NAIC Grapples With Procedural Changes

Regulators and industry lobbyists were not quite sure how the procedure–which requires the Executive Committee and the parent committee to approve any new model law effort before it is undertaken–will impact the proposed Reinsurance Evaluation Office, which is an amendment to the model Credit for Reinsurance Act.

At the NAIC meeting, the Reinsurance Task Force voted to go on with REO efforts despite the fact that the parent Financial Condition Committee and the Executive Committee have yet to approve the required changes. "We are in a little bit of an awkward stage right now," said Andrew Beal, NAIC's deputy executive vice president and chief legal counsel.

With every state having a Credit for Reinsurance Act, and the great interest in settling the controversy by the senior NAIC leadership, it seems highly likely that the REO would not meet the national criteria, according to regulators.

Before any proposal is put before the Executive Committee on a preliminary basis, task force members would presumably have to settle on an amendment or full-scale revision approach.

"This is an interesting question; I have never heard anyone discuss it," said Neal Alldredge, senior vice president of the National Association of Mutual Insurance Companies.

At the Executive Committee meeting, several life sector model laws or amendments were approved, along with a property-casualty item related to medical malpractice data.

The Property-Casualty Committee has decided to turn proposed model laws dealing with independent adjuster regulation and prosecution standards for automobile fraud participants into guidelines, not proposals, for new state statutes.

This new category of guidelines concerns David Snyder, assistant general counsel of the American Insurance Association, who feels their uncertain status could be used by regulators or even plaintiff's bar attorneys as almost-law, since they were approved by the NAIC body.

"In addition, if these proposed new models get preliminary approval, it will in a sense give them a leg up in the process and give an unfair advantage to its proponents," he said.

Consumer representative Birny Birnbaum, with the Center for Economic Justice in Austin, Texas, said that with the two-thirds approval required of both the Executive and parent committees, a tiny percentage of regulators have veto power over development of such models.

He said he feels the requirement that all such models in the future have relevance in all 50 states will preclude a lot of needed legislation that may have relevance in significant parts but not all sections of the country.

While reinsurance collateral reform raises a number of serious procedural questions, the divisions over the substance remain as sharp as ever, with few paths of compromise on the horizon.

Representatives of the domestic primary insurance industry made it clear at the meeting they still do not feel the proposals meet their concerns about the threat to solvency posed if non-U.S. reinsurers no longer have to post 100 percent collateral but instead have a percentage determined by the new REO agency.

CNA Financial representative Jeff Alton suggested one possible modification to the proposed REO structure would be if reinsurers create some sort of guaranty fund, which as a new concept was not greeted with any immediate reaction from either side of the controversy.

Attorney Bill Marcoux, representing non-U.S. reinsurers, said in fleshing out the REO structure, regulators have to decide if it is going to be a rating agency, such as the NAIC's Securities Valuation Office.

In addition, he said, they must also consider the impact the REO will have on the deliberations of rating agencies such as A.M. Best and Standard & Poor's.

American International Group representative Martin Carus said the domestic insurance industry left the negotiations that resulted in the proposed REO office with nothing to show for it. "You are usually not happy if you go away with nothing," he said.

"That is because you already have everything," shot back New York regulator Michael Moriarity.

He went on to say that regulators could not go on managing the credit risk of the domestic ceding companies, and that the collateral requirement currently has nearly $500 million of alien assets tied up for no productive purpose.

As for the need for overall reform, Georgia Insurance Commissioner John Oxendine said creating uniformity among the states will be a critical aim. "We don't want any more of this extraterritorial stuff," he said.

He was referring to the practice of an estimated dozen states requiring some companies to go through special procedures outside the credit-for-reinsurance model to obtain such credit. New York and California are among the commonly cited states.

But once again the NAIC role will become critical, as there seems to be no bite the group can impose that will prevent states going their own way if they want, as evidenced by New York never gaining accreditation and suffering little consequence, industry observers contend.

Accreditation questions also arose, with the industry unsuccessfully resisting efforts to put the Insurance Recievership Model Act on the accreditation path after arguing it did not deal with solvency but rather the aftermath of insolvency.

And while the industry had previously succeeded in requiring state legislatures to approve controversial changes to the model audit rule that imposes Sarbanes-Oxley-like disclosure requirements on companies, the fact that they will be part of accreditation would seem to offset that compromise, a lobbyist noted.