) Provide such monies, pledges, loans, notes, guarantees or other means as are

proper to effectuate Paragraph (1) and assure payment of the contractual obligations of the impaired insurer pending action under Paragraph (1).

B. If a member insurer is an insolvent insurer, the Association shall, in its discretion, either:

(1) (a) (i) Guaranty, assume, reissue, or reinsure, or cause to be guaranteed,

assumed, reissued, or reinsured, the policies or contracts of the insolvent insurer; or

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(ii) Assure payment of the contractual obligations of the insolvent insurer; and

(b) Provide monies, pledges, loans, notes, guarantees, or other means

reasonably necessary to discharge the Association’s duties; or

(2) Provide benefits and coverages in accordance with the following provisions:

(a) With respect to policies and contracts life and health insurance policies and annuities, assure payment of benefits for premiums identical to the premiums and benefits (except for terms of conversion and renewability) that would have been payable under the policies or contracts of the insolvent insurer, for claims incurred:

(i) With respect to group policies and contracts, not later than the

earlier of the next renewal date under those policies or contracts or forty-five (45) days, but in no event less than thirty (30) days, after the date on which the Association becomes obligated with respect to the policies and contracts;

(ii) With respect to non-group policies, contracts, and annuities not

later than the earlier of the next renewal date (if any) under the policies or contracts or one year, but in no event less than thirty (30) days, from the date on which the Association becomes obligated with respect to the policies or contracts;

(b) Make diligent efforts to provide all known insureds, enrollees or annuitants

(for non-group policies and contracts), or group policy or contract owners with respect to group policies and contracts, thirty (30) days notice of the termination (pursuant to Subparagraph (a) of this paragraph) of the benefits provided;

(c) With respect to non-group policies and contracts life and health insurance

policies and annuities covered by the Association, make available to each known insured, enrollee, or annuitant, or owner if other than the insured or annuitant, and with respect to an individual formerly an insured, enrollee or formerly an annuitant under a group policy or contract who is not eligible for replacement group coverage, make available substitute coverage on an individual basis in accordance with the provisions of Subparagraph (d), if the insureds, enrollees or annuitants had a right under law or the terminated policy, contract, or annuity to convert coverage to individual coverage or to continue an individual policy, contract, or annuity in force until a specified age or for a specified time, during which the insurer or health maintenance organization had no right unilaterally to make changes in any provision of the policy, contract, or annuity or had a right only to make changes in premium by class:

(d) (i) In providing the substitute coverage required under Subparagraph

(c), the Association may offer either to reissue the terminated

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coverage or to issue an alternative policy or contract at actuarially justified rates[, subject to the prior approval of the commissioner];

(ii) Alternative or reissued policies or contracts shall be offered without

requiring evidence of insurability, and shall not provide for any waiting period or exclusion that would not have applied under the terminated policy or contract;

(iii) The Association may reinsure any alternative or reissued policy or

contract.

(e) (i) Alternative policies or contracts adopted by the Association shall be subject to the approval of the domiciliary insurance commissioner and the receivership court. The Association may adopt alternative policies or contracts of various types for future issuance without regard to any particular impairment or insolvency.

(ii) Alternative policies or contracts shall contain at least the minimum

statutory provisions required in this State and provide benefits that shall not be unreasonable in relation to the premium charged. The Association shall set the premium in accordance with a table of rates that it shall adopt. The premium shall reflect the amount of insurance to be provided and the age and class of risk of each insured, but shall not reflect any changes in the health of the insured after the original policy or contract was last underwritten.

(iii) Any alternative policy or contract issued by the Association shall

provide coverage of a type similar to that of the policy or contract issued by the impaired or insolvent insurer, as determined by the Association.

(f) If the Association elects to reissue terminated coverage at a premium rate

different from that charged under the terminated policy or contract, the premium shall be actuarially justified and set by the Association in accordance with the amount of insurance or coverage provided and the age and class of risk[, subject to prior approval of the domiciliary insurance commissioner and the receivership court];

(g) The Association’s obligations with respect to coverage under any policy or

contract of the impaired or insolvent insurer or under any reissued or alternative policy or contract shall cease on the date the coverage or policy or contract is replaced by another similar policy or contract by the policy or contract owner, the insured, the enrollee, or the Association;

(h) When proceeding under this Subsection B(2) with respect to a policy or

contract carrying guaranteed minimum interest rates, the Association shall assure the payment or crediting of a rate of interest consistent with Section 3B(2)(c).

C. Nonpayment of premiums within thirty-one (31) days after the date required under the

terms of any guaranteed, assumed, alternative or reissued policy or contract or substitute coverage shall terminate the Association’s obligations under the policy, contract, or coverage under this Act with respect to the policy, contract, or coverage, except with respect to any claims incurred or any net cash surrender value which may be due in accordance with the provisions of this Act.

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D. Premiums due for coverage after entry of an order of liquidation of an insolvent insurer shall belong to and be payable at the direction of the Association. If the liquidator of an insolvent insurer requests, the Association shall provide a report to the liquidator regarding such premium collected by the Association. The Association shall be liable for unearned premiums due to policy or contract owners arising after the entry of the order.

E. The protection provided by this Act shall not apply where any guaranty protection is

provided to residents of this State by the laws of the domiciliary State or jurisdiction of the impaired or insolvent insurer other than this State.

F. In carrying out its duties under Subsection B, the Association may:

(1) Subject to approval by a court in this State, impose permanent policy or contract

liens in connection with a guarantee, assumption or reinsurance agreement, if the Association finds that the amounts which can be assessed under this Act are less than the amounts needed to assure full and prompt performance of the Association’s duties under this Act, or that the economic or financial conditions as they affect member insurers are sufficiently adverse to render the imposition of such permanent policy or contract liens, to be in the public interest;

(2) Subject to approval by a court in this State, impose temporary moratoriums or liens

on payments of cash values and policy loans, or any other right to withdraw funds held in conjunction with policies or contracts, in addition to any contractual provisions for deferral of cash or policy loan value. In addition, in the event of a temporary moratorium or moratorium charge imposed by the receivership court on payment of cash values or policy loans, or on any other right to withdraw funds held in conjunction with policies or contracts, out of the assets of the impaired or insolvent insurer, the Association may defer the payment of cash values, policy loans or other rights by the Association for the period of the moratorium or moratorium charge imposed by the receivership court, except for claims covered by the Association to be paid in accordance with a hardship procedure established by the liquidator or rehabilitator and approved by the receivership court.

G. A deposit in this State, held pursuant to law or required by the commissioner for the

benefit of creditors, including policy or contract owners, not turned over to the domiciliary liquidator upon the entry of a final order of liquidation or order approving a rehabilitation plan of an member insurer domiciled in this State or in a reciprocal State, pursuant to [insert citation to this State’s law dealing with the handling of special deposits] shall be promptly paid to the Association. The Association shall be entitled to retain a portion of any amount so paid to it equal to the percentage determined by dividing the aggregate amount of policy or contract owners’ claims related to that insolvency for which the Association has provided statutory benefits by the aggregate amount of all policy or contract owners’ claims in this State related to that insolvency and shall remit to the domiciliary receiver the amount so paid to the Association less the amount retained pursuant to this subsection. Any amount so paid to the Association and retained by it shall be treated as a distribution of estate assets pursuant to applicable State receivership law dealing with early access disbursements .

H. If the Association fails to act within a reasonable period of time with respect to an

insolvent insurer, as provided in Subsection B of this section, the commissioner shall have

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the powers and duties of the Association under this Act with respect to the insolvent insurer.

I. The Association may render assistance and advice to the commissioner, upon the

commissioner’s request, concerning rehabilitation, payment of claims, continuance of coverage, or the performance of other contractual obligations of an impaired or insolvent insurer.

J. The Association shall have standing to appear or intervene before a court or agency in this

State with jurisdiction over an impaired or insolvent insurer concerning which the Association is or may become obligated under this Act or with jurisdiction over any person or property against which the Association may have rights through subrogation or otherwise. Standing shall extend to all matters germane to the powers and duties of the Association, including, but not limited to, proposals for reinsuring, reissuing, modifying or guaranteeing the policies or contracts of the impaired or insolvent insurer and the determination of the policies or contracts and contractual obligations. The Association shall also have the right to appear or intervene before a court or agency in another State with jurisdiction over an impaired or insolvent insurer for which the Association is or may become obligated or with jurisdiction over any person or property against whom the Association may have rights through subrogation or otherwise.

K. (1) A person receiving benefits under this Act shall be deemed to have assigned the

rights under, and any causes of action against any person for losses arising under, resulting from or otherwise relating to, the covered policy or contract to the Association to the extent of the benefits received because of this Act, whether the benefits are payments of or on account of contractual obligations, continuation of coverage or provision of substitute or alternative policies, contracts, or coverages. The Association may require an assignment to it of such rights and cause of action by any enrollee, payee, policy or contract owner, beneficiary, insured or annuitant as a condition precedent to the receipt of any right or benefits conferred by this Act upon the person.

(2) The subrogation rights of the Association under this subsection shall have the

same priority against the assets of the impaired or insolvent insurer as that possessed by the person entitled to receive benefits under this Act.

(3) In addition to Paragraphs (1) and (2) above, the Association shall have all common

law rights of subrogation and any other equitable or legal remedy that would have been available to the impaired or insolvent insurer or owner, beneficiary, enrollee, or payee of a policy or contract with respect to the policy or contracts (including without limitation, in the case of a structured settlement annuity, any rights of the owner, beneficiary or payee of the annuity, to the extent of benefits received pursuant to this Act, against a person originally or by succession responsible for the losses arising from the personal injury relating to the annuity or payment therefore), excepting any such person responsible solely by reason of serving as an assignee in respect of a qualified assignment under Internal Revenue Code Section 130).

(4) If the preceding provisions of this subsection are invalid or ineffective with respect

to any person or claim for any reason, the amount payable by the Association with respect to the related covered obligations shall be reduced by the amount realized by any other person with respect to the person or claim that is attributable to the policies or contracts (or portion thereof) covered by the Association.

(5) If the Association has provided benefits with respect to a covered obligation and a

person recovers amounts as to which the Association has rights as described in the

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preceding paragraphs of this subsection, the person shall pay to the Association the portion of the recovery attributable to the policies or contracts (or portion thereof) covered by the Association.

L. In addition to the rights and powers elsewhere in this Act, the Association may:

(1) Enter into such contracts as are necessary or proper to carry out the provisions and

purposes of this Act;

(2) Sue or be sued, including taking any legal actions necessary or proper to recover any unpaid assessments under Section 9 and to settle claims or potential claims against it;

(3) Borrow money to effect the purposes of this Act; any notes or other evidence of

indebtedness of the Association not in default shall be legal investments for domestic member insurers and may be carried as admitted assets;

(4) Employ or retain such persons as are necessary or appropriate to handle the

financial transactions of the Association, and to perform such other functions as become necessary or proper under this Act;

(5) Take such legal action as may be necessary or appropriate to avoid or recover

payment of improper claims; (6) Exercise, for the purposes of this Act and to the extent approved by the

commissioner, the powers of a domestic life insurer,or health insurer, or health maintenance organization, but in no case may the Association issue insurance policies or annuity contracts other than those issued to perform its obligations under this Act;

(7) Organize itself as a corporation or in other legal form permitted by the laws of the

State;

(8) Request information from a person seeking coverage from the Association in order to aid the Association in determining its obligations under this Act with respect to the person, and the person shall promptly comply with the request; and

(9) Unless prohibited by law, in accordance with the terms and conditions of the policy

or contract, file for actuarially justified rate or premium increases for any policy or contract for which it provides coverage under this Act; and

(910) Take other necessary or appropriate action to discharge its duties and obligations

under this Act or to exercise its powers under this Act.

M. The Association may join an organization of one or more other State associations of similar purposes, to further the purposes and administer the powers and duties of the Association.

N. (1) (a) At any time within one hundred eighty (180) days of the date of the order of

liquidation, the Association may elect to succeed to the rights and obligations of the ceding member insurer that relate to policies, contracts,

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or annuities covered, in whole or in part, by the Association, in each case under any one or more reinsurance contracts entered into by the insolvent insurer and its reinsurers and selected by the Association. Any such assumption shall be effective as of the date of the order of liquidation. The election shall be effected by the Association or the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) on its behalf sending written notice, return receipt requested, to the affected reinsurers.

(b) To facilitate the earliest practicable decision about whether to assume any

of the contracts of reinsurance, and in order to protect the financial position of the estate, the receiver and each reinsurer of the ceding member insurer shall make available upon request to the Association or to NOLHGA on its behalf as soon as possible after commencement of formal delinquency proceedings (i) copies of in-force contracts of reinsurance and all related files and records relevant to the determination of whether such contracts should be assumed, and (ii) notices of any defaults under the reinsurance contacts or any known event or condition which with the passage of time could become a default under the reinsurance contracts.

(c) The following Subparagraphs (i) through (iv) shall apply to reinsurance

contracts so assumed by the Association:

(i) The Association shall be responsible for all unpaid premiums due under the reinsurance contracts for periods both before and after the date of the order of liquidation, and shall be responsible for the performance of all other obligations to be performed after the date of the order of liquidation, in each case which relate to policies, contracts, or annuities covered, in whole or in part, by the Association. The Association may charge policies, contracts, or annuities covered in part by the Association, through reasonable allocation methods, the costs for reinsurance in excess of the obligations of the Association and shall provide notice and an accounting of these charges to the liquidator;

(ii) The Association shall be entitled to any amounts payable by the

reinsurer under the reinsurance contracts with respect to losses or events that occur in periods after the date of the order of liquidation and that relate to policies, contracts, or annuities covered, in whole or in part, by the Association, provided that, upon receipt of any such amounts, the Association shall be obliged to pay to the beneficiary under the policy, contracts, or annuity on account of which the amounts were paid a portion of the amount equal to the lesser of:

(A) The amount received by the Association; and (B) The excess of the amount received by the Association over

the amount equal to the benefits paid by the Association on account of the policy, contracts, or annuity less the retention of the insurer applicable to the loss or event.

(iii) Within thirty (30) days following the Association’s election (the

“election date”), the Association and each reinsurer under contracts assumed by the Association shall calculate the net balance due to or from the Association under each reinsurance contract as of the election date with respect to policies, contracts, or annuities

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covered, in whole or in part, by the Association, which calculation shall give full credit to all items paid by either the member insurer or its receiver or the reinsurer prior to the election date. The reinsurer shall pay the receiver any amounts due for losses or events prior to the date of the order of liquidation, subject to any set-off for premiums unpaid for periods prior to the date, and the Association or reinsurer shall pay any remaining balance due the other, in each case within five (5) days of the completion of the aforementioned calculation. Any disputes over the amounts due to either the Association or the reinsurer shall be resolved by arbitration pursuant to the terms of the affected reinsurance contracts or, if the contract contains no arbitration clause, as otherwise provided by law. If the receiver has received any amounts due the Association pursuant to Subparagraph (c)(ii) of this Paragraph (1), the receiver shall remit the same to the Association as promptly as practicable.

(iv) If the Association or receiver, on the Association’s behalf, within

sixty (60) days of the election date, pays the unpaid premiums due for periods both before and after the election date that relate to policies, contracts, or annuities covered, in whole or in part, by the Association, the reinsurer shall not be entitled to terminate the reinsurance contracts for failure to pay premium insofar as the reinsurance contracts relate to policies, contracts, or annuities covered, in whole or in part, by the Association, and shall not be entitled to set off any unpaid amounts due under other contracts, or unpaid amounts due from parties other than the Association, against amounts due the Association.

(2) During the period from the date of the order of liquidation until the election date

(or, if the election date does not occur, until one hundred eighty (180) days after the date of the order of liquidation),

(a) (i) Neither the Association nor the reinsurer shall have any rights or

obligations under reinsurance contracts that the Association has the right to assume under Subsection (1), whether for periods prior to or after the date of the order of liquidation; and

(ii) The reinsurer, the receiver and the Association shall, to the extent

practicable, provide each other data and records reasonably requested;

(b) Provided that once the Association has elected to assume a reinsurance

contract, the parties’ rights and obligations shall be governed by Subsection (1).

(3) If the Association does not elect to assume a reinsurance contract by the election

date pursuant to Subsection (1), the Association shall have no rights or obligations, in each case for periods both before and after the date of the order of liquidation, with respect to the reinsurance contract.

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(4) When policies, contracts, or annuities, or covered obligations with respect thereto,

are transferred to an assuming insurer, reinsurance on the policies, contracts, or annuities may also be transferred by the Association, in the case of contracts assumed under Subsection (1), subject to the following:

(a) Unless the reinsurer and the assuming insurer agree otherwise, the

reinsurance contract transferred shall not cover any new policies of insurance, contracts, or annuities in addition to those transferred;

(b) The obligations described in Subsection (1) of this Section shall no longer

apply with respect to matters arising after the effective date of the transfer; and

(c) Notice shall be given in writing, return receipt requested, by the

transferring party to the affected reinsurer not less than thirty (30) days prior to the effective date of the transfer.

(5) The provisions of this Section N shall supersede the provisions of any law State law

or of any affected reinsurance contract that provides for or requires any payment of reinsurance proceeds, on account of losses or events that occur in periods after the date of the order of liquidation, to the receiver of the insolvent insurer or any other person. The receiver, shall remain entitled to any amounts payable by the reinsurer under the reinsurance contracts with respect to losses or events that occur in periods prior to the date of the order of liquidation, subject to applicable setoff provisions.

(6) Except as otherwise provided in this section, nothing in this Section N shall alter or

modify the terms and conditions of any reinsurance contract. Nothing in this section shall abrogate or limit any rights of any reinsurer to claim that it is entitled to rescind a reinsurance contract. Nothing in this section shall give a policyholder, contract owner, enrollee, certificate holder, or beneficiary an independent cause of action against a reinsurer that is not otherwise set forth in the reinsurance contract. Nothing in this section shall limit or affect the Association’s rights as a creditor of the estate against the assets of the estate. Nothing in this section shall apply to reinsurance agreements covering property or casualty risks.

O. The Board of Directors of the Association shall have discretion and may exercise

reasonable business judgment to determine the means by which the Association is to provide the benefits of this Act in an economical and efficient manner.

P. Where the Association has arranged or offered to provide the benefits of this Act to a

covered person under a plan or arrangement that fulfills the Association’s obligations under this Act, the person shall not be entitled to benefits from the Association in addition to or other than those provided under the plan or arrangement.

Q. Venue in a suit against the Association arising under the Act shall be in [insert name of

county] County. The Association shall not be required to give an appeal bond in an appeal that relates to a cause of action arising under this Act.

Drafting Note: Along with Section 3, this section is a key to the specific responsibilities of the Association toward covered persons. That responsibility varies by type of policy or contract involved. The Association is primarily intended to act after the entry of an order of liquidation with the finding of insolvency against a member insurer. However, the Association may act (Section 8A) in the case of an impaired member insurer to guarantee, assume, reissue, or reinsure any or all policies or contracts or otherwise provide money to the member insurer.

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Subsection 8B details the main role of the Association in the instance of an order of liquidation against an insolvent member insurer. The responsibilities of the Association vary depending on the kind of coverage and type of policy or contract—group or individual. The Association may offer alternative policies or contracts or change the premiums or benefits of existing policies or contracts. “New contracts or policies” shall be offered without new underwriting and with coverage for most existing conditions. This subsection also details that any rate changes, including rates for new or replacement contracts or policies, must be actuarially justified and, if specified by the State, the commissioner must approve the rates prior to the rates becoming effective. In order to facilitate the sale of blocks of business for which the Association is responsible, the cooperation of the domestic receiver maywill be necessary. Each State should review its receivership statutes to make sure that such sales by the Association are permitted and that the receiver will act to accomplish this. Subsection F relates to the imposition of policy and contract liens, moratoriums, etc. These are devices which have been used in the past in connection with continuation of the insolvent insurer’s coverage. Since, by definition, the assets of the insolvent insurer were not adequate to support its contractual obligations, liens were used to reduce those obligations to a level where the assets would be adequate. However, in the past there was no means to infuse additional funds where needed to make whole policy or contract owners, insureds, enrollees, and beneficiaries. The purpose of the model act is to provide timely payment and protect against losses due to an insolvency, by providing prompt fulfillment of insurance or health maintenance organization benefits to the extent of the Association’s obligations under this Act. To the extent that liens and moratoriums are sanctioned, the model act retreats from this principle. On the one hand, it can be argued that if liens and moratoriums cannot be used, there will be a run on the assets of the impaired or insolvent company. In the past this seems to have been true. However, unlike the past, the performance of the member insurer’s contractual obligations would be guaranteed. Also, the standard nonforfeiture laws provide that an insurer in its policies shall reserve the right to defer the payment of cash values for a period of six months after demand therefor with surrender of the policy. Similarly, it is common to require an insurer to reserve for a period of six months the right to defer the granting of any policy loan (other than to pay premiums). For those various reasons, the model act does not encourage the use of liens and moratoriums in ordinary situations. On the other hand, in periods of severe liquidity problems and economic stress, perhaps of even catastrophic proportions, such devices may become essential. While the model billact concentrates on the protection of those to whom the impaired or insolvent insurer has a contractual obligation, the impact of assessments on the policyholders, contract owners, certificate holders, or enrollees of assessed companies is also an important consideration (e.g., significant sales of depressed value assets in a tight money market). Consequently Subsection F(1) authorizes the Association to cause to be imposed liens and moratoriums (or other similar means): 1. If the Court finds that the amounts assessable are less than what is needed, or that the economic or financial conditions as

they affect member insurers are sufficiently adverse to render the use of such tools in the public interest; and 2. The Court approves the use of the specific lien, moratorium, etc. This provides a highly flexible mechanism while at the same time it avoids impairing the contractual obligations of the impaired or insolvent insurer as a routine matter under ordinary economic and financial conditions. The provision also recognizes that while contractual rights of policy owners, contract owners, certificate holders, or enrollees may not constitutionally be impaired, when the impaired or insolvent insurer’s obligation under the contract is assumed by another insurer the policy owner, contract owners, certificate holders, or enrollees has two options. The policy owner, contract owners, certificate holders, or enrollees may accept the new contract with such liens or moratoriums as permitted by the court, or accept such pro rata payment as is available from the estate of the insolvent insurer. Furthermore, to provide added flexibility in a temporary situation (e.g., run on assets), Subsection F(2) provides for temporary moratoriums or liens on payment of cash values and policy loans, but not on the payment of other benefits, with the Court’s approval. Subsection J, to enable the Association to protect its interest and the best interests of the policyholders, contract owners, certificate holders, or enrollees in the handling of an impairment or insolvency, provides that the Association shall have standing to appear in courts with jurisdiction over an insolvent insurer and such standing will extend to any matters concerning the duties of the Association. Subsection L(9) was added to clarify that the Association has the authority to request rate increases under Section 8 in accordance with the terms of the policies or contracts, unless prohibited by law. States should determine whether it would be consistent with

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other provisions of State law to make this power of the Association subject to prior approval of the commissioner. States that have adopted long-term care insurance laws and regulations similar to the NAIC’s Long-Term Care Insurance Model Act and Long-Term Care Insurance Model Regulation should consider whether this language should be changed to conform to any applicable notice and approval requirements for premium rate schedule increases for long-term care insurance policies. Subsection M explicitly recognizes that prompt and efficient discharge of the Association’s obligations will be greatly facilitated, especially in multistate insolvencies by acting in concert through the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) to develop and, where appropriate, carry out coordinated plans. Subsection 8N has been revised to conform to the provisions of Section 612 of the Insurer Receivership Model Act. Section 612 represents a compromise among receivers, reinsurers and guaranty associations regarding reinsurance of life and health insurance contracts. The revisions of Section 8N are intended to preserve that compromise in this Act insofar as the Association is concerned.

R. In carrying out its duties in connection with guaranteeing, assuming, reissuing, or reinsuring policies or contracts under Subsections A or B, the Association may, subject to approval of the receivership court, issue substitute coverage for a policy or contract that provides an interest rate, crediting rate or similar factor determined by use of an index or other external reference stated in the policy or contract employed in calculating returns or changes in value by issuing an alternative policy or contract in accordance with the following provisions:

(1) In lieu of the index or other external reference provided for in the original policy or

contract, the alternative policy or contract provides for (i) a fixed interest rate or (ii) payment of dividends with minimum guarantees or (iii) a different method for calculating interest or changes in value;

(2) There is no requirement for evidence of insurability, waiting period or other

exclusion that would not have applied under the replaced policy or contract, and; (3) The alternative policy or contract is substantially similar to the replaced policy or

contract in all other material terms.

Section 9. Assessments

A. For the purpose of providing the funds necessary to carry out the powers and duties of the Association, the board of directors shall assess the member insurers, separately for each account, at such time and for such amounts as the board finds necessary. Assessments shall be due not less than thirty (30) days after prior written notice to the member insurers and shall accrue interest at [insert amount] percent per annum on and after the due date.

B. There shall be two (2) classes of assessments, as follows:

(1) Class A assessments shall be authorized and called for the purpose of meeting

administrative and legal costs and other expenses. Class A assessments may be authorized and called whether or not related to a particular impaired or insolvent insurer.

(2) Class B assessments shall be authorized and called to the extent necessary to carry

out the powers and duties of the Association under Section 8 with regard to an impaired or an insolvent insurer.

C. (1) The amount of a Class A assessment shall be determined by the board and may be

authorized and called on a pro rata or non-pro rata basis. If pro rata, the board may provide that it be credited against future Class B assessments. The total of all non-pro rata assessments shall not exceed $300 per member insurer in any one calendar year.

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(2) The amount of a Class B assessment, except for assessments related to long-term care insurance, shall be allocated for assessment purposes between among the accounts and among the subaccounts of the life insurance and annuity account, pursuant to an allocation formula which may be based on the premiums or reserves of the impaired or insolvent insurer or any other standard deemed by the board in its sole discretion as being fair and reasonable under the circumstances.

(3) The amount of the Class B assessment for long-term care insurance written by the

impaired or insolvent insurer shall be allocated according to a methodology included in the Plan of Operation and approved by the Commissioner. The methodology shall provide for 50% of the assessment to be allocated to accident and health member insurers and 50% to be allocated to life and annuity member insurers.

Drafting Note: The purpose of Subsection C(3) is to allocate the responsibility for an insolvency of a long-term care member insurer evenly between member insurers in the health industry and member insurers in the life and annuity industries. As it is likely that life and annuity member insurers will be subject to assessments from the health account, and accident and health member insurers will be subject to assessments from the life account, the formula below should be utilized by guaranty associations so that member insurers in the health industry pay 50% of the assessment and member insurers in the life and annuity industries pay 50% of the assessment. In determining the shares that shall be allocated to the life and annuity account pursuant to Subsection C(3), guaranty associations should use the following formula: (.50 - Life and annuity member insurers’ share of HA) / (Life and annuity member insurers’ share of LIAA - Life and annuity member insurers’ share of HA) For the purposes of the formula above and Subsection C(3) only, a “life and annuity member insurer” means a member insurer for which (i) the sum of its assessable life insurance premiums and annuity premiums is greater than or equal to (ii) its assessable health insurance premiums, which shall include its assessable health maintenance organization premiums but shall exclude its assessable premiums written for disability income and long-term care insurance. For purposes of this definition, assessable premiums shall be measured within the state. An “accident and health member insurer” means any member insurer not defined as a “life and annuity member insurer.” HA represents the guaranty association Health Account and LIAA represents the guaranty association Life Insurance and Annuity Account.

(42) Class B assessments against member insurers for each account and subaccount shall be in the proportion that the premiums received on business in this State by each assessed member insurer on policies or contracts covered by each account for the three (3) most recent calendar years for which information is available preceding the year in which the member insurer became insolvent (or, in the case of an assessment with respect to an impaired insurer, the three (3) most recent calendar years for which information is available preceding the year in which the member insurer became impaired) bears to premiums received on business in this State for those calendar years by all assessed member insurers.

(53) Assessments for funds to meet the requirements of the Association with respect to

an impaired or insolvent insurer shall not be authorized or called until necessary to implement the purposes of this Act. Classification of assessments under Subsection B and computation of assessments under this subsection shall be made with a reasonable degree of accuracy, recognizing that exact determinations may not always be possible. The Association shall notify each member insurer of its

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anticipated pro rata share of an authorized assessment not yet called within one hundred eighty (180) days after the assessment is authorized.

D. The Association may abate or defer, in whole or in part, the assessment of a member

insurer if, in the opinion of the board, payment of the assessment would endanger the ability of the member insurer to fulfill its contractual obligations. In the event an assessment against a member insurer is abated, or deferred in whole or in part, the amount by which the assessment is abated or deferred may be assessed against the other member insurers in a manner consistent with the basis for assessments set forth in this section. Once the conditions that caused a deferral have been removed or rectified, the member insurer shall pay all assessments that were deferred pursuant to a repayment plan approved by the Association.

E. (1) (a) Subject to the provisions of Subparagraph (b) of this paragraph, the total of

all assessments authorized by the Association with respect to a member insurer for each subaccount of the life insurance and annuity account and for the health account shall not in one calendar year exceed two percent (2%) of that member insurer’s average annual premiums received in this State on the policies and contracts covered by the subaccount or account during the three (3) calendar years preceding the year in which the member insurer became an impaired or insolvent insurer.

(b) If two (2) or more assessments are authorized in one calendar year with

respect to member insurers that become impaired or insolvent in different calendar years, the average annual premiums for purposes of the aggregate assessment percentage limitation referenced in Subparagraph (a) of this paragraph shall be equal and limited to the higher of the three-year average annual premiums for the applicable subaccount or account as calculated pursuant to this section.

(c) If the maximum assessment, together with the other assets of the

Association in an account, does not provide in one year in either account an amount sufficient to carry out the responsibilities of the Association, the necessary additional funds shall be assessed as soon thereafter as permitted by this Act.

(2) The board may provide in the plan of operation a method of allocating funds among

claims, whether relating to one or more impaired or insolvent insurers, when the maximum assessment will be insufficient to cover anticipated claims.

(3) If the maximum assessment for a subaccount of the life and annuity account in one

year does not provide an amount sufficient to carry out the responsibilities of the Association, then pursuant to Subsection C(2), the board shall access the other subaccounts of the life and annuity account for the necessary additional amount, subject to the maximum stated in Paragraph (1) above.

F. The board may, by an equitable method as established in the plan of operation, refund to

member insurers, in proportion to the contribution of each member insurer to that account, the amount by which the assets of the account exceed the amount the board finds is necessary to carry out during the coming year the obligations of the Association with regard to that account, including assets accruing from assignment, subrogation, net realized gains and income from investments. A reasonable amount may be retained in any account to provide funds for the continuing expenses of the Association and for future losses claims.

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G. It shall be proper for any member insurer, in determining its premium rates and policy owner dividends as to any kind of insurance or health maintenance organization business within the scope of this Act, to consider the amount reasonably necessary to meet its assessment obligations under this Act.

H. The Association shall issue to each member insurer paying an assessment under this Act,

other than a Class A assessment, a certificate of contribution, in a form prescribed by the commissioner, for the amount of the assessment so paid. All outstanding certificates shall be of equal dignity and priority without reference to amounts or dates of issue. A certificate of contribution may be shown by the member insurer in its financial statement as an asset in such form and for such amount, if any, and period of time as the commissioner may approve.

I. (1) A member insurer that wishes to protest all or part of an assessment shall pay

when due the full amount of the assessment as set forth in the notice provided by the Association. The payment shall be available to meet Association obligations during the pendency of the protest or any subsequent appeal. Payment shall be accompanied by a statement in writing that the payment is made under protest and setting forth a brief statement of the grounds for the protest.

(2) Within sixty (60) days following the payment of an assessment under protest by a

member insurer, the Association shall notify the member insurer in writing of its determination with respect to the protest unless the Association notifies the member insurer that additional time is required to resolve the issues raised by the protest.

(3) Within thirty (30) days after a final decision has been made, the Association shall

notify the protesting member insurer in writing of that final decision. Within sixty (60) days of receipt of notice of the final decision, the protesting member insurer may appeal that final action to the commissioner.

(4) In the alternative to rendering a final decision with respect to a protest based on a

question regarding the assessment base, the Association may refer protests to the commissioner for a final decision, with or without a recommendation from the Association.

(5) If the protest or appeal on the assessment is upheld, the amount paid in error or

excess shall be returned to the member insurercompany. Interest on a refund due a protesting member insurer shall be paid at the rate actually earned by the Association.

J. The Association may request information of member insurers in order to aid in the

exercise of its power under this section and member insurers shall promptly comply with a request.

Drafting Note: The Association is authorized to raise funds to fulfill its obligations under this Model Act with respect to an impaired or insolvent insurer by assessing the member insurers on the basis of the premiums they write in the State. This corresponds to the Association’s liability which, in most cases, is limited to covered policies of residents. This assessment system provides a base broad enough to meet fairly large demands on the Association. Equally important, since it reflects the market share of each member insurer in the State including health maintenance organizationsconsidered, it is an equitable method of apportioning the burden of the assessments.

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Subsection E provides some limitations on the amounts that can be assessed in a given year. The maximum assessment per year may be varied from State to State depending on the size of the base and the concentration of the business. The two percent (2%) maximum assessment per year should produce an adequate amount while at the same time not impose an undue strain in any given year on the assessed companiesmember insurers and their policy owners, contract owners, certificate holders, or enrollees. The maximum is applied to the amount of assessments authorized in a given year, and not the amount called; this allows the Association the flexibility to utilize current capacity for future obligations without collecting assessments from the member insurers until required. The Model Act provides additional discretion and flexibility for the Association in fulfilling its responsibilities by authorizing it to borrow funds that later can be paid out of future assessments. Subsection G provides that a member insurer may consider in its premium rates and dividend scale an amount reasonably necessary to meet its assessment obligations. This makes it clear that the cost can be ultimately passed on to the policy owners, contract owners, certificate holders, or enrollees—i.e., to persons who enjoy the protection provided by the Act. Subsection H provides that the Association shall issue to assessed member insurers certificates of contribution in the amount levied. The certificates may be carried by a member an insurer in its annual statement as an asset in such form, amount and period as may be approved by the commissioner. By permitting the companiesmember insurers to carry these certificates as an asset, to the extent of their estimated value, the impact on member insurers will be lessened. States may consider establishing a pre-funding arrangement for both insurance companies and health maintenance organizations that write health benefit plans to meet their assessment obligations to the Association. To pre-fund, member insurers writing health benefit plans would collect a set amount per member or per certificate per month and remit that amount directly to the Association. The pre-funded amounts would be utilized by the member insurers to satisfy Class B assessment obligations for future insolvencies. When the fund reaches a statutory cap, the pre-funding would stop. In the event of a depletion of the fund below the statutory cap, the pre-funding assessment would be reinstated. Establishing a pre-funding arrangement allows for the use of interest and investment income to lessen the impact of insolvencies on State taxpayers. Pre-funding also spreads the assessment obligations amongst policyholders prior to an insolvency and does not require the member health insurers or health maintenance organizations to look to the State taxpayers for recoupment. In addition, member insurers in the health industry that do not pay income or premium taxes would be offered a recoupment methodology that is the same as other member insurers in their markets. If a pre-funding arrangement is established, the funds should be legally insulated to avoid diversion for any other purposes, and ensure that they are held exclusively for the Association’s obligations. Section 10. Plan of Operation

A. (1) The Association shall submit to the commissioner a plan of operation and any amendments thereto necessary or suitable to assure the fair, reasonable and equitable administration of the Association. The plan of operation and any amendments thereto shall become effective upon the commissioner’s written approval or unless it has not been disapproved within thirty (30) days.

(2) If the Association fails to submit a suitable plan of operation within 120 days

following the effective date of this Act or if at any time thereafter the Association fails to submit suitable amendments to the plan, the commissioner shall, after notice and hearing, adopt and promulgate such reasonable rules as are necessary or advisable to effectuate the provisions of this Act. The rules shall continue in force until modified by the commissioner or superseded by a plan submitted by the Association and approved by the commissioner.

B. All member insurers shall comply with the plan of operation.

C. The plan of operation shall, in addition to requirements enumerated elsewhere in this Act:

(1) Establish procedures for handling the assets of the Association;

(2) Establish the amount and method of reimbursing members of the board of directors

under Section 7;

(3) Establish regular places and times for meetings including telephone conference calls of the board of directors;

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(4) Establish procedures for records to be kept of all financial transactions of the Association, its agents, and the board of directors;

(5) Establish the procedures whereby selections for the board of directors will be made

and submitted to the commissioner;

(6) Establish any additional procedures for assessments under Section 9;

(7) Contain additional provisions necessary or proper for the execution of the powers and duties of the Association;

(8) Establish procedures whereby a director may be removed for cause, including in the

case where a member insurer director becomes an impaired or insolvent insurer; (9) Require the Board of Directors to establish a policy and procedures for addressing

conflicts of interests.

D. The plan of operation may provide that any or all powers and duties of the Association, except those under Section 8L(3) and Section 9, are delegated to a corporation, association or other organization which performs or will perform functions similar to those of this Association, or its equivalent, in two (2) or more States. Such a corporation, association, or organization shall be reimbursed for any payments made on behalf of the Association and shall be paid for its performance of any function of the Association. A delegation under this subsection shall take effect only with the approval of both the board of directors and the commissioner, and may be made only to a corporation, association, or organization which extends protection not substantially less favorable and effective than that provided by this Act.

Section 11. Duties and Powers of the Commissioner In addition to the duties and powers enumerated elsewhere in this Act,

A. The commissioner shall:

(1) Upon request of the board of directors, provide the Association with a statement of the premiums in this and any other appropriate States for each member insurer;

(2) When an impairment is declared and the amount of the impairment is determined,

serve a demand upon the impaired insurer to make good the impairment within a reasonable time; notice to the impaired insurer shall constitute notice to its shareholders, if any; the failure of the insurerimpaired insurer to promptly comply with such demand shall not excuse the Association from the performance of its powers and duties under this Act.

B. The commissioner may suspend or revoke, after notice and hearing, the certificate of

authority to transact businessinsurance in this State of any member insurer which fails to pay an assessment when due or fails to comply with the plan of operation. As an alternative the commissioner may levy a forfeiture on any member insurer that fails to pay an assessment when due. The forfeiture shall not exceed five percent (5%) of the unpaid assessment per month, but no forfeiture shall be less than $100 per month.

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C. A final action of the board of directors or the Association may be appealed to the commissioner by a member insurer if the appeal is taken within sixty (60) days of its receipt of notice of the final action being appealed. A final action or order of the commissioner shall be subject to judicial review in a court of competent jurisdiction in accordance with the laws of this State that apply to the actions or orders of the commissioner.

D. The liquidator, rehabilitator or conservator of an impaired or insolvent insurer may notify

all interested persons of the effect of this Act. Drafting Note: Subsection A(2) requires that the commissioner give notice of an impairment to the impaired insurer, and hence to its stockholders, and serve a demand that the impairment be made good. If the company and stockholders fail to raise the necessary funds, this will be a factor bearing upon the stockholder’s ownership rights under Section 14E. State Proceedings for the liquidation, rehabilitation or conservation of member insurers present several difficulties that both acts seek to solve. Briefly, the difficulties have two sources. First, in some States the liquidator, rehabilitator or ancillary receiver may be a person unfamiliar with insurance or health benefit plan regulation. Inefficient administration of the proceedings may result. Second, the laws of more than one State may be applied to the proceedings, particularly regarding ownership of assets and preferences for payment. The result is confusion and inequity in the collection and distribution of the assets. The Insurers Rehabilitation and Liquidation Model Act and the Uniform Insurers Liquidation Act meet the first source of problems by designating the insurance commissioner as the receiver of a domestic insurer or the ancillary receiver of a foreign insurer. To solve the problem of multiple laws and marshaling of assets, both acts give the receiver title to the assets. The ancillary receiver is then required to forward all assets to the receiver. Both acts also detail the laws under which preferences in the distribution of assets will be determined. In drafting this model guaranty billact, particular effort was made to avoid (to the extent possible) disrupting existing State liquidation and rehabilitation laws. However, each individual State may want to consider adopting the Insurers Rehabilitation and Liquidation Model Act or the Uniform Insurers Liquidation Act, if it has not already done so. Section 12. Prevention of Insolvencies To aid in the detection and prevention of member insurer insolvencies or impairments,

A. It shall be the duty of the commissioner:

(1) To notify the commissioners of all the other States, territories of the United States and the District of Columbia within thirty (30) days following the action taken or the date the action occurs, when the commissioner takes any of the following actions against a member insurer:

(a) Revocation of license;

(b) Suspension of license; or

(c) Makes a formal order that the member insurer company restrict its

premium writing, obtain additional contributions to surplus, withdraw from the State, reinsure all or any part of its business, or increase capital, surplus, or any other account for the security of policy owners, contract owners, certificate holders, or creditors.

(2) To report to the board of directors when the commissioner has taken any of the

actions set forth in Paragraph (1) or has received a report from any other commissioner indicating that any such action has been taken in another State. The report to the board of directors shall contain all significant details of the action taken or the report received from another commissioner.

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(3) To report to the board of directors when the commissioner has reasonable cause to believe from an examination, whether completed or in process, of any member insurer that the insurer may be an impaired or insolvent insurer.

(4) To furnish to the board of directors the NAIC Insurance Regulatory Information

System (IRIS) ratios and listings of companies not included in the ratios developed by the National Association of Insurance commissioners, and the board may use the information contained therein in carrying out its duties and responsibilities under this section. The report and the information contained therein shall be kept confidential by the board of directors until such time as made public by the commissioner or other lawful authority.

B. The commissioner may seek the advice and recommendations of the board of directors

concerning any matter affecting the duties and responsibilities of the commissioner regarding the financial condition of member insurers and companies insurers or health maintenance organizations seeking admission to transact insurance business in this State.

C. The board of directors may, upon majority vote, make reports and recommendations to the

commissioner upon any matter germane to the solvency, liquidation, rehabilitation or conservation of any member insurer or germane to the solvency of any companyinsurer or health maintenance organization seeking to do an insurance business in this State. The reports and recommendations shall not be considered public documents.

D. The board of directors may, upon majority vote, notify the commissioner of any information

indicating a member insurer may be an impaired or insolvent insurer. E. The board of directors may, upon majority vote, make recommendations to the

commissioner for the detection and prevention of member insurer insolvencies. [Section 13. Credits for Assessments Paid (Tax Offsets)—OPTIONAL

A. A member insurer may offset against its [premium, franchise or income] tax liability to this State an assessment described in Section 9H to the extent of twenty percent (20%) of the amount of the assessment for each of the five (5) calendar years following the year in which the assessment was paid. In the event a member insurer should cease doing business, all uncredited assessments may be credited against its [premium, franchise, or income] tax liability for the year it ceases doing business.

B. A member insurer that is exempt from taxes referenced in Subsection A above may recoup

its assessments by a surcharge on its premiums in a sum reasonably calculated to recoup the assessments over a reasonable period of time, as approved by the commissioner. Amounts recouped shall not be considered premiums for any other purpose, including the computation of gross premium tax, the medical loss ratio, or agent commission. If a member insurer collects excess surcharges, the insurer shall remit the excess amount to the association, and the excess amount shall be applied to reduce future assessments in the appropriate account.

BC. Any sums that are acquired by refund, pursuant to Section 9F, from the Association by

member insurers, and that have been offset against [premium, franchise or income] taxes as provided in Subsection A above, shall be paid by the member insurers to this State in

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such manner as the tax authorities may require. The Association shall notify the commissioner that refunds have been made.]

Drafting Note: Subsection A provides an offset against future premium, franchise or income taxes of assessments, over a five-year period. The timing of the credit is dependent on the year the assessment is paid. It also allows the member insurer to select the applicable tax (premium, franchise or income) against which the credit may be applied and it permits member insurers going out of business to make use of the credit in their final year of operations. The NAIC model insolvency guaranty bill for property and casualty insurance provides, in Section 16, that rates “shall include amounts sufficient to recoup a sum equal to the amounts paid to the Association ...” It is obvious that lLife insurance premiums, and premiums for certain forms of health insurance, cannot be changed on existing policyholders. Thus, recoupment is virtually unattainable through existing policy premium rates and building such assessments into rates for future policyholders is not only impractical but unfair to all policyholders. The onlya suitable and practical method of recoupment available to companies writing life and health insurance lies in offsets against premium or other taxes on such companies. The method suggested in this section is not only equitable to the companies involved but also reduces the impact on State revenue by the partial offset over a period of years. To the extent the recovery from the insolvent company exceeds the tax credit received, the State would be the ultimate beneficiary. The equitable treatment of assessments for tax purposes would have additional positive effects: (1) the State legislature would have an additional incentive for providing adequate funds for premium or other taxes on such companies. The method suggested in this section is not only equitable to the companies involved but also reduces the impact on State revenue by the partial offset over a period of years. To the extent the recovery from the insolvent company exceeds the tax credit received, the State would be the ultimate beneficiary. The equitable treatment of assessments for tax purposes would have additional insurance department personnel and administration, and (2) participation in the economic loss would be shared, to some degree, by the general public rather than solely by insureds, thus minimizing what might otherwise be a penalty on thrift and savings. It may be advisable in some jurisdictions to provide a cross-reference to the premium or other tax statutes to avoid questions of conflicting statutory provisions. Subsection B provides an alternative mechanism for tax-exempt member insurers to recoup funds paid for assessments, and is intended to avoid disadvantaging tax-exempt or non-profit member insurers that are not subject to a [premium, franchise or income] tax liability, and thus would not benefit from a premium tax offset. The amount and duration of a surcharge is subject to approval by the commissioner, and any such surcharge cannot be considered premium for any purpose. Building assessments into surcharges for future policyholders or contract owners has proven to be an effective way for insurers to recoup funds, and a surcharge mechanism is necessary to provide tax-exempt and non-profit member insurers with a meaningful opportunity to recoup funds paid for assessments. Some States allow this credit and others do not. Accordingly, tThis section is optional, and the NAIC neither endorses nor rejects the tax credit or the surcharge concept. Each State will wish to consider this provision in the light of its own regulatory experience. Section 14. Miscellaneous Provisions

A. This Act shall not be construed to reduce the liability for unpaid assessments of the insureds of an impaired or insolvent insurer operating under a plan with assessment liability.

B. Records shall be kept of all meetings of the board of directors to discuss the activities of the

Association in carrying out its powers and duties under Section 8. The records of the Association with respect to an impaired or insolvent insurer shall not be disclosed prior to the termination of a liquidation, rehabilitation or conservation proceeding involving the impaired or insolvent insurer, except (i) upon the termination of the impairment or insolvency of the member insurer, or (ii) upon the order of a court of competent jurisdiction. Nothing in this subsection shall limit the duty of the Association to render a report of its activities under Section 15.

C. For the purpose of carrying out its obligations under this Act, the Association shall be

deemed to be a creditor of the impaired or insolvent insurer to the extent of assets attributable to covered policies reduced by any amounts to which the Association is entitled as subrogee pursuant to Section 8K. Assets of the impaired or insolvent insurer attributable to covered policies shall be used to continue all covered policies and pay all contractual obligations of the impaired or insolvent insurer as required by this Act. Assets attributable to covered policies or contracts, as used in this subsection, are that proportion of the assets which the reserves that should have been established for such policies or contracts bear to the reserves that should have been established for all policies of insurance or health benefit plans written by the impaired or insolvent insurer.

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D. As a creditor of the impaired or insolvent insurer as established in Subsection C of this

section and consistent with [insert cite of applicable State receivership law provision dealing with early access disbursements], the Association and other similar associations shall be entitled to receive a disbursement of assets out of the marshaled assets, from time to time as the assets become available to reimburse it, as a credit against contractual obligations under this Act. If the liquidator has not, within 120 days of a final determination of insolvency of an member insurer by the receivership court, made an application to the court for the approval of a proposal to disburse assets out of marshaled assets to guaranty associations having obligations because of the insolvency, then the Association shall be entitled to make application to the receivership court for approval of its own proposal to disburse these assets.

E. (1) Prior to the termination of any liquidation, rehabilitation or conservation

proceeding, the court may take into consideration the contributions of the respective parties, including the Association, the shareholders, contract owners, certificate holders, enrollees and policy owners of the insolvent insurer, and any other party with a bona fide interest, in making an equitable distribution of the ownership rights of the insolvent insurer. In such a determination, consideration shall be given to the welfare of the policy owners, contract owners, certificate holders, and enrollees of the continuing or successor member insurer.

(2) No distribution to stockholders, if any, of an impaired or insolvent insurer shall be

made until and unless the total amount of valid claims of the Association with interest thereon for funds expended in carrying out its powers and duties under Section 8 with respect to the member insurer have been fully recovered by the Association.

[F. (1) If an order for liquidation or rehabilitation of an member insurer domiciled in this

State has been entered, the receiver appointed under the order shall have a right to recover on behalf of the member insurer, from any affiliate that controlled it, the amount of distributions, other than stock dividends paid by the member insurer on its capital stock, made at any time during the five (5) years preceding the petition for liquidation or rehabilitation subject to the limitations of Paragraphs (2) to (4).

(2) No such distribution shall be recoverable if the member insurer shows that when

paid the distribution was lawful and reasonable, and that the member insurer did not know and could not reasonably have known that the distribution might adversely affect the ability of the member insurer to fulfill its contractual obligations.

(3) Any person who was an affiliate that controlled the member insurer at the time the

distributions were paid shall be liable up to the amount of distributions received. Any person, who was an affiliate that controlled the member insurer at the time the distributions were declared, shall be liable up to the amount of distributions which would have been received if they had been paid immediately. If two (2) or more persons are liable with respect to the same distributions, they shall be jointly and severally liable.

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(4) The maximum amount recoverable under this subsection shall be the amount needed in excess of all other available assets of the insolvent insurer to pay the contractual obligations of the insolvent insurer.

(5) If any person liable under Paragraph (3) is insolvent, all its affiliates that

controlled it at the time the distribution was paid, shall be jointly and severally liable for any resulting deficiency in the amount recovered from the insolvent affiliate.]

Drafting Note: Subsection A is intended to preserve the assessment liability of the insureds of assessment mutuals. Subsection B addresses record-keeping by the Association. The Association should be held publicly accountable for its actions. On the other hand, effective handling of the rehabilitation or liquidation effort requires minimum publicity. Thus, such records will be made public only after the liquidation, rehabilitation or conservation proceeding is terminated, the impairment or insolvency is terminated or there is a prior order by a court of competent jurisdiction. Since this Act imposes the obligation upon the Association to continue coverage for policyholders, contract owners, certificate holders, or enrollees of insolvent insurers, the assets of the insolvent insurer ought to be used, to the extent available, for the purpose of continuing such coverage. Subsections C and D are designed to accomplish this purpose. Subsection E, in conjunction with Section 11A(2), is intended to prevent the shareholders of an impaired or insolvent insurer from sitting back and doing nothing and then reaping the benefits of funds put up by the Association. These stockholders should not obtain a more advantageous position than they would have occupied in the absence of this Act. The court is empowered to modify and distribute the ownership rights of an impaired or insolvent insurer in order to do equity as between the interested parties. Subsection F, which should be deleted if the State has adopted Section 602 of the NAIC Insurers Receivership Model Act dealing with affiliated transactions, is designed to recapture excessive dividend payments to affiliates that exercised control over the impaired or insolvent insurer. The NAIC Insurance Holding Company System Regulatory Model Act in large measure prevents improper distribution of dividends by an insurer to its holding company since extraordinary dividends are subject to the prior approval of the commissioner, and ordinary dividends are required to be reported to the commissioner. If, however, dividends are paid under circumstances that the member insurer should have reasonably known that such payment could reasonably be expected to affect its ability to perform its contractual obligation to its policyholders, contract owners, certificate holders, or enrollees the holding company and affiliates should be required to repay such dividends subject to certain reasonable limitations. If a State has the NAIC Insurance Holding Company System Regulatory Model Act, the definitions therein could be referred to by this subsection. States without the Model Act could incorporate the relevant definitions in this subsection. Section 15. Examination of the Association; Annual Report The Association shall be subject to examination and regulation by the commissioner. The board of directors shall submit to the commissioner each year, not later than 120 days after the Association’s fiscal year, a financial report in a form approved by the commissioner and a report of its activities during the preceding fiscal year. Upon the request of a member insurer, the Association shall provide the member insurer with a copy of the report. Section 16. Tax Exemptions The Association shall be exempt from payment of all fees and all taxes levied by this State or any of its subdivisions, except taxes levied on real property. Section 17. Immunity There shall be no liability on the part of and no cause of action of any nature shall arise against any member insurer or its agents or employees, the Association or its agents or employees, members of the board of directors, or the commissioner or the commissioner’s representatives, for any action or omission by them in the performance of their powers and duties under this Act. This immunity shall extend to the participation in any organization of one or more other State associations of similar purposes and to any such organization and its agents or employees. Drafting Note: This drafting note is for the purpose of clarifying the intent of the drafters of Section 17. As the courts have indicated, this provision was never intended to protect the Association from actions seeking to enforce its statutory obligations to

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pay covered claims. See, e.g., Mendes v. Hawaii Insurance Guaranty Association, 950 P.2d 1214, 1218 (Haw. Sup. Ct. 1998), (“HIGA is amenable to suit for the limited purpose of compelling it to perform its statutory duty to deal with the covered claims of insolvent insurers”); PIE Mutual Insurance Company v. Ohio Insurance Guaranty Association, 611 N.E. 2d. 313, 317 (Ohio Sup. Ct. 1993) (“ … insured or third-party claimant is entitled to judicial relief to force OIGA to perform its statutory duties”). Nor was the provision ever intended to protect the Association from contract actions to enforce express obligations of the Association under contracts entered into by the Association. Each State may wish to review its own statutes to determine whether its Tort Claims Act, if it has one, could be used as an alternative to this section insofar as it applies to the commissioner or his representative. Section 18. Stay of Proceedings; Reopening Default Judgments All proceedings in which the insolvent insurer is a party in any court in this State shall be stayed one hundred eighty (180) days from the date an order of liquidation, rehabilitation or conservation is final to permit proper legal action by the Association on any matters germane to its powers or duties. As to judgment under any decision, order, verdict or finding based on default the Association may apply to have such judgment set aside by the same court that made such judgment and shall be permitted to defend against such suit on the merits. Section 19. Prohibited Advertisement of Insurance Guaranty Association Act in Insurance

Sales; Notice to Policy Owners

A. No person, including an member insurer, agent or affiliate of an member insurer shall make, publish, disseminate, circulate or place before the public, or cause directly or indirectly, to be made, published, disseminated, circulated or placed before the public, in any newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio station or television station, or in any other way, any advertisement, announcement or statement, written or oral, which uses the existence of the Insurance Guaranty Association of this State for the purpose of sales, solicitation or inducement to purchase any form of insurance or other coverage covered by the [State] Life and Health Insurance Guaranty Association Act. However, this section shall not apply to the [State] Life and Health Insurance Guaranty Association or any other entity which does not sell or solicit insurance or coverage by a health maintenance organization.

B. Within one hundred eighty (180) days of the effective date of this Act, the Association shall

prepare a summary document describing the general purposes and current limitations of the Act and complying with Subsection C of this section. This document shall be submitted to the commissioner for approval. At the expiration of the sixtieth day after the date on which the commissioner approves the document, an member insurer may not deliver a policy or contract to a policy owner, or contract owner, certificate holder, or enrollee unless the summary document is delivered to the policy owner, contract owner, certificate holder, or enrollee policy or contract owner at the time of delivery of the policy or contract. The document shall also be available upon request by a policy owner, contract owner, certificate holder, or enrollee. The distribution, delivery or contents or interpretation of this document does not guarantee that either the policy or the contract or the policy owner, contract owner, certificate holder, or enrollee owner of the policy or contract is covered in the event of the impairment or insolvency of a member insurer. The description document shall be revised by the Association as amendments to the Act may require. Failure to

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receive this document does not give the policy owner, contract owner, certificate holder, enrollee, or insured any greater rights than those stated in this Act.

C. The document prepared under Subsection B shall contain a clear and conspicuous

disclaimer on its face. The commissioner shall establish the form and content of the disclaimer. The disclaimer shall:

(1) State the name and address of the Life and Health Insurance Guaranty Association

and insurance department;

(2) Prominently warn the policy owner, contract owner, certificate holder, or enrolleepolicy or contract owner that the Life and Health Insurance Guaranty Association may not cover the policy or contract or, if coverage is available, it will be subject to substantial limitations and exclusions and conditioned on continued residence in this State;

(3) State the types of policies or contracts for which guaranty funds will provide

coverage;

(4) State that the member insurer and its agents are prohibited by law from using the existence of the Life and Health Insurance Guaranty Association for the purpose of sales, solicitation or inducement to purchase any form of insurance or health maintenance organization coverage;

(5) State that the policy owner, contract owner, certificate holder, or enrollee policy or

contract owner should not rely on coverage under the Life and Health Insurance Guaranty Association when selecting an insurer or health maintenance organization;

(6) Explain rights available and procedures for filing a complaint to allege a violation

of any provisions of this Act; and

(7) Provide other information as directed by the commissioner including but not limited to, sources for information about the financial condition of insurers provided that the information is not proprietary and is subject to disclosure under that State’s public records law.

D. A member insurer shall retain evidence of compliance with Subsection B for so long as the

policy or contract for which the notice is given remains in effect. Drafting Note: Subsection A continues the prohibition of using the existence of the Association in the inducement of sale of insurance or health maintenance organization coverage. However, Subsection B requires notification to new policyholders concerning the general parameters of the association law and responsibility thereunder. The following form for the disclaimer notice is suggested:

LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION DISCLAIMER

The [insert name of the Life and Health Insurance Guaranty Association] provides coverage of claims under some types of policies or contracts if the insurer or health maintenance organization becomes impaired or insolvent. COVERAGE MAY NOT BE AVAILABLE FOR YOUR POLICY. Even if coverage is provided, there are significant limits and exclusions. Coverage is always conditioned on residence in this State. Other conditions may also preclude coverage.

The Life and Health Insurance Guaranty Association will respond to any questions you may have which are not answered by this document. Your insurer or health maintenance organization and

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agent are prohibited by law from using the existence of the association or its coverage to sell you an insurance policy or health maintenance organization coverage.

You should not rely on availability of coverage under the Life and Health Insurance Guaranty Association when selecting an insurer or a health maintenance organization.

[Insert addresses of the Association and department.]

Insurers, health maintenance organizations and agents should be required to deliver the document and disclaimer described under Subsections B and C when a customer is solicited if a “free look” period is not required by State law. Computer programs or other evidence of established procedures for including the notice required under Subsection 19B in the policy or contract in the printing, assembly or issue process would be considered evidence of the compliance required under Subsection 19D. Section 20. Prospective Application This Act shall not apply to any member insurer that is insolvent or unable to fulfill its contractual obligations on the effective date of this Act.

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APPENDIX ALTERNATIVE PROVISIONS

Drafting Note: The underlining and overstrikes in the following provisions show the necessary changes from the model if a State decides to eliminate coverage for unallocated annuities. Alternative Section 3. Coverage and Limitations

A. This Act shall provide coverage for the policies and contracts specified in Subsection B:

(1) To persons who, regardless of where they reside (except for nonresident certificate holders under group policies or contracts), are the beneficiaries, assignees or payees including health care providers rendering services covered under health insurance policies or certificates, of the persons covered under Paragraph (2);

(2) To persons who are owners of or certificate holders or enrollees under the policies

or contracts (other than structured settlement annuities) and in each case who

(a) Are residents; or

(b) Are not residents, but only under all of the following conditions:

(i) The member insurer that issued the policies or contracts is domiciled in this State;

(ii) The States in which the persons reside have associations similar to

the association created by this Act;

(iii) The persons are not eligible for coverage by an association in any other State due to the fact that the insurer or the health maintenance organization was not licensed in the State at the time specified in the State’s guaranty association law.

(3) For structured settlement annuities specified in Subsection B; Paragraphs (1) and

(2) of this subsection shall not apply, and this Act shall (except as provided in Paragraphs (5) and (6) of this subsection) provide coverage to a person who is a payee under a structured settlement annuity (or beneficiary of a payee if the payee is deceased), if the payee:

(a) Is a resident, regardless of where the contract owner resides; or

(b) Is not a resident, but only under both of the following conditions;

(i) (I) The contract owner of the structured settlement annuity is a

resident; or

(II) The contract owner of the structured settlement annuity is not a resident; but

• The insurer that issued the structured settlement

annuity is domiciled in this State; and

• The State in which the contract owner resides has an association similar to the association created by this Act; and

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(ii) Neither the payee (or beneficiary) nor the contract owner is eligible for coverage by the association of the State in which the payee or contract owner resides.

(4) This Act shall not provide coverage to a person who is a payee (or beneficiary) of a

contract owner resident of this State, if the payee (or beneficiary) is afforded any coverage by the association of another State.

(5) This Act is intended to provide coverage to a person who is a resident of this State and, in special circumstances, to a nonresident. In order to avoid duplicate coverage, if a person who would otherwise receive coverage under this Act is provided coverage under the laws of any other State, the person shall not be provided coverage under this Act. In determining the application of the provisions of this paragraph in situations where a person could be covered by the association of more than one State, whether as an owner, payee, enrollee, beneficiary or assignee, this Act shall be construed in conjunction with other State laws to result in coverage by only one association.

B. (1) This Act shall provide coverage to the persons specified in Subsection A for policies

or contracts of direct, non-group life insurance, health insurance (which for the purposes of this Act includes health maintenance organization subscriber contracts and certificates), or annuitiesy policies or contracts and supplemental contracts to any of these and for certificates under direct group policies and contracts, except as limited by this Act. Annuity contracts and certificates under group annuity contracts include allocated funding agreements, structured settlement annuities and any immediate or deferred annuity contracts.

(2) Except as otherwise provided in Paragraph (3) of this subsection, Tthis Act shall

not provide coverage for:

(a) A portion of a policy or contract not guaranteed by the member insurer, or under which the risk is borne by the policy or contract owner;

(b) A policy or contract of reinsurance, unless assumption certificates have

been issued pursuant to the reinsurance policy or contract;

(c) A portion of a policy or contract to the extent that the rate of interest on which it is based

(i) Averaged over the period of four (4) years prior to the date on which

the Association becomes obligated with respect to the policy or contract, exceeds a rate of interest determined by subtracting two (2) percentage points from Moody’s Corporate Bond Yield Average averaged for that same four-year period or for such lesser period if the policy or contract was issued less than four (4) years before the Association became obligated; and

(ii) On and after the date on which the Association becomes obligated

with respect to the policy or contract, exceeds the rate of interest

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determined by subtracting three (3) percentage points from Moody’s Corporate Bond Yield Average as most recently available;

(d) A portion of a policy or contract issued to a plan or program of an employer,

association or other person to provide life, health or annuity benefits to its employees, members or others, to the extent that the plan or program is self-funded or uninsured, including but not limited to benefits payable by an employer, association or other person under:

(i) A multiple employer welfare arrangement as defined in 29 U.S.C. §

1144;

(ii) A minimum premium group insurance plan;

(iii) A stop-loss group insurance plan; or

(iv) An administrative services only contract;

(e) A portion of a policy or contract to the extent that it provides for

(i) Dividends or experience rating credits;

(ii) Voting rights; or

(iii) Payment of any fees or allowances to any person, including the policy or contract owner, in connection with the service to or administration of the policy or contract;

(f) A policy or contract issued in this State by a member insurer at a time

when it was not licensed or did not have a certificate of authority to issue the policy or contract in this State;

(g) A portion of a policy or contract to the extent that the assessments required

by Section 9 with respect to the policy or contract are preempted by federal or State law;

(h) An obligation that does not arise under the express written terms of the

policy or contract issued by the member insurer to the enrollee, contract holder, contract owner or policy owner, including without limitation:

(i) Claims based on marketing materials;

(ii) Claims based on side letters, riders or other documents that were

issued by the member insurer without meeting applicable policy or contract form filing or approval requirements;

(iii) Misrepresentations of or regarding policy or contract benefits;

(iv) Extra-contractual claims; or (v) A claim for penalties or consequential or incidental damages;

(i) A contractual agreement that establishes the member insurer’s obligations

to provide a book value accounting guaranty for defined contribution benefit plan participants by reference to a portfolio of assets that is owned by the

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benefit plan or its trustee, which in each case is not an affiliate of the member insurer;

(j) An unallocated annuity contract; and (k) A policy or contract providing any hospital, medical, prescription drug or

other health care benefits pursuant to Part C or Part D of Subchapter XVIII, Chapter 7 of Title 42 of the United States Code (commonly known as Medicare Part C & D), or Subchapter XIX, Chapter 7 of Title 42 of the United States Code (commonly known as Medicaid), or any regulations issued pursuant thereto.

(3) The exclusion from coverage referenced in Paragraph (2)(c) of this subsection shall

not apply to any portion of a policy or contract, including a rider, that provides long-term care or any other health insurance benefits.

C. The benefits that the Association may become obligated to cover shall in no event exceed

the lesser of:

(1) The contractual obligations for which the member insurer is liable or would have been liable if it were not an impaired or insolvent insurer, or

(2) (a) With respect to one life, regardless of the number of policies or contracts:

(i) $300,000 in life insurance death benefits, but not more than

$100,000 in net cash surrender and net cash withdrawal values for life insurance;

(ii) InFor health insurance benefits:

(I) $100,000 for coverages not defined as disability income

insurance or health benefit plansbasic hospital, medical and surgical insurance or major medical insurance or long -term care insurance as defined in [section of State law dealing with health insurance/disability income insurance/long-term care insurance] State including any net cash surrender and net cash withdrawal values;

(II) $300,000 for disability income insurance as defined in

[section of State law dealing with health insurance/disability income insurance] and $300,000 for long-term care insurance as defined in [section of State law dealing with health insurance/long- term care insurance];

(III) $500,000 for health benefit plans;basic hospital medical and

surgical insurance or major medical insurance as defined in [section of State law dealing with health insurance]; or

(iii) $250,000 in the present value of annuity benefits, including net

cash surrender and net cash withdrawal values; or

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(b) With respect to each payee of a structured settlement annuity (or beneficiary or beneficiaries of the payee if deceased), $250,000 in present value annuity benefits, in the aggregate, including net cash surrender and net cash withdrawal values;

(c) However, in no event shall the Association be obligated to cover more than

(i) an aggregate of $300,000 in benefits with respect to any one life under Paragraphs 2(a), 2(b) and 2(c) of this subsection except with respect to benefits for basic hospital, medical and surgical insurance and major medical insurance health benefit plans under Paragraph 2(a)(ii) of this subsection, in which case the aggregate liability of the Association shall not exceed $500,000 with respect to any one individual, or (ii) with respect to one owner of multiple non-group policies of life insurance, whether the policy owner is an individual, firm, corporation or other person, and whether the persons insured are officers, managers, employees or other persons, more than $5,000,000 in benefits, regardless of the number of policies and contracts held by the owner;

(d) The limitations set forth in this subsection are limitations on the benefits

for which the Association is obligated before taking into account either its subrogation and assignment rights or the extent to which those benefits could be provided out of the assets of the impaired or insolvent insurer attributable to covered policies. The costs of the Association’s obligations under this Act may be met by the use of assets attributable to covered policies or reimbursed to the Association pursuant to its subrogation and assignment rights.

(f) For purposes of this Act, benefits provided by a long-term care rider to a life

insurance policy or annuity contract shall be considered the same type of benefits as the base life insurance policy or annuity contract to which it relates.

D. In performing its obligations to provide coverage under Section 8 of this Act, the

Association shall not be required to guarantee, assume, reinsure, reissue or perform, or cause to be guaranteed, assumed, reinsured reissued or performed, the contractual obligations of the insolvent or impaired insurer under a covered policy or contract that do not materially affect the economic values or economic benefits of the covered policy or contract.

Drafting Note: This section and Section 8 are key sections of the Act. Section 3 identifies who and what are covered and not covered by the Act. Section 8 specifies the responsibilities of the Association toward covered persons with covered policies. Protection of this Act is primarily extended to resident persons but certain nonresidents under specific circumstances will be protected by this Act if the insolvent insurer was domiciled in this State. This model does not apply to reinsurance unless assumption certificates were issued to the direct insureds or enrollees. Furthermore, it applies only to direct individual or group certificate insurance issued or written by member insurers licensed to transact insurancebusiness in this State at any time. Persons to whom coverage is typically provided are resident enrollees, policy or contract owners of policies or contracts, or their beneficiaries, assignees or payees. For group contracts or policies, coverage is provided to resident enrollees, and certificate holders and not to the owners of the group contracts or policies; this avoids the possibility of double coverage and indirect coverage of nonresident enrollees, and certificate holders through resident group policy or contract owners. Subsection A(3) provides coverage for structured settlement annuities to resident payees rather than to the contract owners. Subsection A(3) providing structured settlement annuity coverage to resident payees is a significant change from previous versions of this Model Act intended to place the coverage in the State of the resident persons to be protected rather than in the State where

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the nominal owner of the contract resides. Subsections A(4) and (5) avoid the possibility of double coverage due to differing approaches for determining the covered persons in different State statutes and provide mechanisms for resolving which State’s statutes will be used to determine the existence and limits of coverage. Policies and contracts covered by the model billact are life insurance, health insurance and annuity policies and contracts and policies or contracts supplemental thereto. The use of the term health insurance is intended to include “accident and health” insurance, “sickness and accident” insurance, “disability income” insurance, health maintenance organization contracts, etc. The use of the term disability income insurance is intended to include insurance policies and contracts that cover the loss of income due to a disability. The individual State may want to adjust this language to fit its particular terminology. Subsection B(2) identifies certain types of contracts or policies or portions of contracts or policies that are specifically not covered by this Act. If a portion of a contract or policy is not covered, the remainder of the contract or policy is covered unless excluded otherwise. Subsection B(2) also provides a ready means by which an individual State can exempt from the Act those policies and contracts issued by member insurers or similar organizations deemed appropriate for exemption by the State. Subsection B(2)(i) is intended to exclude from coverage those products commonly referred to as “financial guaranty” products. Subsection C provides the maximum limitations of the Association’s liability by type of contract or policy or line of business and overall per one life, plan sponsor or owner. The limits may be reached through cash surrender payments, benefit payments, or continuing coverage or a combination thereof. The maximum limits for each type of coverage should be set at an appropriate level after review by each State. Alternative Section 5. Definitions As used in this Act:

A. “Account” means either of the two accounts created under Section 6.

B. “Association” means the [State] Life and Health Insurance Guaranty Association created under Section 6.

C. “Authorized assessment” or the term “authorized” when used in the context of assessments

means a resolution by the Board of Directors has been passed whereby an assessment will be called immediately or in the future from member insurers for a specified amount. An assessment is authorized when the resolution is passed.

D. “Benefit plan” means a specific employee, union or association of natural persons benefit

plan.

E. “Called assessment” or the term “called” when used in the context of assessments means that a notice has been issued by the Association to member insurers requiring that an authorized assessment be paid within the time frame set forth within the notice. An authorized assessment becomes a called assessment when notice is mailed by the Association to member insurers.

F. “Commissioner” means the Commissioner of Insurance of this State.

Drafting Note: Insert the title of the chief insurance regulatory official whenever the term “commissioner” appears.

G. “Contractual obligation” means an obligation under a policy or contract or certificate under a group policy or contract, or portion thereof for which coverage is provided under Section 3.

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H. “Covered contract” or “covered policy” means a policy or contract or portion of a policy or contract for which coverage is provided under Section 3.

I. “Extra-contractual claims” shall include, for example, claims relating to bad faith in the

payment of claims, punitive or exemplary damages or attorneys’ fees and costs.

J. “Health benefit plan” means any hospital or medical expense policy or certificate, or health maintenance organization subscriber contract or any other similar health contract. “Health benefit plan” does not include:

(1) Accident only insurance:

(2) Credit insurance;

(3) Dental only insurance;

(4) Vision only insurance;

(5) Medicare Supplement insurance;

(6) Benefits for long-term care, home health care, community-based care, or any combination thereof;

(7) Disability income insurance;

(8) Coverage for on-site medical clinics; or

(9) Specified disease, hospital confinement indemnity, or limited benefit health insurance if the types of coverage do not provide coordination of benefits and are provided under separate policies or certificates.

K. “Impaired insurer” means a member insurer which, after the effective date of this Act, is

not an insolvent insurer, and is placed under an order of rehabilitation or conservation by a court of competent jurisdiction.

KL. “Insolvent insurer” means a member insurer which after the effective date of this Act, is

placed under an order of liquidation by a court of competent jurisdiction with a finding of insolvency.

LM. “Member insurer” means an insurer or health maintenance organization licensed or that

holds a certificate of authority to transact in this State any kind of insurance or health maintenance organization business for which coverage is provided under Section 3, and includes an insurer or health maintenance organization whose license or certificate of authority in this State may have been suspended, revoked, not renewed or voluntarily withdrawn, but does not include:

(1) A hospital or medical service organization, whether profit or non-profit;

(2) A health maintenance organization;

(3)(2) A fraternal benefit society;

(4)(3) A mandatory State pooling plan;

(5)(4) A mutual assessment company or other person that operates on an assessment

basis;

(6)(5) An insurance exchange; (7)(6) An organization that has a certificate or license limited to the issuance of

charitable gift annuities under [insert the appropriate section of the State code]; or

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(8)(7) An entity similar to any of the above.

Drafting Note: States that license Health Care Service Corporations or similar organizations that undertake to provide basic health care services may want to address these entities in this Act.

NM. “Moody’s Corporate Bond Yield Average” means the Monthly Average Corporates as published by Moody’s Investors Service, Inc., or any successor thereto.

ON. “Owner” of a policy or contract and “policyholder, “policy owner” and “contract owner” mean

the person who is identified as the legal owner under the terms of the policy or contract or who is otherwise vested with legal title to the policy or contract through a valid assignment completed in accordance with the terms of the policy or contract and properly recorded as the owner on the books of the member insurer. The terms owner, contract owner, policyholders and policy owner do not include persons with a mere beneficial interest in a policy or contract.

P.O. “Person” means an individual, corporation, limited liability company, partnership,

association, governmental body or entity or voluntary organization.

QP. “Premiums” means amounts or considerations (by whatever name called) received on covered policies or contracts less returned premiums, considerations and deposits and less dividends and experience credits. “Premiums” does not include amounts or considerations received for policies or contracts or for the portions of policies or contracts for which coverage is not provided under Section 3B except that assessable premium shall not be reduced on account of Sections 3B(2)(c) relating to interest limitations and 3C(2) relating to limitations with respect to one individual, one participant and one policy or contract owner. “Premiums” shall not include: (1) Premiums on an unallocated annuity contract State; or

(2) With respect to multiple non-group policies of life insurance owned by one owner,

whether the policy or contract owner is an individual, firm, corporation or other person, and whether the persons insured are officers, managers, employees or other persons, premiums in excess of $5,000,000 with respect to these policies or contracts, regardless of the number of policies or contracts held by the owner.

RQ. (1) “Principal place of business” of a plan sponsor or a person other than a natural

person means the single State in which the natural persons who establish policy or contract for the direction, control and coordination of the operations of the entity as a whole primarily exercise that function, determined by the Association in its reasonable judgment by considering the following factors:

(a) The State in which the primary executive and administrative headquarters

of the entity is located;

(b) The State in which the principal office of the chief executive officer of the entity is located;

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(c) The State in which the board of directors (or similar governing person or persons) of the entity conducts the majority of its meetings;

(d) The State in which the executive or management committee of the board of

directors (or similar governing person or persons) of the entity conducts the majority of its meetings;

(e) The State from which the management of the overall operations of the

entity is directed; and

(f) In the case of a benefit plan sponsored by affiliated companies comprising a consolidated corporation, the State in which the holding company or controlling affiliate has its principal place of business as determined using the above factors.

However, in the case of a plan sponsor, if more than fifty percent (50%) of the participants in the benefit plan are employed in a single State, that State shall be deemed to be the principal place of business of the plan sponsor.

(2) The principal place of business of a plan sponsor of a benefit plan shall be deemed

to be the principal place of business of the association, committee, joint board of trustees or other similar group of representatives of the parties who establish or maintain the benefit plan that, in lieu of a specific or clear designation of a principal place of business, shall be deemed to be the principal place of business of the employer or employee organization that has the largest investment in the benefit plan in question.

SR. “Receivership court” means the court in the insolvent or impaired insurer’s State having

jurisdiction over the conservation, rehabilitation or liquidation of the member insurer.

TS. “Resident” means a person to whom a contractual obligation is owed and who resides in this State on the date of entry of a court order that determines a member insurer to be an impaired insurer or a court order that determines a member insurer to be an insolvent insurer, whichever occurs first. A person may be a resident of only one State, which in the case of a person other than a natural person shall be its principal place of business. Citizens of the United States that are either (i) residents of foreign countries, or (ii) residents of United States possessions, territories or protectorates that do not have an association similar to the Association created by this Act, shall be deemed residents of the State of domicile of the member insurer that issued the policies or contracts.

UT. “Structured settlement annuity” means an annuity purchased in order to fund periodic

payments for a plaintiff or other claimant in payment for or with respect to personal injury suffered by the plaintiff or other claimant.

VU. “State” means a State, the District of Columbia, Puerto Rico, and a United States

possession, territory or protectorate.

VW. “Supplemental contract” means a written agreement entered into for the distribution of proceeds under a life, health or annuity policy or contract.

WH. “Unallocated annuity contract” means an annuity contract or group annuity certificate

which is not issued to and owned by an individual, except to the extent of any annuity benefits guaranteed to an individual by an insurer under the contract or certificate.

Drafting Note: Each State will wish to examine its own statutes to determine whether these definitions are applicable and to determine whether some should be deleted and others added.

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Alternative Section 6. Creation of the Association

A. There is created a nonprofit legal entity to be known as the [State] Life and Health Insurance Guaranty Association. All member insurers shall be and remain members of the Association as a condition of their authority to transact insurance or a health maintenance organization business in this State. The Association shall perform its functions under the plan of operation established and approved under Section 10 and shall exercise its powers through a board of directors established under Section 7. For purposes of administration and assessment, the Association shall maintain two (2) accounts:

(1) The life insurance and annuity account which includes the following subaccounts:

(a) Life insurance account; and

(b) Annuity account which shall include annuity contracts owned by a

governmental retirement plan (or its trustee) established under Section 401, 403(b) or 457 of the United States Internal Revenue Code.

(2) The health insurance account.

B. The Association shall come under the immediate supervision of the commissioner and

shall be subject to the applicable provisions of the insurance laws of this State. Meetings or records of the Association may be opened to the public upon majority vote of the board of directors of the Association.

_________________________________

Chronological Summary of Action (all references are to the Proceedings of the NAIC). 1971 Proc. I 54, 58, 134, 159, 160-173 (adopted). 1976 Proc. I 2, 9, 270, 296-297, 298-312 (amended and reprinted). 1977 Proc. II 19, 21, 355, 363 (amended). 1978 Proc. I 13, 15, 211, 241 (corrected). 1986 Proc. I 9-10, 22, 149, 294-295, 306-322 (amended and reprinted). 1987 Proc. II 15, 22, 160, 320 (decertification of 4-account approach). 1988 Proc. I 9, 18-19, 157-159, 337-338, 339-354 (amended to create 2 accounts and reprinted). 1993 Proc. 2nd Quarter 12, 33, 227, 600, 602, 620-621 (amended). 1993 Proc. 3rd Quarter 7, 30, 333-334, 341-343, 350-352 (amended). 1995 Proc. 1st Quarter 7, 10, 461, 466 (amended). 1995 Proc. 3rd Quarter 4, 18, 582, 585-586 (amended). 1996 Proc. 4th Quarter 11, 45-46, 938, 956, 959-981 (amended and reprinted). 1997 Proc. 4th Quarter 25, 27-28, 645, 646-647 (amended). 1998 Proc. 1st Quarter 15, 17, 598, 602, 603-616 (amended to add appendix). 1999 Proc. 1st Quarter 8, 9, 443, 445-446 (amended). 1999 Proc. 2nd Quarter 10, 11, 435, 436-438 (amended). 2009 Proc. 1st Quarter, Vol. I 111, 135, 139, 188, 240-287, 293, 821-835 (amended). 2016 Fall National Meeting (amended).

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PROJECT HISTORY

LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION MODEL ACT

1. Description of the Project, Issues Addressed, etc.

On December 13, 2016, Executive (EX) Committee and Plenary adopted two new charges for the Receivership Model Law (E) Working Group of the Receivership and Insolvency (E) Task Force:

• Evaluate and consider the changing market place of long-term care (LTC) products and the potential guaranty fundimpact.

• Evaluate the need for amendments to the Life and Health Insurance Guaranty Association Model Act (#520) toaddress issues arising in connection with the insolvency of LTC insurers.

The charges were adopted in response to issues arising out of the Penn Treaty Network of America Insurance Company insolvency and other potential insolvencies involving LTC insurance.

On December 15, 2016, the Working Group requested comments regarding the new charges. Eleven comments were received by the February 7, 2017 deadline. The primary concerns raised by the comments involved guaranty association assessments on LTC insurance insolvencies and guaranty association coverage of LTC insurance. Specific issues that were identified included:

• The need to expand the assessment base.

• Whether to include health maintenance organizations (HMOs) as guaranty association members.

• Guaranty associations’ ability to modify LTC insurance benefits and provide alternative policies.

• Clarifying the application of the “Moody's Limitation” to LTC insurance.

• Premium rate increases by guaranty associations.

• The allocation of premiums between the guaranty association and liquidator.

In addition, the National Organization of Life and Health Guaranty Associations (NOLHGA) gave a presentation of background information on LTC insurance on March 30, 2017.

The Working Group discussed the comments at the April, 2017 NAIC Spring National Meeting in Denver, and on four conference calls held in May 2017 and June, 2017. The Working Group determined that changes were needed to Model #520, and submitted a Request for NAIC Model Law Development on June 21, 2017. The request proposed amendments to Model #520 to address guaranty association assessments, coverage issues, and the potential inclusion of HMOs as guaranty association members.

On its July 10, 2017 conference call, the Working Group supported the concepts of aggregating the life/annuity and health insurance accounts and including HMOs as members of the guaranty association, subject to the NAIC’s approval of the Request for NAIC Model Law Development. At the 2017 Summer National Meeting, the Executive (EX) Committee approved the request to revise Model #520. The Working Group formed a drafting group, which included regulators, receivers and the industry representatives.

2. Name of Group Responsible for Drafting the Model and States Participating

The Receivership and Insolvency (E) Task Force is responsible for Model #520. The 2017 members of the Task Force include: New Jersey (Chair); Texas (Vice Chair), Alaska, Arkansas, California, Colorado, Connecticut, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Mexico, New York, Oklahoma, Pennsylvania, Rhode Island, Utah, Washington and Wisconsin.

The Receivership Model Law (E) Working Group evaluated the issues, and completed the amendments to Model #520. The 2017 members of the Working Group include: Texas (Chair), Washington (Vice Chair); Arkansas, California, Colorado,

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Connecticut, Florida, Illinois, Iowa, Massachusetts, Michigan, Missouri, Nebraska, New Jersey, Pennsylvania, Utah, and Wyoming. The amendments to Model #520 were drafted by an informal drafting group of the Receivership Model Law (E) Working Group. The conference calls and interim meeting participation included attendees representing 12 state insurance departments and 35 interested parties including life and health industry trade groups, life insurers, health insurers, HMOs, guaranty associations, receivers, consumer representatives, health care provider trade groups and academics. The attendees were as follows:

• State Insurance Regulators: Arkansas; Colorado; Connecticut; Florida; Maine; Michigan; Missouri; New Jersey; Pennsylvania; Texas; Utah; and Washington.

• Interested Parties: Aetna Inc.; American Council of Life Insurers (ACLI); American Hospital Association (AHA); American Medical Association (AMA); America’s Health Insurance Plans (AHIP); Anthem Blue Cross and Blue Shield of Connecticut; Arbor Strategies LLC; Blue Cross and Blue Shield Association (BSBCA); California Health Advocates; Cantilo & Bennett LLP; Center for Insurance Research; Cigna; Delaware Life and Health Insurance Guaranty Association; Delta Dental Plans Association; Faegre Baker Daniels LLP; GHR Consulting, LLC; Health Care Services Corporation (HCSC); Kaiser Permanente; Katten Muchin Rosenman LLP; Lewis Roca Rothgerber Christie LLP; Life Insurance Guaranty Corp of New York; Mark Pratt Consulting LLC; Maryland Life and Health Guaranty Association; Michigan Life and Health Guaranty Association; Morgan Lewis & Brockius LLP; Mutual of Omaha; National Organization of Life and Health Guaranty Association (NOLHGA); New York Life Insurance Company; Northwestern Mutual Life Insurance Company; Priority Health; Protective Life Corp.; Risk Regulatory Consulting LLC (RRC); RPGLTC Services, LLC; Sonya Larkin-Thorne (Consumer Advocate); United American Insurance Company; United Health Group; and the University of Connecticut School of Law.

3. Project Authorized by What Charge and Date First Given to the Group The Receivership and Insolvency (E) Task Force is charged with addressing any issues that affect receivership law. In 2017, the Receivership Model Law (E) Working Group of the Receivership and Insolvency (E) Task Force was charged to:

• Evaluate and consider the changing market place of LTC products and the potential guaranty fund impact.

• Evaluate the need for amendments to Model #520, to address issues arising in connection with the insolvency of LTC insurers.

4. A General Description of the Drafting Process and Due Process

a. The Working Group held eight conference calls between February 2017 and August, 2017 and meetings at the NAIC Spring National Meeting and Summer National Meeting, during which the issues were evaluated and the plan was decided for drafting amendments to Model #520. On July 10, 2017, the Receivership Model Law (E) Working Group formed a drafting group to draft the amendments to Model #520, contingent upon the approval of the Request for NAIC Model Law Development. The Executive (EX) Committee approved the request at the 2017 Summer National Meeting.

b. The drafting group held 12 conference calls and an interim meeting between September 2017 and October 2017 to draft the amendments to Model #520. Written comments were received during the drafting process from ACLI, AHIP, AMA, Arbor Strategies, LLC, Cantilo and Bennett, LLP, Kaiser Permanente, Morgan Lewis Brockius LLP, NOLHGA, Colorado Division of Insurance, Maine Bureau of Insurance, and the Washington Office of the Insurance Commissioner.

c. The Working Group held a conference call on Oct. 27, 2017, at which time it received a report of the drafting group and exposed the draft amendments for a 30-day public comment period ending Nov. 27, 2017. Written comments on the exposure draft were received from Alliance for Community Health Plans (ACHP), AHA, joint comment letter from ACLI and Arbor Strategies LLC, BCBSA, Cantilo & Bennett LLP, Health Partners, and Kaiser Permanente. Technical edits were received from NAIC legal staff, BCBSA and NOLHGA.

d. The Working Group and the Receivership and Insolvency (E) Task Force held a joint conference call on Nov. 29, 2017. During the call, discussion on the amendments was heard from interested parties and interested regulators.

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The Working Group agreed to make certain non-substantive technical edits. No substantive changes were made to the amendments. The Working Group and the Task Force adopted the amendments to Model #520 on Nov. 29, 2017.

e. The Financial Condition (E) Committee adopted the amendments to Model #520 on [INSERT DATE].

f. The Executive (EX) Committee and Plenary adopted the amendments to Model #520 on [INSERT DATE].

5. A Discussion of the Significant Issues

a. Timeline: Members of the Receivership Model Law (E) Working Group and numerous interested parties urged thatamendments to Model #520 be developed and adopted by the NAIC as expeditiously as possible. It was noted thatlegislation to amend life and health insurance guaranty acts was anticipated in some states as early as January, 2018, regardless of whether the NAIC revised Model #520. Some interested parties suggested that the Working Group takemore time to draft the amendments to fully consider all of the potential ramifications of the proposed changes.

The Working Group concluded that it was imperative that it complete its amendments before the end of 2017, sothe revised Model could be considered in the 2018 legislative sessions.

b. Adding HMOs as Member Insurers: The Working Group considered comments favoring and opposing the inclusionof HMOs as members of the guaranty association. See NAIC Proceedings – Summer 2017, Receivership andInsolvency (E) Task Force, Attachment Three. The following summarizes some of the key arguments.

Arguments in support of HMO membership in guaranty associations included, but were not limited to the following:

• Some states already include HMOs in their life and health guaranty association.

• The market place for HMOs and major medical carriers is similar, both types of carriers now largely writenetwork-based managed care policies, and the distinctions between them have diminished or in many marketsare non-existent. As HMOs compete with major medical carriers, there is no compelling public policy toexclude HMOs. There are concerns that large health insurance groups could move business to their HMOs toavoid assessments.

• As illustrated by health cooperative insolvencies, consumers and providers are at risk without guarantyassociation coverage. When HMOs become insolvent, claims of medical providers and are often unpaid, andconsumers have been improperly billed for unpaid medical services, despite hold-harmless provisions. Somestates have even enacted emergency legislation – similar to traditional guaranty association coverage and oftenpartially funded by health insurers - upon the insolvency of state HMOs to ensure continued care of membersand payment of providers.

• If only LTC insurance writers are assessed, there might not be enough capacity to absorb future LTC insuranceinsolvencies. Broadening the assessment base would simplify the guaranty association system by providingmore uniformity, and enhance the overall stability of the system.

Arguments opposing HMO membership in guaranty associations included, but were not limited to the following:

• There is no nexus between HMOs and LTC insurance; HMOs do not write LTC insurance policies and shouldnot be assessed for a line of business they do not write.

• HMOs have a significant non-profit sector, and it is not good public policy for non-profits to subsidize for-profitenterprises;

• HMO enrollees are already protected through hold harmless provisions with contracted providers or otherregulatory provisions.

• Other NAIC models treat HMOs differently than insurance. There are complexities surrounding tax treatmentand insolvency protections in state laws.

After considering the comments, the Working Group concluded that HMOs should be included as members largely for the reasons discussed above and because it was believed that distinctions regarding HMOs tax and non-profit status could be addressed through alternate provisions depending upon each state’s market and existing laws.

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c. Assessment Split: The Working Group considered alternative methodologies for Class B (claims payment) assessments for LTC insurance insolvencies. The options included different approaches for aggregating the life/annuity and health insurance accounts for LTC insurance insolvencies, and including HMOs as members of the guaranty association. • The ACLI and certain large health insurers/groups proposed a compromise assessment methodology for LTC

insurance insolvency assessments that would: increase the assessment base across the board by adding life and annuity premiums to the assessment base; and create a statutory 50% / 50% split of any needed assessment between life and health insurer members with the inclusion of HMOs as member health insurers.

• Kaiser Permanente proposed an assessment methodology based on the proportion of LTC insurance premium

written in the state, similar to the calculation in Model #520 for other lines.

As the 50%/50% proposal with the inclusion of life and annuity premiums and HMOs would provide a broader and more predictable assessment base on a nationwide basis, would more equitably align assessments by reducing the current burden that is disproportionately on health insurers, and was widely supported by life and large health insurers, the Working Group adopted this methodology.

6. Any Other Important Information

The material changes to Model #520 are described below.

a. Guaranty Association Membership:

• HMOs are added to the definition of “member insurer” in Section 5M, and the exclusion of HMOs from the Act

is removed. A reference to HMO business is added to Section 6A, Creation of the Association.

• A new definition for “health benefit plan” is added to Section 5J, which includes HMO subscriber contracts. This definition is consistent with other similar NAIC model definitions.

• Board membership is increased in Section 7A to account for HMO members. The drafting note gives states flexibility to address fair representation of membership on the board.

b. Assessments

• In the current Model, only the health account is assessed for LTC insurance insolvencies. In the revised Section

9C(2), Class B assessments for LTC insurance insolvencies are shared with the life account. The assessment methodology results in a 50% / 50% split between insurers of the life/annuity and health accounts. This formula factors in the assessments of life and annuity member insurers from the health account, and the assessments of health and HMO member insurers from the life account.

• The assessment methodology is to be included in the Plan of Operation, which is approved by the commissioner under the existing approval process of the state.

• The $300 limitation on Class A assessments in Section 9C(1) is eliminated, to give boards flexibility to address Class A assessments as appropriate in each state. It was noted that some states have deleted this limitation.

• A pre-funding concept for health benefit plans is mentioned in the drafting note to Section 9. A provision based on this concept was not included in Model #520, however, as there was no consensus for pre-funding, and it may be appropriate only in certain states.

• There is an optional provision for the recoupment of assessments in Section 13B. Surcharges may be considered where a member insurer is exempt from tax liability, and unable to take a tax offset. The drafting note addresses considerations for tax-exempt member insurers, such as some HMOs.

c. Coverage and Limitations

• Section 3A(1) specifies that coverage under the Act applies to health care providers rendering services covered

by a health insurance policy or certificate to which the Act applies (which includes HMO certificates). Section 3A(2) extends coverage to HMO enrollees.

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• Section 3B(2)(m) excludes Medicaid from guaranty association coverage, similar to the current exclusion ofMedicare.

• Section 3B(3) and the Drafting Note clarify that the “Moody’s Limitation” in Section 3B(2)(c) is not intendedto apply to any portion of a policy or contract (including a rider) that provides LTC insurance or any otherhealth insurance benefits.

• Section 3C(2)(a)(ii) and 3C(2)(d) clarify that “disability insurance” is intended to mean disability incomeinsurance, which is consistent with the historical interpretation. The term “basic hospital, medical and surgicalinsurance or major medical insurance” is replaced with new definition of “health benefit plan” to encompassbenefits provided by HMOs.

• Section 3C(2)(g) clarifies that LTC insurance riders to life and annuity contracts are considered the same as thebase policy or contract.

d. Rates

• Section 8L(9)(c) clarifies that guaranty associations have the authority to file for rate or premium increases.

• Section 8B(2)(d) and (f) require that rates for substitute or reissued coverage must be “actuarially justified”.

• A requirement for approval of rates by the receivership court in Section 8B(2)(e) is deleted.

e. General Changes

• The Drafting Note in Section 2 is clarified to state that the purposes of the act include: (1) having sufficientassessment capacity for all insolvencies, and (2) assessing insurers in a fair and reasonable manner.

• Throughout Model #520, amendments were made to insert terminology for “contract,” “enrollee,” “certificate,”“health maintenance organization”, “health benefit plan”, “reissue”, “health care providers”, etc., as applicableto address the addition of HMOs as member insurers.

• Outdated language with regard to “identical …premium” is removed from Section 8B(2)(a).

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Documents

FINANCIAL CONDITION (E) · PDF fileArtemio B. Ilagan Guam Michael S. Pieciak Vermont ... The Financial Condition (E) Committee met in Philadelphia, PA, Aug. 8, 201. The following 7