NATIONAL INSURANCE CHARTER MOVING FORWARD IN 2002 RECENTLY INTRODUCED BILLS

NATIONAL INSURANCE CHARTER

MOVING FORWARD IN 2002

RECENTLY INTRODUCED BILLS

2

NATIONAL INSURANCE CHARTER INTRODUCED LEGISLATION

INSURANCE INDUSTRY MODERNIZATION AND

CONSUMER PROTECTION ACT

(“LAFALCE”)

Introduced by Congressman John LaFalce (DNY) on February 14, 2002 Contains concepts from ACLI and ABIA proposals and SCHUMER

Available at http://www.house.gov/banking democrats/lafalc 110.pdf

NATIONAL INSURANCE CHARTERING AND SUPERVISION ACT

(“SCHUMER”)

Introduced by Senator Charles Schumer (DNY) on December 20, 2001 Endorsed by both the ABIA and ACLI Contains concepts from both proposals

Available through Senator Schumer’s office or http://www.acli.com

3

AMERICAN BANKERS INSURANCE ASSOCIATION (ABIA) The National Insurance Act of 2001 November 2000 (revised May 9, 2001)

Available at http://www.aba.com/ABIA

AMERICAN COUNCIL OF LIFE INSURERS (ACLI) National Insurer Act National Insurer Solvency Act April 2001, updated December 2001

Available at http://www.acli.com

AMERICAN INSURANCE ASSOCIATION (AIA) Federal Insurance Chartering Act of 2001 July 2001

Available at http://www.aiadc.org

PRIOR TRADE GROUP PROPOSALS

4

NEW REGULATORY STRUCTURE

LAFALCE

National charter and licensing for underwriters

Ability to write and sell insurance nationwide without being subject to state authorization; however, subject to state rate regulation

Repeals McCarran-Ferguson Act antitrust exemptions for all insurers, state and national, except for two very limited exceptions

5

NEW REGULATORY STRUCTURE (CONT’D)

SCHUMER

National charter for underwriters and agencies

Insurers with a license to write and sell a “national” product can sell the product nationwide without state regulation of any kind

Federally licensed producers can sell “national” and state insurance products nationwide without a state license or complying with other state regulatory requirements

6


U.S. antitrust laws apply to national insurers except to the “development, dissemination, or use” of policy forms, and to state laws applicable to national insurers that are not preempted by the bill

ABIA

National charter for underwriters and agencies

Modeled after the regulation of national banks and federally chartered thrifts under the “dual banking system”

Ability to write and sell insurance nationwide authorized by national charter not subject to state regulation

7


Agencies can sell products issued by national or state domiciled insurance companies without “significant interference” from states

ACLI

National charter for underwriters

Generally regulates companies as if domiciled in a new “Federal” state, no express state law preemption language

Insurers with a license to sell a “national” insurance product can sell the product nationwide

8


Federally licensed producers can sell “national” insurance products nationwide

Products issued by state domiciled carriers can only be sold by producers licensed by the state where product sold, regardless of whether producer is federally licensed

AIA

National charter for underwriters

Contemplates “dual” system similar to ABIA

9


Ability to write and sell insurance nationwide without state regulation or approval

No antitrust protection for rates of federal insurers

Producer licensing not addressed

10

NEW REGULATOR

LAFALCE and ACLI

Office of National Insurers Headed by the Director of the Office of National Insurers

(“DONI”)

SCHUMER and ABIA Office of National Insurance Commissioner Headed by National Insurance Commissioner (“NIC”)

11

NEW REGULATOR (CONT’D)

AIA

Federal Insurance Chartering Office Headed by Director of Federal Insurance Chartering Office

(“DFICO”)

STRUCTURE and TERM

ALL bureau under Department of Treasury LAFALCE, SCHUMER and ABIA patterned after the Office

of the Comptroller of the Currency and the Office of Thrift Supervision

NIC, DONI and DFICO appointed by President with Senate approval

LAFALCE appointment for 4 year term

12


SCHUMER, ABIA and ACLI appointment for 5 year term AIA appointment for 6 year term Express independent regulatory and litigation authority under

LAFALCE, SCHUMER, ABIA and ACLI, implied for AIA

SELF FUNDING

ALL provide for assessments of insurers for examination and application expenses, LAFALCE bill charges national insurer affiliates for examination costs

LAFALCE provides for $10 million agency start up loan from Treasury to be paid in full with no interest within 5 years following date of enactment

13


SCHUMER provides for agency start up loan from Treasury to be paid in full by agency with interest within 10 years following date of enactment of bill

LAFALCE and SCHUMER DONI or NIC may also assess national insurers for a “working capital” fund, in addition to assessments to cover budget of agency

AIA provides for appropriation of start up funds by Congress which is repaid out of assessments and fees

14

REGULATORY AUTHORITY

NATIONAL INSURANCE COMPANIES

ALL provide for organization, operation, regulation and supervision of national insurance companies

ALL provide for authority to charter national insurance companies

LAFALCE, SCHUMER and ACLI provide for licensing of insurers to underwrite and sell national products

LAFALCE requires DONI to approve the policy forms of national insurers and to set policy form standards by regulation

15

REGULATORY AUTHORITY (CONT’D)

SCHUMER NIC may set policy form standards for consumer policies by regulation, NIC prior approval NOT required for policy forms

NATIONAL INSURANCE PRODUCERS SCHUMER and ABIA provide for chartering, regulation and

examination of national insurance agencies Other proposals, including LAFALCE, do not provide for

chartering of national insurance agencies

16


SCHUMER, ABIA and ACLI provide for licensing of producers to sell national products

LAFALCE and AIA contain no provisions on producer licensing

EXAMINATIONS OF NATIONAL INSURERS LAFALCE and SCHUMER require annual examinations for

financial condition and market conduct LAFALCE and SCHUMER permit DONI or NIC, as

applicable, to determine that less frequent exams are warranted

17


LAFALCE DONI cannot exempt insurer from annual market conduct exams

LAFALCE provides for the public availability of exam reports and work papers

ABIA provides for CAMELS rating system and annual examinations unless “adequately capitalized” then biannually

ABIA requires ongoing onsite examination for “large” institutions (as defined by NIC)

ACLI requires triennial examinations; more frequently at DONI’s discretion

AIA provides initial and “special” examinations and [investigative authority of federal and state insolvencies]

18


EXAMINATION OF AFFILIATES OF INSURERS LAFALCE and ACLI may examine only:

To the extent that the activities of the affiliate may affect the operations, management, or financial condition of the insurer

If examiners cannot obtain the necessary information from the insurer

SCHUMER and ABIA may only examine to determine: Relationship and transactions between an insurer and

the affiliate Risks to insurer as a result of the affiliate relationship

19


The insurer’s systems for monitoring and controlling affiliate risk

SCHUMER deference is given to the exam reports of functionally regulated entities by their primary regulator

AIA Silent on affiliate examinations

SCHUMER If the affiliate is functionally regulated, NIC must notify

functional regulator of the examination and give that regulator an opportunity to participate in the examination

20

REGULATOR ENFORCEMENT POWERS

GENERAL ENFORCEMENT AUTHORITY

LAFALCE, SCHUMER, ABIA and ACLI: Akin to 12 U.S.C. 1818 enforcement authority for banks

Subject to Administrative Procedures Act, appeal to federal circuit courts

Suspension, removal and prohibition of certain affiliated parties

Cease and desist authority Civil money penalties - $5,000/day – tier 1, $1 million/day –

tier 3 LAFALCE, SCHUMER, ABIA and ACLI have differing

standards for violation – LAFALCE and SCHUMER have stricter standard, under certain circumstances

21

REGULATOR ENFORCEMENT POWERS (CONT’D)

LAFALCE and SCHUMER allow for revocation, suspension or restriction of federal licenses based on conduct of company or its board of directors

ABIA separate enforcement authority for National Insurance Guaranty Corporation with respect to solvency issues

JURISDICTION OVER: National insurance companies LAFALCE and ACLI also applies to “insurer affiliated parties” LAFALCE applies to state licensed producers (except for

prohibition orders)

22


SCHUMER and ABIA applies to agencies and “company affiliated parties”

SCHUMER specifically permits NIC to take enforcement actions against holding companies of national insurers and any officer, director, employee or agent of a holding company

AIA More limited than others Delinquent fees and penalties May suspend or revoke charter of an insurer that is

knowingly in significant violation of the provisions of the bill

23


Cease and desist authority to stop an activity, no authority to take affirmative or prospective action, except restitution and amending policy forms

May make referrals to federal and state law enforcement authorities for possible civil or criminal investigation

24

SELF-REGULATORY ORGANIZATIONS

SCHUMER and ACLI

One or more self regulatory organizations (“SROs”) (could be one for insurers, one for producers, one for life and annuity, one for property/casualty, etc.)

Modeled after self regulatory provisions of Securities Exchange Act of 1934 – NASD and NYSE

Can adopt rules and impose penalties on its own members and associated persons for rule violations

No producer licensing authority for akin to that provided to the NASD with respect to registered representatives

25

SELF-REGULATORY ORGANIZATIONS (CONT’D)

NIC or DONI has review authority for significant rules and disciplinary actions, can require the SRO to pass rules, can suspend or revoke SRO status

NIC or DONI can discipline SRO members and associated persons directly

SCHUMER – NIC can affirm, set aside or remand SRO’s decision including ability to cancel, reduce or remit any sanction imposed

LAFALCE, ABIA and AIA No provision for establishing SROs

26

POWERS OF NATIONAL INSURERS

LAFALCE and SCHUMER

Can exercise all such “incidental powers” as shall be necessary to carry on insurance operations

Further allows any company to “do all other things necessary or convenient to further its activities and affairs”

LAFALCE

National insurers with a federal license may underwrite and sell in any state any line of insurance permitted to it under its license without having to obtain a state license

If approved by DONI, could underwrite and sell both life, and property and casualty products

27

POWERS OF NATIONAL INSURERS (CONT’D)

Does not provide for underwriting of health products

A national insurer may not issue a policy unless it has filed the policy form with the DONI and received DONI approval

LAFALCE

Provides for DONI to report to Congress 3 years after enactment on whether national insurers should be authorized to underwrite health insurance

Subsidiaries can engage in activities permitted for a subsidiary in the state where subsidiary is organized

28


SCHUMER

Insurance company can underwrite either life, health and annuities or property and casualty insurance, but not both

Permits any company to sell and underwrite accident and health so long as the company has a license to also underwrite life, health and annuities or property and casualty

Subsidiaries can engage in activities that insurer can directly and activities permitted for subsidiary in state where subsidiary is organized with certain limitations

29


ABIA

Insurance companies can underwrite either life, health and annuities or property and casualty insurance, but not both

Can engage in activities that are “incidental” “to the issuance and sale of insurance contracts”

Subsidiaries can engage in activities that insurer can directly and activities permitted for subsidiary in state where subsidiary organized

Subsidiaries engaging in activity that is not permissible for an insurer is limited to 5% of parent company’s assets, and all subsidiaries in the aggregate cannot exceed 10% of insurer’s assets

30


ACLI

Insurer licensed to underwrite and sell life insurance can also underwrite disability, long-term care and annuities

Silent on powers to specifically underwrite property and casualty insurance and limited reference to health insurance

“May exercise all such incidental powers as shall be necessary to carry on insurance operations” (specifically based on 12 U.S.C. 24 (seventh))

31


Subsidiary activities permitted to the extent allowed in state where organized

No limitations on amount invested in subsidiary

AIA

“Business of insurance,” “activities incidental thereto,” and “any other business or activity engaged in by insurers”

No specific provisions regarding powers and activities of subsidiaries

32

VARIABLE PRODUCTS

LAFALCE, SCHUMER and ACLI

Specifically provide authority for the establishment of separate accounts

Not chargeable with insurer liabilities to the extent provided by “applicable agreements”

Risks born by policyholders, not guaranteed by insurer, are not covered by federal guarantee funds

ABIA

Does not specifically provide authority, may assume part of the activities incidental to the issuance and sale of such contracts

No provision for separate account asset insulation

33

VARIABLE PRODUCTS (CONT’D)

Pursuant to discretionary authority, receiver might be able to disallow claim of security interest or priority with respect to separate account assets

Risks born by policyholders, not guaranteed by insurer, are not covered by National Insurance Guarantee Corporation

ACLI

Provides “asset insulation” comparable to NAIC Model Variable Contract Law

Could apply to all assets not only to amount equal to reserves and other contract liability of separate account

Class 2 priority in liquidations to the extent of related reserves in general account

34


AIA

Does not discuss variable products

Proposals may need to address Model Variable Contract Law provisions:

“Sole authority” re: state securities law

Exemption from investment requirements and gains, income and losses separately charged to separate account (separate from insurer)

35


EXCESS INTEREST AND EQUITY INDEXED PRODUCTS

ABIA and ACLI provide for minimum guarantees for 4 years prior to insolvency

ACLI acknowledges coverage of equity indexed products

ABIA only acknowledges interest rate limits

36

FORM, GOVERNANCE, CAPITAL

FORM

LAFALCE, SCHUMER, ABIA and ACLI, allow national insurance companies to be in stock or mutual form

LAFALCE, SCHUMER and ACLI permit establishment of national fraternal organizations

AIA does not address

37

FORM, GOVERNANCE, CAPITAL (CONT’D)

GOVERNANCE

LAFALCE and SCHUMER permit an insurer to choose law of state where “main office” (defined as any office designated by insurer and provided for in its charter subject to approval by DONI or NIC, where insurer conducts insurance operations) is located or where holding company is incorporated and provide, for purposes of jurisdiction, that a company is deemed a citizen of a state in which its main office is located and the state in which it has its principal place of business

38


ABIA can choose law of state where “principal office” is located, where holding company is incorporated, Delaware General Corporation Law or the Model Business Corporation Act subject to limits (e.g., as to minimum number of directors)

ACLI provides that applicable law is state where “main office” (defined as any office designated by the insurer where insurer is doing corporate business) is located or where holding company is incorporated

AIA implies applicable law is state where insurer is incorporated

39


PAID-IN CAPITAL REQUIREMENT

LAFALCE no requirements

SCHUMER NIC to establish requirement – may prescribe minimum that may be based upon the line(s) of insurance

ABIA by type of company:

Life companies – minimum $7 million

Property & casualty – minimum $3 million

Reinsurance – minimum $35 million

40


ACLI and AIA no minimum specified

RISK-BASED CAPITAL STANDARDS

LAFALCE and SCHUMER NAIC model for risk-based capital calculations and remedies – in effect until transition termination date or effective date of standards set by DONI or NIC

LAFALCE in addition to required reserves, establishes minimum financial security benchmarks to provide security against contingencies that are not fully covered by reserves or reinsurance and prohibits public disclosure of risk-based capital ratio, unless otherwise permitted by DONI

41


ABIA established by regulation taking into account asset, credit, underwriting, actuarial and other risks, required reserves equal to estimated and actual claims and all expenses and other revenue

ACLI uses NAIC model for risk-based capital calculations and remedies - required for 5 years thereafter DONI can establish capital requirements

AIA permits DFICO to establish capital requirements, “risk-based or otherwise”

42


ACCOUNTING

ALL require qualified actuaries and independent audit

LAFALCE DONI to establish accounting principles and auditing standards, but NAIC model standards in effect for 5 years

SCHUMER NIC to establish standards based on NAIC model standards and/or GAAP but NAIC model standards in effect until transition (at least 5 years)

ABIA GAAP with 5-year transition period

ACLI and AIA consistent with NAIC statutory financials (at least 5 years for ACLI)

43

MARKET CONDUCT

LAFALCE and SCHUMER

Includes section on “market conduct”

The purpose of the section is to prevent: Unfair and deceptive acts and practices Unfair claims practices Discrimination in underwriting Insurance fraud

DONI and NIC granted broad rulemaking authority to carry out purposes of the Act

44

MARKET CONDUCT (CONT’D)

Includes: A defined list of unfair or deceptive acts and practices Anti tie-in provisions Prohibited discriminatory practices

DONI and NIC granted rulemaking authority concerning replacements

Establishes “fraudulent insurance act” as a federal crime, which includes specified acts or omissions that are made knowingly with intent to defraud

Establishes Division of Insurance Fraud

45


LAFALCE

Subjects national insurers and state licensed insurance producers selling products of national insurers to the provisions of this section and any implementing regulations

Any insurance company (including state and foreign) is subject to the provision of the section as minimum standards for market conduct

DONI required to conduct annual market conduct examinations of state producers that sell products of national insurers

Establishes Division of Consumer Affairs

46


SCHUMER

Prohibits a private right of action under this section

Requires mandatory reporting of insurance fraud by national insurers

ABIA

The legislation does not include any section entitled “Market Conduct”

Includes a list of unfair trade practices similar to LAFALCE and SCHUMER and each national insurance agent and agency is expressly made subject to the unfair trade practices identified in proposal

47


Grants NIC the authority to promulgate regulations governing the sales practices of national insurance agencies and agents, and, to the extent appropriate, national insurance companies

ACLI

The legislation includes section titled “Market Conduct”

The purpose of the section is to ensure appropriate regulation of the sales and marketing practices of federal insurance producers and national insurers

48


DONI is granted rulemaking authority to carry out the purposes of the proposal, including promulgating rules focusing on advertising, sales, issuance, distribution and administration of the products of national insurers

Establishes “fraudulent insurance act” as a federal crime includes specified actsand omissions that are made knowingly and with intent to defraud

Civil as well as criminal liability

49


AIA

DFICO to establish minimum standards for marketing

Prohibits unfair trade practices as defined by DFICO

Insurers must maintain copies of policy forms used

Policyholder complaints for market conduct and unfair trade practices administratively adjudicated by DFICO in lieu of private right of action

50

HOLDING COMPANIES

Registration LAFALCE, SCHUMER and AIA require registration of

federal insurers within a holding company system ABIA and ACLI require registration of holding companies

All limit affiliate transactions All except AIA -- proposals similar to federal banking law

limits AIA based on “reasonableness” standard, transactions

involving 5% or more of assets require prior approval and transactions involving ½ of 1% of assets to 5% of assets and certain material transactions require prior notice

51

HOLDING COMPANIES (CONT’D)

Specify limits on dividends All except ABIA -- out of available surplus only; may pay

extraordinary dividends to shareholders if DONI or NIC, after thirty days prior notice, does not disapprove

ABIA – only from net profits

52

PRODUCER LICENSING

LAFALCE and AIA

No provision for national producer licensing

LAFALCE provides for regulation of producers to remain at state level and prohibits any state law that prevents, impedes or discriminates against a state producer that sells products of a national insurer

AIA relies on state law and Gramm-Leach-Bliley Act, including NARAB

53

PRODUCER LICENSING (CONT’D)

SCHUMER and ABIA

Creates a National Insurance Agency charter with name requirements (e.g., National Agency)

Significant “corporate” guidelines related to governance

ABIA proposal goes further and establishes capital requirements ($100,000) and bonding requirements for national insurance agencies

SCHUMER and ABIA

National insurance agency and federal producer can engage in the “sale, solicitation and negotiation” of insurance issued by either a national or state insurer

54


SCHUMER state producers cannot sell national products unless first obtain a national license or NIC determines by regulation or order the licensing standard in a state is equivalent to the federal standards; ABIA does not appear to require federal license for state-licensed agent to sell a national product

NIC or DONI will establish educational, character, examination and other appropriate requirements for a federal insurance license

No description of any appointment process

SCHUMER requires compliance with GLBA Consumer Protection rules

55


SCHUMER and ABIA

SCHUMER NIC must adopt regulation for creating an electronic database for producers but may delegate authority to an SRO to maintain the database

SCHUMER repeals NARAB

ACLI

No person (organization or individual) can sell an insurance or annuity contract issued by a national insurer unless that person holds a “federal producer” license for that line of business

Does not appear to contemplate either an appointment requirement, or a capital requirement

56


Director will issue regulations governing the rules for commissions and compensation based on sales

If an applicant has a state license as a producer, regulations must provide for “prompt” federal licensing

License authorizes the federal producer to sell lines of insurance authorized under the license, and only those products issued by national insurers

Creates the framework for imposing supervisory responsibilities on the insurer for its captive and independent producers, as well as any of its applicable employees

57

CHANGE IN CONTROL

LAFALCE and SCHUMER

Requires prior approval by DONI or NIC

No conflict with other federal laws – e.g., BHC Act

No delegation of this power to SRO

ABIA

Based on Change in Bank Control Act

Opportunity for prior review by NIC of change in control, then right to disapprove

ACLI and AIA

Requires prior approval by DONI or DFICO, as applicable

58

CONVERSIONS

ALL Except AIA

Allow for national to state charter conversions

LAFALCE, SCHUMER and ACLI allow state to national conversions

LAFALCE and SCHUMER allow mergers, consolidation or acquisition between state insurer and national insurer where national insurer or state insurer survives

ABIA only allows conversions from national to state charter in states where state chartered companies can convert to national charter; ABIA silent regarding state to national charter but allows mergers of state and national companies where national company survives

AIA

Contains no provision

59

DEMUTUALIZATION

LAFALCE

State law will govern demutualization of a state insurer

Silent on demutualization of a national insurer

SCHUMER and ACLI

May convert from mutual to stock

NIC or DONI must approve plan only after holding a hearing which determines that: plan is fair and equitable to insurer and policyholders, does not violate law, and after conversion, insurer still meets federal licensing requirements

60

DEMUTUALIZATION (CONT’D)

All membership interests and rights in surplus are extinguished and will receive fair and equitable payment, does not have to be stock, can be cash, premium credits, credit to insurance policy, account values or enhanced insurance benefits

Can establish stock option or incentive plans customary for publicly traded companies and subject to regulations promulgated by the NIC or DONI

61


SCHUMER

No state interference

No delegation to an SRO permitted

Certain violations or actions may be enforced or enjoined in district court in the District of Columbia or for the district where the converted insurer’s main office is located

Contractual rights and liabilities are preserved unless effected by the conversion plan

No person shall acquire more than 5% of any class of voting stock of a converted insurer or a person that controls a converted insurer without prior approval of DONI or NIC for 5 years after effective date of plan

62


ABIA

May convert from mutual to stock and from stock to mutual form

Must obtain prior approval of conversion plan by Commissioner

After consummation of a mutual to stock conversion, members must have the same rights as before the conversion

Cannot award any additional stock options to any company-affiliated party or a company that owns or controls the insurer that they would not otherwise be entitled to as members

Contractual rights of members preserved

Can appeal NIC decision to Federal Court of Appeals

63


ACLI

Judicial review of DONI decision, but silent on what court

AIA

Does not address

64

SOLVENCY

All Except ABIA

Overlays on current state guaranty association structure

All national insurers would remain members of the state guaranty association in each state where the national insurer does business

Subject to assessments in each state in which insurer does business

65

SOLVENCY (CONT’D)


National guaranty fund(s) serve as “fall back” if a state fund fails to meet certain federal criteria

If state fails to meet federal standards, national and state insurers in that state automatically become members of national guaranty fund(s)

No provisions for unallocated annuities

No authority to take action against insurers bordering on default

Guaranty fund(s) have discretion to guarantee, assume or reinsure any or all policies of an impaired insurer

66

SOLVENCY (CONT’D)

LAFALCE and SCHUMER

Establishes two federal guaranty funds: 1) life and annuity products; 2) property and casualty

SCHUMER – life guaranty fund also includes health products; LAFALCE is silent on health products

Both funds are established as nonprofit District of Columbia corporations and are not agencies of the U.S. government, but subject to oversight by DONI or NIC

Directors of both corporations are selected by member insurers

67

SOLVENCY (CONT’D)

Neither corporation is backed by “full faith and credit” of the United States

Benefits to policyholders under property and casualty fund include: $10,000 per policy Full coverage of worker’s compensation claims

LAFALCE benefits to policyholders under life fund include: $300,000 in death benefits $100,000 in cash value of life insurance and annuity

benefits Aggregate limit of $300,000 for all benefits

68

SOLVENCY (CONT’D)

SCHUMER benefits under life fund same as ACLI and include: $300,000 in death benefits $100,000 in cash value of life insurance and annuity

benefits

Two kinds of Assessments to pay funds: Class A

To meet administrative and legal costs and not based on any particular impaired or insolvent insurer

Assessed on ongoing basis, may be pro rata or non-rata

69

SOLVENCY (CONT’D)

Non-rata assessments capped at $150 per calendar year

Pro rata can be credited against future Class B assessments

Class B Made post-insolvency Assessed to provide protection and benefits with regard

to a particular impaired or insolvent insurer No cap, but total assessments capped at 2% of

average annual

premiums

70

SOLVENCY (CONT’D)

ABIA

Establishes National Insurance Guaranty Corporation (NIGC) patterned after FDIC

5 person board made up of Commissioner, SEC Chairman, FDIC Chairman and two individuals (one chosen as Chair) appointed by President for a six year term

NIGC serves as both guarantor for policyholders and receiver

National insurers are required to be shareholders

State chartered insurers may apply for membership and state-members of NIGC are not required to comply with state guaranty fund law

71

SOLVENCY (CONT’D)

2 funds under NIGC and administered separately—National Life and Health Guaranty Fund and National Property and Casualty Guaranty Fund

Shareholders are a member of a fund based on their line of business and can only be a member of one fund

Assessments are risk-based and when necessary to maintain the designated reserve ratio for each fund will be paid semi-annually

Designated reserve ratio is either set by the Board or is between 0.5% and 1.25% of estimated insured liabilities

Refunds may be given of funds in excess of the designated reserve ratio

72

SOLVENCY (CONT’D)

ABIA

Specified benefits to policyholders and beneficiaries for both funds (certain exceptions apply)

Life and Health Fund: $400,000 in life insurance death benefits $135,000 in net cash surrender value of life insurance and

annuities $6,600,000 aggregate of unallocated annuities by one

owner

73

SOLVENCY (CONT’D)

Separate Enforcement Powers: NIGC may also take a series of actions when it finds that

an insurer is in a troubled condition depending on their capital and reserve category similar to “prompt corrective action” under banking law

NIGC may also provide financial assistance to insured institution prior to being placed in receivership, make loans to, purchase assets of, securities of, assume liabilities of, or make contributions to any insured institution if assistance may prevent a default, restore an institution or lessen risk to the NIGC

NIGC has authority to examine shareholders

74

SOLVENCY (CONT’D)

ACLI

Provides for 1 federal guaranty fund – National Insurance Guaranty Commission (NIGC)

No provisions for property and casualty benefits

Directors of NIGC selected by member insurers

Assessments based on current NAIC Model Act provisions

Assessments are made post-insolvency and are capped at 2% of premiums

75

RECEIVERSHIP AND CONSERVATORSHIP

ALL Except ABIA

Based on Uniform Receivership Law

Only DONI, NIC or DFICO as applicable, may institute receivership proceeding in federal district court

DONI, NIC or DFICO as applicable, serves as conservator, rehabilitator or liquidator under the authority of the federal district court

DONI, NIC or DFICO as applicable, subject to court’s oversight and prior approval of certain actions

76

RECEIVERSHIP AND CONSERVATORSHIP(CONT’D)

Functions of liquidating an insurer

ACLI and AIA – Pay close attention to specific insurance related issues (e.g., reinsurance claims of ceding companies) under priority of claims


Providing guaranty fund protection is separate but coordinated

Authority to transfer insurance liabilities during liquidation is in the guaranty funds

77


Under ACLI, only DONI may disaffirm “executory” contracts, under LAFALCE and SCHUMER, DONI or NIC, as applicable, may disaffirm “executory” contract subject to court approval, but authority not applicable to insurance policies or reinsurance contracts

LAFALCE and SCHUMER

Receivership proceedings may be initiated against national insurer, and persons affiliated with a company in receivership including insurance producers, managing general agents, premium finance companies and insurance holding companies

78


Immunity and indemnification for receivers and their employees

Document depository required during pendency of proceedings

ABIA

NIC required to appoint NIGC as receiver of any national insurer failure

79

RECEIVERSHIP AND CONSERVATORSHIP(CONT’D)ABIA

Role similar to FDIC under federal banking law

NIC has discretion to appoint NIGC as conservator

State may appoint NIGC as conservator or receiver of state member insurer

State member insurer in conservatorship remains under supervision of state

NIGC does not obtain permission from a court to place an insurer in conservatorship or receivership

80


No judicial oversight of NIGC role

Institutions must seek redress from federal court

Little attention paid to specific insurance related issues in priority of claims

Authority to disaffirm or repudiate “burdensome” contracts, damages for repudiation limited to compensatory damages

81

REINSURANCE


Specific sections on reinsurance and bulk transfer

Subject reinsurance to federal regulation patterned after existing state regulation

Bulk transfers (assumption reinsurance) between national insurers are subject only to national regulation

State or foreign chartered reinsurers may be licensed as “federally qualified reinsurers”

82

REINSURANCE (CONT’D)

Reinsurance credit will be allowed a state insurer that cedes any risk to a federal reinsurer or federally qualified reinsurer; state credit-for-reinsurance regulations are preempted

Reinsurance contracts may provide for risk transfer of broader categories of risk -- whether proportional or nonproportional

Some provisions are directed toward improving U.S. reinsurers' ability to compete internationally, e.g., LAFALCE and SCHUMER – formation of commission to study reinsurance regulation in U.S. and other countries

83


LAFALCE and SCHUMER

A national company must obtain DONI’s or NIC’s prior approval before effecting a bulk transfer and DONI or NIC has discretion to decide if policyholder approval is required

State review or action only permitted in certain circumstances as long as it serves a legitimate state interest and does not frustrate the proposed bulk transfer

A “federally qualified reinsurer” must maintain a trust fund if it is a national company that holds a federal license, and is a "federally qualified reinsurer”

84


ABIA

Very general reference – mere placeholder

Unclear how it relates to existing state regulation

No mention of bulk transfers

ACLI

Bulk transfers between national insurers and state insurers are subject to federal and state regulation but if done as part of a conversion of a state insurer to a national insurer or formation and licensing of a new national insurer, exempt from state regulation and policyholder approval

85


AIA

Federally chartered insurer may engage in reinsurance

Imposes limits on affiliate reinsurance

DFICO may set limits and controls “on the use of reinsurance, and standards for ceding, reporting on, and credit for such reinsurance”

Detailed discussion under receivership section

86

TAX

LAFALCE, ABIA and AIA

Currently do not specifically address product taxation

LAFALCE, ACLI and AIA

Neutral treatment of national companies and state insurers for state tax, including retaliatory tax, purposes

SCHUMER and ACLI

Federal tax neutrality of national insurers and policies and contracts for at least five years National insurer treated as if it were a state insurer at

least during five year transition period

87

TAX (CONT’D)

National insurer policies and contracts treated the same as contracts under state law at least during five year transition period

ABIA

Neutral treatment of national companies and state insurers for state tax, including premium tax, purposes

88

CONTACT INFORMATION

If you have any questions concerning the Lafalce or Schumer bills or the National Insurance Charter presentation, please do not hesitate to contact us.

Jamie Cain 202.383.0180

Eric Arnold 202.383.0741

Beth Knickerbocker 202.383.0647

Daphne Frydman 202.383.0656

NATIONAL INSURANCE CHARTER

MOVING FORWARD IN 2002

RECENTLY INTRODUCED BILLS

Documents

NATIONAL INSURANCE CHARTER MOVING FORWARD IN 2002 RECENTLY INTRODUCED BILLS