NAIC Meeting Notes - PwC

NAIC 2011 Spring National Meeting

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NAIC Meeting NotesGlobal Insurance Industry Group, Americas

The National Association of InsuranceCommissioners held its 2011 Spring NationalMeeting in Austin March 25 -29. This newslettercontains information on activities that occurred insome of the committees, task forces and workinggroups that met there. For questions or commentsconcerning any of the items reported, please feel freeto contact us at the address given on the last page.

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PwC Insurance Industry NAIC Meeting Notes | April 8, 2011

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Executive Summary

Fifteen newly appointed or electedCommissioners attended the Spring NationalMeeting. Noticeably absent were allrepresentatives of the New York InsuranceDepartment, who did not attend due to budgetrestrictions. The NAIC has not met in Nationalsession since October so this Newsletter alsocovers six months of interim meetings.

The NAIC's work on health care reformcontinues; Executive Committee formed aProfessional Health Advisors Task Force toanalyze and recommend options for addressingthe effects of the medical loss ratio requirementson agents, consumers and the insurancemarkets. (page 2)

The Dodd-Frank Receivership ImplementationWorking Group is reviewing portions of theDodd-Frank Act to assess whether state laws,regulations or procedures must be implementedor amended in order for state insurancecommissioners to execute their responsibilitiesunder the Act. (page 4)

The Statutory Accounting Principles WorkingGroup adopted additional fair value disclosuresand guidance on early terminated leases andcollateral requirements for high deductiblepolicies. The working group exposed forcomment the anxiously awaited proposedrevisions on income taxes, SSAP 101, whichrecommends adoption of FIN 48 and imposesadditional limitations on deferred tax assets.The working group also exposed proposedrevisions to the definition of "related party,"clarification that MLR rebates would beaccounted for as return premium, extended theproposed effective date of the pension andOPEB guidance to 2013 and re-exposed IssuePaper 141 addressing FAS 166 on transfers ofassets. (page 5)

The Capital Adequacy Task adopted a revisionto the RBC Model to increase the trigger of theLife RBC Trend Test from 250% to 300%. TheSolvency Modernization Initiative RBCSubgroup received a report on implicitcalibrations and missing risks in the three RBCformulas. The Life RBC Working Groupadopted the derivatives risk mitigation proposalafter several years of work. The P/C RBCWorking Group set a target date of 2012 for a

new methodology for reinsurance reserve andpremium charges. The Health RBC WorkingGroup discussed the effect of health care reformon the RBC formula and adopted proposedrevisions to make reporting of health carereceivables more consistent. (page 8)

The Solvency Modernization Initiative TaskForce heard comments from the CFO of theNAIC on group supervision and the IAISCommon Framework. The chair of the taskforce also gave comments on solvencymodernization during PwC's Solvency Webcaston April 6. The Group Solvency Issues WorkingGroup discussed group capital assessmentoptions and which components of the recentlyadopted changes to the Holding Company Actand Regulation should be required for states toadopt for accreditation purposes. TheCorporate Governance Working Groupdiscussed a draft whitepaper on CorporateGovernance Principles for Use in US InsuranceRegulation and exposed the document forpublic comment. The International SolvencyWorking Group continued discussion of anORSA proposal which would require USinsurers to provide regulators with detaileddocumentation of their internal riskmanagement policies. The project to considerthe "future of statutory accounting" has beentabled until more is known about the FASB andIFRS insurance projects and the SEC plans toaccept IFRS. (page 11)

The International Accounting StandardsWorking Group discussed ICP 14, Valuation forSolvency Purposes and heard updates on theFASB and IASB projects related to insurance.(page 13)

The Reinsurance Task Force heard commentsfrom many interested parties on proposedamendments to the Credit for ReinsuranceModel Act and Regulation to adopt theReinsurance Modernization Framework. Thetask force will hold an interim meeting andhopes to adopt a final model at the SummerNational Meeting. (page 17)

The Valuation of Securities Task Forcediscussed the 2010 RMBS and CMBS financialmodeling results and plans for the 2011financial modeling approach, adopted proposalsfor the filing exemption of FDIC securitizationsand certain bank issued certificates of deposit.



SVO staff discussed its development of a newcredit assessment framework, which wouldcreate new NAIC ratings designations forcorporate, municipal and structure securities.(page 18)

The Rating Agency Working Group held apublic hearing in November on the use of NAICARO ratings of municipal obligations, hearingtestimony from rating agencies, issuers andinvestors. The working group is still consideringwhether to require additional reporting ofinsurers' investments in state and municipalobligations. (page 20)

The Blanks Working Group adopted two blanksproposals as final and exposed thirty-three newproposals for public comment. (page 20)

The Life and Health Actuarial Task Force wasrestructured into two groups at the beginning ofthe year: the Life Actuarial Task Force and theHealth Actuarial Task Force. In Austin, LATF

had extensive discussion of the VM-20 impactstudy project, which has been split into twophases; thirteen companies are expected tomeet the Phase I March 31 reporting deadline.The task force also had a spirited discussion of anew AG 38 interpretation issue. Other meetinghighlights included an update on the VariableAnnuity Statutory Framework Review.(page 22)

The Life Insurance and Annuities Committeeadopted a final bulletin on StrangerOriginated/Owned Annuity transactions. (page26)

The Catastrophe Insurance Working Groupheld a public hearing on catastrophe modeling.(page 28)

Executive Committee andPlenary

Adoption of New or Revised ModelsThe Commissioners took the following actions onsignificant proposals at the Spring National Meeting:

Adopted a model law development to modify thelife trend test trigger from 2.5 to 3.0

Adopted the Antifraud Plan Guideline

Received an FAQ document on the new ModelLaw Development Framework that is meant toclarify the criteria for a model law and ensureuniform adoption.

Executive Committee also met via conference call toadopt proposals before year-end. Those adoptionsare discussed in the relevant topic sections below.

Health Care Reform

Formation of Professional Health InsuranceAdvisors Task ForceIn December the Executive Committee formed thistask force whose charge is to "work in an expedientmanner to identify, analyze and recommend optionsto the Executive Committee for addressing the

negative impacts on health insurance brokers/agents, insurance consumers and insurance markets,prior to and as a result of the Medical Loss Ratio(MLR) requirements" of PPACA.

The task force held its inaugural conference callFebruary 28 and concluded they should explore aproposal to ask Congress to amend relevant sectionsof PPACA in order to "preserve consumer andemployer access to professional health insurance" byremoving the requirement to include brokers'commissions in the MLR calculation. Severalconsumer representatives on the call objected to thatproposal; on March 3, the task force exposed forcomment proposed legislation to exclude "licensedindependent insurance producer remuneration"from the MLR calculation. Comments were dueMarch 24. Note, however, that the task force has notyet concluded they will move forward withsubmitting this proposed legislation to Congress asthe task force is still accumulating data to analyzethe effect of the MLR on commissions.

At its meeting in Austin, the task force held a lengthypublic hearing and heard comments from consumergroups, health entities and insurance brokers on theproposed legislation and other questions including



whether commissions have been reduced since thepassage of PPACA, the effect of present and potentialfuture commission reductions, whether this willcause access issues and whether it is likelyagents/brokers will abandon health insurancemarkets. During the public hearing severalconsumer groups commented that excludingcommissions from the MLR will assuredly increasecosts to consumers and the biggest consumer issuefor health insurance is affordability. They requestedthat the task force consider the consequences ofwhat they are considering; they believe the proposedlegislation is not asking for an interpretation of thelaw, but a change in the law. Health insurancecompany representatives focused on the effects oninsurance markets, as some insurers are exitingmarkets as they can't service the market withoutbrokers and cannot meet the MLR requirement withthe commission expense being excluded. Therepresentatives from the agents and agent tradeassociations focused on the services provided by thehealth insurance advisors and the commitment oftime and service to customers after the sale of thepolicy.

Many members of the task force appear sympatheticto the issues of the health insurance advisorsalthough one commissioner raised the possibilitythat it is the insurance companies' reducingcommissions to agents over the last ten years andnot the MLR calculation that is causing the problemsfor agents. Another new commissioner raised theconcern that the project is being too quickly fast-tracked and is not deliberative enough.

At the conclusion of the meeting, the task forceexpressed the need for concrete data to determinethe effect of PPACA on commissions. They thenadopted a motion to ask the Health Insurance andManaged Care (B) Committee to perform thefollowing and report back to the task force withinfour weeks:

Collect, analyze and report on relevantdata regarding the level of commissions and/orother payments to producers in the individual,small and large group markets, including, but notlimited to evaluating 2010 gross commission or feepayments as a portion of the denominator in themedical loss ratio, and

Without determining whether any change isnecessary, identify options to modify MLRdefinitions, methodology and/or numericalstandards that may be necessary to protect healthinsurance consumers, and to preserve the

important role of producers in the healthinsurance transaction and in the resolution ofdisputed health insurance claims.

The Health Insurance and Managed Care Committeemet via conference on April 4 (with nearly 200participants listening) to discuss these charges. Thecommittee discussed the need to obtain the data assoon as possible (4-6 weeks), noting that they aresignificant challenges involved with meeting thatdeadline since the Health Care Supplement Exhibit,which will contain useful data for this project, wasjust filed April 1 and a significant number ofcompanies have asked for filing extensions. Thecommittee then charged the newly formed HealthCare Reform Actuarial Working Group to assist themin its two charges.

The Health Care Reform Actuarial Working Groupmet by conference call on April 7 to begin identifyingpotential sources of data that may be available forthe group to complete its charge. In addition to thedata available in the Supplemental Health CareExhibit, the group explored potential sources of datafrom major insurers, producer associations, majorbrokerages, state insurance departments and otherhealth care related organizations. Representatives ofmajor health insurance companies on the call werenot in a position to make any commitments at thistime as to whether insurers would be able to providethe necessary data in the short time frame neededand would be willing to provide that information.Several times during the call, representatives ofconsumer advocate groups asked questionsregarding the process which suggests that anyproposals stemming from this initiative are likely tobe met with strong debate in the future. Theworking group has scheduled weekly calls for at leastthe next 4 weeks to accomplish its objectives.

Health Care Supplement ExhibitThe Health Reform Solvency Impact Working Groupmet in December and January and adoptedsignificant changes to the Supplement instructionsfor the 2010 filing that were considered controversialby some interested parties. The changes require thatif there is reportable business in Columns 1-3 of theSupplement (comprehensive major medical in thesmall group, large group and individual markets) inany state, the carrier must fill out the supplement inevery state. The original understanding ofcompanies was that carriers with no reportablebusiness in Columns 1-3 in a particular state wouldnot be required to complete the Supplement for thatstate. Interested parties also objected to the changes



to Supplement being adopted so late, i.e. in Februarywith the Supplement being due April 1.In connection with this change, the working groupalso developed guidance for state insurancedepartments which were receiving requests forwaivers from carriers for filing the Supplement. Theguidance recommends that commissions "avoidgranting filing exemptions except for the followingscenario: carriers whose only reportable business inColumns 1-3 is comprised of closed blocks of smallgroup, large group or individual business that, iftotaled across all states does not equal 1000 lives intotal."

The working group also developed proposedrevisions to the Supplemental Health Care Exhibitand instructions for 2011 reporting. Among otherchanges, the proposal would add columns forstudent health, mini-med and expatriate plans toParts 1 and 2. The proposal was exposed by theBlanks Working Group as agenda item 2011-30BWG.

Dodd-Frank ReceivershipImplementation Working Group

The newly formed working group is charged toreview and consider portions of the recently adoptedDodd-Frank Wall Street Reform and ConsumerProtection Act to determine what, if any state laws,regulations or procedures are necessary for statereceivers and the NAIC to be prepared for related toreceivership activities, as well as, t0 monitor, reviewand provide input on federal rulemaking and studiesrelated to insurance receivership. Under Dodd-Frank, state insurance commissioners, theirdesignated receivers and state guaranty funds arecharged with the responsibility of resolving asystemically significant insurance receivership.

The working group held an initial organizationalconference call on February 4 to discuss apreliminary outline of its planned process andcoordination. The outline was exposed for a briefpublic comment period in February, and aspresented in Austin, includes four broad areas ofconsideration by the working group:

What processes at the state level should beexamined to ensure the state receivershipmechanism will respond effectively?

What future issues require analysis andpreparation for the situation in which aninsurance company is a subsidiary or affiliate ofa covered financial organization?

What national coordination initiatives should beconsidered to ensure the national state-basedsystem provides an effective response to asystemically significant insurance receivership?

What potential changes to state laws, regulationsand/or statutes should be developed, andultimately considered at the individual statelevel?

In Austin, the working group discussed the status ofits consideration of each of the four areas included inthe outline and considered potential legal draftingissues. The working group noted that it is workingunder an aggressive timeline and plans to have adraft document completed by the end of April withthe hope of a final document being adopted by theworking group at Summer National Meeting.

Financial Condition Committee

Anti-Money Laundering ProceduresThe committee discussed a request from the USDepartment of Treasury's Financial EnforcementNetwork (FinCEN) for the NAIC to adopt moredetailed anti-money laundering (AML) complianceexamination procedures to be included in theFinancial Condition Examiners Handbook. Thiswould provide state examiners with guidance thatwill enhance their ability to perform consistent risk-based examinations of insurance companies whoissue or underwrite covered life insurance productsas defined by FinCEN. It was noted that the currentFinancial Condition Examiners Handbook instructsexaminers to perform a high-level review of aninsurer's AML compliance by determining whetherlife insurers writing covered products haveestablished an AML program containing therequired elements. The review consists primarily ofinterviewing insurers about their processes and thereporting of any concerns to the appropriate federalauthorities.

The committee adopted a charge to the FinancialExaminers Handbook Technical Group to considerand recommend appropriate revisions to thehandbook which will address the FinCEN request.The committee also noted that the Antifraud TaskForce is considering a further request from FinCENfor NAIC members to enter into Memoranda ofUnderstanding, which would allow state insuranceregulators and FinCEN to share informationresulting from the AML compliance examinations.



Statutory Accounting PrinciplesWorking Group

Adoption of New Standards or Revisionsto SSAPs

SSAP 100 Fair Value Disclosure Revisions - Theworking group held a conference call in November2010 and adopted the amendments to SSAP 100 thatwere exposed at the Fall National Meeting. Thesechanges included elimination of the requirement todistinguish and report separately fair values on arecurring and nonrecurring basis and to require anet presentation of purchases, sales, issuances andsettlements in the Level 3 rollforward disclosure for2010 reporting.

At its meeting in Austin, the working group adoptedguidance that had been deferred from the Novemberconference call. One new disclosure will show thefair value hierarchy of items that are disclosed with afair value measurement but are not valued at fairvalue in the balance sheet. The second item willrequire gross presentation of purchases, sales,issuances and settlements in the Level 3 rollforwarddisclosure. The working group agreed to defer theeffective date of these new disclosures until January1, 2012 to coincide with the effective date of thesedisclosures for US GAAP. The working group didnot agree with the interested party request toprovide only aggregated disclosures of fair value forthe new disclosures; for specific investmentschedules in which fair value is already provided forindividual investments, an electronic only columnwill be added. For all financial instruments, a newfinancial statement note will be added that willsummarize hierarchy levels by type of financialinstrument.

SSAP 22 Guidance on Early Terminated LeasesThe working group adopted FAS 146/ASC 420 Exitor Disposal Activities guidance on leaseterminations, which had been previously rejected bySAP. The guidance requires a liability to berecognized, measured at fair value, for costs toterminate the lease at the time the entity terminatesthe contract. The previously rejected guidance wasreconsidered when the NAIC became aware that withthe adoption of the FASB Codification, EITF 88-10,which is adopted by SSAP 22 but not excerptedtherein, is no longer available for users to review.

Collateral Requirements for High DeductiblePolicies - The working group adopted amendments

to SSAP 65 guidance on collateral for high deductiblepolicies submitted by an interested party, which willallow a single collateral deposit to satisfy collateralrequirements for multiple high-deductible policies,subject to a "fair and equitable" allocationagreement. In connection with the discussion ofthis issue, a member of the working group asked thatNAIC staff research accounting issues identified in aprior white paper on workers compensation highdeductible policies.

Exposure of New Guidance andDiscussion of New and On-goingProjects

Items exposed for comment have a commentdeadline of June 17, 2011 (unless otherwise stated).

SSAP 101, Income Taxes - The NAIC exposed forcomment SSAP 101 on March 22, which wouldreplace SSAP 10R and which expires on December31, 2011. Industry has been anxiously waiting for therelease of the exposure draft, which is more complexthan the current standard and proposes additionallimitations on deferred tax assets. Significantchanges include the following:

The exposure draft provides guidance onuncertain tax positions that is nearly identical tothe ASC 740/FIN 48 guidance.

For the first part of the DTA admissibility test,the RBC threshold has been removed. However,for the second part of the test, a new concept of"exDTA RBC" is introduced that requires RBC tobe calculated without regard to DTAs anddetermines the length of the reversal period forthis part of the test.

The third part of the admissibility test wouldeliminate the offset of DTAs and DTLs if thescheduled reversals differ by more than yearyears.

The DTA can also be limited by a ratio ofadjusted DTA to adjusted capital and surplus.The higher the ratio, the greater the potentiallimitation.

The proposed effective date is January 1, 2012.

At the Spring National Meeting, the comment periodwas extended to April 29. The working group plansto hold a public hearing via conference call May 11with subsequent calls scheduled for May



25, June 8 and June 22. (All calls will be held at 3PM EDT.) The working group hopes to adopt a finalstandard by the Summer National Meeting inAugust.

SSAP 25, Definition of Related Party - Inconnection with its project to consider the guidanceof FAS 166 and FAS 167, NAIC staff identified thatsituations may exist which an insurer in its US GAAPfinancial statements may be required to incorporatean entity, such as a variable interest entity, within itsconsolidated financial statements, but such entitymay not be considered a related party under SAP. Asa result the working group exposed for commentproposed revisions to SSAPs 25, 48 and 97 to modifythe definition of a related party. The proposedchanges would include de facto agents or principalsto the reporting entity as related parties and"control" would include non-voting interests whenthe reporting entity has the power to direct theactivities of the entity that most significantly impactthe entity’s economic performance or the obligationto absorb losses or receive benefits of the entity thatcould be potentially significant to the entity.

Medical Loss Ratio Rebates - The working groupexposed for comment proposed revisions to SSAP66, Retrospectively Rated Contracts, in response toquestions from issuers of health coverage subject toPPACA on the classification of medical loss ratiorebates. The proposed guidance clarifies that formanaged care and A&H entities accrued rebatesshould be accounted for as a liability as part ofaccident and health reserves, with an offset topremiums (as opposed to loss expense). Thedeadline for this proposal is May 27 (in order tomeet related Blanks Working Group deadlines).

Definition of Preferred Stock - The working groupexposed for comment an explicit definition ofpreferred stock for use in SSAP 32, as "any class orseries of shares the holders of which have anypreference over the holder of any other class orseries of share." SSAP 32 currently lists examples ofpreferred stock but no definition.

Accounting for Pensions and SSAP 92,Accounting for Postretirement Benefits Otherthan Pensions - Little progress has been made infinalizing these SSAPs. At the Fall National Meeting,the working group discussed a request to reconsiderthe requirement to establish a liability for OPEBsconsistent with the GAAP guidance because of theability of the sponsor to reduce or terminate benefitsunder an OPEB plan. No action was taken this fallor winter, but the working group will hold an interimconference call later this spring to discuss thecomments. The working group did extend the

proposed effective date for both SSAPs from January1, 2012 to January 1, 2013.

Issue Paper 141, Accounting for Transfers andServicing of Financial Assets andExtinguishment of Liabilities - At the request ofthe FAS 166/FAS 167 Subgroup, the working groupexposed for comment this revised issue paperadopted by the subgroup in February, whichproposes adoption of most of FAS 166 guidance,including removal of the concept of qualifyingspecial purpose entity, but would not requireconsolidation of SPEs. The issue paper does notinclude a proposed effective date.

SSAP 94- Transferable State Tax Credits - The

working group exposed for comment proposedrevisions that allow entities that purchase or acquiretax credits that are subsequently non-transferable toreflect the credits as admitted assets if the domesticstate law requires the credit to be used in thattaxable year. SSAP 94 currently does not allow non-transferable credits as admitted assets.

SSAP 43R Q&A - Industry interested parties aredeveloping a Q&A document that addresses issuesthat have arisen with the January 1, 2011 adoption ofa revised definition of loan-backed and structuredsecurities. The revised definition includes lease-backed securities and equipment trust certificates asSSAP 43R bonds that many insurers previouslyclassified as SSAP 26 bonds. Interested parties hopeto get clearance shortly from regulators and have thedocument posted on the NAIC's website as unofficialguidance.

ASU 2010-28, Intangibles - Goodwill and OtherThe working group exposed for comment proposedrevisions to adopt guidance from ASC 350-20/FAS142, Goodwill and Other Intangible Assets torequire an annual testing of impairment forgoodwill, with additional testing in response tospecific events or circumstances. The revisions alsopropose rejection of the guidance in ASU 2010-28,When to Perform Step 2 of the GoodwillImpairment Test for Reporting Units with Zero orNegative Carrying Amounts, but proposesadditional restrictions to statutory accounting toprevent recognition of goodwill for any underlyinginvestment that has a zero or negative reportedvalue. The guidance also proposes limiting goodwillto the maximum of the reported value of theunderlying investments.



Fund Demand Disclosures for InstitutionalBusiness - At the Summer National Meeting, theworking group discussed this project, which goal isenhanced disclosure of liquidity risk management ofinsurers. Interested parties presented a proposedliquidity disclosure template that they haddeveloped, which is based on the New York liquiditysurvey, and would be a confidential filing. Thetemplate proposes disclosure of documentedliquidity plans, rating agency financial strengthratings, activities such as securities lending, relianceon reinsurers, liquid and illiquid assets, and generalaccount guarantees of market value separateaccounts and cash demands related to institutionalbusiness.

At its meeting in Austin, the working group exposedthe interested party proposal for comment and askedfor comments as to whether the information shouldbe included in a regulator-only filing with the NAICdue to the confidentiality of the information thatwould be disclosed.

Schedule for SSAP 43R Disclosures - Theworking group exposed for comment a proposal tomove the disclosures from paragraph 49g of SSAP43R on non-interest impairment recognized fromthe annual and audited financial statement notes toa new schedule in the annual and quarterlystatement. The first period this change could beeffective would be the first quarter of 2012 so thefootnote disclosure will be in effect for at least onemore year-end.

AVR/IMR Determinations through NAICDesignations - The working group briefly discussedthe proposal to modify significantly the AVR andIMR rules to allow judgment in the allocation of AVRand IMR except when the NAIC designation changesby more than one rating during the holding period orif the security is rated NAIC 6 at any time. Theproposal was a result of a recommendation from theRating Agency Working Group to consider whetherchanges in NAIC designations should be the solefactor to determine whether realized capital gainsand losses are allocated to IMR and AVR forcorporate bonds and debt instruments other thanSSAP 43R securities.

Interested parties had commented that before suchchanges should be considered that the NAIC shouldresearch the effectiveness of the current allocationmethods and whether the process is not adequate fora particular asset class(es). The working groupagreed to form a subgroup to study the issue.

Consideration of FAS 167 - The working groupnoted that the FAS 166/167 Subgroup has releasedfor comment a revised Issue Paper 142, VariableInterest Entities on February 3. The revisions to theissue paper from its last exposure are not material; itwould require a reporting entity to determine whichof its relationships are VIEs and disclose informationwith respect to those VIEs. There is no effective dateyet proposed for this issue paper. Comments aredue April 8.

Separately, the subgroup also exposed for commentASU 2010-15 – Topic 944 – How Investments HeldThrough Separate Accounts Affect an Insurer’sConsolidation Analysis of Those Investments. TheForm A suggests that it may be appropriate for thevariable interest consideration and documentationunder SAP to take into account all separate accountinterests, including those products that do not meetthe separate account GAAP classification criteria

Referral from Life RBC Working Group - Theworking group discussed a referral concerning along-standing issue of the accounting mismatchbetween a hedged bond and a credit default swapwhen hedge accounting is not used e.g. the bond isvalued at amortized cost and the derivative is valuedat fair value. The working group noted two things:1) insurers have the ability to eliminate themismatch if the derivative transaction can qualify asan effective hedge and, 2) hedge accounting is underreview by both the IASB and FASB. Therefore theworking group concluded they will wait until thosedeliberations are complete before they consider anychanges to SSAP 86.

Referral from the PBR Working Group - The

referral asks that each technical group that wasassigned a “Stage 1” deliverable related to theimplementation of principles-based reserving beginto formulate their plan for addressing those items,and provide a written report to present to the PBRWorking Group at the Summer National Meeting.The SAP Working Group asked that interestedparties involved with the project in 2009 assist withthis effort.

GAAP Guidance Rejected for SAPThe working group voted to exposed for comment aproposal to reject the following recently issued GAAPguidance that applies to insurance entities:

ASU 2010-24 - Health Care Entities,Presentation of Insurance Claims and RelatedInsurance Recoveries



ASU 2010-26 - Financial Services - Insurance AICPA SoP 05-1: Accounting by Insurance

Enterprises for Deferred Acquisition Costs inConnection with Modifications or Exchanges ofInsurance Contracts

Emerging Accounting IssuesWorking Group

The working group met in Austin and exposed thefollowing issues for comment.

EITF 03-12: The Impact of FASB Interpretation No.45 on Issue No. 95-1, Revenue Recognition on Saleswith a Guaranteed Minimum Resale Value - Theworking voted to reject this guidance as notapplicable to statutory accounting.

Consideration of FASB Accounting StandardsUpdates - The working group reached a tentativeconclusion that the EAIWG will continue with itsexisting focus, specifically concentrating oninterpretations related to adopted NAIC statutoryaccounting principles. The Statutory AccountingPrinciples Working Group would then review allFASB Accounting Standards Updates, includingthose that reflect consensus positions of the FASBEmerging Issues Task Force.

Capital Adequacy Task Force

The working group met three times since the FallNational Meeting and again in Austin and discussedthe following items.

Deferred Tax Asset ReportAfter many hours of work and discussion, the taskforce voted in December to defer final adoption ofthe Academy's DTA report pending the outcome ofthe SAP Working Group's project to revise SSAP10R. The AAA's preliminary conclusions in its Junereport suggested that there is no need for an RBCcharge on current DTAs for well capitalizedcompanies, as the non-admission requirementsalready act as an implicit RBC charge. During itsmeeting in Austin, the task force noted that the AAAmay need to look again at the asset limitations inrelation to the RBC treatment when the accountingguidance is finalized.

Life Trend TestOver objections from the chair of the Life RBCWorking Group, the task force adopted a model lawdevelopment request to increase the Life Trend Testtrigger from 250% to 300%, which will make itconsistent with the P/C and Health Trend Tests.

The task force hope to obtain an exception to theExecutive Committee model law procedures, whichwill allow final consideration of the change to theLife RBC model at the Summer National Meeting.

Separate Account IssuesThe task force discussed a referral from the FinancialCondition Committee that the task force study theneed to modify RBC to better capture the risks ofnon-unitized products i.e. held in a separate accountbut not legally insulated. The referral notes that it"may be appropriate to establish a capital charge oninsurers that have more exposure to these types ofrisks when compared to the general account." Thetask force has added this issue to the working agendaof the Life RBC Working Group.

DTA Sensitivity TestThe task force adopted a technical correction to theDTA sensitivity test, which is an informational testonly. The chair noted that the sensitivity test mayhave to be adjusted again as a result of the futurechanges to SSAP 10R, Income Taxes.

Fraternal RBCThe task force adopted a recommendation toFinancial Condition Committee to consideramending the current RBC Insurers Model Act toinclude fraternal societies rather than developing aseparate model for them. This request wassubsequently adopted by the Committee. The taskforce also exposed for a 45 day comment periodchanges to the Fraternal RBC instructions toimplement an action level page and a trend test page.

Solvency ModernizationInitiative Risk-Based CapitalSubgroup

The subgroup met via conference call February 24and in Austin and discussed the following issues.

AAA Report on Current RBCThe Academy provided a summary of its 90 pagereport on implicit calibrations and missing risks inthe current RBC formulas. The report was providedin response to the subgroup's request for assistancein understanding intended or expected safety levelsor calibrations of risk factors. The report containsseparate, detailed sections prepared by theAcademy's Life, Health and Property/Casualty RBCCommittees relative to each distinct RBC formula(which are discussed in more detail in the RBCWorking Group summaries below).



The Academy noted that while none of the formulascontain an explicit safety level for aggregate RBC,some of the capital charges for individual risks aredefined by an explicit calibration point. With regardto missing risks in the current formulas, the P/Creport contains a discussion of how and to whatdegree risks faced by P/C insurers are reflected inthe current formula. The discussion identifiespotential shortfalls in the way various risks aretreated, and these shortfalls include risks notreflected in the current formula as well as risks thatare included but not fully captured by the formula.The Health report identifies missing risks, some thatare new or more prevalent since the formula wasfirst established, but notes that the effect needs to bequantified and evaluated for materiality before beingincluded in the formula. The Life report indicatesthat there are no material risks excluded from thecurrent formula, consistent with the objective of theRBC formula which is to identify weakly capitalizedcompanies. The SMI RBC Subgroup voted to receivethe report and will consider the information in thisreport as it continues its work evaluating potentialchanges to the RBC formula.

Capital Initiatives Working Group UpdateThe Capital Initiatives Working Group, comprised ofseven large life insurers, provided an update onactivities related to the assessment of calibrationsunderlying the current Life RBC formula and thedevelopment of an internal model, which will beused to illustrate potential alternative RBCmethodologies. The group is targeting June 30 tohave results of this work available for review. Inaddition, the CIWG studied differences in safetylevels and time horizons of the current RBC formula,both at the product level as well as a business level.

At the Spring National Meeting, the working groupdistributed results from four volunteer life insurerswhich modeled a 100% Company Action Level RBCare as follows:

- Company A -95% using a 20 year run-outmethodology

- Company B - 91-93% using a lifetime run-outmethodology

- Company C - 96.5% using a one year measure- Company D - 90-95% using a one year risk

measure

The SMI RBC Subgroup voted to receive the reportand will consider the information as it movesforward with its work.

Life Risk Based Capital WorkingGroup

The working group did not meet during the SpringNational Meeting, but held two conference calls thiswinter and discussed the following items.

Derivatives Risk Mitigation ProposalThe working group unanimously adopted the ACLIDerivatives Risk Mitigation proposal including NewYork's proposal for an adjustment to the totaladjusted capital (TAC) regarding the purchasedpremium of hedge bonds. The proposal wassubsequently adopted by the necessary parentcommittees in Austin and will be effective for 2011RBC. The ACLI proposal calls for a credit forhedging of C-1 asset risks for fixed income securitiesand common stocks not already considered in C-3modeling. New York's proposal adjusts TAC toaddress their concern that there is a mismatch inreported values when a hedged bond is carried atamortized cost and the corresponding credit defaultswap is carried at fair value. Although the ACLI didnot conceptually agree with New York's proposal,they favored the adoption of the proposal with NewYork's proposed TAC adjustment (as opposed to notadopting anything at this time).

Commercial Mortgage ProposalThe ACLI provided a progress update on workrelated to its proposal for revising the RBCcalculation for commercial mortgages. This revisionis intended to replace the widely criticized MortgageExperience Adjustment Factor (MEAF) methodologycurrently in place. The ACLI is working with themodeller; Moody’s Analytics, using Moody’ssoftware and database and has begun to receivemodeling results. In addition, documentation of themodeling process is in progress so it can be sharedand discussed. The ACLI’s internal review process isongoing and the initial reports should be completedsoon. A conference call will be scheduled to discussthe results.

Low Income Housing Tax CreditsA request had been made to working group to makethe RBC treatment of state low-income housing taxcredits the same as that afforded federal low-incomehousing tax credits. The chair noted that this issuecame up when the federal issue was originallydiscussed but he thought that the state issue was notaddressed due to a lack of information with regard tothe state aspect. NAIC staff was asked to provide asummary of the information reviewed when the



federal low-income housing tax credits proposal wasfirst adopted.

C-3 Phase 3A brief discussion was held on the number ofoutstanding issues regarding the yet to be adopted C-3 Phase 3 changes to the Life RBC requirements.The working group will combine this list with itemsfrom the C-2 Phase 2 Results Subgroup to develop acomplete list of outstanding items.

P/C Risk-Based Capital WorkingGroup

The working group met via conference in Decemberand March and discussed the following topics:

Overview of AAA SMI ReportAs discussed in the SMI RBC Subgroup summaryabove, the AAA reviewed each formula and identifiedareas where either risks are not reflected in theformula or not fully captured. For the P/C RBCformula, five such areas were identified: catastropherisk, reinsurance credit risk, underwriting risk,asset-related risk and precision in specifying risk.The chair noted that changing the formula to onebased "entirely on a statistical outcome would not bein the best interests of the regulators." Othersagreed that making modifications within the currentRBC framework is the best solution. Work on thisimportant project will continue.

Review of Underwriting Risk FactorsAt the request of the reinsurance industry theworking group adopted in 2010 a new workingagenda item to "review the methodology forallocating the underwriting risk reserve andpremium factors for the various lines of business."This issue was added due to industry concerns withthe current methodology for calculating thereinsurance underwriting risk factors, which somebelieve results in "excessively" high capitalrequirements for reinsurers. The methodology forthe factors has not been reviewed since RBC wasdeveloped 20 years ago. The AAA has been asked toreview the methodology and provide regular updatesto the working group and interested parties. At itsMarch meeting, the working group acknowledgedthat given the scope of the project and tasks referredby the SMI RBC Subgroup that the review of themethodology will not be done for 2011 RBC. Theworking group then set a target completion date of2012 RBC.

At the subsequent meeting of the Capital AdequacyTask Force the chair suggested that a conference callor e-mail vote be held after the Spring NationalMeeting to address some concerns of theReinsurance Association of America whetherunderwriting risk factors would be increased for2011 RBC.

Excessive Premium Growth ChargeThe working group continued its discussion of theexcess premium growth charge that could betriggered by a company in run-off when it hassignificant audit premium. The working groupdecided not to amend the RBC instructions to allowan exemption for such companies and suggested thata state could exempt run-off companies on a case bycase basis.

Health Risk-Based CapitalWorking Group

The working group held a conference call inDecember and March and discussed the followingissues.

Overview of AAA SMI ReportAs discussed in the SMI RBC Subgroup summaryabove, the AAA reviewed each formula and identifiedareas where either risks are not reflected in theformula or not fully captured. For the Health RBCformula, five such areas were identified: pandemic,biological terrorism, increased cost of compliance,privacy breaches and risk of reserve inadequacy onlong-tail products. The chair noted the first twoitems are similar to catastrophe risk andcoordination with the P/C RBC Working Group onits project is one potential alternative.

Health Care ReformThe working group continues to monitor progress ofhealth care reform and the potential effects on healthRBC results of companies. The working group notedthat reviewing the insurance risk component of theformula would be a good starting point to assess thechange in pricing and insurance models caused byhealth care reform. A representative from the AAAnoted that PPACA poses new risks for healthinsurers due to the rebate requirements and theability to recoup losses being restricted. The chair ofCADTF noted that either the RBC instructions orformula will need to be revised to reflect this; theworking group approved a motion to develop aproposal for discussion on its next conference call.



Covariance CalculationThe working group had previously discussed theissue of "fine tuning" the covariance calculation. Atits March meeting the working group noted that theSMI RBC Subgroup is currently reviewing thecovariance and calibration of RBC across allformulas. This project has been re-evaluated to a"high priority" agenda item.

Health Care ReceivablesBecause of "significant inconsistencies" in the waythese receivables are reported in the RBC formula,working group developed clarifications to the annualstatement instructions for line 24, Health Care andOther Amounts Receivable; this proposal wasexposed by the Blanks Working Group in Austin(BWG 2011-28). Because the proposal cannot beeffective for 2011 as hoped, the AAA Health CareReceivables Factors Work Group will hold aconference call to discuss the potential assumptionor conclusions based on the current data.

Stop Loss Work GroupThe AAA Stop Loss Work Group appears to bemaking progress on this project that has been on theworking agenda for several years; the work groupwas asked to assess the appropriateness of the stoploss risk charge of .25. A representative from thework group noted they have collected a significantamount of data from 18 insurers and they hope tocomplete their analysis by the end of the year.

New Agenda ItemsThe working group added two new issues to itsworking agenda: evaluate industry segmentconcentration risk and evaluate the underwritingrisk and the invested risk in relation to downturn ofthe economy. Both issues have a completed date of2012 RBC or later.

Solvency ModernizationInitiatives Task Force

The work of the SMI Task Force and its workinggroups continue to dominate the National Meeting.The task force met March 7 and in Austin anddiscussed the following projects.

Comments from Dr. Therese VaughnAt the Spring National Meeting, the task force heardcomments from Dr. Vaughn, CEO of the NAIC, on"Group Supervision and the IAIS CommonFramework for the Supervision of InternationallyActive Companies (ComFrame)." Dr. Vaughn sharedher thoughts about development of a common

framework and working with internationalregulators which included the followingobservations:

Regulators should be clear on the problem theyare trying to solve, i.e. international standardsand supervisory processes need to guard againsta "race to the bottom" without creatinginefficiencies for companies by complying withmultiple sets of regulations.

Regulators need to focus more on supervision ofcompanies than creating new regulations.

Regulators should not place excessive relianceon regulatory capital requirements as thesolution

The relationship between the group or leadsupervisor and the other supervisors shouldcreate the proper incentives, and the GroupSupervisor should be accountable to the othersupervisors.

Particular attention needs to be paid to creatingmechanisms that facilitate information sharing.

Regulators need a consistent benchmark formeasurement, which may be the most difficultpart. Dr. Vaughn stated that the "logicalcandidate at this point is IFRS."

Incremental change is better than revolutionarychange.

Dr. Vaughn's entire speech has been posted to theNAIC's website.

Restructuring of Task Force Working GroupsTo address concerns related to potential overlap ofSMI activities among its working groups, the taskforce combined the International Solvency andInternational Accounting Standards WorkingGroups into the new International Solvency andAccounting Standards Working Group. The taskforce also dissolved the Statutory Accounting andFinancial Reporting Subgroup and moved its chargeto the new International Solvency and AccountingStandards Working Group. These changes took effectat the conclusion of the Spring National Meeting; thetwo international working groups met separately inAustin as discussed below.

PwC Solvency WebcastOn April 6, PwC hosted a webcast on solvency-related issues relevant to the US insurance industry.



The chair of the SMI Task Force, Director ChristinaUrias of Arizona, participated in the webcast andanswered questions from our panelists and theparticipants. Director Urias made the followingobservations:

With respect to ORSA, she noted that there are twodrivers moving it forward: satisfying IAIS InsuranceCore Principles and having an "additional regulatorytool for the tool box." She puts greater weight on thelatter. Director Urias doesn't want the US ORSA tobe too prescriptive and or too inflexible for smallercompanies to use. Her goal is that the final toolcould be used for both US and internationalcompliance and should come as close as possible towhat companies are already doing for riskassessment. She noted the goal of having the ORSAtool completed by the end of 2012 per the SMIRoadmap may be "wishful thinking."

As far as capital requirements are concerned,Director Urias noted that the regulators need todetermine what they want RBC do. She does seesome of the missing risks such as catastrophe riskand reinsurance credit risk being added to RBC, butnoted that regulators view supervision as more thancapital calibration. On the topic on reinsurancemodernization, Urias believes the NAIC will retainthe prescriptive sliding scale for collateralrequirements but there may be some movement inthe scale, especially in the 20% to 75% collateralrequirement range for Secure 3 and Secure 4reinsurers. (See further discussion of this topic inthe Reinsurance Task Force summary below.) Withrespect to statutory accounting and PBR, Uriasbelieves the need for an international commonframework will lead US regulators to adopt IFRS,but retain some regulatory control. She believescompletion of the principles-based reserving projectby the end of 2011 may be achievable but will dependon the results of the Phase I and Phase II testing (asdiscussed below in the LATF summary).

The webcast archive can be accessed using this linkhttp://event.on24.com/r.htm?e=294386&s=1&k=E33F319CFEA5394AE6E6726EE5038837

PBR Working Group

PBR Impact StudyThe chair of the Life Actuarial Task Force providedan update on the status of the PBR impact study,including a presentation by a member of the TowersWatson team conducting the testing. The sameupdate was provided during the LATF meeting; seepage 22 for that summary.

NAIC's Role with PBR Statistical DataThe working group discussed the statistical agentprocess relative to data gathering for regulatoryevaluation of PBR results. The Standard ValuationLaw authorizes commissioners to require that acompany submit experience data as prescribed in theValuation Manual. The purpose of this data is toestablish industry experience that could be used byinsurers that lack credible data to establish their ownPBR assumptions, and to allow regulators to analyzethe appropriateness of assumptions used in PBRcalculations. To better understand how datacollection might work, the working group reviewedLATF's response to its request to define theinformation that would be collected in a FeedbackLoop to review PBR and how that information wouldbe used.

The responses notes that key elements of suchreview are evaluation of assumptions and validationof assumptions against experience. The PBRWorking Group is interested in national aggregationand validation through a centralized database anddoes not favor the Feedback Loop approach. Theworking group drafted a letter to ExecutiveCommittee proposing a number of NAIC actions tofacilitate this data collection, including hiring astatistical agent to collect the data, developing andmaintaining requirements for statistical agents,selecting which companies would be required tosubmit data for an experience study, and assessingall life and annuity writers for the cost associatedwith this experience reporting process. The workinggroup voted to expose the letter for comment.

Letter to Technical Group ChairsThe working group anticipates adoption of theprinciples-based Valuation Manual during the latterpart of 2011. The original principles supporting theNAIC's adoption of a PBR approach provided aframework within which applicable technical groups(e.g. LATF, SAPWG, CADTF) would work to addressaction items assigned to them within the principles.As the NAIC moves closer to adopting the ValuationManual the PBR Working Group is requesting thatthe technical groups review their action items,modify as needed and formulate plans for addressingthe items. Written reports from the technical groupsare to be presented to the PBR Working Group at theSummer National Meeting.



International AccountingStandards Working Group

The working group discussed the followingdevelopments of the International AccountingStandards Board and International Association ofInsurance Supervisors.

IAIS ICP 14, Valuation for Solvency PurposesThe working group discussed the recently exposeddraft IAIS Insurance Core Principle 14, Valuation forSolvency Purposes, which provides a supervisorystandard on the valuation of assets and liabilities forinsurer solvency assessment. The ICP, as drafted,would require assets and liabilities to be evaluatedon an economic basis, rather than a more narrowlydefined basis such as fair value. NAIC staff andinterested parties discussed concerns as to whetherthe NAIC's current valuation approach for certainassets and liabilities (e.g., bonds and non-life lossreserves) would met the definition of an economicvaluation. The working group is consideringproviding a comment letter to the IAIS in advance ofthe April 19 comment deadline.

FASB Financial Instruments Amortized CostRestrictionsThe working group discussed a letter written by theStatutory Accounting Principles Working Group toFASB dated February 15 to express the NAIC’sconcern regarding the additional language added tothe requirements for amortized cost by the FASBrelative to the wording in IFRS 9, FinancialInstruments. This was to add the words “managedthrough a lending or customer financing activity.”These words would likely preclude insurers fromclassifying their fixed income bond portfolios atamortized cost, irrespective of the level of tradingactivity. The working group adopted a motion that, ifthe FASB does not change this wording, the workinggroup will recommend to the NAIC representativeson the IAIS Executive Committee that the IAIS raisethis matter at the Financial Stability Board.

IASB/FASB Supplement on ImpairmentAs part of the overall plan to converge IASB andFASB financial instrument accounting standards, thetwo boards issued a supplementary document onimpairment in January with comments due by April1. The supplement suggests that the impairmentassessment of financial assets managed on an openportfolio basis should be split into two groups, basedon their credit characteristics. For one group, theentire amount of the expected credit losses would berecognized in the impairment allowance (referred to

as the "bad book"). For the other group (referred toas the "good book"), expected credit losses would berecognized on a portfolio basis over a time period atthe greater of the time-proportional expected creditloss (depending on the age of the portfolio) and thecredit losses expected to occur within the foreseeablefuture period (being a minimum of twelve months).The working group adopted a motion to send an e-mail comment to the two boards requestingclarification that the supplementary documentwould provide a choice between an individual assetimpairment approach and an open portfolioimpairment approach for insurers with fixed incomebond portfolios.

IFRS 4, Insurance Contracts - Volatility IssueThe working group discussed a draft letter to theIASB concerning the issue of volatility in profits andlosses which would result from the insurancecontracts standard as currently drafted. Theworking group expects that the letter will be issuedjointly by the NAIC and certain other majorinsurance jurisdictions. The principal concernexpressed in the draft letter is with regard to thevolatility that results from the selection of thediscount rate. The letter states that insurers do notrespond to changes in the yield curve by selling theirentire portfolio and reinvesting in new assets toreflect the new yield curve. Insurers manage theirinvestments in such a way as to achieve a stableinvestment return from their portfolio to fulfill theirinsurance contract obligations. Therefore, aperformance result derived from a short-termchange in yield curve as if all future cash flows areaffected by this change is not appropriate. Theworking group adopted a motion to authorize thechair and NAIC staff to issue the letter with anyminor amendments necessary to get the support ofother jurisdictions expected to be referenced in theletter. The working group agreed that the letterwould be held in abeyance until the IASB had issuedits board papers on volatility, at which stage adecision could be made on whether to send theletter.

It was noted the IASB and FASB are continuing tohold joint meetings on the insurance contractsstandard. NAIC staff noted that the IASB remainsintent on issuing a final insurance standard by June30, 2011.



Group Solvency Issues WorkingGroup

The working group met via conference in Februaryand in Austin and discussed the following issues.

Revisions to the Holding Company Model Lawand RegulationExecutive and Plenary adopted in December theworking group's proposed revisions to the InsuranceHolding Company System Model Act (#440) andInsurance Holding Company System ModelRegulation (#450) to enhance regulators' ability tolook at any entity within an insurance holdingcompany system that could pose an enterprise risk tothe insurer. As of March 2011, five states'legislatures are considering these revisions and WestVirginia has just completed its adoption.

At the Fall National Meeting, the working groupexposed for comment a draft proposal to theFinancial Regulation Standards and AccreditationCommittee on Laws and Regulations SubstantiallySimilar Elements for Revised Insurance HoldingCompany System Act. The draft shows the newlanguage from the just-adopted Holding CompanyAct that would need to be adopted by the states fortheir model to be considered "substantially similar"to the NAIC model. During a conference callFebruary 24, the working group reviewed commentsreceived from four trade associations and adoptedseveral "friendly amendments." However, on theissue of the wording of section 6(x) relating to theprotection of confidential information filed withregulators and the NAIC, there was a lengthydiscussion of proposed wording changes. Theworking group decided to defer adoption to allow foradditional discussion and is expected to vote on thelanguage during a conference call in April.

ORSA and Group Capital Assessment OptionsAs approved by Executive Committee in Austin, theGroup Solvency Issues Working Group will now bein charge of ORSA development as risk assessment isvery closely related to group solvency assessment.

Last fall, the working group exposed for comment"group capital assessment options" as a result of itsdiscussion of the IAIS Insurance Core Principlesapproaches to group capital assessment. Manyresponses expressed the belief that the group capitalcalculation is not feasible or achievable in the shortterm for many reasons including insuranceregulators not having jurisdiction over manymembers in a holding company group. Still, the

working group tentatively concluded that the ORSAtool could include an analysis of the group's financialcondition and target capital.

During its February 24 conference call the workingexposed for a 60 day period comment its DraftGroup Capital Assessment Proposal for USCompliance with the IAIS. The working group notedthat the draft can be viewed either as a starting pointthat needs additional detail on regulatorexpectations on how group target capital should becalculated. Alternatively, it could be used as a high-level principles-based document that providesflexibility on assessing group capital.

The two page document suggests that annually allUS based insurance legal entities must provide agroup capital assessment as part of its confidentialORSA filing. The draft suggests the approach andassessment of group-wide capital adequacy shouldconsider, at a minimum, the following:

Elimination of intra-group transactions and"double-gearing where the same capital is usedsimultaneously as a buffer against risk in two ormore entities"

Take into account leverage resulting fromholding company debt

Identify diversification credits and addressrestrictions on transferability of capital withinthe holding company system.

Address contagion risk, concentration risk andcomplexity risk.

Since the comment period is still open, responses tothe draft were not discussed in Austin. However, theworking group received two presentations on groupeconomic/target capital methodologies. Arepresentative from the ACLI presented "Developinga Group Capital Calculation" and noted seven criticaldecisions in economic capital models: definition ofsolvency, time horizon of risk exposure, risks tomodel, how risks are quantified, measurementmetric, target level of capital and reflectingdiversification. When asked by the working groupwhether the regulators should require companies todiscuss these seven critical decisions, the ACLIrepresentative stated that insurers would likelyprefer a more open-ended requirement, e.g. describeyour risks and your analysis of them.

The working group then heard a presentation fromthe newly formed North American Chief Risk OfficerCouncil on "Introduction and Perspectives on OwnRisk and Solvency Assessment." The Council iscomprised of CROs from 11 of the 15 largest North



American life insurers and 12 of the 15 largest NorthAmerican P/C insurers. The presentation noted thatCRO Council welcomes the "integration of riskmanagement concepts and principles within theregulatory framework." One of the Council's primaryrecommendations is that the ORSA requirementsneed to be aligned with internal company riskmanagement practices and that there is no "one sizefits all" approach to capital management andenterprise risk management. There seemed to be aconsensus among companies that requiring theanalysis at the legal entity level would beinappropriate; most insurer groups don't analyzerisk at that level.

The working group noted that in connection with itscharge to develop an ORSA tool, the regulators areplanning a several day meeting in May or June tohear presentations on enterprise risk managementand will meet with the CRO Council to continuediscussion of its views on what regulators shouldunderstand and focus on when reviewing anorganization's risk management program and groupcapital requirements. The meetings will also includeconfidential ERM workshops where companies willpresent their ERM practices to regulators, and adiscussion of current international ORSAdevelopments.

Holding Company Best PracticesAt the Fall National Meeting, the working groupexposed its best practices document for comment.The document includes best practices for regulatorsto use in their oversight of insurance companieswithin a holding company group. The documentincludes sections on cross-border and other financialsector coordination, information from federalagencies, uniform practices for mergers andacquisitions of control. There is also a section onbest practices for participating in internationalsupervisory colleges.

The working group had scheduled a conference callfor March 15 to discuss comments received on thedraft; the meeting was postponed and will berescheduled for later this spring.

Supervisory CollegesThe chair of the working group discussed theimportance of US involvement with supervisorycolleges for holding companies with internationaloperations; the chair encouraged states to regularlyparticipate in such interactions with internationalregulators. Related to this discussion, the workinggroup heard a brief presentation on the launch of aweb-based tool, which will facilitate coordination of

US regulators participation in such supervisorycolleges. The request for a conference call or annualmeeting is sent directly to the holding companygroup's lead and/or domestic supervisor whocontacts the international regulator. The tool isavailable on the NAIC's website.

Corporate Governance WorkingGroup

International Corporate Governance Standardsand FSAP RecommendationsAt the Fall National Meeting, the working groupdiscussed the review of the US regulatory system forcompliance with the Financial Sector AssessmentProgram (FSAP) which was based on the 2003 IAISInternational Core Principles (ICPs). It was notedthat the United States "largely observed each of theICPs related to corporate governance and riskmanagement" but seven recommendations weremade by the FSAP to "achieve stricter compliancewith existing ICPs." As a result, the working groupwas charged by the SMI Task Force to specificallyaddress the seven corporate governance and riskmanagement related recommendations, as goingforward, the US insurance regulatory system will beevaluated by FSAP based on its compliance with theICPs.

At its meeting in Austin, the working groupdiscussed a draft Whitepaper on High LevelCorporate Governance Principles for Use in USInsurance Regulation. The whitepaper includestwenty principles, organized into seven sections:corporate governance, board of directors, seniormanagement, suitability of individuals, reportingand transparency, risk management and internalcontrol systems, control functions, and regulatoryoversight. While the newly developed whitepaperwas exposed for a 45 day public comment period,interested parties expressed procedural concernswith the development of the document. Someinterested parties suggested that the "blank slate"approach to the development of the principlesdocument presupposes that there are not alreadywell established corporate governance practices inthe US. Interested parties argued that a moremeasured approach would be to engage in a publicdiscussion as to what deficiencies exist with the USinsurance regulatory system, and then developtargeted principles to fill-in the holes.

The working group noted that it has not determinedhow the whitepaper will be used, but possibilitiesrange from a best practices document to the



development of a model law. Interested partiesraised concerns that it is difficult to comment on theexposed whitepaper without knowing exactly howthe principles will be used. In response to thisconcern, the working group indicated that for nowthese are only principles and if a model law issubsequently developed there would be a separateexposure period. The working group plans to hold aninterim conference call, in late May or early June,following the completion of the whitepaper'sexposure period.

International Solvency WorkingGroup

Consultation Paper on the Own Risk andSolvency Assessment (ORSA)At the Fall National Meeting, the working groupconcluded that it would proceed with thedevelopment of a US specific ORSA tool. Solvency IIdefines ORSA as an assessment that the insurermakes about the adequacy of its own riskmanagement practices and its current and futuresolvency position. The working group held aconference call on February 11 to discuss a draft USORSA proposal developed by NAIC staff, who notedthat given the current advancements in computertechnology and internal models, there are bettermethods available today to measure risks thanexisted 20 years ago when the RBC regulatoryframework was developed. Staff noted that ORSAwould allow regulators to better understand themagnitude of risks present within a particularinsurer and the processes in place at that insurer tomitigate those risks. This in turn would assistregulators when evaluating the scope and frequencyof financial examinations. However, it was notedthat the intent of ORSA is not for regulators toprescribe specific risk management practices.

As drafted, the ORSA proposal would requireinsurance companies to document, at the legal entitylevel, the following significant items, among others:

A detailed description of the company's riskmanagement policy, including all relevant andmaterial risk categories, as well as a descriptionas to how each risk category is managed on anoperational basis. The risk management policywould also need to include the company'sinvestment policies, underwriting policies,claims processing policies, retention policies,reinsurance counterparty policies, and anti-fraud policies.

The quantitative measurements of risk exposurein both normal and stressed environments foreach risk category. The quantification of riskswould need to be performed under a range ofoutcomes, using risk measurement techniquesthat are appropriate as to nature, scale andcomplexity of risk.

A description as to how the company combinesthe qualitative elements of its risk managementpolicy with the quantitative measures of riskexposure in determining the level of financialresources it needs to manage its business overthe longer-term business cycle (i.e., 3-5 years).

The ORSA proposal was exposed for a publiccomment period which ended March 18.

In Austin, the working group discussed commentsreceived on the ORSA proposal. Areas of concernraised by working group members and interestedparties include the need to ensure the confidentialityof ORSA documentation, the degree to which theproposal is prescriptive versus principles-based,achieving the appropriate balance of legal entityversus group level requirements, and the need forproportionality. With regard to proportionality, itwas commonly agreed by members and interestedparties that ORSA must be flexible based on thescale, scope and complexity of an insurer's business,so as not to be overly burdensome to smaller, single-state, short-tail insurers. While no specific actionswere taken on the ORSA proposal in Austin by theworking group, it was noted that going forward, theORSA development will be carried out by the GroupSolvency Issues Working Group as risk assessment isvery closely related to group solvency assessment.

Statutory Accounting andFinancial Reporting Subgroup

This subgroup had been tasked with the broadproject to consider the purpose of the regulatoryaccounting model and whether the NAIC shouldcontinue to maintain an entire codification ofstatutory accounting given the possible convergenceof global accounting standards. The subgroup didnot meet last fall or in Austin; as noted in the SMIUpdate memo dated January 2011, the chair of theSMI Task Force "has decided to monitor ongoingdevelopments and postpone further discussions anddecisions until the IAIS insurance core principle forvaluation and the IASB, FASB, and the SecuritiesExchange Commission reach their decisions" asresult of feedback received on the subgroup'sPreliminary Considerations document. The



subgroup was dissolved at the Spring NationalMeeting and its project moved to the newInternational Solvency and Accounting StandardsWorking Group.

International InsuranceRelations Committee

The committee received a report on the revisions ofIAIS Insurance Core Principles. The IAIS iscurrently revising the ICPs and correspondingstandards and guidance material with the goal ofhaving a complete set of revised and restructuredICPs ready for adoption at the October 2011 IAISGeneral Meeting.

The committee then received a report from the IAISSecretary where it was discussed that the FinancialStability Board is very focused on issues relating tosystemic risk in the insurance sector and to ensurethat the insurance sector is appropriatelyrepresented at the FSB. One major initiativeunderway in response to FSB recommendations isthe development of a methodology to assess systemicimportance of insurers. Further discussions on thistopic are scheduled for the April 4-6 meeting inBasel, Switzerland and May 4-6 meeting in KansasCity, Missouri.

The committee then discussed the IAIS CommonFramework for the Supervision of InternationallyActive Insurance Groups. This project continueswith an aim to release for public comment adocument detailing work in identification ofInternationally Active Insurance Groups andjurisdictional matters in June 2011.

The committee received a report on the IAISSupervisory Forum where it was noted that theinaugural meeting was held and a draft mandate wasdiscussed, including a mandate to facilitate andcoordinate better implementation of cooperationand exchange of information between supervisors.

The committee then discussed the US-EU dialogue,including next steps and future meetings. The NAIChosted the regulator-only session, and topicsdiscussed included solvency modernization, groupsupervision (including the exchange andmaintenance of confidential information and the useof supervisory colleges) and the EU equivalenceprocess. Regulators also discussed systemic risk andfinancial stability including representation of theinsurance sector at the FSB through the domesticangle as well as through the IAIS Financial StabilityCommittee in addition to the regulators respective

roles at the Financial Stability Oversight Council andthe European Systemic Risk Board.

The Committee discussed the IAIS multilateralmemorandum of understanding (MMOU), which is aframework for cooperation and the exchange ofinformation and sets minimum standards whichsignatories must meet in order to bolster crossborder supervision of insurance companies. Thereare currently 13 signatories and there is a need formore validators with increasing demand from IAISmembers to join the MMOU. The FAQ is beingupdated and additional guidance for MMOUapplications is being work on, including a matrix tocollect statistics on the use of the MMOU.

Reinsurance Task Force

Credit for Reinsurance ModelsAt the Summer National Meeting, the task forcesubmitted requests to amend the Credit forReinsurance Model Law (#785) and Credit forReinsurance Model Regulation (#786) toincorporate key elements of the ReinsuranceRegulatory Modernization Framework Proposal,including collateral reductions for highly ratedreinsurers and to incorporate the minimum trusteedsurplus requirement for a multiple-beneficiary trustfund maintained by an assuming insurer in run-off(Tawa Proposal). These requests for model lawdevelopment were approved by ExecutiveCommittee at the Fall National Meeting.

The task force released for comment February 22exposure drafts of proposed amendments to Models#785 and #786 to incorporate the above elements.Included for comment within Model #786 wereproposed forms CR-1, CR-F and CR-S, which requireannual statement-like filing forms showing assumedand ceded reinsurance for assuming reinsurers notdomiciled in the US. At its meeting in Austin, thetask force reviewed the sixteen comment letters andheard additional comments from ten interestedparties. Remarks included the following:

Several comment letters raised objections to thesliding scale provisions of the proposals; USceding companies believe the requirement tohold collateral equal to 75% of ceded losses whena reinsurer is rated "Secure 4" (S&P BBB or itsequivalent) is too low and suggest 100% shouldbe required. Non-US reinsurers commented thatthe collateral requirements are still too high for"certified" reinsurers compared to US reinsurers.



Many comment letters advocated deletion of allthe new mandatory contract provisions inSection 8E as unnecessary.

Two comment letters from US ceding insurersobjected to the Tawa proposal which wouldallow a reduction of trusteed surplus forcollateral in a multiple beneficiary trust for areinsurer in run-off.

Several comment letters had opposingviewpoints. Several interested parties requestedthat a commissioner be allowed additionaldiscretion on collateral or allowing a singlereinsurer rating (the current draft requiresratings from two acceptable rating agencies);others suggested that commissioners have lessdiscretion.

The task force will schedule an interim meeting tocontinue its review. The project is on a fast track; thetask force hopes to consider final amendments to thetwo models at the Summer National Meeting.

States Actions on Collateral ReductionIn connection with the task force's discussion ofreinsurance reform, the task force noted that Floridaadopted changes to its credit for reinsurance lawsand regulations in 2007, and has recently approvedseveral reinsurers for reduced collateralrequirements. New York adopted changes to itscredit for reinsurance regulations effective for newreinsurance agreements as of January 1, 2011, andrecently approved a reinsurer for reduced collateralrequirements. New Jersey just signed revisions intolaw as part of Senate Bill 2010/Assembly Bill 2670.

Nonadmitted and Reinsurance Reform ActThe task force continued its discussion of the federallaw implemented under Dodd-Frank and whetherthe task force should issue implementation guidanceregarding the effect of NRRA, whether any changeswill be necessary to state laws and whether the NAICshould develop a uniform definition of the term"reinsurer." The task force is also consideringmonitoring state compliance with the NRRA for thefederal Study and Report on Regulation of Insuranceprovided for under Dodd-Frank. Discussion of theseissues will continue during 2011.

Valuation of Securities TaskForce

2010 Year-End Financial Modeling UpdateSubsequent to the Fall National Meeting, the taskforce held two "regulator to regulator" conferencecalls to consider the macroeconomic assumptions,modeling scenarios and probability weightingswhich will be used in the RMBS and CMBSmodeling. These sessions were followed by a publichearing and conference call in late October/earlyNovember during which interested parties wereprovided an opportunity to present their comments.Interested parties expressed significant concernswith the lack of transparency provided with regard tothe vendors' valuation models. The task forcemembers and NAIC staff indicated that they haddisclosed everything that could be disclosed underthe confidentiality agreements signed by the NAICand these vendors with regard to the 2010 year-endmodeling. The task force committed to beginning thediscussion with the industry for the anticipated 2011year-end modeling in early 2011. This would enablethe task force to consider what specific informationthe industry requires, and within reason, toincorporate this into 2011 vendor selection process.Following the discussion on the two open conferencecalls the task force adopted final assumptions,modeling scenarios and probability weightings forthe 2010 year-end modeling.

NAIC staff provided an update of the 2010 year-endmodeling results on a January 19 conference call ofthe task force. NAIC staff reported that PIMCOAdvisory had modeled more than 19,400 RMBS.With regard to CMBS, it was reported thatBlackRock Solutions had completed the modeled of5,100 securities. The SVO executed a qualityassurance process similar to the 2009 approach forboth RMBS and CMBS.

2011 Year-End RMBS/CMBS Financial ModelingIn Austin, the task force briefly discussed plans forthe 2011 year-end evaluation of RMBS and CMBS. Itis currently expected that updated modeling willagain be performed only at year-end, consistent with2010. The task force instructed NAIC staff toperform a mid-year assessment of marketdevelopments similar to last year.



Certificate of Deposit Filing ExemptionThe task force adopted an amendment to thePurposes and Procedures Manual, previouslyexposed at the Fall National Meeting, which willprovide a filing exemption for any certificate ofdeposit covered by the Federal Deposit InsuranceCorporation up to the $250,000 insurance limit,whether or not the CD is issued by an NAIC AROrated bank. Further, any CD over the FDICinsurance limit will be subject to a filing exemption,if it is issued by an NAIC ARO rated bank. In thiscircumstance, the insurer would apply the bank'srating to the CD.

FDIC Securitizations Filing ExemptionFollowing considerable discussion on two conferencecalls and a second exposure period, the task forceadopted an amendment to the Purposes andProcedures Manual, which will provide a filingexemption for securitizations created by the FDIC inits role as a receiver of failed banks, where thepayment of principal and interest is guaranteed bythe FDIC. The task force was initially concerned thatwhile the governing statutes indicate that the FDICcan bind the full faith and credit of the USgovernment, the authority is limited as to amount,creating questions as to whether any specificguaranty is provided by the regulation. However,following examination of the legal basis for suchlimitation by legal counsel of the New York StateInsurance Department, it was concluded that thesesecuritizations are in fact bound by the full faith andcredit of the US government.

U.S. Government Securities Filing ExemptionsThe task force discussed a proposal from the NewYork Insurance Department to update severallistings of US government securities which areidentified within the Purposes and ProceduresManual as filing exempt. The proposal notes thatthe current list is inaccurate, out of date andunnecessarily complicated. The proposal wasreleased for a forty-five day comment period. Thetask force is also considering whether the exemptobligations list should be expanded to include alldebt issued, guaranteed or insured by institutions ofthe US government.

Eliminating Conflict in Classifying InvestmentThe task force considered a previously exposedproposal from the New York Insurance Departmentrecommending the deletion of the classification ofsecurities methodology from the Purposes andProcedures Manual of the NAIC Securities ValuationOffice as the SVO is required to follow the securityclassification definitions contained in the relevant

statutory accounting principles. The proposal alsowould require that as the SVO conducts annualupdates, securities must be reclassified, as necessary,in accordance with SSAPs. The intent of the proposalis to create consistency between the work of the SVOand application of statutory accounting principlesfor invested assets.

In response to the proposal the SVO reported thatthe statutory accounting definitions are incompatiblewith the mission of the SVO and with the complexfinancial engineering that SVO staff are tasked withevaluating. The task force referred the proposal andSVO report to the Financial Condition Committeewith a request that the Statutory AccountingPrinciples Working Group comment on thedocuments.

Invested Asset Working GroupThe Risk Other than Credit Technical ResourcesSubgroup of the Invested Assets Working Group isdeveloping a comprehensive security-level riskassessment process. This includes linking securitiesdata from various sources into a unified database.The database would enable regulators to create toolswhich will provide for more comprehensiveassessment and risk focused analysis of investmentrisks.

In response to a recommendation received from theSVO Review Working Group, the task forcerequested that the Invested Asset Working Grouplead the efforts to redesign the SVO's portfolioanalysis report (PAR) product and incorporate it intothe risk-other-than-credit framework currently beingdeveloped. PAR was developed prior to the NAIC'simplementation of risk-focused examinations. Thetask force believes that linking the PAR effort to therisk-other-than-credit framework will correlatebetter with the risk-focused approach. The workinggroup suggested that PAR should include an asset-liability matching component in order to provide fora full understanding of portfolio risk.

Update on Referrals from RAWGSVO staff provided a status update on the progressmade on the charges referred to the task force by theRating Agency Working Group. The staff presentedthree written reports which address the first fourcharges, all of which have the goal of placing lessreliance on ARO's in favor of developing moretailored processes. The first report proposes amethodology that can be applied at more discretecredit rating levels. The second report identifiesalternative analytical processes which can be utilizedif the task force concludes not to use credit ratings.



The last report provides an assessment of theperformance of credit ratings broken out by assetclass. The purpose of this report is to evaluatewhether the NAIC credit assessment framework (i.e.,NAIC ratings designations) are still appropriatelycorrelated with ARO credit ratings. The SVOdetermined that credit default rates for corporate,municipal and asset-backed securities differsignificantly, and therefore concluded that theregulatory assumption that a particular ARO ratinghas the same degree of default risk across variousasset classes is not accurate. Accordingly, the SVOhas proposed a new credit assessment framework,which would create separate and distinct NAICratings designations for corporate, municipal andstructure securities. The SVO reports were exposedfor a thirty-day comment period following the taskforces' January 19 conference call.

In Austin, the task force discussed the SVO'sproposed credit assessment framework and relatedcomment letters from interested parties. The taskforce directed SVO staff to work with interestedparties to assess technical issues raised in thecomment letters. The task force also recognized theneed to coordinate the work on the SVO proposalwith other NAIC regulatory initiatives, included theSolvency Modernization Initiative.

Working Capital Finance NotesThe task force received and exposed for a 45 daycomment period a proposal to recognize thepurchase of working capital finance notes as aninvested asset. These notes are created at the requestof a business; a bank establishes programs whichpermit eligible suppliers to sell receivables to thebank. Under such programs the bank confirms theterms of the invoice with the obligor and verifies thatthere are no defences to payment. Once confirmed,the payable is a legally binding obligation to pay asum certain on a stated date to the bank or a noteholder, such as an insurance company. The SVOwould establish a criteria-based program whichwould permit insurers to engage in the revolvingpurchase of short-term obligations.

The task force heard a presentation from an insurerwhich described the benefits investing in workingcapital finance notes. The company argued thatthese notes provide superior risk-adjusted returnswith an attractive liquidity profile as compared tosimilar-duration or perhaps longer-durationinvestment grade corporate securities. The short-term nature provides for a flexible fundingcommitment and allows for frequent credit re-underwriting of the obligor. The task force and some

interested parties raised concerns as to theadmissibility of these investments under statutoryaccounting. The task force has requested in input ofother NAIC regulator groups, including the SAPWorking Group and Blanks Working Group.

Rating Agency Working Group

The working group held a public hearing onNovember 18 to assess the use of NAIC ARO ratingsof municipal obligations. The working group heardtestimony from the managing director of the SVOand from a group of panellists representing issuer,investor and rating agency perspectives. There wasacknowledgement from all parties that default rateson state and municipal bonds are likely to stay low,but concerns do exist given the current economicconditions and unfunded obligations for pension andpost employment benefits.

The working group then held a meeting viaconference call March 15 and approved a charge toconsider whether there is a need for more frequentand detailed reporting on state and municipalobligations, weighed against the cost ofimplementing such reporting and the increasedburden of reporting. The working group will alsodecide whether or not to require more reporting, andif so, whether that reporting should be permanentand part of quarterly and annual statement reportingor temporary and outside the existing reportingframework. The regulators expect to complete thischarge by June 1.

At the meeting of the Financial ConditionCommittee, the regulators reviewed a report of thestatus the Rating Agency Working Group's 29recommendations to various task forces andcommittees. The report is posted to the committee'swebpage.

Blanks Working Group

The working group adopted the following blanksproposals, which were previously exposed during theFall National Meeting. Both adopted proposals areeffective for the 2011 annual statement.

The instructions and an illustration for Note 32A through E, Analysis of Annuity ActuarialReserves and Deposit-Type Liabilities byWithdrawal Characteristics, of the annualstatement blank were modified to requiredisclosure of the general account liabilities and



separate account liabilities, as well as the total.(2010-15BWG)

The instructions and designation matrix for theNAIC Designation column for bonds wasmodified to include three new suffixes (AM, FMand SM). The new suffixes are applicable toloan-backed and structured securities, where theNAIC designation is modified by an insurer'scarrying value of a security. The suffixes willallow regulators to track whether a securityderives its final designation from a SVO assigneddesignation (SM), ARO rating (AM), or financialmodeling (FM). (2010-20BWG)

The working group also considered modifications toa previously exposed blanks proposal which wouldadd a new interrogatory to the GeneralInterrogatories Part 2 for modified durationcategories using five different interest rate scenarios(2010-16BWG). The adoption was deferred until thenext meeting as the New York representativesponsoring the proposal was not present.

Thirty-three new proposals were exposed for a publiccomment period which ends May 27. Theseproposals will be considered for adoption on aconference call to be scheduled in June. Some of themore significant proposals would:

Create two new categories for the reporting ofpreferred stock within Schedules D and DL.(Agenda item 2011-01BWG)

Add three electronic only columns to ScheduleD, Part 1 for call date, call price and maturitydate and modify instructions. (Agenda item2011-05BWG)

Modify the Summary of Investments Scheduleby adding a line for derivatives and securitieslending. (Agenda item 2011-07BWG)

Add a column to the reinsurance schedules toindicate if a reported letter of credit is asyndicated letter credit. (Agenda item 2011-15BWG)

Add an interrogatory to the GeneralInterrogatories, Part 2 for outstandingassessments in the form of liens against policybenefits. (Agenda item 2011-19BWG)

Add an additional line to the Title Statement ofActuarial Opinion, Exhibit A: Scope, for thereserve for unpaid losses and loss adjustmentexpenses. (Agenda item 2011-22BWG)

Modify the instructions for Line 15 (Premiumsand Considerations) and Line 24 (Health Careand Other Amounts Receivable) of the Assets

page to clarify that premiums receivable forgovernment insured plans are to be included onLine 15 and excluded from Line 24. (Agendaitem 2011-28BWG)

Add the actuarial certification for preferredmortality to the Supplemental Exhibits andSchedules Interrogatories. (Agenda item 2011-29BWG)

Modify the Supplemental Health Care Exhibitblank and instructions. Among other changes,the proposal would add columns for studenthealth, mini-med and expatriate plans to Parts 1and 2. (Agenda item 2011-30BWG)

Add medical loss ratio disclosures to Note 24.(Agenda item 2011-31BWG)

Several of the proposals would modify instructionsand illustrations to the Notes section of the annualstatement to be consistent with those included in theAccounting Practices and Procedures manual.

NAIC/AICPA Working Group

The working group met via conference callDecember 2 and finalized the following issuesexposed for comment October 6.

MAR Implementation Guide RevisionsThe working group adopted new guidance for non-accelerated filers (public companies with less than$75 million in public debt) who are nowpermanently exempt under Dodd-Frank from filingan external audit report on the effectiveness ofinternal accounting controls. The guidance clarifiesthe reporting requirements for non-accelerated filersand provides two example reports for users.

Cut-off Date for Internal Control TestingThe working group had previously discussed aquestion raised by industry as to whether controlstesting should extend past the filing of the annualstatement. For example, if management finds afinancial statement error after the filing of theannual statement but before the filing of the auditedfinancial statements, does that indicate an internalcontrol deficiency? The working group concludedthat all financial reporting controls that couldreasonably impact financial statement values shouldbe completed in advance of the annual statementfiling.



Life Actuarial Task Force(LATF)

This was the first meeting of the renamed LifeActuarial Task Force (LATF) following the split inJanuary of the Life and Health Actuarial Task Force(LHATF) into two groups, LATF and the HealthActuarial Task Force (HATF, formerly the Accident& Health Working Group). The split was made inorder to give more recognition to A&H WG that wasoperating under LHATF. HATF will now reportdirectly to the Health Insurance and Managed Care(B) Committee.

The most spirited session at the meeting was debateover the implications of a Universal Life SecondaryGuarantee (ULSG) product design feature that mayresult in reported reserves less than the statutoryminimum intended under Actuarial Guideline 38(AG38). Other highlights of the two-day LATFmeeting included an update on the Principles-BasedReserves (PBR) VM-20 impact study, continueddiscussion of the purpose and objectives of a PBRFeedback Loop, an update on the Variable AnnuityStatutory Framework Review and a discussion of thepurpose and use of separate accounts.

Actuarial Guideline 38 IssueThe New York Insurance Department submitted areport to LATF highlighting a ULSG product designfeature that increases the premiums used in thereserve calculations, resulting in reserves below NY'sinterpretation of the minimum statutoryrequirement in the spirit of AG38. The specificfeature in question is a second set of policy chargesthat apply when the account value is exactly zero,particularly on the policy's anniversary date,generating higher premiums under the exactrequirements of AG38 for determining the minimumpremium and resulting in reserves that NY believesare below the minimum statutory requirement. TheNew York Insurance Department is aware of severalcompanies applying this interpretation of AG38 buthas not yet taken any regulatory actions.

There was lively debate over this issue, with sometask force members raising questions of "blatantmanipulation" and possible disciplinary action, butLATF recognized that more information is neededbefore any action on their part is taken. LATF votedunanimously to draft a communication to all stateinsurance regulators making them aware of theissue. The task force also discussed the possibility ofdrafting a referral to the Actuarial Board forCounselling and Discipline (ABCD). At this meeting,

there was no consensus to move this proposalforward and it is not clear what actions the ABCDcould take given. If regulators want to proceed withthis action, a separate vote will be required.

PBR Life (“VM-20”)Towers Watson presented an update on the impacttesting project. Phase I of the project, to assess theimpact of PBR on the US life insurance industry, beganin November and remains in progress. Phase II, toevaluate documentation and reporting requirements andto assess the effectiveness of specific elements of thePBR methodology, will begin in early April. The targetdate for submission of the Phase I results was March 31.There are 41 companies participating in the study anddue to year-end resource limitations, progress has beendelayed for several companies. Other reasons cited fordelays have been difficulty setting up the Net PremiumReserve calculation and in establishing appropriatemargins. Thirteen companies expect to submit resultsby the target date of March 31, while the remainingcompanies will experience delays of 1-3 months.Companies will begin working on Phase II testing uponcompletion of Phase I, with Phase II results targeted forMay 31. A final report from Towers Watson is targetedfor June 30. However, the report may be delayed if thereis insufficient data to provide meaningful results andpreserve the confidentiality of study participants.Towers Watson may also provide separate reports forPhases I and II so that the NAIC can begin review of thePhase I results as soon as possible. The project bulletinboard containing industry and impact study specificarticles, presentations and technical tools is located athttps://oneplace.ehr.com/sites/NAIC/default.aspx.

The project email address [email protected]; interestedparties can contact Towers Watson at this emailaddress to obtain access to the bulletin board.

PBR Feedback LoopIn response to a request from the PBR WorkingGroup for assistance in defining a PBR FeedbackLoop, LATF formed a subgroup to work on thisinitiative. The subgroup debated the purpose of afeedback loop, including the appropriateness ofusing the feedback loop as a means for evaluatingassumptions but also for evaluating how a PBRsystem should be monitored. LATF sees datacollection as a primary element of a feedback loopand plans for a phased-in approach to data collectionand evaluation, in order to support an assessment ofhow well the valuation process is being performedand how it can be improved. Phase I data collectionefforts will be focused on life insurance experienceand variance testing. In particular, experience onlife insurance mortality will be collected in the first



year, initially through a New York Pilot Project andsubsequently at a national level. The subgroup askedthe American Academy of Actuaries for assistance indeveloping a more comprehensive concept of afeedback loop. The PBR Process and CoordinationSubgroup is coordinating this effort and hopes tohave a more complete Feedback Loop proposal nearthe end of the current VM-20 impact study testingefforts.

PBR Experience Reporting (VM-50 and VM-51)Experience reporting under a PBR framework willinclude aspects related to policyholder behaviorwhich encompasses a much larger number of factorsand assumptions than statutory requirements haveconsidered in the past. Drivers of experience can becompany specific, and can be influenced by factorsnot normally included or considered in anexperience study. There is also variety amongcompanies in the extent to which these factors arestudied. These factors create challenges indeveloping industry level experience studies. ThePBR Experience Reporting Working Group chargedthe AAA Life Experience Subcommittee to work inconjunction with the SOA and interested parties onthe format of the behavior data collection form forVM-51, with a goal of completing the form by the2012 Fall National Meeting.

PBR Process and Coordination (VM-00 & VM-01)This subgroup provided an update on its activitiessince the last meeting. They anticipate changes tothe Valuation Manual due to the PBR impact testingstudy and will schedule conference calls to addresssignificant changes. The subgroup will also providerecommendations to LATF for potentialmodifications to the Standard Nonforfeiture Lawand will propose changes to the NAIC AnnualStatement Blanks, particularly with regard to theAnalysis of Increase in Reserves. The subgroup isworking in conjunction with the ACLI onmodifications to the blanks.

VASFR Phase 2 FindingsOliver Wyman presented findings andrecommendations from Phase 2 of its VariableAnnuity Statutory Framework Review Initiative,under which the firm was commissioned by 12 of thelargest VA writers in North America to review"unintended consequences" of the VA statutoryreporting framework under AG43 and C-3 Phase IIRBC. Phase 2 of the project was furtherinvestigation of issues identified in Phase 1 andrecommendation of potential solutions. The primaryissues are the effect of hedging within the stochasticprojections (i.e. the potential for disincentives for

appropriate risk management) and dominance of theAG43 Standard Scenario. Oliver Wyman testedvarious refinements with a subset of the participantgroup. Results indicated that the refinements wouldnot significantly alter the current reserverequirements, suggesting that the proposedrefinements were unable to address root causes ofthe issues, at least in the current marketenvironment. As such, Oliver Wyman did not makeany recommendations and suggested that furtherinvestigation into other systemic elements is neededbefore changes should be made to the existingframework.

The impact of issues raised in connection with thisstudy apply broadly to principles based frameworks(e.g. C3 Phase 2 ) and not just to VACARVM. Inevaluating potential changes to the AG43framework, LATF will now consider input andactions by regulators including the Life RBCWorking Group, the C3P2 Subgroup and otherinterested parties.

Purpose and Use of Separate AccountsFollowing debate at the Fall National Meeting overissues raised with respect to the use of separateaccounts for non-variable products, the FinancialCondition (E) Committee referred the matter toLATF for further investigation. LATF then gatheredmore detailed information on the history and use ofseparate accounts in order to better frame the issuesincluding those related to solvency, valuation andnonforfeiture. Regulators want to protect againstcompanies structuring products that get the benefitsof separate account treatment without providinginsurance benefits. To do so they need tounderstand the products that are being offered asnon-unit linked products in the separate account andif there is a compelling reason to market them assuch. A motion was passed to form a subgroup thatwill research the issues and report back to the ECommittee. This subgroup will be chaired by BlaineShepherd (MN).

Contingent Annuity SubgroupAt the Fall National Meeting, this subgroup wasappointed by LATF to review a new insuranceproduct that has been filed in virtually all states andhas subsequently raised regulatory concerns. Theproduct is essentially a stand-alone guaranteedlifetime withdrawal benefit (GLWB) offered to amutual fund investor. While the benefit coversinvestments in a range of mutual funds that wouldbe considered "Covered Funds," the key feature isthat the Covered Funds are neither owned normaintained by the insurer.



The task force reviewed and discussed the productfiling and its preliminary conclusion is that theproduct is a financial guarantee product and shouldnot be classified as in insurance or annuity product.The subgroup submitted a report to LATF describingthe product and related issues, with the intentionthat the report be sent to all commissioners to alertthem to potential issues with respect to this product.Given a variety of views expressed duringdiscussions, LATF elected to continue working onthis issue, gather additional information, solicitinput from the Academy, and provide an update at afuture date.

Payout Annuity and Simplified Issue MortalityThe SOA and AAA Joint Project Oversight Grouppresented the 2012 Payout Annuity Mortality tableincluding a basic table, projection scale (G2), andproposed margins for valuation. The table is basedon experience data from 2000-2004 and theprojection scale incorporates mortality improvementfrom the Social Security Administration (SSA) 2010Trustee's Report. The mortality rate is capped at400 per 1,000, or 0.400 at older ages, rather thangrading to 1.0 by age 120. The proposed margins aresimilar to those in the current A2000 valuationtable. Relative to reserves based on the A2000 table,the proposed table results in higher reserves at issuefor all age/gender combinations, and generallyhigher reserves at later durations. LATF voted toexpose the table, projection scale and proposedmargins for comment. Once approved, the table willbe effective for valuation.

The joint group also presented a progress update onthe development of guaranteed issue (GI) andsimplified issue (SI) mortality tables. The data callwas issued in mid-March, delayed from the originaltarget schedule due to challenges in differentiatingmortality drivers of pre-need business versus allother business and resulting complexities in the datacall. Sample carriers responded positively regardingtheir ability to provide data. There will be twotables, one for pre-need business and one for allother business. The group expects to have proposedtables by late 2012. To encourage participation inthe data call, LATF will draft and recommend acommunication to Commissioners notifying them ofthe data call and requesting their support throughcontact with appropriate leaders at solicitedcompanies.

The joint group also commented on the developmentof a 2014 VBT/CSO table for the intended use withPBR when that becomes effective. Experience datafor 2002-2007 has been collected to develop the

table, and 2008-2009 data will be used forvalidation. The current focus is on base andaggregate tables. Analysis of preferred risk criteria istargeted for late 2012; that information will be usedto split the tables into different risk classes.

Nonforfeiture ImprovementThe AAA Non-Forfeiture Improvement Work Group(NFIWG) provided a progress update on its work tostudy the feasibility of a new nonforfeiture law forlife insurance and annuities. The work groupexpects to make a presentation to LATF at theSummer National Meeting. At the Fall NationalMeeting the work group received a charge toarticulate the public policy issues that arose duringits deliberations. The work group chair presented asummary of the issues. The NFIWG full report onthe results of the feasibility study will articulate aspecific position or potential courses of action onsome issues, but others will simply be identified andno position or course of action is indicated. Theidentified issues include those related to theactuarial approach used in the determination of non-forfeiture mandates, regulation or non-regulation ofnon-guaranteed elements, whether cash surrendervalues should be required as additional benefitsunder the policy when nonforfeiture values arepresent, and the degree of regulatory establishmentand review over nonforfeiture assumptions.

Standard Nonforfeiture LawThe ACLI provided an update on the status ofchanges to the Standard Nonforfeiture Law (SNFL)to make it consistent with PBR requirements and therevised Valuation Manual. Proposed revisionspointing to the Valuation Manual as the source forthe applicable interest and mortality rates, andclarifying the effective date of the SNFL relative tothe Valuation Manual were presented andsubsequently exposed for comments.

Preferred Class CertificationsThe actuarial certification required for use ofpreferred class mortality tables in determiningminimum statutory reserve requirements has not yetbeen included in the annual statement blanks. LATFreviewed a Blanks proposal that incorporates thecertification into the Supplemental Exhibits andInterrogatories sections. LATF voted to proceedwith moving the certification through to the BlanksWorking Group for inclusion in the 2011 AnnualStatement.

Regulatory Asset Adequacy Issues ReviewLATF received a referral from the Financial AnalysisWorking Group regarding regulators' review of the



Regulatory Asset Adequacy Issues Summary.Currently the Financial Analysis Handbook does notspecifically address the review of the IssuesSummary. There is concern by the FAWG that thesummary is not being reviewed, particularly in stateswithout regulatory actuaries. Recently the FAWGalerted states that they need to be reviewing theIssue Summary in conjunction with theirexaminations. FAWG recommends that additionalguidance and procedures be included in the 2011Handbook addressing various elements of the reviewincluding communication about the risks addressedby the Issues Summary and recommendations foradditional analysis if certain risks are identified.LATF will draft recommendations for review anddiscussion. The final recommendations are expectedto become part of the accreditation process.

IIPRC ReportThe Interstate Insurance Product RegulationCommission provided a report of recent activities,including adoption of additional standards forprivate placement VA and VUL products, and forchange in insured benefits and overloan protectionbenefits. Current proposals which are expected to bepromulgated without comment are modifications toLong Term Care product standards for rate filing,refund provisions for misstatement of age andannual reporting requirements. The group iscurrently reviewing Disability Income productstandards.

International UpdateLarry Bruning, former LHATF chairperson and nowin a new role focusing on international actuarialdevelopments, gave an update on his activities. Theupdate included an overview of the structure of theInternational Association of Insurance Supervisors,currently representing insurance regulators in 180jurisdictions. The IAIS' primary mission is toestablish a set of Insurance Core Principles (ICPs)that will be used to score each country's regulatoryregime. There are 26 ICPs; five are still beingdrafted while the rest are final. The United States,through the requirements of the NAIC Blanks andRBC reporting criteria, has one of the best datacollection facilities through the NAIC. This will playa key role in evaluating the US regime.

Health and Actuarial Task Force

Long-Term Care Insurance ValuationWork continues on the development of a Long TermCare valuation table and related guidance. TheMedical Information Bureau is coordinating the data

collection and has asked the SOA/AAA JointExperience Committee for clarification regardingorganization of the data so that it will be useful forvaluation. Errors in the sample data set are beingcorrected and a complete data set is expected to beprovided to the MIB by mid-year, with a reporttargeted for June 2012.

The Valuation Subgroup is also reviewing theAccounting Practices and Procedures Manual'sAppendix A-010, Minimum Reserve Standards forIndividual and Group Health Insurance Contracts,and Actuarial Standard of Practice 18, Long TermCare Insurance, to evaluate the need for additionalguidance. One key issue being debated is thereflection of rate increases in premium deficiencyreserve testing. There appears to be variation inpractice in reflecting rate increases, with mostcompanies assuming all necessary rate increases aregranted, while others believe the calculation shouldnot reflect any future rate increases. Research anddiscussion will continue in 2011.

Long-Term Care Insurance PricingThe LTC Model Regulation requires that pricingactuaries sign a certification that rates are sufficientunder marginally adverse experience to besustainable over the life of the product with noincreases anticipated. In light of recent LTC productrate-increase activity and lack of specific guidancerelative to rate adequacy, the LTC Task Force askedits valuation subgroup to clarify the definition of"moderately adverse" in the model regulation. Thesubgroup's recommendation defines a "requiredadverse development threshold" which requires thatboth future expected and lifetime expected claimsexceed those projected under current pricing bymore than 20% before a rate increase is requested.This definition, along with additions to otherrelevant sections of the model regulation, wereexposed for comment. Once the proposed changesare approved, the proposal will be forwarded to theLTC Task Force to authorize changes in the modelregulation.

Group Long Term Disability TableThe SOA Long Term Disability ExperienceCommittee presented the results of a Group LTDexperience study, introducing the 2008 GLTDExperience Table as a basis for LTD claimtermination rates. Recent experience tables reflecttermination rates in excess of emerging experience,and current tables don't provide key levels ofvariation needed to set appropriate reserves. The2008 study covers 72% of 2007 market share and issignificantly credible. The 2008 table provides



separate recovery and death rates and recognizesand quantifies key parameters influencingterminations such as elimination period, diagnosis,duration and gross monthly benefit amount. Thetask force passed a motion requesting that theAcademy develop a valuation table based on the2008 GLTD Experience table, targeting November2011 for a recommendation.

Health Actuarial Opinion ReviewAt the Fall National Meeting a Health ActuaryOpinion Subgroup was formed to provide guidanceto regulators related to review of actuarial opinionsfor health reserves. A conference call was held withregulators early in 2011 and the subgroup providedreference materials including the Practice Notesfrom the Academy's State Health Committee foractuaries writing statutory opinions, and a guidancedocument produced annually by the CasualtyActuarial Society statistical task force. The subgroupwill schedule a call in late May or early June forregulators to discuss health opinions andobservations. The subgroup will also evaluate theneed to produce a regulatory guidance document,based on the nature of the issues raised in the call.

Update on PPACA IssuesThe PPACA Actuarial Subgroup oversees twosubgroups, an ACA Risk and Reinsurance Subgroupand an HHS Rate Disclosure and Review Subgroup.Each group is becoming familiar with emergingissues. The HHS Group is in the process ofreviewing NAIC comments on forms and willdevelop responses to the NAIC.

The Academy has released several comment lettersaddressing various areas of Health Reform butprimarily MLR Reporting and Rebates. TheAcademy is currently working on a statement ofactuarial value and evaluating components of thecalculation. Visits to meet with Congressionalstaffers and agencies are underway, with topics ofdiscussion including alternatives to individualmandate and essential benefits.

Medicare Supplement Refund FormulaThere was an update from the Senior Issues TaskForce charged with review of the MedicareSupplement Refund Formula. The group continuesto collect data and is evaluating changes needed tomake the refund formula more equitable. Once thedata is compiled it will be turned over to theAcademy for review. No date was provided for thecompleted analysis.

Life Insurance and AnnuitiesCommittee

Stranger-Originated Annuity TransactionsThe committee continued its year-long project toconsider stranger originated/owned annuities andhow these transactions may interact with insurableinterest laws and the impact on consumers. Thecommittee developed a draft Insurer Bulletin in2010 on Stranger-Originated Annuity transactions(STOA) which suggests approaches for insurancecompanies to guard against such transactions.Since the Fall National Meeting, the committeereviewed suggested revisions to the NAIC bulletin,suggested through a collaborative effort undertakenby New Jersey and Iowa. At the Spring NationalMeeting, additional comments were heard frominterested parties including a trade association forthe insured retirement income industry.

The most significant change to the draft bulletinsince the Fall National Meeting was to combine thefollowing guidance:

Establish methods to detect agents who may beinvolved in the facilitation of Stranger-Originated Annuity transactions

Ensure the underwriting department hasestablished criteria to identify questionableapplications which would be subject toadditional levels of review

into one revised item as follows: "create detectionmethods to identify STOA transactions and thoseproducers who may be involved in facilitating suchtransactions, including controls to flag questionableapplications." After making the final revisions, thecommittee adopted the sample bulletin/industryalert.

Annuity DisclosuresAt the Fall National Meeting, the Annuity DisclosureWorking Group adopted a final draft of the proposedrevisions to the Annuity Disclosures ModelRegulation (#245) which was then submitted to thecommittee for acceptance. The committee adoptedworking group's proposed revisions to the ModelRegulation but decided to provide an additional 30-day comment period for interested parties to submitcomments on issues not already considered by theworking group.

At its meeting in Austin, the committee discussednewly proposed revisions that were added to addressconcerns raised during the comment period; therevisions were primarily for clarification purposes.The committee then moved to adopt the draftregulation, pending exposure of Section 6, Standards



for Annuity Illustrations, for a two-week commentperiod, and it is anticipated that the draft regulationwill be adopted following expiration of the commentperiod for Section 6. A question was raised withrespect to whether the annuity illustration in Section6 requires actuary certification and it wasdetermined certification is not necessary on the basisthat the illustration is not complex and therefore,companies should be able to complete this section.

The committee then re-appointed the AnnuityDisclosure Working Group for the purpose ofcompleting its work on revising the Annuity Buyer’sGuide, a project that has experienced some delays.

Other MattersThe committee approved formation of a newworking group to revise the Viatical SettlementsModel Regulation (#698) for consistency with the2007 revisions to the Viatical Settlements Model Act(#697). The working group will also revise theconsumer informational brochure, which isAppendix A of the regulation.

The committee then reviewed a memorandumhighlighting issues involving corporate-owned lifeinsurance and Section 1035 of the Internal RevenueCode exchanges. Concerns relate to instanceswhereby a company desires to replace the policy butthe individual is inactive, e.g. retired or terminated.The committee decided to hold a conference call inMay to continue its discussions.

Separate Account Risk WorkingGroup

The working group has not met since October but inMarch its parent committee modified the charge andname of the working group. Its charge is now "studythe need to modify existing or develop newregulatory guidance related to separate accountswhere, in recent years, various products and contractbenefits has increased the risk to the generalaccount." The name of the working group is now"separate account risk" instead of "separate accountrisk charge" working group.

Financial Regulation Standardsand Accreditation Committee

The committee met in Austin and took the followingactions:

Revisions to Documents Required forAccreditationRevisions made during 2010 to publications that arerequired for accreditation purposes (e.g., the Annual

Statement Blanks and Instructions; Life and P/CRBC Formulas; the Purposes and ProceduresManual of the NAIC Securities Valuation Office; theAccounting Practices and Procedures Manual; andthe Financial Condition Examiners Handbook) wereadopted by the committee as revised accreditationstandards. The committee released one significantrevision made to the Financial Condition ExaminersHandbook for a thirty-day public comment period.This revision relates to the contents and the timingof the review of the examination planningmemorandum.

Insurance Holding Company System RegulatoryAct and Model RegulationThe committee discussed the 2010 revisions to theInsurance Holding Company System Regulatory Actand the Insurance Holding Company System ModelRegulation. The committee is waiting for guidancefrom the Group Solvency Issues Working Group asto which sections of the models should be consideredsignificant elements for inclusion in Part A: Lawsand Regulations accreditation standards.

Companies Deemed to be in HazardousFinancial ConditionThe committee received an update on the 2008revisions to the Model Regulation to DefineStandards and Commissioner's Authority forCompanies Deemed to be in Hazardous FinancialCondition. These revisions were previously releasedfor a one-year public comment period which endedDecember 31, 2010. There were no commentsreceived, and there have been no further revisions toModel since 2008. The committee will consideradoption of these revisions for accreditationpurposes at the Summer National Meeting.

Exemption of Risk Retention GroupsThe committee discussed the exemption for RRGswhich is currently provided in the BusinessTransacted with Producer ControlledProperty/Casualty Insurer Act. The committee willrequest that the Property and Casualty InsuranceCommittee consider whether the exemption forRRGs should remain.

Casualty Actuarial andStatistical Task Force

Statement of Actuarial OpinionThe task force heard a presentation from theAmerican Academy of Actuaries regarding proposedchanges to the Statement of Actuarial Opinion(SAO). These changes were triggered by



modifications to requirements for Associateship bythe Casualty Actuarial Society and the need forconsistency between the new CAS requirements andthe SAO. The discussion focused on the definition ofa "qualified actuary." It was confirmed during themeeting that neither AAA nor CAS would attest towhether an actuary has fulfilled the requirededucation requirements; the burden of qualificationlies upon the individual member. A comment wasraised regarding the need for a mechanism toprovide feedback on the quality of an actuary's work.The proposal was tabled for further evaluation,including possible changes to Exhibit B of theActuarial Opinion relating to the actuary'squalifications.

Salvage and Subrogation IssueThe task force also commented that the NAIC hasreceived several inquiries regarding companieshaving unusually high amounts of anticipatedsalvage and subrogation. Auditors are asking whatstandards can be applied in making sure theseamounts are valid. Discussion pursued on whetherthe current SSAPs provide enough guidanceregarding salvage and subrogation, includingwhether credit should diminish as the recoverableages and whether it is clear that the quantificationshould be supported and documented. SSAP 55addresses the manner by which recoverables areestimated, and the task force believes this guidanceis sufficient. The task force noted that quantificationshould be supported and documented, and the focusshould be on the documentation of the estimationprocess.

Catastrophe Insurance WorkingGroup

The working group held a public hearing regardingcatastrophe modeling and the use of short-term vs.long-term horizons. Representatives from RMS, AIRWorldwide and Karen Clark & Company presentedthe pros and cons of catastrophe modeling. There isgrave concern on the part of the commissioners thatcatastrophe modeling may not be reliable and recentchanges to the model due to changes to risk levels bygeographic areas may not be aligned with the generalunderstanding of catastrophe risks and losses. Thethree presenters noted that catastrophe models donot provide the complete picture of a catastrophe'sloss potential. These models are only one tool forcatastrophe risk assessment and must be used inconjunction with high quality data, a process forvalidating model output, and other information onlosses not captured by the models.

The working group did not discuss any "next steps"as a result of the hearing, i.e. what they planned todo with the information obtained or whether theyplanned to share the work with the Catastrophe RiskSubgroup of the P/C RBC Working Group.

Risk Retention Group TaskForce

Risk-Based CapitalThe task force received a report from the CapitalAdequacy for RRGs Technical Subgroup, whichincluded the subgroup's recommendation regardingthe applicability of the Risk-Based Capital forInsurers Model Act to risk retention groupsorganized as captives. The subgroup has concludedthat while most captive RRGs report on a US GAAPbasis, rather than SAP, the RBC calculation is still ameaningful measure for most captive RRGs. Whilethe subgroup acknowledged that utilization of a basisof accounting in the RBC formula that differssignificantly from SAP will produce different RBCamounts, it concluded that the capital adequacystandard for captive RRGs should include therequirement for domestic regulators to enforce RBC.The subgroup's proposal would require captiveRRGs to file annual RBC reports. In addition,captive states would need to adopt the RBC ModelAct.

In limited circumstances, domestic regulators ofRRGs could elect not to take regulatory action whichwould otherwise be required by the RBC Model Act.These circumstances include:

Where an RRG’s members and/or sponsoringorganizations are well-capitalized entities whosefinancial condition and support for that RRG canbe adequately established. However, thedomestic regulator of the RRG must, at aminimum, require the filing of at least threeyears of historical audited financial statementsof the members and/or sponsors in order toestablish the financial ability of those entities tosupport the RRG.

Where each policyholder qualifies as anindustrial insured in their state or in the state ofthe RRG's domicile.

Where the RRG's Certificate of Authority isdated prior to January 1, 2011, and, based on aminimum five-year history of successfuloperations, is specifically exempted in writingfrom the requirements for mandatory RBCaction by its domestic regulator.



The task force exposed the subgroup's proposal for athirty-day public comment period.

Risk-Focused ExamThe task force also received a report from the RRGsand Risk-Focused Examinations Subgroup, whichincluded the subgroups recommendation thatcaptive RRGs not be exempted from the risk-focusedexamination approach (RFE) or certain phases of theRFE. Some subgroup members and interestedregulators have argued that the RFE wouldsignificantly increase the cost of examination tocaptive RRGs and would provide limited to noadditional benefit to regulators, due principally tothe nature and size of the RRGs. However aftersignificant discussions on two conference calls, thesubgroup members concluded that the RFE isflexible enough to allow examiners to tailor theexamination to fit the unique characteristics ofcaptive RRGs. Additionally, the subgroup wasconcerned that developing an alternativeexamination approach may not qualify as a full-scope examination in accordance with the FinancialCondition Examiners Handbook, causing a state topotentially fail accreditation standards.

The task force exposed the subgroup's proposal for athirty-day public comment period.

Title Insurance Task Force

The task force discussed Private Transfer FeeCovenants (PTFCs), which allow a developer or otherperson to collect a fee (typically 1% of the sale price)on each future resale of the affected property duringthe term of the covenant. Typically, these covenantsare in effect for 99 years and are applied toresidential properties. Bills have been proposed inCongress that would outlaw PTFCs.

At the Fall National Meeting, the task force held apublic hearing on private transfer fee covenants, aresult of which they concluded more informationwas needed. A survey of NAIC members related toprivate transfer fee covenants began in December2010 to ascertain whether the NAIC should pursue amodel law or guideline to limit or prohibit privatetransfer fee covenants; or, secondly, whether theNAIC should support legislation, if introduced, thatis similar to the bills. Although the survey resultsindicated a majority vote of "No Opinion," the taskforce believes this could be attributed to whether themembers feel that this is an insurance matter versusa real estate matter. Although there is no clear linebetween title insurance and real estate settlement,the task force has concerns on the adverse effects

PTFCs have on consumers, title insurancecompanies, and the real estate settlement practice.

As a result, the task force adopted a motion to draft acomment letter, making a referral to theGovernment Relations Leadership Council insupport of a proposed rule by Federal HousingFinance Agency regarding prohibiting privatetransfer fee covenants; comments are due to FHFAby April 11.

The task force then heard an update on sevenrecommendations to the Blanks Working Groupregarding improvements to the title annualstatement and filing instructions. The proposals havebeen exposed for comments and will be voted duringa conference call in June.

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The next National Meeting of the NAIC will be held inPhiladelphia August 29-September 1. We welcomeyour comments regarding issues raised in thisnewsletter. Please give your comments or emailaddress changes to your PricewaterhouseCoopers LLPengagement team, or directly to the NAIC MeetingNotes editor: Jean Connolly 440 893-0010 [email protected].

Disclaimer

Since a variety of viewpoints and issues arediscussed at task force and committee meetingstaking place at the NAIC meetings, and because notall task forces and committees provide copies ofagenda material to industry observers at themeetings, it is often difficult to characterize all of theconclusions reached. The items included in thisNewsletter may differ from the formal task force orcommittee meeting minutes.

In addition, the NAIC operates through a hierarchyof subcommittees, task forces and committees.Decisions of a task force may be modified oroverturned at a later meeting of the appropriatehigher-level committee. Although we make everyeffort to accurately report the results of meetings weobserve and to follow issues through to theirconclusion at senior committee level, no assurancecan be given that the items reported on in thisNewsletter represent the ultimate decisions of theNAIC. Final actions of the NAIC are taken only bythe entire membership of the NAIC meeting inPlenary session.

Additional information

If you would like additional information, please contact:

Jean ConnollyManaging Director, NationalProfessional Services GroupTel: 1 440 893 [email protected]

PwC’s Insurance Practice Leaders

Jim ScanlanInsurance Practice LeaderTel: 1 267 330 [email protected]

Paul McDonnellInsurance Advisory LeaderTel: 1 646 471 [email protected]

Sue LeonardInsurance Tax LeaderTel: 1 213 830 [email protected]

www.pwc.com/us/en/insurance

© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PwC” refers to PricewaterhouseCoopers LLP, a Delaware limitedliability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of thenetwork, each of which is a separate and independent legal entity. This document is for general information purposes only, andshould not be used as a substitute for consultation with professional advisors.