After a well attended public hearing and a contentious vote, the Capital and Surplus Relief Working Group (Working Group) put forward six changes to the National Association of Insurance Commissioners (NAIC) rules pertaining to capital and surplus requirements for life insurers. The proposals, most of which were slightly altered versions of the nine proposals recommended earlier by the American Council of Life Insurers (ACLI), were aimed at aiding life insurers with their growing solvency concerns in light of the crumbling economic condition of the country. The NAIC Executive Committee and Plenary gathered on Thursday, January 29, 2009 for a well attended conference call to address the recommendations of the Working Group and necessity of these “emergency” proposals. On the call, all six changes were rejected as a group by the Executive Committee. After the 16-1 defeat, the proposals return individually to NAIC technical committees for consideration at the March 2009 NAIC meeting in San Diego.
Citing a number of solvency concerns of their member life insurers, the ACLI proposed nine changes to the capital and surplus rules and asked the NAIC to work quickly to adopt them in light of the emergency that threatens the industry. In response, the NAIC developed an Executive Committee-level working group to analyze and make recommendations on the proposals. The Working Group held several public hearings and solicited comments on suggested changes. In late January 2009, they voted to recommend that six of the nine proposals be sent for further consideration to the NAIC Executive Committee and Plenary.
Regulators at the January 29, 2009 conference call seemed positive about the changes proposed by the ACLI, but did not feel that there was an emergency that warranted immediate action on all proposals. Unable to name any specific companies that would suffer dire consequences should these proposals not be passed immediately, regulators felt that the more prudent path would be to deal with any life insurer solvency issues on a company-by-company basis.
The most controversy arose over a proposal to change statutory accounting guidance on handling deferred tax assets (DTA) in company accounting. The ACLI argued that the more lenient standards in the U.S. Generally Accepted Accounting Principles (U.S. GAAP) should be adopted to allow insurers to use DTAs for five years with a 25-percent cap. The Working Group felt that this adoption would not protect regulator interests and recommended an altered proposal that would allow DTAs to be used for three years with a 15-percent cap. Regulators on the call expressed discontent with even the more limited version. Several regulators noted that they would vote for the rest of the changes if the DTA proposal had not been included.
In the end, regulators on the Executive Committee were unconvinced that the industry had made its case that there was an emergency that merited immediate attention. Given leave to speak to the Executive Committee, Eric R. Dinallo, Superintendent of the New York State Insurance Department, argued that he was afraid of the message that adoption of these proposals would send at this time of national economic crisis. He did not want insurance regulators to be seen as “diluting surplus” at a critical time and thought the proposals’ adoption would certainly be “detrimental to the industry.” Sean Dilweg, Commissioner of Insurance for the State of Wisconsin, agreed, arguing that a system of “very good financial oversight” already existed and there was not an emergency in the life industry at this point. He noted that the industry would be best served by regulators dealing with solvency issues on a company-by-company, state–by-state basis.
After the proposals’ defeat, Thomas E. Hampton, Commissioner for the District of Columbia’s Department of Insurance, Securities and Banking and Chair of the Working Group, pointed out that two of the nine proposals had already been adopted for implementation later in 2009 and recommended that the other seven be returned to the technical-group level. The technical groups, working in tandem with the Working Group, will advance the remaining proposals individually during the coming months. After further consideration, some of the proposals will likely be added to the relevant committee agendas at the March 2009 NAIC meeting.
While no immediate action is being taken, the regulators are optimistic that the hard work of the Working Group will not go to waste and that the NAIC will be able to respond affirmatively to some of the industry’s proposals.
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Please contact your Foley attorney or the individuals listed below if you have any questions about these issues or want additional information regarding insurance matters:
Kevin G. Fitzgerald
Sarah E. Molenkamp
Foley & Lardner LLP will be hosting an insurance economic summit later this spring in Chicago, Illinois, where industry legal and business leaders will discuss this issue and others related to the impact of the current financial crisis on the insurance industry. More information on this summit will be available shortly.
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