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NALC
PO Box 50053
Sarasota,
Florida 34232
Telephone:
941-379-6100
Fax: 941-379-6112
2008 Fall Conference
September 10 - 13, 2008
Westin
Bay Shore
Vancouver, BC
 The NALC held its 2007
Fall Conference September
12-15, 2007,
at The Coeur d’Alene, Coeur D’Alene, Idaho
CLICK HERE for highlights of other
NALC conferences
NALC Members
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NALC 2003 Spring Conference Report
 The NALC held its Spring
Meeting March 26-29, 2003, at the Southampton Princess in Bermuda. The following
sections are various reports from the meeting.
Thursday, March 27
Commissioners Report
Commissioners Mike Pickens of Arkansas and Carroll Fisher of Oklahoma
provided a panel discussion of issues facing the industry.
Commissioner Pickens, the current President of the NAIC, stated a major issue
this year was the number of new commissioners in the country. With the 2002
election changes, many new faces have joined the NAIC.
 This is at a time when the
state regulatory system is facing a major challenge. Commissioner Pickens
expects a legislative push to federalize insurance regulation, and he asked for
NALC help in supporting continued state regulation. He also provided insight
about the Small Face Amount Working Group and indicated that they were pleased
with the direction of the multiple policy issue and that there would be
discussion and debate at the next NAIC meeting regarding the results of the
Texas study.
Commissioner Fisher talked about the many challenges facing the industry, and
announced he would be a candidate for Secretary-Treasurer of the NAIC. Both
commissioners discussed the important role of small and medium size companies in
NAIC discussions.
Interstate Compact Report
William Fischer, VP & Associate General Counsel, Mass Mutual
The product regulation and approval structure is one of the key areas of
state insurance regulation reform efforts. In December of 2002, the National
Association of Insurance Commissioners (NAIC) adopted the Interstate Insurance
Product Regulation Compact to initiate the modernization effort in the states.
An interstate compact is basically an agreement among two or more states to
cooperate on a specific issue, and it requires passage of identical legislation
by each participating state. This Compact would establish a single entity for
the filing, review and approval of life insurance, annuities, disability income,
and long term care insurance products for the participating states. In addition,
the Compact would create uniform national product and advertising standards for
products filed with it. The uniform standards would take effect only when there
is a critical mass of either 26 participating states or participating states
representing 40% of national premium volume. For products filed with the
Compact, the uniform standards, actions and approvals of the Compact would be
binding on the participating states and would generally pre-empt existing state
law. However, participating states would be able to opt out of uniform standards
either by legislation or regulation.
The Compact offers tremendous promise for modernization and efficiency of
product regulation, but realization of this promise will be a significant
political challenge. Not only will continued support of state insurance
regulators be necessary, but also state legislator support will be needed for
passage of the Compact legislation in the states.
2001 CSO Mortality Table
Jeffrey M. Robinson, President of Life Insurance Financial Essentials - LIFE
What are the other implications of the new 2001 CSO Table? By "other", not
those theoretical issues such as: the development and overview of the table; its
impact on profit and pricing considerations and product design; where the market
is headed and specific tax issues. By "other", those very practical issues that
will most impact smaller companies such as: this table’s very different
structure; how products will be implemented; what should not be done now and
what should; timing and transition issues and preliminary conclusions that can
be reached.
 Is this table to be a
blessing, as it was for the introduction of the 1958 CSO and the 1980 CSO, or a
burden, like other regulatory changes? It will probably be more burden than
blessing, particularly initially and more so for smaller companies. Why a
burden? Because it will dramatically drain resources; there are lots of
questions but few answers on major product tax issues; timing and transition
will be extremely tricky; an asset adequacy opinion will be required to use it;
implementation will be difficult and very costly. How a blessing? For some
products, primarily traditional ones such as term and whole life, reserves, cash
values and premiums will go down and profits may go up. Products on it may be
easier to sell because of lower premiums, but commissions will be lower. It will
be an opportunity and possibly a requirement to rethink your entire portfolio.
The new valuation table’s different structure will cause the significant
implementation issues. It has a terminal age of 121 versus 100. This may mean
changes to some if not all of the older systems that were not designed to extend
that far. By all, consider: pricing and projection; illustration; policy form
print; factor generation, valuation (statutory, tax and GAAP); administration;
reinsurance; commission and dividend systems. It has 25 year select and ultimate
(S & U) rates versus just an ultimate set. Today, 10, 15 and 20 year S & U rates
are commonly used in product pricing but not for valuation and cash value
purposes, except for possibly deficiency reserves. It has sex and smoker
distinct as well as composite and gender blended rates. There will be rates,
rates and more rates. Systems’ storage capacity; indexing designs; look-up
routines and general formatting will be impacted and result in basic system
changes and redesign issues, which will require systems resources and excellent
testing procedures.
Now is not the time to consider a major 1980 CSO product portfolio overhaul,
recognizing that it might be good for 2 years at most, although some tweaks to
existing products may provide some breathing room as you are gearing up. Now is
also not a time for a major systems conversion unless that system will be fully
2001 CSO compliant. Until the regulatory and tax dust settles who knows what
"fully compliant" will mean.
Now is a time to stay very alert to unfolding regulatory, tax and product
design issues and learning about all aspects of the new table. A thorough
investigation and inventory of all systems should be done to ascertain if they
are compliant and if not, how they can be made so. If they cannot be readily
modified, alternatives need to be considered. Also, consider how the new table
structure might help your portfolio’s design. Stock should be taken of internal:
actuarial, project management, compliance, and systems (programmers, analysts
and testers) resources. Given that those resources are probably already
strained, consider your external resources: consulting actuaries; reinsurers;
product filing services; software vendors and TPAs.
 Timing and transition
issues involve: when individual States adopt the new table (which can be done
now by regulation versus legislation) and the new Actuarial Opinion and
Memorandum Regulation; when 26 States adopt it and it becomes the prevailing
table for tax reserve purposes and how the IRC Sections 7702 and 7702A product
tax issues are formulated and when they are effective.
Considerable short and long term planning will be required to keep old
products fresh and aging systems going until numerous questions are answered,
the necessary resources are mustered and difficult timing / transition issues
are surmounted to put some or all products on the new table. This will be a
major undertaking that will require: diligence, planning, excellent timing,
major resources and much capital. Is it a burden or a blessing? For smaller
companies probably a burden. For consulting actuaries, system vendors and filing
services, definitely a blessing.
NALC Annual Elections
 NALC members
attending the conference participated in the annual election of officers. The
NALC Board would like to welcome these newly elected directors: Kathy Demarino,
The Londen Companies; Bob Ries, Philadelphia United Life; and Norm Taplin,
Taplin and Associates.
On behalf of the NALC, Rob Hardy expressed special thanks to Tom Rattmann,
Columbian Mutual Life Insurance for his many efforts for the organization, and
as well as to Alex Zeid, FMSI.
The NALC Officers, Directors and Staff look forward to working together as a
team to ensure the effectiveness of this organization so that the issues of our
members are addressed.
Friday, March 27
Market Conduct Reform
Brian Atchinson, Executive Director, IMSA
In his address to the conference, Brian Atchinson, Executive Director of the
Insurance Marketplace Standards Association (IMSA), called for industry leaders
to "step up and take charge" of efforts to improve regulatory procedures. He
warned, "The industry needs to move quickly and decisively to fix what’s wrong
with the system, or it will get fixed for us by those who don’t know our
business as well as we do."
 The life insurance
industry has changed dramatically over the last 50 years and those changes have
had significant impact on industry regulation, particularly market conduct.
What’s the bottom line? The marketplace has long since evolved beyond the
current regulatory structure. The industry is at a turning point with market
conduct reform and it must take the initiative to fix what’s wrong with the
system – or it’ll get fixed by someone else.
Our biggest challenge is to create a consistent, uniform system with an eye
on how the consumer is being treated. But progress has been slow and that lack
of action has lead, at least in part, to upcoming hearings before the House
Financial Services Committee in May or June at a public hearing. To coincide
with these hearings, the Government Accounting Office is about to release a
survey that is likely to be critical of the inconsistent manner that states
carry out market conduct oversight and examination.
This is a wake-up call to the industry and the states. What would a greater
federal government role mean? One scenario would be federally created national
standards enforced by the states. Another would be federal standards enforced by
an agency in Washington, DC. A third option would be to shift first line
responsibility for compliance away from insurance departments and back to
insurance companies, where it arguably belongs.
This notion of company responsibility is consistent with IMSA’s mission. IMSA
sets forth rigorous and high standards regarding how a company and its employees
and agents should be acting if they intend to treat consumers the way they would
like to be treated.
 IMSA’s more than 200
member companies run the gamut from small to medium to large companies. In the
last two years, IMSA has gained a greater acceptance by regulators and rating
agencies. In fact, a small, but growing, number of state insurance departments
use IMSA membership as a tool when conducting market conduct exams. As we move
ahead, we will continue to work with the industry, government officials both
state and federal, and consumers to develop and implement policies and
procedures to promote sound market practices. We will continue to promote high
standards of ethical conduct in the way insurance companies conduct business
with consumers.
It’s time for the industry to really step up and take charge of the market
conduct issue. It’s time for us to move quickly and decisively to create our own
solutions.
Terrorism Risk Insurance Act of 2002 ("TRIA")
Joseph L. Cregan, Morris, Manning & Martin, L.L.P.
On November 26, 2002, President Bush signed into law the Terrorism Risk
Insurance Act of 2002 ("TRIA"). This new legislation was motivated by the
results of the September 11, 2001, attacks on the United States and was intended
to provide a federal backstop for terrorism losses. Under the TRIA plan, the
federal government assumes most of the risk of a large commercial property and
casualty loss from a terrorism attack, while the insurance industry provides
terrorism coverage to its insureds. Each insurer is subject to a per-company
retention amount and a 10% co-payment obligation for losses above its retention
amount.
 TRIA’s goals were to
address market disruptions arising out of the terrorist attacks on our country
and to allow the private insurance markets to stabilize and rebuild the capacity
to offer terrorism risk insurance in the direct insurance and reinsurance
markets. TRIA is administered by the U.S. Department of the Treasury, in
consultation with the NAIC. The federal reinsurance protection is triggered when
the Secretary of Treasury, along with the Secretary of State and the Attorney
General rules that an event is a certified "Act of Terrorism."
An Act of Terrorism is an act causing loss that occurs due to terrorists who
are foreign individuals or who are acting on behalf of any foreign person or
foreign interest as part of an effort to coerce the civilian population of the
U.S. or to influence the policy or affect the conduct of the U.S. government by
such coercion. It does not include acts of domestic terrorism, nor would it
include an act committed in the course of a war (except for workers’
compensation insurance) or any act resulting in losses that do not exceed a
$5,000,000 minimum threshold.
Currently, participation in TRIA is mandatory for all insurers engaged in
commercial property and casualty lines in the United States. This includes
eligible surplus lines carriers and certain types of state residual market
insurance entities or state workers’ compensation funds. Once a company is
determined to be subject to TRIA, it is required to make available coverage for
the terrorism risk. Except for workers' compensation coverage, where the
coverage is mandatory, the insured has the option of adding the terrorism
protection to the policy or rejecting that coverage. To the extent the insurer
receives direct earned premiums from commercial property and casualty coverage,
then that insurer is subject to TRIA. TRIA does not currently include health or
life insurance, but TRIA requires a study of whether the Act should be
automatically extended to group life insurance, in particular, or to any other
line of insurance that the Treasury Department believes would be appropriate.
The three-year program began with the TRIA’s enactment on November 26, 2002,
and will continue until December 31, 2005, unless the Act is extended by further
act of Congress. The federal government covers 90% of any loss above the
individual company retention amount up to a maximum total loss (regardless of
the federal share) of $100 billion. Treasury is entitled to recover a proportion
of the payments made through a recoupment process. The recoupment is, in effect,
a prospective tax to be applied on the future of premiums received by property
and casualty insurers. This recoupment surcharge generally may not exceed 3% of
the future premiums charged for future property and casualty insurance coverage
risks; however, the government has the discretion to attempt to recoup more
through an additional surcharge.
With respect to the study by Treasury of the applicability of TRIA to the
group life insurance industry, comments were to be submitted to Treasury by
interested parties by January 2003. Knowledgeable officials in Treasury indicate
that the study of the applicability of TRIA to the group life insurance industry
is still ongoing, and there is no indication whether the extension to that line
of coverage will occur. If it is extended to group life, TRIA compliance for
life insurers will embody the same structure and the same mandated retention
calculations and co-payment shares as are currently applied to the commercial
property and casualty insurance industry. Some commentators in the market have
indicated that the group life insurance industry, not unlike certain aspects of
the commercial property and casualty insurance industry, may experience an
adverse selection effect under TRIA. That is, if the insured is given the option
to purchase terrorism coverage, only those insureds which perceive that they are
at the greatest risk of a terrorist event or terrorist loss will actually
purchase the coverage. Most commentators believe that wide acceptance of the
terrorism coverage, with the collection of the commensurate increased premium
for the "terrorism load," is necessary to make the program workable.
It is also possible that Treasury’s study of other lines of insurance might
result in the extension of TRIA to additional lines beyond just group life, if
in fact group life is ultimately included.
NAIC Model Laws, Practices & Procedures
Doug Barnert, President, Barnert Associates
"How a Thought Becomes Law"
Doug Barnert, President of Barnert Associates, Inc. compared the process of
enacting state laws to the way the NAIC adopts principles and procedures that
have the affect of state laws and regulations.
 Barnert described
the many methods of input that are available to the public in the legislative
process, including the ability to appeal decisions into the judicial arena. He
contrasted this with the NAIC process, which has the ability, in certain
circumstances, to adopt changes in a single meeting that are effective with the
next reporting cycle.
Barnert gave, as examples, the Annual Statement Blank and Instructions, the
Securities Valuation Office procedures for valuation of securities, and the
method for adopting accounting standards. While each has different time lines
for adoption, in no cases are they as extensive as the methods available to the
public in the legislative process.
Barnert noted that the NALC Investment Committee generally covers these
issues, but that the membership could assist this process by letting the
committee know when there is activity in their states that might be of interest
to the committee. He gave examples of comments and participation in the
development of the NAIC Model Investment Law and the Codification of Statutory
Accounting where the NALC was particularly active.
The NALC still plays an important role in assuring that companies with a
niche business or small and medium size insurers do not get left out when it
comes time to make a decision.
Barnert said that regulators are extremely sensitive to the needs of smaller
insurers, but that it was necessary to constantly remind them that there still
is an active and competitive market in which they participate.
Post-Enron Corporate Governance In the Life Insurance Business
Prof. Martin C. McWilliams, Jr., University of South Carolina School of Law
These are interesting times for the life insurance business. Debate on the
source and nature of substantive regulation is juxtaposed with a post-Enron
change in public attitudes toward corporate governance, a change that will
affect all sectors of the economy. Enron is all about public confidence in the
markets. What makes our capital markets efficient, thereby enhancing the rate at
which value grows, is public confidence in the accuracy and timeliness of
financial disclosure on the one hand, and on the other public confidence that
businesses traded in the markets are managed for the benefit of investors, not
for the benefit of the managers themselves.
 Enron and recent similar
financial scandals revealed that financial information directed to the markets
was being manipulated by those in control of it, for their own interests.
Perhaps financial information provided to the markets was "accurate" within a
strict reading of generally accepted accounting principles, but it was not
presented in good faith in the way best to inform investors. Also revealed was
an epidemic if managers manipulating companies for their own benefit, at
investors’ cost. The resulting loss of confidence in the market was reflected in
the terrible loss of value in the public securities markets.
The Sarbanes Oxley Act is only the most palpable manifestation of the public
reaction to this loss of faith. The Act is instructive, however, in its details,
because its details suggest to us how regulators will tend to react to restore
public confidence in regulated financial sectors.
Sarbanes Oxley contains four main measures: It requires auditors to be truly
independent, reducing dramatically the non-audit services that accounts can
supply to audit clients; it requires CEOs and CFOs to certify financial
statements, and internal financial controls, on pain of personal liability; it
requires a company’s lawyers to become watchdogs of their clients’ compliance
with fiduciary controls; and it limits the ways in which officers and directors
can benefit from the corporation. The Act accordingly regulates the acquisition
and publication of financial information, and regulates the fiduciary duty of
management in the interests of a company’s investors and the market generally.
Sarbanes Oxley by terms applies only to publicly traded companies, but this
doesn’t mean that non-public companies will be unaffected. The Act itself will
apply to non-public insurers through certain insurance products, such as
registered fixed annuity or life insurance products and unit investment trust ("UIT")
separate accounts. If such products do not have "management," it appears certain
that the depositing insurer’s management may be required to serve certain
functions required of management by Sarbanes Oxley. How far up the ladder this
will go, and how broadly the Act will be applied, is not clear.
Another effect of Sarbanes Oxley on non-public life companies may be in the
form of diminished demand for certain products. For example, Sarbanes Oxley
prohibits corporate loans to officers and directors. Is split-dollar life
insurance a loan? Many believe that it is. If so, the prohibition on loans may
diminish the market for such products. This is only one example. Any product
that gives the appearance of advantaging management may be suspect.
Finally, insurance companies are, of course, highly regulated at the state
level. Will state regulators be able to resist buttressing informational and
fiduciary regulation in the current climate? Many insurance companies that are
not publicly traded are already taking action, using Sarbanes Oxley as a model,
to put in place tighter internal regulation. The goal: To restore public
confidence in all sectors of the financial markets in terms of reliability of
information, and reliability of management in the best interests of investors.
The NALC Welcomes a New Member
Companion Life Insurance Company
Companion Life Insurance Company was incorporated in 1970, and specializes in
marketing ancillary life and health insurance products in the employer group
market. Companion's core product line consists of fully-insured group life,
group dental and group disability (short and long term) insurance and is
designed to complement an employer's existing group health benefit plan. In
addition, Companion offers a portfolio of voluntary products designed for
employers who wish to offer ancillary benefits without cost to the employer.
Although the company markets to groups of any size, the major target market for
Companion's products is to group sizes of 2 to 250 employees. In South Carolina,
Companion partners with its parent, Blue Cross and Blue Shield of South
Carolina, to offer both medical and ancillary group benefits to eligible groups.
Outside South Carolina, Companion markets its group insurance products
through a network of independent insurance agents and brokers. In addition,
Companion has established several marketing partnerships, including a number of
dental maintenance organizations and arrangements that offer Companion's
ancillary products along with a health insurer's medical insurance contract. For
larger employers desiring to self-insure their employees' medical benefits,
Companion offers stop loss insurance.
The company is admitted in 45 states and the District of Columbia. A.M. Best
has recently revised Companion Life Insurance Company's rating to A+, Superior.
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