The 2014 Summer National Meeting...SUMMER 201420 1 4 The 2014 Summer National Meeting Louisville, KY August 16 – 19, 2014 Property and Casualty Insurance (C) Committee Excerpt from

SUMMER 20142014

The

2014

Summer

National

Meeting

Louisville, KY

August 16 – 19, 2014

Property and Casualty

Insurance (C) Committee

Excerpt from the Proceedings of the NAIC

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PROPERTY AND CASUALTY INSURANCE (C) COMMITTEE

Property and Casualty Insurance (C) Committee Aug. 18, 2014, Minutes ............................................................................... 8-2 Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee May 5, 2014, Minutes (Attachment One) ................................................................................................ 8-7 Compendium of Reports Related to the Pricing of Personal Automobile Insurance, May 5, 2014 (Attachment One-A) ............................................................................................................................................ 8-9 Transparency and Readability of Consumer Information (C) Working Group Aug. 18, 2014, Minutes (Attachment Two) .................................................................................................................................................... 8-82 Transparency and Readability of Consumer Information (C) Working Group June 26, 2014, Minutes (Attachment Two-A) ......................................................................................................................................... 8-87 Transparency and Readability of Consumer Information (C) Working Group June 19, 2014, Minutes (Attachment Two-B) ......................................................................................................................................... 8-88 Affordable Care Act Medical Professional Liability (C) Working Group Aug. 17, 2014, Minutes (Attachment Three) .................................................................................................................................................. 8-90 Climate Change and Global Warming (C) Working Group Aug. 17, 2014, Minutes (Attachment Four) ....................... 8-94 Catastrophe Insurance (C) Working Group Aug. 17, 2014, Minutes (Attachment Five) ................................................ 8-98 Catastrophe Insurance (C) Working Group Aug. 8, 2014, Minutes (Attachment Five-A) ..................................... 8-102 Data Collection Template (C) Subgroup July 22, 2014, Minutes (Attachment Five-B) ........................................ 8-103 Data Collection Template (C) Subgroup June 26, 2014, Minutes (Attachment Five-C) ........................................ 8-104 Data Collection Template (C) Subgroup May 22, 2014, Minutes (Attachment Five-D) ........................................ 8-106 Terrorism Insurance Implementation (C) Working Group Aug. 17, 2014, Minutes (Attachment Six) ......................... 8-107 Auto Insurance (C/D) Study Group Aug.16, 2014, Minutes (Attachment Seven) ........................................................ 8-109 Auto Insurance (C/D) Study Group July 28, 2014, Minutes (Attachment Seven-A) ............................................. 8-112 Crop Insurance (C) Working Group Aug. 16, 2014, Minutes (Attachment Eight) ........................................................ 8-115 Crop Insurance (C) Working Group June 4, 2014, Minutes (Attachment Eight-A) ............................................... 8-116 Casualty Actuarial and Statistical (C) Task Force 2014 Revised Charges (Attachment Nine) ..................................... 8-118 Best Practices for Creating Consumer Online Insurance Policy Resources, June 19, 2014 (Attachment Ten) ............ 8-121 Data Collection Template, July 22, 2014 (Attachment Eleven) .................................................................................... 8-138 National Association of Public Insurance Adjusters (NAPIA) Letter, Aug. 13, 2014 (Attachment Twelve)................ 8-146

8-1NAIC Proceedings – Summer 2014

© 2014 National Association of Insurance Commissioners 1

Draft: 10/20/14

Property and Casualty Insurance (C) Committee Louisville, Kentucky

August 18, 2014 The Property and Casualty Insurance (C) Committee met in Louisville, KY, Aug. 18, 2014. The following Committee members participated: Mike Chaney, Chair (MS); Merle D. Scheiber, Vice Chair, represented by Larry Deiter (SD); Jim L. Ridling (AL); Lori K. Wing-Heier represented by Marty Hester (AK); Jay Bradford represented by Bill Lacy (AR); Kevin M. McCarty represented by Richard Koon (FL); Andrew Boron represented by James Stephens (IL); Joseph G. Murphy represented by John Turchi (MA); John G. Franchini (NM); John D. Doak (OK); Joseph Torti III represented by Paula Pallozzi (RI); Mike Kreidler (WA); and Tom C. Hirsig (WY). Also participating were: Joel Laucher (CA); Richard Piazza (LA); and Angela Nelson (MO). 1. Adopted its May 5 Minutes Commissioner Chaney reported that the Committee met May 5 in joint session with the Market Regulation and Consumer Affairs (D) Committee. Upon a motion by Commissioner Doak, seconded by Ms. Pallozzi, the Committee adopted its May 5 minutes (Attachment One). The Committee also met in regulator-to-regulator session June 23 pursuant to paragraph 8 (consideration of strategic planning issues relating to the federal legislative and regulatory matters or international regulatory matters) of the NAIC Policy Statement on Open Meetings. 2. Voted to Recall the Compendium of Reports on the Pricing of Personal Automobile Insurance from the Executive (EX)

Committee and Plenary Agenda Commissioner Hirsig requested that the Committee to reconsider the Compendium of Reports on the Pricing of Personal Automobile Insurance, which was adopted on the Committee’s May 5 conference call. He said conversations during the Market Regulation and Consumer Affairs (D) Committee meeting suggest the report lacks balance. He asked that the report be sent back to the Auto Insurance (C/D) Study Group for revision to include certain documents reflecting consumer views. Commissioner Hirsig made a motion, seconded by Ms. Pallozzi, to recall the report and assign it to the Auto Insurance (C/D) Study Group for revision. A voice vote was conducted and the motion passed. 3. Adopted its Task Force and Working Group Reports Upon a motion by Commissioner Hirsig, seconded by Mr. Turchi, the Committee adopted the reports of its task forces and working groups: the Casualty Actuarial and Statistical (C) Task Force; the Surplus Lines (C) Task Force; the Title Insurance (C) Task Force; the Workers’ Compensation (C) Task Force; the Transparency and Readability of Consumer Information (C) Working Group (Attachment Two); the Affordable Care Act Medical Professional Liability (C) Working Group (Attachment Three); the Climate Change and Global Warming (C) Working Group (Attachment Four); the Catastrophe Insurance (C) Working Group (Attachment Five); the Terrorism Insurance Implementation (C) Working Group (Attachment Six); the Auto Insurance (C/D) Study Group (Attachment Seven); the Crop Insurance (C) Working Group (Attachment Eight); the Earthquake (C) Study Group; and the Risk Retention (C) Working Group. It was reported that the Advisory Organization Examination Oversight (C) Working Group met Aug. 16 and June 24 in regulator-to-regulator session pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings. 4. Adopted Proposed Amendments to the Casualty Actuarial and Statistical (C) Task Force 2014 Charges Mr. Piazza said the Casualty Actuarial and Statistical (C) Task Force decided it needed to amend one of its 2014 charges. He said the proposed amendments to the ninth charge were necessary because the Joint Qualified Actuary (A/B/C) Subgroup completed its work without a resolution of one part of its charges. The goal of the Joint Qualified Actuary (A/B/C) Subgroup was to arrive at a single definition of what constitutes a “qualified actuary.” On this task, the Subgroup was unsuccessful. Thus, the purpose of the change is to recognize that the Subgroup report was completed, but part of its charge remains and has been assigned to the Appointed Actuary (C) Subgroup. Upon a motion by Superintendent Franchini, seconded by Commissioner Kreidler, the Committee adopted the proposed amendments to the ninth charge of Casualty Actuarial and Statistical (C) Task Force (Attachment Nine).

8-2 NAIC Proceedings – Summer 2014


5. Adopted the Casualty Actuarial and Statistical (C) Task Force Request to Withdraw Drafting Changes to Model #745 Mr. Piazza said the Executive (EX) Committee approved a model law development request to amend the Property and Casualty Actuarial Opinion Model Law (#745) at the 2012 Fall National Meeting. The request focused on amending Section 2 of the model to incorporate stronger actuarial discipline procedures when an industry actuary provides an inaccurate, incomplete or otherwise poor quality actuarial opinion. The Appointed Actuary (C) Subgroup was appointed to provide recommended revisions to the Task Force, based on information from the Joint Qualified Actuary (A/B/C) Subgroup; i.e., a common definition of “inappropriate or unprofessional actuarial work” and a recommended process for regulatory disciplinary actions in order to provide a report to the Life Actuarial (A) Task Force, the Health Actuarial (B) Task Force and the Casualty Actuarial and Statistical (C) Task Force. However, the Appointed Actuary (C) Subgroup was unable to reach a consensus on the matter. As a result, the Casualty Actuarial and Statistical (C) Task Force asks that the model law development request be withdrawn from consideration. Upon a motion by Superintendent Franchini, seconded by Commissioner Kreidler, the Committee adopted the request from the Casualty Actuarial and Statistical (C) Task Force to withdraw the model law development request to amend Model #745. 6. Adopted the Best Practices for Creating Consumer Online Insurance Policy Resources Ms. Nelson discussed the Best Practices for Creating Consumer Online Policy Resources (Attachment Ten). She said it was a collection of best practices used by the states in creating Web-based resources to allow consumers to access and compare policy forms. She said several states are already employing these techniques to serve consumers and the document was expected to make it easier for others to implement similar services. Mr. Deiter made a motion, seconded by Commissioner Doak, to adopt the Best Practices for Creating Consumer Online Policy Resources. The motion passed. 7. Adopted the Data Collection Template Ms. Pallozzi reported that the Catastrophe Insurance (C) Working Group appointed the Data Collection Template (C) Subgroup in 2013 to create a uniform template that could be used to collect data in the event of a catastrophe. The Subgroup used the Northeast Zone template as a foundation. The Subgroup compared the Northeast Zone template definitions with definitions provided in the Market Conduct Annual Statement (MCAS) and the NAIC Disaster Reporting Framework. The Subgroup adopted the template July 22 and the Working Group adopted the template Aug. 8. The data collection template is not intended to be a market conduct tool or a financial tool and the template is not linked to rate filings. The purpose of the template is to gather important data for policymakers and regulators after a catastrophic event. The states are free to modify the template if additional data is needed; however, the Working Group hopes most states will be able to use it as presented. Ms. Pallozzi said the data collection template is meant to reflect the minimum amount of information to be collected after a catastrophic event. The Working Group and Subgroup believe that the data collection template would be of beneficial use as an addendum to the NAIC Disaster Reporting Framework, as the framework provides guidance for more in-depth reporting, if needed. Ms. Pallozzi made a motion, seconded by Mr. Turchi, to adopt the data collection template (Attachment Eleven) and recommend the template be referred to the Financial Condition (E) Committee for consideration of adopting the template and adding it as an addendum to the NAIC Disaster Reporting Framework. The motion passed, with Florida abstaining. 8. Discussed Letter Received from the NAPIA Regarding Unlicensed Public Adjusters Greg Serio (Park Strategies), representing the National Association of Public Insurance Adjusters (NAPIA), spoke about an issue with some contractors conducting unlicensed public adjuster activity. He presented correspondence from NAPIA President Karl Denison (Attachment Twelve). He requested the Committee consider forming a joint working group with the Market Regulation and Consumer Affairs (D) Committee to evaluate the unauthorized practice of public adjusting, with an emphasis on improving enforcement capabilities and tools for insurance regulators. He added there might be changes needed in the Public Adjuster Licensing Model Act (#228) or other model laws. Commissioner Chaney said formation of a working group would be considered.



9. Heard a Report on CIPR Event: “Commercial Ride-Sharing and Car-Sharing Issues” Mr. Laucher reported that the Center for Insurance Policy and Research (CIPR) held a luncheon panel to explore the insurance issues surrounding transportation network companies (TNCs). This is the formal name given to the technology companies whose business model is matching willing drivers with passengers using a smartphone app, often known as ride-sharing companies. The event proved to be timely and proactive, with more than 300 attendees. The panel was moderated by Commissioner Dave Jones (CA) and included nine expert panelists consisting of representatives from the insurance industry, the livery industry, TNCs, the car-sharing industry and consumer advocates, as well as Commissioner Marguerite Salazar (CO) and Commissioner Joseph G. Murphy (MA). The discussions centered on insurance coverage issues, underwriting and pricing considerations, regulatory concerns and how to encourage new product development. 10. Appointed the Car-Sharing and Ride-Sharing (C) Working Group Mr. Laucher said Commissioner Jones would like to chair a working group to address some of the remaining regulatory issues related to ride-sharing and car-sharing. He said the new working group would focus on standardizing the terminology used to describe ride-sharing and car-sharing activities, develop best practices for the states, develop a model bulletin for the states to use and compile information on collection of information such as the information required to be collected under the Colorado law. Commissioner Chaney appointed the Car-Sharing and Ride-Sharing (C) Working Group. Commissioner Jones was appointed chair of the Working Group. Members are: Mr. Hester; Commissioner Salazar; Commissioner Thomas B. Leonardi (CT); Commissioner Murphy; Superintendent Franchini; Commissioner Doak; Ms. Pallozzi; Joanne Scott (VA); and Commissioner Kreidler. Commissioner Chaney said formal charges for the Working Group would be developed and distributed to the Committee for consideration. [Editor’s Note: This Working Group was subsequently renamed to the Sharing Economy (C) Working Group.] 11. Heard a Presentation on the TransUnion/CARFAX Rating Model Eric Rosenberg (TransUnion) said TransUnion recently introduced a rating model using CARFAX data. Dan Hill (CARFAX) said the product was created because private passenger auto insurers lost $15.4 billion due to “premium leakage” and underwriting fraud in 2010. As an example of premium leakage, he said annual mileage data is predictive of loss but many companies are removing it from class plans because most cars are not rated in the correct category. He said traditional vehicle symbols—such as year, make, model and trim—are widely accepted as predictors of insurance risk, but companies are unable to account for individual vehicle characteristics. He said telematics has emerged as a complement to driver history, but driving habits do not necessarily translate to vehicle history. He said vehicle history is an attractive addition to symbols and telematics, because there is no personal information required or collected and it examines individual vehicles, regardless of symbol. Patrick Foy (TransUnion) said vehicle history events are significant predictors of how safe and reliable a vehicle will perform in the future, independent of the driver. As an example, he said vehicles previously used as a taxi have a 62% negative impact on average loss ratios. He said vehicle history analyzes risk at a more granular level than conventional rate symbols. After applying a vehicle history score, rates may vary significantly. He said underwriting and pricing for individual vehicles fills a gap in the market for insurers and consumers. He said the rating model provides data that was previously unavailable or replaces data that was solely based on customer input. Mr. Foy said consumers will have the opportunity to receive recognition on their insurance rate for well-maintained cars. He also said protection of consumer privacy and transparency of the data is important. He said only a 17-digit vehicle identification number is required to generate a vehicle history score. He said the vehicle score is a new variable that is not correlated with other rating variables, including credit. He said the vehicle history score is highly predictive across all coverages, risk types and channels. He also said the vehicle history score does not adversely affect protected classes. Mr. Foy said the best 5% of vehicles have loss ratios 30% better than average, while the worst 5% of vehicles have loss ratios 35% worse than average. He concluded by saying consumers’ privacy is protected, the vehicle history score results in lower rates for consumers, and CARFAX data are accurate and transparent. Mr. Hill said the vehicle history score breaks out a rating factor that is already embedded in base rates and makes it more accurate.



Commissioner Kreidler said the vehicle history score has significant consumer and regulatory issues. He said a low-income individual would be more likely to drive an older vehicle that may have a worse vehicle history score. Upon a motion by Commissioner Kreidler, seconded by Commissioner Hirsig, the Committee recommended that the Auto Insurance (C/D) Study Group study the issue further. 12. Heard Update on CSST and Agreed to Participate in the NASFM Safety Campaign Jim Narva (National Association of State Fire Marshals—NASFM) and Ann Frohman (Frohman Law Office, LLC) presented information on the use of yellow corrugated stainless steel tubing (CSST) in homes and businesses and discussed a safety campaign. Mr. Narva said the CSST was installed in businesses and homes from the mid-1990s to the mid-2000s before a flaw was discovered. The flaw occurs when lightning strikes the CSST or within a few feet of the CSST. If this occurs and the CSST is not properly bonded (a grounding technique), then a small leak in the CSST could form. If there is a leak, the natural gas or propane cold ignite and destroy the building. If the CSST is properly bonded, then the risk is eliminated. The problem for the construction and remodeling industry is that nobody knows where the CSST has been installed. To address the situation, the NASFM has been working to educate insurance producers, adjusters and policyholders. The NASFM has previously worked with the NAIC in releasing joint public safety messages. The NASFM has also assisted with data collection to learn more about lightning and its impact. Commissioner Chaney remarked that he and several other commissioners serve dual roles as both insurance regulator and fire marshal. Commissioner Doak made a motion, seconded by Mr. Deiter, to support a joint communication effort between the NASFM and the NAIC. The motion passed. 13. Received an Update on the Multipurpose Vehicle Survey Commissioner Doak said commissioners are currently responding to a survey regarding a multipurpose vehicle that could be used by state insurance departments in catastrophe relief and educational efforts. He said initial results show that commissioners would like to investigate other alternatives. He stressed the importance of the NAIC assisting the states with natural catastrophe issues. 14. Appointed the Catastrophe Response (C) Working Group Commissioner Chaney appointed the Catastrophe Response (C) Working Group and asked the Working Group to look into ways the NAIC could assist its members with responding to catastrophes. Commissioner Doak was appointed chair of the Working Group. Members are: Commissioner Jones; Superintendent Franchini; Ms. Pallozzi; and Commissioner Hirsig. Commissioner Hirsig asked whether the issue of commercial insurers paying only for cosmetic damage resulting from hail might also be addressed by the Working Group. Commissioner Doak asked if the Working Group could also discuss earthquakes and fracking. Commissioner Chaney asked the Working Group to include discussions of the issue with contractors conducting unlicensed public adjuster activity. Commissioner Chaney said formal charges for the Working Group would be developed and distributed to the Committee for consideration. 15. Heard Update on AIR Inland Flood Model Brandi Andrews (AIR Worldwide) presented information on the new inland flood computer model being developed by AIR Worldwide. She said traditional pricing methods are not useful for catastrophe exposures. Standard perils like fire and theft have a highly predictable frequency of claims, and a weak correlation of losses among exposures. However, catastrophes are the opposite of what is generally required by actuaries for pricing. There are no large numbers of events to study because of low frequency of occurrences, yet they have a severe impact on insurers’ bottom line. The frequency is highly unpredictable and there is a strong correlation of losses. Ms. Andrews said that, in the property lines, catastrophe models substitute for historical data sets in developing loss costs. They are used in two ways. The first use is to model average annual losses, which serves as a proxy for expected catastrophe losses. The second use is to model probable maximum losses. This function justifies the amount of capital an insurer includes in its cost of capital analysis and provides an indication of its annual probability of consumption.



Ms. Andrews said the AIR storm surge model relies on the primary meteorological variables of a hurricane, including central pressure, forward speed and storm track angle at landfall. In addition to these meteorological variables, the module incorporates detailed databases of coastal elevation, coastal vegetation, tide height and bathymetry. She explained that bathymetry is the study of underwater depth of lake or ocean floors; i.e., it is the underwater equivalent to topography. AIR has developed a new surge model in 2014. It features regional hydrodynamics; models tide conditions both in space and time; provides local, fine resolution footprints; measures the velocity of waves; and is peer reviewed. Its hydrology components include precipitation, water runoff, the impact of snow pack and river flows. Its hydraulic components include mechanics of flow, how water overflows river or lank banks, and mapping of flood zones. Ms. Andrews said the event generator in the model determines the frequency, severity and location of flood events based on simulated precipitation, snowmelt and soil conditions. It also considers the impact of levees, lakes and dams, river shape and the routes floodwaters take along the river network. It measures local intensity, provides damage estimates and, ultimately, can be used for insurance loss calculation. Ms. Andrews said the private sector is warming to the idea of writing coverage for flood risk. She said there has been congressional interest in reducing the federal subsidies, nothing that, as this occurs, demand for private coverage could grow. She added that legislation is under consideration in Florida and West Virginia to encourage insurers to write private flood insurance. She said the AIR Inland Flood Model for the U.S. can be used to support flood insurance pricing and risk management. Mr. Hester asked whether Alaska is included within the model. Ms. Andrews said the model only covers the contiguous 48 states. 16. Discussed Possibility of Collecting Data Related to Cyber Insurance Commissioner Chaney said there were discussions at the Commissioners Roundtable about regulatory participation in the Financial and Banking Information Infrastructure Committee (FBIIC). Therese M. Goldsmith (MD) has been appointed as principal for collectively representing insurance commissioners. Commissioner Chaney said the other major issue the states face is obtaining information about the extent of insurance underwriting activities related to cyber liability insurance. The Committee agreed to discuss this matter further at the Committee level. 17. Discussed Status of Lender-Placed Insurance Data Collection Commissioner Chaney said lender-placed insurance data collection templates were sent to three companies April 15, with a date of July 3 to begin producing the information requested. Mississippi began receiving information from the companies subsequent to July 3, but due to the size and complexity of the information requested, the state has held several calls and meetings with the companies to work through specific data elements that were requested. Commissioner Chaney reported that a vast majority of the information the insurers own, control and possess has been produced. There remain issues over collecting information that is controlled or possessed by third-party clients of the insurers mainly due to privacy concerns regarding the information requested. Mississippi has instructed the insurers to contact these clients and ask that they produce this information and cooperate with the data call. Commissioner Chaney said Mississippi has received close to 15 million files and is working with the NAIC to aggregate this information, ensuring that the data collected is complete and in the appropriate format. He said Mississippi is working with the Federal Housing Finance Agency (FHFA) closely on this data call and keeping them up to date on the progress that is being made. He said the FHFA has expressed appreciation for the NAIC’s work in coordinating the data call and collecting this information on its behalf. 18. Discussed Other Matters Dave Snyder (Property Casualty Insurers Association of America—PCI) asked whether the scope of work to be covered by the new working groups could be shared with all parties in order to receive feedback. Commissioner Chaney said the Committee would communicate the charges of the new Working Groups to all parties. Having no further business, the Property and Casualty Insurance (C) Committee adjourned. W:\National Meetings\2014\Summer\Cmte\C\08-Cmin.docx


Attachment One Property and Casualty Insurance (C) Committee

8/18/14


Draft: 9/30/14

Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee Conference Call

May 5, 2014 The Property and Casualty Insurance (C) Committee and the Market Regulation and Consumer Affairs (D) Committee met jointly via conference call May 5, 2014. The following Property and Casualty Insurance (C) Committee members participated: Mike Chaney, Chair (MS); Jim L. Ridling represented by Charles Angell (AL); Lori K. Wing-Heier (AK); Jay Bradford represented by William Lacy (AR); Kevin M. McCarty represented by Amy Groszos (FL); Andrew Boron represented by John Gatlin (IL); Joseph G. Murphy (MA); John G. Franchini represented by Brad Gardner (NM); Joseph Torti III represented by Paula Pallozzi (RI); Mike Kreidler represented by Lee Barclay (WA); and Tom C. Hirsig (WY). The following Market Regulation and Consumer Affairs (D) Committee members participated: Stephen W. Robertson, Chair (IN); Therese M. Goldsmith, Vice Chair (MD); Jay Bradford represented by William Lacy (AR); Sharon P. Clark (KY); Mike Rothman (MN); Bruce R. Ramge (NE); Wayne Goodwin represented by Bill George (NC); Laura N. Cali (OR); Susan L. Donegan (VT); Michael D. Riley represented by Mark Hooker (WV); and Tom C. Hirsig (WY). Also participating was: Joel Laucher (CA). 1. Adopted the Compendium of Reports Related to the Pricing of Personal Automobile Insurance Commissioner Chaney explained the Auto Insurance (C/D) Study Group adopted a document summarizing prior work product during its March 29 meeting. The document was adopted with a revised title, Compendium of Reports Related to the Pricing of Personal Automobile Insurance (Compendium), and a clarification that removed mention of it being a “best practices” document. Commissioner Chaney explained that the Study Group had originally adopted a work plan in August 2012 that consisted of eight tasks. The Compendium addresses six of those items: prior NAIC work; uninsured motorists; competiveness of auto markets; insurer initiatives; state laws and regulations; and state initiatives. He said the last two items required extensive research into how the states regulate their auto markets and a survey, which nearly all jurisdictions completed, that shows specific actions states have taken related to initiatives concerning availability and affordability issues. He said the two items the Compendium does not address have to do with data collection: 1) the Risk Classification Survey, which the Study Group previously decided not to move forward with; and 2) additional data collection, which the Study Group has discussed numerous times and continues to discuss. Commissioner Chaney explained the Study Group wished to adopt the information that it has already considered, while continuing to study potential data collection and other issues, such as price optimization, as they arise. Commissioner Murphy explained that the Study Group does not see the Compendium as a final work product of the Study Group but, rather, as a piece of its overall work. Mr. Barclay said the document should not be adopted because it may give the impression that the NAIC endorses the industry viewpoints within the document. He said the Study Group should reopen the document and make it more balanced. Commissioner Chaney asked which parts of the document Mr. Barclay objected to. Mr. Barclay said the document has industry letters as a part of it, but not opposing consumer group opinions. Commissioner Robertson asked whether the intent of the report is to endorse all opinions contained within it or to share information gathered. Commissioner Chaney said the information within the report was shown as it was presented, and the report is meant to provide information to regulators and others. He said the Committees is not endorsing every viewpoint within the document. Commissioner Robertson asked whether this alleviated any of the concerns from Washington. Mr. Barclay said he believes adoption would give the perception that regulators are endorsing viewpoints within the report. He suggested that the Committees could receive the document without adopting it. Commissioner Robertson stressed that adoption would not mean that regulators are endorsing all viewpoints within the document, but instead accepting the information as a compendium. Commissioner Chaney said all parties have had ample time to comment on the document. Mr. Laucher said he agrees with the concerns expressed by Birny Birnbaum (Center for Economic Justice—CEJ) that the document lacks balance by including industry perspectives. He suggested that the Compendium include additional reports from consumer groups, such as those from the Consumer Federation of America (CFA). He said if the Compendium is adopted as a reference tool, it should be balanced. Commissioner Goldsmith said the Study Group’s original work plan included an item regarding insurer initiatives. The letters from the industry within the Compendium are industry responses to the Study Group’s invitation for information on insurer initiatives. She said this is explained within the Compendium, and adoption of the collection of documents is not an endorsement of any particular commenter. She also noted that Appendix C1 references studies and


Attachment One Property and Casualty Insurance (C) Committee

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reports on credit scoring, occupation and education, including those from consumer groups. She said the Study Group did not intend to include a comprehensive list of every possible study, but did include reports and studies from the states, industry members and consumer groups. Commissioner Chaney said the document is a compendium of information and not a recommendation. Tom Feltner (CFA) said the Compendium should be sent back to the Study Group because it focuses on all consumers instead of just low-income consumers. He said CFA has provided reports to the Study Group in the past and would like to see those reports included to provide balance. Commissioner Chaney asked whether CFA had solutions to address low-income issues. Mr. Feltner said he would like to see a focus on the use of non-driver rating factors such as credit scores, occupation, education and price optimization. He said the list of state laws within the Compendium is helpful. He also pointed out that CFA recently conducted a state law compendium that focused on uninsured driver penalties. Ms. Pallozzi asked what specific reports CFA was referencing in its letter. Mr. Feltner said the initial CFA report on the issue was in 2012 and was presented by J. Robert Hunter (CFA) before the Study Group. Commissioner Chaney said CFA’s May 2 letter referenced eight reports. Bob Passmore (Property Casualty Insurers Association of America—PCI) asked that the Committees adopt the Compendium. He said the report has information and data on availability and affordability of auto insurance for those of all income levels. He said auto insurance rate levels are declining, and the report included a number of proposals that could improve affordability, including highway safety and antifraud measures, reducing mandatory minimum insurance limits and encouraging usage-based insurance. He said availability and affordability are improved when insurance pricing is risk-based. He said once the report is adopted, the Study Group can review other emerging issues such as insurance implications related to ride-sharing. He stressed that state insurance regulation produces a competitive market, and regulators should not try to fix something that is not broken. Robert Detlefsen (National Association of Mutual Insurance Companies—NAMIC) asked whether CFA wants copies of its recent reports included in the Compendium or just references to its reports, such as what is found in Appendix C1. Mr. Feltner said he does not want the consumer perspective to just be in a list at the end of the document but, rather, incorporated within policy options. Mr. Birnbaum said the comments by the PCI exemplify the problems with the Compendium, because the information within the report is meaningful for all income levels. He said the Study Group’s charge was to look at issues concerning low- and moderate-income consumers. He said the responses from insurers on insurer initiatives did not respond to low-income issues, but tried to shift the focus away from new approaches to rating and price optimization and how this might affect low-income consumers. Mr. Birnbaum said the industry letters are just industry wish lists that call for deregulation. He said the industry does not always want risk-based pricing, as seen with price optimization. He said the survey of the states within the Compendium is valuable, and the survey should be adopted but not the rest of the report. Mr. Birnbaum said consumer perspectives are needed to balance the industry letters. He said the document sends the message that state insurance regulators are not dealing with the issues of availability and affordability. He said the Study Group should continue to work on pricing as it relates to low-income consumers. Mr. Angell asked whether there would be more work from the Study Group on low-income consumer issues. Commissioner Chaney said the Study Group will continue to work on other issues. Ms. Pallozzi asked whether Appendix C1 could be amended to include additional reports so states could utilize the listing as a reference. Commissioner Chaney said reports could be gathered at a future date. He said the issues of availability and affordability have been, and will continue to be, debated for a long time. Upon a motion by Commissioner Murphy and seconded by Commissioner Wing-Heier, the Property and Casualty Insurance (C) Committee adopted the Compendium of Reports Related to the Pricing of Personal Automobile Insurance (Attachment One-A). Upon a motion by Commissioner Hirsig and seconded by Commissioner Goldsmith, the Market Regulation and Consumer Affairs (D) Committee adopted the Compendium of Reports Related to the Pricing of Personal Automobile Insurance. Having no further business, the Property and Casualty Insurance (C) Committee and the Market Regulation and Consumer Affairs (D) Committee adjourned. W:\National Meetings\2014\Summer\Cmte\C\05-CDmin.docx


Compendium of Reports on the Pricing of Personal Automobile Insurance

Report of the Auto Insurance (C/D) Study Group

Adopted by the Property and Casualty Insurance (C) Committee and the Market Regulation and Consumer Affairs (D) Committee, May 5, 2014

Introduction This document, created by the Auto Insurance (C/D) Study Group, is meant to serve as a resource for state insurance regulators seeking to know more about issues concerning the availability and affordability of automobile insurance. The document contains background information that provides: prior work done by the NAIC; summaries of materials relevant to the issue; and a list of studies and surveys examining the use of credit, occupation or education. The document also includes potential policy options, consisting of an array of state laws and initiatives that may impact the availability and/or affordability of automobile insurance. The information contained in this document was collected by the Study Group, which was created in 2012. The Study Group created a work plan in August 2012 that called for the collection of research related to its charge to “review issues relating to low-income households and the auto insurance marketplace and to make recommendations as may be appropriate.” In addition to research collected by the Study Group, two separate surveys of state insurance regulators were conducted in order to obtain information concerning laws and various initiatives that states have undertaken to address issues related to the availability and affordability of automobile insurance. These results are summarized in Section E – Policy Options. State insurance regulators are frequently called upon to research the issue of auto insurance availability and affordability. The Study Group hopes that regulators find this document useful when conducting such research for their state. A. Prior NAIC Work

1. NAIC Insurance Availability and Affordability Task Force, Final Report, January 1998. 2. Improving Urban Insurance Markets: A Handbook of Available Options, NAIC Insurance Availability and

Affordability (EX3) Task Force, June 4, 1996. [March 2013 Summary] 3. “Preliminary Analysis of Urban Insurance Markets,” Robert Klein, Presented to the NAIC Insurance Availability

and Affordability (EX3) Task Force, Feb. 28, 1996. [March 2013 Summary] 4. “Best Practices for Developing a Premium Comparison Guide,” drafted by the Transparency and Readability of

Consumer Information (C) Working Group and adopted by NAIC membership in 2012. Posted at www.naic.org/documents/committees_c_trans_read_wg_related_bp_prem_comp.pdf.

5. “Consumer Shopping Tool for Auto Insurance,” drafted by the Transparency and Readability of Consumer

Information (C) Working Group and adopted by the NAIC membership in 2013. Posted at www.naic.org/documents/committees_c_trans_read_wg_related_auto_shop_tool.pdf.

B. Summaries Drafted by the Auto Insurance (C/D) Study Group

Uninsured Motorist Issues 1. Summary of Insurance Research Council (IRC) study, “Uninsured Motorists – 2011 Edition,” March 2013. 2. Summary of IRC study, “The Potential Effects of No Pay, No Play Laws, November 2012,” March 2013. Competiveness of Auto Markets

3. Auto insurance industry results from three NAIC statistical reports (Competition Database Report, Report on

Profitability by Line by State and Auto Insurance Database), March 2013.

Adopted by the Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee May 5, 2014

1

Attachment One-A Property and Casualty Insurance (C) Committee

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C. Studies, Reports and Surveys Examining the Use of Credit Scoring, Occupation or Education in Insurance 1. List of studies collected by the Auto Insurance (C/D) Study Group, March 2013.

D. Insurer Initiatives Related to Availability and Affordability Issues

1. “Summary of Insurer Initiatives to Address the Availability and Affordability of Auto Insurance for Low-income Drivers,” Feb. 26, 2014.

a) Property Casualty Insurers Association of America (PCI) report, “The U.S. Private Passenger Automobile Insurance Market is a Sound and Efficient One that Benefits Consumers,” July 2013.

b) National Association of Mutual Insurance Companies (NAMIC) letter, April 2013. c) PCI letter, February 2013. d) Progressive disclosure forms, November 2012.

E. Policy Options

1. “Summary of State Laws Related to Auto Insurance,” December 2013. Posted at

www.naic.org/documents/committees_c_d_auto_insurance_study_group_related_auto_law_summary.pdf. Includes state laws related to:

Rate Filing Form Filing Fault System Tort Threshold Compulsory Liability Compulsory Personal Injury Protection (PIP) Compulsory Uninsured Motorists Minimum Liability Limits No Pay, No Play Negligent Systems

2. “Results of State Survey Concerning Programs and Initiatives Related to the Availability and Affordability of

Automobile Insurance,” December 2013. Posted at www.naic.org/documents/committees_c_d_auto_insurance_study_group_related_auto_law_results.pdf. Includes information related to:

a) State studies, hearings or inquiries regarding the availability or affordability of auto insurance for low-income households.

b) Changes to state residual auto insurance markets. c) State identification of uninsured motorists. d) State data collection that can be used to examine the impact of underwriting or rating practices on low-

income consumers. e) State initiatives. f) States requiring insurers to provide a disclosure notice to automobile insurance applicants or policyholders

that includes underwriting guidelines, rating factors or discounts. g) States with publicly available auto insurance underwriting guidelines. h) Laws or regulations that specify or limit the factors auto insurers can use in underwriting or rating

including, but not limited to, credit, education or occupation. i) States with Market Assistance Programs for automobile insurance. j) States with auto insurance rate comparison guides. k) Other initiatives.

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Summary of “Improving Urban Insurance Markets: A Handbook on Available Options”

NAIC Insurance Availability and Affordability (EX3) Task Force, June 4, 1996

Auto Insurance (C/D) Study Group March 2013

In 1996, the NAIC Insurance Availability and Affordability (EX3) Task Force concluded that some urban areas have significant insurance market problems and inadequate availability, leading to high costs in urban areas for low-income drivers. In its paper titled, “Improving Urban Insurance Markets: A Handbook on Available Options,” the Task Force developed a continuum of potential remedial measures for state insurance regulators to fit the specific circumstances in their respective markets. The paper begins by providing a detailed analysis of how regulators might assess market conditions, including an analysis of the theory of competition and market failures and problems. This section shows how to use available data to measure market structure, conduct, and performance. The Task Force’s opinion was that regulators should apply tools least intrusive to market intervention to address market failures, although it was stressed that the states could choose different measures from different levels along the continuum based on the particular circumstances within their own state. The continuum of policy options within the paper are organized based on the degree of intervention in the market required by each:

“The limited market intervention level would maximize reliance on and facilitate the exercise of market forces in resolving urban insurance problems. The moderate market intervention level sets standards and safeguards but still emphasizes market forces to determine the prices and amount of insurance available in different areas. Extensive market intervention contemplates a much more restrictive approach in which there is significantly less room for market forces to determine prices and products and the actions of insurers and agents would be highly constrained or subject to mandates in order to achieve specific public policy objectives. At the farthest end of the spectrum, public provision of insurance would reject reliance on, and supplement, or supplant, the private market to provide insurance.”

Limited Market Intervention – Emphasis is placed on eliminating barriers to competition and enhancing incentives for profits and cost reduction.

Institute territorial ratemaking – true competitive rating systems and no constraints on territorial rate differentials. Establish market assistance plans and partnership/outreach programs – temporary programs to address a specific

line of insurance where availability issues occur. Develop partnership/outreach programs – partnerships between local community development groups and insurers

to expand insurance coverage in urban areas by educating consumers. Allow policy innovations – modified deductible policies; modified benefit policies; alternative coverage limits. Require disclosure of declinations. Enhance market information on prices, products, and quality of service for consumers. Promote risk-reduction and cost-containment incentives and programs – such efforts could make urban risks more

insurable and could lower premiums. Ease restrictions on distribution systems to increase entry and access Fair Access to Insurance Requirements (FAIR) plans/residual markets – maintain residual market that does not

compete with the voluntary market. Encourage participation by insurance agents. Monitor underwriting guidelines. Foster development of voluntary market incentive programs.

Moderate Market Intervention – Insurers and agents are given leeway, but business practices are required to meet specific regulatory standards of reasonableness and supporting analysis would be subject to greater supervision and monitoring.

Require rating factors to meet certain standards. Institute territorial definition standards. Institute underwriting criteria standards. Limit termination.

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Require insurer self-monitoring. Maintain competitive residual markets with take-out and keep-out provisions. Create a selected array of products. Disclosure of market practices.

Extensive Market Intervention – Assumes there is significant evidence of market failures that can only be remedied by close regulatory supervision and extensive government intervention in the marketplace.

Tight regulation of rate levels, rate structures and rating factors (prohibit or mandate certain factors). Mandate standard territory definitions. Approve list of underwriting criteria. Restrict termination provisions. Mandate product and service requirements – “take all comers” laws. Impose agent appointment/compensation provisions. Require insurers to offer a full array of products.

Public Provision of Insurance

Government-owned insurers. Pay-at-the-pump auto insurance. Government compensation.

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Summary of Insurance Research Council’s Study, “Uninsured Motorists – 2011 Edition”

Auto Insurance (C/D) Study Group

March 2013 METHODOLOGY

Auto injury claim frequency data was collected from nine insurers representing more than 50% of the private passenger automobile market.

Size of the uninsured motorist population was estimated by comparing the injury portion of the uninsured motorist (UM) coverage with the bodily injury (BI) liability coverage.

A ratio of the UM claim frequency to the BI claim frequency produces an estimate of the percentage chance that, in an accident where someone is injured, the at-fault driver is uninsured, or the percentage of uninsured drivers.

The ratio of UM to BI claim frequencies establishes a measure for comparison across the states that is not affected by the level of hazard or the legal environment in particular areas.

UM and BI coverages were compared because both are fault-based, with the difference between them being whether the at-fault driver was insured.

Participating companies provided data on a state-by-state basis for 2008 and 2009. Each insurer provided data covering its total private passenger line of business (preferred, standard, and nonstandard

lines) in each state. The number of earned car-years and the number of incurred claims, including incurred but not reported (IBNR)

claims, were aggregated to determine the claim frequencies in each state for both UM and BI coverage. Participating companies:

o Allstate Insurance Company o American Family Insurance Group o Erie Insurance Group o GEICO o The Hartford Financial Services Group o Liberty Mutual Group o Safeco Insurance Companies o State Farm Insurance Companies o United Services Automobile Association

DATA

Roughly one in seven auto accidents involving injury include an uninsured at-fault driver. The countrywide UM to BI ratio decreased from 14.3% in 2008 to 13.8% in 2009.

The 2008 report documented a strong historical correlation between the national unemployment rate and the UM-to-BI ratio. For every percentage point increase in the unemployment rate, there was a corresponding 0.75 percentage point increase in the UM-to-BI ratio.

The estimated percentage of uninsured motorists in 2009 varied significantly by state, from 4% to 28%. Some states, namely Nevada, experienced a steady decrease in the percentage of uninsured motorists over time, as

identified by the UM-to-BI ratio. In Nevada, the UM-to-BI ratio went from 17% in 2005 to 15.2% in 2007 to 13.2% in 2009.

In a few states, the UM-to-BI ratio indicated an increase in the percentage of uninsured motorists, namely Rhode Island and Michigan. Rhode Island’s UM-to-BI ratio increased from 13.6% in 2007 to 17.6% in 2009.

RESPONSE TO NEVADA COMMENTS

Nevada: “With respect to identifying the number of uninsured motorists, the methodology commonly used by the insurance industry relies upon UM coverage claims information. This is problematic in states where the uninsured and underinsured motorist coverages are inseparable. Pursuant to Nevada law, the uninsured motorist coverage includes underinsured motorist coverage. For Nevada, where the financial responsibility coverage requirement is relatively low (15/30/10) and underinsured motorists claims are therefore fairly commonplace, using UM claims information to estimate the number of uninsured drivers likely overestimates the number of uninsured motorists.”

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IRC: “While state law requires the pairing of these coverages, instructions for submitting data to IRC on UM experience explicitly directs companies to submit data for uninsured motorist coverage experience. I would discourage anyone from assuming that companies are unable to separate UM and UIM experience simply because state law requires both coverages to be provided together. Given Nevada’s relatively low minimum liability requirements, I would expect to see a significantly higher UM rate for the state than the 2011 estimate of 13.2%, if UIM experience was included in the UM data reported to IRC.”

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Summary of “The Potential Effects of No Pay, No Play Laws”

Insurance Research Council (IRC), November 2012


The Insurance Research Council (IRC) released a report in November 2012 titled, “The Potential Effects of No Pay, No Play Laws.” This report aimed to evaluate the effectiveness of “no pay, no play” laws that prevent uninsured motorists from collecting non-economic damages from a traffic accident involving an insured, at-fault driver. One purpose of these laws is to encourage uninsured motorists to become insured, thus lowering the state uninsured rate.

Ten states have enacted these “no pay, no play” laws. The IRC study seeks to determine whether the laws have reduced the number of uninsured motorists and to measure the potential cost savings in the states that have not enacted these types of laws.

The study recognizes a correlation between unemployment rate and an insurance affordability index and the percentage of uninsured motorists. A regression equation was created using a dummy variable for whether a state had a “no pay, no play” law, the unemployment rate and an insurance affordability index in order to attempt to measure the percentage of uninsured motorists.

Results found that enacting a “no pay, no play” law is associated with a 1.6% decline in the percentage of uninsured motorists. The correlation, although limited, is statistically significant. The unemployment rate has the strongest correlation with the percentage of uninsured motorists.

The IRC study also looked at how much compensation paid to uninsured motorists could potentially be eliminated by the institution of a “no pay, no play” law. The study created a model that used the average compensation for noneconomic loss in bodily injury claims, the percentage of uninsured motorists, the percentage of bodily injury claimants who were drivers, and the number of bodily injury claimants. Using these data points, the study estimated the amount paid in noneconomic damages to uninsured motorists in each state.

The study found that the average insured driver in 2007 paid an additional $4.69 to address the average $17.5 million loss to uninsured claimants in each state.

W:\National Meetings\2013\Spring\Cmte\C\Auto\Handout\Summary of IRC No Pay No Play.docx

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Auto Insurance Industry Results From NAIC’s Competition Report, Profitability Report

and Auto Insurance Database


The NAIC’s Competition Database Report, Report on Profitability by Line by State, and Auto Insurance Database Report contain numerous metrics that can be used to evaluate the competiveness and performance of the auto insurance market. Data for the auto physical damage and auto liability lines of business for the data year 2011 are shown on a countrywide and state basis in the analysis below. Market Concentration Market concentration is looked at in two ways within the Competition Report. The first is by looking at the market share of the four largest groups in an insurance line. This traditional measure of market concentration is often used as a rough indicator of market competition. While there is no formal way to determine market competitiveness based on this calculation, values above 50% suggest that concentration at least be given a closer look in judging the overall competitiveness of a market. Top Four Market Shares – National Results On a national basis, the top four writers of private passenger auto liability make up 47% of the overall market, while the top four writers of private passenger physical damage make up 44% of the market. Top Four Market Shares – State Results The top four writers of auto insurance in individual states range from a market share of 44% to 74%. Forty-one states have at least one of the auto lines with a four-firm market share of more than 50%. Two states, with small populations, have four-firm market share percentages of more than 70%. The report also shows the competitiveness of the market by examining the Herfindahl-Hirschman Index (HHI). The HHI is calculated by summing the squares of the market shares (as a percentage) of all groups in the market. For example, if a market had only one seller, its market share would be 100% and the HHI would be 10,000. If a market had 10 sellers, each with an equal 10% of the market, the HHI would be 1,000. Although there is no precise point at which the HHI indicates that a market or industry is concentrated highly enough to restrict competition, the U.S. Department of Justice has developed guidelines with regard to corporate mergers. Under these guidelines, if a merger of companies in a given market causes the HHI to rise above 1,800, the market is considered highly concentrated. If, after the merger, the HHI is between 1,000 and 1,800, the market is considered moderately concentrated, and an HHI of less than 1,000 is considered not concentrated. Because these numbers are guidelines, judgment must be used to interpret what information the HHI provides for a particular market. HHI – National Results In 2011, the HHI for auto liability was 735, while it was 691 for auto physical damage. HHI – State Results In individual states, the HHI ranges from 724 to 1,776 in the auto liability line and from 664 to 1,924 in the auto physical damage line. No state had an HHI above 1,800 in either auto line. Twenty-nine states had HHI figures above 1,000 in at least one of the auto lines. Two states had HHI figures above 1,600 in each of the two auto lines.

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Market Size and Entries/Exits Analysts of competition are usually interested in how many insurance groups are participating in a market, as well as how many insurance groups are deciding to enter or leave a market. A market demonstrating a steady increase in the number of groups providing insurance (more groups enter the market than exit) can be considered a strong market where insurers see an opportunity to make a profit. Conversely, markets where more groups are exiting the market than entering might indicate that insurers are unable to earn a profit sufficient to justify a continued presence. Because there are a number of insurance groups that, for various reasons, have a small amount of direct written premium in a given market, a threshold was used to identify true market participants. While a number of different thresholds could be used, the Competition Report uses a threshold of 0.1% of a market’s total direct written premium. Number of Group Sellers – National Results The number of groups writing auto liability was 74 in 2011, with 76 groups writing auto physical damage. Number of Group Sellers – State Results The number of groups writing in individual states ranged from 13 to 62 for auto liability and from 13 to 60 for auto physical damage. Entries/Exits – National Results Over the past five years, the auto liability line had 11 new entries and 14 exits, while the auto physical damage line experienced eight new entries and 11 exits. Entries/Exits – State Results The states generally experienced entries and exits that resulted in net changes that did not greatly alter the market. No state had a double-digit loss in terms of net exits out of the market over the past five years (2007–2012). Market Growth Market growth can be a measure of competition, as growing markets typically attract competitors. The Competition Report shows how the market has grown over the three years and the 10 years preceding each annual release of this report. Market growth can be initiated by one of two different types of events. One is when new consumers enter into the market and demand new insurance coverages. The second is when existing consumers start to purchase additional coverage, such as when property values increase or consumers purchase more expensive automobiles as their incomes rise. In general, both of these events create market growth over time. However, increasing premium rates could cause direct written premium to increase, giving the appearance of market growth when, in fact, there is none. Market Growth – National Results Auto liability experienced a 5.4% growth from 2008 to 2011 and a 22.9% growth from 2001 to 2011. Auto physical damage experienced a 0.7% decline from 2008 to 2011 and a 6.5% growth from 2001 to 2011. Market Growth – State Results Market growth varied greatly across states. For auto liability, results ranged from a three-year decline of 3% to a three-year increase of 19% in premium. Ten-year results for auto liability ranged from a 6% decline to 45% growth. For auto physical damage, results ranged from a three-year decline of 9% to a three-year increase of 15% in premium. Ten-year results for auto physical damage ranged from a 21% decline to 42% growth.

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Profitability Insurer profitability results can be examined to determine whether a market is attractive to insurers to enter, thereby creating greater competition, or unattractive, causing insurers that are in the market to leave. Persistently high levels of profitability could indicate that a market is failing to attract competitors, thus enabling non-competitive rates of return to be earned. Alternatively, persistently low levels of profitability could indicate that insurers have difficulty estimating losses and/or are unable to set premium rates at adequate levels. The Profitability Report stresses several caveats, including the fact that the report cannot and should not be used to determine whether current rates are adequate to cover future costs. In addition, the report provides only approximations of actual profits earned by line and by state. The data for all companies in all of the states are aggregated prior to allocation of that data by line and by state. Data that the companies do not allocate by state and that the report allocates by state from countrywide aggregates for all companies combined include: net worth, investment gain, federal taxes, general expenses, unallocated loss adjustment expenses, other acquisition expenses, and the effects of consolidation of affiliated insurers. Return on Net Worth – National Results The average annual return on net worth from 2001 to 2011 was 5% for auto liability coverage and 13% for auto physical damage coverage. Return on Net Worth – State Results For individual states, average return on net worth from 2001 to 2011 ranged from -5% to 18% in the auto liability line and from 3% to 28% in the auto physical damage line. Ten states experienced average return on net worth above 10% in auto liability, while 41 states had return on net worth above 10% in the auto physical damage line. Auto Insurance Database Report The Auto Insurance Database Report obtains data from statistical agents and state insurance departments in order to calculate average expenditures and premiums for private passenger automobile insurance. The state average expenditure per insured vehicle is the total written premium for the combined liability, collision and comprehensive coverages, divided by the liability written car-years (exposures) in that state. This assumes that all insured vehicles carry liability coverage but do not necessarily carry the physical damage coverages (i.e., collision and/or comprehensive). The state-combined average premium per insured vehicle, on the other hand, is calculated by summing the average premiums for the three coverages. The result is the average cost of an auto insurance policy in the state that contains all three coverage (i.e., liability, comprehensive and collision). Aggregate written premiums and aggregate written exposures are used in calculations with no distinction as to policyholder classifications, vehicle characteristics, or the selection of specific limits or deductibles. Nor do the results consider differences in state auto and tort laws, rate filing laws, traffic conditions, or other demographics. It is important to recognize that the report is not intended to be a true comparison of auto insurance rates/premiums from state to state. The most recent results available for this report are from the data year 2010. Average Expenditure and Premiums – National Results Results within the report show that, from 2006 to 2010, there has been a general decline in average expenditures and average premiums on a national basis. This decline has been about 3%. Average Expenditure and Premiums – State Results Average expenditures in individual states have varied. From 2006 to 2010, average expenditures have fallen by as much as 17% and risen by as much as 6%. Average premiums have fallen by as much as 17% and risen by as much as 4.5%. Thirteen states saw an increase in average expenditures from 2006 to 2010 and five saw a decrease of more than 10%. In the same time period, average premiums rose in eleven states and fell by more than 10% in six states. The NAIC’s Competition Database Report, Report on Profitability by Line by State, and Auto Insurance Database Report are available for state insurance regulators via the NAIC’s StateNet, under “Publications,” at https://i-site.naic.org/cgi-bin/statenet/publications_home.htm. The public can find more information about these publications at http://www.naic.org/store_pub_statistical.htm

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17


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Con

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19


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Summary of Insurer Initiatives to Address the Availability and Affordability of Auto Insurance for Low Income Drivers

Automobile Insurance (C/D) Study Group February 26, 2014

Introduction One element of the Auto Insurance (C/D) Study Group’s Work Plan is to work with insurers to identify initiatives taken by insurers to address the cost of insurance for low income drivers and to investigate and document how those initiatives are working. To that end, the Study Group requested that Property & Casualty trade organizations provide information on the initiatives the industry has taken to address the issue of the availability and affordability of auto insurance for low-income drivers and the outcome of those initiatives. Property Casualty Insurers Association of America (PCI) submitted a response dated February 9, 2013, and subsequently provided an additional review it conducted of the auto insurance marketplace dated July 2, 2013. The National Association of Mutual Insurance Companies (NAMIC) also submitted comments dated April 30, 2013. The information provided by PCI and NAMIC, as well as additional industry initiatives identified by Study Group members, are summarized below. PCI PCI commented that insurers take a risk-based pricing approach, as governed by applicable law. With regard to availability and affordability, they advocate for measures that reduce risk, and therefore reduce cost, for all drivers, without regard to income. PCI noted that to the extent costs are reduced, there may be a particular benefit to consumers with lower incomes. PCI identified the following industry initiatives intended to reduce costs:

1. Highway Safety Measures – The industry has supported the work of the Insurance Institute for Highway Safety and Advocates for Highway and Auto Safety. PCI contends that industry’s support of safety measures such as strong seatbelt laws, graduated drivers licensing programs, text messaging bans, more vigorous enforcement of DUI laws and tighter blood alcohol standards have reduced highway deaths and injuries and have reduced costs.

2. Anti-Fraud Efforts – The industry has taken steps to prevent, detect, and prosecute insurance fraud. 3. Efforts to Reduce Health Care, Auto Repair, and Litigation Costs – Insurers have worked with state governments to

implement health care cost containment measures in some states, which PCI contends have lowered auto injury costs for the benefit of policyholders. Similarly, industry has supported measures to reduce auto repair costs, such as allowing alternatives to original equipment manufacturers repair parts. And “[w]here necessary, insurers have supported the elimination of incentives for frivolous lawsuits” to reduce litigation costs.

4. Usage Based Insurance (“Pay-As-You Drive”) – PCI observed that information collected from telematics devices can be used to distinguish lower risks from higher risks and make prices more competitive, accurate, and equitable.

5. Opposition to Mandatory Insurance and Increased Financial Responsibility Laws – PCI has opposed mandatory liability insurance and increases in financial responsibility limits, which PCI contends can impose an unreasonable burden on those who can afford to purchase only minimum coverage.

6. No Pay-No Play Laws – Insurers have supported laws that prohibit uninsured drivers from collecting damages from

insured drivers, which PCI contends help reduce costs and potentially reduces the number of uninsured drivers. 7. Low Cost Policies – PCI cited its work with states such as New Jersey and California to implement measures that

create lower cost minimum policies for low income drivers. 8. Use of Technology – PCI noted insurers’ use of technology to increase efficiency and thereby reduce costs.

In it July 2, 2013 letter, PCI summarized certain “positive results” for auto insurance consumers, including more affordable insurance coverage as compared with other household expenditures; a highly competitive auto insurance

20


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marketplace; fair and equitable rates; small assigned risk pools, denoting more available coverage; a declining trend in auto insurance-related consumer complaints; and industry efforts to increase highway safety measures and reduce insurance fraud. NAMIC In its comments dated April 30, 2013, NAMIC questioned two assumptions implicit in the above-referenced element of the Study Group’s Work Plan: first, that there is an “issue” concerning the cost of insurance for low-income drivers; and second, that “insurers are, or perhaps should be, taking ‘initiatives’ to ‘address’ this ‘issue’.” In NAMIC’s view, usage-based auto insurance is not intended to address a particular cost issue for low income consumers, but rather is “a way to grow [insurers’] book of business and increase their market share.” NAMIC emphasized that in the highly competitive auto insurance marketplace, insurers strive to provide coverage to all consumers at the lowest possible price. According to NAMIC, insurers’ use of credit-based insurance scoring, in particular, “makes auto insurance more available and affordable.” Other Industry Initiatives Study Group members identified certain insurer disclosures as another means by which to enhance auto insurance availability and affordability for low income consumers. For example, the Study Group reviewed one consumer-friendly disclosure that identifies factors for which consumers’ credit history was favorable and unfavorable and provided consumers with information about potential steps they can take to improve their credit scores and lower their auto insurance premiums.

21


8/18/14



THE U.S. PRIVATE PASSENGER AUTOMOBILE INSURANCE MARKET IS A SOUND AND EFFICIENT ONE

THAT BENEFITS CONSUMERS

Introduction Private passenger automobile insurance coverage affects nearly every household in the U.S. Despite the recent financial crisis, the auto insurance market remains a sound and efficient one that benefits consumers. Over the years, the insurance industry has made great strides in improving the availability and affordability of coverage and initiated or participated in efforts to save hundreds of thousands of lives, prevent millions of injuries and combat crime. Positive results for the auto insurance-buying public include:

more affordable insurance coverage, compared to other household expenditures

a very competitive market with a wide choice of products and services

fair and equitable rates, contributing to a decreased uninsured motorist population

more available coverage, as denoted by a very small assigned risk market

greater customer satisfaction

safer driving and vehicles and less fraudulent activity

Benefits Latest (2010) data indicate that the annual average expenditure for auto liability and physical damage insurance is

$791 per insured car. Compared to other important consumer expenses, the cost of auto insurance represents the smallest percentage of the average household income.1

1 National Association of Insurance Commissioners (NAIC) and U.S. Bureau of Labor Statistics, Economic News Release, “Consumer Expenditures, 2011,” www.bls.gov/news.release/cesan.nr0.htm

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The average expenditure for auto coverage has been declining over time. In 2006, drivers in the U.S. paid an annual

amount of $818 per insured car; by 2010, this amount dropped 3.3 percent to $791. In contrast, the cost of other economic sectors based on the Consumer Price Index has increased over the same period (from 6.4 percent for housing to 23.0 percent for education).2

2 PCI, based on data from the NAIC and Consumer Price Index provided by the U.S. Bureau of Labor Statistics

Auto Insurance is Affordable Compared to Other Expenditures

2.5%

26.5%

12.3%9.8%

5.1% 4.0%2.7%

5.4%

0

5

10

15

20

25

30

Note: Percentages reflect 2010. Auto Insurance Expenditure reflects two insured cars.

Auto Insurance

Housing

Transportation

Food

Health Care

Entertainment

Apparel

All Other

% of Household Income before Taxes

Changes in Prices for Different Goods and ServicesPercent Change from 2006 to 2010

-3.3%

6.4%8.2%

12.4%

15.5%

23.0%

8.2%

-5

0

5

10

15

20

25

Auto Insurance

Housing (CPI)

Note: Consumer Price Indexes are not seasonally adjusted.

Motor Fuel (CPI)

Food & Beverages(CPI)

Medical Care(CPI)

Education (CPI)

All Items (CPI)

23


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A total of 945 large, medium and small insurance companies throughout the country – or an average of 150 carriers per state – currently offer personal auto coverage.3 Based on the Herfindahl-Hirschman Index (HHI), state auto insurance markets are found to be unconcentrated. In other words, with an average index of 688,4 the markets in each state are very competitive with many different companies providing a wide array of auto insurance products and services to consumers.

Under state law, insurance prices cannot be inadequate, excessive or unfairly discriminatory. In compliance with these laws, and subject to state regulatory review, auto insurers use predictive rating factors to distinguish lower-risk drivers from higher-risk drivers. These factors measure driving performance and loss likelihood, as well as the context in which the driving occurs. For example, the prior experience of the drivers is considered and increasingly, their actual vehicle usage. Another important underwriting and rating factor is the geographical location, or place of garaging. Because certain areas have greater traffic density, higher cost of health care and body shop repairs, a greater likelihood to report injuries, more vehicle thefts, etc. compared to others, more claims and higher losses per insured car result in these areas. If the use of geographical location were eliminated or restricted, lower-risk drivers would end up paying more for insurance coverage than their fair share to subsidize higher-risk drivers. By permitting insurers to use predictive tools in their underwriting and rating process, consumers are charged appropriate rates that reflect their underlying costs and can benefit from a healthy competitive insurance market. Risk-based pricing also encourages insurers to commit more capital to a market because they can better predict and price for the risk they are assuming.

The latest (2009) estimated uninsured motorist population in the U.S. is about 13.8 percent; in general, the proportion of drivers without auto insurance has been declining since 2003 when it was 14.9 percent.5 This downward trend suggests that more people are finding affordable auto insurance and are purchasing liability (and physical damage) coverage. A lower U.M. population also means lower U.M. rates for drivers.

Today’s assigned risk market is very small (0.93 percent), indicating that the overwhelming majority of the nation’s drivers have no problem finding auto insurance coverage in the primary voluntary market. This is a vast improvement from 20 years ago when the assigned risk market was 6.7 percent and there was less coverage availability in the voluntary market.6

3 SNL Financial LC, using NAIC data; the state average of 150 is computed by PCI using the arithmetic mean of the number of personal auto carriers in each state.

4 The Herfindahl-Hirschman Index (HHI), used extensively by the U.S. Department of Justice and economists, is a commonly accepted measure of market concentration, taking into account the relative size and distribution of the insurers in a market. Index values less than 1,500 denote “unconcentrated” or competitive markets [U.S. Dept. of Justice & FTC, Horizontal Merger Guidelines § 5.2 (2010)]. The state average of 688 – indicating a very competitive market – is computed by PCI using the arithmetic mean of the individual state indexes.

5 Insurance Research Council, Uninsured Motorists, 2011 Edition 6 Auto Insurance Plans Service Office, 2010 and 1990

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Based on various state insurance department reports, the trend in auto insurance-related complaints has been dropping. The downward trend suggests that customer expectations related to insurers’ products, prices and claim settlements are being met on a more frequent basis.7

The above chart illustrates the four-year trend of complaints for every 10,000 insured cars found in five different states combined. To offer another perspective on how few auto insurance-related complaints have been filed by the public, the latest one-year complaint ratio relative to the total number of insured cars in 14 states is an infinitesimal 0.0002 (i.e., about 19,870 complaints relative to 103 million insured cars!).8 Such a small number indicates that consumers throughout the nation are by and large satisfied with their auto insurers.

Other efforts that the insurance industry has successfully supported include strong seatbelt laws, graduated drivers licensing programs, text messaging bans, more vigorous enforcement of DUI laws, and tighter blood-alcohol standards. Insurers have also engaged in their own anti-crime efforts, e.g., establishing special investigative units and maintaining anti-fraud plans, and increased data sharing aimed at detecting and preventing fraud. They have partnered with government in efforts to rein in out-of-control costs, working to improve the efficiency of claims operations.

7 PCI, based on NAIC insured cars and available state insurance department reports on personal auto complaints. Note that many states may not publish aggregate complaints or complaint ratios.

8 The complaint ratio relative to the number of insured cars reflects Arizona, California, Colorado, Illinois, Indiana, Kansas, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Oregon and Texas.

Consumer Personal Auto Insurance-Related ComplaintsHave Been Dropping Over Time

2.152.09 2.08

1.93

1.6

1.8

2

2.2

2.4

2007 2008 2009 2010

# Complaints per 10,000 Ins. Cars

Note: Aggregated complaints are from Colorado, Indiana, Missouri, North Carolina and Texas state insurance department reports. Most other state reports are not readily available.

The Property Casualty Insurers Association of America (PCI) is a trade association consisting of more than 1,000 insurers of all sizes and types, and representing 39.6 percent of the total general insurance business and 45.8 percent of the total personal auto business in the nation.

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VIA EMAIL April 30, 2013 Ms. Therese M. Goldsmith Insurance Commissioner Chair, NAIC Auto Insurance (C/D) Study Group [email protected] Re: Request for Comments on the Availability and Affordability of Auto Insurance Dear Commissioner Goldsmith: On behalf of the National Association of Mutual Insurance Companies, I offer these comments in response to your March 21, 2013 letter requesting that NAMIC submit a report regarding initiatives undertaken by NAMIC and its members “to address the issue of the availability and affordability of auto insurance for low-income drivers.” NAMIC is the largest and most diverse property/casualty trade association in the country, with 1,400 national, regional and local mutual insurance member companies serving more than 135 million auto, home, and business policyholders. These companies write in excess of $196 billion in annual premiums, accounting for 50 percent of the automobile/ homeowners market and 31 percent of the business insurance market. More than 200,000 people are employed by NAMIC member companies. As noted in your letter, the Study Group’s work plan calls for the group to “work with insurers to identify initiatives taken by insurers to address the issue of the cost of insurance for low income drivers (e.g., usage based programs).” There are two assumptions here, both of which are open to question. First, the Study Group assumes that there is an “issue” concerning the cost of insurance for low-income drivers. Second, the Study Group assumes (or seems to assume) that insurers are, or perhaps should be, taking “initiatives” to “address” this “issue.” Regarding the first assumption, as far as I am aware, the Study Group has yet to determine empirically that the cost of insurance for low-income drivers is an “issue” in the sense that it represents a problem in need of a solution. Therefore, asking insurers to explain what they are doing to address this matter strikes me as putting the cart before the horse. It may be that the “issue” you refer to is not really an issue at all. Regarding the second assumption, even if one were to grant that the cost of insurance for low-income drivers is a genuine “issue” in the sense delineated above, it is not clear that insurers

26


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could do anything beyond what they have always done, which is to offer quality products that consumers want at the lowest possible price. That is the essential business model followed by all insurers that operate in the highly competitive auto insurance market. As their advertising attests, insurers recognize that no consumer, regardless of income, wants to pay more than necessary for auto insurance. Your letter cites “usage based programs” as an example of an initiative that insurers might undertake to “address the issue” of the cost of insurance for low-income drivers. While it is true that many auto insurers, including some NAMIC member companies, are developing usage-based policy options, I would submit that their purpose in doing so is not to address any particular cost “issue” associated with any particular income group. Rather, they are acting on the results of market research that indicates that a considerable number of consumers would like to be able to purchase this type of insurance product, and consequently, they see these products as a way to grow their book of business and increase their market share. If we broaden the inquiry to ask, “What do insurers do to make auto insurance available and affordable?”—not just for low-income drivers, but for all drivers—we can answer in two words: “They compete.” Auto insurance is sold in a market that is not just competitive but extremely competitive. Every advertising medium is rife with messaging from auto insurers seeking to attract applicants. And given that price is a significant factor that influences a consumer’s choice of insurer, insurers competing for business naturally strive to offer coverage at the lowest price possible. Mutual insurers, operated for the sole benefit of their policyholders, are particularly focused on providing coverage to their members at the lowest possible price. Mutual insurers are affected by the same competitive forces that prompt all insurers to offer coverage at low prices, but they do not have stockholders seeking to earn investment income. Auto insurers are able to compete effectively, thereby keeping costs to consumers as low as possible, by using multiple rating factors to ensure that rates are commensurate with risk. In particular, credit-based insurance scoring is a powerful tool that allows auto insurers to offer discounts to many drivers and enables them to offer coverage to applicants they might not otherwise offer coverage. In other words, insurers’ use of credit-based insurance scoring makes auto insurance more available and affordable. Auto insurers are also able to compete effectively and thereby keep costs to consumers as low as possible when they are able to adjust their rates swiftly in response to changing market conditions. Knowing that rates can be increased if circumstances warrant provides insurers with a level of confidence that allows them to lower rates as they compete for business. When rates must be approved by a regulator prior to their being used, insurers will lack that confidence. In other words, greater rating freedom makes auto insurance more available and affordable. To the extent that the ultimate goal of the Auto Insurance Study Group is to identify ways to make auto insurance more available and affordable, we would suggest that it identify statutory

27


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and regulatory impediments to the full benefits of competition, such as prior approval of rates and limits on the use of rating factors including credit-based insurance scoring. Finally, to turn from the activities of NAMIC member companies to the activities of NAMIC itself, I would note that NAMIC, on behalf of its members, consistently advocates in support of insurance regulatory reforms that are aimed at increasing the supply of insurance and keeping insurance costs as low as possible. Thank you for your consideration of these comments. Please contact me if you need any additional information by way of explanation or clarification. Sincerely,

Robert Detlefsen, Ph.D. Vice President, Public Policy

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February 9, 2013 BY ELECTRONIC MAIL Therese M. Goldsmith Insurance Commissioner Maryland Insurance Administration Suite 2700 200 St Paul Place Baltimore, Md. 21202 Dear Commissioner Goldsmith: Thank you for your involvement in the NAIC’s initiative regarding auto insurance affordability and availability and the opportunity to provide information regarding insurers' efforts to reduce costs and improve affordability and availability in auto insurance. We look forward to continuing to work with you, other regulators and all stakeholders on this effort. Measures that Reduce Costs Improve Affordability and Availability. Insurers base pricing and underwriting on risk, as governed by applicable law, and do not use factors such as income for those purposes. So, in approaching the issue of availability and affordability, we push for measures that would benefit the entire system and then allow risk based pricing, again as regulated by applicable law, to allocate the costs without regard to factors such as income. However, to the extent costs are reduced, there is a particular benefit to those who may have lower incomes. In addition, through long experience, we wish to provide guidance on how to maximize availability and competition. The industry has been active in many areas to reduce costs for all drivers, sometimes through their operations where permitted and sometimes through advocacy for governmental action. In combination, these efforts have saved hundreds of thousands of lives and prevented millions of injuries and have helped combat crime, all of which have obvious society-wide benefits as well as cost reductions for our policyholders. Highway Safety Measures Starting with highway safety measures, our support for the Insurance Institute of Highway Safety (IIHS) and Advocates for Highway and Auto Safety has produced abundant benefits for society and our customers in terms of lower costs, because of the well-documented reduction in highway deaths and injuries resulting from federal safety standards and state and federal driving laws that our industry has supported. Other industry-backed measures that have saved lives and reduced costs include strong seatbelt laws, graduated drivers licensing programs, text messaging bans, more vigorous enforcement of DUI laws, and tighter blood-alcohol standards. Auto Theft and Insurance Fraud On the issues of auto theft and other types of insurance fraud, insurers have engaged in their own anti-crime efforts, e.g., establishing special investigative units and maintaining anti-fraud plans, and increased data sharing aimed at detecting and preventing fraud. In addition, we have advocated for enactment of effective state and federal laws and have assisted in prosecutions. We also support the National Insurance Crime Bureau, Coalition Against Insurance Fraud and sister state coalitions that comprise insurer organizations, consumers and law enforcement agencies that work together to enact anti-fraud legislation and educate the public. Two examples of anti-fraud measures include legislation adopted to decertify certain physicians involved in fraudulent schemes related to auto accidents in New York and tighten Florida’s licensing standards for medical clinics that treat injured victims in auto crashes.

29


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Health care, auto repair and litigation costs can get out of hand as well, hence adversely affecting consumers. Health Care Costs Here too, insurers have worked to improve the efficiency of claims operations and have partnered with government in efforts to rein in out-of-control costs. Examples of health care cost containment measures can be found in Colorado, New Jersey and Pennsylvania. In Colorado, insurers had advocated for managed care programs allowing them to direct injured parties to state-approved health care organizations. By allowing insurers to have input into medical care, auto injury costs were lowered for the benefit of policyholders. Medical fee schedules were put in place in New Jersey and Pennsylvania to control escalating health care costs. By placing modest restraints consistent with quality care on providers’ bills and medical treatment costs, fees, charges, and reimbursements are more fair and reasonable. Auto Repair Costs To reduce auto repair costs, we have supported pro-competitive measures that allow alternatives to original equipment manufacturers (OEM) repair parts and that allow consumers to have their cars repaired by network providers combined with better warranties. We have also opposed legislative measures that sought to artificially inflate repair costs by restricting competition and consumer choice. For example, one hard fought battle in Rhode Island led by PCI and insurers resulted in the governor’s veto of a bill that would have made body shops more likely to take civil action against insurance companies; this would have further increased body shops’ revenues at the expense of Rhode Island drivers. Litigation Costs In general, unnecessary lawsuits and skyrocketing litigation and insurance costs end up hurting everyone. Rampant fraud in some areas has even led to a two-tiered system with most consumers paying for unnecessary medical bills and attorney fees for those taking advantage of the system. Where necessary, insurers have supported the elimination of incentives for frivolous lawsuits. Rating Has Become More Accurate, Thereby Reducing Costs for Good Drivers. In the recent past, insurance pricing was basically limited to three tiers and relied heavily on large groupings, because of the limited availability of individual data. Now, however, with the availability of more data, insurers can much more accurately peg the price of insurance to each driver's particular risk of loss. One of the most obvious innovations in this area is Usage Based Insurance (UBI, or “pay as you drive”). Attached is more information on that topic, so you can readily see that UBI is not limited to one company or even a category of companies, but is increasingly widespread. Other innovations have also helped to distinguish lower risks from higher risks and make prices more competitive, accurate and equitable. Insurers Have Opposed Legislation for Mandatory Insurance and Increased State Financial Responsibility (FR) Laws that Cause Costs to Rise. We oppose mandatory liability insurance and, once enacted, have argued for levels of mandatory FR limits that are not set so high as to impose an unreasonable burden on people, especially those who can only purchase the minimum coverage. We consistently oppose increases in FR limits, as well, for the same reason. And we oppose adding mandated coverages such as uninsured and underinsured motorists(UM/UIM). Insurers Have Pushed for Other Reforms that Lower Costs. No Pay/No Play Laws Insurers have supported so-called "no pay/no play" laws that prohibit uninsured drivers from collecting damages from insured drivers. These laws help to reduce costs and potentially reduce uninsured drivers, providing a strong incentive to comply with FR mandates. And, while we challenged inefficient FR enforcement measures, we have offered alternatives if the state wishes to adopt an electronic enforcement program. Low Cost Policies Insurers have also worked with the states to implement their measures to create lower cost minimum policies for low income drivers. Examples of these types of policies can be found in both New Jersey and California.

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Insurers have fully embraced new technologies that have been the driving force behind advances in pricing, repair service, and predictive analytics. In addition to the use of on-line comparative pricing and applications and online repair service information that improve efficiency, insurers are able to respond more quickly to natural disasters that impact not just homes but motor vehicles as well. With improved technology, insurers can dispatch large amounts of information, locate catastrophe victims more easily to offer assistance, be more productive in their work, and provide a more efficient claims settlement process. Insurers Need Regulators' Help to Continue to Reduce Costs. A significant challenge lies ahead with regard to the implementation of the federal health care legislation. Most important is the much increased risk of cost shifting from health care to auto insurance. As cost-saving measures kick in under the health care law, we fear a greater and greater shift of these costs to first- and third-party auto insurance. We will need to cooperate with the state regulators and the federal government to prevent this from occurring. Simply put, it does no good to reduce health insurance payments from one pocket of a consumer just to see that same consumer pay more for auto insurance out of the other pocket--it all comes from the same pay check. Further, such a cost shift would serve to undercut one of the major objectives of the health care reform. Beyond this new challenge, there continue to be unnecessary inefficiencies in some state regulation. Among these are repetitive filing, reporting and licensing requirements. Just as important is the need to void and repeal well-meaning rate regulation that actually has an anti-competitive effect, such as that seen in Massachusetts, New Jersey and South Carolina before their reforms and as can be still be seen today in North Carolina, for example. Conclusion Insurers have done much to contain costs for all drivers on their own and in partnership with government. This has already produced huge savings of special benefit to policyholders who may have lower incomes. But old and new challenges remain. We sincerely hope this NAIC initiative on availability and affordability will help us identify pro-competitive actions, consistent with risk based pricing, that we can take to further reduce costs for all drivers, and thereby have a sound competitive market with even more available coverage at more affordable prices. Sincerely, David F. Snyder Vice President

Insurers are Employing Technology to Reduce Costs and Improve Service.

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Page ofReference number: 1231201551

2 2

For these factors, your credit history was favorable: • You have 1 or more open, satisfactory loans or accounts.• You opened 0 - 3 loans or accounts in the last year.• Your most recent reported auto loan or lease was opened over 24 months ago.• You have credit history reported for more than 70% of the last 10 years.

For these factors, your credit history was unfavorable: • You had 7 collection accounts in the last 7 years.• You applied for credit 17 times in the last 2 years, excluding auto and mortgage applications.• You applied for 6 or more auto loans or leases in the last 2 years.• You applied for 8 or more mortgages in the last 2 years.• You had a derogatory loan or account in the last 7 years.• Your most recent application for credit was in the last 22 days.• Your most recent past due payment was 0 - 5 months ago.

For these factors, your credit history was neutral:• You are using 96 - 100% of your available credit.

DefinitionsLoans have fixed terms with regular payments. Examples include car loans or leases, mortgages, student loans, and personal loans.

Accounts have varying payments depending on the balance of the account. Examples include major credit cards, gas cards and cards from department stores.

DEROG or derogatory refers to a loan or account that has a derogatory payment status. Examples include collection accounts, defaults, repossessions, foreclosures, charge-offs and bankruptcies.

If you have multiple applications for auto financing within 30 days of one another, then only one is counted toward your insurance score. Likewise, multiple mortgage applications within 30 days of one another are counted as one. Other credit applications include all other loan or credit card applications. However, we do not count inquiries that result from insurance quotes, from ordering your own credit report, from creditors reviewing the terms of your credit cards or loans, or from creditors prescreening you for unsolicited credit cards or loan offers.

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33


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34


8/18/14



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§21.39.210, 21.39.220

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21.42.123, A

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N/A

N/A

§ 28.22.011N

/AA

S 28.20.440(b)(3), A

S 28.22.101(e), A

S 21.96.020(c)

§ 28.22.101(d)

§09.65.320

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7.080

AL

Ins. Reg.

123§27-14-8

N/A

N/A

§ 32-7A-4

N/A

N/A

§ 32-7-6(c)(4)

N/A

Alabam

a Power

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215 So.2d 447 (A

la. 1968).

AR

§23-67-211

§23-79-109

§ 23-89-202 to 23-89-216

§ 23-89-207§ 27-22-104

§ 23-89-202 to 23-89-216

Ark. C

ode Ann. 23 -

89-403§ 27-22-104

N/A

§16-64-122.

AZ

§20-385§20-398

N/A

N/A

§ 28-4135N

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/A§ 28-4009(2)

N/A

§12-2505

CA

Ins s 1861.05;

1851

§1861.01c

N/A

N/A

Vehicle C

ode § 16020

N/A

N/A

Vehicle C

ode § 16451

Ins § 11580.2

Liv v. Yellow

C

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CO

§10-4-401; 10-4-

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eg. 5-1-10; 5-1-

11

N/A

N/A

N/A

§ 10-4-619N

/AN

/A§ 10-4-620

N/A

§13-21-111

CT

§38a-688, 368-389

§38a-676c

N/A

N/A

§ 14-112, 38a-371N

/A§38a-334, 368-371

§ 14-112, 38a -371

N/A

§52-572o

DC

§31-2704§31-

2502.27§ 31-2404

§ 31-2404§ 31-2403

N/A

§ 31-2406§ 31-2406

N/A

Wingfield v.

People's Drug

Store, 379 A.2d

685 (D.C

. 1994).

35


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18 §§ 2502 to 2506

18 § 2712Tit. 21 § 2118

N/A

Tit. 21 § 2118Tit. 21 § 2118

N/A

Tit. 21 § 2118

N/A

10 § 8132

FL§627.0651

§627.410§ 627.736

§ 627.737§ 324.022

§ 627.736N

/A§ 324.022

N/A

§768.81

GA

§33-9-21 §33-24-9

N/A

N/A

§ 33-34-4N

/A§ 33-7-11

§ 33-34-4N

/A§51-11-7

HI

§431:14-104

Haw

. R

ev. Stat. §§

431:10C-

201 to 216

§431:10C-306

§431:10C-306

§431:10C-104;

§431:10C-301

§431:10C-104,

§431:10C-301;

§431:10C-304;

§431:10C-306

N/A

431:10C-301

N/A

§663-31

IA§§515F.20 to 515F.25

§ 515.102N

/AN

/A§ 321.20B

N/A

§516A.1

§ 321A.1;

321A.21

§613.2§668.3

IDB

ulletin 91 -1

§41-1812N

/AN

/A§ 49-1229

N/A

N/A

§ 49-117N

/A§6-801

ILR

eg. tit. 50 §§ 754.10 to 754.40

Ch. 215 § 5/143

N/A

N/A

625 ILCS 5/7-601

N/A

215 ILCS 5/143a

625 ILCS 5/7 -

203N

/A735 ILC

S 5/2-1116

IN§27-1-22-4

§27-1-22-4

N/A

N/A

§ 9-18-2-11; § 27-1-13-7

N/A

§ 27-7-5-2 § 9-25-4-5

N/A

§34-51-2-6

KS

§40-955§40-216

§ 40-3103, et. al.

§ 40-3117§ 40-3104

§ 40-3107§ 40-3107, 40-284

§ 40-3107§40-3130

§60-258a

KY

§304.13-051,

§304.13-021

§304.14-120

§ 304.39-030; 304.39-040; 304.39-060

§ 304.39-060§ 304.39-110

N/A

N/A

§ 304.39-110N

/A§411.182

LA

§22:1451R

.S. 22:861

N/A

N/A

§ 32:861N

/A§22.1295

§ 32:900§32:866

C.C

. Art. 2323

36


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STR

AT

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FILIN

GFO

RM

FIL

ING

NO

FAU

LT

O

R

VA

RIA

TIO

NT

OR

T

TH

RE

SHO

LD

CO

MPU

LSO

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L

IAB

ILIT

YC

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PUL

SOR

Y

PIP

CO

MPU

LSO

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U

NIN

SUR

ED

M

OT

OR

ISTS

MIN

IMU

M

LIA

BIL

ITY

L

IMIT

S

NO

PAY

N

O

PLA

YN

EG

LIG

EN

CE

MA

175E §§ 5 to 7

175 § 2B90 § 1A

231 § 6D90 § 1A

90 § 34M175 M

GLA

113L90 § 34A

N/A

§231:85

MD

Ins. § 11-306

through 11 -319

Ins. §11-206

§ 19-505 through 19-

508

N/A

Trans. § 17-103Trans. § 17-103

and Ins. § 19-505 and 19-506

Insurance §19-509 through 19-511

15 Trans, § 17-103

N/A

Board of C

ounty C

omm

'r of G

arrett County v

Bell A

tlantic, 695 A

.2d 171 (M

d. 1997).

ME

24-A s

2302; 2304-A

24-A §

2412N

/AN

/Atit. 29-A

§ 1601N

/A24 A

MR

SA 2902

tit. 29-A §

1605N

/A14 § 156

MI

§500.2108§500.223

6§500.3101, et.

seq.§500.3135

§ 257.520§500.3101, et.

seq.N

/A§ 257.520

§257.1105

§600.2959

MN

§60A.315

§70A.06

§ 65B.48

§ 65B.51

§ 65B.48

§ 65B.41-71

§65B.48

§ 65B.44

N/A

§604.01M

O§379.321

§375.92N

/AN

/A§ 303.025

N/A

§379.203§ 303.190

N/A

Gustafson v.

Benda, 661

S.W.2d 11 (M

o. 1983).

MS

§83-2-7§83-2-7

N/A

N/A

§ 63-15-4N

/A§83-11-101

§ 63-15-4N

/A§11-7-15

MT

§33-16-203

§33-1-501; 33-4 -

509

N/A

N/A

§ 61-6-301N

/AN

/A§ 61-6-103

N/A

§27-1-702

NC

§58-36-70§58-36-55; §58-

38-30

N/A

N/A

§§ 20-309; 20-314N

/A§20-279.21

§ 20-279.1N

/A§99B

-4

ND

§26.1-25-04

§26.1-30-19 to 2020

§26.1-41-02§26.1-41-01

§§ 26.1-40-15.2;26.1-41-01; 39-08 -

20; 39-16.1-01

§26.1-41-02§26.1-40-15.2

§ 26.1-40-01, 39-16.1-02

N/A

§32-03.2-02.1

37


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AT

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FILIN

GFO

RM

FIL

ING

NO

FAU

LT

O

R

VA

RIA

TIO

NT

OR

T

TH

RE

SHO

LD

CO

MPU

LSO

RY

L

IAB

ILIT

YC

OM

PUL

SOR

Y

PIP

CO

MPU

LSO

RY

U

NIN

SUR

ED

M

OT

OR

ISTS

MIN

IMU

M

LIA

BIL

ITY

L

IMIT

S

NO

PAY

N

O

PLA

YN

EG

LIG

EN

CE

NE

§§44-7501 to 44-7535 N

eb. Rev.

Stat. § 44 -7501, et

seq.

N/A

N/A

§ 60-3,167N

/A§44-6408

Neb. R

ev. Stat. § 60-

310

N/A

§25-21,18

NH

§412:16 §412:5 I

N/A

N/A

§ 264:2N

/A§264:15

§ 264:20N

/A§507:7

NJ

§17:29A-

46.6; Reg.

11:3-16.6 to 11:3-16.16;

Reg. 11:3-

16B.1 to

11:3-16B.6

§17:29AA

-6§§ 17.28-1.1;

39:6A-8;

39:6A-8.1

§ 39:6A-8

§ 39:6A-14

§ 39:6A-4

§39:6A-14

§ 39:6A-3.1

to 39:6A-4; §

§ 17:28-1.1

§39:6A-

4.5§2A

:15-5.1

NM

§S59A-17-

9; 59A-17-

13

§59A-18-

12N

/AN

/A§§ 66-5-205; 66-5 -

205.1N

/AN

/A§ 66-5-208

N/A

Scott v. Rizzo,

634 P.2d 1234 (N

.M. 1981).

NV

§§ 686B

.070 to

686B.110

NR

S 686B

.070; N

RS

686B.030

N/A

N/A

§ 485.185N

/AN

RS 687B

.145§ 485.185

N/A

§41-141.

NY

Ins. Law §

2305Ins. Law

§ 2307

§§ 5102; 5103§ 5102(d);

§5104 V

eh. & Traf. Law

, Sections 311 and

312

§§ 5102; 5103Insurance 3420

§§ 345; 3420N

/AIns. Law

§ 1411

OH

§3937.03§3937.03

N/A

N/A

§§ 4509.44; 4509.45; 4509.46

N/A

N/A

§ 4509.51N

/AO

hio Rev. C

ode A

nn. § 2315.32 -2315.36.

38


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AT

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FILIN

GFO

RM

FIL

ING

NO

FAU

LT

O

R

VA

RIA

TIO

NT

OR

T

TH

RE

SHO

LD

CO

MPU

LSO

RY

L

IAB

ILIT

YC

OM

PUL

SOR

Y

PIP

CO

MPU

LSO

RY

U

NIN

SUR

ED

M

OT

OR

ISTS

MIN

IMU

M

LIA

BIL

ITY

L

IMIT

S

NO

PAY

N

O

PLA

YN

EG

LIG

EN

CE

OK

titl. 36 § 987

36 § 3610N

/AN

/Atit. 47 § 7-601

N/A

36 Okla. St. A

nn. 3636

tit. 47 § 7-324

47 § 7-116

23 § 13

OR

§737.205§742.003

N/A

N/A

§ 806.010§ 806.080

§ 806.010§278.215

§ 806.070§31.715

§31.600

PA75 P.S. §§

2003 to 2009

40 PS 477b

Tit. 75 § 1705Tit. 75 § 1705

Tit. 75 § 1786N

/AN

/ATit. 75 §

1702N

/A§42-7102

PRtit. 26 §1205

tit. 26 §1111

tit. 26 § 8053tit. 26

§8052(k)R

I§§27-44-6; 27-6-8 to 27-6-11; 27-9-7 to 27-9-10

§27-9-6.1 N

/AN

/A§ 31-31-7

N/A

§27-7-2.1§§ 31-32-24;

31-47-2N

/A§9-20-4

SC§§38-73-

340; 38-73 -915; 38-73-960; 38-73-

520

§38-73-1060

N/A

N/A

§ 38-77-140N

/A§38-77-150

§ 38-77-140N

/AN

elson v. C

oncrete Supply, 399

S.E.2d 783 (S.C.

1991).

SD§§58-24-1 to 58-24-

67

§58-11-12; 58-11 -16; 58-11-

17

§58-23-8N

/A§ 32-35-113

N/A

§58-11-9§ 32-35-70

N/A

§20-9-2

TN

§56-5-305 §56-5-

305N

/AN

/A§ 55-12-102

N/A

§56-7-1201§ 55-12-102

N/A

McIntyre v.

Balentine, 833 S.W

.2d 52 (Tenn. 1992).

39


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STR

AT

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FILIN

GFO

RM

FIL

ING

NO

FAU

LT

O

R

VA

RIA

TIO

NT

OR

T

TH

RE

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LD

CO

MPU

LSO

RY

L

IAB

ILIT

YC

OM

PUL

SOR

Y

PIP

CO

MPU

LSO

RY

U

NIN

SUR

ED

M

OT

OR

ISTS

MIN

IMU

M

LIA

BIL

ITY

L

IMIT

S

NO

PAY

N

O

PLA

YN

EG

LIG

EN

CE

TX

Texas Insurance

Code,

§§2251.001 and

2251.101

Texas Insurance

Code,

Chapter 2301

Texas Insurance

Code,

§1952.151

N/A

Texas Transportation

Code, §601.051

Texas Insurance C

ode, Chapter

1952, Subchapter D

Texas Insurance C

ode, Chapter

1952, Subchapter C

Texas Transportatio

n Code,

§601.072

N/A

Texas Civil

Practice and R

emedies C

ode, §§33.001-

33.017

UT

§31A-19a-

201-§31A-

19a-207

§31A-21-

201§ 31A

-22-302 to 307

§ 31A-22-309

§ 41-12A-301

§31A-22-307 - 309

§31A-22-305

§ 31A-22-

304N

/A78B

-5-817; 78B-

5-818

VA

§§ 38.2-1904, 38.2-1906, 38.2-2003, 38.2-2005, 38.2-

2006

§§ 38.2-2218

through 38.2-2223,

38.2-317

N/A

N/A

N/A

N/A

§ 38.2-2206 46.2-472

N/A

Com

mon law

of V

irginia

VI

22 V.I.C

. 810

Tit. 20 § 701Tit. 20 § 703

VT

tit. 8 § 4688

T. 8 § 3541

N/A

N/A

Tit. 23 § 800N

/A23 V

.S.A. 941

Tit. 23 § 800N

/AT. 12 § 1036

WA

§48.19.060§48.18.10

0§ 48.22.085

N/A

§ 46.30.020§ 48.22.095

N/A

§ 46.29.090N

/A§4.22.005-015

WI

§625.13§631.20

§632.32N

/A§§ 344.01; 344.29

N/A

§632.32§§ 344.01;

344.33N

/A§895.045

40


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AT

E

FILIN

GFO

RM

FIL

ING

NO

FAU

LT

O

R

VA

RIA

TIO

NT

OR

T

TH

RE

SHO

LD

CO

MPU

LSO

RY

L

IAB

ILIT

YC

OM

PUL

SOR

Y

PIP

CO

MPU

LSO

RY

U

NIN

SUR

ED

M

OT

OR

ISTS

MIN

IMU

M

LIA

BIL

ITY

L

IMIT

S

NO

PAY

N

O

PLA

YN

EG

LIG

EN

CE

WV

§33-20-4; W

. Va.

Code R

. § 114-75-3

§33-6-8N

/AN

/A§§ 17D

-2A-3;

17D-4-2

N/A

§33-6-31§ 17D

-4-2N

/AB

radley v. A

ppalachian Pow

er Co., 256

S.E.2d 879 (W.

Va. 1979).

WY

§26-14-107

§26-15-110

N/A

N/A

§ 31-4-103N

/AN

/A§ 31-9-405

N/A

§1-1-109

41


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Georgia

Rhode Island

Kentucky

Kentucky

Georgia

Kentucky

Nevada

Virginia

Rate Filing Laws

Additional Comm

ents Provided by the States

Fault System

Compulsory PIP

In 2008, the legislature changed the rate filing law, O

CGA 33-9-21 to provide that rate filings for minim

um

required liability limits be filed on a prior approval basis. All other liability lim

its and other coverages are filed on a file and use basis and can be im

plemented w

hen received by the Department.

Modified File and U

se as state can extend deemer dates for review

s. State allows flex rating if +/- 5%

.

KY has No Fault for BI only, not for PD. W

hile each individual can reject the limitations on their tort rights, unless

they have properly done so, they are deemed to have accepted the lim

itations.

PIP is a compulsory coverage, it m

ust be provided on every policy even if all insureds have rejected. There must

be coverage for guest passsengers and pedestrians struck by the insured vehicle.

In 2008, the legislature amended the U

M law

, OCGA 33-7-11 to provide tw

o forms of U

M coverage. U

nless rejected by the insured, the default coverage provides the U

M Lim

its added to the liability limits of the "at fault"

party. The optional selection provides for the UM

Limits reduced by the liability lim

its of the "at fault" party.w

riting.

An insurer transacting motor vehicle insurance in N

V must offer, on a form

approved by the Comm

issioner, U

M/U

IM coverage to the insured in an am

ount equal to the limits of coverage selected by the insured for bodily

injury liability under the policy. The insured can reject that coverage, but a written signature of the insured m

ust be obtained if the insured selects less coverage than is required to be offered or if the coverage is rejected.Lim

its of at least $25,000/$50,000/$20,000 required on motor vehicle liability policies.

Compulsory U

M

42


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Results of State Survey Concerning Programs and Initiatives Related to the Availability and Affordability of Automobile Insurance

Automobile Insurance (C/D) Study Group

December 15, 2013

43


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Contents Executive Summary .............................................................................................................................. ........

II. Background .............................................................................................................................. .............

III. Methodology .............................................................................................................................. .......

IV. Summary of Survey Results ..............................................................................................................

A. Background on Auto Insurance and Low Income Consumers ..........................................................

Question 1 .............................................................................................................................. ...............

Question 2 .............................................................................................................................. ...............

Question 3 .............................................................................................................................. ...............

Question 4 .............................................................................................................................. ...............

B. Specific State Initiatives....................................................................................................................

Question 1 .............................................................................................................................. ...............

Question 2 .............................................................................................................................. ...............

Question 3 .............................................................................................................................. ...............

Question 4 .............................................................................................................................. ...............

Question 5 .............................................................................................................................. .............

Question 6 .............................................................................................................................. .............

V. Conclusions .............................................................................................................................. ...........

Appendix 1: Compilation of States’ Responses to 2013 NAIC Auto Insurance (C/D) Study Group Survey .............................................................................................................................. ......................................

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Executive Summary As a part of its charge to review issues relating to low income households and the auto insurance marketplace and to make recommendations as may be appropriate, the Auto Insurance (C/D) Study Group conducted a survey of state insurance regulators to learn more about programs or initiatives each state may have implemented to address availability and affordability issues, particularly for low income drivers. The state survey was distributed to all 56 states and jurisdictions in April 2013. The survey was divided into two parts. The first was devoted to obtaining background information on whether states had gathered any information regarding automobile insurance for low income consumers. The second requested information on specific state initiatives that were taken to assist low income consumers. Responses were received from 49 states as well as the District of Columbia, Guam, Puerto Rico and the Virgin Islands. According to the survey responses:

Eight states have conducted some type of study, hearing or similar inquiry regarding the availability or affordability of automobile insurance for low income consumers. For the most part these studies were undertaken as a result of legislation or in order to determine whether legislation was necessary.

Over the past five years, only three of the states have seen an increase in their automobile insurance residual market,

while 19 states have seen a decrease in the size of their market. The basis cited for the decrease generally was the competitive market. In 24 of the states, the size of the residual market has remained the same.

Thirty-three of the states have a process in place to identify the number of uninsured motorists.

Only three states reported collecting data from insurers that could be used to examine the impact of underwriting or

rating practices on low income consumers.

Twenty-nine of the responses indicated that insurers were required to disclose information regarding underwriting guidelines, rating factors or discounts to applicants or policyholders. The majority of these required disclosures related specifically to the use of credit.

Eighteen states either currently or in the past have required underwriting guidelines be made publicly available.

Several states have an exception to this general rule if the company can show that the information is a trade secret.

The majority of the states have some laws that limit the factors insurers can use in underwriting or rating. Many of them restrict the use of credit and at least four states place limitations on the use of education and occupation.

Only four states or territories currently have or have ever had a Market Assistance Program.

Forty-two of the states either currently, or in the past, have produced rate comparison guides.

Seven states reported having undertaken some type of initiative to address the availability and affordability of auto

insurance.

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The Auto Insurance (C/D) Study Group was established by the Property and Casualty Insurance (C) Committee and the Market Regulation and Consumer Affairs (D) Committee on March 5, 2012. The Study Group was charged to “to review issues relating to low income households and the auto insurance marketplace and to make recommendations as may be appropriate.” The Study Group approved a work plan on Aug. 14, 2012. Among the items on the work plan was a charge for the Study Group to “document innovative initiatives states have taken to address affordability issues for low income drivers. (e.g. California’s low cost auto plan)” and to “investigate and document how these plans are working and challenges jurisdictions have faced.” To accomplish this component of its work plan, the Study Group conducted a survey of state insurance regulators to learn more about programs or initiatives each state may have implemented to address availability and affordability issues, particularly for low income drivers. The state survey was adopted by the Study Group at the NAIC’s Spring 2013 National Meeting and distributed to jurisdictions in April 2013.

III. Methodology The state survey was distributed to the insurance regulators in all 56 NAIC member states and territories. Responses were received from 49 states as well as the District of Columbia, Guam, Puerto Rico and the Virgin Islands, resulting in a 95% response rate. The survey was divided into two substantive parts. The first part consisted of four questions about information states may have gathered related to the availability and affordability of automobile insurance for low income consumers. The second part consisted of six questions regarding specific initiatives states may have taken to enhance the availability or affordability of automobile insurance for low income consumers. The survey also invited additional comments concerning issues related to low income households and the auto insurance marketplace.

IV. Summary of Survey Results Survey results are summarized below, organized by category and by question within each category. A tally of responses to survey questions is included as Appendix 1.

A. Background on Auto Insurance and Low Income Consumers

Question 1: Has your state conducted any studies, hearings or similar inquiries regarding the availability or affordability of auto insurance for low income households? Yes No

If yes, please describe: (a) What prompted the inquiry; (b) When the inquiry occurred; (c) The form of the inquiry; (d) The focus of the inquiry; (e) Any inquiry findings; (f) Any recommendations made or actions taken as a result of the inquiry.

According to the survey responses, eight states (California, Iowa, Kentucky, Maryland, Michigan, Missouri, New Jersey and Texas) have conducted some type of study, hearing or similar inquiry regarding the availability or affordability of automobile insurance for low income consumers. For the most, part these studies were undertaken as a result of legislation or in order to determine whether legislation was necessary.

II. Background

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In 1998, California conducted legislative hearings regarding the difficulty low income Californians experienced when trying to purchase auto insurance. As a result of those hearings, California created a Low Cost Auto Insurance Program.1 This program was created to provide income-eligible, good drivers with access to affordable automobile liability insurance. Additional description and analysis of this program can be found under Section IV.B. Question 6 of this document. From 2008 to 2010, the Iowa Insurance Division conducted a data call of the top auto and homeowners insurers and hired a university to produce an independent study on the use of credit-based insurance scoring.2 As a result of the study, exceptions for extraordinary life circumstances were added to insurance scoring laws to allow consumers an opportunity to have a covered life event removed from consideration in the calculation of that consumer’s insurance score. In April and May of 2013, Kentucky requested data from 14 insurers consisting of over 68% of the auto market in Kentucky. The companies were asked to rate a basic policyholder with different variables, including changes to socioeconomic factors, in order to determine rate differences. Kentucky found that:

Employment and wage have little to no bearing on premiums. Regardless of income, policyholders all have the same opportunity to create a good or bad credit score. For educational degree vs. no type of degree, only two companies showed a slightly higher premium. Kentucky

requires actuarial supports for the use of education factors. Negative credit history/factors adversely affected premiums. Driving record adversely affected premiums. Premiums are based on expected loss and not the ability to pay.

Maryland’s 2006 Final Report of the Automobile Task Force to Study Rates in Urban Areas includes a number of recommendations to reduce the level of premiums, interest and fees charged for automobile insurance in urban areas, such as: allowing the insurer of last resort to develop an installment payment plan to offer to policyholders in lieu of premium financing their policies; eliminating duplicative coverage and subrogating against collateral sources when settling claims; combating insurance fraud more aggressively; streamlining the premium increase, cancellation and non-renewal process and procedures; educating consumers with respect to automobile insurance coverage, rates, public safety and how they are inter-related; and providing financial incentives for people to drive with insurance.3 All of the recommendations in the Maryland report required legislative changes, except consumer education, which the MIA has undertaken through the development of over 100 brochures, advisories, rate comparison guides, etc. and participation in over 500 outreach opportunities every year. Chapter 350, Acts of 2006 clarified some, and eliminated other requirements for information contained in notices of cancellation, non-renewal and premium increase provided to insureds effective January 1, 2007. Chapter 588, Acts of 2012 provided the MIA's fraud unit the authority to investigate allegations of civil fraud and if appropriate after investigation, impose administrative penalties up to $25,000 for each act of insurance fraud and order restitution. Chapter 334, Acts of 2013 permitted the Maryland Automobile Insurance Fund (MAIF), the automobile insurer of last resort, to accept premiums on an installment basis, subject to the approval of the Commissioner, effective July 1, 2013. In addition, the Commissioner is required to approve forms that provide information to applicants and insureds of the payment options available when purchasing auto policies from MAIF. In Michigan, legislation was introduced in 2012 that would require insurers to provide low cost auto insurance through a pilot program. According to the Michigan Department of Insurance, the legislation arose from a concern over the cost of auto insurance.

1 Two bills were enacted to establish a Low Cost Auto Insurance Program. SB 171 http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=sb_171&sess=9900&house=B&author=escutia. SB 527 http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=sb_527&sess=9900&house=B&author=speier 2 http://insuranceca.iowa.gov/hot_consumer_topics/credit_scoring.html 3 Final Report of the Automobile Insurance Task Force to Study Rates in Urban Areas, April 2006. http://www.mdinsurance.state.md.us/sa/docs/documents/home/reports/autotaskforcereport.pdf

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The state of Missouri is required by statute to collect zip code-level premium and loss data on an annual basis. The Missouri Department of Insurance regularly uses this data to monitor the private auto insurance marketplace.4 The last full-length study was performed in 2005 and found significant issues in low income areas, including higher consumer dissatisfaction, higher rates and limits on distribution channels. The New Jersey Department of Insurance issued a paper on insurance rates in 2008 which analyzed: applicable statutes and regulations in New Jersey and other states; consumer-advocate reports regarding impacts of the use of education and occupation as rating factors; insurer rate filings; previous findings of Maryland and Florida insurance departments; census data; and other studies. The study found that the use of education and occupation is consistent with New Jersey statutes and regulations; the use of such factors is common throughout the U.S.; the use of these factors did not create higher overall premiums for drivers with lesser occupational or educational attainment; and these factors were not used as proxies for race or income. In 2013, legislation was introduced, but not passed, in Texas that would create a low income insurance program5. The Texas Legislative Budget Board’s (LBB) Texas State Government Effectiveness and Efficiency Report found that data showed a relationship between vehicles identified as uninsured by the Texas Department of Insurance (TDI), poverty rates, and median income. Additional data show that a higher proportion of persons in geographic areas with less access to automobile insurance have been convicted of driving without insurance. Because of this, the report recommended a statutory change to require that TDI establish a low income automobile insurance program. Question 2: Over the past 5 years, the number of insureds in your state’s residual auto insurance market has: Increased Decreased Remained about the same

If the size of your residual market has increased or decreased, please summarize and provide the source(s) of any available information regarding the reason(s) for this change.

The survey responses indicated that over the past five years only three of the responding states (Florida, Michigan, and Rhode Island) have seen an increase in their automobile insurance residual market while 19 states have seen a decrease in the size of their residual market. Reasons given for an increase in the size of residual markets were: an insolvency, a non-standard carrier withdrawing from the market, and the tightening of underwriting standards. The reason most commonly cited for a reduction in the size of the residual market was the competitiveness of the auto insurance marketplace. In 24 of the responding states, the size of the residual market has remained the same. Several of the states were unable to provide a response to this question. Question 3: Does your state have a process in place to identify uninsured motorists? Yes No

If yes, please respond to the following: (a) Describe the process. (b) How long has the process been in place? (c) Provide citations to any statute, regulation, or other authority that governs this process. (d) Summarize and provide the source(s) of any available information regarding the success or

impact of identifying uninsured motorists. Thirty-three of the responding states have a process in place to identify uninsured motorists. A majority of the responses indicated that insurance companies are required to report to a state entity, such as the Department of Revenue or Department of Motor Vehicles, insurance status information, such as lapses, non-renewals or cancellations. Some states match this information with registrations while others contact drivers who have cancelled policies to ensure that they have a new policy.

4 http://insurance.mo.gov/reports/ 5 Introduction of proposed legislation, Senate Bill 491 and House 1111, in the 83rd Legislative Session (2013). SB 491: http://www.legis.state.tx.us/tlodocs/83R/billtext/pdf/SB00491I.pdf#navpanes=0. HB 1111: http://www.legis.state.tx.us/tlodocs/83R/billtext/pdf/HB01111I.pdf#navpanes=0

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In some states, Departments of Motor Vehicles randomly select a sample of registrations and send to insurers for verification of coverage. Several states have implemented online insurance verification systems where the Department of Motor Vehicles or law enforcement can check the status of a driver’s insurance coverage and can send notices to drivers who may be uninsured. Most of these processes began in the 1980s or 1990s while some of the more comprehensive databases were implemented in the past ten years. Most states indicated that the success of the program has been difficult to measure, although several states, including Delaware, Florida, Georgia, Kentucky, New York, Texas and Utah, presented data showing uninsured motorist rates to be relatively low or lower than before the program began. Question 4: Does your state collect any data from auto insurers that could be used to examine the impact of

underwriting or rating practices on low income consumers? Yes No

If yes, please respond to the following: (a) Describe the data collected and how it is used. (b) Is the data treated as confidential commercial information?

Yes No Only three states (California, Massachusetts and Missouri) reported that they collect any data from auto insurers that could be used to examine the impact of underwriting or rating practices on low income consumers. In California, section 2646.6 of the California Code of Regulation was adopted to identify underserved communities. California defines an underserved community as having the following three characteristics:

1) uninsured motorist ratio that is ten percentage points above the statewide ratio; 2) the per capita income is below the 50th percentile for California as measured by the most recent U.S. Census;

and 3) predominately minority where two-thirds of the population is minority as measured by the most recent U.S.

Census.

California’s insurance department collects, by zip code, the following data from insurers licensed to write business in California:

premium; exposure; the number of agency offices and the languages spoken in these offices; the number of servicing offices; the number of direct solicitations made; and the demographics of new policyholders.

California uses this data as the basis for its bi-annual Report of Underserved Communities.6 The 2011 report found 10.3% of total earned exposures for private passenger automobile insurance to be in underserved communities. The report notes that it was not able to address the issue of why some people do not have insurance. It concluded that it is up to the community, insurance industry and the California Department of Insurance to make sure adequate coverage can be made available to all people.

6 http://www.insurance.ca.gov/0400-news/0200-studies-reports/0800-underserved-comm/2011/index.cfm

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Missouri annually collects premium, exposure and loss data at the zip code level in order to monitor the market.7 Insurers are required by statute to provide this data and it is kept confidential by the state. Missouri is able to merge the insurance data with other data sources, such as U.S. Census data and/or vehicle registration records in order to create analyses. Although Massachusetts does not directly collect this type of data, the state does closely monitor the impact of various rating and underwriting features on personal automobile insurance premiums. Massachusetts requires personal auto rate filings to include actuarial support for any changes to the final rating factors associated with a tier assignment. The filing company also provides underwriting tier assignments for sample policies. Massachusetts calculates the premium under the proposed rates and compares the results with the premiums available in the residual market. A Massachusetts Division of Insurance bulletin establishes a premium cap for policies that provide the minimum insurance coverage required by law for operators with certain driving records. New York’s response to this question focused on data collection related to “redlining.”8 A New York regulation requires insurers to maintain records by zip code of all agents and brokers whose contracts or accounts have been terminated; all applicable policies issued, renewed, cancelled (other than for nonpayment of premium) or nonrenewed; and all applications for insurance where the insurer did not issue a policy. The information collected is used to examine the impact of underwriting on geographical locations, which could indirectly provide information on low income consumers.

B. Specific State Initiatives Question 1: Has your state ever required insurers to disclose information regarding underwriting guidelines, rating

factors, or discounts to auto insurance applicants or policyholders? Yes No

If yes, please respond to the following: (a) Indicate whether this is a current initiative or a past initiative. (b) Describe the required disclosure(s). (c) When is/was the insurer required to make the disclosure(s)?

Twenty-nine of the responses indicated that insurers were required to disclose information regarding underwriting guidelines, rating factors or discounts to applicants or policyholders. The majority of these requirements related specifically to the use of credit. Some states required additional disclosures. For example, California’s laws required the following disclosures, among others:

CIC § 381.1 -Disclosure of Specified Rating Information: Insurers are required to include this disclosure in each renewal notice that is sent prior to the renewal of the policy. The disclosure enables the named insured to check key rating information for accuracy so that he or she can request corrections to the policy premium calculation, as necessary. CIC § 489(a) - Disclosure of the Named Insured's Right to Be Informed, Upon Request. of a Premium Increase at Renewal that is Due to an Accident or Traffic Conviction: The insurer must provide this disclosure to the named insured not less than 20 days prior to the policy renewal effective date. The disclosure is helpful to named insureds whose premium has increased at policy renewal due to an accident or traffic violation that was erroneously recorded on a comprehensive loss underwriting exchange report or on the insured's motor vehicle report. CIC § 791.10- Notice of an Adverse Underwriting Decision: If the insurer charges a higher rate at policy renewal due to information that differs from what the policyholder furnished the insurer must notify the policyholder of its

7 http://www.sos.mo.gov/adrules/csr/current/20csr/20c600-3.pdf 8 Redlining is defined as when termination or refusal to renew is based solely on the geographical location of the agent or broker or of the risks for which coverage is afforded through such agent or broker. N.Y. ISC Law §§ 3433.

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adverse underwriting decision and of the policyholder's rights under CIC § 791.08, § 791.09, and§ 791.1 O(b). This notice could be provided at, or prior to, the policy renewal effective date. CIC § 11580.15- Disclosure of All Available Premium Discounts: The insurer must disclose all its available premium discounts to the named insured, in a free-standing document, when the insurer offers to renew the policy. By providing this notice, the insurer gives the named insured the opportunity to apply for premium discounts that the insured is not already receiving. CCR § 2632.5(c)(2)(8)(iii) - Notice of the Annual Mileage Figures that Were Used for the Expired and the Renewal Policies: The insurer must provide the applicant with this notice before the policy renewal effective date. By providing the notice, the insurer gives the named insured the opportunity to challenge excessive annual mileage figures so that policy premiums can be corrected.

Michigan requires that, at least annually, an insurer provide the automobile insurance policyholder with a notice that the following information is available and will be provided upon request:

A description of the specific rating classifications by which rates and premiums have been determined; A general explanation of the extent to which rates or premiums vary among policyholders on the basis of the

rating classifications used by the insurer; Sources and reasonable procedures by which the policyholder can obtain from the insurer additional

information sufficient for the policyholder to calculate and confirm the accuracy of his or her specific premium; Relevant information regarding the rights of the policyholder to appeal the application of the insurer's rating

plan in determining his or her premium; A description of all of the insurer's underwriting rules based on insurance eligibility points and a description of

all of the underwriting rules of the insurer's affiliates based on insurance eligibility points; and A suggestion that the policyholder contact his or her agent to determine if he or she is eligible for insurance

from an affiliate of the insurer or under a different rating plan of the insurer that would provide to the policyholder insurance at a more favorable premium.

Pennsylvania requires the following disclosures, among others: At new business and at each renewal, insurers must provide each insured a notice stating that discounts are

available for insureds that meet the requirements for the statutory passive restraint, anti-theft device and driver improvement course discounts.

At new business and at least once annually, insurers must provide each insured their surcharge disclosure plan.

Question 2: Has your state ever made auto insurance underwriting guidelines publicly available, or required insurers to make them publicly available?

Yes No

If yes, please respond to the following:

a) Indicate whether this is a current initiative or a past initiative. b) Under what circumstances are/were underwriting guidelines made publicly available? c) Provide the statutory or regulatory authority for making underwriting guidelines publicly

available. d) Summarize any analysis that has been conducted regarding the effectiveness or impact of this

initiative.

Eighteen states responded they make auto insurance underwriting guidelines publicly available. For most of these states, the guidelines fall under open records laws within the state. Several states provide a specific exemption for credit-based insurance scores or an exemption if the company can show that the information is a trade secret. Three states indicated the guidelines would only be required to be filed, and therefore available to the public, if the guidelines had an impact on rates.

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No states indicated that they had conducted an analysis of the effectiveness or impact of making underwriting guidelines publicly available.

Question 3: Has your state ever had laws or regulations that specify or limit the factors auto insurers can use in

underwriting or rating including, but not limited to, credit, education or occupation? For purposes of this survey, the term “underwriting” means a rule that determines whether a person is offered coverage, is not offered coverage, or is offered coverage with some limitations. The term “rating” means a rule or factor that would cause a person’s premium to be different. This would include rules that place a person into one rating tier or another. This also includes risk classification factors that differentiate price between two otherwise similarly situated individuals.

Yes No If yes, please respond to the following: a) Indicate whether this is a current initiative or a past initiative. b) Identify what underwriting or rating factors were specified or limited, and in what way. c) Provide the statutory or regulatory authority for these specifications or limitations. d) Summarize any analysis that has been conducted regarding the effectiveness or impact of this

initiative.

Forty-one jurisdictions reported some limitations on the factors insurers can use in underwriting or rating. Approximately half of the responses indicated limits on the use of credit scores in underwriting and rating. These limitations typically require certain consumer notifications and prohibit an insurer from failing to renew or, at renewal, again underwrite or rate a personal insurance policy based in whole or in part on a consumer’s credit history or insurance score. These states often prohibit an insurer from canceling, denying, underwriting or rating coverage based in whole or in part on the absence of credit history or the inability to determine a consumer’s credit history. Seven of the states indicated that a person’s credit history or score shall not be the sole basis to cancel, deny or nonrenew an insurance policy. Seven states also indicated certain characteristics (income, gender, address, zip code, ethnic group, religion marital status, or nationality) could not be used to calculate a credit-based insurance score. Georgia responded that education and occupation cannot be used in rating. Wisconsin responded that insurers cannot cancel or refuse to issue or renew a policy based on occupation. In New Jersey, insurers are prohibited from using occupation, education or insurance score of the applicant or insured in acceptance criteria. In Colorado, an underwriter may not refuse to write or renew a policy solely because of a lawful occupation. California’s laws provide very specific limitations on what rating factors may be used. According to California’s survey response, Proposition 103 was passed in 1998 and established three primary rating factors:

1) the insured’s driving record, 2) the number of miles driven, and 3) the number of years of driving experience.

For California auto insurers, these factors must have the largest impact on the rate calculation. The optional factors that an insurer may use are prescribed in state regulations. The optional factors most closely related to territory, frequency and severity rating bands in the rating scheme must carry the least weight if they are included. Credit score is not an allowable rating factor in California. In response to the question regarding the effectiveness of the initiative, the California response stated:

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A 2008 report by the Consumer Federation of America, looking solely at automobile insurance rates before and after Proposition 103, found that consumers realized $61.8 billion in savings as a result of the reforms enacted by Proposition 103.9

To the question regarding the effectiveness of underwriting restrictions, Texas responded:

The Texas Department of Insurance has not conducted any studies regarding the effectiveness or impact of these laws and regulation. However, the department provided a report to the governor and the legislature in December 2004 regarding insurers’ use of credit scoring, and a supplemental report in January 2005. These reports are on the department’s website at: http://www.tdi.texas.gov/reports/credit3.html.

Question 4: Has your state ever had a Market Assistance Program for automobile insurance?

Yes No If yes, please respond to the following: a) Indicate whether this is a current initiative or a past initiative. b) Describe the parameters of the Market Assistance Program(s). c) Provide the statutory or regulatory authority pursuant to which the Market Assistance Program

is or was operated. d) Summarize any analysis that has been conducted regarding the effectiveness or impact of the

Market Assistance Program(s). Only four responding states or territories currently have or have ever had a Market Assistance Program (New Jersey, Puerto Rico, South Carolina and Texas). In New Jersey, the Urban Enterprise Zone program was a past initiative that allowed policies in under-served urban areas to be assigned to insurers who wrote less than their proportionate market share in those areas. This market assistance program was related to New Jersey’s previous statutory requirement that insurers “take-all-comers.” This statutory requirement was repealed in 2003 along with the associated Urban Enterprise Zone program. In South Carolina, the website SCMarketAssist.com assists consumers in finding insurance coverage by helping them connect with agents and companies. A consumer may view a list of agents and companies participating in SC MarketAssist to help them search or a consumer may ask those agents and companies to contact them directly. In Texas, the auto insurance Market Assistance Program (MAP) was launched in 1998 to assist motorists who were placed in nonstandard markets at high premium rates despite their good driving records. The program was available to drivers who met two eligibility criteria:

1) Residence in one of the 383 designated underserved ZIP codes. 2) A three-year state motor vehicle record free of traffic citations for at-fault accidents or moving violations.

The Texas Department of Insurance (TDI) has not conducted any analysis regarding the effectiveness or impact of the MAP. The auto MAP was eliminated on August 31, 2005, as part of the overall state budget reductions for 2006. Puerto Rico described two current auto insurance assistance programs. One is the Automobile Accidents Compensation Administration (ACAA by its Spanish acronym). ACAA is a governmental insurer that provides compulsory bodily injury liability coverage on a no-fault basis for an annual premium of $35 per vehicle. Puerto Rico also has a compulsory physical damage liability coverage requirement of $4,000 minimum limit. If this coverage is not obtained in the competitive market, it

9http://consumerfed.org/elements/www.consumerfed.org/file/finance/state_auto_insurance_report.pdf

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is provided by a Joint Underwriting Association (ASC by its Spanish acronym). The association charges a uniform premium of $99 for personal auto and $148 for commercial auto. The premiums for these two programs are paid to the Secretary of the Treasury of Puerto Rico when a motor vehicle license is obtained or renewed, along with the payment of the fees for issuing or renewing such license. The Secretary of the Treasury of Puerto Rico then transfers the corresponding premium to ACAA and ASC. The response from Puerto Rico indicated that, with this process, no motorist should be uninsured. Question 5: Has your state ever produced auto insurance rate comparison guides?

Yes No If yes, please respond to the following: a) Indicate whether this is a current initiative or a past initiative. b) Describe the scope and content of the auto insurance rate comparison guide. c) Provide any statutory or regulatory authority pursuant to which the comparison guide was

produced. d) Describe the manner and extent to which the comparison guide was distributed, with particular

emphasis on distribution to low income drivers. e) Summarize any analysis that has been conducted regarding the effectiveness or impact of the

rate comparison guide.

Forty-two of the survey respondents either currently produce, or in the past have produced, rate comparison guides. Most states with current rate comparison guides require insurers to provide rates for several hypothetical scenarios based on varying risk categories and geographic areas. Most of these states require all insurers to provide the data while some only require data from the largest 10 or 20 insurers, and one state asks for the data on a voluntary basis. All of the states provide the rate comparisons on their websites, while many of the states also produce physical guides which are provided at locations such as libraries, fairs, and Department of Insurance events. Although none of the states was able to provide analysis of the effectiveness or impact of the guides, several states indicated that the guides receive a large number of online hits and are well received by consumers. Eleven jurisdictions responded that they had rate comparison guides in the past, but no longer maintain them. The submission of data was voluntary for insurers in two of these states. Other states indicated that they did not find the rate comparison guides to be indicative of actual rates in their states. Two of these states indicated that consumers could find more accurate rates from agents or other online quote systems.

Question 6: Has your state or a local jurisdiction within your state undertaken any other initiatives to address

availability and affordability of auto insurance for low income consumers? Yes No

If yes, please respond to the following: a) Indicate whether this is a current initiative or a past initiative(s). b) Describe the nature of the initiative(s). c) Provide the statutory or regulatory authority pursuant to which the initiative(s) is or was

conducted. d) Summarize any analysis that has been conducted regarding the effectiveness or impact of the

initiative(s).

Seven responding states (California, Connecticut, Hawaii, Maryland, Massachusetts, New Jersey and Texas) at some point have undertaken an initiative to address the availability and affordability of auto insurance. In 1998, the California Legislature developed California’s Low Cost Auto Insurance Program to provide income-eligible, good drivers with access to affordable automobile liability insurance. The policies are sold by licensed insurance agents and

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issued by California licensed insurance companies. Customers can call a toll-free number or visit a website to be referred to producers in the area. To be eligible, a consumer must:

Be at least 19 years of age; Have been continually licensed to drive for the past three years; Own a vehicle valued at less than $20,000; Have a good driving record; and Meet income eligibility requirements (approximately $36,000 for a 2-person household, or $55,000 for a 4-

person household).

Additionally, all cars in the household must be insured through this program. The California policy is a liability-only auto insurance that meets the state's financial responsibility laws. For an additional charge, consumers can add other coverages. This program does not offer comprehensive or collision coverage. The cost of the policy is less than $350 per year in every county in California. There currently are more than 11,000 people enrolled in the program out of an uninsured population of 3 million in the state. Since the program’s inception, it has covered $8.6 million in medical claims and $7.8 million in property damage. Annual reports on the California Low Cost Auto Insurance Program are provided to the Legislature.10 The 2013 report found that California's Low Cost Automobile Insurance Program addressed and achieved each of the success measures the legislature set for it: rates were sufficient to meet statutory rate-setting standards; the program served underserved communities; the program offered access to previously uninsured motorists, thus reducing the number of uninsured drivers; and the program’s advertising caused uninsured motorists to visit a producer and obtain insurance other than that provided by the program. Connecticut’s law requires flattening of certain expenses and tempering of rates with a 75% weight given to an individual territory loss cost indication and 25% to the statewide average loss cost indication. Under the Hawaii Motor Vehicle Insurance Law, recipients of public assistance benefits consisting of direct cash payments through the Department of Human Services or benefits from the Supplemental Security Income Program under the social security administration are eligible to receive basic motor vehicle insurance coverage at no cost. However, the public assistance recipients must be licensed drivers or unlicensed permanently disabled individuals unable to operate their motor vehicles, and the sole registered owners of the motor vehicle to be insured, provided that the motor vehicle is used strictly for personal purposes, and not for commercial purposes. Recipients eligible under this provision must first exhaust all paid coverage under any motor vehicle insurance policy in force. Eligibility for basic motor vehicle insurance coverage at no cost ends upon termination of public assistance benefits. Recipients are required to notify the insurance company promptly when public assistance benefits terminate. Not more than one vehicle per eligible household shall be insured unless extra vehicles are approved by the department of human services as being necessary for medical or employment purposes. In Maryland, Sections 11-321 through 11-326 of the Insurance Article, require every insurer and the Maryland Automobile Insurance Fund (MAIF), Maryland's insurer of last resort, to file data about the geographic distribution of private passenger premium written in the state for the preceding calendar year on a territory or zip code basis, or both. If a major insurer (as defined in statute) does not write a certain percentage of its written premium in Baltimore City, the insurer must file a marketing plan for approval by the Commissioner. The purpose of this requirement is to ensure that insurers are making automobile insurance available and affordable for residents of Baltimore City. The Massachusetts Community Insurance Fraud Initiative (CIFI) began in 2003, and remains ongoing. It is an effort designed to root out fraud schemes in high fraud areas, notably urban areas which coincidently are heavily populated by lower income and immigrant communities. The goal is to reduce or eliminate fraudulent claims, which would in turn reduce premiums for all citizens in these communities. A report titled “The Community Insurance Fraud Initiative (CIFI) A Ten Year

10 http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0010-automobile/lca/CLCALegRpts.cfm

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Retrospective” found that, in addition to the continuing efforts to drive out fraud, regulators have overhauled the residual market and opened auto insurance to competitive pricing, leading to more than a 50 percent increase (from 19 to 34) in insurers now willing to write auto insurance policies in Massachusetts.11 The report found the average annual savings per vehicle are estimated at $185 in CIFI communities and $148 statewide since the introduction of CIFI. In New Jersey, policies are available which provide less than statutory minimum coverage levels. The "Basic" policy is available to any insured and provides only minimal property damage, personal injury protection, and bodily injury (optional) coverage. The "Special" policy is available only to those who fall below specified income levels and it provides coverage only for emergency medical care.

The Texas Legislative Budget Board’s (LBB) Texas State Government Effectiveness and Efficiency Report (submitted to the 83rd Texas Legislature) contained an issue and recommendation to reduce the number of uninsured drivers by establishing a low income automobile insurance program.12 The report arose over concerns that uninsured drivers increase the cost of automobile insurance for all Texans and low income Texans are more likely to lack automobile insurance due to cost than Texans with higher incomes. The report presented data showing a relationship between vehicles identified as uninsured by the Texas Department of Insurance (TDI), poverty rates, and median income. Additional data show that a higher proportion of persons in geographic areas with less access to automobile insurance have been convicted of driving without insurance. The LBB report recommended a statutory change to require that TDI establish a low income automobile insurance program. Legislation concerning this issue did not pass in 2013.

V. Conclusions This survey of state insurance regulators demonstrated that states and territories have taken a variety of actions to address availability and affordability of automobile insurance. These range from activities common to most states, such as the creation of rate comparison guides or the implementation of restrictions on underwriting guidelines, to initiatives unique to a small number of states such as comprehensive programs to provide low-cost liability policies to low income drivers. The Auto Insurance Study Group hopes these survey results can assist states as they evaluate auto insurance markets in their states and consider initiatives or programs that may address the issue of availability and affordability for low income drivers.

11 http://www.ifb.org/ContentPages/DocumentView.aspx?DocId=856 12 http://www.lbb.state.tx.us/GEER/Government%20Effectiveness%20and%20Efficiency%20Report%202012.pdf

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Appendix 1: Compilation of States’ Responses to 2013 NAIC Auto Insurance (C/D) Study Group Survey

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Yes No Unknown No ResponseCalifornia Alabama Montana American SamoaIowa Alaska New MexicoKentucky Arizona Northern Mariana IslandsMaryland ArkansasMichigan ColoradoMissouri ConnecticutNew Jersey DelawareTexas District of Columbia

FloridaGeorgiaGuamHawaiiIdahoIllinoisIndianaKansasLouisianaMaineMassachusettsMinnesotaMississippiNebraskaNevadaNew HampshireNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaPuerto RicoRhode IslandSouth CarolinaSouth Dakota

A. Background on Auto Insurance and Low Income Consumers Question 1: Has your state conducted any studies, hearings or similar inquiries regarding the availability or affordability of auto insurance for low-income households?

Yes No

If yes, please describe:

(a) What prompted the inquiry;(b) When the inquiry occurred;(c) The form of the inquiry;(d) The focus of the inquiry;(e) Any inquiry findings;(f) Any recommendations made or actions taken as a result of the inquiry.

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TennesseeUtahVermontVirgin IslandsVirginia WashingtonWest VirginiaWisconsinWyoming

8 44 1 3

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Increased Decreased Remained about the same Other* No Response

Florida Alaska Alabama Colorado American SamoaMichigan Arizona Arkansas District of Columbia New MexicoRhode Island California Georgia Guam Northern Mariana Islands

Connecticut Indiana Idaho Puerto RicoDelaware Iowa MontanaHawaii Kansas Virgin IslandsIllinois LouisianaKentucky MinnesotaMaine NevadaMaryland New JerseyMassachusetts North CarolinaMississippi North DakotaMissouri OhioNebraska OklahomaNew Hampshire OregonNew York South CarolinaPennsylvania South DakotaTexas TennesseeVirginia Utah

VermontWashingtonWest VirginiaWisconsinWyoming

3 19 24 6 4

A. Background on Auto Insurance and Low Income Consumers Question 2: Over the past 5 years, the number of insureds in your state’s residual auto insurance market has:

Increased Decreased Remained about the same

If the size of your residual market has increased or decreased, please summarize and provide the source(s) of any available information regarding the reason(s) for this change.

* State needs to obtain information from another source; response was incomplete; fluctuation in market; or no residual market.

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Yes No No ResponseAlabama Alaska American SamoaArkansas Arizona New MexicoCalifornia Hawaii Northern Mariana IslandsColorado Idaho Puerto RicoConnecticut IowaDelaware MaineDistrict of Columbia MichiganFlorida MinnesotaGeorgia MississippiGuam New HampshireIllinois North CarolinaIndiana North DakotaKansas OklahomaKentucky Rhode IslandLouisiana South DakotaMaryland VermontMassachusetts Virgin IslandsMissouri WisconsinMontana WyomingNebraskaNevadaNew JerseyNew YorkOhioOregonPennsylvaniaSouth Carolina TennesseeTexasUtahVirginiaWashingtonWest Virginia

33 19 4

A. Background on Auto Insurance and Low Income Consumers Question 3: Does your state have a process in place to identify uninsured motorists?

Yes No


(a) Describe the process.(b) How long has the process been in place? (c) Provide citations to any statute, regulation, or other authority that governs this process.(d) Summarize and provide the source(s) of any available information regarding the success or impact of identifying uninsured motorists.

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Yes No No ResponseCalifornia Alabama American SamoaMassachusetts Alaska New MexicoMissouri Arizona Northern Mariana IslandsNew York (indirectly) Arkansas

ColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgiaGuamHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMichiganMinnesotaMississippiMontanaNebraskaNevadaNew HampshireNew JerseyNorth CarolinaSouth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaPuerto RicoRhode Island

A. Background on Auto Insurance and Low Income Consumers Question 4: Does your state collect any data from auto insurers that could be used to examine the impact of underwriting or rating practices on low-income consumers?

Yes No


(a) Describe the data collected and how it is used.(b) Is the data treated as confidential commercial information?

Yes No

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South DakotaTennesseeTexasUtahVermont Virgin Islands Virginia WashingtonWest VirginiaWisconsinWyoming

4 49 3

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Yes Current or Past No No Response

Alaska C Alabama American SamoaCalifornia C Arizona New MexicoColorado C Arkansas Northern Mariana IslandsConnecticut C District of ColumbiaDelaware C FloridaHawaii C GeorgiaIdaho C GuamIllinois C IndianaIowa C KentuckyKansas C LouisianaMaine C MississippiMaryland C MissouriMassachusetts C MontanaMichigan C NevadaMinnesota C OklahomaNebraska C OregonNew Hampshire C Puerto RicoNew Jersey C South DakotaNew York C Virgin IslandsNorth Carolina C Virginia North Dakota C WashingtonOhio P WisconsinPennsylvania C WyomingRhode Island CSouth Carolina CTennessee CTexas CUtah CVermont CWest Virginia C

30 C-29 / P-1 23 3

B. Specific State Initiatives Question 1: Has your state ever required insurers to disclose information regarding underwriting guidelines, rating factors, or discounts to auto insurance applicants or policyholders?

Yes No


(a) Indicate whether this is a current initiative or a past initiative.(b) Describe the required disclosure(s).(c) When is/was the insurer required to make the disclosure(s)?

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Arizona C Alabama American SamoaConnecticut C Alaska New MexicoFlorida C Arkansas Northern Mariana IslandsGeorgia C CaliforniaGuam C ColoradoIdaho C DelawareIndiana C District of ColumbiaIowa C HawaiiMaine C IllinoisMichigan C KansasMinnesota C KentuckyNebraska C LouisianaNevada C MarylandNew Hampshire C MassachusettsNew Jersey C MississippiOhio C MissouriSouth Dakota C MontanaUtah C New YorkWisconsin C North Carolina

North DakotaOklahomaOregonPennsylvaniaPuerto RicoRhode IslandSouth CarolinaTennesseeTexasVermontVirgin IslandsVirginia WashingtonWest VirginiaWyoming

19 C-19 34 3

B. Specific State Initiatives Question 2: Has your state ever made auto insurance underwriting guidelines publicly available, or required insurers to make them publicly available?

Yes No


a) Indicate whether this is a current initiative or a past initiative.b) Under what circumstances are/were underwriting guidelines made publicly available?c) Provide the statutory or regulatory authority for making underwriting guidelines publicly available.d) Summarize any analysis that has been conducted regarding the effectiveness or impact of this initiative.

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Alaska C Alabama American SamoaArkansas C Arizona New MexicoCalifornia C District of Columbia Northern Mariana IslandsColorado C IllinoisConnecticut C LouisianaDelaware C North DakotaFlorida C Puerto RicoGeorgia C South CarolinaGuam C VermontHawaii C Virgin IslandsIdaho C WashingtonIndiana CIowa CKansas CKentucky CMaine CMaryland CMassachusetts CMichigan CMinnesota CMississippi CMissouri CMontana CNebraska CNevada CNew Hampshire CNew Jersey CNew York CNorth Carolina COhio COklahoma COregon CPennsylvania CRhode Island CSouth Dakota C

B. Specific State Initiatives Question 3: Has your state ever had laws or regulations that specify or limit the factors auto insurers can use in underwriting or rating including, but not limited to, credit, education or occupation?

Yes No


a) Indicate whether this is a current initiative or a past initiative. b) Identify what underwriting or rating factors were specified or limited, and in what way.c) Provide the statutory or regulatory authority for these specifications or limitations.d) Summarize any analysis that has been conducted regarding the effectiveness or impact of this initiative.

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Tennessee CTexas CUtah CVirginia CWest Virginia CWisconsin CWyoming C

42 C-42 11 3

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Yes Current or Past No Other No Response

New Jersey P Alabama District of Columbia American SamoaPuerto Rico C Alaska New MexicoSouth Carolina C Arizona Northern Mariana IslandsTexas P Arkansas

CaliforniaColoradoConnecticutDelawareFloridaGeorgiaGuamHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew YorkNorth CarolinaNorth DakotaOhioOklahoma

B. Specific State Initiatives Question 4: Has your state ever had a Market Assistance Program for automobile insurance?

Yes No


a) Indicate whether this is a current initiative or a past initiative.b) Describe the parameters of the Market Assistance Program(s).c) Provide the statutory or regulatory authority pursuant to which the Market Assistance Program is or was operated.d) Summarize any analysis that has been conducted regarding the effectiveness or impact of the Market Assistance Program(s).

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OregonPennsylvaniaRhode IslandSouth DakotaTennesseeUtahVermontVirgin IslandsVirginiaWashingtonWest VirginiaWisconsinWyoming

4 C-2 / P-2 48 1 3

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Alabama C District of Columbia American SamoaAlaska C Guam New MexicoArizona C Idaho Northern Mariana IslandsArkansas C IndianaCalifornia C MaineColorado C North CarolinaConnecticut C Rhode IslandDelaware C South DakotaFlorida C TennesseeGeorgia C Virgin IslandsHawaii C WyomingIllinois CIowa CKansas CKentucky CLouisiana CMaryland CMassachusetts CMichigan PMinnesota PMississippi PMissouri CMontana CNebraska CNevada CNew Hampshire CNew Jersey CNew York PNorth Dakota COhio COklahoma COregon CPennsylvania P

B. Specific State Initiatives Question 5: Has your state ever produced auto insurance rate comparison guides?

Yes No


a) Indicate whether this is a current initiative or a past initiative. b) Describe the scope and content of the auto insurance rate comparison guide.c) Provide any statutory or regulatory authority pursuant to which the comparison guide was produced.d) Describe the manner in which and extent to which the comparison guide was distributed, with particular emphasis on distribution to low-income drivers.e) Summarize any analysis that has been conducted regarding the effectiveness or impact of the rate comparison guide.

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Puerto Rico CSouth Carolina CTexas CUtah CVermont PVirginia CWashington PWest Virginia CWisconsin P

42 C-34 / P-8 11 3

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California C Alabama American SamoaConnecticut C Alaska ArkansasHawaii C Arizona New MexicoMaryland C Colorado Northern Mariana IslandsMassachusetts C DelawareNew Jersey C District of ColumbiaTexas C Florida

GeorgiaGuamIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew YorkNorth CarolinaSouth CarolinaNorth DakotaOhioOklahomaOregonPennsylvania

B. Specific State Initiatives Question 6: Has your state or a local jurisdiction within your state undertaken any other initiatives to address availability and affordability of auto insurance for low-income consumers?

Yes No


a) Indicate whether this is a current initiative or a past initiative(s). b) Describe the nature of the initiative(s).c) Provide the statutory or regulatory authority pursuant to which the initiative(s) is or was conducted.d) Summarize any analysis that has been conducted regarding the effectiveness or impact of the initiative(s).

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Puerto RicoRhode IslandSouth DakotaTennesseeUtahVermontVirgin IslandsVirginiaWashingtonWest Virginia Wisconsin Wyoming

7 C-7 45 4

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Attachment Two

Property and Casualty Insurance (C) Committee 8/18/14


Draft: 9/30/14

Transparency and Readability of Consumer Information (C) Working Group Louisville, Kentucky

August 18, 2014 The Transparency and Readability of Consumer Information (C) Working Group of the Property and Casualty Insurance (C) Committee met in Louisville, KY, Aug. 18, 2014. The following Working Group members participated: Angela Nelson, Chair, and Joan Dutill (MO); Joel Laucher (CA); Peg Brown (CO); George Bradner (CT); James Stephens (IL); Martin Hazen (KS); Ron Henderson (LA); Sandra Castagna (MD); Emily Johnson Piper (MN); Carla Obiol (NC); and Tynesia Dorsey (OH). Also participating were: Richard Koon (FL); and Paula Pallozzi (RI). 1. Adopted its June 26 and June 19 Minutes Ms. Nelson reviewed the Working Group’s June 26 (Attachment Two-A) and June 19 (Attachment Two-B) minutes. Mr. Henderson made a motion, seconded by Ms. Peg Brown, to adopt the minutes. The motion carried. 2. Discussed its Recent Work Products Ms. Nelson noted that the final published versions of the NAIC Consumer Shopping Tool for Homeowners Insurance and the NAIC Consumer Shopping Tool for Auto Insurance were provided to each of the Working Group members, as well as members of the audience. She said NAIC staff would work with the NAIC Communications Division to produce electronic versions of the documents. Ms. Nelson said the NAIC Best Practices for Creating Online Insurance Policy Resources document was adopted June 26 via e-vote. She said it would be considered for adoption by the Property and Casualty Insurance (C) Committee during its session at this national meeting. 3. Heard Presentations Regarding Smart Disclosures Ms. Nelson said smart disclosures are a means of combining data with choice engines to sort publicly available data to help consumers make more informed purchasing decisions. She said smart disclosures are becoming more prevalent as technology advances and enables regulators to do more things with the data that is collected. Ms. Nelson said technology will to continue to change the way consumers shop for products and services. Ms. Nelson said the purpose of the presentations is to help the Working Group understand and learn about smart disclosures and their purpose. Ms. Lisa Brown (American Insurance Association—AIA) said she first heard of the concept of a smart disclosure last summer when she heard a presentation given by Brenda Cude (University of Georgia). She said she is intrigued by the potential use of smart disclosures as it relates to P/C insurance. Ms. Lisa Brown said that, in September 2011, the White House Office of Management and Budget released guidance to federal agencies regarding informing consumers through smart disclosure. She said this guidance defines smart disclosure as “the timely release of complex information and data in standardized, machine-readable formats in ways that enable consumers to make informed decisions.” Ms. Lisa Brown said the guidance goes on to say that smart disclosure will typically take the form of providing individual consumers of goods and services with direct access to relevant information and data sets. Ms. Lisa Brown said there are three major types of smart disclosure data that would certainly be applicable to the work of this Working Group. She said the first type of smart disclosure is product and service data. Ms. Lisa Brown said there might be a potential here for smart disclosure to be used by the industry and regulators to leverage the data. She said the second type of smart disclosure is data on providers and the third type of smart disclosure is individualized consumer data. Ms. Lisa Brown said examples of individualized consumer data might include an individual’s past purchases or product usage history.


Attachment Two



She said personal lines insurance carriers might be able to utilize this type of information to provide policyholders with information that might be helpful at renewal time. Ms. Lisa Brown said she thinks there are opportunities for state insurance departments to leverage existing data and information to provide insurance consumers with useful pre-purchase tools. She said it is evident that what many of us regard as common knowledge is, in fact, not common knowledge. Ms. Lisa Brown said consumers could benefit from having basic terminology defined prior to purchasing an insurance policy. She said she was on a panel last week where she was required to explain the definition of “actual cash value” to a consumer. Ms. Lisa Brown said she found that several states do a great job of explaining this concept on their websites, but providing a clear explanation and example of “actual cash value.” She said these are the types of things an insurance department would be able to provide to help consumers. Ms. Lisa Brown said state insurance departments might also be able to use smart disclosures in conjunction with information already provided on their websites regarding carriers, such as complaint data or market conduct data. She said that, according to 2013 data from the Task Force on smart disclosures, they are generally used through a choice engine. David Kodama (Property Casualty Insurers Association of America—PCI) said PCI and its members are looking for opportunities to improve financial literacy. He said PCI and its members understand the value and the benefit of informed and educated insurance consumers. Mr. Kodama said PCI is engaged in an effort with the National Oceanic and Atmospheric Association (NOAA) to bring awareness regarding risk preparedness and to inform people across the country about how they can use their insurance as a tool, along with some basic steps to become more prepared for extreme events. Mr. Kodama said that utility bills are changing in the way they are presented to consumers. He said information regarding usage statistics and how a customer’s statistics compare with others in the neighborhood. Mr. Kodama said these are examples of smart disclosures. He said the insurance industry will not likely have this type of information for a group of people in the same neighborhood; however, there are some circumstances that would warrant the use of smart disclosures. Mr. Kodama said one of the most immediate products that might be suitable for smart disclosures is usage-based insurance (UBI), because UBI provides real-time information. He said the goal of smart disclosures is to educate consumers. Lynn Quincy (Consumers Union) said her definition of “smart disclosure” is “expanding access to data in machine-readable formats so that innovators can create interactive services and tools that allow consumers to make better informed choices.” Ms. Quincy said smart disclosures are generally used when there is a choice to be made. Ms. Quincy said that smart disclosure relies on open data, which is data that can be freely used and redistributed. She said that, when the data is in a machine-readable format, it can spur the creation of choice engines; i.e., technologies that interpret the data and turn it into human-readable format. Ms. Quincy said there are really two categories of data (i.e., product and service); however, she agrees with the three categories presented by Ms. Lisa Brown. She said there is also personal data, where an individual is given secure and private access to his or her own data. Ms. Quincy said an example of a “smart disclosure” can be found on the National Highway Traffic Safety Administration (NHTSA) website, www.safercar.gov. She said it is important for information to come from a trusted source; if not, consumers will not use the tool or information. Ms. Quincy said the NHTSA website also has a section to file a complaint. She said she really likes the fact that this section exists on the website, because consumers do not know where to complain and complaint data helps an organization do its job. Ms. Quincy said the actual choice engine is the section that searches for recalls. She said information is sorted based on the type of recall chosen. Ms. Quincy said smart disclosures are needed to empower consumers to make good choices. She said that, through more informed consumer choices, markets operate more transparently and efficiently. Ms. Quincy said a “smart disclosure” is not necessarily an effective disclosure. She said smart disclosures should meet a real consumer need. Ms. Quincy said it is important to test a consumer product for usability. She said usability is not just writing things in a language that can be understood; it is also based on appeal and whether the product can be easily navigated. Ms. Quincy said that a consumer must


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be able to easily find information when they need it. She said it is also important to have a feedback loop that demonstrates success. Ms. Quincy said the role for the NAIC and state insurance departments include the following: assess consumer insurance information needs; assess open data (i.e., find out where more data is needed); discern where the data exists and how it can made more human-readable; and commit to a threshold for consumer understanding of insurance disclosures. She said consumer testing is an important aspect that should be included in the process. Ms. Quincy said the Working Group should avoid overreliance on transparency. She said that transparency-oriented regulatory strategies are a complement, but not a substitute, for other more aggressive regulatory tools needed to promote consumer choice, harness market discipline and ensure regulatory accountability. Ms. Quincy said that to improve a consumer’s ability to function in the insurance marketplace, better information regarding the challenges consumers face needs to be gathered. She said this information should be used to improve the underlying products, improve the way products are communicated and activate consumers. Ms. Quincy said that in designing a tool with consumers in mind, the initial display of search results is critical. She said consumers actually do not want to take the time to shop for insurance. Ms. Quincy said the vast majority of consumers will make their decision or choice based on the first screen of information they view. She said there is no such thing as a “neutral choice” architecture; a decision must be made about what to show first. Ms. Quincy said there must also be cognitive shortcuts. She said that when people are faced with a difficult task, which is referred to as a “big cognitive list,” they take shortcuts. Ms. Quincy said that, in the health insurance marketplace, a cognitive shortcut would be shopping by brand. She said there are tools that provide the consumer with cognitive shortcuts to help them to make better choices. Ms. Quincy said regulators can help consumers make more informed choices by providing cognitive shortcuts for them. She said there are some health insurance websites that use choice tools based on the total estimated cost of an insurance policy. Ms. Quincy said some of these choice tools take the premium cost and the consumer’s expected out-of-pocket cost expenses and rank the policies. She says it makes the choice easier for the consumer, because the cost is automatically calculated. Ms. Quincy said this is an example of a cognitive shortcut that works. She showed an example of an effective choice tool that is provided to help government employees choose a health plan. Ms. Quincy ended her presentation by quoting from Richard Thaler and Will Tucker: “By combining unprecedented access to data and technological advances, policymakers and business leaders have the opportunity to unleash a rare virtuous circle that benefits consumers, incumbent businesses, and entrepreneurs. No modern economy can afford to leave that value on the table.” Peter Kochenburger (University of Connecticut School of Law) said the idea of consumer protection often starts with the consumer’s basic information or the contract. He said the basic steps to create smart disclosures include: getting the data; narrowing the data down to a smaller subset of information that is important for consumer comparison; creating the sorting mechanism; and providing consumer testing to see if the consumers are utilizing the smart disclosure as intended. Mr. Kochenburger said a consumer gets “information overload” when reading an insurance contract. He said effective disclosures, empowering consumers and fostering transparency, start with access to insurance policies in advance of the sale of the policy. Mr. Kochenburger said there are several states that have begun placing insurance policies online. Mr. Kochenburger said getting policies online is important so that consumers are able to read the terms that may bind them before they agree to the insurance contract. He said potential policyholders would have at least the realistic possibility of becoming more informed. Mr. Kochenburger said independent third parties that have the expertise and resources to collate and compare insurer contracts could create smart disclosures. Mr. Kochenburger said that when considering consumer information needs for the purchase of insurance, consumers might prefer to compare insurers on the basis of underwriting considerations; usage-based programs; particular underwriting credits, such as good student discounts; or particular coverages, such as for mold.


Attachment Two



Mr. Kochenburger said there is not enough information provided regarding the comparison of insurer claims handling. He said insurance is the exchange of money for a promise for paying a valid claim if needed. Mr. Kochenburger said insurer performance should include information regarding the average length of time a claim is open before payment is made; the percentage of claims denied; the number of lawsuits filed against an insured by a policyholder; and information about consumer complaints filed with a state insurance department. Mr. Kochenburger said that policy language must be understandable for smart disclosures (or any disclosures) to work. He said that many crucial policy terms and definitions are not consistent across insurers. Mr. Kochenburger said there is no consumer market for the majority of contractual terms, exclusions and conditions, and he asked if smart disclosures could help to create one. He said it was worth trying, but not a substitute for close regulatory review of policy coverages and exclusions. Mr. Kochenburger said the anti-concurrent causation clauses are inconsistent and asked what type of disclosure would work. He said the next steps might be to hold a Center for Insurance Policy and Research (CIPR) event regarding smart disclosures and consumer testing. Mr. Kochenburger said more formal connections with government, academics, non-profits and industry groups studying and implementing smart disclosures. He said the NAIC might want to conduct an in-depth study to develop claim metrics that will provide consumers with much more information on claims handling. Mr. Laucher said that due to the fact that many people do not know that a state insurance department exists, many people would not read disclosures written by a state insurance department. He said it sounds like one of the challenges regulators have is getting the word out regarding state insurance departments and how they can help insurance consumers. Mr. Laucher said a possibility is to create valuable disclosures that a consumer would want to find. He said one of the problems consumers have with reading an insurance policy is that the consumer never expects to have to actually use the insurance policy. Mr. Laucher said consumers are most likely to shop for insurance based solely on price. Ms. Quincy said consumers are risk-adverse. She said consumers will take an action in order to avoid loss. Mr. Henderson said one of the problems with insurance is that it is mandated. He said a consumer might not want to buy a policy if it was not mandated, because they do not realize they need insurance. Mr. Henderson said consumers are not interested about what is in their insurance policy until something happens. Annalise Mannix (Fair Insurance Rates in Monroe—FIRM) said FIRM has found that partnering with its local realtors association has been positive. She said people are looking for homes before they sign contracts. She said realtors hand out pamphlets all the time, which opens an opportunity for the Working Group to reach consumers. She said FIRM focuses mainly on wind and flood issues, as those have been the most common issues. She said consumers think that insurance will make them whole after a loss; however, most insurance policies in Florida have excluded foundations that are underground. She said homeowners just believe that when disaster strikes they will be OK because they have insurance; however, they tend to be unaware of the cost they will need to incur due to deductibles, etc. She said if this information is available upfront, then consumers might make better decisions. She said that, after a disaster, whole communities are devastated and, oftentimes, consumers do not have the money to recover from a loss. Ms. Nelson said some of the things the health side worked on was to provide information regarding deductibles, and she provided examples. 4. Discussed Next Steps Ms. Nelson said there are a number of things the Working Group can do regarding smart disclosures. She said the Working Group does not have enough information to begin working on a deliverable at this point. Ms. Nelson said there are several universities that have groups working on smart disclosures. She suggested the Working Group hear presentations from some of the universities, as well as from some of the vendors that work with smart disclosure tools. Ms. Nelson suggested the Working Group continue gathering information regarding smart disclosures and said the


Attachment Two



Working Group will hear presentations at the Fall National Meeting. She added that information will be sent to the Working Group and interested parties to review periodically. NAIC staff are to check into the possibility of state insurance departments being able to add their logo and information to the front of the consumer shopping tools, as well as check into the possibility of the NAIC creating an interactive form or application. Having no further business, the Transparency and Readability of Consumer Information (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\TransparencyWG\08-TransparencyWGmin.docx


Attachment Two-A Property and Casualty Insurance (C) Committee

8/18/14


Draft: 9/30/14

Transparency and Readability of Consumer Information (C) Working Group E-Vote

June 26, 2014 The Transparency and Readability of Consumer Information (C) Working Group of the Property and Casualty Insurance (C) Committee conducted an e-vote that concluded June 26, 2014. The following Working Group members participated: Angela Nelson, Chair (MO); Joel Laucher (CA); Peg Brown (CO); Martin Hazen (KS); Ron Henderson (LA); Sandra Castagna (MD); and Emily Johnson Piper (MN.) 1. Adopted the Data Collection Template The Working Group conducted an e-vote to consider adoption of the NAIC Best Practices for Creating Online Insurance Policy Resources June 26 (Attachment Ten). A majority of the Working Group members voted to adopt the best practices document. The motion passed. Having no further business, the Transparency and Readability of Consumer Information (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\TransparencyWG\06-26 TransparencyWG E Vote.docx


Attachment Two-B Property and Casualty Insurance (C) Committee

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Draft: 9/30/14

Transparency and Readability of Consumer Information (C) Working Group Conference Call June 19, 2014

The Transparency and Readability of Consumer Information (C) Working Group of the Property and Casualty Insurance (C) Committee met via conference call June 19, 2014. The following Working Group members participated: Angela Nelson, Chair (MO); Joel Laucher (CA); Peg Brown (CO); John Vecchio (CT); John Gatlin (IL); Martin Hazen (KS); and Ron Henderson (LA); Sandra Castagna (MD); and Emily Johnson Piper (MN). Also participating were: Kimberly McLemore (AR); Kate Kixmiller (IN); Denise Lamy (NH); Lee Barclay (WA); and Tracy Klausmeier (UT). 1. Discussed Best Practices for Creating Consumer Online Insurance Policy Resources Ms. Nelson said she incorporated the comments received during the Spring National Meeting into the current best practices document. She said the discussion during the Spring National Meeting brought forth some concerns regarding whether the best practices document should include commercial lines products. Ms. Nelson said the Working Group decided not to address commercial lines in this document, but to mention that this may be something a state wants to include at some point in the future. She said the second bullet-point item in the “What are the DOI resources necessary for this effort?” section was taken from the “Identifying the Scope of the Project” section and put into this section. The bullet-point item now reads: “The DOI may want to start by including only personal lines of insurance such as homeowners or private passenger automobile. However, the DOI may want to consider including policy forms for small business owners at a later point in time.” Ms. Nelson said the sixth bullet-point item in the “What are the DOI resources necessary for this effort?” section now reads: “Whether the summaries are drafted by DOI staff or insurers, it is important to ensure the coverage summaries meet readability standards and that consistent language or terminology is utilized. Please also see the ‘Coverage Comparison Tools’ section for more information.” She said this bullet-point item was added because the consumer representatives believe it is important to provide uniform and consistent language, as well as meet readability standards. Ms. Nelson said the cross-reference to the “Coverage Comparison Tools” section was also added. Ms. Nelson reviewed the “Method 2: Voluntary Participation” section. She said Brenda Cude (University of Georgia) added a comment in which she asked if it would be helpful to indicate how many companies actually participated in posting online resources in Missouri, because the insurance companies provide information on a voluntary basis in Missouri. Ms. Cude said the states might dismiss this option because they might think companies would be hesitant to participate. She said that, because this initiative was success in Missouri, it might be helpful to share this information. Ms. Nelson will add a sentence to include this information. Ms. Nelson said the question “Should the DOI include only personal insurance lines or should they include any commercial lines?” in the “Identifying the Scope of the Project” section was moved to the “DOI Considerations” section. Ms. Nelson said the first bullet-point item in the “Content and amount of information” section was changed to read, “To assist consumers in evaluating the information that is important to them, regulators should prioritize or simplify the information on the Web page.” Ms. Nelson reviewed the “Avoid rating or ranking policies or coverage” section. She said the following bullet-point item was added: “Ratings can mislead consumers if their experience doesn’t match the rating provided and may cause companies to complain about the rating of their product.” Ms. Nelson said the following bullet-point item was also added: “Consumers should also be reminded to consider service in terms of complaint history of the company and the company’s current financial rating.” David Kodama (Property Casualty Insurers Association of America—PCI) suggested that a qualifier be added to explain a rating and where it can be referenced. Ms. Nelson is to add the sentence, “If they haven’t already, regulators should consider giving consumers links to where financial rating information can be found.” Ms. Nelson discussed Appendix 3—Recommended Disclaimers. She said she updated the disclaimer, “Listing policies on this page is not a guarantee that the insurance company will sell you coverage” to read “Just because a policy is included in this page does not mean that the insurance company will sell you coverage.”


Attachment Two-B Property and Casualty Insurance (C) Committee

8/16/14


Ms. Nelson reviewed the copyright disclosure in the disclaimer section. She said she took the copyright protection language provided by the Insurance Services Office (ISO) and re-wrote it to be more consumer-friendly. Ms. Nelson asked Steve Clark (ISO) if the new language was adequate. Mr. Clark said the new language was acceptable. Upon a motion from Mr. Gatlin, seconded by Mr. Hazen, the Working Group voted to incorporate the suggested changes to the best practices document and send the final draft to the Working Group for consideration of adoption via e-vote. The motion carried. 2. Discussed Next Steps for the Working Group Ms. Nelson reviewed the suggestions for the Working Group’s next steps. She said the suggestions include: creating a model for online assistance tools; reviewing current readability model laws and guidance; creating new models for disclosures; and drafting smart disclosures. The Working Group agreed to begin work on smart disclosures. The Working Group will hear presentations regarding smart disclosures at the Summer National meeting. Having no further business, the Transparency and Readability of Consumer Information (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\TransparencyWG\0619 TransparencyMin.docx


Attachment Three



Draft: 9/3/14

Affordable Care Act Medical Professional Liability (C) Working Group Louisville, Kentucky

August 17, 2014 The Affordable Care Act Medical Professional Liability (C) Working Group of the Property and Casualty Insurance (C) Committee met in Louisville, KY, Aug. 17, 2014. The following Working Group members participated: John G. Franchini, Chair (NM); Carol Jones (DE); Tom Donovan (ID); Marty Hazen (KS); Kevin Dyke (MI); Phil Vigliaturo (MN); Jay Eads and Mark Haire (MS); James Mills (OK); and Laura N. Cali (OR). Also participating were: Joel Laucher (CA); and Joan Dutill (MO). 1. Heard a Presentation from Mesirow Financial Structured Settlements Neil Herald (Mesirow Financial Structured Settlements) said structured settlements are a financial product prepared by the defendants and presented tax-free to the plaintiffs. For the first time in tort ligation history, plaintiffs can now get insurance policies, previously unavailable due to preexisting conditions. He said when involved in a case, the sources of leverage Mesirow reviews include client liability and causation facts, what jurisdiction the case is pending in, and providing annuities and lifetime benefits to clients at a cheaper rate than what the market provides. On a serious personal injury case, Mesirow receives an economic report from the company’s economist, and they are complex, convoluted reports. However, these reports provide the components of the present value formula, which include annual damages, discount rate, growth rate/inflation and duration period. He said when dealing with its clients, Mesirow looks to obtain information on medicals/life care plan, economist reports, rehabilitation specialists, life expectancy experts, regional authority on public programs and any private health care policies. Mesirow tries to provide its clients with collateral sources or other benefits the plaintiff is receiving, such as special needs trust(s)—public aid and Social Security income (SSI), Medicare/Liability Medicare Set-Aside Arrangement (LMSA), federal Affordable Care Act (ACA), Social Security disability and school district therapies—Individuals with Disabilities Education Act (IDEA), and private disability. The most popular method of preserving benefits is a special needs trust. Mr. Herald said Mesirow can set up a special needs trust and have annuity payments feed into the trust. Lynn Petrouski (Mesirow Financial Structured Settlements) said some key concepts of the ACA include elimination of discrimination based on preexisting conditions and removal of the annual and lifetime dollar limits for health care policy limits. Starting Jan. 1, 2014, the following “Ten Essential Benefits” must be included under all insurance plans with no lifetime or annual dollar limits: 1) ambulatory patient services; 2) emergency services; 3) hospitalizations; 4) maternity and newborn care; 5) mental health and substance abuse treatment; 6) prescription drugs; 7) rehabilitative and habilitative services and devices; 8) laboratory services; 9) preventive care; and 10) pediatric services, including oral and vision care. She explained that medical information was sent to life insurance companies that offer medical underwriting on structured settlements to derive a rated age to determine the cost of future care. In the provided example, the life care plan for a man 46 years old, rated at age 54, was estimated at a cost of more than $9.7 million. Using the purchasing power of the rated age, Mesirow created a life care plan just more than $6 million. Annuities are purchased for every year of care and are provided for the plaintiff’s entire life. Mesirow provided a guarantee benefit of more than $6.3 million, meaning it guarantees enough years’ worth of payments so that even if the plaintiff passes away before receiving the full benefit of the settlement, his or her estate would still receive at least the cost of the annuity. Ms. Petrouski said under the ACA, Mesirow provides the plaintiff upfront with a cash payment for attorney fees; liens; expenses; one-time purchases; and the first year of care needs, less non-covered items. Mesirow then pays 100% of non-covered items, which include home care, recreation, home modifications, and transportation not covered in structure settlement plans. It also purchases premiums for the plaintiff’s health insurance policy and an annual amount for maximum out-of-pocket expenses, inclusive of deductibles. She said, in the example, an amount of $14,350 was purchased for the plaintiff, payable for 15 years, with a 3% annual growth. Mesirow prices for the most expensive policy, regardless if that is the policy selected. Whatever money is not spent is usable by the plaintiff. Because of these changes, the new cost of the annuity is now closer to $3.2 million, instead of the $6.1 million cost generated pre-ACA. The new total offer settlement of $5.7 million, as opposed to an offer of around $15 million or $18 million according to the present value provided by company economists for the life care plan. If a plaintiff would wait until a verdict is received, Ms. Petrouski said the cost of


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the benefits provided would be closer to $7.3 million, and the plaintiff would not be able to purchase his or her benefits tax-free. Mr. Herald said there are two sides to litigation, and most of Mesirow’s clients are P/C insurers. The three arguments plaintiffs usually make are: 1) the effects of the ACA on the plaintiff’s recoverable future medical expenses are speculative; 2) the evidence of collateral sources are prejudicial to the personal injury of the plaintiff; and 3) tort fees should bear the risk that the future medical expenses will not be covered by medical insurance. He said these points are usually presented during litigation, and Mesirow deals mainly with mediation. In the practical world of negotiating settlements, the argument could be made that a plaintiff would not want to buy direct health care from a provider when he or she could pay insurance premiums and be covered by health insurance. Ms. Petrouski said the point of using the ACA and incorporating it into life care plans is to provide context to the plaintiffs. Mesirow tries to show the plans it set up will provide the care plaintiffs need the rest of their lives. It is important for plaintiffs to understand how the structures work, the pricing purchasing power of the rated age, tax-free benefits, and that credible offers are being made. Mr. Dyke said the new structured settlement approach under ACA seems to exemplify cost shifting. Costs usually handled by structured settlement companies are shifted to health insurance companies. Ms. Petrouski said one of the primary pieces of the ACA was to bring in a large pool of people to offset the cost of individual risks. Instead of plaintiffs having to purchase health care with catastrophic risk, they are in with the general population and should compensate for the catastrophic injury category. She said home care costs are typically the larger portion of life care plans, and while those can be covered in certain health care policies, they typically are not. So, those benefits that are typically covered for healthy individuals should be covered for injured individuals as well. Mr. Donovan asked how Mesirow predicts medical trends and how it speculates a cost for future medical costs. Ms. Petrouski said the settlements are set up to purchase the most expensive policy, which is not always the best and the chosen plan, so plaintiffs should expect the individual to begin with a surplus. A 3% annual growth percentage was chosen so that in order to increase health insurance premium, carriers have to present a strong case for the increase. As a result, there is some confidence regarding premium stability. Mr. Donovan asked if Mesirow anticipates many of the plaintiffs will qualify for the premium tax credit. Ms. Petrouski said tax-free acceptance depends on the case and how the plaintiff uses the funds received. Superintendent Franchini said it is a positive thing for the ACA to be used in this way for structured settlements, and it used to be, after a catastrophic loss, access to affordable care was always an issue. Mr. Herald said the ACA changes the landscape on how medical professional liability (MPL) cases are settled. Mr. Laucher said Congress repeatedly talks about repealing the ACA. He asked if there were any contingent plans, should the ACA, or any piece of it, be repealed. Ms. Petrouski said Mesirow does not foresee a repeal, but part of settling means the injured is unable to come back to negotiate. Mr. Herald said legislation may be different in the future, but Mesirow deals in day-to-day scenarios. 2. Heard a Presentation from the University of Arkansas College of Business Lars Powell (University of Arkansas College of Business) said he and coauthors J. Bradley Karl (East Carolina University) and Chip Wade (Mississippi State University) are looking into how the Medicaid expansion piece of the ACA affects MPL insurance. More medical care provided means medical personnel and infrastructure could be stretched and more opportunities for bad outcomes and MPL losses, but also for more defensive medical procedures. The change in health insurance coverage among the population also means fewer unpaid medical bills. Bills that are difficult to pay become a catalysts for lawsuits, and there is an expectation of a decrease in the frequency and severity of lawsuits. He said if patients have not had coverage or resources to have long-standing medical procedures, they may have unrealistic expectations of how much their medical care will help.


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Mr. Powell said the Medicaid expansion will bring more low-income population into the health care system. As the average income of patients decreases, lost wages negotiated in settlements would be lower, but there is an opportunity cost associated with filing a lawsuit. He said individuals with lower incomes have a lower opportunity cost of time lost and tend to file more claims. Because of all the potential positives and negatives of the expansion, it makes it difficult to estimate problems and outcomes. He said there are two issues making this issue difficult to solve empirically. First, the answer to the impact to the MPL market will be unknown for a while. Generally, there is time between when an incident occurs and a claim is filed, estimated to be about two years. There is also time between when a claim is filed and a claim is being resolved, which is estimated to be around 44 months. The time lag makes it difficult to price MPL coverage, because frequency and severity can be hard to estimate. Second, the ACA is an unprecedented change, and it is unknown what is going to happen as pieces are rolled out. Mr. Powell said using historical data to predict what the future experience will be is a problem because the ACA is unlike past changes. Mr. Powell said MPL data incurred loss estimates, at the state level, are not always accurate, but there are less uncertainty and more consistency in loss adjustment expense (LAE) estimates. He explained he took loss amounts paid from the National Practitioner Data Bank (NPDB) for incidents occurring in a given year and added the NAIC’s LAE incurred. He said there may still be room for improvement in the data and is open to comments. He said they built a model to try to predict experience. In their model, they assume that MPL losses are a function of Medicaid spending and other control variables. Variables included are per capita income, percentage of the population in poverty, percentage of the population that is uninsured, the number of lawyers per capita, year and state fixed effects; this catches omitted variables, and the model adjusts for inflation where appropriate. Physicians per capita will also be included, but the data are not yet available. The percentage of the population uninsured and in poverty does not matter much in the model and is not statistically significant. The results of the model suggests that if the number of lawyers were to increase by one percentage point, it would reduce MPL losses by $7 per person, though those results are not consistent with the academic literature. He said Washington, DC, is an outlier in lawyers per capita, with 10 times more lawyers per capita than the next highest state. Eight percent of people in Washington, DC, are lawyers, where the next highest state is New York, with 0.8%. He said above the poverty line, the opportunity cost outweighs damages for lost wages. The relationship between Medicaid expense per capita and MPL losses shows a positive and significant coefficient estimate of one-half of 1%. For example, a $2 per person increase in Medicaid spending would cause a $0.01 increase in MPL losses per person. If Medicaid spending were to be increased by $100 billion in a year, a $500 million increase in MPL losses would be expected. Using 2012 data, total MPL losses incurred totaled around $6.57 billion, so a $500 million increase would be a 7.6% annual increase in real MPL losses. Mr. Powell said changes are likely to persist over time. The NAIC might consider accommodating possible rate increases and an increasingly competitive market. He said to be mindful of other ACA-, attendant- and insurance-related changes that could affect MPL exposures, such as medical payment reforms, medical home concepts and physician payment schedules. He suggested legislators consider some actions as well, such as reforms that make the liability system more efficient, reforms that make the medical system more efficient, and creating guidelines for medical negligence to reduce uncertainty. Mr. Donovan said the number of individuals in poverty was mentioned, so pre-ACA it would 100% of the poverty limit, but eligibility for Medicaid, post-ACA, was raised to 133% of the poverty limit. He asked how poverty was calculated in the model. Mr. Powell said the model’s definition of poverty may need to be adjusted to the Medicaid eligibility level. Mr. Donovan said the presentation mentioned more defensive medical procedures, but he asked if that was likely given the higher demand of medical attention. Mr. Powell said he hopes to capture that data within the doctors per capita to gauge the potential strain on the medical system. He said it is likely that primary care physicians, as opposed to specialists, will feel most of the strain, and due to the increased number of patients, they may be more likely to order more tests. Mr. Laucher asked if Mr. Powell had done any research regarding different specialties of medicine and where the impact of a physician shortage may be felt most. Mr. Powell said he has not researched that information for his current project, but he agreed it would be worth looking into. Timothy S. Jost (Washington and Lee University School of Law) said he thought Medicaid recipients were less likely to file claims than other malpractice victims. He said he had found some studies to support those findings, which he said makes sense due to little or no lost wages, any recoveries they receive would be subject to Medicaid’s secondary payer program, and they don’t have the same access to lawyers. Mr. Powell said there are conflicting studies, depending on data used, but agreed


Attachment Three



with Mr. Jost’s point. He said the paper on which he is working is currently in draft form, and he will provide it to the Working Group upon its completion. Mr. Dyke asked about the details used in the analysis, such as if particular years were used, if groups of years were used, if there was a holdout set used, or was the data just lumped together. Mr. Powell said in their sample, 800 or 900 observations by state by year were used, and they started running out degrees of freedom with the fixed affect model. He said the results are robust, and while the model has not be held out for predictability, he agreed it would be worth considering. Andrea Routh (Missouri Health Advocacy Alliance) said she appreciated the thinking that went into the modeling and asked if the fact that approximately 80% of Medicaid spending in the states is spent on the 20% of people who are disabled and elderly was taken into consideration. She said the policyholder expansion under the ACA is likely not those individuals and suggested looking into whether that affects the model. Ms. Routh said lawyers who are not plaintiff attorneys and do not work on MPL cases should be taken into consideration in the model, as well. Mr. Powell said he was not aware of data purely on plaintiff attorneys. He said he meant for the data to represent public accessibility to lawyers, rather than advocating for a reduction in lawyers. Mr. Powell said their model can produce state-specific results and offered to circulate the information to the Working Group. Having no further business, the Affordable Care Act Medical Professional Liability (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\ACAWG\08-ACAWGmin.docx


Attachment Four



Draft: 9/3/14

Climate Change and Global Warming (C) Working Group Louisville, Kentucky

August 17, 2014 The Climate Change and Global Warming (C) Working Group of the Property and Casualty Insurance (C) Committee met in Louisville, KY, Aug. 17, 2014. The following Working Group members participated: Mike Kreidler, Chair, and Lee Barclay (WA); Dave Jones, Vice Chair, Geoff Margolis and Joel Laucher (CA); George Bradner and Bill Arfanis (CT); Joy Hatchett (MD); John G. Franchini (NM); Tom Botsko (OH); and Mark Worman (TX). Also participating were: Mike Chaney (MS); Joan Dutill (MO); and Paula Pallozzi (RI). 1. Heard a Presentation from the CAS, the Academy and the SOA on the Actuarial Climate Index Research Project Michael Angelina (American Academy of Actuaries—Academy) stated that the Actuaries Climate Index (ACI) Research Project is a collaborative effort of the Academy, the Canadian Institute of Actuaries, the Casualty Actuarial Society (CAS) and the Society of Actuaries (SOA). The project aims to develop an index that will raise awareness of the potential risks and risk management implications associated with climate change. The index will function as a useful monitoring tool for actuaries, policymakers, the public and other interested parties. The Actuaries Climate Index (ACI) supports the scientific consensus that the frequency and intensity of extreme climate events have increased notably in recent decades. According to Munich Re, severe weather events have accounted for 85%–90% of natural hazards since 2005. A significant increase in the frequency of heavy precipitation events has been observed in the majority of locations where data is available. This is particularly true in the eastern half of North America and Northern Europe, where there is a long record of observations. As expected, regional changes can be significantly higher or lower than the global average. For example, in the southwest Pacific Ocean, the rate of sea-level rise is four times the global mean. Additionally, at 66% of measurement stations along the continental shores of the U.S., sea-level rising has led to a doubling in the annual risk of what was considered “once in a century” or worse floods. Many significant changes have been observed. Over the past 100 years, the global mean surface temperature has risen by three-quarters of a degree Celsius. The 16 warmest years on record occurred in the 17-year period from 1995–2011. Land regions have warmed at a faster rate than the oceans, which is consistent with the known slower rate of heat absorption by seawater. Additionally, over the past five decades, the frequency of abnormally warm nights has increased and that of cold nights has decreased at most locations on land. Dale Hall (SOA) stated that the ACI measures change in frequency of extreme events and/or magnitude of recent change relative to natural climate variability in the U.S. and Canada. The index is also calculated for 12 North American subregions. There is the potential for the index to be expanded to include subregions in other parts of the world. Also, the index could be readily extended to a more comprehensive index containing socioeconomic information, serving the needs of actuaries, stakeholders and the public more directly. The index focuses on key climate indicators—such as temperature, precipitation, drought, wind and sea level—to measure frequency and intensity. Data observations are updatable on a seasonal basis from publicly available data sources. The index and related information are published on a website. The actuarial organizations are also developing the Actuaries Climate Risk Index (ACRI) by combining the climate phenomena in the ACI with linkages to hazards and exposures. The exposure base will be obtained from publicly available data and may include parameters such as population, housing stock and planted acreage. The goal is to provide an index that is especially useful to the insurance industry by quantifying risk from the establishment of relationships between climatic and socioeconomic factors. Steve Kolk (CAS) discussed how actuaries and others could use the ACI and ACRI. He stated that he expected actuaries to use the index to measure change over time. Furthermore, he stated the five-year average was determined to be the best measure of change over time. This is similar to the recommendation included in the recent report by the Intergovernmental Panel on Climate Change (IPCC). The index can also be used to measure change in extreme climate by its six components: temperature, five-day precipitation, drought, soil moisture, wind power and sea-level rise. The ACI region data and ACRI exposure measures will allow actuaries to drill down into specific areas. However, the Actuarial Climate Index Research Project is just now entering phase three, which is the development of the ACRI. Thus, work on gathering exposure and population data has just begun. These types of socioeconomic factors are needed to establish relationships between climatic and socioeconomic factors and to quantify risk in the form of an ACRI.


Attachment Four



Commissioner Kreidler asked if there are limitations to using historical data to take into account accelerations in the trend lines. Mr. Kolk stated there are limitations in using only historical data. The project aimed to use as much historical data as possible, covering as much of the globe as possible. However, the researchers found that consistent data was not available until 1960. Mr. Angelina stated when the ACI is applied to recent catastrophes, such as the Joplin, MO, tornado, a correlation is seen in the intensity and increase in wind. He stated that models for things such as hurricanes are adjusting for changing frequency assumptions. For example, Risk Management Solutions (RMS) made a significant change in its hurricane model in 2012 to reflect changing frequency assumptions. Modelers, actuaries and others will be in the best position when ACI historical data can be paired with information on disasters to project forward. Commissioner Jones asked for a clarification between the ACI and ACRI and asked what data would be needed to complete the ACRI. He asked if there was a model that allowed, with any degree of geographic precision, the prediction of severe weather impacts. Mr. Angelina stated that the ACI is based on weather observations, where the ACRI, which is still in development, would seek to combine those observations with risk exposure. He stated that the ACRI would use information such as insured property values. However, there are still gaps. There are models that provide a certain exposure predication based on what variables are inputted. These inputted variables do not necessarily reflect that weather severity and intensity are increasing. However, the gap is closing. Commissioner Chaney stated policymakers make decisions based on catastrophe models, such as those from RMS and EQECAT, which frequently arrive at different ratings outcomes. He asked how many of the models used today incorporate the type of data derived from the Actuarial Climate Index Research Project. Mr. Angelina stated that these models have a variety of different outcomes and factors that the modeler can choose to use when modeling. For instance, the modeler can choose whether or not he wants to incorporate storm surge in the modeling assumptions. It is up to users how they want to adjust the data incorporated into the models. A risk professional needs to use his or her own assessment of the situation for things such as hurricane frequency. RMS made a dramatic change a few years ago when it went from a long-term average to a medium-term average. The data used in the ACI supports moving to a medium-term average, which would result in using a 10-year average for hurricane incidents versus a 25-year average. As a policymaker, the key is to ask what dials have been turned on and off, and what assumptions are going into the model. If users feel they are in a more severe weather pattern, with a higher intensity of storms, the modelers should be adjusting their data to reflect this. The model outcomes rely heavily on what adjustments the modeler is making to the data incorporated into the model and what parameters the model itself allows. Commissioner Chaney stated that from a public policy point of view, the use of these various models can have a tremendous impact on the consumer’s pocketbooks. After RMS changed its modeling assumptions in 2011, some policyholders were seeing rate increases of 1,000% on property 200 miles inland. He stated that public policyholders need to be careful on how far they let the pendulum swing without solid supporting data. Mr. Angelina stated that the rate changes he saw while working for an insurer during that time were not as severe because his company had a better understanding of the model and that it had already incorporated many of the assumptions previously fed separately into the models. This situation reflects how paramount it is that policymakers understand what assumptions users have incorporated into the model.


Attachment Four



2. Heard a Presentation from S&P’s Ratings Services on Whether Insurers are Prepared for the Extreme Weather Climate Change May Bring

Taofik Gharib (North America Insurance Ratings, Standard & Poor’s Ratings Services—S&P) stated that weather volatility and frequency are on the rise, and so are losses for (re)insurers. S&P believes the industry has been, and remains, well prepared to deal with natural catastrophes of the magnitude the world has been experiencing recently. For that reason, the ratings impact of these natural catastrophes has been limited. Since 2012, S&P has not taken any rating actions on (re)insurers as a direct result of weather events. However, it did slightly raise its assumptions about expected catastrophe losses in some regions. S&P believes (re)insures can manage their exposure to extreme events and adjust their pricing for gradual increases in catastrophe claims. As such, it does not expect climate change to have a ratings impact over the next three to five years, unless it causes a sudden increase in the frequency and severity of extreme events. S&P analyzes natural catastrophe risk by examining an insurer’s business risk profile, financial risk profile, management and governance, enterprise risk management (ERM), and liquidity. In examining the business risk profile, S&P looks at an insurer’s competitive position and the risk it faces within its industry and country of operations. Review of an insurer’s financial risk profile includes an insurer’s capital earnings, risk position and financial flexibility. S&P’s capital charge for catastrophe risk is based on the company-specific tax-adjusted net aggregate 1-in-250-year property-line-only probable maximum loss (PML). S&P typically allocates capital according to premiums and reserves, with adjustments for asset risk. However, S&P does not believe that catastrophe premiums provide a consistent and adequate indication of exposure and risk. Therefore, it assesses capital requirements for property catastrophe risk based on exposure. S&P’s capital model uses the (re)insurer’s own modeled exposure (i.e., the exceedence probability curve). S&P gains insight into a (re)insurer’s catastrophe risk profile and how the company models and manages exposure by using a property catastrophe survey. The survey includes questions covering areas such as: gross and net exposures by zone and peril, historical impact of catastrophe events on the loss ratio and the expected average annual loss (AAL), variances in catastrophe models used, details (such as demand surge and storm surge) on model assumptions, details on exposure assumptions and data quality (such as construction age and type and building condition), and description of credit quality of reinsurance protection and other mitigation forms (such as insurance-linked securities). Mr. Gharib stated S&P has observed that many of the insurers and reinsurers it rates have processes in place to monitor the potential impact of climate change. However, even those that have invested the most in understanding the impact of climate change currently don't explicitly allow for it in their pricing and modeling. This is due, in part, to the fact that they expect the impact will be felt only five or 10 years or more down the road. A lack of consensus on climatic severity and frequency also inhibits direct pricing. He warned that disregarding the possible impact of climate change may lead (re)insurers to accept higher catastrophe risk than their risk appetite would usually allow. Commissioner Kreidler stated a key struggle in addressing climate change is that it is not as simple as tying everything to the weather. There is a fair amount of political pushback if carriers increase rates dramatically. Insurance regulators are averse to the pressure of policymakers passing laws that change the rules. Insurers should do more than just rely on rating adjustments. This kind of information should act as a strong indicator to companies and associations of companies that they need to redouble their efforts on mitigation. If insurers can’t exit the market, they can at least reduce their risk and exposure through mitigation activities such as land-use practices and building codes. He asked if S&P took these types of mitigation efforts into account in their ratings. Mr. Gharib stated that S&P looks at the insurer’s risk concentration and how it mitigates any excessive risks taken through such activities as reinsurance or raising capital. S&P also tries to understand if the insurer priced the product to adequately cover the risk. Commissioner Chaney asked if S&P rated any of the reinsurers operating outside of the U.S. and if S&P had made any rating revisions since 2012.


Attachment Four



Mr. Gharib stated that S&P does rate non-U.S. reinsurers. S&P has made some ratings revisions due to the typhoons in Southeast Asia, but it has not made any revisions on weather-related events since 2012. Even in the case of Superstorm Sandy, the insurance industry was well prepared, with two-thirds of insured losses being absorbed by insurers and one-third being absorbed by reinsurers. Commissioner Kreidler invited Mr. Gharib to update the Working Group on any changes S&P observes in the insurance industry’s ability to deal with the impact of natural catastrophes. 3. Discussed Other Matters Commissioner Kreidler stated that senior administration officials and business leaders met June 24–25. The June 24 meeting centered on opportunities to share data between the federal government and the insurance industry to better communicate and reduce risks to policyholders, communities and taxpayers. He stated that Michael McRaith (Federal Insurance Office—FIO) contacted him because the FIO has been tasked with parts of this issue. The Washington Office of the Insurance Commissioner will assist the FIO to the extent it can, while still adhering to the interests of the Working Group. The June 25 meeting focused on the systemic risk of climate change on the economy. Having no further business, the Climate Change and Global Warming (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\ClimateWG\08-ClimateWGmin.docx


Attachment Five



Draft: 9/30/14

Catastrophe Insurance (C) Working Group Louisville, Kentucky

August 17, 2014 The Catastrophe Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee met in Louisville, KY, Aug. 17, 2014. The following Working Group members participated: Kevin McCarty, chair represented by Richard Koon, Chair, and David Altmaier (FL); Charles Angell (AL); Joel Laucher (CA); George Bradner (CT); Colin Hayashida (HI); Martin Hazen (KS); Warren Byrd and Richard Piazza (LA); Joy Hatchett (MD); Angela Nelson and Joan Dutill (MO); Jay Eads (MS); Peter L. Hartt (NJ); Tom Botsko (OH); Buddy Combs and Brian Gabbert (OK); Paula Pallozzi (RI); Kendall Buchanan (SC); Michael Humphreys (TN); and Joanne Scott (VA). Also participating was: Suzette Green-Wright (UT). 1. Adopted its Aug. 8 Minutes

Upon a motion by Mr. Byrd, seconded by Mr. Bradner, the Working Group adopted its Aug. 8 minutes (Attachment Five-A).

2. Adopted the Data Collection Template (C) Subgroup’s July 22, June 26 and May 22 Minutes Mr. Koon provided an overview of the Subgroup’s July 22 (Attachment Five-B), June 26 (Attachment Five-C) and May 22 (Attachment Five-D) minutes. Upon a motion by Mr. Byrd, seconded by Mr. Bradner, the minutes were adopted. 3. Disbanded the Data Collection Template (C) Subgroup Mr. Koon said the Data Collection Template (C) Subgroup has completed its work on the data collection template. He suggested the Subgroup be disbanded. Upon a motion by Mr. Bradner, seconded by Mr. Byrd, the Subgroup was disbanded. 4. Heard an Update Regarding the NFIP and Catastrophe-Related Legislation Brooke Stringer (NAIC) said there have been no substantive legislative developments regarding flood insurance since March when the U.S. Congress passed, and President Barack Obama signed into law, a comprehensive flood insurance reform bill to address concerns related to the federal Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12). Ms. Stringer said there have been two U.S. Senate hearings regarding flood-related issues. She said Federal Emergency Management Agency (FEMA) Director W. Craig Fugate met with the Senate Appropriations Committee and the Senate Banking Committee last month. Ms. Stringer said Director Fugate said he does not anticipate that FEMA will complete the flood plain mapping updates before the next National Flood Insurance Program (NFIP) reauthorization in 2017 due to FEMA’s financial constraints and workload issues. She said Director Fugate indicated that approximately half of the flood plain maps are up-to-date, 40% of the maps need to be reviewed, and approximately 10% of the maps are outdated. Ms. Stringer said that when BW-12 was passed this spring, Congress expected that the flood plain maps would be updated before the next reauthorization of the NFIP in 2017. She said Congress requires updated maps before the next reauthorization so they can work from accurate estimates regarding the amount of money the NFIP is expected to bring in from premiums and to pay out in damages. Ms. Stringer said the updating of the flood plain maps was also intended to give constituents time to weigh in on FEMA’s assessment of the risks to their properties. She said there might be a congressional push to complete the mapping project prior to the next NFIP reauthorization. Ms. Stringer said there was a hearing held regarding the flood insurance claims process after Superstorm Sandy. She said Director Fugate said that he has asked the U.S. Department of Homeland Security’s inspector general to examine the management of the claims received after Superstorm Sandy to ensure that FEMA has the appropriate controls in place to provide rapid payments appropriate to the losses incurred. Ms. Stringer said that Director Fugate also asked the inspector general to examine allegations that lawyers representing insurers were making appeals last longer to increase their fees.


Attachment Five



Ms. Stringer said the private flood insurance rulemaking stemming from BW-12, which requires federally regulated lenders to accept private flood insurance as an alternative to the NFIP, continues to be discussed by federal banking regulators. She said the federal banking regulators continue to work on finalizing a rulemaking on this matter. However, some members of Congress would like to facilitate the sale of private flood insurance more expeditiously. Ms. Stringer said U.S. Sen. Dean Heller (R-NV), U.S. Sen. Jon Tester (D-MT), U.S. Rep. Dennis Ross (R-FL) and U.S. Rep. Patrick Murphy (D-FL) have introduced legislation (S. 2381/H.R. 4558) to clarify the definition of “private flood insurance.” She said the language is based on an amendment that Sen. Heller offered to the Senate flood bill earlier this year. However, this amendment failed by one vote. Ms. Stringer said that, given the fact that Congress recently undertook flood issues comprehensively, it is unlikely that this bill will see any floor time in the near future. Ms. Stringer said the NAIC continues to work with federal banking regulators on their rulemaking efforts and has postponed taking a formal position on the legislation until the federal banking regulators issue the final rule, which is expected in the next few months. Ms. Stringer said once the rule is finalized, the NAIC will assess its position on this legislation. Ms. Stringer said there has not been any action on specific catastrophe insurance legislation, but the U.S. House of Representatives did approve the National Windstorm Impact Reduction Act Reauthorization (H.R. 1786) in July. She said the bill would reauthorize the National Windstorm Impact Reduction Program, which was created to improve the understanding of windstorms and their impact and to develop measures to reduce the damage they cause. Ms. Stringer said this legislation would also establish new committees to coordinate the activities of federal agencies participating in the program and to assess developments in efforts to mitigate damage from windstorms. Ms. Stringer said the Senate has not yet considered the bill. Ms. Pallozzi said that, after Superstorm Sandy, FEMA was working on a flood insurance handbook for regulators. She asked what the Working Group believed would be an appropriate time to contact FEMA regarding the project’s status. The Working Group agreed this would be an appropriate time to contact FEMA for a status. NAIC staff are to contact FEMA and report back to the Working Group. 5. Discussed the Work Plan and Next Steps for the Working Group

Mr. Koon said NAIC staff recently sent a survey to the Working Group members asking them to indicate the charges they are interested in addressing. He said there is a copy of the work plan in the handouts that indicates the survey’s results. Mr. Koon said the first charge addressed in the work plan is the Working Group’s charge regarding the update of the NAIC Catastrophe Computer Modeling Handbook. He said NAIC staff are going to work on transitioning the handbook into an online document, which will make it easier to update when modeling companies revise their models. Mr. Koon said that once NAIC staff complete the online document, Working Group members will need to review the work. Mr. Koon said the second charge listed in the work plan asks the Working Group to review the findings from the fall 2012 catastrophe public hearing and consider developing a model guideline, white paper and/or compilation of best practices to reduce post-disaster insurance recovery obstacles for insurance consumers. He said the 2012 catastrophe hearing summary is attached to the handouts for the Working Group to review. Mr. Koon suggested the Working Group discuss the summary in more detail during the Fall National Meeting. He asked the Working Group members to review the document before then. Mr. Koon said the third charge listed in the work plan refers to providing a model law, regulation and/or guideline to standardize insurer premium collection procedures, underwriting limitations, claims handling processes and claims data reporting requirements that a state could adopt in advance of a catastrophe and activate after a catastrophe. He said the Data Collection Template (C) Subgroup addressed the claims data reporting requirements, which is a small component of the charge. Mr. Koon said the Subgroup consisted of members from each zone. He asked the Working Group if they would like to form a new subgroup to work on this charge. He said that, ideally, this subgroup would have representation from all of the zones. Mr. Koon said there is a lot of work that has been completed by various states that can be used as a foundation.


Attachment Five



Ms. Pallozzi said the form created by the Data Collection Template (C) Subgroup was adopted by this Working Group via an e-vote that concluded Aug. 8. She noted that there were two representatives from each zone on that Subgroup, which was just disbanded, and suggested that the members from that Subgroup participate in this charge, as well as any other members that would like to serve on the new subgroup. Ms. Pallozzi said many of the items in the charge are areas that have been addressed and just need to be documented. She said that, while some of the input from interested parties did not apply to the data collection template, they would apply to a regulatory guidance document. 6. Appointed the Post-Catastrophe Regulatory Guidance (C) Subgroup Upon a motion by Ms. Nelson, seconded by Mr. Byrd, the Post-Catastrophe Regulatory Guidance (C) Subgroup was appointed. Mr. Koon appointed Ms. Pallozzi as chair of the Subgroup. The members of the Subgroup include: Alabama, California, Connecticut, Florida, Kansas, Louisiana, Maryland, Missouri, New Jersey, Oklahoma, Rhode Island and Virginia. Mr. Byrd said Louisiana has many documents and bulletins that were distributed after Hurricane Katrina that would be useful to the Subgroup. Mr. Byrd said some insurance companies have approached Louisiana asking for predefined rules on how to work coastal catastrophes, which would also be of help to the Subgroup. Ms. Nelson said she would be interested in working with the Subgroup, in conjunction with the Transparency and Readability of Consumer Information (C) Working Group. She said fall would be a good time to start work on some of these items, because many of the states will begin to gear up for disasters that naturally occur in the spring. 7. Heard a Presentation on Farmers Insurance Company’s Disaster Recovery Playbook Victoria McCarthy (Farmers Insurance Company) said Farmers Insurance has partnered with the St. Bernard Project to assist communities with residential disaster recovery. She said the goal of the Disaster Recovery Playbook is to help communities prepare for and complete the disaster process for residential recovery. Ms. McCarthy said the web-based playbook is a living document that is frequently updated and compiled jointly by the St. Bernard Project and Farmers Insurance. She said the playbook reflects what has been learned in real-life experiences in residential disaster recovery and reflects the best practices that have been used. Ms. McCarthy said the best practices have been updated since several recent disasters. Ms. McCarthy said the St. Bernard Project is an organization that was created in 2006, when its founders realized that in New Orleans there was a need to help people recover from Hurricane Katrina more effectively. She said the St. Bernard Project helped to start affiliate nonprofit groups in many cities. Ms. McCarthy said that in 2013, Farmers Insurance partnered with the St. Bernard Project and with Rebuild Joplin. She said the goal was to document how the St. Bernard Project approach works so that it could be shared with as many community leaders as possible. Ms. McCarthy said the result was the Disaster Recovery Playbook. She said the playbook details the steps community leaders can take after a disaster. Ms. McCarthy said the Disaster Recovery Playbook was a response to an increase in severe weather. She said homeowners in communities that are subjected to disaster are not always properly insured, or not insured at all. Ms. McCarthy said homeowners with flood insurance policies might find that they do not receive enough money for complete repairs to their homes. Ms. McCarthy said when Farmers Insurance met with the St. Bernard Project in 2013, the company asked how it could help. She said the St. Bernard Project said they needed three things: 1) money; 2) volunteers; and 3) help in documenting everything it had done and everything it had learned post-Katrina. Ms. McCarthy said the St. Bernard Project wanted the information to be assessable and shared with other communities. She said St. Bernard Project leaders thought that by giving this information to communities and providing them with this resource, recoveries could be completed more quickly. Ms. McCarthy said in Joplin, MO, for example, estimates were that it would take seven years for a full recovery. She said using the guidance from the St. Bernard Project, most of the homes would be rebuilt by the end of 2014, which is about three-and-one-half years early.


Attachment Five



Ms. McCarthy said the St. Bernard Project told Farmers that it was important for communities to get in front of the issue and to understand that they need to have a vehicle through which they can accept donations. She said Farmers Insurance offered to write the playbook and aggregate all the data so that they could take what was learned through these processes actionable and repeatable after another disaster. Ms. McCarthy said the initiative was launched May 21, 2013, and the Disaster Recovery Playbook was launched a year later. She said the playbook offers insights into best practices that every community should know about, including communicating the recovery plan in the first seven days post-catastrophe—when most activity occurs following a catastrophe. She said this is also when the most resources are available. Ms. McCarthy said there are people coming into the community, and this time frame is when the most funds come in as well. Ms. McCarthy said it is important to understand the people coming into the community to provide assistance may be there for the short-term only. She said those in the community need to know best how to leverage their engagement for the long-term rebuild. Ms. McCarthy said it is also important to run the recovery as if it were a business, which means establishing clear goals, a plan and accountability. Ms. McCarthy said what is unique about the Disaster Recovery Playbook is that it focuses on long-term recovery for entire communities rather than on immediate response, which is the goal of most existing disaster recovery plans. She said in addition to helping communities recover from disasters, the playbook also provides a guide to help communities prepare for disasters. Ms. McCarthy said the Disaster Recovery Playbook is Web-based and tactical. She said it is updated frequently with information provided by those people who actually participate in the disaster recovery. Ms. McCarthy said that when the website is accessed, there is an overview of what is critical and what has to be addressed first, what to expect following a disaster, as well as setting up the options for a rebuild organization. She said there are chapters that address each area of residential disaster recovery. Ms. McCarthy said these chapters discuss: 1) how to manage a volunteer workforce; 2) how to manage AmeriCorps workers; 3) how to manage construction; 4) how to interact with and support clients (those who are having their homes rebuilt); 5) how to write grants; and 6) how to manage media, in particular social media. She said there are also documents that the St. Bernard Project uses that can be used as templates. Ms. McCarthy said the Disaster Recovery Playbook is a complete kit that can be used in establishing an organization to manage residential disaster recovery using the model that was created by the St. Bernard Project and used in New Orleans in the wake of Hurricanes Katrina, Rita and Isaac. The St. Bernard Project also established operations in Joplin, MO, following the E-5 tornado, as well as in New York and New Jersey in the wake of Superstorm Sandy. Ms. McCarthy said that, in addition to the tactical issues, the playbook addresses what to expect after a disaster as people are in those initial phases of facing the devastation and destruction. She said a recovery organization is able to mobilize some of the available resources that have been donated in the first seven to 10 days, which will allow residents to rebuild sooner than they might otherwise be able to. Ms. McCarthy said the Disaster Recovery Playbook can be accessed at www.disasterrecoveryplaybook.org. 8. Discussed Other Matters Mr. Koon asked if any of the states represented in the meeting have seen any interest from carriers regarding the writing of private flood insurance in their respective states. Ms. Nelson said no one has approached Missouri, but they are interested. Mr. Koon said the only company writing private flood insurance in Florida has reached its capacity in the areas that are the most difficult to obtain flood insurance. Mr. Bradner said one of the things he heard was a realtor warning buyers to be cautionary if deciding to leave the NFIP because once a person leaves the NFIP, he or she is unable to return to the NFIP and obtain subsidized rates. Having no further business, the Catastrophe Insurance (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\CatInsWG\08-CatInsWGmin.docx


Attachment Five-A Property and Casualty Insurance (C) Committee

8/18/14


Draft: 10/16/14

Catastrophe Insurance (C) Working Group E-Vote

August 8, 2014 The Catastrophe Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee conducted an e-vote that concluded Aug. 8, 2014. The following Working Group members participated: Richard Koon, Chair (FL); Charles Angell (AL); George Bradner (CT); James Donelon (LA); Joy Hatchette (MD); Angela Nelson (MO); Peter Hartt (NJ); Tom Botsko (OH); Cuc Nguyen (OK); Paula Pallozzi (RI); and Michael Humphreys (TN). 1. Adopted the Data Collection Template The Working Group conducted an e-vote to consider adoption of the Data Collection Template (C) Subgroup data collection template Aug. 8 (Attachment Eleven). A majority of the Working Group members voted to adopt the template. The motion passed. Having no further business, the Catastrophe Insurance (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\CatInsWG\08-08 Cat Ins E Vote.docx


Attachment Five-B Property and Casualty Insurance (C) Committee

8/18/14


Draft: 10/16/14

Data Collection Template (C) Subgroup E-Vote

July 22, 2014 The Data Collection Template (C) Subgroup of the Catastrophe Insurance (C) Working Group conducted an e-vote that concluded July 22, 2014. The following Subgroup members participated: Paula Pallozzi, Chair (RI); Charles Angell (AL); Richard Koon (FL); Angela Nelson (MO); Carl Sornson (NJ); Brian Gabbert (OK); and Rebecca Nichols (VA). 1. Adopted the Data Collection Template The Subgroup conducted an e-vote to consider adoption of the data collection template July 22. A majority of the Working Group members voted to adopt the template (Attachment Eleven). The motion passed. Having no further business, the Data Collection Template (C) Subgroup adjourned. W:\National Meetings\2014\Summer\Cmte\C\CatInsWG\DataSG\07-22 Data SG E Vote.docx


Attachment Five-C Property and Casualty Insurance (C) Committee

8/18/14


Draft: 9/30/14

Data Collection Template (C) Subgroup Conference Call June 26, 2014

The Data Collection Template (C) Subgroup of the Catastrophe Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee met via conference call June 26, 2014. The following Subgroup members participated: Paula Pallozzi, Chair (RI); Charles Angell (AL); Richard Piazza (LA); Angela Nelson (MO); Carl Sornson (NJ); Brian Gabbert and Joel Sander (OK) and Eric Lowe and Phyllis Oates (VA). Also participating were: Lori K. Wing-Heier (AK); Sandra Castagna (MD); and David Dahl (OR). 1. Discussed the Updated Data Collection Template and Reviewed Comments Ms. Pallozzi asked if any other interested parties, including but not limited to those who submitted written comments, were on the call. No party identified himself or herself. Ms. Pallozzi said Rhode Island issued insurance bulletins as well as a data call after Superstorm Sandy. She said the bulletins addressed some of the information that the American Insurance Association (AIA) is requesting be provided in the data collection template. Ms. Pallozzi reviewed the comments received from AIA. She asked if anyone from the AIA was on the call to discuss its comments. Hearing no comments, Ms. Pallozzi continued with the review. She said the AIA noted that the comment section was limited to an explanation of “any decrease in data reported or any large swing (>25%).” The AIA said companies may want to provide commentary beyond decreases or large data swings. Ms. Pallozzi said the Subgroup may want to change the data collection template explanation section to encompass information other than decreases or large data swings. Ms. Pallozzi is to work with NAIC staff to change the wording on the data collection template. Ms. Pallozzi said the AIA’s second comment suggests a slight modification to the template definition of “All Other Lines.” She said the current template does not include this definition as it was potentially dropped off in the process of reviewing. The Subgroup agreed to add this definition back into the template. Ms. Pallozzi said the AIA’s third comment asks for workers’ compensation to be considered as an optional data element for inclusion in the template. She said the directive issued by the state would definitely ask for this information if necessary. However, she said the Subgroup may consider adding “Optional” next to the “Workers’ Compensation” definition and section. The Subgroup agreed to make this change. Ms. Pallozzi said the AIA’s fourth comment asks for the justification for separating out private flood insurance data. She said that after Superstorm Sandy, the National Flood Insurance Program (NFIP) restricted the information insurers could report to the states on NFIP policies. Ms. Pallozzi said the reason the Subgroup included “Private Flood” was to allow companies to report data that was their own data and not NFIP data. Mr. Piazza said “Private Flood” could be dropped from the form altogether and added to the “All Other Lines” category, as there will be little private flood reported in this category currently. He said the category could be added to the data collection template at a later date if the need arises. Ms. Pallozzi said that while this may not be a large category right now, it appears that private flood insurance is being written in some states. She also noted that the Subgroup had previously voted to include “Private Flood” as a separate item. The Subgroup agreed to leave the “Private Flood” line of business on the data collection template. Ms. Pallozzi said the AIA’s fifth comment discusses confidentiality. She said the AIA recommends the template include a sentence that would specifically identity the information as confidential and make reference to the particular state confidentiality and open records laws. Ms. Pallozzi said Rhode Island and several other states include language regarding confidentiality in the bulletins sent out to companies in the event of a data call. She said New York did provide a report card, which was the state’s prerogative. Ms. Pallozzi said the template does specify that data will be reported in aggregate. Ms. Pallozzi said state-specific bulletins would address the confidentiality issue. Mr. Piazza said that Louisiana put something in the templates regarding confidentiality when a data call has been necessary. He said the Subgroup may consider adding a placeholder in the template that says, “Each state should put its own confidentiality statement in the space provided.” Mr. Lowe agreed with Mr. Piazza’s suggestion in light of varying state laws. Ms. Pallozzi will work with NAIC staff to add this statement.


Attachment Five-C Property and Casualty Insurance (C) Committee

8/18/14


Ms. Pallozzi said the final AIA comment recommended specific due dates and frequency of reporting. She said the due dates are going to differ based on the event. Ms. Pallozzi said states will need to make that determination when they send out their data call. Ms. Nelson noted that the NAIC Disaster Reporting Framework provides guidance on timing and frequency of reporting during different stages of an event. Ms. Pallozzi noted that the goal is to add the template as an addendum to the framework. Therefore, states can look to the framework for guidance if needed. In light of this discussion, the Subgroup will not make any changes to the template regarding specific due dates. Ms. Pallozzi reviewed the comments received from State Farm. She asked if anyone from State Farm was on the call to discuss its comments. Hearing no comments, Ms. Pallozzi continued with the review. She said the first comment referenced ZIP code level reporting. She said State Farm voiced concerns and asked states to check their insurance codes and make appropriate adjustments if needed to authorize the request of this information. Ms. Pallozzi said the state would address these concerns if needed at the time of the data call. Ms. Pallozzi said State Farm’s second comment referenced trade-secret protection. She said State Farm voiced that ZIP code level claims data could provide competitors with valuable insights into the market position of their rivals. Ms. Pallozzi noted that based on the Subgroup’s discussion on the AIA’s comments on confidentiality, each state would provide information regarding its confidentiality provisions in the confidentiality space provided on the template. Ms. Pallozzi said State Farm asked for the heading on the template to be changed from “Data Call for [Storm Name]” to “Data Call for [Event].” The Subgroup agreed to make this change. NAIC staff will make this change on the template. Ms. Pallozzi said the Consumer Federation of America (CFA) also submitted comments. She said the comments the CFA made were more consumer-driven, would likely require manual reviews and would extend the data collection elements. Ms. Pallozzi asked if anyone from the CFA was on the call to discuss its comments. Hearing no comments, she continued with the review. Mr. Lowe said the information the CFA requested was beyond what was needed for an initial data call. Mr. Piazza said the template the Subgroup developed follows the Northeast Zone template, providing a simple, lowest-common denominator format that all states could use and would provide consistent and uniform data collection across all states. Mr. Piazza noted that it would be useful to the regulator in answering the most common questions arising from the event and in determining the impact of the event on insureds and insurers, both statewide and geographically. The Subgroup agreed that any state regulatory needs beyond this template could be obtained through expansion of the template or through a separate data call or market conduct inquiry. The Subgroup decided that it will not expand the data collection data elements that the CFA suggested. Ms. Pallozzi asked if there were any regulators or any interested parties on the call that wanted to offer comments. There were no further comments. Upon a motion by Mr. Lowe, seconded by Mr. Piazza, the Subgroup agreed to review the changes to the template and conduct an e-vote to consider adoption of the template once the agreed-upon changes have been made. Having no further business, the Data Collection Template (C) Subgroup adjourned. W:\National Meetings\2014\Summer\Cmte\C\CatInsWG\Data Collection Template Subgroup\0626 Data Collection Subgroup Minutes.docx


Attachment Five-D Property and Casualty Insurance (C) Committee

8/18/14


Draft: 9/2/14

Data Collection Template (C) Subgroup Conference Call May 22, 2014

The Data Collection Template (C) Subgroup of the Catastrophe Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee met via conference call May 22, 2014. The following Subgroup members participated: Paula Pallozzi, Chair (RI); Charles Angell (AL); Richard Koon and Rebecca Matthews (FL); Rich Piazza (LA); Carl Sornson (NJ); Brian Gabbert and Cuc Nguyen (OK) and Rebecca Nichols (VA). Also participating were: George Bradner (CT); and Sandra Castagna (MD). 1. Discussed the Updated Data Collection Template and Review the Proposed Definitions Ms. Pallozzi said Mr. Piazza reviewed the data collection template definitions for consistency and added definitions for each of the data elements. She said Florida has a statute that requires commercial property to be separated into two categories, commercial property residential and commercial property non-residential. Ms. Pallozzi said the data collection template may not fit the statutory or regulatory needs of all states. Mr. Koon said he recognizes many states may not have the same statutory needs as Florida. He said the commercial property differentiation is not the only portion of the template that would need to be changed to comply with Florida statutes. Mr. Koon said Florida has a long history of dealing with catastrophes and due to this history their rate filings also have to be separated into commercial property residential and commercial property non-residential. He said Florida statutes have been shaped by the numerous catastrophic losses that have occurred over time. Mr. Koon said Florida stakeholders have come to expect a great deal of information during catastrophic events. He said he could send comments to the Subgroup explaining the areas of difference. Ms. Pallozzi said that when the Northeast zone originally developed the data collection template it was not intended to be a market conduct tool or financial tool. She said the original form also was not linked to rate filings. Ms. Pallozzi said the purpose of the original template was to gather important data for policymakers and regulators. She said some states did collect more information than what is reflected on the current template. Ms. Pallozzi said she realized that Florida collects much more data than the information required in the current data collection template. Mr. Piazza said he thought the goal of the Subgroup was to review the data collection template and to design a template that incorporated the lowest common starting point for the collection of data on a timely basis and to address as many regulatory concerns as possible. He said he understands Florida has a unique situation due to their statutory requirements; however, he said the template reflects the lowest common starting point for data collection. Ms. Pallozzi said there was one state in the Northeast zone that modified the template during the collection of Superstorm Sandy data. She said she understands some states will not be able to use the template due to statutory requirements. Mr. Koon said Florida has some differences in definitions, as well as the particular data that is collected on the template. He said Florida would not be able to adopt the document due to definitions, etc. Ms. Pallozzi asked Mr. Koon if the data collection form would have to be recreated for Florida to be able to use the form. Mr. Koon said there are many differences, for example, the way Florida deals with their catastrophe fund, the way they have to segregate rating for reinsurance purposes, etc. He said Florida has different components of residential property, whereas other states may not have these components. Mr. Koon said it would be difficult for Florida to use or adopt the updated data collection template as it stands. Ms. Pallozzi said the base template may not be applicable for Florida since the data collected in Florida is based on Florida statutes. Mr. Koon said he did not want to hold up the adoption of a basic template that is being used to set a “best practice” for states to use after a catastrophic event. Ms. Pallozzi asked the Subgroup was willing to move forward with the data collection template and expose the template to interested parties for comment. She said other states have reached out to the NAIC and have used the template to issue data calls in response to recent catastrophic events, such as wildfire and tornado activity. The members of the Subgroup agreed to expose the current template to industry for comment. The data collection template will be exposed to interested parties and the next call will include the Catastrophe Insurance (C) Working Group members, as well as interested regulators and interested parties. Having no further business, the Data Collection Template (C) Subgroup adjourned. W:\National Meetings\2014\Summer\Cmte\C\CatInsWG\DataSG\0522 Data Collection Subgroup Minutes.docx


Attachment Six



Draft: 9/30/14

Terrorism Insurance Implementation (C) Working Group Louisville, Kentucky

August 17, 2014 The Terrorism Insurance Implementation (C) Working Group of the Property and Casualty Insurance (C) Committee met in Louisville, KY, Aug. 17, 2014. The following Working Group members participated: Benjamin M. Lawsky, Chair, represented by Martha Lees (NY); Jill Jacobi (CA); George Bradner (CT); Virginia Christy (FL); James Stephens (IL); Martin Hazen (KS); Robert Whitney (MA); Joan Dutill and Angela Nelson (MO); Elena Ahrens (NV); Peter Hartt (NJ); Brian Gabbert (OK); Paula Pallozzi (RI); Mark Worman (TX); and Rebecca Nichols (VA). 1. Received a Report on its May 20 Meeting Ms. Lees reported that the Working Group met in regulator-to-regulator session May 20 pursuant to paragraph 8 (consideration of strategic planning issues relating to federal legislative and regulatory matters or international regulatory matters) of the NAIC Policy Statement on Open Meetings. 2. Heard a Federal Update Brooke Stringer (NAIC) said there is not a definitive path forward in the U.S. Congress for reauthorization of the federal Terrorism Risk Insurance Act (TRIA), particularly in the U.S. House of Representatives. She explained the full U.S. Senate passed, by a vote of 93–4, a seven-year TRIA reauthorization bill (S. 2244) that would: 1) gradually increase the insurer co-share from 15% to 20% over five years; 2) gradually increase the recoupment mechanism by $10 billion over five years from $27.5 billion to $37.5 billion; 3) increase the surcharge on recoupment of federal funds from 133 % to 135.5%; 4) require the U.S. Department of the Treasury to issue rules governing the timing of certification; and 5) require the U.S. Government Accountability Office (GAO) to study the feasibility of the federal government collecting upfront premiums on insurers. An amendment that would direct the Treasury to establish an advisory committee to encourage the growth of private market reinsurance capacity to protect against losses due to terrorism was adopted. A similar provision is in the House bill. Ms. Stringer said the House Financial Services Committee approved its version of a TRIA reauthorization bill (H.R. 4871) on a party line 32–27 vote. The House bill is a five-year extension that would: 1) significantly reduce the federal government’s role in TRIA; 2) establish a small insurer opt-out; 3) provide different levels of coverage for NBCR and non-NBCR; 4) gradually raise the non-NBCR trigger from $100 million to $500 million; 5) gradually increase the insurer co-share from 15% to 20%; 6) increase the recoupment surcharge from 133% to 150%; 7) change the certification process/timeline; and 8) require the Treasury to collect insurer TRIA information. Ms. Stringer explained that if the House passes a bill, the differences between the House and Senate versions would still have to be reconciled before Congress could give its final approval. Given the tight congressional schedule and potential political outcomes of the November elections, some speculate that a short-term extension could be possible, or the final bill may not get approved until close to the expiration date as has been the case with previous reauthorizations. Ms. Stringer noted that the NAIC has not taken a formal position on either the House or Senate bill, but it continues to encourage prompt congressional action on a long-term reauthorization and will urge Congress to move expeditiously on a final bill when it returns from the August recess. Mona Carter (National Council on Compensation Insurance—NCCI) asked whether the NAIC had informed Congress of what would happen if TRIA was reauthorized late in the year or not at all. Ms. Stringer said NAIC staff has had numerous discussions with congressional staff about the importance of a prompt, long-term reauthorization. Ms. Stringer said the NAIC has previously passed a resolution expressing the need for a long-term reauthorization, but the issue of reauthorization has become quite politicized in Congress. Ms. Jacobi emphasized that the NAIC has not taken a position on particular bills but has taken a strong stance on the need for reauthorization in general. Ms. Stringer agreed that the NAIC has not supported individual bills but has expressed concerns over particular elements within bills.


Attachment Six



3. Discussed Documents that Need to be Revised Prior to TRIA Reauthorization Ms. Lees explained several documents likely need to be revised and adopted, assuming that TRIA is ultimately reauthorized, including a model bulletin on filing procedures, an expedited filing form and model policyholder disclosures. Eric Nordman (NAIC) explained the NAIC had dealt with similar issues in the case of prior reauthorizations of TRIA, in 2005 and 2007. He said that reauthorization had occurred in late December both years. Because of this, state regulators had to swiftly adopt bulletins through conference calls. He said a six-month straight reauthorization would not require updates to documents, but if there are changes to TRIA, the Working Group must be ready to act quickly. He said the Property and Casualty Insurance (C) Committee would likely have a conference call following any adoption of revised models by the Working Group so that insurers would have certainty regarding the expedited filing process, even if the full membership did not adopt the forms until later. Ms. Nelson asked whether an expedited filing form was still needed because, in 2007, there were many paper filings compared to now, when there are few. Ms. Lees said the Working Group would need to look at this and consider whether the form could be eliminated. Ms. Carter said regulators should see if the expedited filing process can be done electronically through SERFF. Ms. Jacobi said it makes sense to start looking at the documents that need to be updated and make revisions now, where possible, and create placeholders for information that will need to be filled in later. Ms. Lees said NAIC staff will begin this work. David Kodama (Property Casualty Insurers Association of America—PCI) asked if many changes were made by Congress, would the Working Group would need additional time to complete its updates. He asked whether the NAIC had shared with Congress that the industry will need more time if many changes are made to TRIA. Ms. Stringer said NAIC staff have stressed to Congress that regulators will need to act quickly after reauthorization to reduce uncertainty within the industry. Steve Clark (Insurance Services Office—ISO) said the ISO has looked at the proposed legislation and found that if a bill like what the House has proposed passes, there will be many changes for industry. He said that in 2007, the industry began filings before President Barack Obama signs it into law. He said a mechanism was in place between the NAIC and industry to improve the expedited filing procedures. Having no further business, the Terrorism Insurance Implementation (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\TerrorismWG\08-TerrorismWGmin.docx


Attachment Seven



Draft: 9/3/14

Auto Insurance (C/D) Study Group Louisville, Kentucky

August 16, 2014 The Auto Insurance (C/D) Study Group of the Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee met in Louisville, KY, Aug. 16, 2014. The following Study Group members participated: Joseph G. Murphy, Chair (MA); Tom Hirsig, Vice Chair (WY); Joel Laucher (CA); James Stephens (IL); Robin Coombs (KY); Warren Byrd (LA); Therese M. Goldsmith (MD); Elena Ahrens (NV); Paula Pallozzi (RI); Mark Worman (TX); and Brett Barratt (UT). 1. Adopted its July 28 Minutes Commissioner Murphy explained the Study Group met via conference call July 28 to hear from Towers Watson about the issue of price optimization and how it is used by insurers. Upon a motion by Commissioner Hirsig, seconded by Commissioner Goldsmith, the Study Group adopted its July 28 minutes (Attachment Seven-A). 2. Discussed the NAIC Letter to FIO Concerning Affordability Commissioner Murphy explained that the Federal Insurance Office (FIO) issued a Federal Register notice April 10, asking for comments on how to define the affordability of auto insurance. The NAIC submitted a letter to the FIO June 9. The letter described the difficulty in defining affordability and described prior work of the NAIC and the Study Group’s work, including the compendium of reports the Study Group adopted and potential data collection. Dave Snyder (Property Casualty Insurers Association of America—PCI) said there are new ways that people purchase automobile insurance, making availability no longer the issue it was years ago. He said the PCI recommended to the FIO ways to measure affordability, including measuring auto insurance expenditures in terms of other household expenditures. He said auto insurance expenditures are not significant compared to food and housing, and they have not increased as much as other household expenditures. He said auto insurance is relatively affordable thanks to competition and good regulation. Mr. Snyder said the overall cost of insurance is a combination of public policy results in each state, such as mandatory limits, health care costs, auto repair costs and the litigation environment. He said auto insurance is a pass-through mechanism. Mr. Snyder said the industry is not insensitive to the needs of everyone to pay less. He said the industry works to make auto insurance more affordable for all policyholders through highway safety and combating auto theft and fraud. He said the auto insurance industry is one of the most competitive industries. Mr. Byrd said Louisiana has some of the highest auto insurance premiums, so they are likely a higher portion of household expenditures. Mr. Hirsig asked why there are many more writers of auto insurance compared to 20 years ago. Mr. Snyder said a large factor is the collective effort to improve highway safety, safer cars and better enforcement of laws. He said costs are more manageable than they once were, especially in terms of liability. Mr. Snyder also said the addition of credit scoring has made the rating of risk more cost-effective. He said new risk factors are accurate in predicting risk. He said many state governments have allowed innovation in auto insurance. He said usage-based insurance would have similar benefits. Birny Birnbaum (Center for Economic Justice—CEJ) said the question before the Study Group and the FIO is: What is the availability and affordability of auto insurance for consumers in low-income and minority communities? He said a key question is whether consumers are able to pay the cost. He said the comments by the industry answer what has happened to the average in terms of costs and what is the average burden on consumers. He said this does not address the actual question. He said data is needed to answer the real question. Mr. Birnbaum said there are not competitive markets in areas where storefront sellers, often affiliated with check-cashing facilities, sell auto insurance. He said the auto insurance industry has a history of redlining, whether it was due to poor oversight or misinformation. He said the industry’s new approach to price individual consumers at a granular level leads to greater price variation. He said the use of credit scoring expanded the range of prices offered to consumers. Mr. Birnbaum said for non-preferred consumers, insurance has become less affordable. He said the Missouri Department of Insurance previously studied credit scoring and found it to be correlated with minority


Attachment Seven



population. He also said insurers are raising prices based on how responsive consumers are to price increases. He said he supports initiatives that reduce auto insurance costs, but that does not translate into greater affordability for underserved communities. Mr. Birnbaum said there remains a need to collect data. He said when the U.S. Congress demanded a study from the Federal Emergency Management Agency (FEMA) into flood costs, it did not request a study of average costs but one that looks at particular communities. 3. Discussed Price Optimization Commissioner Murphy said the Study Group heard from Earnix during a March 17 conference call about price optimization. The Study Group then submitted questions to Earnix, and Earnix said it would respond by Aug. 29. He said Towers Watson also presented before the Study Group May 20 regarding price optimization. The Study Group agreed that similar follow-up questions should be submitted to Towers Watson. Commissioner Murphy said because the topic of price optimization goes beyond auto insurance and requires a great deal of actuarial expertise, it is best suited before the Casualty Actuarial and Statistical (C) Task Force. He said the Task Force has also looked into the work of the Casualty Actuarial Society, which is considering revising its Actuarial Standards of Practice. The Study Group decided to request that the Task Force draft a white paper on regulatory issues regarding price optimization. Commissioner Murphy said J. Robert Hunter (Consumer Federation of America—CFA) had previously sent comments and questions to the Study Group regarding the Towers Watson presentation. Those comments have been posted and distributed. Mr. Birnbaum explained that he would like to respond to some of the assertions within the Towers Watson presentation. He said he would address three misconceptions:1) insurers have always deviated from indicated rates, and price optimization is just a more scientific way of doing this; 2) rating factors are factors related to the transfer of risk and because price optimization is not related to the costs of transfer of risk, it is not a rating factor and, consequently, not subject to regulatory oversight; and 3) there is a statistical confidence interval around the indicated rate, and any selection based on management judgment within that confidence interval is actuarially sound. He said each of these contentions is erroneous. He said demonstrating the falsehood of any one of these assertions renders price optimization illegal and unfair under current statutory rate standards. He said demonstrating the falsehood of all three should make clear that regulators should take immediate action to stop price optimization under existing regulatory authority. Mr. Birnbaum said it is correct that insurers have deviated from indicated rates in the past, but that deviation has not been anything like price optimization. He said historical deviation from rates has typically been an insurer selecting a lower rate than the indicated rate. He said regulators have not routinely approved insurer requests for rate increases significantly higher than the insurer’s indication. He said historical deviation from indicated rates has almost always been a lower selected rate than the indicated rate, and the lower selection has been across broad risk groups. Mr. Birnbaum said price optimization employs consumer-specific information to deviate from indicated rates not by broad risk groups, but by individual consumers. He said those deviations are as likely or more likely to be higher than indicated rates than lower than indicated rates. Mr. Birnbaum said what drives price optimization is price elasticity of demand, meaning the rate charged is dependent on the consumer’s likely response to a higher rate. Price optimization means that an insurer will charge a higher rate to a consumer for whom the price optimization scoring model indicates the higher rate will not prompt the consumer to shop for insurance from other providers. He said this is not a symmetrical exercise in which some consumers will see lower rates while others will see higher rates. He said price optimization is optimization of price to maximize profit, so higher prices will be assessed on these consumers the insurer believes will accept prices greater than the expected and indicated cost of the transfer of risk. Mr. Birnbaum said that historically, there was a clear demarcation between underwriting and rating factors. Underwriting used few and simple criteria to determine if an insurer would offer coverage and, if so, in which company coverage would be offered. Rating factors were any characteristic of the consumer, vehicle or property used to determine the premium charged for an individual policyholder. Historically, underwriting was left to the insurer and not subject to routine regulatory oversight, while regulators did require the filing of rating manuals and reviewed those rating manuals for compliance with the statutory requirement that rates not be unfairly discriminatory. Mr. Birnbaum said some insurers began to use rating factors to create different base rates in order to call the rating factor a tier placement factor, declare it as part of underwriting and not


Attachment Seven



tell regulators about it. He said instead of using a credit score as a rating factor with, for example, relativities of 0.75, 1.0 and 1.25 (reflecting a discount of 25%, base rate and a surcharge of 25%), the insurer could call the credit score a tier placement factor and have three sets of base rates: 25% below the average, the average and 25% above the average. He said there have been sessions at the Casualty Actuarial Society’s Annual Ratemaking Seminar instructing company actuaries how to use “tier placement” to avoid regulatory scrutiny. Mr. Birnbaum said a rating factor is any characteristic of the consumer, vehicle or property that the insurer uses to determine the premium charge. Rating factors must be risk classifications to comply with statutory rate standards; that is, a rating factor must be related to the expected costs of the transfer of risk, expected losses or expenses to issue and administer the policy. He said that by this definition of a rating factor, price optimization is clearly a rating factor as it is based on individual consumer characteristics and is applied to individual consumers to determine the premium charge for that consumer. He said price optimization is an impermissible rating factor because it is not related to the cost of transfer of risk. Mr. Birnbaum said the concept of a confidence interval around indicated rates misapplies a statistical concept to insurance ratemaking and regulation. The confidence interval is a function of choices the insurer makes in specifying the rate development model and, consequently, is subject to manipulation. He said it is incorrect that any rate within the confidence interval is as reasonable an estimate of the expected cost of risk transfer as the indicated rate. Mr. Birnbaum said price optimization means higher prices predominantly for those low-income and moderate-income consumers least able to afford auto insurance because these are consumers living in communities with the least competition among auto insurers for business. He said price optimization means taking advantage of those with the fewest alternatives. He concluded that addressing price optimization is not only an issue of enforcing existing statutory standards regarding unfair discrimination, but also an issue essential to promoting greater affordability of insurance among those consumers for whom the cost of auto insurance is the greatest burden. 4. Discussed Car-Sharing and Ride-Sharing Issues Commissioner Murphy said the Center for Insurance Policy and Research (CIPR) held a panel discussion Aug. 16 regarding car-sharing and ride-sharing issues. He said many states have issued consumer alerts warning consumers about potential insurance gaps, and the NAIC has drafted a consumer alert that states can use. Mr. Laucher said California will request through the Property and Casualty Insurance (C) Committee that the NAIC appoint a working group to look at insurance issues related to transportation network companies (TNCs). Ms. Pallozzi said an additional issue related to TNC drivers is whether they are considered independent contractors and, therefore, lack workers’ compensation insurance. Gus Fuldner (Uber) said he is generally supportive of the NAIC consumer alert, but it should note that companies offering services distinct from ride-sharing, such as those with professional drivers, go through the same process as taxis and have the same insurance requirements. He also noted that the major ride-sharing companies typically provide insurance coverage that is higher than that for taxis. He said an alert to consumers should be general to include all hired vehicles. 5. Discussed Distribution of Data Call Template and Comment Deadline Commissioner Murphy said that, at the Spring National Meeting, the Study Group discussed a date call template that states could use. Some changes were made to that draft based on comments received at the meeting. He said there has not been consensus on issuing a national data call. Several states have issued state-specific data calls and shared that information with the Study Group. The Study Group agreed to expose the draft data call template for a 45-day public comment period and then meet via conference call to discuss comments and make edits. Mr. Laucher said once a state obtains this data, it would need to overlay it with income or ethnicity by ZIP code to see if there is an impact on low-income groups. Commissioner Murphy said he would like to receive suggestions on how to conduct such a study. Having no further business, the Auto Insurance (C/D) Study Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\AutoSG\08-AISGmin.docx


Attachment Seven-A Property and Casualty Insurance (C) Committee

8/18/14


Draft: 9/2/14

Auto Insurance (C/D) Study Group Conference Call

July 28, 2014 The Auto Insurance (C/D) Study Group of the Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee met via conference call July 28, 2014. The following Study Group members participated: Joseph G. Murphy, Chair (MA); Tom Hirsig represented by Nancy Olsen, Vice Chair (WY); Ed Cimini (CA); Pete Riker (GA); Jim Stephens (IL); Robin Coombs (KY); Warren Byrd (LA); Therese M. Goldsmith (MD); Elena Ahrens (NV); Paula Pallozzi (RI); Mark Worman (TX); and Tracy Klausmeier and Tomasz Serbinowski (UT). Also participating was: Mike Andring (ND). 1. Heard Presentation on Price Optimization Commissioner Murphy said the Study Group earlier heard from Earnix on the issue of price optimization and the Study Group is waiting to hear back from Earnix on questions from the Study Group. He said Towers Watson has been asked to give a similar presentation on how it uses price optimization in pricing auto insurance. Serhat Guven (Towers Watson) said the risk and financial services segment of Towers Watson is tasked with understanding, mitigating and pricing risk. He pointed out that the Casualty Actuarial Society has working groups looking into issues concerning price optimization. Mr. Guven defined price optimization as “selecting a price that deviates from cost-based indications.” Mr. Guven said price optimization is not new. He said insurers have always set rates in line with business objectives. He said actuarial standards of practice acknowledge that companies charge a final price in line with other business objectives. He said selecting a price that deviates from cost-based indications is a common practice. Mr. Guven said that, historically, insurers used judgment to make deviations from the indicated rate, trying to mitigate the impact on consumers while also being in line with the marketplace. He said the modern approach of price optimization removes judgmental bias from the process. He said the price optimization solution puts rigor behind actuarial judgment. He said that, with each indication, there is a parameter estimate and quantitative statistics around the quality of that parameter estimate (also known as a confidence interval) showing how much the actuary can believe that indication. He said it is important to look at the point estimate and also the range of confidence around that estimate. Mr. Guven said price optimization is a process for adjusting prices away from a cost-based benchmark to better achieve business objectives. He said these objectives are embodied in portfolio key performance indicators such as profit, volume, revenue, lifetime value and other indicators. He said adjustments to the cost-based indicators reflect profitability, price responsiveness, price competiveness and long-term customer value considerations. Price optimization uses customer knowledge to improve portfolio performance with the appropriate controls. Elements included under customer knowledge include risk costs, expenses, competitive positioning, buying behavior, retention behavior, existing product holdings, likelihood to purchase additional products and marketing activities. Improvements to portfolio performance include volume and/or profit uplift, sustained long-term improvement and strategy. The appropriate controls include internal controls, branding concerns and regulatory objectives. He stressed that objectives must be defined. If a company’s goal is to minimize subsidization, then there would be no adjustment to the indication. Mr. Guven said cost models include expense, competitor and demand models. He said companies use customer level knowledge to select a rate that improves performance. He said controls include internal, branding and regulatory controls. Mr. Guven said without price optimization an insurer is only using loss costs and regulatory objectives, but is still selecting a price that deviates from the loss cost model. Mr. Guven said insurers use cost models and expense models to define profit; demand models and competitor prices to define volume; and business constraints and regulatory objectives to define a search space. Traditionally, an actuary looks at cost models and expense models and makes a selection. This generates a scenario. Price optimization prospectively evaluates the impact of scenarios. Actuarially, an insurer can select from a cost model and generate scenarios to assess the scenario. A scenario is selected and the company asks the regulator for approval. Price optimization generates millions of scenarios in a search space to prospectively assess rating algorithms that reflect all known information most in line with business and regulatory objectives. He said insurers are looking for the right rate for the risk depending on overall and regulatory objectives.



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Mr. Guven said customer knowledge is used to simulate a constrained search space. The insurer can then calculate an expected profit. If a price is increased too much, renewal may fall and expected profits fall. He said a wide array of constraints is introduced into the optimization algorithm, reflecting internal and external considerations. He said the confidence interval is used for this constraint. This keeps the rate from being inadequate, excessive or unfairly discriminatory. He said the result of the optimization has to be a rate order calculation, meaning two customers with the same risk characteristics should get the exact same rate. Mr. Guven said the actuary explores the simulated search space to identify potential price scenarios. Optimization identifies and summarizes a range of options in the search space. Rating algorithms may mix profit, volume or other aspects. Mr. Guven said a price scenario is identified to align with portfolio-level objectives. Mr. Guven said the regulatory process remains the same with price optimization; i.e., rates should not be inadequate, excessive or unfairly discriminatory. He said optimization is a tool that helps make the selection; there is no easy way to see if a company is or is not using the tool, but a regulator can see if the selection deviates from the indication, showing that some form of optimization was used. He said the goal should be to ensure the selected rate is in line with regulation, not creating a rate that is inadequate, excessive or unfairly discriminatory. Mr. Guven said the selection should be between the current and indicated rates. If the rate is above or below the current and indicated rates, it is likely to be challenged by regulators. He said regulators might want to ask for a compilation of risk factor selections and compare the current price to the proposed price to identify dislocation. He said companies do not want too much dislocation because it hurts market continuity. He said regulators could compare selections to the cost-based model so the regulator can assess the change in subsidization if a change is made to the proposed rates. He said regulators might want to get an aggregate understanding of what a customer will see and how subsidization is minimized. He said price optimization is a scientific approach to rate selection and regulators should continue to ensure that the selections are actuarially justified. Ms. Pallozzi asked what level of detailed data is needed in filings for regulators to understand what effect price optimization had on the rate. Mr. Guven said regulators should receive the selected discounts and surcharges for the rating factor compared to indicated discounts and charges and current discounts and charges. He said regulators might also want to ask for a confidence interval around the indicated rate. Ms. Pallozzi asked if it is possible for two individuals who were charged the same before price optimization to be charged a different rate after price optimization is used. Mr. Guven said two people with the same risk characteristics in the rate order calculation should have the same rate. Mr. Serbinowski asked whether a retention score is a rating factor within the rating calculation. Mr. Guven said that, in his experience, it is not a rating factor. He said the retention score may be correlated with loss costs. He said policy tenure is correlated with loss costs. He said if the retention score is correlated with loss costs, then the retention score could be a rating factor rate order calculation. Mr. Serbinowski asked whether two consumers who differ in sensitivity to price could end up with different rates. Mr. Guven said this does not happen unless the rate order calculation includes a retention score as a rating factor. Mr. Byrd asked whether reinsurance costs could be a business constraint. Mr. Guven said a scenario might involve an insurer growing by keeping profitability level, which could make reinsurance costs a business constraint. Commissioner Murphy asked how retention score is defined. Mr. Guven said a retention model creates a retention score given the characteristics and a rate change. Commissioner Goldsmith asked how many and what types of characteristics are in a retention model. Mr. Guven said it depends on the data collected and the retention model. There could be hundreds of characteristics in the model. He said the characteristics could be policyholder or transactional attributes, such as whether a person calls or complains or how a consumer interacts with either an agent or a distribution channel. He said the characteristics may be related to risk or demand. Commissioner Goldsmith asked if complaints could cause a consumer to get a worse retention score and higher premium. Mr. Guven said someone who complains would be considered to be more price-sensitive, so an increase in price would mean that consumer is more likely to leave the company. Mr. Andring asked whether regulators should consider rates not excessive if the selections fall within the confidence interval. Mr. Guven said rates are actuarially sound around the indicated rate’s confidence interval.



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Bob Hunter (Consumer Federation of America) asked whether the Study Group would accept written questions and comments. Commissioner Murphy said individuals could send in questions and comments through Aug. 8. Mr. Hunter said he disagrees with several assumptions found in Mr. Guven’s presentation. He said the Casualty Actuarial Society is currently trying to change the ratemaking standards of practice, because the current standards make price optimization problematic. He said some regulators have had objections to the changes, and California believes price optimization is illegal. Mr. Hunter said he disagrees with the notion that price optimization only removes bias from the current practices deviating from cost-based indications. He said price optimization clearly raises prices above cost-based levels. He said Mr. Guven has authored a paper showing that an optimized rate may be higher than the current rate. Mr. Hunter said he has never seen a filing that showed the selected rate 10% higher than the indicated rate, noting that this would not be approved by state regulators. He said there is no easy way for regulators to see if insurers are using price optimization. He said regulators need to understand the cumulative impact of rating factors. He said regulators need to require the necessary information from insurers to understand how much rates are being adjusted from cost-based levels and who is paying subsidies. He said low-income consumers need to be protected because they are required by law to purchase auto insurance and they have inelastic demand. Commissioner Murphy said the Study Group is scheduled to meet Aug. 16 at the Summer National Meeting. He also said the Center for Insurance Policy and Research will host a panel discussion titled, “Commercial Ride-Sharing and Car-Sharing Issues,” which will be held Aug. 16 at the Summer National Meeting. Having no further business, the Auto Insurance (C/D) Study Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\AutoSG\07-AutoInsSGmin.docx


Attachment Eight



Draft: 9/3/14 Crop Insurance (C) Working Group

Louisville, Kentucky August 16, 2014

The Crop Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee met in Louisville, KY, Aug. 16, 2014. The following Working Group members participated: Merle D. Scheiber, Chair, and Larry Deiter (SD); Marty Hazen (KS); Phil Vigliaturo (MN); Robert Bell (NE); Kelvin Zimmer (ND); and Brian Gabbert (OK). 1. Adopted its June 4 Minutes Upon a motion by Mr. Hazen and seconded by Mr. Zimmer, the Working Group adopted its June 4 minutes (Attachment Eight-A). 2. Received an Update on the Private Crop Insurance Blanks (E) Working Group Proposal Sara Juliff (NAIC) said the private crop insurance blanks proposal, which adds line 2.4 “Private crop” to the state page and Insurance Expense Exhibit (IEE), was adopted by the Blanks (E) Working Group on June 17. She said staff appreciated the Working Group’s efforts on this project, and she thanked all the regulators and interested parties who spoke on the Blanks (E) Working Group call in support of the proposal. The proposal will provide better and more complete data, which could be invaluable to a regulator—especially during a disaster such as a drought. The proposal, and all other adopted blank changes, will go on to be considered by the Accounting Practices and Procedures (E) Task Force, Financial Condition (E) Committee, and the Executive (EX) Committee. No further action should be required for Working Group members, and the 2014 data blanks coming out this fall should reflect adopted changes. 3. Heard an Update on the Federally Subsidized Index-Based Weather Insurance Programs Ms. Juliff said representatives from the Kansas City office of the U.S. Department of Agriculture’s (USDA) Risk Management Agency (RMA) could not attend the meeting. However, she read a small update provided for the Working Group. The RMA has drafted a proposed rule to amend 7 C.F.R. part 400 subpart V, which is the regulation that deals with submissions of privately developed policies to the Federal Crop Insurance Corporation (FCIC) board of directors. Currently, the proposed rule is awaiting review by the Office of the General Counsel (OGC) for legal sufficiency. Once approved by the OGC, the proposed rule will be sent to the Office of the Administrator for the RMA, the Office of the Under Secretary for the Farm and Foreign Agricultural Services (FFAS), and the Office of the Secretary of the USDA for approval. After concurrence has completed, the proposed rule will be published in the Federal Register for public inspection and comment. The timing of the proposed rule’s publication will depend on the time frame in which it takes concurrence to be completed. The RMA will notify the Working Group when the proposed rule is published so that the information can be shared with any interested stakeholders. The RMA will consider and respond to public comments and likely follow up with a final rule that will put into effect the proposed changes following publication in the Federal Register. The RMA is also drafting a procedures handbook for the submission of index-based weather plans of insurance. This handbook will provide more specific instructions for the submission and content of index-based weather plans submitted to the FCIC board of directors. It is the RMA’s intention to release this handbook when the final rule to amend 7 C.F.R. part 400 subpart V goes into effect. Having no further business, the Crop Insurance (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\CropWG\08-CropWGmin.docx


Attachment Eight-A Property and Casualty Insurance (C) Committee

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Draft: 9/2/14 Crop Insurance (C) Working Group

Conference Call June 4, 2014

The Crop Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee met via conference call June 4, 2014. The following Working Group members participated: Merle D. Scheiber, Chair, and Larry Deiter (SD); Martin Hazen (KS); Tammy Lohmann (MN); Joan Dutill (MO); Beverly Anderson and Laura Arp (NE); Mike Andring (ND); and Wayne Stewart and Brian Gabbert (OK). Also participating were: Khapre Staton (MI); and Jeff Baughman (WA) 1. Discussed Section 11026 of the 2014 Farm Bill Sara Juliff (NAIC) said Section 11026 of the 2014 Farm Bill authorizes the U.S. Department of Agriculture’s Risk Management Agency (RMA) to approve two or more index-based weather insurance programs. These programs would not be considered part of the federally reinsured multiple-peril crop insurance (MPCI) program, but would be federally subsidized. One of the three criteria for approving these programs is state approval. There have only been one or two states that have already approved these types of products. There are many questions surrounding this piece of the farm bill legislation, such as whether these products are insurance or derivatives, regulatory authority and other implementation questions. She said she had been contacted by both state and federal regulators on how best to proceed, and hopes this conference call will serve as a forum to begin these discussions. While there have been one or two states that considered weather insurance an insurance product, there have also been states that have not considered it insurance and declined the product filing. Shaun Collins (RMA) said the RMA is currently in a fact-finding mission, as it is tasked with implementing Section 11026. The Kansas City branch of the RMA must develop procedures for the Federal Crop Insurance Corporation (FCIC) Board of Directors, so they may review and approve products. Requests must be submitted by approved insurance providers (AIPs) that have adequate underwriting experience, sufficient assets or reinsurance, and state approval. He said the RMA is hoping to discuss the basic state approval process with state insurance regulators and answer any questions state insurance regulators may have of the RMA. Tim Hoffman (RMA) said the Climate Corporation’s Total Weather Insurance (TWI) product uses a rainfall index and is available nationwide. Climate Corporation was the impetus for the weather insurance in the bill. He said the company was created by former Google executives and the company now has a standard reinsurance agreement (SRA) with the FCIC. Climate Corporation’s motive was its insurance product, which it believes complements MPCI, and it wanted a subsidy for farmers to make their product more affordable. Mr. Hoffman said Climate Corporation worked with several senators to craft restrictive language so it would be only company qualified to get the subsidy; however, other companies caught on and the language morphed into the current bill language. As such, if the FCIC Board of Directors receives a submission for index-based weather insurance, the RMA will do the work and check criteria for its board members, but Mr. Hoffman said he does not know if the RMA needs to contact each state individually to ensure state approval. If the states consider the product non-insurance, that section of the bill may be rendered inapplicable anyway, as no company could ever qualify. The FCIC Board of Directors serves at the pleasure of the FCIC secretary and is only a part-time function, as the board members are business people and farmers. The board relies on the RMA for procedures. He said Climate Corporation may never submit a filing, even though it was the genesis of the bill language. Mr. Collins said the law says the RMA will provide a subsidy, but no federal reinsurance. The product still needs to be written by AIPs. He asked how the states plan to handle these companies. Director Scheiber said South Dakota is familiar with Climate Corporation, and it is a licensed entity in South Dakota, with insurance product rates and form approved. Unless its weather insurance is a different type of product from what has been submitted in the past, South Dakota regulates its weather insurance as an insurance product. Mr. Hoffman said the federal government has no issue with the weather insurance as a product. He said if a company requests a subsidy for its customers, the RMA will assist the FCIC Board of Directors to assess the criteria. Director Scheiber said Climate Corporation is a licensed company and South Dakota considers its product insurance. He said state insurance regulators have a regulatory obligation to make sure rates are affordable and the companies are solvent. Mr. Hazen and Mr. Andring said Kansas and North Dakota have the same position as South Dakota. Ms. Dutill said she has not seen the product in Missouri.


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Ms. Juliff said it is possible to distribute a short multi-state survey to ask what the states’ positions are on the products, because the Working Group is relatively small and it is likely the states that do not consider weather products insurance may not be present on this call. Mr. Hoffman asked, should RMA were to get a submission for the subsidy, if it were possible to check with the NAIC for state approval or if the RMA would need to go state by state. Director Scheiber said RMA can submit an inquiry to Ms. Juliff at the NAIC level. Ms. Juliff said many states mandate the use of SERFF for rate and form filings. Director Scheiber said the availability of data may depend on the type of information needed by the RMA. Mr. Collins asked if it is the product itself that is approved or if the insurance provider that is approved. Director Scheiber said SERFF is the best way to find out which products apply to a certain state. Ms. Juliff said companies must first be licensed to write in a state and then subsequently file products. Director Scheiber said if a company is monoline, the company is licensed first and then it files to get its products approved. If the company is already licensed, then it files the product. Either way, the product goes to the respective state insurance regulator for approval for each product the company is attempting to be market. He said verification of product approval should be able to be done through the NAIC or SERFF. Ms. Juliff said the RMA is likely not going to have searchable access to SERFF because it contains company proprietary information. She said, on the SERFF website, there is a list of states that mandate its use. Mr. Hoffman said confidentiality is a good point, and any filings received by the RMA would be confidential until approved. The confidential piece would be the request of subsidies. Ms. Juliff said a confidentiality agreement could be crafted so that any information shared between the RMA and the NAIC would be kept proprietary. Mr. Collins agreed a confidentiality agreement may be needed in the future. Director Scheiber said the decision is left up to each individual state, but the NAIC can get provide a platform for the RMA to discuss with each state. Having no further business, the Crop Insurance (C) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\C\CropWG\06-04-CropWGmin.docx


Attachment Nine Property and Casualty Insurance (C) Committee

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Draft: 038/0416/14

CASUALTY ACTUARIAL AND STATISTICAL (C) TASK FORCE

2014 CHARGES – PROPOSED AMENDMENTS The mission of the Casualty Actuarial and Statistical (C) Task Force is to identify, investigate and develop solutions to actuarial problems and statistical issues in the property/casualty insurance industry. The Task Force’s goals are to maintain the financial health of property/casualty insurers and to ensure that appropriate data regarding property/casualty insurance markets are available. Ongoing Maintenance of NAIC Programs, Products or Services: 1. Provide reserving, pricing, ratemaking, statistical and other actuarial support to NAIC committees, task forces and

working groups. Propose changes to the appropriate work products (with the most common work products noted below) and present comments on proposals submitted by others relating to casualty actuarial and statistical matters. Monitor the activities, including the development of financial services regulations and statistical (including disaster) reporting, relating to casualty actuarial issues.—Essential

Blanks (E) Working Group (property/casualty annual statement, including Schedule P; property/casualty quarterly statement; property/casualty quarterly and annual statement instructions, including Statement of Actuarial Opinion and Actuarial Opinion Summary Supplement).

Statutory Accounting Principles (E) Working Group and Emerging Accounting Issues (E) Working Group (Accounting Practices and Procedures Manual). Review and provide comments on statutory accounting issues being considered under Statement of Statutory Accounting Principles (SSAP) No.—65 Property and Casualty Contracts.

Capital Adequacy (E) Task Force (property/casualty RBC report). Financial Analysis Handbook (E) Working Group (property/casualty actuarial sections of the Financial Analysis Handbook).

Financial Examiners Handbook (E) Technical Group (property/casualty actuarial sections of the Financial Condition Examiners Handbook).

Operational Efficiencies (EX) Working Group (property/casualty actuarial sections of the Product Filing Review Handbook).

2. Appoint an Actuarial Opinion (C) Subgroup to propose revisions to the following, as needed, especially to improve

actuarial opinions and the regulatory analysis of actuarial opinions and loss and premium reserves.—Essential Financial Analysis Handbook Financial statement instructions Regulatory guidance to appointed actuaries.

3. Appoint a Risk-Focused Surveillance (C) Subgroup to recommend charges to aid implementation of the risk-focused

examination process and the use of the property/casualty actuarial specialists.—Essential

4. Appoint a Statistical (C) Subgroup to do the following.—Essential a. Consider updates and changes to the Statistical Handbook of Data Available to Insurance Regulators. b. Consider updates and developments, provide technical assistance and oversee the production of the following

reports and databases. Also, periodically evaluate the demand, utility and income derived versus the costs of production of each product.—Essential

Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owners Insurance.

Auto Insurance Database. Competition Database Report.



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5. Appoint a Profitability (C) Working Group to produce the Report on Profitability by Line by State on an annual basis. —Essential

6. Provide property/casualty actuarial advice and assistance regarding the Solvency Modernization Initiative, including

providing commentary as needed on relevant draft reports of the International Actuarial Association (IAA) and other international bodies. Monitor activities related to establishing life insurance principle-based reserving and provide guidance based on experiences with establishing property/casualty principle-based reserving.—Important

7. Monitor national casualty actuarial developments and consider regulatory implications.—Important

Casualty Actuarial Society (Statements of Principles and Syllabus of Basic Education). American Academy of Actuaries (AAA) (Standards of Practices, Council on Professionalism and Casualty Practice Council).

Society of Actuaries (general insurance track). Federal legislation.

8. Appoint a Joint Qualified Actuary (A/B/C) Subgroup to do the following.—Important

a. Recommend a uniform definition of “qualified actuary” for life, health and property/casualty appointed

actuaries signing prescribed Statements of Actuarial Opinion, identifying any differences that should remain between lines of business. Recommend a uniform definition of “qualified actuary” for other regulatory areas (e.g., rate filings, hearings). Consistency between uses is preferred, to the extent appropriate.

b. In performance of actuarial work upon which the regulators might rely, recommend a definition of

“inappropriate or unprofessional actuarial work” and recommend a process (which could be an existing process) for regulatory and/or professional organizations’ action(s). If needed, recommend a means of implementation through a model act, regulation or other means.

9. Appoint an Appointed Actuary (C) Subgroup to do the following.—Important

a. Receive the report of the Joint Qualified Actuary (A/B/C) Subgroup regarding a uniform definition of “qualified

actuary” for actuaries signing prescribed NAIC Statements of Actuarial Opinion and consider any necessary changes to the definition in the Property & Casualty Annual Statement Instructionsapproved Request for Model Law Development for the Property and Casualty Actuarial Opinion Model Law (#745) to consider granting authority to commissioners to take action against actuaries who provide inaccurate, incomplete or otherwise poor-quality actuarial opinions and provide a recommendation to the Task Force for changes to Model #745, through the following activities:

1) Identify and communicate to the Task Force any concerns, challenges, and implementation issues,

including if appropriate an alternative definition of “qualified actuary” for the Task Force to consider.Receive recommendations from the Joint Qualified Actuary (A/B/C) Subgroup regarding a definition of “appointed actuary,” the handling of “inappropriate or unprofessional actuarial work” and a recommended process for regulatory disciplinary actions, if desired.

2) Engage interested parties to assist the Subgroup in assessing the impact of the Joint Qualified Actuary

(A/B/C) Subgroup’s recommendations.

b. Continue dialogue with the Actuarial Board for Counseling and Discipline, the AAA Council on Professionalism and the AAA Casualty Practice Council to address regulator concerns expressed in the 2012 Casualty Actuarial and Statistical (C) Task Force survey about the actuarial guidance and discipline process.

10. Appoint an Actuarial ORSA (C) Subgroup to do the following.—Essential

a. Monitor Own Risk and Solvency Assessment (ORSA) activities, including the activities of the Own Risk and

Solvency Assessment (ORSA) (E) Subgroup, the AAA, the IAA and other relevant associations.

b. Assist the ORSA (E) Subgroup with the quantitative aspects of ORSA.



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c. Provide guidance for the financial and actuarial regulator, as needed.

d. Coordinate training for regulatory actuaries, as needed. 11. Appoint an Actuarial IRIS 11-13 (C) Subgroup to do the following.—Essential

a. Verify the formulas for IRIS ratios 11, 12 and 13 are accurate and efficient calculations of the ratios.

b. Ensure that there is consistency between the IRIS ratio 11-13 formulas and related NAIC documents, including

annual financial statement blanks, Schedule P, the actuarial opinion instructions and the actuarial supplemental procedures of the Financial Analysis Handbook.

c. Establish a range for the usual/unusual values for each IRIS ratio (11-13).

d. Provide a written report to the Task Force. 12. Make a recommendation by July 1, 2015, regarding the ability of SOA members who obtain the SOA fellowship in

general insurance and meet U.S. qualification standards to sign actuarial opinions for NAIC property/casualty annual statements. If appropriate, follow the recommendation with a blanks proposal to allow SOA members who obtain the SOA fellowship in general insurance and meet U.S. qualification standards to sign Property/Casualty Statements of Actuarial Opinion.

NAIC Support Staff: Kris DeFrain/Jennifer Gardner W:\National Meetings\2014\Summer\TF\CasAct\2014 CASTF Revised Charges.doc


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Best Practices for Creating Consumer Online Insurance Policy Resources

1. Purpose

2. Background

3. DOI considerations

4. Methods of collection or retrieval of forms

5. Identifying scope of project

6. File formatting considerations

7. Web format considerations

8. Disclaimers

9. Coverage comparison tools

10. Additional consumer information

11. Maintenance

12. Appendix - Sample forms, web examples

Purpose

This Best Practices Document sets forth the various ways state departments of insurance (DOI) are creating web-basedresources for consumers to access and compare policy forms. The intent is to provide a guide for states that want to create this type of web-based resource with minimal effort and cost. This Document will identify decisions and expenditures likely to be involved and the resources necessary to complete this type of project. Finally, this Best Practices Document provides regulators with template forms to use, suggested disclaimers and examples of completed work product.

Background

Over the course of several NAIC meetings, consumer groups have implored state regulators and insurance industryrepresentatives to make insurance policy forms available to consumers on a pre-sale basis. In addition, giving consumers web-based shopping tools will help preserve a healthy and competitive marketplace as insurers move away from standardized policy forms and language.

Seeking to provide consumers with the opportunity to review and compare actual policy coverages, limits, and exclusions,,certain states’ DOIs have taken action to provide consumers with access to insurance policy forms on their ownwebsites. These states have utilized a variety of approaches to this process. Some states have provided consumers onlineaccess to insurance product filings; others have created a web-based resource with complete policy forms to allow consumersto review policies on a pre-sale basis. As of the date of this draft, Nevada, Missouri, Maine and Oklahoma have launchedweb-based policy resources. At least one state, Texas, has created an online tool that allows consumers to compareinsurance coverages for up to five different insurance policies. California is working on the launch of a similar resource.

DOI considerations

There are a number of factors or trends a DOI should consider before undertaking a project to make policy forms orsummary coverage language public.

How will this project be responsive to consumer expectations?

• Providing online access to coverage forms meets consumer expectations of 24/7 access to financial service information.

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• Online forms allow DOI staff to provide specific references to consumers who are asking specific questions about coverage.

• Coverage forms on the DOI website provide a single source for coverage comparisons versus a website-by-website reviewof specific insurers.

How does the project align with industry trends?

• Industry movement away from standardized coverage provisions heightens the need for consumers to compare coverageforms.

• As insurers move toward e-posting of contracts in lieu of postal delivery, consumers must become comfortable withonline review of documents.

• Insurers create national websites that may be difficult to navigate to find state-specific coverage information.

What will be the utility of this tool to the DOI?

• Reference to coverage forms will assist the regulator in determining whether a complaint is driven by a miscomprehension ofcoverage versus an actual regulatory violation.

• Online policy forms provide staff with a useful reference when communicating with a consumer who is shopping forcoverage or a state policymaker who has a concern about a particular coverage.

• Having online forms publicly available will allow DOIs to more readily respond to public records requests.

• States that have experienced natural disasters know that one post-disaster need is for consumers to have access to policyforms. Maintaining policy forms on a DOI website that are publicly available would provide additional resources toconsumers at the time of their greatest need.

What are the DOI resources necessary for this effort?

• The DOI must first determine the scope of the project including which lines of business or coverages will be included andwhether some or all insurers for each line will be included in the posting of coverage forms.

• The DOI may want to start by including only personal lines of insurance, such as homeowners or private passenger automobile. However, the DOI may want to consider including policy forms for small business owners at a later point in time.

• The DOI must identify the individuals who will be tasked with creating the script for the notices, survey forms, webpagenarratives, and disclaimers and the individuals who will send out requests and follow up with and provide assistance toinsurers to make sure the insurers provide the necessary responses.

• The DOI must determine if the IT/web staff resources are available to create the webpages, program the formatting and set upinsurer access if the insurer is to be involved in the data entry, and post forms.

• If the DOI website is to contain any summary language of key coverages, the determination must be made whether theinsurers or DOI staff will write the summary language. If DOI staff is involved, a significant amount of time will be required,at least initially.

• Whether the summaries are drafted by DOI staff or insurers, it is important to ensure the coverage summaries meet readability standards and that consistent language or terminology is utilized. Please also see the “Coverage Comparison Tools” Section for more information.

• Finally, the DOI must identify the division or unit that will maintain the website and consider how frequently theposted policy forms and information will be updated.

For a DOI, whether to embark on this project can be a big decision. The level of staff effort needed will depend on thenumber of companies and lines of insurance included and whether the project will be limited to a posting of coverageforms or will include information about specific coverage details. Limiting the project to the posting of a single line


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of coverage or to a limited number of the largest insurers in that line can be a way to “ease in” to a larger effort over time.

Methods of collection or retrieval of forms

There are three primary methods by which regulators could collect policy forms for pre-sale public access.

Method 1: DOI Data call

A DOI can initiate a data call to its licensed insurance companies, requesting complete copies of policy forms. However, ifa DOI does not already have clear authority to collect and publish this information, then legislation may first be necessary.

DOI resource consumption will be driven largely by:

• The number of licensed companies receiving the data call, and the lines of insurance covered by the data call.

• The amount of advance communication needed with insurance companies in order to convey and refine the project’spremise, scope, and requirements.

• Website design and maintenance, including organization and posting of policy forms. (TheNevada DOI has reported that this has been the most time consuming element.)

After a DOI posts policy forms collected via a data call, insurance companies might file and make changes to those forms. Therefore the DOI webpage (where forms are posted) should clearly inform consumers that recent policy changesmight not be reflected in the online forms. (See the Disclaimer section for recommended disclaimers).

The Nevada DOI issued a data call to the top ten insurance groups, by market share. It self-imposed a limit of 40 staff hoursper year for data collection and website maintenance. Website development was done in-house, and was therefore negligible.

Method 2: Voluntary Industry Participation

Some state DOIs may have insufficient authority to initiate a data call. For these states, another option is to seek voluntary industry participation via an informal request. If industry participation is indeed voluntary, then the DOI webpage shouldclearly identify the companies that chose not to participate.

The Missouri DOI asked its top 20 carriers, by market share, to voluntarily provide policy forms for public access. Even with a voluntary process, Missouri’s resource includes policy forms for 23 Homeowners’ companies and 24 Private Passenger Auto companies. The process of collecting and posting policy forms required approximately 30 hours of Missouri’s stafftime (mostly for posting the forms). Missouri used its own staff for the entire project, and therefore did not incur additionalIT costs.

Method 3: Use of SERFF Filings

This NAIC online filing system provides a web-based platform for the regulatory review of insurance product filings. Asdiscussed below, using SERFF for public access to policy forms presents a number of challenges and limitations.

SERFF is first and foremost a regulatory tool, created to expedite the regulatory review of insurance product filings. SERFF filings can be voluminous, and are not formatted with the consumer in mind; therefore, they might be difficult for manyconsumers to search and understand. Furthermore, policy changes are sometimes made via the filing of policy endorsements(instead of filing entire policy forms). Therefore, a “current” policy can be based on multiple SERFF filings that were made over a long period of time. Additionally, some states’ record retention laws may limit the availability of older SERFF filings.

Based on these limitations, SERFF is not currently a viable option for facilitating public access to insurance policy forms.The NAIC Transparency and Readability of Consumer Information Working Group recommends that the SERFF ProductSteering Committee (SERFF PSC) research the development of a new SERFF consumer portal to facilitate “user friendly”consumer access to insurance companies’ policy forms and applicable endorsements and to facilitate policy comparisonacross insurance companies. This “user friendly” portal would need to address the access and search issues noted previously.

Developing such functionality within SERFF would provide regulators, industry, and consumers alike with a uniform andcost-effective approach to policy form access. Please see the Maintenance Section for additional information about how


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SERFF could be utilized for collection of policy forms.

Identifying scope of project

Once a DOI has determined how it will collect or retrieve the insurance policy forms, the next consideration will be toidentify the scope of the project.

The scope of the project will be determined by which lines of insurance, what types of policy forms and the number ofinsurance companies that will be included. A more limited scope may cost the DOI less in terms of staff time and ITcosts, provide for easier access and greater usability for consumers and result in less effort and greater participation by theindustry. However, a more limited scope of information available may inadvertently mislead consumers about the size of theinsurance market. The use of clear disclaimers will be very important in terms of consumers understanding what they are andare not reviewing. Please see the Disclaimers section for additional information and important considerations on disclaimers.

The DOI will want to consider a number of factors, based upon their own assessment of the makeup of the insurance market,consumer complaint activity, etc.:

For personal lines of insurance, what products should be included? A list of potential personal lines coverages toconsider follows:

Homeowners;Dwelling;Tenants;Condo-owners;Mobile homeowners;Private passenger automobile;Personal umbrella.

Should forms be obtained for all carriers in a particular market segment, or will a specific number of companies or aspecific percentage of the market suffice? Should the DOI consider including all companies that are active in the market,and what would active mean - those carriers reporting written premium or only those writing new business?

Should just the base policy forms be obtained, or should the DOI collect and post mandatory and/or optionalcoverage endorsements? Should they collect exclusionary endorsements?

To date, several states have made policies available online on a pre-sale basis: Texas, Nevada, Missouri, Maine andOklahoma. These states limited the policies to personal lines of insurance, limited the number of companies to those representing roughly 80% of their respective markets and collected only base policy forms and mandatory endorsements. Atthe time of drafting, California was in the process of building its online resource for homeowners’ insurance. The CaliforniaDepartment has chosen to include every carrier who is reportingpremium volume in the state; excluding those who indicate they are not actively marketing or who are in runoff.

Obviously, there are other options that could be considered within this online policy resource that will dramaticallyimpact the scope of the project. See the Additional Information Section for more about other consumer information that canbe added to this online resource.

File formatting considerations

The value of reviewing policy forms online will be limited if forms are in different formats – or, if the forms are in formatsthat consumers cannot easily access. The following are some recommended best practices for file formatting:

• Regulators should post policy forms in the Adobe Acrobat (.pdf) format. Adobe providesAcrobat software that is available, free of cost, on the internet.

• Policy forms should be published in a searchable Adobe format. This will allow consumers to query terms to find policyprovisions of interest to them.

• A watermark should be included on all documents to deter alteration or misuse of forms.


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• Regulators can include headers and footers in the Adobe document to denote the date of submission or posting, or other pertinent information.

• Regulators may want to consider providing the resource and policy forms in other languages for the non-English speaking populations in their state.

Web format considerations

The format of the webpage will determine how the resource and policy forms are visually presented to consumers.Regulators are encouraged to remember the general principles of good web design and to incorporate the followingsuggestions:

Content and amount of information:

• Regulators should prioritize or simplify the information on the webpage to assist consumers in their evaluation of the information that is important to them.

• Research indicates that consumers do not scroll down a computer screen, so it is important to minimize text.Collapsing text blocks or hyperlinks should be used to reduce the visual “clutter” and minimize text. In a collapsing textblock format, a consumer clicks the company name and the webpage expands to show information or documents. With ahyperlinked format, a consumer clicks the company name and is re- directed to a specific section within the same webpage oris re-directed to another webpage.

• Consumers frequently do not recognize individual underwriting companies. Accordingly, the Working Grouprecommends organization by group or trade name, which is the way most consumers identify insurance companies.

• The IT programming should be scalable so new features, data or other information can be added over time.

Avoid rating or ranking policies or coverage

• Consumer Reports has found if a list is not organized alphabetically, consumers automatically assume the firstitem/company is “best”. Regulators should utilize an alphabetical organization of insurance companies. Alternatively, theyshould include aclear explanation the companies are organized by their market share.

• Rating tools are problematic in policy comparisons. Regulators should avoid ranking because premiums and coverage vary significantly between policies and insurance companies;

• Ratings can mislead consumers if their experience doesn’t match the rating provided and may cause companies tocomplain about the rating of their product.

• Consumers should also be reminded to consider service in terms of complaint history of the company and theircurrent financial rating. If they haven’t already, regulators should consider giving consumers links to where financial rating information can be found.

Test before launch and use a “soft” rollout:

• Stakeholders (companies, producers and consumers) should test the tool before public launch by using a securedwebsite;

• Regulators should initiate a “soft” rollout before publicizing the service to identify any remaining technical issues;

• Even after the formal launch, regulators should continue to publicize the existence of the tool to make sure consumers areaware of its existence.


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Disclaimers

Plain language disclaimers will explain what information is provided and help consumers understand how to use theresource. Below are recommended topics for disclaimers. The Appendix contains recommended disclaimers the WorkingGroup has compiled. Regulators may include other information they feel is pertinent to their state's insurance market.

• The scope of the online resource:

Regulators should explain what companies are or are not included in the resource and why.

If policies are available by individual underwriting company, regulators should disclose what group the company is partof.

If only a portion of the state's market is included in the resource, consumers should be told there are other companiesselling the same insurance.

If only some types of insurance are included, consumers should be told there may be other insurance productsavailable to meet their needs. Regulators should also suggest consumers ask about optional coverages.

Depending on the scope of the resource, regulators should explain which policy forms are included and which arenot.

• Intent of resource. Regulators should disclose that they do not recommend or endorse any of the companies.Consumers should be referred to insurance companies or agents for additional information or guidance.

• Limitations on usage. Regulators should clarify the information provided is for educational purposes and is notintended to be legal advice. Additionally, regulators should disclose copyrighted materials are included.

• Currency of resource. Regulators should disclose how frequently information will be updated and make sureconsumers know insurance companies can change policy forms.

• Guarantees of coverage. Regulators should disclose that the presentation of these policies is not a guarantee ofcoverage. The policy the consumer purchases will determine the consumer’s insurance coverage.

• Basic insurance consumer education. Regulators should provide links to consumer information available on the DOIwebsite. Additionally, regulators should provide links to other consumer education materials, such as the NAICConsumer Guides and Shopping Tools.

Coverage comparison tools

As noted in the introduction to this Best Practices Document, states have taken different approaches to increasetransparency of insurance coverage. Most of this document has focused upon state DOIs making policy forms available toconsumers on a pre-sale basis. This section will focus on an additional tool that helps consumers understand the differencesin coverage between different policy forms.

The Texas Office of Public Insurance Counsel (OPIC) created an online tool to help consumers identify coveragedifferences between insurance policies.

http://www.opic.state.tx.us/policy-comparisons/how-to-use-the-comparison-tool

The OPIC coverage comparison tool allows consumers to simultaneously compare up to five insurance policies - forhomeowners, condo, renters or auto insurance. Consumers tailor the comparison by selecting companies, the specific policyforms or even specific coverages they want to see. The comparison results are provided in a table format that allowsthe consumer to visually compare the coverages side by side. Consumers see definitions of insurance terms when they“mouse over” certain terms in the results.

Investment: OPIC staff prepares the coverage summaries. One staff person completed the reviews of homeowners’, rentersand condo owners’ policy forms for over 100 insurance companies. The initial review of policy forms took 160 staff hours to


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complete; OPIC estimates updates take an average of 3 hours per week to maintain. OPIC relied upon an outsideprogrammer to design and build the website. It took three months to complete at a cost of $10,000. As to maintenance, OPIC estimated the annual costs to be $2,000.

OPIC shared several “lessons learned” their staff identified through the development of the coverage comparison tool:

• Regulators should consider the risk profile of consumers in their state and only include those coverages that areimportant in their state;

• Regulators should facilitate comparison of coverages that differ between companies rather than coverages that are consistent between companies;

• Regulators should provide their own independent analysis of the coverage to provide unbiased and consistentsummary and comparisons;

• Regulators should verify that the coverages and terms of the policy form align with the company’s internal claims handling;

• Regulators should ensure they update the information as needed.

OPIC noted several benefits to state DOIs of this coverage comparison tool in addition to the benefits to consumers. Oncethe comparison tool is built, the DOI has a central repository of coverage information for internal staff use. This saves stafftime and effort by avoiding repeated reviews of policy terms and coverages and ensures consistent policyinterpretation. When subject matter experts leave, much of their policy/product knowledge remains with the tool.

Finally, the coverage comparison tool provides better interaction with consumers and producers. OPIC indicates since itsJanuary 2012 launch, the policy comparison tool has received more than 15,000 web hits per month.

Additional consumer information

Realizing again that this online policy resource presents regulators with an opportunity to reach interested consumers,regulators should consider if there is additional information they want to make available. For instance, the online policyresource could give links to other information available on the DOI website – for example: licensure, company contactinformation and complaint information. Additionally, the DOI should consider providing links to other consumer educationmaterials, such as the NAIC Consumer Guides and Shopping Tools. As noted in the Web Format Consideration section,regulators should remain mindful of the organization and quantity of information so they do not inadvertently overwhelm theconsumer.

Maintenance

Maintenance of the online policy resource should be discussed and finalized before the initial requests are sent out. It willhelp regulators determine the amount of internal resources needed for the project - and it would be helpful for the industry tohave an expectation about when they will be asked for updates. Also, establishing the schedule for updates will allowdisclaimers to be clear when the policy information will be updated for consumers.

This group recommends as a best practice, creating a process that contemplates at least annual updates of the policyforms. A DOI can choose to do more frequent updates - such as every six months - but should consider the resources neededand the filing activity for the industry in their state. Regulators can consider a number of ways to establish a process forroutine updates. They can set a firm schedule of updates, where the DOI initiates a request for updated forms. Alternatively,the regulator should consider establishing a process to allow companies to voluntarily submit updated forms and informationin the interim.

There are two alternatives to a scheduled update process. The DOI could monitor form filing activity and initiate requests forupdated forms on an individual company basis. The DOI could also require that forms for web posting be submitted alongwith filed policy form changes in SERFF. These updated forms could be obtained from SERFF and then postedelectronically to the online policy webpage


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Regardless of the method of collection, it is recommended that the regulator contact insurance companies and obtain a pointof contact for DOI questions about the forms, other company information or updates.

As an additional resource, sample update requests are included in the Appendix to this document.


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Appendix - Sample forms, web examples

Appendix 1 - Sample policy form requests

Appendix 2 - Links to state webpages with online policies

Appendix 3 - Recommended disclaimers

Appendix 4 - Sample update request


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Appendix 1—Sample Request Forms

Mandatory Data Call Regarding Private Passenger Automobile Insurance Policies in Use by the Top Ten Insurance Groups in {State}(Date)

NOTE: Responding to this data call is required pursuant to {regulatory citation} for the top ten insurance groupsin {state} in terms of market share. {Can be omitted if state is collecting through voluntary process}

PURPOSE OF THE DATA CALLThis data call is being submitted to collect copies of the private passenger automobile insurance policies, including anymandatory endorsements, in use by insurance companies of the top ten groups in {state} in terms of market share. Thesepolicies will be published on the Department’s “Auto Insurance Information” Consumer webpage. This new resource will assist consumers in achieving an understanding of the most prevalent private passenger automobile insurance policies in the{state} market.

PLEASE PROVIDE THE FOLLOWING INFORMATION:NAME

TITLE

INSURANCE GROUP

NAIC ID OF GROUP

COMPANIES (list all)

NAIC IDs OF COMPANIES

TELEPHONE #

EMAIL ADDRESS

DATE COMPLETED

Mandatory Data Call Regarding Private Passenger Automobile Insurance Policies in Use by the Top Ten Insurance Groups in {State}

(Date)

NOTE: Responding to this data call is required pursuant to {regulatory citation} for the top ten insurance groups in {state} in terms of market share. {Can be omitted if state is collecting through voluntary process}

PURPOSE OF THE DATA CALL


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This data call is being submitted to collect copies of the private passenger automobile insurance policies, including anymandatory endorsements, in use by insurance companies of the top ten groups in {state} in terms of market share. Thesepolicies will be published on the Department’s “Auto Insurance Information” Consumer webpage. This new resource will assist consumers in achieving an understanding of the most prevalent private passenger automobile insurance policies in the{state} market.


TITLE

INSURANCE GROUP

NAIC ID OF GROUP



TELEPHONE #

EMAIL ADDRESS

DATE COMPLETED

PLEASE ATTACH THE FOLLOWING DOCUMENTS VIA E-MAIL:

1. The most current version of each private passenger automobile insurance policy form offered in {state} by anycompany within your insurance group

2. The most current versions of any mandatory amendatory endorsements applying to each private passenger automobileinsurance policy offered in {state} by any company within your insurance group

3. An exhibit clearly listing which private passenger automobile insurance policy applies for each company and whichmandatory amendatory endorsement applies to each policy.

Important note: All forms must be in a file format that is searchable, such that any individual word within the filecould be located using a search function. We will not accept scanned attachments where searching for individual words is notfacilitated.

DEFINITIONS

Mandatory amendatory endorsement: A form that amends the terms of a policy and which the insured has no option toreject.Important note: This term encompasses both endorsements that are mandatory as a result of law and endorsements that


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are required as a result of a business decision by the insurer.

Private passenger automobile insurance policy: A policy issued for insurance described under the NationalAssociation of Insurance Commissioners (NAIC) Sub-Types of Insurance (Sub-TOIs) 19.0000 and 19.0001.

PLEASE RETURN THE REQUESTED INFORMATION BY E-MAIL BY (Date), TO {email or other contactinformation}.

If you have any questions concerning this request, please contact **** by e-mail at { email address }or by telephone at(***) ***-****.

Mandatory Data Call Regarding Homeowners’ Insurance Policies in Use by the Top Ten Insurance Groups in {state}

Date

NOTE: Responding to this data call is required pursuant to {regulatory citation} for the top ten insurance groups in{state} in terms of market share.

PURPOSE OF THE DATA CALLThis data call is being submitted to collect copies of the homeowners’ insurance policies, including any mandatoryendorsements, in use by insurance companies of the top ten groups in {state} in terms of market share. These policies will be published on the Department’s “Homeowners Insurance Information” Consumer webpage. This new resource will assist consumers in achieving an understanding of the most prevalent homeowners insurance policies in the {state} market.


TITLE

INSURANCE GROUP

NAIC ID OF GROUP



TELEPHONE #

EMAIL ADDRESS

DATE COMPLETED


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PLEASE ATTACH THE FOLLOWING DOCUMENTS VIA E-MAIL:

1. The most current version of each homeowners’ insurance policy form offered in {state} by any company within yourinsurance group

2. The most current versions of any mandatory amendatory endorsements applying to each homeowners’ insurance policyoffered in {state} by any company within your insurance group

3. An exhibit clearly listing which homeowners’ insurance policy applies for each company and which mandatoryamendatory endorsement applies to each policy.

Important note: All forms must be in a file format that is searchable, such that any individual word within the filecould be located using a search function. We will not accept scanned attachments where searching for individual words is notfacilitated.

DEFINITIONS

Mandatory amendatory endorsement: A form that amends the terms of a policy and which the insured has no option toreject.Important note: This term encompasses both endorsements that are mandatory as a result of law and endorsements thatare required as a result of a business decision by the insurer.

Homeowners’ insurance policy: A policy issued for insurance described under the National Association of Insurance Commissioners (NAIC) Type of Insurance (TOI) 4.0. This includes policies for residential owners of stand-alone homes,tenants, and condominium unit-owners.

PLEASE RETURN THE REQUESTED INFORMATION BY E-MAIL BY {date}, TO {email address or othercontact information}.

If you have any questions concerning this request, please contact **** by e-mail at {email address} or by telephone at(***) ***-****.


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Appendix 2—Links to State Department Websites

Texas Office of Public Insurance Counsel (OPIC):

http://www.opic.state.tx.us/policy-comparisons/how-to-use-the-comparison-toolPrivate passenger automobile, homeowners’, condominium and renters and tenant policies

Nevada Division of Insurance, Department of Business and Industry:

http://doi.nv.gov/Consumers/Homeowners-Insurance/Policy-Forms/ Homeowners’ policies

Missouri Department of Insurance, Financial Institutions and Professional Registration (DIFP):

http://insurance.mo.gov/consumers/home/homeowners_policies.phpHomeowners’, renters’ and condominium policies

http://insurance.mo.gov/consumers/auto/auto_policies.phpPrivate passenger automobile policies

Maine Bureau of Insurance, Department of Professional and Financial Regulation:

https://www.maine.gov/pfr/insurance/PC_Compare/Homeowners_index.htmlHomeowners’ policies

https://www.maine.gov/pfr/insurance/PC_Compare/Auto_index.htmlPrivate passenger automobile policies

Oklahoma Insurance Department (OID):

http://www.ok.gov/oid/Consumers/Insurance_Basics/Home_Insurance_Policy_Forms.htmlHomeowners’ and earthquake policies

https://www.ok.gov/oid/Consumers/Insurance_Basics/Auto_Insurance_Policy_Forms.htmlPrivate passenger automobile policies

Appendix 3—Recommended DisclaimersDisclaimers:

The companies listed below are the [top 10/20/etc.] insurance [companies/groups] that write [homeowners/auto] insurance in [state]. The top [10/20/etc. – companies/groups] were chosen based on [market share/reported premiums/NAIC data]. Other companies also sell [homeowners/auto] insurance in [state].

Note - if other companies are included on a voluntary basis beyond the noted selection, the following additional disclaimer should be added: Other companies also volunteered their policies to be listed on this website.

The policies and endorsements available on this page are only the ones the insurance company requires its policyholders to have. You may want to broaden, narrow or change your coverage in other ways. Ask your insurance agent or company about your coverage options.

The number of endorsement forms listed doesn’t necessarily reflect the amount of coverage a policy provides. Some endorsements may reduce the amount coverage a policy provides.

The [Department/Division of Insurance] doesn’t endorse or recommend the policies listed on this page. There likely are other companies and other policies that would meet your insurance needs.

This information is for education only and not intended to be legal advice.


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The information on this page was last updated on [date]. The next update is planned for [month/season of year].

Just because a policy is included in this page does not mean that the insurance company will sell you coverage.

Insurance companies frequently make changes to their policies. The specific policies shown on this page may not be available to you. Nothing here changes the coverage you already have. The content of your policy determines your coverage.

Legal Protections for Departments/Companies

Some of these policy forms may be protected by federal or international copyright laws or contain copyrighted information. The policy forms shouldn’t be copied, transcribed or used for business purposes, without permission of the company. The use of these policies is limited to your personal review and education.

Optional Consumer Education

An insurance group is a corporation that owns multiple insurance companies. Each insurance company sells its own insurance policies, but frequently, the companies advertise under the insurance group name. You may not be eligible for coverage from all of the companies in an insurance group.

Policy endorsements can expand, restrict or change the terms of an insurance policy. They should be reviewed together with the policy form.

There is no such thing as “full coverage” when it comes to insurance. Every insurance policy contains “exclusions” which are things that won’t be covered by the policy. Make sure you read the exclusions carefully to understand what won’t be covered. Ask your agent or company if you have questions.

Buying additional coverage may cost you more up front, but buying additional coverage will also provide you with greater protection. Optional coverages are not shown here, so ask your agent or company about optional coverage(s) that are available.

Always read your insurance policy carefully. If you have questions, ask your agent or company for additional information.

It is important to evaluate more than just the price of insurance. You should shop around to find companies and policies that are best for you.


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Appendix 4—Update Request Forms

Mandatory Data Call Regarding Private Passenger Automobile Insurance Policies in Use by the Top Ten Insurance Groups in {state} – 201* Update

(Date)

NOTE: Responding to this data call is required pursuant to {regulatory citation} for the top ten insurance groupsin {state} in terms of market share.

PURPOSE OF THE DATA CALLThis data call is being submitted to update the information available to the Division regarding the private passengerautomobile insurance policies, including any mandatory endorsements, in use by insurance companies of the top ten groups in {state} in terms of market share. Information as of (date) is available on the following website: {website}


TITLE

INSURANCE GROUP

NAIC ID OF GROUP



TELEPHONE #

EMAIL ADDRESS

DATE COMPLETED

PLEASE RESPOND TO THE ITEMS BELOW.

Item 1. Please examine the policy forms and mandatory amendatory endorsements, specific to ** Insurance Group, posted on the following webpage: {website}

(a) Are any of the forms on the page no longer in use in {state}? If so, please indicate this by listing all such forms in thebox below. (Note: A form that is only issued to renewal business is still considered to be in use and should not be listedbelow. )

(b) Have any new policy forms or mandatory amendatory endorsements been added to any of the private passengerautomobile insurance programs for ** Insurance Group? If so, please list them in the box below and attach searchablePDF files of each such listed form as part of your response. Do not include any forms that are optional for the policyholder.

Item 2. For each of the companies below, please indicate whether this company only writes legacy business or whetherthe company offers products to new business.


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Company Name Select EITHER “Legacy Only” OR “Open to NewBusiness”

DEFINITIONS

Mandatory amendatory endorsement: A form that amends the terms of a policy and which the insured has no option toreject. Important note: This term encompasses both endorsements that are mandatory as a result of law and endorsements thatare required as a result of a business decision by the insurer.

Private passenger automobile insurance policy: A policy issued for insurance described under the NationalAssociation of Insurance Commissioners (NAIC) Sub-Types of Insurance (Sub-TOIs) 19.0000 and 19.0001.

PLEASE RETURN THE REQUESTED INFORMATION BY E-MAIL BY (date), TO {Email address} ONLYELECTRONIC SUBMISSIONS AND ONLY SEARCHABLE PDF FILES WILL BE ACCEPTED.

If you have any questions concerning this request, please contact *** by e-mail at {email} or by telephone at(***) ***-****.


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1

Evaluation Date: XX/XX/XXXX

NAIC Group # 9999 Group NameNAIC Company # 99999 Company Names

9999999999999999999999999999999999999999Insert more rows if needed

Due DatesClaims Reported as of: 1st Report due 5th Report due

2nd Report due 6th Report due3rd Report due 7th Report due4th Report due

Contact PersonName:Title:Telephone:E-Mail:

Instructions:

Definitions:

The appropriate reporting dates will be placed in this area.

Each state should place their own confidentiality statement in the space provided below

"Claims Reported" means all claims reported regardless of whether a payment was made or not.

"Claims Closed with Payment" means all claims closed where a loss payment was made regardless of the date of loss or when the claim was received. Exclude claims closed where loss adjustment expense was incurred but no payment to the insured was made.

"Claims Closed without Payment" means all claims closed where no loss payment was made regardless of the date of loss or when the claims was received. Include claims closed where loss adjustment expense was incurred but no payment to the insured was made.

* The Zip Code data fields are locked down. If there are no claims in a particular Zip Code the insurer will need to report a zero to confirm there are no claims in the particular Zip Code.

* Data should be entered as a number - this has been incorporated into the form - please do not change the form in any way

* Reporting does not apply to Reinsurance claims. Reporting applies solely to Property & Casualty Insurers.* E-mail the report to xxxx@xxxx. Please do not submit printed copies.* Data will only be released in aggregate form on an overall state level.

The respective Department of Insurance will determine updated reporting timeframes and list that information here. Additionally a Department of insurance generally requires insurers to continue to

report updated data until the respective Department of Insurance advises the insurer to cease reporting.

* Numbers that are zeroes should be reported using a zero - do not leave cells blank

State of [STATE NAME]Data Call for [Event]

XXXXXXXXX

XXX

XXX

XXXXXX

XXX

XXX

XXX

* One file is to be submitted for the group.* Data should be inception-to-date as of the evaluation date (this is cumulative data)

Attachment ElevenProperty and Casualty Insurance (C) Committee

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2

Instructions from the State of [STATE NAME]:

"% Closed" is calculated as (Claims Closed with Payment + Claims Closed without Payment)/(Claims Reported).

Please use the space provided below to explain any potential differences in the information you have provided, such as, an unusual decrease in the data reported or any unusually large swings in the data previously reported.

"Paid Loss" means indemnity payments but excludes adjustment expense. Payments should be net of actual salvage and subrogation recoveries. For applicable lines, include losses associated with the loss of use, additional living expense, fair rental value, etc."Case Incurred Loss" means indemnity case reserves plus payments to date. Estimates of IBNR should not be included.

"Residential Property" is defined as any type of personal insurance protecting against loss to owner-occupied property as defined in the standard fire policy and extended coverage thereon, a dwelling policy, a homeowners, tenants and condominium unit-owners multiple peril policy, a mobile homeowners insurance policy, insurance against the perils of vandalism, malicious mischief, burglary or theft, personal liability insurance or any combination of these policy coverages."Commercial Property" is defined as all property not categorized as "Residential Property.""Personal Auto" is defined as liability and physical damage insurance that covers a vehicle driven for personal use. This coverage includes automobiles, motorcycles and recreational vehicles. Experience for these vehicles is reported on lines 19.1, 19.2 and 21.1 of the P&C annual statement.

"Private Flood" is defined as specific insurance coverage against property loss from flooding under any policy or endorsement, issued by any entity other than the NFIP. Flood coverage provided as an additional peril without endorsement under a residential or commercial property policy may be included with the associated property policy.

"Commercial Auto" is defined as liability and physical damage insurance that covers vehicles used for commercial purposes. Experience for these vehicles is reported on lines 19.3, 19.4 and 21.2 of the P&C annual statement.

"Business Interruption" is defined as insurance that covers the loss of income, continuing fixed expenses or extra expenses a business suffers after a disaster while its facility is either closed because of the disaster or in the process of being rebuilt after it. Losses under business interruption coverage should be reported under "Business Interruption" and not under "Commercial Property."

Industry Comments:

"All Other Lines" is defined as any line of business or coverage that is not included in any of the above line/coverage definitions for which claims attributable to the disaster subject to this data call were reported. "All Other Lines" does NOT include mortgage/financial guaranty, title, fidelity, surety, medical malpractice, or professional liability insurance lines of business.

"Workers Compensation" is defined as insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her employer for the tort of negligence. "Workers Compensation" includes associated employers liability coverage. Experience for this type of coverage is reported on line 16 of the P&C annual statement.


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Claims ReportedClaims Closed With Payment

Claims Closed Without Payment Paid Loss

Case Incurred Loss % Closed

Residential Property 0 0 0 0.00 0.00 0.0%Commercial Property 0 0 0 0.00 0.00 0.0%Personal Auto 0 0 0 0.00 0.00 0.0%Commercial Auto 0 0 0 0.00 0.00 0.0%Business Interruption 0 0 0 0.00 0.00 0.0%Workers' Compensation (Optional) 0 0 0 0.00 0.00 0.0%Private Flood (Optional) 0 0 0 0.00 0.00 0.0%All Other Lines 0 0 0 0.00 0.00 0.0%

Totals 0 0 0 0.00 0.00 0.0%

"All Other" shall exclude Workers Compensation, other than property damage claims, and non-Property/Casualty claims.

XX/XX/XXXXClaims as of:

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State of [STATE NAME] Data Call SummaryGroup: XXX

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ALL ALL - - - - - - - 0 City 1

11111 City 222222 City 333333 City 444444 City 555555 City 6

Unknown Unknown

Make sure the data reported is cumulative dataPlease continue to report data even if there are no changes from the prior reporting period

Each individual state can provide the zip codes in their state. These zipcodes can be put into the spreadsheet and protected. The company can then enter information by zip code. Prepopulation of zip codes makes it easier to get correct information as some companies do not provide zip codes. There can also be a

listing for unknown. Note that rows 1 & 2 are also locked. The numbers fill in automatically using the sum of the columns.

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Commercial Property Claims Closed Without

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Attachment TwelveProperty and Casualty Insurance (C) Committee

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Attachment Twelve Property and Casualty Insurance (C) Committee

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W:\National Meetings\2014\Summer\Cmte\C\NAPIA Letter of 8-13-14.pdf




CASUALTY ACTUARIAL AND STATISTICAL (C) TASK FORCE

Casualty Actuarial and Statistical (C) Task Force Aug. 16, 2014, Minutes ......................................................................... 8-149 Casualty Actuarial and Statistical (C) Task Force July 23, 2014, Minutes (Attachment One) ...................................... 8-152 Core Elements of the Actuarial Education Survey (Attachment One-A) ............................................................... 8-153 Casualty Actuarial and Statistical (C) Task Force July 1, 2014, Minutes (Attachment Two) ....................................... 8-185 Appointed Actuary (C) Subgroup 2014 Charges (Attachment Two-A) ................................................................. 8-186 Casualty Actuarial and Statistical (C) Task Force June 10, 2014, Minutes (Attachment Three) .................................. 8-187 Financial Analysis Handbook, Analyst Reference Guide and Actuarial Opinion Supplemental Procedures (Attachment Three-A) ................................................................................................................. 8-189 Memo to Risk-Focused Surveillance (E) Working Group Regarding Comments on Modifications to Financial Condition Examiners Handbook and Financial Analysis Handbook, May 29, 2014 (Attachment Three-B) ..................................................................................................................................... 8-200 Draft Memo Financial Analysis Research and Development (E) Working Group Regarding Response to Referral Regarding Proposed Changes to Certain Reserving IRIS Ratios (Attachment Three-C) ..................................................................................................................................... 8-202 Actuarial IRIS 11–13 (C) Subgroup June 5, 2014, Minutes (Attachment Four) ........................................................... 8-204 Actuarial IRIS 11–13 (C) Subgroup April 30, 2014, Minutes (Attachment Five) ......................................................... 8-205 Actuarial IRIS 11–13 (C) Subgroup April 16, 2014, Minutes (Attachment Six) .......................................................... 8-207 Actuarial Opinion (C) Subgroup July 16, 2014, Minutes (Attachment Seven) ............................................................. 8-208 Actuarial Opinion (C) Subgroup July 2, 2014, Minutes (Attachment Eight) ................................................................ 8-210 Actuarial Opinion (C) Subgroup May 20, 2014, Minutes (Attachment Nine) .............................................................. 8-212 Actuarial Opinion (C) Subgroup May 2, 2014, Minutes (Attachment Ten) .................................................................. 8-214 Actuarial Opinion (C) Subgroup April 23, 2014, Minutes (Attachment Eleven) .......................................................... 8-216 Actuarial Opinion (C) Subgroup April 11, 2014, Minutes (Attachment Twelve) ......................................................... 8-218 Actuarial ORSA (C) Subgroup June 27, 2014, Minutes (Attachment Thirteen) ........................................................... 8-219 Actuarial ORSA (C) Subgroup April 15, 2014, Minutes (Attachment Fourteen) ......................................................... 8-221 Appointed Actuary (C) Subgroup June 19, 2014, Minutes (Attachment Fifteen) ......................................................... 8-223 Appointed Actuary (C) Subgroup June 2, 2014, Minutes (Attachment Sixteen)........................................................... 8-225 Comparison of the Proposed Qualified Actuary Definition, June 2, 2014 (Attachment Sixteen-A) ...................... 8-226 Appointed Actuary (C) Subgroup May 20, 2014, Minutes (Attachment Seventeen) .................................................... 8-227 Various Comments Regarding IRIS Ratio 11, Ratio 12 and Ratio 13 Referral Response (Attachment Eighteen) ............................................................................................................................................ 8-228 Memo to the Financial Analysis Research and Development (E) Working Group Regarding Response to Referral Regarding Proposed Changes to Certain Reserving IRIS Ratios, Aug. 16, 2014 (Attachment Nineteen) ........................................................................................................................................... 8-251 Society of Actuaries (SOA) General Insurance Actuarial Educational Track Action Plan (Attachment Twenty) .............................................................................................................................................. 8-253 Letter from Casualty Actuarial Society (CAS) Regarding the CAS Core Elements of Actuarial Education

Regulatory Guidance on the Statement of Actuarial Opinion for the Year 2014 (Attachment Twenty-Two) .............. 8-264

8-148

Survey and Results, July 16, 2014 (Attachment Twenty-One)............................................................................... 8-262

NAIC Proceedings – Summer 2014


Draft: 8/29/14

Casualty Actuarial and Statistical (C) Task Force Louisville, Kentucky

August 16, 2014 The Casualty Actuarial and Statistical (C) Task Force met in Louisville, KY, Aug. 16, 2014. The following Task Force members participated: James J. Donelon, Chair, represented by Richard Piazza (LA); Mike Kreidler, Vice Chair, represented by Lee Barclay (WA); Lori K. Wing-Heier represented by Sarah McNair-Grove (AK); Jim L. Ridling represented by Charles Angell (AL); Dave Jones represented by Perry Kupferman and Joel Laucher (CA); Kevin M. McCarty represented by Robert H. Lee (FL); Andrew Boron represented by Judy Mottar (IL); Sandy Praeger represented by Mark Birdsall (KS); Therese M. Goldsmith represented by Sandra Castagna (MD); Annette E. Flood represented by Kevin Dyke (MI); Mike Rothman represented by Phil Vigliaturo (MN); Kenneth E. Kobylowski represented by Carl Sornson (NJ); Mary Taylor represented by Tom Botsko (OH); John D. Doak represented by Brian Gabbert (OK); Laura N. Cali (OR); Michael F. Consedine represented by Annette Szady (PA); and Julia Rathgeber represented by Mike Boerner (TX). 1. Adopted its Minutes

Upon a motion by Mr. Dyke, seconded by Mr. Angell, the Task Force adopted its July 23 (Attachment One), July 1 (Attachment Two) and June 10 minutes (Attachment Three); the Actuarial IRIS 11-13 (C) Subgroup’s June 5 (Attachment Four), April 30 (Attachment Five) and April 16 minutes (Attachment Six); the Actuarial Opinion (C) Subgroup’s July 16 (Attachment Seven), July 2 (Attachment Eight), May 20 (Attachment Nine), May 2 (Attachment Ten), April 23 (Attachment Eleven) and April 11 minutes (Attachment Twelve); the Actuarial ORSA (C) Subgroup’s June 27 (Attachment Thirteen) and April 15 minutes (Attachment Fourteen); and the Appointed Actuary (C) Subgroup’s June 19 (Attachment Fifteen), June 2 (Attachment Sixteen) and May 20 minutes (Attachment Seventeen). The Task Force met in regulator-to-regulator session June 24 pursuant to paragraph 3 (specific companies, entities or individuals, including, but not limited to, collaborative financial and market conduct examinations and analysis) of the NAIC Policy Statement on Open Meetings. The Profitability (C) Working Group met in regulator-to-regulator session July 24 and July 2 pursuant to paragraph 3 of the NAIC Policy Statement on Open Meetings. 2. Adopted a Referral Response Letter Regarding IRIS Ratio 11, Ratio 12 and Ratio 13 The Task Force discussed the comment letters received on the draft response letter to the Financial Analysis Research and Development (E) Working Group regarding the Insurance Regulatory Information System (IRIS) ratio 11, ratio 12 and ratio 13 (Attachment Eighteen). Ms. Mottar said the impact of adding adjusting and other loss expense development to the ratios is minimal and there is substantial follow-up work to implement this. She proposed modifying the letter to include a recommendation to not make the changes to the formulas. Mr. Dyke agreed with the revisions to the letter, saying it is not a necessary change at this time. Lisa Slotznick (American Academy of Actuaries—Academy) said most of the members of the Academy’s Committee on Property and Liability Financial Reporting (COPLFR) agree with the recommendation to not make the change. Upon a motion by Ms. Mottar, seconded by Mr. Dyke, the Task Force adopted a referral response letter to the Financial Analysis Research and Development (E) Working Group (Attachment Nineteen). 3. Voted to Expose an Action Plan to Evaluate the SOA’s General Insurance Actuarial Educational Track for a Public

Comment Period Ending Sept. 15 Based on the discussion on the Task Force’s July 23 conference call, Mr. Piazza said he created a draft action plan to evaluate the Society of Actuaries’ (SOA) general insurance actuarial educational track. Mr. Botsko said the Academy has an existing process to determine whether a specific actuary is qualified to sign opinions and he would like to use that process rather than make a decision prematurely judging the success of the track before anyone has completed the examination requirements. Mr. Piazza said he would like to gather additional information. Commissioner Cali said that if the Task Force does want to use the Academy’s evaluation process as an interim step, the Task Force should plan how, upon a critical mass of candidates completing the exams, it will be prepared to make a decision about the qualifications of the group. Mr. Piazza said the Task Force could go beyond the specific charges to determine how to go forward.



Mr. Barclay said that, upon discussion of the Task Force’s charge, the chair of the Property and Casualty Insurance (C) Committee specifically noted that a possible response by the July 1, 2015, deadline could be that the Task Force needs more time. Mr. Barclay said the Task Force does not necessarily have to reach a final decision on everything by the deadline. Mr. Kupferman said that if an independent analyst is used to evaluate the educational track, he suggests that the Task Force consider using an accountant, attorney or a dual fellow (in both the SOA and Casualty Actuarial Society—CAS). Mr. Piazza said there are professional testing organizations that might be able to assist, although they might not have actuaries on their staffs, so that might limit the scope of work they can do. Stuart Klugman (SOA) said the SOA hires independent consultants to evaluate parts of its curriculum. He said it usually takes a consultant 200 hours of work time, at a cost of around $30,000, to review a track. He said the SOA is willing to bear part of the cost, if that is appropriate. Mr. Klugman said that if the actuarial qualification standards are revised to be more specific, then the SOA will incorporate those changes into their curriculum. He suggested the learning objectives be written into the standards rather than specific readings, so that the actuarial societies’ curriculums can be refreshed over time. Mr. Klugman said the SOA does not have detailed demographics of its actuarial candidates. Mr. Piazza asked whether it would be onerous to request the information from the limited number of candidates. Mr. Klugman said it would not be a problem in that the SOA can make the request, but the SOA cannot force a response from the candidates. Ralph Blanchard (CAS) said there is an omission in the action plan, because evaluating an exam is not enough. He said it is important for the writers and graders of the questions to have real-life experience in the topic. He said some candidates answer questions based on actual experience, deviating from a textbook response. Valid responses need to be graded appropriately. Also, a writer or grader of a test might not really understand the textbook because they do not have real-life experience. Upon a motion by Ms. Mottar, seconded by Commissioner Cali, the Task Force voted to expose an action plan to evaluate the SOA’s general insurance actuarial educational track (Attachment Twenty) and the CAS letter on the topic (Attachment Twenty-One) for a public comment period ending Sept. 4. Upon a motion by Mr. Dyke, seconded by Mr. Birdsall, the Task Force voted to extend the exposure period to Sept. 15. Mr. Piazza specifically asked for feedback on the nine action items, including whether it is necessary or unnecessary to perform each action, and where enhanced qualifications might be needed. He said that, in case the Task Force uses an independent party to assess the educational track, he requested advice on who might be able to evaluate the training. 4. Voted to Expose the Annual Regulatory Guidance on the Statement of Actuarial Opinion for a Public Comment Period

Ending Sept. 1

The Actuarial Opinion (C) Subgroup adopted proposed revisions to the 2014 Regulatory Guidance on the Statement of Actuarial Opinion via an e-vote that concluded July 31. Upon a motion by Mr. Dyke, seconded by Mr. Angell, the Task Force voted to expose the annual Regulatory Guidance on the Statement of Actuarial Opinion for a public comment period ending Sept. 1 (Attachment Twenty-Two).

5. Received Reports from its Working Group and Subgroups Commissioner Cali said the Profitability (C) Working Group is on track for completion of the next Report on Profitability by Line by State. Kris DeFrain (NAIC) said the Actuarial Opinion (C) Subgroup hopes the regulatory guidance is adopted prior to the CAS’ Casualty Loss Reserve Seminar in mid-September. Mr. Piazza said the Actuarial ORSA (C) Subgroup is discussing the possibility for regulatory actuaries to observe the 2014 Own Risk and Solvency Assessment (ORSA) pilot project. Mr. Piazza said the regulatory actuary can request to participate in the pilot and see if the state is amenable to the actuary’s participation. The Academy has offered to provide training on the ORSA. He added that the NAIC has hired an enterprise risk management expert, Elisabetta Russo. Mr. Piazza said the Task Force will await action by the Financial Analysis Research and Development (E) Working Group on the IRIS ratios to decide whether to disband the Actuarial IRIS 11–13 (C) Subgroup at the Fall National Meeting.



Mr. Dyke said the Appointed Actuary (C) Subgroup will continue discussion of the goals of the qualified actuary verification process and will provide comment on the Academy’s draft attestation form. Mr. Barclay said the Statistical (C) Subgroup’s activities will focus on the annual reports toward the end of each year. He said that if the Property and Casualty Insurance (C) Committee adopts a catastrophe data reporting form, the Subgroup should consider including that form in the Statistical Handbook of Data Available to Insurance Regulators. 6. Heard Reports from the Academy Ms. Slotznick said COPLFR is working on the law manual update, which includes the compendium of state laws. She said the regulators’ help to develop the compendium is beneficial because regulators are more familiar with their states’ laws relative to the Statement of Actuarial Opinion, whereas others can find it more difficult to find details about captives and other issues that vary state to state. Mr. Piazza encouraged the states to respond. Ms. Slotznick said COPLFR is also working on the reserve practice note (which includes the regulatory guidance document), the opinion writers’ seminar and an issues brief for audit committees. Tricia Matson (Actuarial Standards Board—ASB) said the ASB has numerous revisions to standards, including some new standards. The ASB will discuss a ratemaking exposure draft in September and a new ORSA standard in December. Some slight changes need to be made to reserve standards for consistency. A final modeling standard is scheduled for potential consideration at the September meeting, with the related catastrophe modeling standard being updated at the same time. The ASB is beginning to assess the standard regarding assisting auditors and examiners. John Purple (Actuarial Board for Counseling and Discipline—ABCD) said the ABCD had 31 cases under review in the second quarter. Most cases were pension cases; four were P/C cases. Requests for guidance are trending upward and will probably reach 100 requests this calendar year. About one-third of requests for guidance are typically P/C related. Many requests are related to Precept 13 of the Code of Professional Conduct. Mary Miller (Academy) presented the Academy’s draft “U.S. Qualification Standards Attestation” document. She said the intent is for actuaries to be able to present their qualifications to regulators and the public. Employers could also use the document to track continuing education for their staff. Regulators might want the boards and audit committees to review in their appointment process of appointed actuaries. The document is ordered the same as the qualification standards. A publicly available database will be created by the Academy and available for optional actuarial use. She expects to present a revised document at the Fall National Meeting. The Appointed Actuary (C) Subgroup will draft a comment letter for the Task Force to consider sending to the Academy. Having no further business, the Casualty Actuarial and Statistical (C) Task Force adjourned. W:\National Meetings\2014\Summer\TF\CasAct\08-CasActTFmin.docx


Attachment One Casualty Actuarial and Statistical (C) Task Force

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Draft: 8/12/14 Casualty Actuarial and Statistical (C) Task Force

Conference Call July 23, 2014

The Casualty Actuarial and Statistical (C) Task Force met via conference call July 23, 2014. The following Task Force members participated: James J. Donelon, Chair, represented by Richard Piazza (LA); Mike Kreidler, Vice Chair, represented by Lee Barclay (WA); Dave Jones represented by Ron Dahlquist and Giovanni Muzzarelli (CA); Kevin M. McCarty represented by Howard Eagelfeld (FL); Andrew Boron represented by Judy Mottar (IL); Therese M. Goldsmith represented by Walter Dabrowski (MD); Mike Rothman represented by Phil Vigliaturo (MN); Roger A. Sevigny represented by Sally MacFadden (NH); Kenneth E. Kobylowski represented by Boris Privman and Carl Sornson (NJ); Mary Taylor represented by Tom Botsko (OH); John D. Doak represented by Daniel Figueroa (OK); Laura N. Cali represented by David Dahl (OR); Michael F. Consedine represented by Melissa L. Greiner (PA); and Julia Rathgeber represented by Brock Childs, Alberto Garza and Jennifer Wu (TX). Also participating were: Ramona Lee (IA); and Tomasz Serbinowski (UT). 1. Discussed the Core Elements of the Actuarial Education Survey Mr. Piazza said the purpose of the call is to focus on the charge from the C Committee regarding the Society of Actuaries’ (SOA) new general insurance educational track. The charge is to: “Make a recommendation by July 1, 2015, regarding the ability of SOA members who obtain the SOA fellowship in general insurance and meet U.S. qualification standards to sign actuarial opinions for NAIC property/casualty annual statements. If appropriate, follow the recommendation with a blanks proposal to allow SOA members who obtain the SOA fellowship in general insurance and meet U.S. qualification standards to sign Property/Casualty Statements of Actuarial Opinion.” Mr. Piazza said he conducted a survey to gather regulators’ current opinions about some specific issues regarding this charge (Attachment One-A). He said he did not capture all issues, but he focused on the priority issues regulators previously expressed. The Task Force discussed each item in the survey and separated the ideas into two categories: 1) top priority or front burner activity; and 2) lower priority or back burner activity. The Task Force decided the following items would be top priority: 1, 2, 4, 10, 11, 12a, 12b, 12c, 16 and 18. Items 3, 15, 17 and 19 would be lower priority. Items 5, 6, 7, 8, 13 and 14 might be done as a group. Item 9 will be done if the SOA has already done this, and item 20 might be done if specific discussion is identified. Mr. Barclay said he would like to include criteria about how well the SOA candidates are received in the property/casualty insurance industry. Mr. Piazza said he would draft a preliminary action plan, including a start to a list of what a regulator would expect an actuary to be or know when they sign a Statement of Actuarial Opinion, and expose it at the Summer National Meeting for comment. Mr. Piazza said his aim for this project is to gather information in 2014 and finalize a response to the charge in the first half of 2015. Having no further business, the Casualty Actuarial and Statistical (C) Task Force adjourned. W:\National Meetings\2014\Summer\TF\CASTF\7-23 CASTF min.docx


Attachment One-A Casualty Actuarial and Statistical (C) Task Force

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Attachment Two Casualty Actuarial and Statistical (C) Task Force

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Draft: 8/12/14 Casualty Actuarial and Statistical (C) Task Force

Conference Call July 1, 2014

The Casualty Actuarial and Statistical (C) Task Force met via conference call July 1, 2014. The following Task Force members participated: James J. Donelon, Chair, represented by Richard Piazza (LA); Mike Kreidler, Vice Chair, represented by Lee Barclay (WA); Lori K. Wing-Heier represented by Sarah McNair-Grove (AK); Jim L. Ridling represented by Charles Angell (AL); Thomas B. Leonardi represented by Susan Gozzo Andrews (CT); Kevin M. McCarty represented by Howard Eagelfeld (FL); Andrew Boron represented by Judy Mottar (IL); Therese M. Goldsmith represented by Walter Dabrowski (MD); Ann Flood represented by Kevin Dyke (MI); Mike Rothman represented by Phil Vigliaturo (MN); Kenneth E. Kobylowski represented by Boris Privman and Carl Sornson (NJ); Mary Taylor represented by Tom Botsko (OH); John D. Doak represented by Frank Stone (OK); Laura N. Cali represented by David Dahl (OR); Michael F. Consedine represented by Melissa L. Greiner and Stephanie Ohnmacht (PA); and Julia Rathgeber represented by Steven White and Jennifer Wu (TX). Also participating were: Karen Adams (AZ); Patrick Knepler (CO); Sally MacFadden (NH); Leslie Jones (SC); and Tomasz Serbinowski (UT). 1. Discussed the Results of the Core Elements of the Actuarial Education Survey Mr. Piazza said he expects to distribute the survey responses soon and will schedule a meeting via conference call to discuss. 2. Adopted Revised Charges for the Appointed Actuary (C) Subgroup

Upon motion by Mr. Dyke, seconded by Mr. Stone, the Task Force adopted revised charges for the Appointed Actuary (C) Subgroup (Attachment Two-A).

3. Adopted a Request to Withdraw the Model Law Development Request for Model #745

Mr. Dyke said with a shift to focusing on the definition of “qualified actuary” and the work with the American Academy of Actuaries (AAA) to improve the Actuarial Board for Counseling and Discipline (ABCD) process, he recommends evaluating the success of the future ABCD process before determining whether to make changes to the Property and Casualty Actuarial Opinion Model Law (#745). Upon motion by Mr. Dyke, seconded by Mr. Barclay, the Task Force adopted a request to withdraw the model law development request regarding Model #745 without making any modifications to the model law at this time. 4. Heard a Report from the AAA Lisa Slotznick (American Academy of Actuaries—AAA) said the Committee on Property and Liability Financial Reporting is updating various annual publications. She said the AAA’s Law Manual supports appointed actuaries writing the regulatory Statements of Actuarial Opinion. The AAA asks each state to quickly and accurately respond to a questionnaire about whether the state’s prior year’s laws have changed. Ms. Slotznick said the response time has been shortened this year. She said the law manual was started in the days before the Internet, so the AAA continues to discuss whether the manual is still as useful as it was in the past. The AAA finds it is still useful because there are sometimes obscure places to find the laws. The committee asks regulators whether they believe this is the best way to continue communication about laws. Mr. Piazza offered NAIC assistance to reach out to the states that have not yet responded. Having no further business, the Casualty Actuarial and Statistical (C) Task Force adjourned. W:\National Meetings\2014\Summer\TF\CASTF\7-1 CASTF min.docx


2014 CASTF Charge Appointed Actuary Subgroup*

Proposed Changes

Appoint an Appointed Actuary (C) Subgroup to do the following.—Important a. Receive the report of the Joint Qualified Actuary (A/B/C) Subgroup regarding a uniform definition of

“qualified actuary” for actuaries signing prescribed NAIC Statements of Actuarial Opinion and consider any necessary changes to the definition in the Property & Casualty Annual Statement Instructions,approved Request for Model Law Development for the Property and Casualty Actuarial Opinion Model Law (#745) to consider granting authority to commissioners to take action against actuaries who provide inaccurate, incomplete or otherwise poor-quality actuarial opinions and provide a recommendation to the Task Force for changes to Model #745, through the following activities:

1) Receive recommendations from the Joint Qualified Actuary (A/B/C) Subgroup regarding a definition of “appointed actuary,” Identify and communicate to the Task Force any concerns, challenges, and implementation issues, including if appropriate an alternative definition of “qualified actuary” for the Task Force to consider.the handling of “inappropriate or unprofessional actuarial work” and a recommended process for regulatory disciplinary actions, if desired.

2) Engage interested parties to assist the Subgroup in assessing the impact of the Joint Qualified Actuary (A/B/C) Subgroup’s recommendations.

b. Continue dialogue with the Actuarial Board for Counseling and Discipline, the AAA Council on Professionalism and the AAA Casualty Practice Council to address regulator concerns expressed in the 2012 Casualty Actuarial and Statistical (C) Task Force survey about the actuarial guidance and discipline process.

*Charge#9 from CASTF approved charges for 2014

W:\\National Meetings\2014\Summer\TF\CasAct\ApptActuary\2014 Appt Actuary Charges.docx

Attachment Two-A Casualty Actuarial and Statistical (C) Task Force

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Attachment Three Casualty Actuarial and Statistical (C) Task Force

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Draft: 8/11/14

Casualty Actuarial and Statistical (C) Task Force Conference Call June 10, 2014

The Casualty Actuarial and Statistical (C) Task Force met via conference call June 10, 2014. The following Task Force members participated: James J. Donelon, Chair, represented by Richard Piazza (LA); Mike Kreidler, Vice Chair, represented by Lee Barclay (WA); Lori K. Wing-Heier represented by Sarah McNair-Grove (AK); Jim L. Ridling represented by Charles Angell (AL); Dave Jones represented by Giovanni Muzzarelli (CA); Thomas B. Leonardi represented by Susan Gozzo Andrews (CT); Andrew Boron represented by Judy Mottar (IL); Therese M. Goldsmith represented by Walter Dabrowski (MD); Annette E. Flood represented by Kevin Dyke (MI); Mike Rothman represented by Phil Vigliaturo (MN); Kenneth E. Kobylowski represented by Boris Privman and Carl Sornson (NJ); Mary Taylor represented by Tom Botsko and Brad Schroer (OH); John D. Doak represented by Frank Stone (OK); Laura N. Cali represented by David Dahl and Suna Oh (OR); Michael F. Consedine represented by Melissa L. Greiner and Stephanie Ohnmacht (PA); and Julia Rathgeber represented by J’ne Byckovski, Brock Childs, Nicole Elliott, Alberto Garza and Jennifer Wu (TX). Also participating were: Steve Ostlund (AL); Karen Adams (AZ); Ramona Lee (IA); Julie Lederer (MO); Chrystal Bartuska (ND); Gordon Hay (NE); Sally MacFadden (NH); Gloria Huberman, Sak-man Luk and Anthony Yoder (NY); Gennady Stolyarov (NV); and Tomasz Serbinowski (UT). 1. Discussed Receipt of the CAS Preliminary Version of the Revised Draft of the CAS Statement of Principles on

Ratemaking Mr. Piazza said that in response to exposure of revisions to the Casualty Actuarial Society’s (CAS) Statement of Principles on Ratemaking, the Task Force provided significant comments on June 5, 2013, expressing concerns about: 1) the elimination of standards language from the principles prior to release of a related Actuarial Standards of Practice for ratemaking; and 2) the shift in emphasis from loss-based ratemaking principles to principles that encompass subjective market-driven ratemaking. The CAS was introducing the concept of a final rate in the actuarial ratemaking principles, and the Task Force suggested that the CAS needs to be able to explain how this concept will not conflict with state rating laws that require rates not to be excessive, inadequate and unfairly discriminatory. The CAS is getting close to publicly releasing a revised draft of the Ratemaking Principles. Regarding the Task Force’s first issue, the CAS said that some of its members who are working on these principles will be working with the Actuarial Standards Board (ASB) to draft established standards. Regarding the Task Force’s second issue, the CAS is revising its principles to remove the concept of a final rate and now would note that the actuary has a further role in development of pricing. When the CAS publicly releases its re-draft, the Task Force will publicly discuss and comment on the document. After discussion, Mr. Piazza said that he will submit an informal compilation of comments received from individual regulators, but he will make it clear that the Task Force has not yet discussed the issue and reserves the right to comment during the CAS’ public exposure period. Chris Carlson (CAS) said that informal comments by individual regulators are welcome now with expectation of official NAIC comments upon public release of the CAS document. J. Robert Hunter (Consumer Federation of America—CFA) asked for letters he wrote to be part of the minutes. Mr. Piazza said the Task Force is not addressing the issue and will defer receipt of the letters until the CAS document is publicly disclosed and the subject is on the Task Force agenda. Birny Birnbaum (Center for Economic Justice—CEJ) agreed with Mr. Hunter, saying the process seems odd. Mr. Birnbaum asked about the impact of the CAS adopting principles that are not in compliance with state rating laws. Mr. Piazza said the Task Force would need to solicit legal advice to answer that question. 2. Announced Results of the E-Vote on the Proposed Statement of Actuarial Opinion Revisions to the Financial Analysis

Handbook Mr. Piazza said that, on May 30, the Task Force adopted a proposal via e-vote (Attachment Three-A) to propose changes to the Financial Analysis Handbook (E) Working Group regarding the Analyst Reference Guide and Actuarial Opinion Supplemental Procedures of the Financial Analysis Handbook (Attachment Three-B). The Financial Analysis Handbook (E) Working Group will consider whether to make any final changes to the Financial Analysis Handbook.


Attachment Three Casualty Actuarial and Statistical (C) Task Force

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3. Referred a Comment Letter Regarding ORSA Changes to the Financial Handbooks

Mr. Piazza said the Risk-Focused Surveillance (E) Working Group is meeting via conference call June 13 to discuss incorporation of an Own Risk and Solvency Assessment (ORSA) review into the Financial Condition Examiners Handbook and the Financial Analysis Handbook. At the Working Group’s request, the Actuarial ORSA (C) Subgroup drafted some comments regarding the changes. Upon a motion by Mr. Stone, seconded by Mr. Dahl, the Task Force agreed to send the comment letter to the Risk-Focused Surveillance (E) Working Group (Attachment Three-C).

4. Voted to Expose the Referral Response Regarding IRIS Ratios 11, 12 and 13

The Financial Analysis Research and Development (E) Working Group proposed changes to the formulas and explanations of the Insurance Regulatory Information System (IRIS) property/casualty ratio 11, ratio 12 and ratio 13. The main change is the addition of adjusting and other (A&O) development into the ratios, which is in line with the title of these ratios that say that all loss expense development is included in these ratios. Based on the Task Force’s comment letter, the Working Group made its Sept. 27, 2013, referral to the Task Force. The Actuarial IRIS 11-13 (C) Subgroup submitted a draft response to the referral (Attachment Three-D).

Ms. Mottar said the letter accurately reflects the Subgroup’s work. However, as expressed during the Subgroup’s discussions, she said she still has significant concerns. She said that upon completion of research and identification of the multiple changes that would need to be made for consistency purposes, Illinois would prefer the formulas not to be changed. Ms. Mottar said the referral did not specifically ask for endorsement of adding A&O development, but she would prefer that the Task Force provide its expert advice. Ms. Elliott agreed that an expert opinion should be provided on whether to include the A&O expense development. Mr. Dyke supports the letter. Mr. Barclay said the statement about the Task Force supporting the formulas might be viewed as the recommendation. Ms. Wu said that the Subgroup agreed that the formulas proposed are the most accurate without additional changes to data reporting requirements.

Upon a motion by Ms. Mottar, seconded by Mr. Dyke, the Task Force voted to expose the letter for a public comment period ending July 10.

5. Heard a Report from the AAA

Lisa Slotznick (American Academy of Actuaries—AAA) said the Committee on Property and Liability Financial Reporting is updating the 2007 Issues Brief about how auditors use input from actuaries, hoping to present a redraft at the CAS’ Casualty Loss Reserve Seminar. The committee is also preparing for the Statement of Actuarial Opinion Writers’ Seminar to be held in September.

6. Discussed the Core Elements of Actuarial Education

Mr. Piazza asked regulators to complete his survey by June 20. He said the Task Force would discuss future action on its next conference call.

7. Disbanded the Joint Qualified Actuary (A/B/C) Subgroup

Mr. Piazza recommended disbanding the Joint Qualified Actuary (A/B/C) Subgroup. He said that once the AAA develops its recommendations for the verification process as mentioned in the currently proposed definitions of a “qualified actuary,” the Task Force would work with the Life Actuarial (A) Task Force and the Health Actuarial (B) Task Force to determine next steps. Upon a motion by Mr. Stone, seconded by Mr. Dyke, the Task Force disbanded the Joint Qualified Actuary (A/B/C) Subgroup.

8. Planned a Regulator-to-Regulator Call to Discuss Specific Statements of Actuarial Opinion

The Task Force decided to meet via conference call in regulator-to-regulator session to discuss specific Statements of Actuarial Opinion and related regulatory concerns. Mr. Piazza asked Ms. Greiner to lead the discussion on that call. 9. Received an Update from the Appointed Actuary (C) Subgroup

Mr. Dyke said the Appointed Actuary (C) Subgroup is considering asking to withdraw the model law development request regarding the Property and Casualty Actuarial Opinion Model Law (#745) with no modification. The Subgroup is also investigating ways for the states to be able to report actuaries to the Actuarial Board for Counseling and Discipline.

Having no further business, the Casualty Actuarial and Statistical (C) Task Force adjourned. W:\National Meetings\2014\Summer\TF\CASTF\6-10 CASTF min.docx


Financial Analysis Handbook – 20134 Annual / 20145 Quarterly

IV. Analyst Reference Guide – C.1. Statement of Actuarial Opinion & Actuarial Opinion Summary (Property/Casualty and Title Insurers)


Overview A. Actuarial Opinion

The Statement of Actuarial Opinion (Opinion) can be a valuable piece of information in determining whether the insurer requires further regulatory attention. While the Annual Statement Instructions (Instructions) as a whole are directed to the insurer, Section 1 identifies the specific responsibilities of the insurer regarding appointment of a qualified actuary, the definition of a qualified actuary, required notification to regulators and exemptions from the requirement. Most of this is straightforward. The Casualty Actuarial and Statistical (C) Task Force has defined a qualified actuary with consideration of Actuarial Standards of Practice and a Code of Conduct that bind members of identified professional organizations. With respect to filing exemptions, it should be noted that a commissioner is not obligated to grant an exemption merely due to the presence of one or more conditions. Consideration of an exemption request should include the size and uncertainty in the reserves, both the direct and assumed as well as the net. Another thing to keep in mind is that theThe Actuarial Opinion is not independent from the Annual Financial Statement itself. Everything that follows in describing the Opinion should be expected to be consistent with all other elements of the Annual Financial Statement, including but not limited to the General Interrogatories, Notes to Financial Statements, MD&A, and Independent Auditors’ Report. (Note that the Annual Financial Statement is also referred to as the Annual Statement within this reference guide.) The remainder of the Instructions provides guidance to the company and its appointed actuary regarding expectations around the reported information that is expected. Section 2 provides that the Opinion should contain four clearly designated sections: Identification, Scope, Opinion, and Relevant Comments. While illustrative language is provided in the instructionsInstructions, specific language is not required, provided the information is clearly conveyed. Section 3 (Identification) is self-explanatory. No appointed actuary should have difficulty providing clarity. The actuary is rendering his or her opinion as an individual, not the firm the actuary represents. Section 4 (Scope) is similarly self-explanatory. Required reserve amounts upon which the Opinion is based are consolidated into Exhibit A. Required disclosure amounts are consolidated into Exhibit B. The exhibit structure lends itself to easier identification of zero and non-zero amounts and comparison to amounts in the Annual Financial Statement. Section 4 also calls requires for the actuary to identify disclose the name and affiliation of the person(s) upon whom the actuary relied upon for the data used in the reserve analysis. This reliance is expected to be based on an a single individual(s) from the company, that with bothhas both authority and responsibility for relevant data and data systems of the company. A company appointed actuary may choose to accept responsibility for the data without identifying reliance on another company person. If someone from the regulated insurance entity is not named here, Deviation from this requirement should be called to the attention of the insurer, and the analyst should request the insurer to provide an clarifying amendment should be provided. Section 5 (Opinion) presents the first opportunity for the regulator to see a need for immediate attention. The illustrative language is not required. The actuary is required to explicitly identify his or her opinion within one of five categories. The illustrative language is based on the most commonly rendered opinion—that the carried

Attachment Three-ACasualty Actuarial and Statistical (C) Task Force

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reserves make a reasonable provision. Should any other category of opinion be presented, the opinion calls for immediate further attention and determination of the need for follow-up action. Section 6 (Relevant Comments) identifies specific areas in which the actuary is required to comment. The purpose of this requirement is to provide the regulator with information that numbers alone cannot convey. The most important relevant comment relates to the Risks of Material Adverse Deviation (RMAD). The appointed actuary should provide explanation of the major risk factors affecting the company. Then tThe actuary must explicitly state whether or not he or she reasonably believes there arethose significant risks and uncertainties that could result in material adverse deviation. Note that on average nearly 70 percent of companies have reported “No” for RMAD as chosen by the appointed actuary in Exhibit B. The actuary must also identify the materiality standard and the basis for establishing it. Actuaries oOften choose a the materiality standard chosen will to be a percentage of surplus or reserves, but other standards may also be appropriate. The standard chosen helps to quantify the degree of risk the appointed actuary believes to be present in the company’s reserves. The standard may vary based on the solvency position of the insurer. The materiality section of the Preamble to the Accounting Practices and Procedures Manual contains excellent guidance regarding the selection of a materiality threshold. Using this guidance, an actuary for two companies with comparable business and comparable reserves could have different RMAD statements. For example, an insurer with an RBC ratio of 205 percent could possibly need only a small change in reserves to put it in Company Action Level, whereas a similar insurer with an RBC of 600 percent may be seen viewed as having little or no RMAD. If the Company is subject to Risk-Based Capital (RBC) reporting requirements, the following calculation is suggested for use as a Bright Line Indicator regarding the need for an RMAD statement:

If 10 percent of the insurer’s net loss and loss adjustment expense (LAE) reserves is greater than the difference between the Ttotal Aadjusted capital and Company Action Level capital, the appointed actuary should be asked to explain why they do not feel there is an RMAD.

A similar comparison could be made between 10 percent of the insurer’s net reserves and the size of their underwriting or operating income. It should be noted that the RMAD might increase with more volatile exposures such as asbestos and environmental, excess casualty, and/or other commercial lines. Collectively the relevant comments should reveal exposures, transactions, historical developments, processes, and uncertainty that contribute to the appointed actuary’s opinion. Some of the comments call for judgment on the part of the actuary. The disclosures in Exhibit B are required to ensure that the actuary acknowledges consideration of certain items in reaching his or her opinion. Section 7 (the Actuarial Report) provides guidance for both the actuary (regarding required content of the report) and for the regulator (regarding what to expect from the report if more information is desired). The NAIC places a high level of trust in the work of a qualified actuary. The presumption is that professional qualifications and adherence to the Actuarial Standards of Practice and Code of Conduct promulgated by the American Academy of Actuaries result in a work product that assists the regulator in understanding a balance sheet entry that is management’s best estimate, but an estimate that can have considerable uncertainty. That trust is only justified if the actuary can readily provide support for the opinion provided. That support should be available in the Actuarial Report. Section 8 (Signature) is self-explanatory.


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Section 9 (Error Correction) addresses infrequent events or corrections that occur at a later date. No action is necessary as part of Opinion review. Should an appointed actuary provide such notification, the analyst should immediate immediately attention should be given to such information to determine if additional regulatory action is needed. Special Requirements for Pooled Companies These requirements are also identified in Section 1C of the Annual Statement Instructions and

These instructions apply only only to insurers who are participants to intercompany pooling agreements in which the lead company retains 100 percent of the pooled reserves and the other members of the pool retain zero percent. In this situation, the Schedule P of the zero percent companies is blank, and rendering an Opinion on non-existent values is virtually useless to the regulator. For these situations only, the actuary is directed to prepare an Opinion on the Pool, which is to be filed with the Annual Statement of each of the pooled companies. Exhibits A and B for each company in the pool should reflect values specific to the individual the company’s share of the pool and should reconcile to values filed with the Annual Statement. For companies whose pool participation is 0%, (i.e. no reported Schedule P data), Additionally, the actuary is directed to write an Opinion that reads similar to that of the lead company. should prepare Exhibits A and B of the lead company Pool toshould be filed as an addendum to the Opinions of the zero 0% percent pool companies. This will allow for proper data submission for each company in the pPool while accommodating the greatest distribution of the relevant values for the Poolproviding additional meaningful data to the analyst. The Instructions include specific answers for the Exhibit B questions regarding materiality and the RMAD. Note the distinction between pooling with a 100 percent lead company with no retrocession and ceding 100 percent via a quota share agreement. These affiliate agreements must be approved by the regulator as either an intercompany pooling arrangement or a quota-share reinsurance agreement. The proper financial reporting is dependent on the approved filings, regardless of how company management regards their operating platform. B. Actuarial Opinion Summary

The Actuarial Opinion Summary (Summary) is a confidential document which provides valuable insight to an appointed actuary’s conclusion regarding the reasonability of the carried reserves. Nearly all Oopinions submitted provide a qualitative statement that the carried reserves are “reasonable.” The Summary provides quantitative information to more clearly show the analyst what how the appointed actuary means in reacheding that conclusion. With that addedthe additional information provided in the Summary, the analyst can make a judgment regarding the need for further regulatory attention. As with the Opinion, the Annual Statement Instructions for the Actuarial Opinion Summary are directed to the insurer. Section 1 of Supplemental Instructions 23-1 (Actuarial Opinion Summary Supplement) identifies the specific responsibilities of the insurer regarding this document. The analyst should first determine if the domiciliary state requires the Summary. If so, review of the Summary should be completed reviewed in tandem with the Opinion and factored into recommendations for the decision for further actionregulatory attention regarding the Statement of Actuarial Opinion. Sections 2 restates regulatory expectations that the Summary beis consistent with professional standards that guide a “qualified actuary” as defined in the Opinion Instructions.


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Section 3 restates exemption considerations. Section 4 addresses confidentiality. As noted above, the analyst should have advanced knowledge of the state’s requirements for submission of the Summary. Section 5 provides guidance to the company and its appointed actuary regarding the specific content that is expected in the Summary. This is the quantitative information that the analyst should focus onreview in order to develop a recommendation for further regulatory action. Subsections A, B, C and D in combination call for a comparison that can be presented in a simple table. Regardless of how the information is presented, the intention is to translate forprovide to the regulator the qualitative/subjective opinion regarding “reasonableness” into a quantitative/objective financial comparison. Subsections A and B require the actuary to show in the comparisoncompare their point estimate and/or , range of estimates (whatever is calculated), or both, in accordance with what they have calculated. The comparison is always made to the carried loss and loss adjustment expense reserves. The actuary must compare these estimates, on both a net and gross of reinsurance basis. These carried amounts should agree with the amounts presented in Exhibit A of the Opinion and the Annual Financial Statement. The analyst should note that the amounts provided in the Summary will likely be theare commonly presented as combined Loss & Loss Adjustment Expense amounts (Exhibit A Lines 1 & 2 for Net; Lines 3 & 4 for Direct & Assumed). If the amounts do not agree, that may be a first signthis could be an indication of weak controls within the reserving or financial reporting process of the company. Regardless of the source of the error, it is an indication of a lapse in communication between the appointed actuary and the company and requires follow up.. The comparisons will likely result in one of the following situations. Note thatT the tables in these illustrations show both point and range estimates by the actuary. The actuary is not required to calculate both, but is regulators expect actuaries required to report both whenwhatever is calculated. Note that it has been observed that approximately 50 percent of the time, the actuary has calculated a point estimate only, whereas the remaining appointed actuaries have calculated both the point estimate and a range. A small percentage of appointed actuaries have calculated a range only. Situation 1: Actuary’s Point Estimate or Range Midpoint = Carried Reserves

Net Loss + LAE Reserves

Direct & Assumed Loss + LAE Reserves

Low Point High Low Point High B. Actuary’s Estimates 17,000 20,000 23,000 21,500 25,000 28,000 C. Company Carried Reserves 20,000 25,000 D. Difference 3,000 0 (3,000) 3,500 0 (3,000)

ThTheis example above is the simplest, but not the most common (approximately one in five cases for non-zero reserves), and. It can represent a situation in which the company relies completely on the appointed actuary and by carries carrying his or her estimate. In that case there is no difference between the actuary’s estimate and the carried amount. There may be small variations on this case in which the actuary’s estimate is “close to” the company carried reserves. The question facing the analyst needs to determineis “How close is close enough?” With Because the regulatory emphasis is on financial solvency, an initial consideration might be the impact on surplus of management’s decision to carry an amount different from the actuary’s estimate. If the carried reserves are higher than the actuary’s estimate, then surplus is more conservatively stated. Further action is generally not necessary.


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Situation 2: Actuary’s Point Estimate or Range Midpoint < Carried Reserves



Low Point High Low Point High B. Actuary’s Point Estimates 17,000 20,000 23,000 21,500 25,000 28,000 C. Company Carried Reserves 21,000 26,500 D. Difference 4,000 1,000 (2,000) 5,000 1,500 (1,500)

In this case, (approximately half of all cases), if a “Reasonable” opinion is issued; the company is carrying a reserve amount greater than the actuary’s recommended point estimate or is carrying reserves in the high end of the actuary’s range. From a solvency perspective, surplus is more conservatively stated, and the analyst should apply judgment about whether to follow up with the company.and no further action is generally not necessary. However, ifWhen the actuary’s estimate is greater than the carried reserves, the question of “How close is close enough?” becomes more relevant. This is brings one to a more challenging situation for the analyst to evaluate.(#3 below). Situation 3: Actuary’s Point Estimate or Range Midpoint > Carried Reserves



Low Point High Low Point High B. Actuary’s Point Estimates 17,000 20,000 23,000 21,500 25,000 28,000 C. Company Carried Reserves 17,100 22,000 D. Difference 100 (3,000) (5,900) 500 (3,000) (6,000)

This situation has occurred approximately 25 percent of the time. When the carried reserves are less than the actuary’s point estimate or range midpoint, calculate the analyst should focus on the difference between the carried reserves and the point estimate or range midpoint. If the actuary has issued a “Reasonable” opinion, the analyst should consider the following factors in making a judgmenthow to accept this difference and/oror to seek more information:

The difference as a percent of surplus The difference as a percent of carried loss + loss adjustment expense reserves The company’s risk-based capital position

At this point, the analyst might consider an alternate question: “If the company had carried the actuary’s higher estimate and surplus was comparably reduced, would my evaluation of the company’s financial condition change to a less favorable one?” If the answer to that question is “yes,” then the analyst should consider requesting management’s rationale and documentation to support the lower carried reserve amount(s). In addition, the analyst might require the company to have their appointed actuary provide more detailedadditional information regarding the range of estimates, if calculated. This informationThe actuary’s description and derivation of the range should also be available documented in the Actuarial Report supporting the Oopinion. As a rule of thumb, carrying reserves more than 5 percent (of surplus) below the actuary’s point estimate or range midpoint is concerning, even if the reserves still lie within the actuary’s range. The 5 percent (of surplus) is a common examiner materiality starting selection.


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Next, consider the Summary in the context of RMAD as addressed in the Opinion. If a range is provided, is the material adverse deviation standard less than the difference between the carried reserves and the high end of the actuary’s range? This implies that the actuary’s range of reasonable reserve estimates encompasses the amount the actuary considers to be a material adverse deviation. Does the actuary conclude “yes” in Exhibit B that there are significant risks for material adverse deviation and provide extensive discussion of risks and uncertainties? The analyst should document any comments or concerns. Over 99 percent ofMost Actuarial Opinions issued are “Reasonable,”, whichReasonable, which means that the carried reserve amounts are within the actuary’s range of reasonable reserve estimates. Thus, only a handful of Opinions fall into the other categories as defined in the Instructions (Deficient or Inadequate, Redundant or Excessive, Qualified, or No Opinion). These types of opinions likely require further action by the analyst. The Considerations section below identifies several actions that could be taken, particularly with regard to a Qualified Opinion or a No Opinion. A Deficient or Inadequate Opinion, while very rare, presents a challenge for the analyst. This type of Opinion means that the carried reserves are less than the minimum amount the appointed actuary needed to be considers to beed reasonable. As with Ssituation #3 above, the analyst should evaluate the materiality of the deficiency in light of surplus, the cCompany’s Rrisk-Bbased Ccapital position, net income, and other factors. The analyst should review aAll options as listed in the Considerations section below should be considered. In this situation, more than likely it will be necessarythe regulator may wish to initiate to perform a target examination or engage an another independent actuary to evaluate the reasonability of the carried reserves, so the perceived implied deficiency can be evaluatedcured, as needed. Regardless of the analyst’s concerns, it is important to remember that the carried reserves are the responsibility of management. The appointed actuary may or may not be part of management. In nearly all cases, the analyst initial questions should be directed initial questions to company management for rationale and documentation of decisions regarding carried amounts. Subsection E addresses what the Casualty Actuarial and Statistical (C) Task Force calls “persistent adverse development.” When the company experiences one-year adverse development in excess of 5 percent of surplus as measured by Schedule P, Part 2, in at least three of the past five calendar years, the appointed actuary must provide It calls for explicit discussion of the causes or actions that contributed to having a one-year adverse development in excess of 5 percent of surplus as measured by Schedule P, Part 2 in at least three of the past five calendar years. The calculation of the one-year adverse development ratio can be found in the Ffive-Yyear Hhistorical Data exhibit of the Annual Statement. In the discussion of persistent adverse development, the appointed actuary is encouraged to Comment can reflect address common questions that regulators have, such as:

Is the development concentrated in one or two exposure segments, or is it broad across all segments? How does the development in the carried reserve compare to the change in the actuary’s estimates? Is the development related to specific and identifiable situations that are unique to the company? Is the development judged to be random fluctuation attributable to loss emergence? Does either the development or the reasons for development differ depending on the individual calendar

or accident years?


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The analyst should also cConsider also the following situations:

Situation A:. Prior Ssummaries indicate suggest that the company relies on the actuary’s estimates. If persistent adverse development occurs, one might the analyst mightthen infer that the actuary’s methods and assumptions have a bias toward underestimation.

Situation B:. Prior summaries Summaries indicate that the company regularly carries amounts lower than the actuarial point estimate or low in the actuary’s range. If persistent adverse development occurs, one the analyst might then infer that management sets the actuary’s indications aside and takes a more optimistic view of its liabilities, regardless of what the appointed actuary calculates.

Considerations

The Statement of Actuarial Opinion and/or the Actuarial Opinion Summary may contain broad general caveats. These include generalizations about the unpredictability of future jury awards, coverage expansions, etc. They are not to be confused with disclosures about a specificcompany-specific sources of uncertainty, such as new lines of business or territories, new claims/underwriting/marketing/systems initiatives, etc. These specific disclosures should be viewed as areas for formal investigation through an examination or informal investigation through correspondence or conversation. Initial Steps

The Statement of Actuarial Opinion Supplemental Procedures and the Actuarial Opinion Summary Supplemental Procedures provide guidance for a reviewing analyst. The procedures should be supplemented with comments and questions as needed. Both tThe Opinion and the Summary should both be reviewed and considered together before any action is taken. At the completion of the review procedures, the analyst should be able to conclude what, if any, further action is needed. Consult with the regulatory property/casualty actuary, if available

If the insurance department has a regulatory property/casualty actuary on staff, the analyst may consult him or her with any questions or concerns. they may be consulted about any questions or concerns the analyst may have. Contact the insurer

The analyst may need to contact the insurer for additional information, particularly if the RMAD is large relative to surplus, or if the insurer’s RBC is likely to fall below the Company Action Level. Some of the items that may need clarification are a concern over reinsurance collectibility, a change in method for determining the carried loss and LAE reserves, or other risk items noted in the Relevant Comments section as having the potential for to result in material adverse deviation. Typically, items of a general nature, such as the risk from a change in the legal or regulatory environment, would not require further investigation. Collectibility of reinsurance can be a concern when noted in the Relevant Comments section. Contracts with reinsurers who that are not financially strong, reinsurance coverage obtained under a program that is no longer offered, or reinsurance coverage on unusual risks the company was writing as a primary insurer could increase the uncertainty regarding reinsurance collectibility. Also, a change in reinsurance contract language, a change in reinsurers, or writing a new program in a new type line of business or a new class of business may affect the uncertainty concerning reinsurance collectibility if the insurer does not have a good understanding of the primary coverage written and the reinsurance coverage obtained.


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A change in the method for determining the loss and LAE reserves could also be identified in the Relevant Comments section. If an insurer has recently implemented loss reserve discounting or if the discount rate used to determine the reserves has changed, then the impact on the reserve estimate arising from these changes should be ascertained by the examiner or analyst. The impact of any changes in the reserving methodology should be investigated, particularly with regard to its effect on the provision for material adverse deviation and its potential impact on RBC levels. For property/casualty companies, the appointed actuary must include comments on the factors that led to exceptional values for IRIS ratios #11, #12, and #13 should be explained in the Statement of Actuarial Opinion. An explanation that identifies risk elements that are part of the insurer’s operations rather than a one-time occurrence would merit further investigation by the analyst. It is generally not sufficient to explain an IRIS ratio, outside the usual range exceptional value, by simply stating the insurer has strengthened reserves. Specific detail regarding lines of business, accident years, or changes in operations should be requested if they the actuary have has not been provided in thethat explanation for the specific IRIS ratio. Similarly for title insurers, exceptional reserve development as defined by the Instructions 6D should be explained in the Statement of Actuarial Opinion. Obtain a copy of the Actuarial Report

If there are particular items identified as significant in the Relevant Comments section or there is significant risk of the insurer falling below the RBC Company Action Level, reviewing the Actuarial Report supporting the Statement of Actuarial Opinion can give the analyst insights about the nature and severity of the risks identified. If one or more portions of the carried reserves are excluded from the Opinion, the Actuarial Report may give the analyst insight as to the relative amount of any excluded items and the reasons why any of thethose items were excluded from the Opinion. If the analyst believes requests the Actuarial Report needs to be requested, the analyst might start reviewing perhaps only the narrative component needs reviewfirst. It The narrative should contain the summary exhibits and the appointed actuary’s point estimate and/or range, and is . Oftentimes, this section isoften referred to as the Executive Summary. The technical component will likelyshould contain the loss development triangles and factors, support for ultimate loss selections, and required data reconciliations. Normally, the technical component would be requested for a full-scope examination or limited-scope examination that includes an evaluation of the carried reserves by an actuary. If the relevant comments or provision for material adverse deviationRMAD paragraphs mention the use of loss portfolio transfers or financial reinsurance as a potential source for subsequent adverse impact, then the analyst needs to understand how these agreements may affect the insurer’s financial position. The Actuarial Report may include information about the impact of these contracts under various scenarios or consider the possible range of outcomes under different circumstances. Any items in the insurer’s carried reserves that were identified in the Statement of Actuarial Opinion as not quantifiable require further investigation. The particular reasons or circumstances given can provide guidance on how to proceed. The analyst should consult with the appointed actuary who prepared the report to find out why there was not an opinion rendered on a portion of the reserves. Consult with the in-house actuary

If the appointed actuary is ana company employee of the insurer, the analyst should consider contacting that actuary regarding any issues noted in the Opinion or the Summary.


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The classes of business for which the insurer has provided coverage can greatly affect the type of liabilities that arise. Pollution liabilities are particularly difficult to estimate and are often determined by models that look examineat the risk profile of the company’s insuredspolicyholders, particularly when insurer loss history has limited predictability. The results from these models can often have a wide range in estimates for loss and LAE reserves. Construction defect claims have a 10-year reporting period in some states, making their liabilities particularly difficult to estimate. Other uncertainties can arise over asbestos or other types of mass tort claims. The analyst should consider submitting aA request for additional information from the insurer a company’s in-house actuary should be considered if an RMAD from these types of claims is identified. Next Steps

Engage an independent actuary to review the insurer’s reserves

For items that were not quantified in the Statement of Actuarial Opinion or any liability items for which there is significant concern, the analyst may recommend engaging an independent actuary to provide a review of the carried reserves in question. This independent review can also be valuable if there is a significant difference between management’s view and the appointed actuary’s view concerning a material item identified in the Aactuarial Rreport. Meet with the insurer’s management

The analyst may recommend mMeeting with the insurer’s management is an option for an analyst to recommend when there are items in the Actuarial Report that need clarification or require the insurer to take further action. This could include developing a business plan, setting up interim reporting, developing a corrective action plan, or providing additional information about the underlying factors contributing to the risk in the insurer’s financial report. Any concerns with company financial data or reconciling various data sources should be investigated with the insurer’s management. Concerns about a company’s exposure due to policy coverage terms or lack of available data should be investigated as warranted. Refer the insurer to the examination section for a target examination

The analyst may recommend a target examination if, after obtaining further information, there is still concern about the financial risk of the insurer. The target examination should determine if the insurer is taking proper steps to mitigate the adverse impact arising from the risks identified in the Statement of Actuarial Opinion. Discussion of the Supplemental Procedures

A. Actuarial Opinion

The analysis of the Statement of Actuarial Opinion, although filed with the Annual Financial Statement, is documented separately from the Annual Procedures because of its significance. GENERAL and IDENTIFICATION

Procedures #1 through #97 assist the analyst in determining whether, (1) a Statement of Actuarial Opinion was filed and prepared by a qualified actuary who was appointed by the insurer’s board of directors prior to December 31 of the year for which the opinion Opinion pertains, or (2) the insurer has an exemption from filing the Statement of Actuarial Opinion that was approved by the domiciliary state insurance department and (3) the insurer is a member of an intercompany pooling arrangement. Pool members’ financial results may need to be evaluated differently than insurers who operate independently..


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SCOPE

Procedures #8 10 through #11 143 assist the analyst in determining whether the Scope paragraph of the Statement of Actuarial Opinion contains verbiage that covers the reserves and premium amounts required to be reviewed (as shown in Exhibit A) according to the Annual Statement Instructions Property/Casualty, and whether the reserve amounts included in the Statement of Actuarial Opinion agree with the amounts per reported in the Annual Financial Statement. If the reserve amounts included in the Statement of Actuarial Opinion do not agree with the amounts per the Annual Financial Statement, the analyst should (1) comment on the reasons for the differences, (2) consider the impact of the differences on the conclusions reached as a result of the analysis of the Annual Financial Statement, and (3) consider the need to perform additional analysis on the Annual Financial Statement. Procedure #12 14 assists the analyst in determining whether the actuary indicated that the data used in forming his or her opinion on the loss and LAE reserves were reconciled to Schedule P, Part 1 of the insurer’s Annual Financial Statement. Schedule P, Part 1 is then required to be tested by the independent CPA as a part of the audit of the insurer. These procedures were designed to prevent the problem of the actuary relying on unaudited data in analyzing the insurer’s reserves. For title insurers, data is reconciled to Schedule P, Parts 1 and 2. OPINION

Procedures #13 15 through #17 19 assist the analyst in determining whether the Statement of Actuarial Opinion states that the reserves meet the requirements of the insurance laws of the state of domicile, are computed in accordance with accepted loss reserving standards and principles, makes a reasonable provision for all unpaid loss and LAE obligations of the insurer under the terms of its policies and agreements, and whether all portions of the insurer’s reserves are covered by the Statement of Actuarial Opinion. If the Actuarial Opinion deviates from these statements or if any portion of the insurer’s reserves are excluded from the Statement of Actuarial Opinion (e.g., pools and associations, reserves for asbestos or environmental exposures, etc.), the analyst should (1) comment on the deviations or exclusions, (2) consider their impact on the conclusions reached as a result of the analysis of the Annual Financial Statement, and (3) consider the need to perform additional analysis on the Annual Financial Statement. Procedure #16 18 is not applicable for title insurers. RELEVANT COMMENTS AND EXHIBIT B DISCLOSURES

Procedures #18 20 through #23 25 assist the analyst in determining whether the actuary commented on various topics and issues in Exhibit B of the Statement of Actuarial Opinion (including the materiality standard, discounting, salvage and subrogation, asbestos and environmental, reinsurance collectibility, etc.) as required by the Annual Statement Instructions Property/Casualty and Annual Statement Instructions Title. For property/casualty companies, the Statement of Actuarial Opinion should also indicate if the insurer failed the reserving IRIS ratios and discuss any exceptional values. For Title insurers, do not use IRIS ratios do not apply. H; however, similarly the Statement of ActuarialTitle Opinion should also indicate if the insurer had exceptional reserve development as defined in the Title Instructions. The analyst should summarize any pertinent comments made by the actuary and consider the impact, if any, of the actuary’s comments on the conclusions reached as a result of the analysis of the Annual Financial Statement and determine the need to perform additional analysis on the Annual Financial Statement.


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CONCLUSIONS/RECOMMENDATIONS

Procedures #24 26 through #26 28 assist the analyst in determining whether the actuary indicated that an Actuarial Report has been prepared that which supports the findings expressed in the Statement of Actuarial Opinion. In some cases, and suggest that the analyst may consider obtaining a copy of the Actuarial Report. The Actuarial Report is a confidential document that describes the sources of data, material assumptions, methods used, and supports the appointed actuary’s opinion. The Actuarial Report generally includes relevant loss and LAE data triangles and discusses significant issues that affected the appointed actuary’s interpretation of the data. Examples of significant issues that may be discussed by the appointed actuary include changes in the following: management of the insurer, claims payment philosophy, the claims reporting process, computer systems, mix of business, contract limits or provisions, and/or reinsurance. While not required to be filed with the Statement of Actuarial Opinion, the Actuarial Report is required to be retained by the insurer for a period of seven years and available for regulatory examination. B. Actuarial Opinion Summary

The Actuarial Opinion Summary Supplemental Procedures provide a guide for a reviewing analyst. The procedures should be supplemented with comments and questions as needed. The Actuarial Opinion Summary is not applicable required to be prepared forto title insurers. Procedure #1 verifies the regulatory requirements for filing the Summary and the company’s compliance with the requirement. Procedure #2 verifies if the insurer is a member of an intercompany pooling arrangement and if such applicable pooling percentages are disclosed. Procedure #32 verifies consistency between the Summary and the Opinion with respect to the carried reserves of the company. Inconsistencies in reported values may indicate weak controls within the company. Procedure #43 identifies the type of comparison that the actuary presents (carried reserves to the actuary’s point estimate and/or carried reserves to the actuary’s range). The analyst should note concerns regarding carried amounts that appear significantly low relative to the actuary’s estimate(s). See the Analysts Reference Guide for guidance on evaluating the comparison. Procedure #54 verifies consistency between the appointed actuary’s opinion found in the Statement of Actuarial Opinion and the comparison presented in the Summary. Procedure #65 verifies compliance with the Summary reporting requirement regarding persistent adverse development. The analyst should note concerns regarding the nature of historical adverse development. See the above discussion for guidance on evaluating the comments provided by the appointed actuary.


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DRAFT – to be considered on the June 10th Casualty Actuarial and Statistical (C) Task Force Call.

To: Risk-Focused Surveillance (E) Working Group From: Richard Piazza (LA), Chair, Casualty Actuarial and Statistical (C) Task Force

Date: May 29, 2014 Re: Comments on modifications to the NAIC Financial Condition Examiners and Financial Analysis

Handbooks Thank you for the opportunity to comment on the proposed modifications to the NAIC Financial Condition Examiners and Financial Analysis Handbooks. In general, the Casualty Actuarial and Statistical (C) Task Force is comfortable with the direction taken in these documents, especially in the context of the underlying regulator philosophy on enterprise risk management conveyed in these documents (i.e., two-way learning through frequent dialog including in-person meetings, non-prescriptive approach, emphasis on ownership, etc.). With respect to the potential role of the actuary as part of the team participating in the ORSA review process, we believe that the actuary can make a significant contribution in, but not limited to, the following areas:

For life insurers, compare the assumptions the company used in its risk analysis with the assumptions used in its asset adequacy analysis. There should be a level of consistency in the company’s view of its key risks;

For all insurers, compare the statutory Total Asset Requirement (“TAR”; statutory reserves plus Company Action Level RBC) with the company’s estimates of its target capital needs. The statutory TAR represents a key measure of the company’s ability to meet possible future adverse experience and forms a barrier against removing needed capital from the company. While RBC represents minimum capital, the relationship between minimum capital and target capital should make sense to the regulator; and

To the extent a company calculates economic or best estimate reserves in its analysis, the actuary can calculate statutory margins that could be tracked over time. A large portion of the future statutory profits of the company are embedded in the statutory margins. These statutory margins will vary by line of business and, depending on the lines of business, by era of statutory reserve requirements.

Following is a general comment pertaining to both the Financial Condition Examiners and Financial Analysis Handbooks:

We believe that the context of long-term versus short-term liabilities, products and guarantees is relevant and should be captured. It applies to the work of actuaries, examiners and analysts. The approach to the evaluation of an ORSA might differ, for example, between life/annuity products with long-term guarantees (and, in the extreme, no (or limited) flexibility in changing premiums) and short-term products (property, automobile, etc.). Potential risk outcomes where the duration is shorter may have “more tolerance” in evaluation than for longer liabilities in view of the time horizon. In other words, we might be more tolerant of an assumption we felt was aggressive for short-term products than for long-term products.


Attachment Three-BCasualty Actuarial and Statistical (C) Task Force

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1


Following are a few specific comments pertaining to both the Financial Condition Examiners and Financial Analysis Handbooks:

Clarification of the term “far-sighted scenarios” is needed. This term is first referenced on the bottom of page five when describing the Insurers’ Risk Management Framework, Risk Culture and Governance, Managed Practices. The Subgroup reasons this may be a reference to a tail scenario, however, further clarification would be helpful.

In the Description of the Insurers’ Risk Management Framework: Risk Culture and Governance section, a

clearer contrast of Leadership Practices and Managed Practices would be helpful. The Subgroup contemplated as to how the description of “leadership practices” is a better structure than “managed practices.”

In the Insurer’s Assessment of Risk Exposure section, we recommend more emphasis on forward-

looking, prospective, and emerging risks.

Also in the Insurer’s Assessment of Risk Exposure section, more specific guidance for the examiner on stress testing may be helpful. For example, add possible time frames and event probabilities, (e.g., is stress testing a 1-in-100 year event sufficient, or should a higher event horizon be considered?).

Regarding the outcomes of stress testing, the Handbook may want to instruct the examiner to consider prior years’ stress test. There may be value from comparing assumptions/financial outcomes of recent prior years’ stress tests. For example, how different are the stress scenarios and risk parameter assumptions this time around from prior year(s) and why? Or, how different are the financial outcomes and why?

It may also be helpful to capture additional information during the analyst’s review (e.g. significant changes in the product lines, processes, calculation methodologies and assumptions, key economic capital outcomes, risk appetite, tolerances, risk mitigation, management personnel over the period since the prior ORSA and reasons for the change) as found somewhere in the submissions to the regulators. While the documents do suggest this, it may be preferable to be more specific.

If you have any questions, please contact Nikki Hall ([email protected]), NAIC staff.


Attachment Three-BCasualty Actuarial and Statistical (C) Task Force

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2

W:\National Meetings\2014\Summer\TF\CasAct\CASTF Letter to RFSWG_052914.pdf


To: Judy Weaver, Chair, Financial Analysis Research and Development (E) Working Group

From: Richard Piazza, Chair, Casualty Actuarial and Statistical (C) Task Force

Date: _______, 2014

Re: Response to Referral Regarding Proposed Changes to Certain Reserving IRIS Ratios

1. As requested in the Financial Analysis Research & Development Working Group (FARD)’s Sept. 27, 2013 referral, the Casualty Actuarial and Statistical (C) Task Force studied the proposed revisions to the following IRIS Ratios: P/C Reserve Ratio 11 – one-year Reserve Development to Policyholders’ Surplus, P/C Reserve Ratio 12 – Two-year Reserve Development to Policyholders’ Surplus and P/C Reserve Ratio 13 – Estimated Current Reserve Deficiency to Policyholders’ Surplus.

2. The Task Force verified that the proposed formulas are accurate given the accompanying proposed

description of the formulas. The Task Force supports these formulas.

3. We note that additional accuracy could be achieved in the formulas but that would require creating additional reporting on the blank. For example, given that the currently proposed formulas require use of two annual statements to calculate the change in A&O and pooling changes would only be reflected in the most recent annual statement’s Schedule P, the A&O development would be incorrect when there are pooling changes. If we required A&O development to be reported in Schedule P, and therefore adjusted for pooling changes, we could improve the accuracy of the formula. Another option that would be more accurate is to use the Statement of Income to calculate development (which we referred to as the “Texas formula”), but we would need to revise Note 32 “Discounting of Liabilities for Unpaid Losses or Unpaid Loss Adjustment Expenses” and have the tabular and nontabular discounts submitted electronically. If you would like to pursue one of these other options, we could assist with development of specific reporting needs.

4. The Task Force determined that the ranges for the usual/unusual values could be adjusted by a couple of

percentage points. Given that the ranges are generally rounded to the nearest 5% and the current definition for unusual values seems significant even with A&O included, the current upper bounds could continue to be used for these calculations. Some actuaries have suggested that the IRIS ratios’ usual/unusual values should be modified from their fixed percentages to vary depending on recent experience (e.g. low interest rates, etc.). Given that would be beyond the scope of your current referral, please let us know if you wish for us to further investigate that possibility.

5. Lastly, you asked the Task Force to ensure there is consistency between the revised formulas and related

NAIC documents. The following are inconsistencies we identified:

A. Annual Statement Blank: • Five-Year Historical Data: The current descriptions of development are the same as the

current titles for the IRIS ratios, describing the data in the exhibit as being development for loss and all loss expenses when those are not accurate descriptions. The Five-Year Historical Data development should say the development is for loss and DCC expenses (rather than all loss expenses). This reporting should be consistent with the IRIS reporting. [Also note that a


Attachment Three-CCasualty Actuarial and Statistical (C) Task Force

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change in the IRIS ratios will distort the history in the Five-Year Historical Data development reporting unless you require restatement for the past few years.]

B. Annual Statement Instructions: • Actuarial Opinion Summary Supplement: Current wording regarding development is as

follows: “Where there has been one-year adverse development in excess of 5% of surplus as measured by Schedule P, Part 2 Summary in at least three of the past five calendar years, include explicit description of the reserve elements or management decisions which were the major contributors.” Consideration should be given to refer directly to the IRIS ratios, similar to the wording in the Statement of Actuarial Opinion Instructions.

C. Financial Analysis Handbook: • Similar changes made to the Actuarial Opinion Summary Supplement would need to be made

in the Analyst Reference Guide and the Supplemental Procedures (referring to the IRIS ratio rather than referring to Schedule P, Part 2).

• Similar changes made to the IRIS ratios’ formulas would need to be made to the Supplemental Procedures. Presently the procedures describe the IRIS ratio, referencing Schedule P, Part 2.

D. Financial Analysis Solvency Tools Scoring System (Regulator Only): the Property/Casualty scoring system ratios would need to be adjusted for consistency.

6. We found no inconsistencies between the currently proposed IRIS formulas and the following NAIC

documents: Schedule P and the Statement of Actuarial Opinion instruction. With or without the changes to the IRIS ratio calculations, we do not recommend any changes to the Schedule P, Part 2 loss development triangles and subsequent development calculations. This is because the A&O expenses are not accurately allocated to accident years and thus, could distort the triangles for their use in reserve sufficiency calculations.

7. We suggest you weigh the inconsistencies and additional issues against the value of the IRIS ratio changes to add A&O expenses. Our Task Force has mixed reaction as to whether the status quo is preferable, with some strong opinions that the change is unnecessary. We have data showing the impact of adding A&O expenses if you wish to see the research.

8. If you have any further questions, please contact me ([email protected]) or NAIC staff Kris DeFrain ([email protected]).

cc: Wei Chuang (LA) Kris DeFrain (NAIC) Adopted by the Actuarial IRIS 11-13 (C) Subgroup on June 5, 2014. W://National Meetings/2014/Summer/TF/CasAct/IRIS/CASTF Response to FARD Referral_060514.docx


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Attachment Four Casualty Actuarial and Statistical (C) Task Force

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Draft: 8/5/14

Actuarial IRIS 11–13 (C) Subgroup Conference Call

June 5, 2014 The Actuarial IRIS 11–13 (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call June 5, 2014. The following Subgroup members participated: Wei Chuang, Chair (LA); Chantel Long (IL); Kevin Dyke (MI); Phil Vigliaturo (MN); Julie Lederer (MO); and Brock Childs and Jennifer Wu (TX). 1. Adopted a Referral Response Letter Mr. Chuang said the referral from the Financial Analysis Research and Development (E) Working Group asks the Casualty Actuarial and Statistical (C) Task Force to: 1) verify the formulas for IRIS ratios 11, 12 and 13 are accurate and correct calculations of the ratios; 2) ensure that there is consistency between the formulas for IRIS ratios 11, 12 and 13 and related NAIC documents, including annual financial statement blanks, Schedule P, the actuarial opinion instructions and the actuarial supplemental procedures of the Financial Analysis Handbook; 3) establish a range for the usual/unusual values for each IRIS ratio (11, 12 and 13); and 4) provide a written report to the Task Force. Mr. Chuang said NAIC staff drafted a response to the referral reflecting the positions previously adopted by the Subgroup. He said the proposed response directly answers all of the questions in the referral. The Subgroup decided to make it clear that the currently proposed formulas are supported by the Subgroup. The Subgroup discussed whether to expand the letter to discuss the research conducted by the Subgroup and decided to mention that research is available. Upon a motion by Mr. Dyke, seconded by Ms. Wu, the Subgroup adopted the amended referral response and will refer the proposal to the Task Force (Attachment Three-C). The motion passed unanimously. Mr. Chuang said the Subgroup has completed its charges so he will recommend that the Subgroup be disbanded. Having no further business, the Actuarial IRIS 11–13 (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CASTF\IRIS\6-5 IRIS min.docx


Attachment Five Casualty Actuarial and Statistical (C) Task Force

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Draft: 6/9/14

Actuarial IRIS 11–13 (C) Subgroup Conference Call April 30, 2014

The Actuarial IRIS 11–13 (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call April 30, 2014. The following Subgroup members participated: Wei Chuang, Chair (LA); Chantel Long and Judy Mottar (IL); Kevin Dyke (MI); Rick Tyson (MN); Julie Lederer (MO); and Brock Childs and Jennifer Wu (TX). Also participating was Tom Botsko (OH). 1. Adopted a Proposal for Formula Changes to IRIS Ratio 11, Ratio 12 and Ratio 13 Ms. Wu compared the current proposed formulas and the Texas formulas. He said the Texas formulas are simpler, only need the current annual statement, provide precise results, can reflect tabular and nontabular discounts with results consistent with the balance sheet, and are more accurate because they use Statement of Income data, which is thoroughly audited rather than Schedule P. Ms. Wu said the formula would be net of all discounts by subtracting the nontabular discount from the Schedule P data used. Mr. Dyke said the ratios would then be impacted by the unwinding of the discount. He said the original formula might be more complex, but it is more accurate. Ms. Mottar and Ms. Lederer agreed. Ms. Wu said the Texas formulas could instead be modified to be gross of all discount by using data in financial annual statement Note #32. Ralph Blanchard (Travelers) said the current development in the Insurance Regulatory Information System (IRIS) ratios is gross of discounting. Mr. Chuang said having the formulas be net of all discounts would be consistent with the balance sheet. Mr. Dyke said the issue is that the balance sheet has reserves for all years, but the IRIS reserve development is a comparison of a subset of years, including only specific accident years. If the IRIS reserve development could somehow include the most recent accident year’s discount, then there would be more of a steady state of discount and the unwinding would not be a problem. Note #32 would need to be expanded and the data would need to be electronically submitted for the Texas formula to be adjusted. Ms. Long said the adjusting and other expenses (A&O) would be pulled from Schedule P, Part 1, which is gross of only nontabular discounts. Mr. Dyke verified there is no tabular discount for A&O, so that is not a problem. Mr. Botsko asked about the impact of pooling changes on the ratio, given the use of two different annual statements with potentially different pooling percentages. Mr. Blanchard said companies could explain the failure of the ratios resulting from the change in pooling, but he expressed concern about the states where failure of three IRIS ratios requires particular actions. He said IRIS Ratio 13 has always been impacted by pooling changes, but now there would be potential for failure of two additional IRIS ratios. He said a potential way to solve the issue is to require restatement of the prior year Schedule P with a change in pooling. Mr. Dyke said the largest part of the formula would already be restated for pooling; only the A&O development in the formula would be impacted. Upon a motion by Mr. Dyke, seconded by Ms. Wu, the Subgroup agreed to support the proposed formulas with no additional changes. The motion passed unanimously. 2. Recommended the Ranges for IRIS Ratio 11, Ratio 12 and Ratio 13 Remain Unchanged Mr. Chuang said the Subgroup needs to decide whether the unusual ranges for the IRIS ratios need to be modified. He supports leaving the ranges unchanged. Ms. Long said that not changing the range would be a stricter threshold; thereby penalizing the company. Ms. Wu said there is no justification to change the ranges. Mr. Dyke said there are more reserves subject to development, so there could potentially be a modest adjustment. Mr. Blanchard said A&O reserves are about 10% of total reserves. He said an increase of the range from 20% to 21% or 22% could be justified. Mr. Dyke said the unusual values in the IRIS ratios appear to be rounded to the nearest 5%. He believes a proposal of 22% would be rejected by the financial regulators, so he would be inclined to keep the unusual value at 20%. Upon a motion by Mr. Dyke, seconded by Ms. Wu, the Subgroup agreed to recommend no change to the current ranges for unusual values. The motion passed unanimously.


Attachment Five Casualty Actuarial and Statistical (C) Task Force

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3. Discussed Consistency with Other Financial Regulatory Requirements Mr. Chuang said the Subgroup needs to discuss the impact of revising the IRIS ratios on other NAIC documents. He said the five-year historical data would be impacted by this change. Ms. Long said that the addition of A&O to the IRIS ratios has an impact on other reporting, which was the reason why she had reservations about making the changes to the IRIS ratios. Mr. Dyke said it is important to understand all of the downstream implications of this change. Ms. Mottar said there are additional inconsistencies and research might lead to the Subgroup changing previous decisions. Having no further business, the Actuarial IRIS 11–13 (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CASTF\IRIS\4-30 IRIS min.docx


Attachment Six Casualty Actuarial and Statistical (C) Task Force

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Draft: 5/20/14

Actuarial IRIS 11–13 (C) Subgroup Conference Call April 16, 2014

The Actuarial IRIS 11–13 (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call April 16, 2014. The following Subgroup members participated: Wei Chuang, Chair (LA); Chantel Long and Judy Mottar (IL); Kevin Dyke (MI); Phil Vigliaturo (MN); Julie Lederer (MO); Arthur Schwartz (NC); and Brock Childs (TX). 1. Proposed Revised Formulas for IRIS Ratios 11, 12 and 13 Ms. Long said she initially supported adding adjusting and other expenses (A&O) to the Insurance Regulatory Information System (IRIS) ratios, but after researching the impact, she believes the change is not material enough and the extra work to adjust other financial requirements is not outweighed by the benefits. She said the IRIS ratios provide guidance to states and not many more companies will be identified through IRIS ratios’ failures. She said states could perform the calculations themselves. Mr. Chuang said the charge is to evaluate the IRIS ratios and offer a list of other changes for consideration. He said there were no public concerns addressed when the Financial Analysis Research and Development (E) Working Group originally exposed the changes for comment. Mr. Dyke said it is possible this project could be burdensome but he believes the benefits outweigh the disadvantages. He said the A&O should have been added at the time the loss adjustment expenses were redefined, so not including A&O is a hole in the IRIS ratios. Mr. Chuang said the IRIS ratios are calculated on a company level so the ability to allocate A&O to lines of business is not an issue for IRIS ratios. Mr. Dyke said that, when discussing development with the board of directors, an actuary would include all development. He said it is then difficult to explain why that development differs from the statutory development. Mr. Chuang said that companies’ estimation of A&O might improve if the development is included in the IRIS ratios. Mr. Schwartz said this is a philosophical issue. He said development of A&O is pretty minor compared to development of losses and defense and cost containment expenses. Mr. Chuang said the current IRIS definitions specifically mention development of all loss adjustment expenses. He said including A&O in the formula matches how the current IRIS ratios are defined. Upon a motion by Mr. Vigliaturo, seconded by Mr. Childs, the Subgroup agreed to propose revised formulas for IRIS ratio 11, ratio 12 and ratio 13 formulas that include A&O. The motion passed unanimously. 2. Discussed Next Steps Mr. Chuang said the next step is to decide which formulas to recommend. He said he prefers the Texas formulas because they are easier to follow and have fewer problems. He said Texas provided some information about discounting issues, showing that most companies do not use discounts. He said the Statement of Income tends to be more accurate than Schedule P data. He believes the development in the IRIS ratios should be a close match to the balance sheet. He said Schedule P Part 1 data can be easily calculated to be net of discount. The Subgroup discussed alternative means to obtain A&O development. Ralph Blanchard (Travelers) said that modifying Schedule P to include A&O development would be a problem because Part 1 information is not restated with pooling. He said the earned and incurred numbers in re-pooling are not distorted, but the paid numbers are distorted. He said the Statement of Income numbers are net of all discounts. Mr. Dyke said this is not a match to the incurred loss used in the IRIS formulas that are net of tabular and gross of non-tabular discounts. He said the Texas formula would need to be modified to adjust for this issue. Mr. Dyke questioned whether the note that includes A&O development could be used. Ms. Long said that entry would need to be required as an electronic entry. She said the two-year ratio would also need to be added and that would put extra burden on the company. Mr. Chuang said the Subgroup will also need to discuss consistency and the ranges for IRIS ratio 11, ratio 12 and ratio 13. Having no further business, the Actuarial IRIS 11–13 (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CASTF\IRIS\4-16 IRIS min.docx


Attachment Seven Casualty Actuarial and Statistical (C) Task Force

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Draft: 7/31/14

Actuarial Opinion (C) Subgroup Conference Call

July 16, 2014 The Actuarial Opinion (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call July 16, 2014. The following Subgroup members participated: Melissa L. Greiner, Chair (PA); Julie Rachford (IL); Julie Lederer (MO); Jennifer Wu, Steven White and Brock Childs (TX). Also participating were: Tami Bossart (FL); and Annette James (NV). 1. Discussed Revisions to the 2014 Regulatory Guidance on Property and Casualty Statements of Actuarial Opinion

(Regulatory Guidance) and Regulatory Guidance on Property and Casualty Statutory Statements of Actuarial Opinion Summary (Regulatory Guidance Summary)

Ms. Greiner stated that she, Ms. Rachford and Ms. Lederer reviewed the document after the previous meeting via conference call and made revisions based on discussion during the call. Ms. Greiner requested comments on the modifications made to the document after the meeting via conference call July 2. Hearing none, she began explaining the reasoning for revisions made to the document. Ms. Greiner said that Paragraph 1: Appointment, Definition, Exemptions and Reporting for Pooled Companies was enhanced to describe changes made to the 2014 Annual Statement Instructions (Instructions). The following sentence was added: “When disagreements occur, regulators now request that a description of the disagreement and the nature of its resolution, or non-resolution, be included in the letter to the Insurance Department.” Ms. Rachford enhanced the language under Paragraph 1C: Requirement for Pooled Companies. The intent of the changes to Paragraph 1C is to clarify and provide reasoning for the changes made to the 2014 Instructions. The following sentence was added to the Regulatory Guidance: “Regulators would like to see this disclosure at the beginning of the Opinion to ensure the reader has a proper understanding of the contents within the Opinion and how they relate to the subject company.” Ms. Greiner pointed out that the NAIC is discontinuing use of the Interpretations. Due to this change, she removed the reference to Interpretation 02 21 of the NAIC Accounting Practices and Procedures Manual and replaced it with Statement of Statutory Accounting Principles (SSAP) No. 55—Unpaid Claims, Losses and Loss Adjustment Expenses under Paragraph 4: Scope, item number two. She also revised the last sentence of Paragraph 4 to state: “However, any third party or firm is not the regulated entity, and regulators expect that a company official will always be identified.” A new paragraph was added under Paragraph 5: Opinion to describe additional requirements for Appointed Actuaries writing Opinions that fall into the deficient, inadequate, redundant or excessive Qualified Opinion categories. Ms. Lederer added language to the section regarding risk of material adverse deviation under Paragraph 6: Relevant Comments to describe risk-focused procedures and what regulators expect company management and actuarial specialists to disclose in the Instructions. A sentence was added under Paragraph 6: Relevant Comments to describe changes to the sequence of requirements as stated in the Instructions. Regulatory analysts as well as examiners are increasingly interested in understanding companies’ risk of material adverse deviation. Ms. Greiner modified a statement to clarify that each statutory entity, except for intercompany pooling members that retain a 0% share, are required to have a separate opinion as well as its own materiality standard. A paragraph was added to state: “If the actuary does not consider there to be ANY specific or unique risk factors to this company, the actuary should say that. If the risks have been mitigated by certain company actions, those explanations will also be helpful.” The following sentence was struck from the document due to decreasing relevance in today’s economic environment: “Specific current risks such as subprime mortgage exposure or declining real estate values may be relevant to the extent that they can be significant and directly related to adverse deviation.” Content was modified regarding methods and assumptions under Paragraph 6: Relevant Comments to state: “The Instructions were modified in 2014 to recognize that when there is a change in Appointed Actuary, the newly Appointed Actuary may not be able to review the work of the prior actuary. If the Appointed Actuary has changed from the prior year and finds that no such comparison to methods and/or assumptions is practical or meaningful the Actuary should make such a disclosure.”


Attachment Seven Casualty Actuarial and Statistical (C) Task Force

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A sentence was added under Paragraph 7: The Actuarial Report to identify the bulleted items added in the 2014 Instructions. The last sentence under Paragraph 9: Notice Regarding Errors states: “This is an addition to the discovery of the data errors as described in Paragraph 9.” Several regulators question the meaning of the sentence and whether it is beneficial. Ms. Greiner stated that she would discuss the meaning and relevance with Susan Gozzo Andrews (CT), who influenced the addition of the sentence in the 2013 Regulatory Guidance. Ms. Greiner and Ms. Rachford stated that the last paragraph should be revised to state: “For those companies that participate in an intercompany pooling arrangement and retain a 0% share, Exhibits A and B of the lead company should be attached as an addendum to the PDF file and/or hard copy of the Opinion being filed for the 0% companies.” Ms. Greiner suggested that another sentence be added to state: “The pool description and disclosure will be helpful to the regulator in understanding what percentage of the pool the lead company represents.” The reasoning for inclusion of additional language is for regulators to have the benefit of seeing Exhibits A and B of the lead company and the relative size and materiality of the smaller company’s surplus and reserve amounts. Ms. Greiner stated that the only substantive change to the 2014 Guidance Summary since the July 16 conference call was the addition of the following sentence at the end of the document: “For 0% pooled companies, the information should be that of the lead company.” The introduction was modified to state: “Changes were made to Paragraph 6 of the 2014 Instructions.” The Regulatory Guidance will be revised pursuant to the minor revisions discussed on the conference call and distributed for the Subgroup to review. The Subgroup will consider the documents for adoption via e-vote. Upon adoption by the Subgroup, the Regulatory Guidance and Guidance Summary will be sent to the Casualty Actuarial and Statistical (C) Task Force, interested regulators and interested parties for exposure with request for comment. The Task Force will discuss the Regulatory Guidance and Guidance Summary at the Summer National Meeting. Having no further business, the Actuarial Opinion (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AOSG\07 16-AOSGmin.docx


Attachment Eight Casualty Actuarial and Statistical (C) Task Force

8/16/14


Draft: 7/23/14


July 2, 2014 The Actuarial Opinion (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call July 2, 2014. The following Subgroup members participated: Melissa L. Greiner, Chair (PA); Giovanni Muzzarelli (CA); Susan Gozzo Andrews (CT); Julie Rachford (IL); Julie Lederer (MO); Thomas Botsko (OH); and Stephanie Ohnmacht (PA). Also participating were: Karen Adams (AZ); Mike Andring (ND); Frank Stone (OK); Leslie Jones (SC); and Scott Fitzpatrick (WA). 1. Discussed Revisions to the 2014 Regulatory Guidance on Property and Casualty Statements of Actuarial Opinion

(Regulatory Guidance) Ms. Greiner identified the two major changes to the Property and Casualty Annual Statement Instructions (Instructions) proposed by the Actuarial Opinion (C) Subgroup and adopted by the Blanks (E) Working Group June 7: 1) the expanded requirements for disclosure of intercompany pooling arrangements; and 2) the relevant comments section regarding risk of material adverse deviation. The relevant comments section now calls for the actuary to describe major factors or particular conditions relevant to the filing entity, regardless of whether there is a presumed risk of material adverse deviation. The requirement now calls for an explanation regardless of a “yes” or “no” answer to the following question: “Does the actuary believe that there are significant risks or uncertainties that could result in material adverse deviation (Exhibit B, Item #6)?” Ms. Greiner introduced her initial draft of the Regulatory Guidance, which was emailed to the Subgroup prior to the conference call. Paragraph 1B: Exemptions of the Regulatory Guidance was expanded to remind appointed actuaries that Paragraph 1B in the Instructions is directed toward company management and does not generally apply to appointed actuaries. Paragraph 1C was modified to explain that all intercompany pooling arrangements should be identified. The disclosure requirement is no longer limited to100% lead insurer and 0% pooling member situations. The Instructions were modified to provide clarity for readers of the Opinion regarding pooling arrangements. Ms. Rachford volunteered to edit this section for discussion on the next conference call. Ralph Blanchard (Travelers) made note that the rest of the paragraphs in that section should also be edited in accordance with the recent changes in the Instructions. Ms. Lederer stated that the reference under Paragraph 4: Scope, item #2, prepaid loss adjustment expenses needs to be changed from Interpretation 02-21 to Statement of Statutory Accounting Principles (SSAP) No. 55—Unpaid Claims, Losses and Loss Adjustment Expenses. Ms. Lederer suggested that the language under Paragraph 5: Opinion should be changed to state, “If material, the actuary should disclose if they have made use of the work of another actuary. Further, the Appointed Actuary should disclose whether they reviewed the others’ underlying analysis and the extent of the review including items such as the methods and assumptions used and the underlying arithmetic calculations.” Ms. Greiner stated that she would work on Paragraph 5: Opinion to address changes to the Instructions that consider other loss reserve items on which the appointed actuary is opining. Ms. Greiner requested that Ms. Lederer specify in the language added to the Regulatory Guidance regarding intercompany pooling that regulators would like to see disclosure of pooling arrangements earlier in the Opinion and remove the reference to pooling disclosures under Paragraph 6: Relevant Comments. Ms. Greiner also suggested that the beginning paragraph of Paragraph 6: Relevant Comments include an explanation of changes adopted for the 2014 Instructions regarding the evolution of risk-focused examinations and how Opinions are being utilized to help regulators understand the risk factors of a company. Ms. Greiner reorganized the order of the requirements for the appointed actuary under Paragraph 6: Relevant Comments, Risk of Material Adverse Deviation (RMAD). Mr. Blanchard recommended that the wording under Paragraph 6: Relevant Comments be amended to state, “The Instructions were revised and modified in 2014. The new version of the Instructions requires the appointed actuary to.” Ms. Lederer recommended that the paragraph beginning, “The Instructions state that the RMAD explanatory paragraph” under Paragraph 6: Relevant Comment be modified to request that actuaries include a statement if they do not believe the company has risk of material adverse deviation and an explanation of the ways in which risk factors have been mitigated. Several regulators and interested parties suggested that the sentence, “Specified current risks—such as subprime mortgage exposure or declining real estate values—may be relevant to the extent that they can be significant and directly related to adverse deviation” be removed from the document as prevalent risks are constantly evolving and vary by type of business written. Ms. Greiner stated that she added two sentences under Paragraph 6: Relevant Comments that state, “The Instructions were modified in 2014 to recognize that when there is a change in Appointed Actuary, the newly Appointed Actuary may not be able to review the work of the prior actuary. In these situations, the new actuary should disclose this fact in the Opinion.” Ms. Rachford stated that under Paragraph 7: The Actuarial Report, this same requirement is stated regarding the Opinion in slightly different terms. Ms. Greiner agreed to tweak the language in Paragraph 6: Relevant


Attachment Eight Casualty Actuarial and Statistical (C) Task Force

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Comment regarding the Opinion to be consistent with that contained in Paragraph 7: The Actuarial Report. Ms. Lederer volunteered to edit Paragraph 6: Relevant Comments regarding RMAD. Ms. Adams said that she has received Opinions reconciled against Schedule P itself instead of reconciling them against more detailed data or data utilized to develop Schedule P. The Subgroup determined that this situation requires follow-up with the filing entity and further explanation in the Regulatory Guidance is not warranted. Ms. Greiner stated that she modified the last paragraph in the Regulatory Guidance on the Property and Casualty Actuarial Opinion Summary (Regulatory Guidance Summary). Ms. Greiner added, “The regulators expect that carried values reported in the Summary can be tied back to values reported in the Annual Statement and the Opinion, and that actuarial estimates can be tied back to the Actuarial Report. Regulators encourage appointed actuaries to display values on the pooled (or consolidated) basis in addition to the statutory entity basis. This can be accomplished by displaying two tables of information.” This was added to clarify how the statutory entity relates to the entity as a whole. This is not a requirement but a best practices guide and a preference of the regulators. Ms. Lederer stated that she would review related documents and determine appropriate language for this section. Ms. Greiner told the Subgroup that the goal for completion of the Regulatory Guidance and Regulatory Guidance Summary is to have the document finalized and ready for review by the Casualty Actuarial and Statistical (C) Task Force by the middle to end of August. Having no further business, the Actuarial Opinion (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AOSG\07-AOSGmin.docx


Attachment Nine Casualty Actuarial and Statistical (C) Task Force

8/16/14


Draft: 6/2/14

Actuarial Opinion (C) Subgroup Conference Call May 20, 2014

The Actuarial Opinion (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call May 20, 2014. The following Subgroup members participated: Melissa L. Greiner, Chair (PA); Susan Gozzo Andrews (CT); Julie Lederer (MO); Gloria Huberman (NY); Stephanie Ohnmacht (PA); and Jennifer Wu (TX). 1. Discussed Comments Received Regarding Proposed Revisions to the Financial Analysis Handbook

Ms. Greiner introduced the comment received from Lee Barclay (WA) in his absence. Mr. Barclay’s comments state:

“I have one concern, and it pertains to the question newly numbered as 16 in the checklist document. If a SAO states that the carried reserves ‘are consistent with reserves computed in accordance with accepted actuarial standards and principles,’ the actuary is making a much weaker statement than ‘reserves are computed in accordance with accepted actuarial standards and principles.’ I do not regard this as ‘similar language,’ as is suggested by the new wording in this draft checklist. “The issue is whether or not we want the appointed actuary to give the regulator some confidence in the way that the company computes and books its reserves. Are we really satisfied with the weaker wording? It’s roughly is equivalent to: “I’m not saying anything about how the company computed its reserves, but the reserves seem to have come out OK at the end of last year. Maybe it was just good luck.” Or would we like the appointed actuary to give us some assurance that the company itself is setting reserves in an actuarially sound manner? I would prefer to have this assurance—and to know that the company’s reserve adequacy is more than just good luck, which might not continue in the following months and years.”

Ralph Blanchard (The Travelers Companies) sent a comment in response to Mr. Barclay’s comment. Mr. Blanchard’s comments state:

“With regard to the language about reserves being ‘computed in accordance with accepted actuarial standards and principles,’ the Academy Practice Note says: “In situations in which the actuary does an independent analysis of the reserves, the opinion statement in 5(B) may read ‘are consistent with reserves computed....’ “I would expect the examination to be more granular on this issue, but am personally not in favor of forcing the more extensive statement for all actuarial opinions. The work required to evaluate the approach used to compute the reserves can be very involved for a larger company, particularly if reserves are set in multiple locations. For example, the Travelers reserves are set in more than 1,000 different pieces (when you look at all the business units, annual statement lines and sublines, loss vs. DCC vs. A&O, and assumed reinsurance/pools). Would all those pieces have to be reviewed before one can state that the reserves are ‘computed in accordance with accepted actuarial standards and principles’? “If the expectation for the appointed actuary is made stronger, then the COPLFR practice note will need to change.”

Ms. Andrews said that one of the reasons Section 16 was modified was to be consistent with question 11, which asks if the analyst reviewing the company documents has either examined the actuarial assumptions and methods used in determining reserves listed in Exhibit A or the analyst has examined the reserves listed in Exhibit A. The Subgroup did not believe that the broader language exhibits a weakness in the reserve calculation. The Subgroup agreed that the modified language, consistent with language contained the in the American Academy of Actuaries’ practice note, Statements of Actuarial Opinion on Property and Casualty Loss Reserves, should be retained in the Financial Analysis Handbook. The Subgroup determined that use of the term “consistent with reserves computed…” is important in cases where the opining actuary is not an employee, but rather a consultant, of the company under review. The Subgroup questioned Mr. Barclay’s reasoning for the comment and his typical response that, if an opining actuary does not use the language, “reserves are computed in accordance with accepted actuarial standards and principles.”


Attachment Nine Casualty Actuarial and Statistical (C) Task Force

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Jennifer Gardner (NAIC) stated that Mr. Barclay sent the following comments via email prior to the conference call:

“Here in Washington, I and one of my staff complete the P&C checklists, which are then sent to our Financial Analysis Unit for review and to determine what regulatory action, if any, is appropriate. Last year most of our domestic P&C insurers’ appointed actuaries used the standard, stronger wording, so we just answered ‘Yes’ to this question on the checklist. But when the weaker wording was used, we wrote something like the following on the checklist: “No. The actuary states that the amounts ‘are consistent with amounts computed in accordance with the Casualty Actuarial Society Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves and relevant standards of practice promulgated by the Actuarial Standards Board.’ It could be inferred that the company didn’t necessarily compute its reserves this way. “Typically, at the end of the checklist we would then summarize our impressions as ‘A clean but carefully worded opinion.’ Any further action related to the checklists is the responsibility of the Financial Analysis Unit. However, I don’t think that unit has ever done any follow-up in situations where we have put the above paragraph on the checklist. “So maybe it’s not a big deal, but I still think there’s a distinction worth preserving here.”

The Subgroup determined that the language, as proposed, should be retained and that they do not agree that the expanded verbiage represents a weakness in the analysts review. The second comment was submitted by Carl Sornson (NJ). Mr. Sornson was unable to be present on the call. Mr. Sornson’s comment is as follows:

“The opinion summary says ‘If the carried reserves are higher than the actuary’s estimate, then surplus is more conservatively stated. Further action is generally not necessary.’ While we agree that our main focus should be solvency, i.e. monitoring for deficient reserves, we are surprised that the document doesn’t make any further statements regarding over-reserving. The document gives a rule of thumb regarding 5% of surplus applicable to under-reserving, but does not provide a similar rule for redundant reserves. We believe action should be taken if reserves are significantly redundant.”

Ms. Lederer stated that she believes, and infers this is Mr. Sornson’s belief as well, that if the carried reserves are different than the range regardless of whether they were higher or lower than the actuary’s estimate, the reserves need to be reviewed. The Subgroup determined that Mr. Sornson’s comment is validated, as reserves should be reviewed if the carried reserves are significantly above or below surplus. Ms. Greiner suggested that Section B. Actuarial Opinion Summary, the paragraph that begins with “Subsections A, B, C and D…” should be modified to state “Regardless of the source of the error, it is an indication of a lapse in communication between the appointed actuary and the company and requires follow up.” Under the same Section B. Actuarial Opinion Summary, “Situation 2: Actuary’s Point Estimate or Range Midpoint < Carried Reserves,” the last sentence should be amended to state “From a solvency perspective, surplus is more conservatively stated, and the analyst should apply judgment about how to follow up with the company.” A sentence was added under Situation 3: Actuary’s Point Estimate or Range Midpoint > Carried Reserves to state, “The 5 percent (of surplus) is a common examiner materiality starting selection.” The Subgroup agreed to the revisions to require follow up and apply judgment regarding the review of reserves that are more than 5% above or below the actuary’s estimate.

2. Adopted Revisions to the Financial Analysis Handbook The Subgroup agreed to vote on the document with the modifications discussed on the call. Upon a motion by Ms. Lederer, seconded by Ms. Andrews, the Subgroup adopted the revisions to the Financial Analysis Handbook. The revisions will next be considered by the Casualty Actuarial and Statistical (C) Task Force. Having no further business, the Actuarial Opinion (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AOSG\05.20-AOSG.docx


Attachment Ten Casualty Actuarial and Statistical (C) Task Force

8/16/14


Draft: 6/2/14


May 2, 2014 The Actuarial Opinion (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call, May 2, 2014. The following Subgroup members participated: Melissa L. Greiner, Chair (PA); Susan Gozzo Andrews (CT); Judy Mottar and Julie Rachford (IL); Julie Lederer (MO); Gloria Huberman (NY); Brad Shroer (OH); Stephanie Ohnmacht (PA); and Jennifer Wu (TX). 1. Revised and Voted to Expose Revisions to the Financial Analysis Handbook Ms. Greiner explained that the new timeline for the Subgroup to complete their charge is to today consider adoption of the Financial Analysis Handbook (Handbook) and, if adopted, send it to the Casualty Actuarial and Statistical (C) Task Force and expose it for a public comment period ending May 16. The Subgroup would then meet again via conference call May 20 or May 21 to discuss and revise the documents per comments received. The documents would then be sent back to the Task Force for consideration of adoption. Upon adoption by the Task Force, the documents would be sent to the Financial Analysis Handbook (E) Working Group for consideration. Ms. Rachford explained that she made updates on the Supplemental Procedures Guide per discussion on the April 23 conference call. Ms. Rachford added “Does it” to the beginning of paragraph 9a for syntax. She also modified paragraph 16 at the request of Ms. Andrews to complement verbiage located in the Academy of Actuaries’ practice note, Statements of Actuarial Opinion on Property and Casualty Loss Reserves. Additional edits were made to mirror revisions made to the Annual Statement Instructions—Property and Casualty (Instructions). Ms. Rachford modified paragraph 21 for consistency within the document, and modified the references to eliminate duplicative verbiage. She added paragraph two under the section, Actuarial Opinion Summary, concerning disclosure of intercompany pooling arrangements pursuant to verbiage added to the 2014 Instructions. Ms. Greiner said that she edited the Analyst Reference Guide. She explained that the first section, Actuarial Opinion, identifies each section for review by analysts when assessing Statements of Actuarial Opinion (Opinion). She modified section four regarding disclosure of names and affiliation of the person or persons upon whom the actuary relied upon for data used in the reserve analysis. This information has not been required in the past, but is something the Subgroup is working toward requiring. Information added to the Handbook is pursuant to information included in the 2014 Instructions. Ms. Greiner said that she changed section six stating that “the appointed actuary should provide explanation of the major risk factors affecting the company.” This is consistent with verbiage added to the 2014 Instructions whereby the appointed actuary is asked to provide explanation of the major risk factors affecting the company. The Subgroup would like this explanation to become a requirement. However, for the upcoming Handbook, this will be a recommendation not a requirement. Ms. Greiner added a sentence under the paragraph, Requirements for Pooled Companies, to identify Section 1C in the Instructions as the location to disclose pooling arrangements. Ms. Greiner added content to the paragraph beginning “Subsections A and B…” under Section B, Actuarial Opinion Summary, to require follow-up when there is a discrepancy between the opinion and the financial annual statement. She updated the formatting, in addition to linguistic updates to more closely match what is found in the Instructions and the Regulatory Guidance on Property and Casualty Statutory Statements of Actuarial Opinion (Guidance). Ms. Lederer said that Schedule P, Part Two may need to be removed as a reference in the paragraph beginning with “Subsection E” due to changes currently under consideration by the Actuarial IRIS 11–13 (C) Subgroup. The changes brought forward by that Subgroup will not be made to coincide with the 2014 Instructions, so the reference is still valid and will remain in force for the 2014 Handbook. Ms. Greiner added to the paragraph beginning “If the analyst…” under the Considerations section. In addition to loss development triangles and factors, the technical component should contain “support for ultimate loss selections, and required data reconciliations.”


Attachment Ten Casualty Actuarial and Statistical (C) Task Force

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Ms. Greiner stated that she added language pertaining to intercompany pooling arrangements under the section, General and Identification. She also updated the references within the document to mirror the Supplemental Procedures in the Handbook. Ms. Greiner added a statement under the Conclusions/Recommendations Section that states, “Procedure #2 verifies if the insurer is a member of an intercompany pooling arrangement and if such applicable pooling percentages are disclosed.” This is in accordance with the Supplemental Procedures section of the Handbook. Upon a motion by Ms. Rachford, seconded by Ms. Wu, the Subgroup adopted the revisions to the Financial Analysis Handbook to be exposed for a public comment period ending May 16. Having no further business, the Actuarial Opinion (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AOSG\05-AOSG.docx


Attachment Eleven Casualty Actuarial and Statistical (C) Task Force

8/16/14


Draft: 5/12/14

Actuarial Opinion (C) Subgroup Conference Call April 23, 2014

The Actuarial Opinion (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call April 23, 2014. The following Subgroup members participated: Melissa L. Greiner, Chair (PA); Giovanni Muzzarelli (CA); Susan Gozzo Andrews (CT); Judy Mottar and Julie Rachford (IL); Boris Privman (NJ); Gloria Huberman (NY); Thomas Botsko (OH); and Stephanie Ohnmacht (PA). Also participating was: Leslie Jones (SC). 1. Discussed Revisions to the Financial Analysis Handbook Ms. Greiner explained that the Subgroup is focused on two sections of the Financial Analysis Handbook (Handbook): 1) the supplemental procedures section, which is a checklist for reviewing Statements of Actuarial Opinion (Opinion) and Actuarial Opinion Summaries; and 2) the analyst reference guide, which is an explanation of the checklist. Ms. Rachford said she modified the supplemental procedures prior to the conference call. Ms. Rachford added two questions to the checklist at the end of the identification section to introduce intercompany pooling arrangements. Ms. Andrews questioned the placement of the paragraph regarding pooling arrangements within the Handbook as it correlates to the Annual Financial Statement Instructions (Instructions). It was agreed that the placement should be explicitly stated in the Instructions, as well as the Regulatory Guidance on Property and Casualty Statutory Statements of Actuarial Opinion (Regulatory Guidance), which will be reviewed by the Subgroup later this calendar year. Ms. Greiner said the second question under the opinion section of the supplemental procedures in the Handbook includes alternatives for the computation of amounts shown in Exhibit A. Alternatives were added in 2013 based on regulator experience. Ms. Rachford proposed broadening the sentence to include “or similar language.” The Subgroup members compromised by revising the statement to read: “Does the Opinion state that the amounts shown in Exhibit A are computed in accordance with accepted actuarial standards and principles or similar language such as ‘consistent with reserves computed in accordance with...?’” The third question under the opinion section, question 17b, was modified to replace “stated reserve” with “carried reserve,” as well as to include the question under item b “does the actuary disclose the item(s) to which the qualification relates and the amounts of such items?” Ms. Rachford stated that she enhanced question 19c under the opinion section to reflect changes proposed in the Instructions earlier this year. The revised statement should read: “If for a material portion of the reserves, are the name(s) and affiliations of actuary(ies) disclosed?” This modification is in accordance with revisions made to the Instructions that require inclusion of identification of names and affiliations only if they represent a material portion of the group. Question 20e under the section titled, “Relevant Comments and Exhibit B Disclosures,” was enhanced to state that explanation of major risk factors should be disclosed by the actuary regardless of the answer to Exhibit B, Item 6. Exhibit B, Item 6 of the Opinion states: “Are there significant risks that could result in Material Adverse Deviation?” Ms. Andrews requested that the Instructions be revised during their next review to require an explanation regardless of the answer to Exhibit B, Item 6. Question 21 was modified for consistency of verbiage and formatting between the list for property/casualty insurers, as well as title insurers. Under the section titled, “Actuarial Opinion Summary,” question 2 was added: “Is the company a member of an intercompany pooling arrangement? If ‘yes,’ is the percentage of company’s share of the pool disclosed? If 0% pool participant, the information provided should be that of the lead company.” Ms. Andrews requested that this question be modified slightly to more closely reflect the verbiage included in the Instructions. Ms. Rachford agreed to modify this before the Subgroup’s next conference call. Ms. Greiner stated that she made revisions to the analyst reference guide. She added a sentence to the paragraph labeled section 6, and the Subgroup agreed with the addition. The sentence states: “The appointed actuary should provide explanation of major risk factors affecting the company.” A sentence was also deleted from that paragraph which states: “on average nearly 70% of companies have reported ‘No’ for RMAD as chosen by the appointed actuary in Exhibit B.” The Subgroup decided that including the percentage would result in additional annual review for consistency with prior years. The Subgroup members decided to revise the paragraph that begins with “Section 7 (the Actuarial Report)” to change the sentence, “The NAIC places a high level of trust in a qualified actuary” to “The NAIC places a high level of trust in the work of an appointed actuary.” The Subgroup decided a locator was needed under “Requirements for Pooled Companies” to identify the link between it and Section 1C of the Instructions. The paragraph will be modified to state: “As identified in paragraph 1C of the Annual Instructions, these instructions apply to insurers who are participants in intercompany pooling agreements.” The Subgroup decided to modify the sentence regarding controls, within the paragraph that begins with, “Subsections A and B require the actuary to,” to help analysts understand risk focused procedures. The sentence was revised


Attachment Eleven Casualty Actuarial and Statistical (C) Task Force

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to read: “If the amounts do not agree, this could be an indication of weak controls within the reserving or financial reporting process of the company.” Ms. Rachford agreed to modify the checklist per the discussion on the call. Ms. Greiner will collect additional comments from the Subgroup members and revise the reference guide before the Subgroup’s May 2 conference call. Having no further business, the Actuarial Opinion (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AOSG\04.23-AOSG.docx


Attachment Twelve Casualty Actuarial and Statistical (C) Task Force

8/16/14


Draft: 5/22/14

Actuarial Opinion (C) Subgroup Conference Call April 11, 2014

The Actuarial Opinion (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call April 11, 2014. The following Subgroup members participated: Melissa L. Greiner, Chair (PA); Julie Rachford (IL); Julie Lederer (MO); Boris Privman (NJ); Stephanie Ohnmacht (PA); and Jennifer Wu (TX). 1. Discussed Revisions to the Financial Analysis Handbook Ms. Greiner explained that the proposed revisions to the Financial Analysis Handbook should mirror the revisions proposed to the Annual Statement Instructions—Property and Casualty which was submitted for consideration to the Blanks (E) Working Group March 5. Ms. Greiner said the changes proposed to the Annual Statement Instructions—Property and Casualty (instructions) emphasized the reporting of pooled companies and also changed all reserve references to carried reserves from stated or booked reserves. Ms. Rachford volunteered to edit the Financial Analysis Handbook, Section 4, Supplemental Procedures (supplement). Edits should include instructions within the supplement for the analyst to explain any pooling arrangements for which the company is a party. This should include identification of the lead company and a list of all companies included, along with their respective state(s) of domicile and pooling percentage. Ms. Greiner and Ms. Rachford agreed that a new question should be added to the supplement pertaining to pooling arrangements. The question should be added at the end of the “Identification” section before the “Scope” section in the supplement. The question should include checkboxes for each of the identifying disclosures related to intercompany pooling. Ms. Greiner volunteered to edit the Financial Analysis Handbook Section 4, Analyst Reference Guide (reference guide) to embody changes made to the supplement. Susan Gozzo Andrews (CT), who was unable to be present on the call, submitted comments pertaining to clarification issues. Ms. Greiner introduced the issues on behalf of Ms. Andrews. The comments were discussed and it was determined that follow-up is needed with Ms. Andrews to understand the basis of said comments. The issue pertains to the analyst’s judgment of the difference in the actuary’s range of estimated reserves and the company’s carried reserves. Ms. Lederer volunteered to review the reference guide and provide further clarification as needed. Ms. Lederer asked whether any other regulatory actuaries on the call have received opinions that cite calculations not in accordance with actuarial standards or principles. This relates to question #14 on the supplement. None of the other regulators on the call have received an opinion citing calculations not in accordance with actuarial standards or principles. Ms. Lederer will recommend language to clarify question #14. All revisions will be sent to NAIC staff for compilation into two drafts, the reference guide and the supplement, for discussion and consideration during the Subgroup’s next conference call. Having no further business, the Actuarial Opinion (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AOSG\04-AOSGmin.docx


Attachment Thirteen Casualty Actuarial and Statistical (C) Task Force

8/16/14


Draft: 7/21/14

Actuarial ORSA (C) Subgroup Conference Call June 27, 2014

The Actuarial ORSA (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call June 27, 2014. The following Subgroup members participated: Richard Piazza, Chair (LA); Karen Adams (AZ); Susan Gozzo Andrews (CT); Judy Mottar (IL); Jennifer Wu (TX); and Shiraz Jetha (WA). Also participating was Dan Daveline (NAIC). 1. Heard a Presentation from the AAA on the ORSA Education and Training Patricia Matson (American Academy of Actuaries—AAA) provided an overview of how the AAA can assist the Actuarial ORSA (C) Subgroup with Own Risk and Solvency Assessment (ORSA) education and training. Ms. Matson currently chairs the AAA’s ORSA Subgroup and said the Subgroup is interested in supporting the Actuarial ORSA (C) Subgroup as needed. Ms. Matson discussed two areas the AAA ORSA Subgroup could assist. The first area is specific subject matter expertise. Ms. Matson said there is a wide range of expertise among the AAA committee members; many have prepared ORSAs for their companies, have participated in the ORSA pilot project or have reviewed ORSA reports. These committee members can speak to the Actuarial ORSA (C) Subgroup, in an educational way, on their experiences. Ms. Matson said the second area would be formal training; for example, a presentation on what you may see in an ORSA report or a presentation with case studies on real-life ORSA reports. Ms. Matson said there are two AAA ORSA Subgroup projects currently under way: 1) a paper on the role of the actuary in the ORSA process, which is near completion and currently under peer-review; and 2) work on a document on how the regulatory community can use ORSA in the examination and analysis process. Ms. Matson offered to share the paper with the Actuarial ORSA (C) Subgroup prior to its publication. Mr. Piazza said the next steps to move forward with AAA educational training would be to send specific topics of interest or priority to him or Shanique Hall (NAIC). These topics will be compiled and presented to Ms. Matson to assist in developing a training agenda for the Actuarial ORSA (C) Subgroup. Ralph Blanchard (Travelers) said Travelers is one of the companies that has started to produce ORSA reports. He said there are differences in the ORSA report and the ORSA process. Mr. Blanchard recommended the Actuarial ORSA (C) Subgroup consider whether to focus education and training on what the reports will produce or what the process will produce. Mr. Blanchard said there is more experience with the ORSA process because of many companies’ pre-existing enterprise risk management (ERM) processes, whereas the reports are newer and still evolving. 2. Received an Update on the Own Risk and Solvency Assessment (ORSA) (E) Subgroup Activities Mr. Daveline provided an update on current activities under way at the Own Risk and Solvency Assessment (ORSA) (E) Subgroup. He said the most recent ORSA pilot project occurred in 2013. Following the pilot project, NAIC staff were charged with drafting regulatory guidance on how examiners and analysts should approach the ORSA Summary Report. A first draft was reviewed and subsequently sent to the Risk-Focused Surveillance (E) Working Group so that the analysis and examination are in coordination with each other. After making modifications, the Working Group recently re-exposed the Financial Analysis Handbook and the Financial Condition Examiners Handbook for comment until July 14. Mr. Daveline said that the Own Risk and Solvency Assessment (ORSA) (E) Subgroup will recommend a few tweaks to the NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual for clarification purposes. The Own Risk and Solvency Assessment (ORSA) (E) Subgroup will meet via conference call July 14 to discuss these edits. Mr. Daveline also said the Own Risk and Solvency Assessment (ORSA) (E) Subgroup has requested to hire an ERM advisor to assist regulators, specifically with education and training. Mr. Piazza asked Mr. Daveline which states are participating in the 2014 ORSA pilot project. Mr. Piazza said many of the Actuarial ORSA (C) Subgroup members would like to be involved in the pilot with their neighboring states (at the states’ discretion) in order to gain ORSA experience. Mr. Daveline said while the list of participating states will not be made public, he would provide the Subgroup members with the list of states privately. Ms. Adams said that several of the states have not adopted the Risk Management and Own Risk and Solvency Assessment Model Act (#505) and asked Mr. Daveline if this


Attachment Thirteen Casualty Actuarial and Statistical (C) Task Force

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would affect ORSA commencing in 2015. Mr. Daveline said it may have some impact. He added, however, that the ORSA Summary Report is intended to be a group report for the lead state, and a significant number of the large states, which are lead states, have adopted Model #505. 3. Heard an Update on ORSA Activities at the AAA and the IAA Mr. Jetha provided an overview of ORSA activities at the AAA and International Actuarial Association (IAA). Mr. Jetha said that Ms. Matson has already provided an overview of ORSA activities at the AAA earlier in the call; therefore, he would focus his update on ORSA activities at the IAA. Mr. Jetha said the IAA hosted a seminar in May to get attendees acquainted with the IAA and its members. Attendees included the Financial Stability Board, the International Association of Insurance Supervisors and the Bank for International Settlements. Mr. Jetha said there are several educational slide presentations on the IAA’s website that may be of interest to the Subgroup. Mr. Jetha said the IAA announced in May a Statement of Intent to prepare an international actuary note on ERM practices. Mr. Blanchard said the IAA ORSA Subgroup is producing a grid comparison of ORSA requirements across the globe. Mr. Blanchard said this is a quick resource to identify the ORSA requirements for other jurisdictions. 4. Discussed the Own Risk and Solvency Assessment (ORSA) Guidance Manual Ms. Adams had questions and comments on the Own Risk and Solvency Assessment (ORSA) Guidance Manual that she would like to discuss with the Actuarial ORSA (C) Subgroup. Ms. Adams asked that given the Own Risk and Solvency Assessment (ORSA) Guidance Manual states that the ORSA Summary Report is the company’s own risk assessment, what happens when a regulator reviews the ORSA Summary Report and disagrees with the assessment or identifies something in the report that needs to be addressed. Mr. Daveline said the regulator is assessing the risk management and not the report; therefore, it is not up to the regulator to change the report. Mr. Daveline said situations in which the regulator sees unmitigated risk in the report can result in further conversation with the company. David Sandberg (Allianz Life Insurance Company of North America) said the report is a starting point for regulators to raise conversation as to what they are seeing and to help them understand potential issues down the road they need to focus on and prepare for. Mr. Sandberg said that the report is a high-level summary report, but the real test will be during the on-site examinations. Ms. Adams asked what the actuary should include in his/her review when reviewing an ORSA report. Mr. Daveline restated the analysis and examination guidance, which says the states would summarize their observations and what the risks are, etc., and to document these for internal proposes only. Mr. Piazza asked Ms. Adams to distribute her list of questions to the Subgroup members. Mr. Piazza requested that if other Subgroup members had questions on the Own Risk and Solvency Assessment (ORSA) Guidance Manual, to send them to him or Ms. Hall. The questions would be consolidated and sent to the industry and the Own Risk and Solvency Assessment (ORSA) (E) Subgroup for informal responses. Mr. Piazza asked the Subgroup members whether they had a preference for the next conference call. It was decided that the Subgroup’s next call would be conducted after the Summer National Meeting. Having no further business, the Actuarial ORSA (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AORSA\AORSA minutes_06 27 14.docx


Attachment Fourteen Casualty Actuarial and Statistical (C) Task Force

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Draft: 5/5/14

Actuarial ORSA (C) Subgroup Conference Call April 15, 2014

The Actuarial ORSA (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call April 15, 2014. The following Subgroup members participated: Richard Piazza, Chair (LA); Karen Adams (AZ); Judy Mottar (IL); Mark Birdsall (KS); Thomas Botsko (OH); Jennifer Wu (TX); and Shiraz Jetha (WA). 1. Discussed Subgroup Status Mr. Piazza said that on the Subgroup’s March 21 call, Danny Saenz (TX), chair of the Own Risk and Solvency Assessment (ORSA) (E) Subgroup, described the Actuarial ORSA (C) Subgroup activities, provided an overview of the 2012 and 2013 ORSA pilot project and asked for input and advice of the Actuarial ORSA (C) Subgroup when the Own Risk and Solvency Assessment (ORSA) (E) Subgroup reviews certain ORSA reports. The Own Risk and Solvency Assessment (ORSA) (E) Subgroup has already distributed a memo to the states and invitations to the industry to participate in the 2014 ORSA pilot project. The Actuarial ORSA (C) Subgroup is invited to participate in any conference calls and any activities of the Own Risk and Solvency Assessment (ORSA) (E) Subgroup. Mr. Piazza said the American Academy of Actuaries’ (AAA) Task Force on Enterprise Risk Management is drafting a paper regarding the ORSA report from an actuarial perspective. Mr. Piazza said Mr. Jetha volunteered to monitor and provide feedback on information he receives from the AAA and the International Association of Actuaries. Mr. Jetha said he is a member of the AAA’s ORSA Subgroup. Mr. Piazza said outside reading material/links recently distributed to the Actuarial ORSA (C) Subgroup are for educational purposes and will be updated over time as needed. The current list includes the following: the 2014 ORSA pilot project invitation; the 2013 NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual; the 2014 NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual (draft); the 2014 ORSA exam guidance (draft); the 2014 ORSA analysis guidance; the NAIC’s 2013Report on ORSA Pilot Project; the 2012–2013 ORSA pilot project feedback; the AAA’s comments on the NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual (March 5, 2014); the Society of Actuaries “Risk Metrics for Decision-Making and ORSA” (2012) Report; the Center for Insurance Policy and Research (CIPR) ORSA article; and the CIPR ORSA topic page. Mr. Piazza said Ms. Adams requested that the Actuarial Standards Board Actuarial Standard of Practice (ASOP) No. 46, Risk Evaluation in Enterprise Risk Management, and ASOP No. 47, Risk Treatment in Enterprise Risk Management, be added to the list. 2. Reviewed Comments Received Regarding the Request From the Risk-Focused Surveillance (E) Working Group Mr. Piazza discussed the request from the Risk-Focused Surveillance (E) Working Group to review modifications to the Financial Analysis Handbook and the Financial Condition Examiners Handbook. Mr. Piazza said Mr. Jetha and Ms. Adams submitted comments. Mr. Piazza will distribute the comments to the Subgroup and requested additional comments. Mr. Jetha said he supports the general direction of the edits to the handbooks. He had two specific comments, as well as a few general comments, on the handbook revisions. Mr. Jetha said the phrase “far-sighted scenarios” needs further amplification. Mr. Jetha questioned if there was value from comparing assumptions to financial outcomes of recent/prior years’ stress tests. Mr. Jetha also said that, given the newness of the ORSA program, perhaps three to four maturity levels upon which an insurer can be assessed would be more appropriate, instead of the six currently. Ralph Blanchard (Travelers) said that, in looking at the Financial Analysis Handbook document, there is a lot of work the analyst is supposed to do for something that is supposed to be a high-level summary. Mr. Blanchard suggested that someone who has seen an ORSA should review the edits to the Financial Analysis Handbook to see how workable and achievable the work is, perhaps even using beta or field testing. Mr. Piazza said that this aspect will be reviewed during the ORSA pilot project.


Attachment Fourteen Casualty Actuarial and Statistical (C) Task Force

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3. Discussed Other Matters Mr. Piazza said that the actuarial role is not clearly defined in the ORSA review process, other than that it will be an advisory role. Mr. Piazza said there are several steps the Subgroup may want to consider to learn more about the ORSA process. Mr. Piazza said it would be useful if the Subgroup could review an actual ORSA report and have the examiners and actuary involved walk the Subgroup through an ORSA review process. Mr. Piazza said he would also like to review an ORSA report from a company perspective to get the company’s views. Because of the confidential nature of these reports, Mr. Piazza said any ORSA review would have to take place in regulator-to-regulator session. Mr. Jetha said the objective of the ORSA is to get an in-depth understanding of the company one is regulating. Ms. Adams said that the idea of walking through an ORSA is a great idea. Mr. Botsko said that several companies from Ohio participated in the 2013 pilot project and it was helpful to read and walk through an ORSA with the examiners. Mr. Piazza said he will research how to move forward with this idea. Mr. Piazza asked which members of the Subgroup would be participating in the 2014 ORSA pilot project. Mr. Botsko said Ohio would be participating in the 2014 ORSA pilot project. Mr. Birdsall raised one matter for further consideration. He said he is involved in drafting a project for streamlining actuarial documentation requirements. He said there is some overlap between the ORSA analysis and reporting and the work for reserving and RBC. He said at some point in the future, he would like to streamline actuarial documentation requirements in order to avoid duplication and redundancy of effort and promote internal consistency. Having no further business, the Actuarial ORSA (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CasAct\AORSA\AORSA minutes_04 15 14.docx


Attachment Fifteen Casualty Actuarial and Statistical (C) Task Force

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Draft: 8/8/14

Appointed Actuary (C) Subgroup Conference Call June 19, 2014

The Appointed Actuary (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call June 19, 2014. The following Subgroup members participated: Kevin Dyke, Chair (MI); Giovanni Muzzarelli (CA); Susan Gozzo Andrews (CT); Howard Eagelfeld (FL); Judy Mottar (IL); Mark Birdsall (KS); and Frank Stone (OK). 1. Adopted a Proposal to Amend its 2014 Charges Mr. Dyke said the Subgroup has previously discussed its charges in light of directions given to the Joint Qualified Actuary (A/B/C) Subgroup to not spend time on discipline issues, but rather work through the American Academy of Actuaries (AAA) and the Actuarial Board of Counseling and Discipline (ABCD) on discipline issues. He said that if the AAA does not respond satisfactorily to the regulators’ concerns, then the issue can addressed in the future. Mr. Eagelfeld said Commissioner Kevin M. McCarty (FL) will likely be concerned with the approach to defer to the AAA. He suggested a more definitive timetable on the issue. Mr. Birdsall agreed that a timeline could be beneficial. Mr. Dyke said development of the timeline is fine, but the Subgroup must be sensitive to the AAA’s timeline. He said the Subgroup might be able to finish the definition by the Fall National Meeting; however, the AAA’s validation process is needed to accomplish this. Mary Miller (AAA) said the AAA is working on the attestation template. She said it would be helpful to have regulatory goals for the validation process, especially because different actuaries have identified different goals for that process. Ms. Miller said a recent discipline notice from the ABCD had more information than previous notices have had. The aim is to increase transparency in the process. Mr. Dyke said the ABCD included facts and circumstances around the case so that other actuaries could learn from what another actuary did wrong. Mr. Dyke said the definition of “qualified actuary” is contained in the Statement of Actuarial Opinion Instructions; therefore, any modification of that particular definition would not require a model law change. Upon a motion by Mr. Birdsall, seconded by Mr. Stone, the Subgroup adopted a proposal to change its 2014 charges and to create a projected timeline. The revised charges will be proposed to the Casualty Actuarial and Statistical (C) Task Force for consideration. 2. Adopted a Recommendation to Withdraw the Model Law Development Request for Model #745

Mr. Dyke recommended withdrawing the model law development request regarding the Property and Casualty Actuarial Opinion Model Law (#745) with no modification. He said the Subgroup should focus on the definition of “qualified actuary” and work with the AAA to improve the ABCD process. With changes occurring in the ABCD process, the Subgroup will evaluate success of this before proposing changes to Model #745. Upon a motion by Mr. Birdsall, seconded by Mr. Stone, the Subgroup agreed to propose a withdrawal of the model law development request regarding the Property and Casualty Actuarial Opinion Model Law (#745). 3. Discussed Issues Regarding State Reporting to the ABCD Mr. Dyke said the Subgroup should discuss issues such as confidentiality regarding state reporting to the ABCD. Ms. Andrews said the part of Model #745 about confidentiality in reporting to the ABCD is not an accreditation standard. She said the new Standard Valuation Law (#820) in Connecticut includes this confidentiality provision. She said that it is unlikely that Connecticut would create legislation to change this one piece for property/casualty unless there is a change to the NAIC accreditation standard. State lawyers are not confident that they would want to take a case to the ABCD. However, if the accreditation standard for Model #820 includes this confidentiality provision, then Ms. Andrews suggests that the property/casualty try to piggyback on that accreditation proposal.


Attachment Fifteen Casualty Actuarial and Statistical (C) Task Force

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Ms. Miller said a stronger case might be built that actuaries should be protected by a state’s confidentiality laws if that exists for reporting of auditors or attorneys who are doing shoddy work. She asked whether regulators would report a certified public account (CPA) to the auditor’s hearing board if they found violations of auditing standards in an examination. 4. Discussed the Proposed Validation Process

The Subgroup discussed regulatory goals and principles for the validation process. Mr. Dyke said the discussion should focus on qualifications to be an appointed actuary, as opposed to actuaries performing rate filings or other regulatory work. Mr. Birdsall said the actuary should have relevant education and work experience to perform the task at hand. He said the continuing education (CE) ought to be relevant to the opinion and should be robust enough. Ms. Miller said that to write the opinion there must be 15 hours of CE directly related to that opinion. Mr. Birdsall said verification of that would be helpful. Mr. Dyke discussed the frequency of reviews. He said the reviews might be done when first appointed, annually, biannually, every five years, etc. Mr. Birdsall said a review should be done at the appointment date, but every year is not necessary; perhaps every three to five years. Ms. Gozzo said she likes having a connection to the timing for the financial examination. Ms. Mottar said that, in circumstances of heightened priority, the state conducts targeted exams. In those cases, an annual review might be needed. Mr. Dyke said the state might want to request the AAA conduct verification if there is a regulatory concern about the quality of an actuary’s work. Ms. Mottar said that, with a consultant who does work for multiple companies, the review for that actuary might end up being annual when the financial exams are not on the same schedule. Mr. Birdsall said that there could be a stipulation added that an examination be done “no more than once every three years.” Ms. Andrews said the evaluation would be performed by the regulator. Mr. Dyke said the verification is anticipated to be performed by the AAA. Mr. Birdsall said there is question of who would trigger the verification. Ms. Miller said there are a lot of issues involved; any particular qualification for a particular work product is related to that work product at a point in time. As such, the regulator would likely always have a role in this process; the AAA would simply provide a tool to make the assessment easier. She said that, prior to appointment of an actuary, regulators might want to require a company to receive documentation of the actuary’s qualifications. She said this would be in line with regulators regulating companies and not individuals. Having no further business, the Appointed Actuary (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CASTF\Appointed Actuary\6-19 Appt Actuary min.docx


Attachment Sixteen Casualty Actuarial and Statistical (C) Task Force

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Draft: 6/5/14

Appointed Actuary (C) Subgroup Conference Call

June 2, 2014 The Appointed Actuary (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call June 2, 2014. The following Subgroup members participated: Kevin Dyke, Chair (MI); Susan Gozzo Andrews (CT); Mark Birdsall (KS); Tom Botsko and Brad Schroer (OH); and Mina Bahgvardani (OK). 1. Discussed its 2014 Charges Mr. Dyke said that before any changes to the Subgroup charges are made, some investigation needs to occur. He said some states have not adopted the confidentiality provisions and ability to defer poor actuarial work to the Actuarial Board for Counseling and Discipline (ABCD). Ms. Andrews asked that each state review its law. She also said the ABCD paragraph is new on the life insurance side. NAIC staff is asked to research the accreditation requirements for both property/casualty and life/health insurance. 2. Discussed the Joint Qualified Actuary (A/B/C) Subgroup’s Proposed Definition of “Qualified Actuary” Mr. Dyke submitted a comparison document highlighting the changes in the proposed “qualified actuary” definition (Attachment Sixteen-A). The Subgroup discussed the proposed definition. Mr. Dyke said the American Academy of Actuaries’ (AAA) verification process is still under development. The Subgroup will need to evaluate the AAA’s process, decide an appropriate level of reliance on that process, and discuss any duplication of effort between the regulators and the AAA. The Subgroup will develop a process for regulatory verification and related actions, considering whether to: 1) share responsibility by having the domestic regulator perform reviews; 2) use the financial exams for verification; 3) expand verification requirements to more than just Statements of Actuarial Opinion; and 4) implement a transition period and process to evaluate qualifications of current signers. Ms. Gozzo Andrews said Colorado has a requirement to investigate qualifications of actuaries. Mr. Dyke asked for documentation of that requirement to be shared with the Subgroup and the AAA. Mr. Dyke said the Subgroup should consider that some states do not have property/casualty actuaries on staff. Mr. Birdsall said the Subgroup should consider whether to evaluate qualifications broadly or whether to get more specific (e.g., evaluate for property/casualty by individual line, such as auto, commercial and workers’ compensation, or by work product). Ms. Gozzo Andrews suggested a master list by line of business could help to strengthen the profession. Mary Miller (AAA) said the annual review of qualifications could make such a list difficult to handle in practice. An actuary qualified to handle a particular line of business one year might not meet qualification standards the next year. Numerous people commented that the wording in the proposed definition could be improved by removing unnecessary redundancies in language and breaking up the one sentence into shorter sentences that are easier to understand. Having no further business, the Appointed Actuary (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CASTF\Appointed Actuary\6-2 Appt Actuary min.docx


Definitions of Qualified Actuary for Issuing NAIC Property/Casualty Statements of Actuarial Opinion

(1) Current Definition “’Qualified Actuary’ is a person who meets the basic education, experience and continuing education requirements of the Specific Qualification Standard for Statements of Actuarial Opinion, NAIC Property and Casualty Annual Statement, as set forth in the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States, promulgated by the American Academy of Actuaries, and is either: (i) A member in good standing of the Casualty Actuarial Society, or

(ii) A member in good standing of the American Academy of Actuaries who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the American Academy of Actuaries.”

(2) As Proposed February 5, 2014 by Joint Qualified Actuary SubgroupA ’Qualified Actuary’ is a member of the American Academy of Actuaries who meets the basic education,

experience and continuing education requirements of the Specific Qualification Standard for Statements of Actuarial Opinion, NAIC Property and Casualty Annual Statement, including knowledge of and experience with U.S. regulatory requirements, as set forth in the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States, promulgated by the American Academy of Actuaries, validated in compliance with the Academy’s verification process and providing current documentation of relevant basic education, continuing education, and work experience to regulators with each regulatory submission for which certification by a qualified actuary is required, and is either: (i) A member of the Casualty Actuarial Society, or

(ii) A member of the American Academy of Actuaries who has been approved as qualified for signing statutory opinions relating to reserves and any other actuarial items by the American Academy of Actuaries.

(3) Comparison of Current (1) to Proposed (2) “A ’Qualified Actuary’ is a personmember of the American Academy of Actuaries who meets the basic education, experience and continuing education requirements of the Specific Qualification Standard for Statements of Actuarial Opinion, NAIC Property and Casualty Annual Statement, including knowledge of and experience with U.S. regulatory requirements, as set forth in the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States, promulgated by the American Academy of Actuaries, and is either:validated in compliance with the Academy’s verification process and providing current documentation of relevant basic education, continuing education, and work experience to regulators with each regulatory submission for which certification by a qualified actuary is required, and is either:

(i) A member in good standing of the Casualty Actuarial Society, or (ii) A member in good standing of the American Academy of Actuaries who has been approved as

qualified for signing casualty loss reservestatutory opinions relating to reserves and any other actuarial items by the Casualty Practice Council of the American Academy of Actuaries.”.

W:\\National Meetings\2014\Summer\TF\CasAct\Appt Actuary\Compare QA Definitions 6-2-2014.docx

Attachment Sixteen-ACasualty Actuarial and Statistical (C) Task Force

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Attachment Seventeen Casualty Actuarial and Statistical (C) Task Force

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Draft: 6/11/14

Appointed Actuary (C) Subgroup Conference Call May 20, 2014

The Appointed Actuary (C) Subgroup of the Casualty Actuarial and Statistical (C) Task Force met via conference call May 20, 2014. The following Subgroup members participated: Kevin Dyke, Chair (MI); Susan Gozzo Andrews (CT); Judy Mottar (IL); Tom Botsko (OH); and Frank Stone (OK). 1. Discussed 2014 Subgroup Charges Mr. Dyke said the Subgroup needs to decide how to move forward given the recommendations in the Joint Qualified Actuary (A/B/C) Subgroup’s February 2014 report (JQA Report). The Appointed Actuary (C) Subgroup reviewed its charges and noted it might recommend changes to those charges. Mr. Botsko said most states have authority to take action when they receive a substandard actuarial opinion by requiring another actuary to perform a new actuarial opinion. He said the current Subgroup charge seems to be about punishment of an actuary. Mr. Dyke said the charge originated from discussion to implement the life insurance actuarial hearing methodology. Mr. Botsko said he still holds the opinion that no change is needed to the model law. He also does not believe the qualified actuary definition needs to be changed. Ms. Andrews says some states have permission to share an actuary’s inappropriate work with the Actuarial Board for Counseling and Discipline (ABCD), but not all states adopted this part of the Property and Casualty Actuarial Opinion Model Law (#745). She said she believes the Subgroup should determine how to help states when they have not adopted this ability to report an actuary to the ABCD, especially in order for regulatory actuaries to meet Code of Professional Conduct obligations. She said the power to request a new report might be the answer, although at least one state does not have that power. Mary Miller (Risk & Regulatory Consulting) said the life insurance Actuarial Opinion and Memorandum Regulation (#822) was the foundation for drafting Model #745. She said that if the ABCD requirement exists on the life side, then perhaps this ABCD element in Model #745 could be made an essential element for accreditation. Ms. Miller said there might be a Financial Condition (E) Committee solution because this is not just an actuarial issue; it could also exist when the regulator should report an accountant or lawyer to his or her professional disciplinary bodies. She said there should not be any state confidentiality law that keeps regulators from referring any actuary, accountant or attorney to his or her professional disciplinary committees. Mr. Dyke agreed that the state should want this ability so long as it maintains confidentiality. 2. Discussed the Definition of “Qualified Actuary” Mr. Dyke said the JQA Report focused on the definition of “qualified actuary” and did not address some of the other issues the Joint Qualified Actuary (A/B/C) Subgroup originally discussed. Mr. Dyke pointed out the five main changes proposed to the definition of “qualified actuary” and suggested that the Subgroup should reflect on each word in the definition. He said there appears to still be indecision from regulatory actuaries regarding the need for or extent of changes to the definition. Mr. Dyke said the proposed “qualified actuary” definition would include an American Academy of Actuaries’ (AAA) validation process. Mr. Dyke suggested that the Subgroup identify goals for the validation process and determine any remaining needs of regulators (including frequency of submission and the process). Ralph Blanchard (Travelers) said Canada uses an approach similar to the UK’s practicing certificates. In those two jurisdictions, they use their professional actuarial society to deem an actuary qualified. The actuary pays a substantial fee to apply for the qualification designation or certificate. This differs from the AAA’s plans for the validation process. Ms. Miller said the current idea is that all actuaries would participate in a self-verification process, and then statutory filers would either be subjected to an audit process and/or a tool would be created to aid regulators in their determination of qualifications of actuaries opining in their states. Mr. Dyke said the Subgroup should coordinate with the Life Actuarial (A) Task Force and the Health Actuarial (B) Task Force, although neither of the task forces have this issue on their agendas yet. Having no further business, the Appointed Actuary (C) Subgroup adjourned. W:\National Meetings\2014\Summer\TF\CASTF\Appointed Actuary\5-20 Appt Actuary min.docx


From: Mottar, Judy P [mailto:[email protected]] Sent: Thursday, July 03, 2014 3:19 PM To: DeFrain, Kris Subject: FW: Casualty Actuarial and Statistical (C) Task Force Exposure - IRIS Referral Response Kris, Illinois is opposed to the proposed changes to IRIS Ratios 11, 12 and 13, which would include Adjusting and Other (A&O) Expenses in the calculation of the one and two year development. Therefore, we have made suggested revisions to the CASTF letter to FARD, consistent with this position. See attached file CASTF_Response_to_FARD_Referral_060514_(2)_Illinois.docx. Additionally, we would like to provide comments as to why we are opposed to these changes. Initially, Illinois agreed with including A&O in IRIS Ratios 11, 12 and 13 so that the incurred development would include all segments, not just losses and DCC. In theory, this could red flag additional companies for regulators to monitor that might have financial troubles due to development. It was the belief that many companies with adverse A&O development were being overlooked since these ratios only captured loss and DCC development. However, as Illinois 1) began researching this issue, 2) considered the statistics provided by Texas DOI and the NAIC, and 3) started identifying reporting inconsistencies as outlined in the letter, Illinois’s position changed such that the cost (resources and time) outweighed the benefit of adding A&O to the ratios. Most pointedly, the impact of adding A&O for the majority of companies was approximately 2.5 percentage points difference between the current ratios and the proposed ratios. IRIS Ratios 11, 12, and 13, as currently calculated, provide a sufficient benchmark for identifying issues with a Company’s reserves. Adding A&O will probably not reveal additional information that we as regulators don’t already know, especially given the impact from the research. Illinois believes the numerous tests/benchmarks in place, for example the current IRIS Ratios, FAST scores, RBC, Bright Line test, etc., will appropriately trigger the identification of problem companies without including A&O. For states that feel strongly about including all the development to monitor their domestic companies and include A&O in that measurement, ad hoc reports can be ran. Thus the need to redefine the IRIS Ratios and other related NAIC documents seems unnecessary. Sincerely, Judy P. Mottar, ACAS, MAAA Casualty Actuary Illinois Department of Insurance 320 W. Washington Street Springfield, IL 62767 217.524.5376

1© 2014 National Association of Insurance Commissioners

Attachment EighteenCasualty Actuarial and Statistical (C) Task Force

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Date: _______, 2014

Re: Response to Referral Regarding Proposed Changes to Certain Reserving IRIS Ratios Recommendation: The Casualty Actuarial and Statistical Task Force recommends that the Reserving IRIS Ratios 11, 12 and 13 NOT be revised to the proposed formulas, which would add Adjusting and Other (A&O) Expenses. The intent of the proposed revisions was to identify companies with adverse A&O development that were potentially being overlooked. However, research has shown that upon making this change, the ratios for a majority of the companies are impacted minimally (2.5% or less). In addition, the proposed revisions to these formulas will create inconsistencies in reporting (outlined below) and new challenges making in the calculations (allocation issues vs estimation issues). Therefore, it is our belief that adding A&O will not reveal additional information that we as regulators do not already know. In addition, regulators have numerous other tools and benchmarks available to identify companies that need heightened attention.



description of the formulas. The Task Force supports these formulas.



percentage points. Given that the ranges are generally rounded to the nearest 5% and the current definition for unusual values seems significant even with A&O included, the current upper bounds could continue to be used for these calculations. Some actuaries have suggested that the IRIS ratios’ usual/unusual values should be modified from their fixed percentages to vary depending on recent experience (e.g. low interest rates, etc.). Given that would be beyond the scope of your current referral, please let us know if you wish for us to further investigate that possibility.



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A. Annual Statement Blank: Five-Year Historical Data: The current descriptions of development are the same as the

current titles for the IRIS ratios, describing the data in the exhibit as being development for loss and all loss expenses when those are not accurate descriptions. The Five-Year Historical Data development should say the development is for loss and DCC expenses (rather than all loss expenses). This reporting should be consistent with the IRIS reporting. [Also note that a change in the IRIS ratios will distort the history in the Five-Year Historical Data development reporting unless you require restatement for the past few years.]

B. Annual Statement Instructions: Actuarial Opinion Summary Supplement: Current wording regarding development is as


C. Financial Analysis Handbook: Similar changes made to the Actuarial Opinion Summary Supplement would need to be made


Similar changes made to the IRIS ratios’ formulas would need to be made to the Supplemental Procedures. Presently the procedures describe the IRIS ratio, referencing Schedule P, Part 2.




7. We caution you, before adopting the changes, suggest you to weigh the inconsistencies and additional issues against the value of the IRIS ratio changes to add A&O expenses. Our Task Force has mixed reaction as to whether the status quo is preferable, with some strong opinions that the change is unnecessary. We have data showing the impact of adding A&O expenses if you wish to see the research.


cc: Wei Chuang (LA) Kris DeFrain (NAIC) Adopted by the Actuarial IRIS 11-13 (C) Subgroup on June 5, 2014.



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July 10, 2014

Via email to [email protected]

Rich PiazzaChair, Casualty Actuarial and Statistical (C) Task Forcec/o Kris DeFrain, Director, Research and ActuarialNational Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197

Re: Comments on the Proposal to Change the Basis of Insurance Regulatory Information System Ratios 11, 12, and 13

Dear Rich:

The Committee on Property and Liability Financial Reporting (COPLFR) of the American Academy of Actuaries1 appreciates this opportunity to provide feedback to the National Association of Insurance Commissioners’ (NAIC) Casualty Actuarial and Statistical (C) Task Force (CASTF) on proposed changes to Insurance Regulatory Information System (IRIS) Ratios 11, 12, and 13.

Background

As you know, last September, the Financial Analysis and Research Development (FARD) (E) Working Group requested that the CASTF examine proposed changes to the basis for calculating IRIS Ratios 11 (One-Year Reserve Development to Surplus), 12 (Two-Year Reserve Development to Surplus), and 13 (Current Reserve Deficiency to Surplus) to include all loss adjustment expenses (LAE). Currently, the “reserve ratios” are based on loss and defense and cost containment (DCC) expenses. The proposal would revise the IRIS ratio formulas to also include adjusting and other expenses (A&O). The CASTF has reviewed the proposed calculations and requested feedback on its findings.

COPLFR is responding to CASTF’s request for comments on the proposed changes. Our remarks address the benefits and drawbacks of the proposal, the impact of the proposal on insurers, the results of research conducted using publically available data, and some commentary on A&O expense allocation.

1 The American Academy of Actuaries is an 18,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. The Academy assists public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.



8/16/14


Observations

1. About two-thirds of COPLFR’s members recommended no change. One reason for that position was the small effect on insurers as a whole. The remaining third was split between (a) making the proposed change and (b) designing a way to use both the current formula for the IRIS ratios along with the new formula. The members of the group who favored making the change did so because, among other reasons, they believe it will reveal an area in which companies under-reserve. Members cited anecdotal evidence of such under-reserving, and they believe the benefit of revealing under-reserving outweighs the drawbacks of making the change.

2. To assess the effect such a change would have on insurers, we calculated IRIS Ratios 11 and 12 including and excluding A&O using data from the 2012 and 2013 Annual Statement filings. The results of this analysis are provided later in this letter. The results indicate that a small number of the approximately 1,370 insurers in each year would have changed their status, from having or not having an unusual value for the ratio to the opposite.

3. Using the same set of data, we analyzed the extent to which, if the proposal was approved, companies could manipulate the IRIS ratios by altering the allocation of A&O reserves by loss year on Schedule P. We found that approximately 15 percent of the companies with an exceptional value for IRIS Ratio 11 could have a change in that status.

4. In considering the potential for manipulation of the allocation of A&O to accident year, we found ambiguity in the Annual Statement Instructions related to allocation of A&O to loss year. We have included a further description of this inconsistency, along with aproposed solution to it, in Appendix A.

5. We did not assess whether a change in companies’ allocation of A&O to loss year is by itself a driver of whether companies have an exceptional value.

Impact of the Proposal

The proposal would not universally result in a change from “usual” to “unusual” values. Some companies would benefit from the proposed change; others would not.

Benefits

Theoretically, and assuming that a reasonable and reliable allocation of A&O reserves and payments by loss year were achievable, practicable, and in use, the proposed change would provide a more appropriate measure of adverse development and potential reserve deficiency.

Drawbacks

The result of the proposed formula is subject to manipulation, as each company has an element of discretion in its assignment of A&O payments and reserves by loss year. This assignment of A&O payments and reserves by year may vary by company enough to reduce the comparability of the metrics across companies.



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The proposed formula is more complicated to calculate because Schedule P is not currently constructed to allow for easy calculation. Prior-year Schedule P information is needed to perform the calculation. This can cause problems where the prior-year Schedule Ps are calculated on a different basis than current-year Schedule Ps. Such differences can be caused by restatements as a result of, among other things: changes in pooling, divestitures, acquisitions, and commutations.In its current form, the proposed formula is complicated to calculate. The calculation could be made easier by making numerous other changes to the Annual Statement Blank and the Instructions, as outlined in the CASTF draft response to the FARD Working Group referral. However, such changes would require financial and other resources, and the need for such resources could potentially be ongoing.Insurance regulators may not realize the impact on a particular insurer of the inclusion of A&O and may need additional information about the effect of adding A&O during the transition to its inclusion to fully understand its impact.

Other Comments

State regulators currently have the option of including A&O in their calculation of the IRIS ratios if they believe the result would be materially different or if they suspect a company of manipulating its financial statements.

Approach

Our review included Annual Statement data on a group basis from SNL Financial. We reviewed 1,377 companies for year-end 2012 and 1,352 companies for year-end 2013. For each year, we excluded companies with negative surplus in any of the three most recent years (current plus two prior) from our review. For this reason, there are fewer companies included for IRIS Ratio 12than for IRIS Ratio 11.

Analysis of Insurance Company Data

For each company and each Annual Statement year, we calculated the results of IRIS Ratios 11 and 12 using both the current and proposed formulas. The figures below outline the results ofour analysis. Using IRIS Ratio 11 at year-end 2012 as the example:

Under the current formula, 78 companies exceeded the 20 percent threshold result.Under the proposed formula, 88 companies would have exceeded the 20 percent threshold result.The change (i.e., 10 additional companies) is comprised of three companies changing from an exceptional to a usual result and 13 companies changing from a usual to an exceptional result. Exhibit 1 (attached in Appendix B) graphs the results for all 1,377 companies.



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Figure 1: IRIS Ratio 11

Result

as Reported with DCC

OnlyExceptionalTo Usual

Usual toExceptional

as Proposedwith DCC and A&O

PercentChange

Year-end 2012:

Usual 1,299 1,289 -1%Exceptional 78 (3) 13 88 13%

Total 1,377 1,377

Year-end 2013:


Total 1,352 1,352



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As companies have discretion in the allocation of A&O reserves and payments by loss year, and as this discretionary allocation does not currently affect the IRIS ratio results, it is unknown whether the additional unusual values or the absence of unusual values are the result of a faulty A&O allocation, or truly an indication of adverse development.

If the proposal is approved, it would be theoretically possible for a company to influence the results of the IRIS ratios by selecting a different allocation of A&O expenses. To test an extreme, we calculated the results of IRIS Ratios 11 and 12 assuming that each company altered its allocation of A&O reserves to place all reserves as of Dec. 31, 2012 (for the 2012 Annual Statement) in loss-year 2012 and all reserves as of Dec. 31, 2013 (for the 2013 Annual Statement) in loss-year 2013.

As shown in Figure 3 below, 16 of the 88 companies with an unusual IRIS Ratio 11 result in 2012 (or 18 percent) would have been able to produce a usual result by allocating all A&O reserves to the most recent loss year. The IRIS Ratio 11 results for year-end 2013 were comparable. IRIS Ratio 12 (Figure 4 below) had fewer companies with the potential to change the result.


Result

as Reported with DCC

OnlyExceptionalTo Usual

Usual toExceptional

as Proposedwith DCC and A&O

PercentChange

Year-end 2012:


Total 1,360 1,360

Year-end 2013:


Total 1,319 1,319



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Result as Reported

with Modified

A&O Allocation Change

Percent Change

Year-end 2012:

Usual 1,289 1,305 16 1%Exceptional 88 72 (16) -18%

Total 1,377 1,377

Year-end 2013:


Total 1,352 1,352


Result as Reported

with Modified

A&O Allocation Change

Percent Change

Year-end 2012:


Total 1,360 1,360

Year-end 2013:


Total 1,319 1,319



8/16/14


COPLFR appreciates this opportunity to provide input to the CASTF. We hope these observations are helpful, and we welcome any further discussion or review that may be helpful to this process. If you have any questions about our comments, please contact Lauren Pachman, the Academy’s casualty policy analyst, at [email protected] or (202) 223-8196.

Sincerely,

Lisa Slotznick, FCAS, MAAAVice Chairperson, COPLFRAmerican Academy of Actuaries



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Appendix A

Recommended Changes to Annual Statement Instructionson Allocation of Loss Adjustment Expenses by Year



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The current Schedule P Interrogatories state in Item 3, “The Adjusting and Other expense payments and reserves should be allocated to the years in which the losses were incurred based on the number of claims reported, closed and outstanding in those years.” (The Schedule P instructions also mention that reinsurers should report A&O “according to the reinsurance contract.”)

The NAIC Instructions for Schedule P include the following: “Reporting entities should assign the ‘Defense & Cost Containment’ expenses to the accident year in which the associated losses were assigned. Reporting entities may assign the ‘Adjusting & Other’ expenses in any justifiable way among the accident years. The preferred way is to apportion these expenses in proportion to the number of claims reported, closed or outstanding each year.” The NAIC Instructions are somewhat more flexible than the Schedule P Interrogatory Instructions.

We have the following universe of situations (A) through (D):Accident Date is available Accident Date is not available

Defense & Cost Containment LAE

(A) (B)

Adjusting & Other LAE (C) (D)

Filling in the table with some examples, we have:Accident Date is available Accident Date is not available

Defense & Cost Containment LAE

Bill from outside law firm for work on an individual claim or

in-house attorney with detailed tracking of hours

Salary of in-house attorney who works on a number of claims each day but without detailed tracking of hours to

individual claimsAdjusting & Other LAE Bill from outside adjusting

firm for work on an individual claim or in-house claim department with detailed tracking of hours spent

Salary of in-house claim department employee without detailed tracking of hours to

individual claims

The Annual Statement Instructions only explicitly cover the two cells in the above table that are shaded in YELLOW. The Instructions never explicitly recognize that insurers may have accurate accident date information for A&O LAE and may use it to recognize the accident year of the expense.

Here is a suggestion for some improved wording related to the A&O. We also recommend revisiting the wording on the DCC instructions for consistency.

1. NAIC Annual Statement Instructions – 2013 Annual Statement Instructions, page 268

Current wording:



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… Reporting entities may assign the “Adjusting & Other” expenses in any justifiable way among the accident years. The preferred way is to apportion these expenses in proportion to the number of claims reported, closed, or outstanding each year.

Suggested change:… Reporting entities may assign the “Adjusting & Other” expenses in any justifiable way among the accident years. One acceptable way is to assign these expenses to the same year as the associated loss or claims. Another acceptable The preferred way is to apportion these expenses in proportion to the number of claims reported, closed, or outstanding each year (unless the insurer is aware that this approach does not reproduce a reasonable allocation to accident year, and can produce a more reasonable allocation).

Rationale for the change:The word “preferred” implies that other ways are discouraged. That is inconsistent with the first sentence. It also may be that an allocation strictly based on claim counts may not reflect the relative costs involved to service the claims—e.g., certain types of claims may require greater levels of claim servicing, and an insurer capable of tracking such details should not be discouraged from reflecting this information in allocating A&O reserves and payments.

2. Schedule P Interrogatories – Question 3

Current wording:The Adjusting and Other expense payments and reserves should be allocated to the years in which the losses were incurred based on the number of claims reported, closed and outstanding in those years. When allocating Adjusting and Other expense between companies in a group or a pool, the Adjusting and Other expense should be allocated in the same percentage used for the loss amounts and the claim counts. For reinsurers, Adjusting and Other expense assumed should be reported according to the reinsurance contract. For Adjusting and Other expense incurred by reinsurers, or in those situations where suitable claim count information is not available, Adjusting and Other expense should be allocated by a reasonable method determined by the company and described in Interrogatory 7, below. Are they so reported in this statement? Yes [ ] No [ ]

Suggested change:The Adjusting and Other expense payments and reserves mayshould be allocated to the years in which the losses were incurred in any justifiable way that reflects the costs to adjust claims by accident year, with one generally acceptable method being to apportion such expenses to accident year based on the number of claims reported, closed and outstanding in those years. When allocating Adjusting and Other expense between companies in a group or a pool, the Adjusting and Other expense should be allocated in the same percentage used for the loss amounts and the claim counts. For reinsurers, Adjusting and Other expense assumed should be reported according to the reinsurance contract. For Adjusting and Other expense incurred by reinsurers, or in those situations where suitable claim count information is not available, Adjusting and Other expense



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should be allocated by a reasonable method determined by the company and described in Interrogatory 7, below. Are they so reported in this statement? Yes [ ] No [ ] Briefly describe how such expenses are allocated in this statement.

Rationale for the change:The word “should” in the current Interrogatory wording implies that any way other than that suggested is not acceptable. That conflicts with the 2013 Annual Statement Instructions on page 268, where it says, “Reporting entities may assign the ‘Adjusting & Other’ expenses in any justifiable way among the accident years.” The suggested wording makes the Interrogatory wording consistent with the wording of the Annual Statement Instructions.



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Appendix B

Impact of Inclusion of A&O on IRIS Ratio Results for 2012 and 20132

2 Annual Statement data from SNL Financial.



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W:\National Meetings\2014\Summer\TF\CasAct\IRIS\Comments Received\Comments Received.pdf




Date: August 16, 2014

Re: Response to Referral Regarding Proposed Changes to Certain Reserving IRIS Ratios Recommendation: The Casualty Actuarial and Statistical (C) Task Force recommends that the IRIS Ratios: P/C Reserve Ratio 11 – One-year Reserve Development to Policyholders’ Surplus, P/C Reserve Ratio 12 – Two-year Reserve Development to Policyholders’ Surplus and P/C Reserve Ratio 13 – Estimated Current Reserve Deficiency to Policyholders’ Surplus NOT be revised to the proposed formulas which would add Adjusting and Other (A&O) Expenses. The intent of the proposed revisions was to identify companies with adverse A&O development that were potentially being overlooked. However, research has shown that upon making this change, the ratios for a majority of the companies are impacted minimally (2.5% or less). In addition, the proposed revisions to these formulas will create inconsistencies in reporting (outlined below) and new challenges (allocation issues vs estimation issues). Therefore, it is our belief that adding A&O will not reveal additional information that we as regulators do not already know. In addition, regulators have numerous other tools and benchmarks available to identify companies that need heightened attention.



description of the formulas.



percentage points. Given that the ranges are generally rounded to the nearest 5% and the current definition for unusual values seems significant even with A&O included, the current upper bounds could continue to be used for these calculations. Some actuaries have suggested that the IRIS ratios’ usual/unusual values should be modified from their fixed percentages to vary depending on recent

Attachment Nineteen Casualty Actuarial and Statistical (C) Task Force

8/16/14



experience (e.g. low interest rates, etc.). Given that would be beyond the scope of your current referral, please let us know if you wish for us to further investigate that possibility.



A. Annual Statement Blank: • Five-Year Historical Data: The current descriptions of development are the same as the

current titles for the IRIS ratios, describing the data in the exhibit as being development for loss and all loss expenses when those are not accurate descriptions. The Five-Year Historical Data development should say the development is for loss and DCC expenses (rather than all loss expenses). This reporting should be consistent with the IRIS reporting. [Also note that a change in the IRIS ratios will distort the history in the Five-Year Historical Data development reporting unless you require restatement for the past few years.]

B. Annual Statement Instructions: • Actuarial Opinion Summary Supplement: Current wording regarding development is as


C. Financial Analysis Handbook: • Similar changes made to the Actuarial Opinion Summary Supplement would need to be made


• Similar changes made to the IRIS ratios’ formulas would need to be made to the Supplemental Procedures. Presently the procedures describe the IRIS ratio, referencing Schedule P, Part 2.




7. We caution you, before adopting the changes, to weigh the inconsistencies and additional issues against the value of the IRIS ratio changes to add A&O expenses. Our Task Force has mixed reaction as to whether the status quo is preferable, with some strong opinions that the change is necessary. We have data showing the impact of adding A&O expenses if you wish to see the research.


cc: Wei Chuang (LA) Kris DeFrain (NAIC) Andy Daleo (NAIC) W://National Meetings/2014/Summer/TF/CasAct/IRIS/CASTF Response to FARD Referral_081614.docx

Attachment NineteenCasualty Actuarial and Statistical (C) Task Force

8/16/14



Casualty Actuarial and Statistical (C) Task Force SOA GI Track Education Action List

On our July 23, 2014 conference call, I indicated that I would compile a list of items to gather together for consideration by CASTF members in consideration of our charge to make a recommendation to C Committee regarding a SOA GI Track (SGIT) fellow’s P&C statement of actuarial opinion (SAO). This list is comprised of actions to collect information that may prove useful for CASTF members in making a recommendation to C Committee. For a refresher, the CASTF charge from C Committee reads as follows:

“Make a recommendation by July 1, 2015, regarding the ability of SOA members who obtain the SOA fellowship in general insurance and meet U.S. qualification standards to sign actuarial opinions for NAIC property/casualty annual statements. If appropriate, follow the recommendation with a blanks proposal to allow SOA members who obtain the SOA fellowship in general insurance and meet U.S. qualification standards to sign Property/Casualty Statements of Actuarial Opinion.”

During our July 23 conference call we trimmed a list of twenty-two interesting items down to a group of nine high priority action items. Attached is the list of actionable items and their status.


Attachment TwentyCasualty Actuarial and Statistical (C) Task Force

8/16/14

W:\National Meetings\2014\Summer\TF\CasAct\SOA GI Track Action Items.docx


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APPENDIX B

Item Qualification Standards for Actuaries Issuing

Statements of Actuarial Opinion in the United States (Effective January 1, 2008)

Enhanced Qualification Standard

1 1.5 - Actuaries should regularly review their qualifications …

2 2.1 – Be a Member of the Academy, a Fellow or Associate of … the CAS …

3 2.1 – Have three years of responsible actuarial experience, which is defined as work that requires knowledge and skill in solving actuarial problems.

4 2.1 – Be knowledgeable, through examination or documented professional development, of the Law applicable to the Statement of Actuarial Opinion. “Law” means statutes, regulations, judicial decisions and other statements having legally binding authority (Code of Professional Conduct).

5 2.1 – Attain the highest possible actuarial designation in an IAA full-member organization (other than the Academy) and have a minimum of one year of responsible actuarial experience in the area of actuarial practice relevant to the subject of the SAO under the review of an actuary who was qualified to issue the SAO at the time the review took place under standards in effect at that time.

Or

Have a minimum of three years of responsible actuarial experience in the area of actuarial practice relevant to the subject of the SAO under the review of an actuary who was qualified to issue the SAO at the time the review took place under standards in effect at that time.



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APPENDIX B




6 2.1.2 - An actuary need only satisfy the basic education and experience requirement in an area of practice once. Accordingly, an actuary who has satisfied the basic education and experience requirement in an area of practice prior to the effective date of the Qualification Standards is deemed to satisfy the basic education and experience requirement in that area of practice of the Qualification Standards.

7 2.2.2 - To satisfy the General Qualification Standard, actuaries are required to complete and document at least thirty (30) hours each calendar year of relevant continuing education of which at least three (3) hours must be on professionalism topics and at least six (6) hours must be “organized activities” ....

8 3.1 - An actuary must have obtained sufficiently comprehensive knowledge of and responsible experience with the subjects specifically involved to be able to determine which actuarial concepts and techniques are applicable to the assignment and to apply those concepts and techniques successfully … An actuary who has satisfied the basic education requirements for a particular Specific Qualification Standard is not required to pass additional examinations that may subsequently be offered by the U.S.-based organizations with regard to that Statement of Actuarial Opinion after an actuary has met the basic education requirements.



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APPENDIX B




9 3.1.1.2 - An actuary should successfully complete relevant examinations administered by the American Academy of Actuaries or the Casualty Actuarial Society on the following topics: (a) policy forms and coverages, underwriting, and marketing; (b) principles of ratemaking; (c) statutory insurance accounting and expense analysis; (d) premium, loss, and expense reserves; and (e) reinsurance.

Or

3.1.2 - An actuary may also satisfy the basic education requirement by acquiring comprehensive knowledge of the applicable topics through responsible work and/or self-study …

• Property and Casualty Annual Statement Instructions

• Practice Note on Statements of Actuarial Opinion on P&C Loss Reserves (AAA/COPFLR)

• Knowledge of the CASTF practice note (same as “guidance” below?)

• Casualty Actuarial and Statistical Task Force’s (CASTF) Regulatory Guidance for YYYY Statements of Actuarial Opinion and Actuarial Opinion Summary

• Germani/Gwynn paper “Reconciliation and The Actuarial Opinion”

• Code of Professional Conduct (AAA) • For reserves: basic techniques for

estimating claim liabilities • For reserves: advanced techniques for

estimating claim liabilities • Qualification Standards for Actuaries

Issuing Statements of Actuarial Opinion in the United States (AAA)

• ASOP No. 21, Responding to or Assisting Auditors or Examiners in Connection with Financial Statements for All Practice Areas

• ASOP No. 36, Statements of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves

• ASOP No. 43, Property/Casualty Unpaid Claim Estimates

• ASOP No. 41, Communications



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APPENDIX B




10 3.2 - An actuary must obtain at least three years of responsible experience relevant to the subject of the Statement of Actuarial Opinion under review by an actuary who was qualified to issue the Statement of Actuarial Opinion at the time the review took place under standards in effect at that time. Although this experience need not necessarily be recent, it must be relevant to the subject of the Statement of Actuarial Opinion.

11 3.3 - To satisfy the Specific Qualification Standards, an actuary must obtain sufficient continuing education to maintain current knowledge of applicable standards and principles in the area of actuarial practice of the Statement of Actuarial Opinion. At a minimum, an actuary must complete 15 credit hours per calendar year of continuing education that is directly relevant to the topics identified in Section 3.1.1. A minimum of 6 of the 15 hours must be obtained through experiences that involve interactions with outside actuaries or other professionals, such as seminars, in-person or online courses, or committee work that is directly relevant to the topics identified in Section 3.1.1 ...

12 5 - A Statement of Actuarial Opinion should include an appropriate acknowledgment of qualification …



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APPENDIX B




13 6.1 - Actuaries who must satisfy the requirements of the General or Specific Qualification Standards should keep appropriate timely records as evidence that their continuing education requirements have been met. …

These records should be maintained for at least six years beyond the year(s) to which the records are applicable.

6.2 - Whenever an actuary issues a Statement of Actuarial Opinion, an actuary should be prepared to provide evidence of compliance with the Qualification Standards, including certificates of attendance (if any), meeting outlines or handouts, and notes related to “other activities,” when requested by the appropriate counseling and disciplinary body of the profession, in connection with a disciplinary, counseling, or other proceeding of such body relating to the Code of Professional Conduct.



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Wayne H. Fisher, FCAS, MAAA, CERA, ASA

President, Casualty Actuarial Society

Casualty Actuarial Society 4350 North Fairfax Drive, Suite 250, Arlington, VA 22203 [email protected] 703.276.3100 tel 703.276.3108 fax

www.casact.org

July 16, 2014 Mr. Richard Piazza, ACAS, MAAA Chair, Casualty Actuarial and Statistical (C) Task Force c/o Ms. Kris DeFrain, FCAS, CPCU, MAAA Director, Research and Actuarial NAIC Central Office 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197 Dear Mr. Piazza:

I am writing to briefly comment on one aspect of the Core Elements of Actuarial Education Survey and Results distributed in advance of your CASTF call scheduled for July 23rd. These comments are in addition to the comments submitted to the CASTF in my letter of March 19, 2014, which I believe remain valid. As before, this letter reflects my personal comments and suggestions. Should you so desire, the CAS would be happy to work with you in our shared intention to ensure the skills and professionalism of Appointed Actuaries remain at the high levels you require.

I was concerned with the fact that the Survey didn’t specifically address the importance and priority of the experience of the individuals writing and grading the relevant examinations. I believe this is perhaps the most critical consideration in evaluating the skills and professionalism of individuals completing the examinations and achieving a designation.

Syllabi, reading lists, study materials and learning objectives are important but they are only the first part of the story. Similarly, sample exams and model answers alone don’t provide insight into the qualifications of individuals passing those exams.

As I noted before, the CAS has over 600 casualty actuaries writing and grading our examinations. They have the depth and breadth across the subject areas being tested to write probing questions and evaluate answers to ascertain whether the candidate really has mastered the material and can apply it in practice; these are the individuals practicing in these areas now. And their work products have been reviewed multiple times by your colleagues in financial examinations, other peer reviews and so forth. They are skilled practitioners and are the best ones to design and administer the examination process for casualty actuaries.

Attachment Twenty-OneCasualty Actuarial and Statistical (C) Task Force

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In summary, in its consideration of actuaries to be qualified as appointed actuaries, I urge the CASTF to look beyond Syllabi, learning objectives, sample exams and so forth and focus on the technical skills and relevant, validated experience of the individuals writing and grading the exams. I am confident that CAS members, and our designations, will continue to provide you the professionalism you require in Appointed Actuaries signing Statements of Actuarial Opinion.

Regards,

Wayne H. Fisher, FCAS, MAAA, CERA, ASA

Attachment Twenty-One Casualty Actuarial and Statistical (C) Task Force

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W:\National Meetings\2014\Summer\TF\CasAct\CAS Memo Wayne Fisher.docx


Adopted October 8, 2013

REGULATORY GUIDANCE On Property and Casualty Statutory Statements of Actuarial Opinion

For the Year 20132014

Prepared by the NAIC’s Casualty Actuarial and Statistical (C) Task Force

The Casualty Actuarial and Statistical (C) Task Force (CASTF) of the NAIC believes that the Statement of Actuarial Opinion (Opinion) is a valuable tool in serving the regulatory mission of protecting consumers. This Regulatory Guidance document supplements the NAIC Annual Statement Instructions – Property/Casualty (Instructions) in an effort to provide clarity and timely guidance to companies and Appointed Actuaries regarding regulatory expectations with respect to the Opinion. An Appointed Actuary has a responsibility to know and understand both the Instructions and the expectations of regulators. One expectation of regulators clearly presented in the Instructions is that the Opinion and the supporting Actuarial Rreport and workpapers should be consistent with appropriate Actuarial Standards of Practice (ASOP), including, but not limited to, ASOPs Nos. 23, 36, 41, and 43. The CASTF consciously tries to avoid illustrative language in the Instructions and encourages all actuaries to use whatever language they feel is appropriate to clearly convey their opinion and thought processes in reaching conclusions on a company with reference to specific characteristics of that company in both the Opinion and the supporting reportActuarial Report. Specific characteristics include relevant background information about the company, such as intercompany pooling percentages, recent mergers or acquisitions, significant changes in operations, product mix, reinsurance arrangements, etc. Note that noSeveral changes were made to the 2013 2014 Instructions. Paragraph 1: Appointment, Definitions, Exemptions, and Special Reporting Requirements for Pooled Companies Paragraph 1 is directed to company management and was changed slightly in 2014 and 2012 as it relates to disclosure of disagreements with a prior Appointed Actuary. Regulators expanded on the types of disagreements that an insurer is required to report to the Insurance Department when there is a change in Appointed Actuary. Two additional types, “category type of opinion issued” and “substantive wording of the opinion,” were added and clarified. When disagreements occur, regulators now request that a description of the disagreement and the nature of its resolution, or non-resolution, be included in the letter to the Insurance Department. In additionFinally, the paragraph was amended to include a reference to ASOP No. 43. Both company management and the Appointed Actuary should be mindful of the following:

Timely feedback — The CASTF encourages management to seek feedback from a “qualified actuary” prior to management’s decision on establishing carried reserves. This allows management to make an informed decision with the benefit of actuarial analysis. It also helps to avoid a difficult situation in which management is committed to a decision that results in pressure on the actuary to “stretch” the range of reasonable reserve estimates.

Reporting to the Board of Directors or Audit Committee — The actuary is required to report to the Board of

Directors (Board). This may be done in a form of the actuary’s choosing, including, but not limited to, an executive summary or PowerPoint presentation. The entire Actuarial Report must still be made available to the Board upon request. The CASTF strongly encourages the Appointed Actuary to present his or her analysis in person so that the risks and uncertainties that underlie the exposures and the significance of the actuary’s findings can be adequately conveyed and discussed. As the actuarial profession makes advances in reserve methodology, such as stochastic simulation, a single deterministic indication would not be appropriate for many companies.


Attachment Twenty-TwoCasualty Actuarial and Statistical (C) Task Force

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While management is limited to single values on lines 1 and 3 of the Liability Page, the Board should be made aware of the actuary’s opinion regarding the risk of material adverse deviation, the sources of risk, and what amount of adverse deviation the actuary judges to be material.

Paragraph 1A: Definitions In 2011, the definition of the Actuarial Report was modified to include the Board of Directors as part of the intended audience in order to be consistent with Paragraph 1, which states that the Actuarial Report should be made available to the Board. In 2012, language was added to emphasize that this change in definition was not intended to change the content of the ReportActuarial Report as described in Paragraph 7. The actuary may still choose to present findings to the Board in any manner deemed suitable to such audience.

Paragraph 1B: Exemptions

Paragraph 1B is directed to company management, defines exemption requirements, and does not generally apply to the work of appointed actuaries. Paragraph 1C: Special Requirements for Pooled Companies

This section was modified in 2014 to expand the Instructions to apply to all companies that operate in an intercompany pooling agreement. The Instructions are no longer restricted only to the 100% lead insurer and 0% pooling member situations. The regulators recognize that the same information is required in Notes to Financial Statements, which is prepared by company management. The changes were made to provide additional clarity for readers of the Opinion; as many pooled company Opinions were silent on pooling arrangements. For each company in the pool, the Appointed Actuary shall provide in the Opinion, a brief description of the pool, identify the lead insurer and list all pool members. The Instructions also require that the actuary provide the state of domicile and the respective pooling percentage with each pool member. The actuary may choose to provide this information in a table form or paragraph form;. however, regulators would like to see this disclosure at the beginning of the Opinion to ensure the reader has a proper understanding of the contents within the Opinion and how they relate to the subject company. Regulators recognize that the same information is required in the Notes to Financial Statements, which is prepared by company management prepares. Changes were made to provide additional clarity for readers of the Opinion, as many pooled company Opinions were silent on pooling arrangements. Paragraph 1C applies only to those In situations where there is an intercompany pooling agreement in which a the lead company retains 100% of the pooled reserves and the other members of the pool retains 0%. In this situation, the Schedule P of the 0% companies is blank, and rendering an Opinion on non-existent values is virtually useless to the regulator. For these situations only, the Appointed Aactuary is directed to prepare an Opinion that reads similar to that of the lead company (“pooled Opinion”) on the Pool, which is to be filed with the Annual Statement of each of the 0% pooled companies.

Exhibits A and B should reflect values specific to the individual company. For companies with 0% pool participation,Additionally, the actuary should prepare Exhibits A and B of the Pool lead company to be filed as an addendum to the 0% pooled companies Opinions of the 0% companies. This will allow for proper data submission for each company in the pPool while accommodating the greatest distribution of the relevant values for the pPool. The Instructions include specific answers for the Exhibit B questions regarding materiality and the risk of material adverse deviation. Note the distinction between pooling with a 100% lead company with no retrocession and ceding 100% via a quota share agreement. The regulator must approve these affiliate agreements must be approved by the regulator as either an intercompany pooling arrangement or a quota-share reinsurance agreement. The proper financial reporting is dependent on the approved filings, regardless of how company management regards their operating platform. Special Note: The CASTF recognizes that paragraph 1C has limited application and that many companies are part of intercompany pooling arrangements with non-0% and less than 100% shares. For these entities, regulator expectations as well as requirements may not be clear. The CASTF intends to develop changes to the Instructions to address Opinions for all pooled companies. Until that time, the CASTF offers the following guidance and expectations: The Opinion for each pooled entity should disclose the pooling arrangements, including the percentage share for each



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pooled entity. The comments regarding reinsurance collectability should indicate that the amount of the recoverables with affiliates is due to the pooling arrangement.

Paragraph 2: Structure of the Opinion

Paragraph 2 is unchanged for 20132014. It succinctly presents the four primary sections of the Opinion.

Paragraph 3: Identification

Paragraph 3 is unchanged for 20132014.

Paragraph 4: Scope

The suggested language for the Scope paragraph includes “… and reviewed information provided to me through XXX date.” This is intended to capture the ASOP No. 36 requirement to disclose (within the scope) the date through which material information known to the actuary is included in forming the reserve opinion (review date), if it differs from the date the Opinion is signed. However, when the actuary is silent regarding the review date, this can indicate either a review date the same as the date the opinion is signed or that the actuary overlooked this disclosure requirement. In instances where the actuary’s review date is the same date the opinion is signed, regulators suggest actuaries clarify such in the opinion. Suggested language may include “… and reviewed information provided to me through the date of this opinion.”

Exhibit A provides a clear picture of what items are to be opined on by the actuary. Guidance for Exhibit B disclosure items is discussed in Paragraph 6.

The CASTF calls attention to two items of interest to regulators that pertain to the Scope of the Opinion:

1. Exposure - — An Opinion on the reasonability of the carried reserves should reflect consideration

and evaluation of more than just loss history. The CASTF expects the actuary to probe and understand the exposure associated with the company for which the Opinion is issued. Areas of particular interest to regulators include: Coverage for Service Contracts: Due to wide variation in state laws, this type of product may or may not be

regulated or treated as insurance. Insurance may only come into play as excess coverage for contractual liability.

Economic Conditions: With the current strains on the economy, regulators expect the Appointed Actuary of a company that faces such risks to attempt to quantify those risks in the analysis. Mere disclaimers are insufficient.

These are examples of what regulators expect the actuary to address as “specific characteristics of the company.”

2. Prepaid lossPrepaid adjustmentloss expensesadjustment expenses — - According to Interpretation 02-21SSAP 55, Paragraph 5 in Appendix B of the NAIC’s Accounting Practices and Procedures Manual, the liability for unpaid loss adjustment expenses should shall be established regardless of any payments made to third-party administrators (TPA), management companies, or other entities. The values should be recorded as loss adjustment expense reserves throughout the Annual Statement and not recorded as a write-in. Appointed Actuaries should be aware of any such arrangements, incorporate this consideration into their analysis, and include appropriate disclosures in the Opinion and the Actuarial Report.

The Scope paragraph also requires disclosure of the individual upon whom the Appointed Actuary relied for preparation of the data. In some cases, the Appointed Actuary, if a senior officer of the company, may be the individual who holds this responsibility. In these cases, it is acceptable for the actuary to identify himself/herself in this section. Regulators expect the Appointed Actuary’s disclosure to always include the senior official(s) of the regulated entity responsible for integrity of the data. The Appointed Actuary may receive data from a TPA, accounting firm or similar organization that provides service to the regulated entity. If such a relationship exists, it is informative to identify it in this section. However, any third party or firm is not the regulated entity, and regulators expect that a company official will always be identified..



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Paragraph 5: Opinion Paragraph 5 is meant to be consistent with ASOP No. 36 as it relates to making use of the work of another actuary. Regulators expect full compliance with additional disclosure requirements pursuant to ASOP No. 36. If material, tThe actuary should disclose if they have made use of the work of another actuary and should state if this portion of the reserves is material. Further, per ASOP No. 36, if it is for a material portion of the reserves, the Appointed Actuary should disclose whether they he or she reviewed the other’s’ underlying analysis and the extent of the review, including items such as the methods and assumptions used and the underlying arithmetic calculations. In most cases, this disclosure will result from the use of the work of another actuary for underwriting pools & and associations. The CASTF expects points C (unpaid loss and loss adjustment expense reserves) and D (unearned premium reserves for long duration contracts and/or other loss reserve items on which the Appointed Actuary is expressing an Opinion) of the Opinion paragraph to be the full and complete expression of the Appointed Actuary’s conclusion on the type of opinion rendered. Regulators will presume that the conclusion will apply to both the Net and the Direct and Assumed reserves. If the actuary reaches different conclusions, the actuary should use whatever language is appropriate to clearly convey a complete opinion, but the actuary should prepare the response to Exhibit B, Item 4, to reflect the opinion on the Net reserves. The CASTF encourages the actuary to further include narrative comments to describe any differences with respect to the Direct and Assumed reserves. The CASTF has outlined additional requirements for actuaries writing Opinions that fall into the Deficient/Inadequate, Redundant/Excessive or Qualified Opinion categories. Regulators have defined these types of Opinions to address the unique situations when an Actuary determines reserves do not make a Reasonable provision. In the Deficient/Inadequate situation, the actuary should disclose the minimum amount that the actuary believes is reasonable. Similarly, the actuary should disclose the maximum amount the actuary believes is reasonable for a Redundant/Excessive provision. Finally, regulators ask for additional information about Qualified Opinions, related to the item(s) to which the qualification relates, the reason(s) for qualification, and amounts, if disclosed by the company. Exhibit A, Items 7 and 8 require disclosure of the amount of the reserve for unearned premium for long duration contracts, and the Instructions further require the actuary to include a paragraph (D) regarding the reasonableness of the unearned premium reserve in the Opinion paragraph when these reserves are material. However, regulators have noted that some Opinions include paragraph (D) regardless of materiality. The CASTF expects that actuaries either add paragraph (D) if they can and are indeed expressing an opinion on the reasonableness of this reserve and/or add an explanatory paragraph about these unearned premium reserves in Relevant Comments and state whether the amounts are material or immaterial. With regard to “Other Premium Reserve items” in Exhibit A, Item 9, the actuary should also include an explanatory paragraph about these premium reserves in Relevant Comments and state whether the amounts are material or immaterial. Paragraph 6: Relevant Comments The CASTF considers the relevant comments of the Appointed Actuary to be the most valuable information in the Opinion. Relevant comments provide the context for the regulator to interpret the Opinion and to understand the actuary’s reasoning and judgment. In addition to the required Relevant Comments, disclosures regarding intercompany pooling, reinsurance with affiliates, mergers or acquisitions, long duration contracts, other premium reserves, catastrophe impact or risk, and other items the Appointed Actuary feels are relevant provide important information for the regulator. Risk of Material Adverse Deviation (RMAD or RMAD) Regulators continue to move towards a risk-focused approach to to improve upon risk-focused procedures in both the fFinancial aAnalysis and fFinancial eExamination areas.s areas, regulator In accordance with this approach, regulators sexpect indeed place reliance on both the cCompany management and the and management’s use of actuarial specialists employed by management to identify and discuss company-specific risk factors to insurance company operations. The Appointed Actuary’s discussion in the Opinion is an increasingly important source of information in this regard. Regulators are encouraged to see how Appointed Actuaries address company-specific risk factors in the Opinions. Therefore, the Instructions were enhanced in 2014 to require thean Appointed Actuary’s considerations and disclosureto disclose and discuss of risks in the body of the Opinion before making a statement and conclusion on RMAD. The latest version of the Instructions, as modified in 2014, requires the Appointed Actuary to:



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1) Identify the materiality standard. in U.S. dollars, ensuring that such is consistent with the amount shown in Exhibit B: Disclosures.

2) Identify the basis, or rationale, for establishing this standard. 3) Explicitly state whether he or she believes that there are significant risks and uncertainties that could result in MAD.

Describe the major factors, combination of factors or particular conditions underlying the risks and uncertainties that the actuary considers relevant to the statutory entity.

4) If such risk exists, the actuary should describe the major factors or particular conditions underlying the risks and uncertainties that the actuary reasonably believes could result in MAD. (Note that the actuary is encouraged to comment on the risks and other factors considered even when no RMAD is judged to exist.)Explicitly state whether he or she believes that those significant risks and uncertainties could result in MAD.

Note that Item 3 now precedes Item 4; the Appointed Actuary is asked to discuss risks whether or not he or she believes the company is exposed to RMAD.

With the exception of intercompany pooling members that retain a 0% share, The Appointed Actuary is reminded that each statutory entity, except for those following paragraph 1C of the Instructions, is required to have a separate Opinion and, therefore, with its own materiality standard. Where there are no unusual circumstances to consider, it may be acceptable to determine a standard for the entire pool and assign each member their its proportionate share of the total. It is not appropriate to use the entire amount of the materiality threshold for the pool as the standard for each individual pool member. For those companies following paragraph 1C of the Instructions,submitting a pooled Opinion, (i.e., the non-lead0% pool companies only)’, the materiality standard should be $0, and the RMAD conclusion should be “Not Applicable,”, as per the Instructions. If the actuary does not consider there to be ANY specific or unique risk factors to this company, the actuary should say that. If the risks have mitigated by certain cCompany actions, those explanations will also be helpful. The Instructions state that the RMAD explanatory paragraph should not include general broad statements about unspecified risks and uncertainties that could apply to nearly all companies in any situation. When considering the inclusion of risk disclosures in the Opinion, the actuary should take into account the likelihood of the event occurring. Risks and uncertainties may include items such as the uncertainty in the tail factors or the need to use industry benchmarks. Specified current risks—such as subprime mortgage exposure or declining real estate values—may be relevant to the extent that they can be significant and directly related to adverse deviation. When considering significant risks and concluding if RMAD exists, the Appointed Actuary should consider the materiality standard in relation to the range of reasonable estimates and the carried reserves. For example, RMAD should likely exist when the sum of the materiality standard plus the carried reserves is within the range of reasonable estimates. Regardless, the actuary should support the conclusion. IRIS Ratios The CASTF considers it insufficient to attribute an unusual reserve development ratio to “reserve strengthening” or “adverse development” alone and expects relevant comments on an unusual ratio to provide reasonable insight as to the company-specific factors that caused the result. Detailed documentation should be included in the Actuarial Report to support comments instatements provided in the Opinion. Methods and Assumptions The Instructions were modified in 2014 to recognize that when there is a change in Appointed Actuary, the newly Aappointed Aactuary may not be able to review the work of the prior actuary. If the Appointed Actuary has changed from the prior year and finds that no such comparison to methods and/or assumptions is practical or meaningful, the actuary should make such a disclosure. Paragraph 7: The Actuarial Report The CASTF believes that the Instructions provide the best guidance to actuaries regarding the Actuarial Report and supporting documentation.



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In 2012, Tthe Instructions were recently revised to require the Actuarial Report to include include or clarify the following additional components. The first four bullets were added recently; the latter two bullets have been requirements of the Instructions for many years.:

A description of the Appointed Actuary’s relationship to the cCompany with clear presentation of the aActuary’s role in advising the Board and/or management regarding the carried reserves. The reportActuarial Report should identify how and when the Appointed Actuary presents the analysis to the Board and, where applicable, to the officer(s) of the company responsible for determining the carried reserves;

An exhibit which that ties to the Annual Statement and compares the aActuary’s conclusions to the carried amounts consistent with the segmentation of exposure or liability groupings used in the analysis. The aActuary’s conclusions include the aActuary’s point estimates(s), range(s) of reasonable estimates, or both;

An exhibit that reconciles and maps the data used by the aActuary, consistent with the segmentation of exposure or liability groupings used in their analysis, to the Annual Statement Schedule P line of business reporting;

An exhibit or appendix showing the change in the a c t u a r y’ s estimates from the prior Actuarial Report, including extended discussion of factors underlying any material changes;.

Extended comments on trends that indicate the presence or absence of risks and uncertainties that could result in material adverse deviation;.

Extended comments on factors that led to unusual IRIS ratios for One-Year Development to Surplus, Two-Year Reserve Development to Surplus, or Estimated Current Reserve Deficiency to Surplus, and how these factors were addressed in prior and current analyses.

With regard to the first bullet, the CASTF believes that the American Academy of Actuary’s Property/Casualty Practice Note, Statements of Actuarial Opinion on Property and &Casualty Loss Reserves, provides germane sample illustrative wording covering regulators’ expectations with regard to this disclosure. The second bullet replaced the previous language: “An exhibit which ties to the Annual Statement and compares the aActuary’s conclusions to the carried amounts.” The Actuarial Opinion Summary already provides this information at the highest level of aggregation; this information should still be presented in the ReportActuarial Report. However, the language added in 2012 was intended to capture the comparisons at a more detailed level consistent with how the reserves were analyzed, ; to the extent these comparisons are possible. The third bullet further clarifies the requirement for a Schedule P reconciliation and replaces the previous language: “Documentation of the required reconciliation from the data used for analysis to the Annual Statement Schedule P.” Regulators are at least looking for a mapping of the data groupings used in the analysis to Schedule P lines of business along with detailed reconciliations of the data at the finest level of segmentation that is possible and practical. If the data cannot be reconciled, the reasons should be clearly documented in the ReportActuarial Report. The actuary should reconcile all data elements to the extent used in the analysis such as claim counts and earned premium. The CASTF recognizes that company line of business definitions are often more meaningful than Annual Statement line of business definitions when completing a reserve analysis. Such differences in data classification should be addressed and clearly documented within the ReportActuarial Report. The required reconciliation to Schedule P should illustrate differences between the data used in the actuary’s analysis and the amounts presented in Schedule P of the Annual Statement. The actuary should address the reasons for any significant differences in order to reduce questions regarding data integrity. The final fourth bullet was added in response to the recommendation by the Casualty Actuarial Society’s Task Force on Actuarial Credibility in an effort to improve the transparency of disclosures in actuarial work. The exhibit or appendix should at least illustrate the changes on a net basis, but should also include the changes on a gross basis, if relevant. The CASTF expects any significant total change to be discussed; however, an explanation should also be included for any significant fluctuations among accident years or segments. The regulator is interested in seeing what the Appointed Actuary judges to have contributed to any significant changes at any level of granularity the actuary feels is appropriate to put this the current year’s results in the context of last the prior year’s results. Thus, the actuary should judge at what level of aggregation the comparisons are meaningful. Further note that this exhibit or appendix is to show the change in the actuary’s estimates, not the



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company’s. If the Appointed Actuary has changed from the prior year and no such comparison is practical or meaningful, the actuary should make a disclosure consistent with that reported in the Opinion. such a disclosure. Exhibits alone rarely convey professional conclusions and recommendations or the significance of the actuary’s opinion or findings. A narrative section should provide clearly worded information so that readers are able to appreciate the significance of the actuary’s findings and conclusions, the uncertainty in the estimates, and any differences between the actuary’s estimates and the carried reserves. Sources of assumptions should be clearly supported. The CASTF has identified the following notable weaknesses in the documentation of many actuarial reportActuarial Reports:

1. Expected Loss Ratios. When using methodologies that rely on expected loss ratios, particularly in a long-tailed line or new business segment with high premium volume, the CASTF expects the documentation to include recognition of pricing and underwriting information in the recent years, loss costs, and loss inflation. Historical loss ratio indications have little value if rate actions, credit adjustments or program revisions have affected premium adequacy or inadequacy.

2. Actuarial Judgment. The use of this phrase in an ReportActuarial Report, in either the narrative comments or in exhibit footnotes, is not considered to be proper explanation. A descriptive rationale is needed.

3. Schedule P Reconciliation. The CASTF believes that a summary reconciliation (all years and all lines combined) is an insufficient demonstration of data integrity. The risk of lack of data integrity is increased as companies cut data into finer pieces. A reconciliation should include enough detail to reflect the segmentation of exposure or liability groupings structure used in the reserve analysis, the accident years of loss activity, and the methods used by the actuary. See more discussion on this topic above.

4. Underwriting Pools and Associations. The CASTF expects the ReportActuarial Report to include exhibits that

reconcile with the net amount shown in Exhibit B Item 10, including a reconciliation to Schedule F or discussion if the amount cannot be reconciled to Schedule F, as well as a list of the pools and associations with the associated reserve amounts. If the actuary has made use of the work of another actuary for these pools and associations and the amounts are material to the total reserves, the ReportActuarial Report should include extended discussion of what the Appointed Actuary has done to review these reserves. Ideally, the regulators would also like to see support for pools and associations on a direct and assumed basis so differences from net to gross can be understood.

The CASTF recognizes that the majority of analysis supporting an Opinion may be done with data received prior to year-end and “rolled forward” to 12/31/20xx. By reviewing the ReportActuarial Report, the regulator should be able to clearly identify why the actuary made changes in the ultimate loss selections and how those changes were incorporated into the final estimates. A summary of final selections without supporting documentation is not sufficient. The CASTF believes that regulators should be able to rely on the ReportActuarial Report as an alternative to developing their own independent estimates. A well-prepared and documented Actuarial Report that is consistent with the spirit of ASOP No. 41 can provide a foundation for efficient reserve evaluation within a statutory financial examination. This provides benefits to the examination process and potential cost-savings to the company. Paragraph 8: Signature Paragraph 8 is unchanged for 20132014. Paragraph 9: Notice Rregarding Errors Paragraph 9 of the Instructions outlines the requirements of company management to provide corrected actuarial documents to the domiciliary regulator when data errors occur. Regulators expect that whenWhen an error is discovered by the Aappointed Aactuary, the company or the regulator, that regulators expect to see a revised Opinion. Regardless of the reason for the change or re-filing of an Opinion, the revised Opinion document should be submitted in hard copy and electronically within ten 10 business days. The revised Opinion should clearly state that it is an amended filing, should contain or accompany an explanation for the revision, and should include the revised date. This is in addition to the discovery of data errors as described in paragraph 9.



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Note that Exhibit B, Item 12 includes extended loss and expense reserves for all P&C lines of business, not just Medical Professional Liability, which is addressed in the Schedule P Interrogatory. The reference toterm “Data Capture Format” from in the Annual Statement Instructions means refers to an electronic filing submission of the data in a format usable for computer queries. This allows for mechanical queries on demographic information and financial data. Appointed Actuaries should refer to the Instructions and prepare exhibits to assist the company in accurately populating the electronic submission. For those companies meeting the requirements of paragraph 1Cthat participate in an intercompany pooling arrangement and retain a 0% share of the Instructions, Exhibits A and B of the lead company should be attached as an addendum to the PDF file and/or hard copy of the Opinion being filed for the non-lead companies.


Exhibits A and B


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REGULATORY GUIDANCE

On the Property and Casualty Actuarial Opinion Summary For the Year 20132014

Prepared by the NAIC’s Casualty Actuarial and Statistical (C) Task Force

The Casualty Actuarial and Statistical (C) Task Force (CASTF) of the NAIC believes that the Actuarial Opinion Summary (Summary) is a valuable tool in serving the regulatory mission of protecting consumers. This Regulatory Guidance document supplements the NAIC Annual Statement Instructions – Property/Casualty (Instructions) in an effort to provide clarity and timely guidance to Appointed Actuaries regarding regulatory expectations with respect to the Summary. Note that noC changes were made to Paragraph 6 of the 2013 2014 Instructions, related to intercompany pooling..

Form

The Summary is intended to be a confidential document separate from the Statement of Actuarial Opinion (Opinion). The CASTF advises the Appointed Actuary to provide the Summary to their his or/ her company separately from their the Opinion. The Summary should be clearly labeled and identified prominently as a confidential document. The CASTF advises that, in order to avoid confusion, the Appointed Actuary should not attach the related Opinion to the Summary.

Not all states have adopted the Property and Casualty Actuarial Opinion Model Law that requires the Summary to be filed. Nevertheless, the CASTF recommends that the Appointed Actuary prepare the Summary regardless of the domiciliary state’s requirements, so that the Summary will be ready for submission should a foreign state—having the appropriate confidentiality safeguards—request it. Most states provide the Annual Statement contact person with a checklist that addresses filing requirements. The CASTF advises the Appointed Actuary to work with the company in determining the logistic requirements for each state.

The Summary is not submitted to the NAIC. Regulators expect that when an error in the Summary is discovered by the Appointed Actuary, the company or the regulator discovers an error in the Summary, that the revised Summary document be submitted only to the regulator within ten 10 business days. The revised Summary should clearly state it is an amended document, should contain or accompany an explanation for the revision, and should include the revised date.

Substance

The entire substance of the Summary rests in Paragraph 5. The required information for Parts A–D of Paragraph 5 is highlighted by the straightforward examples provided in the Summary section of the American Academy of Actuary’s Property/Casualty Practice Note, Statements of Actuarial Opinion on Property and Casualty&C Loss Reserves.

The content of the Summary should reflect the analysis performed by the Appointed Actuary, because the Summary is a synopsis of the conclusions drawn in the Actuarial Report. Therefore, all of the actuary’s calculated estimates, including actuarial central estimates and ranges, are to be presented in the Summary consistent with estimates presented in the Actuarial Report.

Regulators expect that point or range estimates reported in the Summary are be clearly supported and documented in the Actuarial Report. Without clarity, the documentation fails to meet Actuarial Standards of Practice and the expectation that another actuary can evaluate the work.

Adopted October 8, 2013



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Part E of Paragraph 5 of the Instructions addresses persistent adverse development. The actuary Appointed Actuary is in a unique position to be able to comment on the nature of this development. This section requires the actuary Appointed Actuary to do so. Comments can reflect common questions that regulators have, such as:

Is development concentrated in one or two exposure segments, or is it broad across all segments? How does development in the carried reserve compare to the change in the actuary’s estimate? Is development related to specific and identifiable situations that are unique to the company? Does the development or the reasons for development differ depending on the individual calendar or accident years?

Paragraph 6 is relevant ONLY to all in pooling situations as defined in paragraph 1C of the Instructions for the Opinion and provides more relevant information to the domiciliary regulator of the 0%pooled companies. For non-0% companies, The regulators expect that carried values reported in the Summary can be tied back to values reported in the Annual Statement and the Opinion, and that actuarial estimates can be tied back to the Actuarial Report. Regulators encourage the Appointed Actuaryies to display values on the pooled (or consolidated) basis in addition to the statutory entity basis. This can be accomplished by displaying two tables of information. For 0% pooled companies, the information should be that of the lead company. W:\National Meetings\2013\Summer\TF\CasAct\2013 Reg Guidance 10082013.docx



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W:\National Meetings\2014\Summer\TF\CasAct\2014 Reg Guidance SG draft.pdf



SURPLUS LINES (C) TASK FORCE The Surplus Lines (C) Task Force did not meet at the Summer National Meeting.



TITLE INSURANCE (C) TASK FORCE Title Insurance (C) Task Force Aug. 17, 2014, Minutes ...................................................................................................... 8-276 Title Insurance Financial Reporting (C) Working Group June 30, 2014, Minutes (Attachment One) .......................... 8-279

Memo to Statutory Accounting Principles (E) Working Group Regarding Agenda Item 2014-06: Title Insurance Premium Classification, July 16, 2014 (Attachment One-A) .................................. 8-281 Title Insurance Guaranty Fund (C/E) Working Group June 26, 2014, Minutes (Attachment Two) .............................. 8-282 Title Insurance Guaranty Fund (C/E) Working Group July 8, 2014, Minutes (Attachment Two-A) ..................... 8-283 Title Insurance Guaranty Association – Title Insurance Consumer Protection Fund Guideline, June 26, 2014, Revised Draft (Attachment Two-A1) ............................................................................... 8-284



Draft: 8/29/14

Title Insurance (C) Task Force Louisville, Kentucky

August 17, 2014 The Title Insurance (C) Task Force met in Louisville, KY, Aug. 17, 2014. The following Task Force members participated: Bruce R. Ramge, Chair, and Justin C. Schrader (NE); Annette E. Flood, Vice Chair, represented by Jean Boven (MI); Lori K. Wing-Heier represented by Marty Hester (AK); Jay Bradford represented by William Lacy (AR); Dave Jones represented by Jill Jacobi (CA); Chester A. McPherson represented by Philip Barlow (DC); Karen Weldin Stewart represented by Paul Reynolds (DE); Ralph T. Hudgens represented by Margaret Witten (GA); Gordon I. Ito represented by Colin Hayashida (HI); Sandy Praeger represented by Martin Hazen (KS); Sharon P. Clark represented by Ray Perry (KY); James J. Donelon represented by Warren Byrd (LA); Mike Rothman represented by Paul Hanson (MN); John M. Huff represented by Tamara Kopp (MO); Scott J. Kipper represented by Elena Ahrens (NV); Roger A. Sevigny (NH) represented by Win Pugsley; Kenneth E. Kobylowski represented by Carl Sornson (NJ); Mary Taylor represented by Michelle Rafeld (OH); John D. Doak represented by Brian Gabbert (OK); Joseph Torti III represented by Paula Pallozzi (RI); Julia Rathgeber represented by Mark Worman (TX); Todd E. Kiser represented by Brett Barratt and Suzette Green-Wright (UT); Jacqueline K. Cunningham represented by Brian Gaudiose (VA); and Mike Kreidler represented by Lee Barclay (WA). 1. Adopted Reports of its Working Groups Mr. Schrader reported that the Title Insurance Financial Reporting (C) Working Group met via conference call June 30, in which it discussed a referral from the Statutory Accounting Principles (E) Working Group regarding title insurance premium classification. The Working Group replied to the Statutory Accounting Principles (E) Working Group in a July 16 memorandum in which it agreed with revisions to delete the existing disclosure in Statement of Statutory Accounting Principles (SSAP) No. 57—Title Insurance related to gross risk rate and gross all-inclusive premium. The Working Group decided its next steps would be to work on evaluating the distribution of companies’ Schedule P reserve development and proposing to add one- and two-year development in dollars and as a percentage of surplus to the title insurers’ five-year historical exhibit. Ms. Jacobi reported that the Title Insurance Guaranty Fund (C/E) Working Group continued to work on its charge to develop a title insurance guaranty fund guideline. The Working Group met via conference call June 26 and discussed two title guaranty fund guideline drafts. A draft was exposed for comments on July 8 and will be discussed on a future conference call. Mr. Hazen reported that the Title Consumer Shopping Tools (C) Working Group’s chairs, with input from consumer representatives closely tied to the project, have drafted a shopping tool for title insurance. The draft was provided to the Working Group, interested regulators and interested parties Aug. 12. Comments should be sent to NAIC staff no later than Aug. 25, and a meeting via conference call will be held Sept. 2 to discuss: 1) the draft; 2) any comments received; and 3) the final charge to determine potential methods of distribution. Upon a motion by Mr. Byrd, seconded by Mr. Barratt, the Task Force adopted the reports of the Title Insurance Financial Reporting (C) Working Group (Attachment One), the Title Insurance Guaranty Fund (C/E) Working Group (Attachment Two) and the Title Consumer Shopping Tools (C) Working Group. 2. Heard a Presentation Concerning Consumer Disclosures

Birny Birnbaum (Center for Economic Justice—CEJ) said he and Brenda Cude (University of Georgia) presented on consumer information related to title insurance at the Aug. 16 meeting of the NAIC/Consumer Liaison Committee. He said education and disclosures are often used by regulators to address a market problem, but they are often not used with the same rigor as other regulatory tools. He said best practices for how and when to give disclosures to consumers have been developed over the years. He said a key issue of a consumer guide for title insurance is when to get the guide to consumers at the appropriate time. He said the title industry is fairly concentrated, with the top four writers having more than 80% of the market. He also said title insurers do not market to consumers but rather to real estate professionals, who steer consumers to products based on considerations given by title agents. He said this steering could be legal or illegal depending if it is a legal affiliated business arrangement. He said it is too late if consumers do not learn they can shop until the closing.



Mr. Birnbaum said the Consumer Financial Protection Bureau (CFPB) has had two recent enforcement actions related to consumer disclosures. One involved a title company paying a referral fee to law firms for steering title business where the entities referring business performed no services for consumers. The other involved a preprinted purchase contract explicitly directing the use of title and closing services. He said the title and real estate professionals have tremendous market power in referring consumers. He said disclosures need to level this market power. In response to proposed legislation in New York, Mr. Birnbaum developed a consumer alert that requires that at the first time a professional involved with the purchase, sale or refinance of a house mentions title insurance or closing to a consumer, the professional must provide a notice stating that: tes1) a person has a right to shop for title insurance; and 2) a professional who recommends a title insurer or agent may make money doing so. He said the person referring business would give the notice to the consumer and have the consumer sign it. He said this would give the consumer key information, including access to a shopping guide. He requested the Title Consumer Shopping Tools (C) Working Group and this Task Force think about how to make consumers aware of guides and rate comparison tools at the earliest time. In addition, he pointed out that many people are using smartphones to access information, so tools may need to be designed differently. Ms. Pallozzi asked how a consumer would sign a consumer alert. Mr. Birnbaum said the idea is to require the notice be given to individual consumers to sign. Mr. Hanson asked whether states would need to adopt legislation requiring real estate professionals to provide the document to consumers. Mr. Birnbaum said two entities need to be defined: 1) the licensed title agent; and 2) the affiliated professional. He said affiliated professionals would be required to provide the notice, and if there is not an affiliated entity, the title agent would be required to provide the notice. He also said disclosures should be tested with consumers before implementation. 3. Heard a Presentation on Nevada’s Title Insurance Rate Comparison Tool

Ms. Ahrens said the Nevada Division of Insurance recently released a title insurance rate comparison tool. The website asks consumers to enter information on the purchase price, down payment, county, and type of sale or refinance. The rate comparison website brings back information on title agency and carrier, rates for owner’s policy, rates for simultaneous lender’s policy and escrow fees. Consumers can email the results or download the data in a portable document format (PDF) file or Excel file format. Ms. Ahrens said additional details can be retrieved—including contact information and websites for the title agency and title insurer, as well as links to scheduled fees and rate manuals—allowing consumers to look up surcharges, discounts and miscellaneous fees. Ms. Ahrens said Nevada implemented the rate comparison tool because title insurance products are marketed to real estate agents and brokers, mortgage bankers and others who might refer business rather than to consumers, who pay for the product. The tool gives consumers access to information not previously available. Ms. Ahrens said the Division decided to include the following rates in the tool: 1) premium for standard owner’s title policy; 2) premium for simultaneous lender’s title policy; 3) premium for refinance loan policy; 4) escrow fees for the purchase or refinance of a home; 5) and short sale escrow fees. Ms. Ahrens said Nevada used Excel to develop an escrow rate input spreadsheet for title agencies to complete and a title rate input spreadsheet for insurers to complete. The state worked with the Nevada Land Title Association on an initial data call, receiving comments on the data template. Ms. Ahrens said the initial data call collected title insurance premiums and escrow rates. She said the division compared rates submitted by the insurers and agencies with the approved rate filings. Rates were then uploaded into an internal Oracle database for access by the Web application. Ms. Ahrens said insurers and agencies were instructed that an input spreadsheet must be submitted with each subsequent rate filing. Ms. Ahrens explained the Division had to be careful to account for different pricing mechanisms like bundled or itemized rates. She said the Division mandated that certain basic services be included in in the basic rate submitted in the spreadsheets. She said a consumer disclosure lists what is included in the rates and informs consumers that the rate is meant to be a comparison of title and escrow rates and not an insurance quote. The consumer disclosure also informs consumers of additional charges or discounts applicable to specific transactions. Ms. Ahrens said the rate comparison tool took about five months to create. Ms. Brown asked about independent agencies using many underwriters. Ms. Ahrens said the website shows the agency and then anyone authorized to write for the agency. Mr. Barclay asked about advertising. Ms. Ahrens said Nevada advertised through real estate magazines, local lifestyle magazines, and online and social media targeted to real estate searches. Ms. Jacobi asked if Nevada had received feedback from title professionals. Ms. Ahrens said the Division worked closely with industry in creating language on the website, but it is too early for much feedback.



4. Director Ramge reported regulator-only webinars were held May 8 and May 15. The webinars covered the Title Escrow Theft and Title Insurance Fraud White Paper, auditing of agencies, collaborative efforts with state and federal agencies, mortgage fraud, market conduct and case studies involving the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) suspicious activity reports, affiliated business arrangements and vicarious liability for producers. He said many of the comments received through evaluations requested additional detail on the issues, especially the case studies. He said the Task Force may wish to consider hosting additional training in the future. He also said the webinar is available on-demand through the NAIC’s Education and Training Department. 5. Heard an Update on Regulator Collaborative Efforts Concerning Fraud Ms. Boven reported that a collaborative enforcement group meets in regulator-to-regulator session in order to create a forum for regulators to discuss new and ongoing title insurance and mortgage fraud matters and regulations. The purpose is to facilitate regulators in the collaboration of regulating title insurance entities and products, as well as the broader title insurance related industry—including real estate, mortgage lending and origination, and the closing and settlement functions, when applicable. Ms. Boven said the CFPB has been involved with the conference calls. If any state would like to begin participating on the calls, they can contact Michael Draminski (MI). Mr. Hazen said the calls have been helpful for his state.

6. Heard an Update on Federal Activities

Anthony Cotto (NAIC) reported that there is currently no relevant title-specific federal legislation. He provided an update on the housing finance reform in the U.S. Senate Committee on Banking, Housing and Urban Affairs, which would have eliminated Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA) and wrapped them all into a new Federal Mortgage Insurance Corporation (FMIC). That bill has not proceeded to the Senate floor, but may be revisited with the next U.S. Congress. He noted that the CFPB continues to be active with mortgage transactions. 7. Heard an Update from ALTA Justin Ailes (American Land Title Association—ALTA) said there has been increased federal attention given to the mortgage transaction. He noted that, on Aug. 15, new mortgage disclosures will replace the current disclosures. He said the industry is currently working on implementation issues with the new disclosures. He said he works with the CFPB frequently and has asked the CFPB to work with state insurance regulators, real estate and banking regulators, and county recorders in each state. He said questions to consider include: 1) whether any state customs or practices need to change to accommodate the Integrated Mortgage Disclosures; 2) whether any state-specific fees or charges need to change to accommodate the Integrated Mortgage Disclosures and Uniform Closing Dataset (UCD); and 3) whether any state-specific disclosures need to be changed or created to accommodate consumer needs. Mr. Ailes said the ALTA Board of Governors has recommended that title professionals take steps to implement ALTA’s Title Insurance and Settlement Company Best Practices and conduct a self-assessment no later than September 2014. He also said ALTA is working with an outside communications and research firm to quantify what consumers think about title insurance and the best ways that the title industry can reach consumers and educate them directly. He said the research includes: 1) what information is most meaningful and impactful to consumers when communicating about title insurance; 2) how to shop; 3) what the best ways are to reach consumers; and 4) when the best time is to deliver information about title insurance to them. Mr. Ailes said ALTA will next: 1) design one-on-one interviews with a sampling of state insurance departments for additional feedback; 2) identify the most meaningful and impactful messages to communicate to consumers about title insurance and how to shop; and 3) develop a future communications campaign to improve the public’s understanding of title insurance. Having no further business, the Title Insurance (C) Task Force adjourned. W:\NationalMeetings\2014\Summer\TF\Title\08-TitleTFmin.docx

8-278

Heard a Report on the Development of a Webinar for Regulators


Attachment One Title Insurance (C) Task Force

8/17/14


Draft: 8/25/14

Title Insurance Financial Reporting (C) Working Group Conference Call June 30, 2014

The Title Insurance Financial Reporting (C) Working Group of the Title Insurance (C) Task Force met via conference call June 30, 2014. The following Working Group members participated: Gordon Hay, Chair (NE); Susan Bernard (CA); Alan Seeley (NM); and David Dahl (OR). Also participating were: Peter Rice (FL); and Michael Draminski (MI). 1. Adopted a Memo to the Statutory Accounting Principles (E) Working Group Regarding SSAP No. 57 Mr. Hay explained that this Working Group received a referral from the Statutory Accounting Principles (E) Working Group regarding agenda item 2014-06: Title Insurance Premium Classification. The Statutory Accounting Principles (E) Working Group had determined that disclosure of premium by the five separate categories was not feasible. Instead, the Working Group re-exposed the agenda item with revisions to delete the existing disclosure in Statement of Statutory Accounting Principles (SSAP) No. 57—Title Insurance related to gross risk rate and gross all-inclusive premium. Mr. Hay asked whether the Title Insurance Financial Reporting (C) Working supports deleting the clause referencing gross all-inclusive and gross risk rate premium basis. Mr. Rice asked why the five risk rates were being deleted. Mr. Hay said the Statutory Accounting Principles (E) Working Group noted that the existing categories are not being used and there does not appear to be a need to separately disclose amounts in the title annual statement notes that are already captured in Schedule T. Mr. Rice said Florida has a data call under way that is seeking data on the breakout of agency activities, asking agencies to record information based on the estimated amount of time spent on each activity. He said Florida is getting some pushback from agencies, but there is software that is facilitating the gathering of this information. Mr. Hay asked whether the annual statement blank should be used to capture this expense detail. Mr. Rice said he is not proposing that, but Florida is trying to capture this level of detail. Oregon and Nebraska said they are not collecting agency data. Mr. Rice said some agencies have indicated they wish to capture this data for their own purposes in demonstrating the amount and type of work that goes into producing a title insurance policy. Mr. Hay asked whether the annual statement is meant for this type of data. Aaron Brandenburg (NAIC) said the Working Group could ask the Blanks (E) Working Group to add this data to the annual statement if regulators find it to be helpful. Mr. Seeley asked whether the activity codes were being collected on direct operations of title insurers or whether the data would cover independent and affiliated agents. Mr. Hay said the state page asks the title insurer to characterize the premiums using combinations of the codes. He said there is no requirement that the subparts be measured or reported. Mr. Seeley said it would be hard to determine which part of premium goes into each activity code. It would require keeping track of time for search and other activities. Mr. Draminski asked about all-inclusive rates where underwriters are not allowed to collect a search or examination fee over and above the premium. Mr. Hay said, for Michigan premium, the companies’ activity codes would be “risk rate,” “search” and “examination.” Brent Scheer (Agents National Title Insurance Company) verified that is correct, based on companies in Michigan. Mr. Hay said the Working Group needs to decide if it agrees with the recommended deletion in SSAP No. 57. Robin Marcotte (NAIC) clarified that the Statutory Accounting Principles (E) Working Group is not considering deletions from Schedule T. She said the Title Insurance Financial Reporting (C) Working Group may also wish to review the comments to see if any other actions are warranted. Mr. Hay said there is no proposal to change Schedule T or the state page. Upon a motion by Mr. Dahl, seconded by Ms. Bernard, the Working Group voted to send a memo to the Statutory Accounting Principles (E) Working Group (Attachment One-A) indicating that the Title Insurance Financial Reporting (C) Working Group agrees with the deletion of the clause as referred to it by the Statutory Accounting Principles (E) Working Group. 2. Discussed Comments Received by the Statutory Principles (E) Working Group Joe Petrelli (Demotech) said Demotech recommends there be clarification on whether closing protection coverage should be allocated to activity codes having to do with closing or escrow. He said Demotech would like to see consistency created through a definition change. Ms. Marcotte said the activity codes are in the Annual Statement Instructions for Schedule T. Mr. Dahl said closing protection letters can only be issued without a charge in Oregon. Mr. Hay asked whether there were fees in some states for closing protection letters. Mr. Scheer said that, in Missouri, closing protection letters are not a premium and would not be associated with an activity code. He said they would probably be reported as other income. Mr. Petrelli said closing protection coverage is mandated in some states (Louisiana, North Carolina, Ohio and Pennsylvania) and there would then be a premium charge. Mr. Hay said this issue may require a separate proposal by the Working Group. Ms. Marcotte said it appears the closing activity code on Schedule T has to do with documents, while the escrow activity code focuses on funds. She asked whether it is essential to separate closing protection letter premium. Mr. Petrelli said it would be beneficial if the premium is consistently reported rather than left to


Attachment One Title Insurance (C) Task Force

8/17/14


the discretion of companies. Mr. Scheer said premiums would be split into activity codes, while fees would go separately in the blank. Mr. Hay said there are few states that have both closing and escrow activity codes. He asked whether the industry believes it is important to define whether closing protection premium goes under the closing activity code or the escrow activity code. Mr. Scheer said he would seek input from other industry members through the American Land Title Association (ALTA) by the end of July. Mr. Scheer said the comment letter from ALTA did not need to be discussed, because the Working Group is recommending the deletion of the risk rate language. Mr. Hay said Nebraska made three points in its original comment letter, but only the third point remains relevant based on the actions the Working Group has taken. He said the terms “gross all-inclusive” and “gross risk rate” premiums are defined in SSAP No. 57, but no similar definitions appear in SSAP No. 57 for the combinations of rate types, and it is not clear that the “gross all-inclusive” and “gross risk rate” concepts are still needed anywhere in SSAP No. 57. He recommended revised language to SSAP No. 57-6. Ms. Marcotte said she would conduct research to make sure this does not create other conflicts. Upon a motion by Mr. Dahl, seconded by Ms. Bernard, the Working Group asked Ms. Marcotte to research the implications and possibly make a recommendation to the Statutory Accounting Principles (E) Working Group. . Subsequently, Ms. Marcotte found no issues with the recommendation and it was added to the memo sent to the Statutory Accounting Principles (E) Working Group. 3. Discussed Next Steps for the Working Group Mr. Hay asked whether the Working Group should review companies’ state pages for any remaining anomalies. He said most anomalies are already known. Mr. Dahl said Oregon already reviews the state pages for companies reporting in Oregon. Mr. Hay said Nebraska does the same thing. The Working Group decided to focus on other issues at this time. Mr. Hay asked whether the Working Group should develop an industry-wide benchmark for statutory premium reserve (SPR) setup. This could be used in combination with disclosures in Notes #1 to compare companies’ SPR set-up to the industry benchmark, and compare companies’ release of SPR to the schedule set forth in the Title Insurers Model Act (#628) and in Appendix A-628 of SSAP No. 57. Mr. Hay said there are currently no nationwide benchmarks for SPR setup. He said that, without the nationwide benchmarks, the notes to financial statements are not helpful. The Working Group decided not to proceed with the work. 4. Agreed to Draft a Proposal to the Blanks (E) Working Group Mr. Hay asked whether the Working Group should test the adequacy of companies’ known claims reserve as of year-end 2013. He asked whether the Working Group should evaluate the distribution of companies’ Schedule P reserve development. Mr. Dahl said that would be useful and would tie in to the adequacy of the known claims reserve. Paul Struzzieri (Milliman) asked what was meant by “distribution of the reserve development.” Mr. Hay said one company could be always short on the adverse side and another company could always be conservative on the favorable development side. Mr. Struzzieri said most companies would probably move together based on the overall economy, but there could be some differentiation based on reserving practices. Mr. Petrelli said Demotech could provide one- or two-year development back to its inception in the 1990s. Mr. Hay said he would follow up with Mr. Petrelli on this project. Mr. Hay asked whether the Working Group should propose to add one- and two-year development in dollars and as percentage of surplus to the title insurers’ five-year historical exhibit. He said the P/C insurance blank has that information. He said this would ease the states’ review of actuarial opinion and identification of chronic inadequacy. He said it would make it easier to monitor the known claim reserve development as a subset of the Schedule P development. The Working Group found this to be a good idea. Mr. Brandenburg said he could help draft a proposal that could be given to the Blanks (E) Working Group. Upon a motion by Mr. Dahl, seconded by Ms. Bernard, the Working Group decided to draft a proposal to the Blanks (E) Working Group seeking to add one-year and two-year development for known claims and Schedule P reserves to title insurers’ five-year historical exhibit. Having no further business, the Title Insurance Financial Reporting (C) Working Group adjourned. W:\National Meetings\2014\Summer\TF\Title\FinRptWG\06-TitleFinRptWGmin.docx


Attachment One-ATitle Insurance (C) Task Force

8/17/14


To: Dale Bruggeman, Chair of the Statutory Accounting Principles (E) Working Group From: Gordon Hay, Chair of the Title Insurance Financial Reporting (C) Working Group Re: Agenda Item 2014-06: Title Insurance Premium Classification Date: July 16, 2014

On June 12, 2014, the Statutory Accounting Principles (E) Working Group asked the Title Insurance Financial Reporting (C) Working Group for its opinion on agenda item 2014-06: Title Insurance Premium Classification, specifically a recommendation to delete the existing disclosure in SSAP No. 57 of Gross Risk Rate and Gross All Inclusive Premium. The Title Insurance Financial Reporting (C) Working Group met on June 30, 2014, to discuss this proposal and agrees with the recommendation to delete the existing clause in SSAP No. 57 paragraph 23a that requires disclosure of premium on the Gross Risk Rate and Gross All Inclusive bases.

In addition, the Statutory Accounting Principles (E) Working Group requested a review of the comments received. Based on its review, the Title Insurance Financial Reporting (C) Working Group makes the following suggested revision to SSAP No. 57, paragraph 6:

A variety of services are generally provided (either by the title insurance underwriter, its agent, or others) in connection with the transfer of title to real estate. Title insurance premiums frequently are determined in the rate making process based on the bundle of services provided, including Risk Rate and some or all of title search and examination and closing or escrow fees. , referred to as “Gross All-Inclusive” premiums. By statute or custom, certain states exclude a combination of title search, and examination and closing or escrow fees from the rate-making process for title insurance premiums. , referred to as “Gross Risk Rate” premiums. Premiums shall be recorded at the date of policy issuance, on a gross either the Gross All-Inclusive or Gross Risk Rate premium basis that is consistent with the rate-making method used. The premium related to a title insurance policy is due upon the effective date of the insurance and is not refundable. The term of a title insurance policy is indefinite because the policyholder is insured for as long as he or his heirs or devisees have an interest in the property.

Please feel free to contact me or NAIC staff Aaron Brandenburg ([email protected]) if you have any questions. Cc: Julie Gann, Robin Marcotte, Aaron Brandenburg

W:\National Meetings\2014\Summer\TF\Title\FinRptWG\TFRWG to SAPWG.docx


Attachment Two Title Insurance (C) Task Force

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Draft: 8/25/14

Title Insurance Guaranty Fund (C/E) Working Group Conference Call June 26, 2014

The Title Insurance Guaranty Fund (C/E) Working Group of the Title Insurance (C) Task Force and Receivership and Insolvency (E) Task Force met via conference call June 26, 2014. The following Working Group members participated: John Finston, Co-Chair, and Jill Jacobi (CA); Christine Nelson (CO); Philip Barlow (DC); Martin Hazen (KS); Carrie Couch, Tamara Kopp and Majorie Thompson (MO); Gordon Hay (NE); and James Kennedy (TX). 1. Discussed the Drafting Committee’s Work Mr. Finston gave a brief history of the Working Group’s effort to develop acceptable guidelines. The current draft is the Working Group’s response to the American Land Title Association (ALTA) comments. The revised draft more closely reflects how guaranty funds have traditionally operated. The fund would respond if there is an insolvency of a title underwriter. The Working Group incorporated some suggestions that ALTA had made to the initial draft. Ms. Jacobi said the revised draft includes several drafting notes in areas where the states are likely to have state laws that apply. The states can insert their specific state statutes in these sections. These were inserted to provide the flexibility suggested during earlier comment periods. Madeleine Nagy (ALTA) said she had conducted a call with ALTA members earlier in the week. ALTA does not have any concerns with the current draft. She thanked the Working Group for its efforts in revising the draft. Mr. Kennedy asked if there should be wording added to Section 7 on “Powers and Duties of the Association” to get an assumption agreement of policies, rather than just paying covered claims. Mr. Finston agreed, and Ms. Jacobi agreed to add specific wording to the powers section. Ms. Jacobi said that she had received a written suggestion from Michael Draminski (NAIC) that the words “claims and expenses” be reinserted to the sentence at the bottom of Page 7. Ms. Jacobi will make that change, as well. Mr. Hay said that there was a typo on Page 1 that needed to be corrected. Ms. Jacobi acknowledged that this has now been addressed on the master draft. Mr. Barlow said a vote is needed to expose the draft. Because the Working Group did not have a quorum on the call, Mr. Finston instructed Dave Keleher (NAIC) to conduct an e-vote on whether to expose the draft (Attachment Two-A). If approved, the draft will be exposed for a 30-day public comment period. Having no further business, the Title Insurance Guaranty Fund (C/E) Working Group adjourned. W:\National Meetings\2014\Summer\TF\Title\GuarantyFund\06-TitleGuarantyFundmin.docx


Attachment Two-A Title Insurance (C) Task Force

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Draft: 10/17/14

Title Insurance Guaranty Fund (C/E) Working Group E-Vote

July 8, 2014 The Title Insurance Guaranty Fund (C/E) Working Group of the Title Insurance (C) Task Force and Receivership and Insolvency (E) Task Force conducted an e-vote that concluded July 8, 2014. The following Working Group members participated: Cynthia Donovan, Chair (IN); Martin Hazen (KS); Tamara Kopp (MO); and Gordon Hay (NE). 1. Voted to Expose the June 26 draft Title Insurance Guaranty Association – Title Insurance Consumer Protection Fund

Guideline The Working Group conducted an e-vote to decide if the June 26 draft Title Insurance Guaranty Association – Title Insurance Consumer Protection Fund Guideline (Attachment Two-A1) was ready for public exposure. A majority of the Working Group members voted to expose the draft for a public comment period ending Aug. 8. The motion passed. Having no further business, the Title Insurance Guaranty Fund (C/E) Working Group adjourned. W:\National Meetings\2014\Summer\TF\Title\GuarantyFundWG\07-08 e-vote Title Guaranty Fund WG.docx


#859756v1 NAIC Jacobi OPTION June 26, 2014 Revised Draft

NAIC Jacobi OPTION June 26th, 2014 Revised Draft #859756

GUARANTY ASSOCIATION FOR TITLE INSURANCE

TITLE INSURANCE GUARANTY ASSOCIATION-TITLE INSURANCE CONSUMER PROTECTION FUND GUIDELINE

Table of Contents

Section l. Title

Section 2. Purpose

Section 3. Scope

Section 4. Definitions

Section 5. Organization of Association

Section 6. Board of Directors

Section 7. Powers and Duties of the Association

Section 8. Plan of Operation

Section 9. Duties and Powers of Commissioner

Section 10. Coordination Among Guaranty Associations

Section 11. Effect of Paid Claims

Section 12. Non-duplication of Recovery

Section 13. Examination of Association; Financial Reports

Section 14. Recognition of Assessment in Rates

Section 15. Immunity and Confidentiality

Section 16. Stay of Proceedings

Section 17. Termination; Distribution of Funds


Attachment Two-A1 Title Insurance (C) Task Force

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Section 1. Title

This Act may be cited as the "[State] Title Insurance Guaranty Association-Title Insurance Consumer Protection Fund.”

Section 2. Purpose

The purpose of this Act is to provide a mechanism for continuation of coverage, payment of covered claims under certain insurance policies, to avoid excessive delay in payment and avoid financial loss to policyholders because of insolvency of a title insurer and provide an association to assess the cost of such protection.

Section 3. Scope

This Act applies to all title insurers authorized to transact insurance in this state.

Section 4. Definitions

A. "Association" means the title insurance guaranty association.

B. "Authorized to transact insurance" means a title insurer as defined in [insert appropriate citation to the insurance code].

C. “Commissioner" means the chief regulatory insurance official of this state, whether referred to as Director, Superintendent, Commissioner, or other similar title.

D. "Covered claim" means an unpaid claim of an insured covered under and not in excess of the applicable limits of a title insurance policy insuring land located in this state issued by an insolvent insurer. Subject to applicable policy limits, the association's liability for covered claims shall not exceed $300,000.00 per claim The total amount that may be recovered from the association by a claimant for all covered claims shall not exceed $600,000. "Covered claim" does not include supplementary payment obligations, including but not limited to adjustment fees and expenses, escrow or other closing protection claims nor does it include punitive, exemplary, extra-contractual or bad-faith damages awarded by a court judgment against an insurer. “Covered claim” does not include any first or third party claim by or against an insured whose net worth on December 31 of the year preceding the date the insurer becomes insolvent exceeds $25,000,000; provided the insured’s net worth on such date shall be deemed to include the aggregate net worth of the insured and all of its affiliates as calculated on a consolidated basis, and the insured has not applied for or consented to appointment of



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a receiver, trustee or liquidator for all or substantially all of its assets, filed a voluntary bankruptcy petition or a proceeding under state law to reorganize or receive protection under any insolvency law. The amount of a covered claim shall be reduced by the amount or other benefit that an insured recovers from any person, including an agent, regardless of whether an assignment is taken.

Drafting Note: States which desire to include additional claims in the fund may omit one or more of the exclusions from this definition.

F. "Insolvent insurer" means:

(1) An insurer authorized to transact business in this state at the time the policy was issued or an insurer that subsequently assumes such policy under an assumption agreement;

(2) Against which an Order of liquidation with a finding of insolvency has been entered after the effective date of this Act by a court or administrative agency of competent jurisdiction in the insurer's state of domicile, or of this state under [insert state liquidation law citation]; and

(3) Which Order of liquidation has not been stayed or been the subject of a writ of supersedes or other comparable Order.

G. “Insured” means a person entitled to payment for insured loss under a policy issued by the insolvent title insurance company on title to real property located in this state.

H. "Member insurer" means any person who is authorized to transact title insurance in this state.

Drafting Note: Some states may authorize property and casualty insurers to transact title insurance. Other states may limit the transaction of title insurance to monoline title insurers.

I. "Person" means any individual, corporation, partnership, association, trust or voluntary organization.

J. “Policy” means a title insurance policy, or assumption certificate whose subject of coverage or protection is title to real property located in this state; and “Title Policy” means any written instrument or contract by means of which title insurance liability is assumed by a title insurer.

K. “Receiver” means receiver, liquidator, rehabilitator, or conservator as the context may require.

L. “Servicing facility” means a person or persons delegated by the board of directors to settle or compromise claims and to expend association assets to pay claims.



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Section 5. Organization of Association

There is hereby created a nonprofit legal entity to be known as the [State] Title Insurance Guaranty Association. All member insurers shall maintain membership in the association as a condition of their authority to transact title insurance in this state. The association may take any appropriate form of legal entity available under the laws of this state, including, but not limited to, a corporation or receivership association as approved by the Commissioner.

Section 6. Board of Directors

A. The board of directors of the association shall consist of not less than five (5), nor more than eleven (11) persons serving terms as established in the plan of operation. In addition to the voting members of the board, the commissioner or his designated representative shall be an ex-officio non-voting member of the board. The members of the board shall be selected by member insurers subject to the approval of the Commissioner and shall have as a majority of its members, persons who are employed by member insurers. Vacancies on the board shall be filled for the remaining period of the term by a majority vote of the remaining board members, subject to the approval of the Commissioner.

B. In approving selections to the board, the Commissioner shall consider, among other things, whether all member insurers are fairly represented.

C. Members of the board of directors shall not receive compensation for serving as members of the board or any committees thereof, but may be reimbursed from the administrative account for actual expenses incurred by them as members of the board of directors.

Section 7. Powers and Duties of the Association

A. The association shall:

(1) Be obligated to the extent of the amount of covered claims arising prior to the determination of insolvency, except that the association shall not be obligated as to policies which have been replaced by another title insurance policy issued by a solvent authorized title insurer. In no event shall the association be obligated for an amount in excess of the obligation of the insolvent insurer under the policy from which the claim arises;

Drafting note: If another title insurance company issues a policy there should be no covered claims under the original, now insolvent, title insurance company policy.

(2) Have no liability for the alleged bad faith of the insolvent insurer in the handling of any claim prior to the determination of insolvency or for any exemplary or punitive damages;



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(3) Investigate claims made against the policies of an insolvent insurer and adjust, negotiate, resolve, settle and pay covered claims to the extent of the association's obligation and deny all other claims and may review settlements, releases and judgments to which the insolvent insurer or its insureds were parties to in order to determine the extent to which such settlements, releases and judgments may be properly contested; handle claims through its employees or through one or more insurers or other persons designated as servicing facilities. Designation of a servicing facility is subject to the approval of the Board of Directors, but the designation of such insurer may be declined by the member insurer; and

(4) Refund to the member insurers in proportion to the contribution of each member insurer to that account that amount by which the assets of the account exceed the covered claims and expenses, including loss adjustment expenses, and receivership expenses for the coming year if, at the end of any calendar year, the board of directors finds that the assets of the association in the fund exceed the liabilities of that account.

B. The association may subject to approval by the board of directors:

(1) Employ or retain persons or companies as servicing facilities necessary to handle claims and perform other duties of the association;

(2) Borrow funds necessary to affect the purposes of this article in accordance with the plan of operation;

(3) Sue or be sued and intervene in any court or arbitration forum having jurisdiction over an insolvent member insurer;

(4) Negotiate and become a party to contracts necessary to carry out the purpose of this Act;, including, assumption or reinsurance agreements relating to the title policies of an insolvent insurer;

(5) The association may take actions as provided in subsections A and B of this section prior to an insurer being declared insolvent by a court, where an insurer is potentially unable to fulfill its contractual obligations or Is determined to be impaired; and

(6) Perform other acts necessary or proper to effectuate the purpose of this Act.

C. If the association fails to act within a reasonable time, the Commissioner shall assume the powers and duties of the board of the association and cause it to act as appropriate.



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Section 8. Plan of Operation

A. The association shall submit to the Commissioner a plan of operation and any amendments thereto necessary or suitable to assure the fair, reasonable and equitable administration of the association. The plan of operation and any amendments thereto shall become effective upon the approval in writing by the Commissioner. If, at any time, the association fails to submit suitable amendments to the plan, the Commissioner shall, after notice and hearing, adopt rules necessary or advisable to effectuate the provisions of this Act. The rules shall continue in force until modified by the Commissioner or superseded by a plan or amendments submitted by the association and approved by the Commissioner.

B. All member insurers shall comply with the plan of operation, subject to the provisions of this Act.

C. The plan of operation, among other things, shall establish procedures for conducting the business of the association, for handling its assets, for keeping records and for the conduct of other activities necessary for execution of the powers and duties of the association.

D. The plan of operation may provide that any and all powers and duties of the association, except those under Section 6 and 7 of this Act that are to be performed by the Board, be delegated to a corporation, association or other organization which performs or will perform functions similar to those of the association, or its equivalent, in two (2) or more states. Such a corporation, association or organization shall be reimbursed as a servicing facility would be reimbursed and shall be paid by the association for its costs incurred in performance of such functions.

Section 9. Duties and Powers of Commissioner

A. The Commissioner shall:

(1) Serve on the association a copy of any complaint seeking an order of liquidation with a finding of insolvency against a member insurer domiciled in this state at the same time that such complaint is filed with a court of competent jurisdiction; and

(2) Notify the association of the existence of an insolvent insurer not later than three (3) days after receipt of notice of the determination of the insolvency; and upon request of the board of directors, provide the association with a statement of the reported direct premiums written for the [insert time period] of each member insurer.



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B. The Commissioner may:

(1) Suspend or revoke, after notice and hearing, the certificate of authority to transact insurance in this state of any member insurer which fails to pay an assessment when due or fails to comply with the plan of operation. As an alternative, the Commissioner may levy a civil penalty on any member insurer which fails to pay an assessment when due. The civil penalty shall not exceed five percent of the unpaid assessment per month, except that no civil penalty shall be less than one hundred dollars ($100) a month; and

(2) Revoke the designation of any servicing facility if he finds claims are being handled unsatisfactorily.

Section 10. Coordination Among Guaranty Associations

A. The association may join one or more organizations of other state title guaranty associations of similar purposes, to further the purposes and administer the powers and duties of the association. The association may designate one or more of these organizations to act as a liaison for the association and to the extent which the association authorizes, to bind the association in agreements or settlements with the receiver of the insolvent insurer or his or her designated representative.

B. The association, in cooperation with other obligated or potentially obligated guaranty associations, or their designated representatives, shall make all reasonable efforts to coordinate and cooperate with the receiver, or his or her designated representative, in the most efficient and uniform manner.

Section 11. Effect of Paid Claims

A. Any person recovering under this Act shall be deemed to have assigned his rights under the policy to the association to the extent of his recovery from the association. Every insured seeking the protection of this Act shall cooperate with the association to the same extent as he would have been required to cooperate with the insolvent insurer. The association shall have no cause of action against an insured for any sums it has paid out except such causes of action as the insolvent insurer would have had if such sums had been paid by the insolvent insurer. In the case of an insolvent insurer operating on a plan with assessment liability, payments of claims of the association do not operate to reduce the liability of the insured to the receiver, liquidator, or statutory successor for unpaid assessments.

B. The court having jurisdiction shall grant such claims assigned pursuant to Subsection A of this section and the expenses of the association or similar organization in another state the same priority as the claims and expenses of policyholders. The association may make application to the receivership court for reimbursement of such reasonable claims



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and expenses and upon proper showing to the court for reimbursement of such amounts the court shall order appropriate reimbursement of reasonable claims and expenses to be made.

C. The receiver for the insolvent insurer shall, each time a request for funds is submitted to the association but not less than once every six months within the time set by the receivership court, file with the receiver or liquidator court of the insolvent insurer, a statement of the covered claims paid, reserves for unpaid claims, claims expense incurred, and the balance of funds then in the possession of the receiver.

Section 12. Non-Duplication of Recovery

Any person having a claim against an insurer under any provision in an insurance policy other than a policy of an insolvent insurer which is also a covered claim, shall be required to first exhaust his or her rights under such policy. Any amount payable on a covered claim under this Act shall be reduced by the amount of any recovery or value thereof received under such insurance policy.

Section 13. Examination of Association; Financial Reports

The association is subject to examination and shall complete audited financial statements. The board of directors shall submit to the commissioner and its member insurers, not later than June 30 each year, a financial report for the preceding year in a form approved by the commissioner.

Section 14. Recognition of Assessment in Rates

A. ASSESSMENTS

1. MAKING OF ASSESSMENT. (a) If the commissioner determines that a title insurance company has become insolvent, the association shall promptly estimate the amount of additional money needed to supplement the assets of the impaired title insurance company or agent to pay all covered claims and administrative expenses.

(b) The association shall assess title insurance companies in writing an amount as determined under Part 2 of this subsection. A member insurer does not incur real or contingent liability under this Act until the association provides the member insurer with a written assessment.

2. AMOUNT OF ASSESSMENT; PRORATION OF PAYMENT. (a) The association shall assess member insurers the amount necessary to pay: (1) the association's obligations under this Act and the expenses of handling covered claims subsequent to an insolvency; and (2) other expenses authorized by this Act.



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(b) The assessment of each member insurer must be in the proportion that the net direct written title premiums of that company for the calendar year preceding the assessment bear to the net direct written title premiums of all member insurers for that year.

(c) The total assessment of a member insurer in a year may not exceed an amount equal to two percent of the member's net title premiums earned for the calendar year preceding the assessment. If the maximum assessment and the association's other assets are insufficient in any one year to make all necessary payments, the money available shall be prorated and the unpaid portion shall be paid in subsequent years.

3. NOTICE AND PAYMENT. (a) Not later than the 45th day before the date an assessment is due, the association shall notify member insurers.

(b) Not later than the 45th day after the date an assessment is made, the member insurer shall pay the association the amount of the assessment.

4. EXEMPTION FOR IMPAIRED TITLE INSURANCE COMPANY. A member insurer is exempt from assessment during the period beginning on the date the commissioner designates the company as an impaired member insurer and ending on the date the commissioner determines that the company is no longer an impaired member insurer.

Drafting Note: Some states may substitute hazardous financial condition or inability to meet obligations for impaired.

5. DEFERMENT. (a) At the discretion of commissioner, the association may defer in whole or in part an assessment of a member insurer that would cause the member's financial statement to show amounts of capital or surplus less than the minimum amount required for a certificate of authority in any jurisdiction in which the company is authorized to engage in the business of insurance.

(b) The member insurer shall pay the deferred assessment when payment will not reduce capital or surplus below required minimums. The payment shall be refunded to or credited against future assessments of any member insurer receiving a larger assessment because of the deferment, as elected by that member.

(c) During a period of deferment, the member insurer may not pay a dividend to shareholders or policyholders.

6. ACCOUNTING; REPORTS; REFUND. (a) The association shall adopt accounting procedures to show how money received from assessments or partial assessments is used.

(b) The association shall make interim accounting reports as the commissioner requires.



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(c) The association shall make a final report to the commissioner showing how money received from assessments or partial assessments has been used, including a statement of any final balance of that money.

7. USE OF ASSESSMENTS. The association may use money from assessments to negotiate and consummate contracts of reinsurance, assumption of liabilities or replacement policies from authorized title insurers to provide for outstanding liabilities of covered claims. Assessments shall be used to pay the associations general expenses and statutory obligations.

8. FAILURE TO PAY; AUTHORITY OF COMMISSIONER.

(a) The association shall promptly report to the commissioner a failure of a member insurer to pay an assessment when due.

(b) On failure of a member insurer to pay an assessment when due, the commissioner may either:

(1) Suspend or revoke, after notice and hearing, the company's certificate of authority to engage in business in this state; or

(2) Assess an administrative penalty in an amount not to exceed the greater of five percent of the unpaid assessment each month or $100 each month.

(c) A member insurer whose certificate of authority is canceled or surrendered is liable for any unpaid assessments made before the date of the cancellation or surrender.

9. RECOVERY OF ASSESSMENT IN RATES; TAX CREDIT. (a) The surcharge on title insurance policies shall be based on historical need-include amounts sufficient to recoup a sum equal to the amounts paid to the association by the member insurers, less any amounts returned to the member insurers by the association, and such rates shall not be deemed excessive because they contain an amount reasonably calculated to recoup assessments paid by the member insurers.

(b) Unless the commissioner determines that all amounts paid as assessments by each member insurer have been recovered under Subsection (a), for any amount not recovered the member insurer is entitled to a credit against its premium tax [include reference to state law providing for premium taxes]. The credit may be taken at a rate of 20 percent each year for five successive years following the date of assessment and, if the member insurer elects, may be taken over an additional number of years.

Drafting note: State law may not permit this tax offset, as premium taxes are for general fund purposes and assessments as provided in this Act are for a specific purpose.



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(c) An amount of a tax credit allowed by this section that is unclaimed may be shown in the member insurer’s books and records as an admitted asset for all purposes, including an annual statement under [include reference to state law].

Drafting note: State law may not permit this tax offset, therefore subsections (b) and (c) may be omitted.

Section 15. Immunity and Confidentiality

A. There shall be no liability on the part of, and cause of action of any nature shall arise against, any member insurer, the association or its officers, agents or employees, the board of directors, any individual director or the Commissioner or his representative for any action taken by them in the performance of their powers and duties under this Act or for failure to prevent any insolvency.

B. The meetings, activities, recommendations and decisions of the board of directors of the association as required or permitted in this article shall not be open to public inspection, nor considered public documents pursuant to [insert relevant state law]. No representative of a member insurer shall be excluded from any meeting of the board of directors, with the exception of a representative of an insolvent insurer.

Section 16. Stay of Proceedings

All proceedings in which the insolvent insurer is a party or is obligated to defend a party in any court in this state shall, subject to waiver of the association for specific cases involving covered claims, be stayed for six (6) months and such additional time as may be determined by the court from the date the insolvency is determined or an ancillary proceeding is instituted in the state, whichever is later, to permit proper defense by the association of all pending causes of action.

The liquidator, receiver or statutory successor of an insolvent insurer covered by this Act shall permit access by the board or its authorized representative to such of the insolvent insurer’s records which are necessary for the board in carrying out its functions under this act with regard to covered claims. In addition, the liquidator, receiver or statutory successor shall provide the board or its representative with copies of those records upon the request by the board and at the expense of the board.

Section 17. Termination; Distribution of Funds

A. The Commissioner shall by Order terminate the operation of the association if he or she finds, after hearing, that there is in effect a statutory or voluntary plan which:

(1) Is a permanent plan which is adequately funded or for which an adequate means of funding is provided; and



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(2) Extends, or will extend to the policyholders of this state protection and benefits with respect to insolvent member insurers not substantially less favorable and effective to the policyholders than the protection provided under this Act.

B. If operation of the association is terminated or if the association has no further known obligations, the association, as soon as possible thereafter, shall distribute the balance of money and assets remaining, after discharge of the functions of the association, with respect to prior insurer insolvencies not covered by another plan, together with expenses, to the member insurers or former member insurers, pro rata upon the basis of the aggregate of such payments made by the respective insurers during the period of five (5) years next preceding the date of the Order.



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WORKERS’ COMPENSATION (C) TASK FORCE Workers’ Compensation (C) Task Force Aug. 18, 2014, Minutes........................................................................................ 8-297

8-296

NAIC/IAIABC Joint (C) Working Group May 7, 2014, Minutes (Attachment One) ................................................... 8-299



Draft: 8/29/14

Workers’ Compensation (C) Task Force Louisville, Kentucky

August 18, 2014 The Workers’ Compensation (C) Task Force met in Louisville, KY, Aug. 18, 2014. The following Task Force members participated: Merle D. Scheiber, Chair, represented by Larry Deiter (SD); William D. Deal, Vice Chair (ID); Jim L. Ridling represented by Charles Angell (AL); Lori K. Wing-Heier represented by Sarah McNair-Grove (AK); Jay Bradford represented by Lenita Blasingame (AR); Dave Jones represented by Jill Jacobi (CA); Thomas B. Leonardi represented by George Bradner (CT); Karen Weldin Stewart represented by Gene Reed (DE); Ralph T. Hudgens represented by Steve Manders (GA); Andrew Boron represented by Jim Stevens (IL); Sharon P. Clark represented by Ray Perry (KY); James J. Donelon represented by Warren Byrd and Rich Piazza (LA); Joseph G. Murphy represented by Robert Macullar (MA); Eric A. Cioppa represented by Bob Wake (ME); Mike Rothman represented by Phil Vigliaturo (MN); John M. Huff represented by Joan Dutill and Angela Nelson (MO); John G. Franchini (NM); Scott J. Kipper represented by Elena Ahrens (NV); John D. Doak represented by James Mills (OK); Laura N. Cali (OR); Joseph Torti III represented by Paula Pallozzi (RI); Julie Mix McPeak represented by Chlora Lindley-Myers (TN); Jacqueline K. Cunningham represented by Rebecca Nichols (VA); and Michael D. Riley (WV). 1. Heard a Presentation on TRIA Brooke Stringer (NAIC) reviewed the current Terrorism Risk Insurance Act (TRIA) bills in the U.S. House of Representatives and in the U.S. Senate. She said the National Council on Compensation Insurance (NCCI) has strongly advocated its support of reauthorization in meetings with both the House and Senate. There is no clear path forward for reauthorization at this time. The House bill and the Senate bill are dramatically different, and the NAIC has not taken a formal position on either version. There is a possibility of a short-term authorization. The Terrorism Insurance Implementation (C) Working Group is working on revisions to expedited filing forms, so the states can act quickly to approve forms filings should the reauthorization of TRIA be delayed until the end of 2014. 2. Discussed the Impact on the Workers’ Compensation Market Should TRIA Not Be Renewed in its Current Form in 2014 Superintendent Franchini asked Mona Carter (NCCI) what impact a delay in renewing TRIA would have on NCCI-member companies. Ms. Carter stated that companies would have to issue policies with wording that would redefine terrorism coverage in workers’ compensation policies, more like it is defined in other property/casualty policies. They would continue with a surcharge for the coverage that is actuarially sound. Superintendent Franchini asked if the failure to renew TRIA is having an impact on the workers’ compensation reinsurance market. Ms. Carter said there are articles from the Rand Corporation that specifically address the impact on residual markets and reinsurance. Julie Gackenbach (Confrere Strategies) commented about how the industry reacted to both the House and Senate versions of TRIA renewal legislation. 3. Received Report on Hostess Brands’ Bankruptcy Proceedings and the Possible Impact on Self-Insured Securities Held

by Kansas and Rhode Island David Keleher (NAIC) reported that attorneys representing the debt holders for Hostess Brands have contacted the Kansas Insurance Department seeking to review injured workers’ reserve files. They want to determine if the loss reserve file amounts are excessive and if any of the excess funds can be released to satisfy amounts owed the debtors. Kansas allowed attorneys for the debtors to review the files in question, but has not received any correspondence from the debtors since they performed their review. Mr. Wake commented that Maine received an excellent opinion from the 1st U.S. Circuit Court of Appeals regarding self-insured reserve account funds stating this type of security (i.e., loss reserve), under Maine, Missouri and New Hampshire law, is not the property of the estate; it is for the benefit of insured claimants. Mr. Wake pointed out that there is an appropriate avenue in statue that the self-insured can use to request a refund of funds that are considered excessive. Mr. Wake pointed out that, in the Urban Tanning /Prime Tanning case, those who considered the reserve funds to be excessive should have been



able to secure a good price on a loss portfolio transfer if the loss reserves really were excessive, noting that a loss portfolio transfer never happened. He reiterated that, in the Urban Tanning/Prime Tanning case, the 1st Circuit determined that reserve funds are not the property of the estate. 4. Received Second Quarter 2014 Statistical Results for the Residual Market Mr. Keleher presented information received from the independent bureau states (Delaware, Massachusetts, Michigan, Minnesota and New Jersey) regarding the growth of the residual market. The only state with significant growth in its residual market was Michigan, where the policy count was up 38% over the same period in 2013. Jeff Eddinger (NCCI) stated that he would not expect there to be extensive growth of the residual market until and unless TRIA is not actually renewed. 5. Heard Report from the NCCI on the State of the Workers’ Compensation Market Mr. Eddinger described the state of the workers’ compensation market as balanced. There has been premium growth over the past year, driven by growth in payroll. Combined ratio results have improved by seven points to 101%. There were strong investment gains of about 15%. There was a pretax operating gain of 14%. There have been 10 rate filing made this year; eight were for rate decreases, one for a rate increase and one for no change. Mr. Eddinger said he did not expect the residual market share to grow like it did during the last TRIA renewal, when it grew to 13% of the market. He believes it will not exceed 10%, and that the residual market will continue to run with a combined ratio of around 109%. Mr. Eddinger asked to have his presentation slides posted to the Task Force’s Web page. 6. Adopted the Report of the NAIC/IAIABC Joint Working Group

Mr. Keleher reported that the NAIC/IAIABC Joint (C) Working Group met May 7 at the NCCI Annual Issues Symposium. Commissioner Deal made a motion, seconded by Mr. Byrd, to adopt the report (Attachment One). The motion carried. 7. Heard Request for Information on Independent Contractors

Mr. Deiter requested information from other states regarding how their jurisdiction handles independent contractor issues. Ms. Pallozzi volunteered to send Mr. Deiter information about how Rhode Island handles the issue. Mr. Keleher said he will post the question on the NAIC Property and Casualty Product Filing Board. Having no further business, the Workers’ Compensation (C) Task Force adjourned. W:\National Meetings\2014\Summer\TF\WC\08-WCTFmin.docx


Attachment One Workers’ Compensation (C) Task Force

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Draft: 8/26/14

NAIC/IAIABC Joint (C) Working Group Orlando, FL May 7, 2014

The NAIC/IAIABC Joint (C) Working Group of the Workers’ Compensation (C) Task Force met in Orlando, FL, May 7, 2014. The following Working Group members participated: George Bradner (CT); James Stephens (IL); Joan Dutil (MO); James Mills and Dan Byrd (OK); Mike Shinnick (TN); Tracy L. Klausmeier (UT); and Kevin Gaffney (VT). The following IAIABC members participated: Cathy Kaczanowski (IL); Larry Karns (KS); Paul Sighinolfi (ME); Peter Van Nice and Bill Wheeler (MT); Sally MacFadden and David Ruju (NH); Thomas Dow (NM); Denise Engle (OK), Tonya Gallegos and Francine Johnson (UT); and Laura Collins (VA) 1. Discussed TRIA Renewal Dave Keleher (NAIC) and Tim Tucker (National Council on Compensation Insurance—NCCI) gave updates on the possible reauthorization of the Terrorism Risk Insurance Act (TRIA) first passed in 2002. Mr. Keleher outlined letters that the NAIC sent to Congress supporting renewal of TRIA. Mr. Tucker summarized the latest RAND report and impact report from Marsh.

2. Heard an Update on the State of the Residual Market In NCCI States

Shani Oulton (NCCI) reviewed the 2013-2014 residual market results. The residual market grew in both policy count and premium. The number of assignments grew 21%. Assigned premium grew 22%. The residual market share of premiums grew to 6.6%. The combined ratio improved to 109%. 3. Discussed Growth of the Residual Market In Non-NCCI States

Mr. Keleher reviewed reports from the independent bureau states. It appears that growth in the residual market in independent bureau states is similar to the growth reported in NCCI states. The number of assignments grew 9.2%. The assigned premium grew 29%. 4. Heard a Status on the Hostess Bankruptcy Case

Mr. Karns gave an overview of the Hostess bankruptcy case. The debtors are seeking the release of workers compensation self-insurance reserves in Kansas and Rhode Island. Like the Prime Tanning case last year, the debtors produced estimates of potential future liabilities. However, after performing extensive research, the State of Kansas presented evidence to the bankruptcy judge that the debtors severely underestimated potential future liabilities for known cases. The case remains open, and no funds have been released. The latest documents for the case can be found on the IAIABC website.

5. Discussed the “Oklahoma Option”

Ms. Engle gave a brief overview of the progress that had been made in the implementation of the “Oklahoma Option” program that went into effect earlier this year. The program changed from a judicial system to an administrative system. The Workers’ Compensation Commission has been conducting seminars, meetings and webinars for agents and employers so they understand their coverage options. One result of the change was a reduction in the NCCI loss costs for the state. Employers now have the option of purchasing traditional workers’ compensation, or the option of providing benefits that meet or exceed standards established in the law. So far, three carriers have filed to provide coverage for employers that choose to opt-in: Safety Mutual, One Beacon and Great American. Mr. Byrd discussed some of the requirements for companies that choose the option. Like traditional self-insured plans, these companies must file a formal benefit plan, provide three years of past loss information, provide financial statements for the last three years, secure a surety bond and produce an irrevocable letter of credit. One interesting feature is that there is no provision in the law for the formal collection of workers’ compensation loss data.


Attachment One Workers’ Compensation (C) Task Force

8/18/14


6. Discussed Bail-out of Group Self-Insurance Plan in New York Mr. Keleher outlined provision of the $370 million bailout or work comp trusts in New York State. New York sold more than $370 million in bonds to help meet the payments due from 23 failed self-insurance trusts. Some of these trusts owe injured workers payments as far back as 2007. The state is now paying workers the benefits owed and at the same time initiating legal action against those trusts to recuperate the money currently being paid out. Working group members pointed out that these trusts often make member employers jointly and severally liable for the losses of other employers in the trusts. Having no further business, the NAIC/IAIABC Joint (C) Working Group adjourned. W:\National Meetings\2014\Summer\TF\WC\IAIABC\5-07 Joint WG.docx
