Transcript No Slide Title

NATIONAL INSURANCE CHARTER
MOVING FORWARD IN 2002
RECENTLY INTRODUCED BILLS
NATIONAL INSURANCE CHARTER
INTRODUCED LEGISLATION
INSURANCE INDUSTRY MODERNIZATION AND
CONSUMER PROTECTION ACT
(“LAFALCE”)


Introduced by Congressman John LaFalce (DNY) on February 14, 2002
Contains concepts from ACLI and ABIA proposals and SCHUMER
Available at http://www.house.gov/banking democrats/lafalc 110.pdf
NATIONAL INSURANCE CHARTERING AND
SUPERVISION ACT
(“SCHUMER”)



Introduced by Senator Charles Schumer (DNY) on December 20, 2001
Endorsed by both the ABIA and ACLI
Contains concepts from both proposals
Available through Senator Schumer’s office or http://www.acli.com
2
PRIOR TRADE GROUP PROPOSALS
AMERICAN BANKERS INSURANCE ASSOCIATION (ABIA)
 The National Insurance Act of 2001
 November 2000 (revised May 9, 2001)
Available at http://www.aba.com/ABIA
AMERICAN COUNCIL OF LIFE INSURERS (ACLI)
 National Insurer Act
 National Insurer Solvency Act
 April 2001, updated December 2001
Available at http://www.acli.com
AMERICAN INSURANCE ASSOCIATION (AIA)
 Federal Insurance Chartering Act of 2001
 July 2001
Available at http://www.aiadc.org
3
NEW REGULATORY STRUCTURE
LAFALCE

National charter and licensing for underwriters

Ability to write and sell insurance nationwide without being
subject to state authorization; however, subject to state rate
regulation

Repeals McCarran-Ferguson Act antitrust exemptions for all
insurers, state and national, except for two very limited
exceptions
4
NEW REGULATORY STRUCTURE
(CONT’D)
SCHUMER

National charter for underwriters and agencies

Insurers with a license to write and sell a “national” product
can sell the product nationwide without state regulation of any
kind

Federally licensed producers can sell “national” and state
insurance products nationwide without a state license or
complying with other state regulatory requirements
5
NEW REGULATORY STRUCTURE
(CONT’D)

U.S. antitrust laws apply to national insurers except to the
“development, dissemination, or use” of policy forms, and to
state laws applicable to national insurers that are not
preempted by the bill
ABIA

National charter for underwriters and agencies

Modeled after the regulation of national banks and federally
chartered thrifts under the “dual banking system”

Ability to write and sell insurance nationwide authorized by
national charter not subject to state regulation
6
NEW REGULATORY STRUCTURE
(CONT’D)

Agencies can sell products issued by national or state
domiciled insurance companies without “significant
interference” from states
ACLI

National charter for underwriters

Generally regulates companies as if domiciled in a new
“Federal” state, no express state law preemption language

Insurers with a license to sell a “national” insurance product
can sell the product nationwide
7
NEW REGULATORY STRUCTURE
(CONT’D)

Federally licensed producers can sell “national” insurance
products nationwide

Products issued by state domiciled carriers can only be sold
by producers licensed by the state where product sold,
regardless of whether producer is federally licensed
AIA

National charter for underwriters

Contemplates “dual” system similar to ABIA
8
NEW REGULATORY STRUCTURE
(CONT’D)

Ability to write and sell insurance nationwide without state
regulation or approval

No antitrust protection for rates of federal insurers

Producer licensing not addressed
9
NEW REGULATOR
LAFALCE and ACLI


Office of National Insurers
Headed by the Director of the Office of National Insurers
(“DONI”)
SCHUMER and ABIA
 Office of National Insurance Commissioner
 Headed by National Insurance Commissioner (“NIC”)
10
NEW REGULATOR (CONT’D)
AIA


Federal Insurance Chartering Office
Headed by Director of Federal Insurance Chartering Office
(“DFICO”)
STRUCTURE and TERM




ALL bureau under Department of Treasury
LAFALCE, SCHUMER and ABIA patterned after the Office of
the Comptroller of the Currency and the Office of Thrift
Supervision
NIC, DONI and DFICO appointed by President with Senate
approval
LAFALCE appointment for 4 year term
11
NEW REGULATOR (CONT’D)



SCHUMER, ABIA and ACLI appointment for 5 year term
AIA appointment for 6 year term
Express independent regulatory and litigation authority under
LAFALCE, SCHUMER, ABIA and ACLI, implied for AIA
SELF FUNDING

ALL provide for assessments of insurers for examination and
application expenses, LAFALCE bill charges national insurer
affiliates for examination costs

LAFALCE provides for $10 million agency start up loan from
Treasury to be paid in full with no interest within 5 years
following date of enactment
12
NEW REGULATOR (CONT’D)

SCHUMER provides for agency start up loan from Treasury
to be paid in full by agency with interest within 10 years
following date of enactment of bill

LAFALCE and SCHUMER DONI or NIC may also assess
national insurers for a “working capital” fund, in addition to
assessments to cover budget of agency

AIA provides for appropriation of start up funds by Congress
which is repaid out of assessments and fees
13
REGULATORY AUTHORITY
NATIONAL INSURANCE COMPANIES
ALL provide for organization, operation, regulation and
supervision of national insurance companies
ALL provide for authority to charter national insurance
companies
LAFALCE, SCHUMER and ACLI provide for licensing of
insurers to underwrite and sell national products
LAFALCE requires DONI to approve the policy forms of
national insurers and to set policy form standards by
regulation




14
REGULATORY AUTHORITY (CONT’D)

SCHUMER NIC may set policy form standards for consumer
policies by regulation, NIC prior approval NOT required for
policy forms
NATIONAL INSURANCE PRODUCERS
 SCHUMER and ABIA provide for chartering, regulation and
examination of national insurance agencies
 Other proposals, including LAFALCE, do not provide for
chartering of national insurance agencies
15
REGULATORY AUTHORITY (CONT’D)


SCHUMER, ABIA and ACLI provide for licensing of
producers to sell national products
LAFALCE and AIA contain no provisions on producer
licensing
EXAMINATIONS OF NATIONAL INSURERS
 LAFALCE and SCHUMER require annual examinations for
financial condition and market conduct
 LAFALCE and SCHUMER permit DONI or NIC, as
applicable, to determine that less frequent exams are
warranted
16
REGULATORY AUTHORITY (CONT’D)






LAFALCE DONI cannot exempt insurer from annual market
conduct exams
LAFALCE provides for the public availability of exam reports
and work papers
ABIA provides for CAMELS rating system and annual
examinations unless “adequately capitalized” then biannually
ABIA requires ongoing onsite examination for “large”
institutions (as defined by NIC)
ACLI requires triennial examinations; more frequently at
DONI’s discretion
AIA provides initial and “special” examinations and
[investigative authority of federal and state insolvencies]
17
REGULATORY AUTHORITY (CONT’D)
EXAMINATION OF AFFILIATES OF INSURERS

LAFALCE and ACLI may examine only:

To the extent that the activities of the affiliate may affect
the operations, management, or financial condition of
the insurer

If examiners cannot obtain the necessary information
from the insurer

SCHUMER and ABIA may only examine to determine:

Relationship and transactions between an insurer and
the affiliate

Risks to insurer as a result of the affiliate relationship
18
REGULATORY AUTHORITY (CONT’D)




The insurer’s systems for monitoring and controlling
affiliate risk
SCHUMER deference is given to the exam reports of
functionally regulated entities by their primary regulator
AIA
 Silent on affiliate examinations
SCHUMER
 If the affiliate is functionally regulated, NIC must notify
functional regulator of the examination and give that
regulator an opportunity to participate in the examination
19
REGULATOR ENFORCEMENT POWERS
GENERAL ENFORCEMENT AUTHORITY

LAFALCE, SCHUMER, ABIA and ACLI: Akin to 12 U.S.C. 1818
enforcement authority for banks





20
Subject to Administrative Procedures Act, appeal to federal
circuit courts
Suspension, removal and prohibition of certain affiliated
parties
Cease and desist authority
Civil money penalties - $5,000/day – tier 1, $1 million/day –
tier 3
LAFALCE, SCHUMER, ABIA and ACLI have differing
standards for violation – LAFALCE and SCHUMER have
stricter standard, under certain circumstances
REGULATOR ENFORCEMENT POWERS
(CONT’D)


LAFALCE and SCHUMER allow for revocation,
suspension or restriction of federal licenses based on
conduct of company or its board of directors
ABIA separate enforcement authority for National
Insurance Guaranty Corporation with respect to solvency
issues
JURISDICTION OVER:
 National insurance companies
 LAFALCE and ACLI also applies to “insurer affiliated parties”
 LAFALCE applies to state licensed producers (except for
prohibition orders)
21
REGULATOR ENFORCEMENT POWERS
(CONT’D)
SCHUMER and ABIA applies to agencies and “company
affiliated parties”
 SCHUMER specifically permits NIC to take enforcement
actions against holding companies of national insurers
and any officer, director, employee or agent of a holding
company
AIA
 More limited than others
 Delinquent fees and penalties
 May suspend or revoke charter of an insurer that is
knowingly in significant violation of the provisions of the
bill

22
REGULATOR ENFORCEMENT POWERS
(CONT’D)


Cease and desist authority to stop an activity, no authority to
take affirmative or prospective action, except restitution and
amending policy forms
May make referrals to federal and state law enforcement
authorities for possible civil or criminal investigation
23
SELF-REGULATORY ORGANIZATIONS
SCHUMER and ACLI

One or more self regulatory organizations (“SROs”) (could be
one for insurers, one for producers, one for life and annuity,
one for property/casualty, etc.)

Modeled after self regulatory provisions of Securities
Exchange Act of 1934 – NASD and NYSE

Can adopt rules and impose penalties on its own members
and associated persons for rule violations

No producer licensing authority for akin to that provided to the
NASD with respect to registered representatives
24
SELF-REGULATORY ORGANIZATIONS
(CONT’D)

NIC or DONI has review authority for significant rules and
disciplinary actions, can require the SRO to pass rules, can
suspend or revoke SRO status

NIC or DONI can discipline SRO members and associated
persons directly

SCHUMER – NIC can affirm, set aside or remand SRO’s
decision including ability to cancel, reduce or remit any
sanction imposed
LAFALCE, ABIA and AIA
 No provision for establishing SROs
25
POWERS OF NATIONAL INSURERS
LAFALCE and SCHUMER

Can exercise all such “incidental powers” as shall be
necessary to carry on insurance operations

Further allows any company to “do all other things necessary
or convenient to further its activities and affairs”
LAFALCE

National insurers with a federal license may underwrite and
sell in any state any line of insurance permitted to it under its
license without having to obtain a state license

If approved by DONI, could underwrite and sell both life, and
property and casualty products
26
POWERS OF NATIONAL INSURERS
(CONT’D)

Does not provide for underwriting of health products

A national insurer may not issue a policy unless it has filed
the policy form with the DONI and received DONI approval
LAFALCE

Provides for DONI to report to Congress 3 years after
enactment on whether national insurers should be authorized
to underwrite health insurance

Subsidiaries can engage in activities permitted for a
subsidiary in the state where subsidiary is organized
27
POWERS OF NATIONAL INSURERS
(CONT’D)
SCHUMER

Insurance company can underwrite either life, health and
annuities or property and casualty insurance, but not both

Permits any company to sell and underwrite accident and
health so long as the company has a license to also
underwrite life, health and annuities or property and casualty

Subsidiaries can engage in activities that insurer can directly
and activities permitted for subsidiary in state where
subsidiary is organized with certain limitations
28
POWERS OF NATIONAL INSURERS
(CONT’D)
ABIA

Insurance companies can underwrite either life, health and annuities
or property and casualty insurance, but not both

Can engage in activities that are “incidental” “to the issuance and
sale of insurance contracts”

Subsidiaries can engage in activities that insurer can directly and
activities permitted for subsidiary in state where subsidiary
organized

Subsidiaries engaging in activity that is not permissible for an insurer
is limited to 5% of parent company’s assets, and all subsidiaries in
the aggregate cannot exceed 10% of insurer’s assets
29
POWERS OF NATIONAL INSURERS
(CONT’D)
ACLI

Insurer licensed to underwrite and sell life insurance can also
underwrite disability, long-term care and annuities

Silent on powers to specifically underwrite property and
casualty insurance and limited reference to health insurance

“May exercise all such incidental powers as shall be
necessary to carry on insurance operations” (specifically
based on 12 U.S.C. 24 (seventh))
30
POWERS OF NATIONAL INSURERS
(CONT’D)

Subsidiary activities permitted to the extent allowed in state
where organized

No limitations on amount invested in subsidiary
AIA

“Business of insurance,” “activities incidental thereto,” and
“any other business or activity engaged in by insurers”

No specific provisions regarding powers and activities of
subsidiaries
31
VARIABLE PRODUCTS
LAFALCE, SCHUMER and ACLI

Specifically provide authority for the establishment of separate
accounts

Not chargeable with insurer liabilities to the extent provided by
“applicable agreements”

Risks born by policyholders, not guaranteed by insurer, are not
covered by federal guarantee funds
ABIA

Does not specifically provide authority, may assume part of the
activities incidental to the issuance and sale of such contracts

No provision for separate account asset insulation
32
VARIABLE PRODUCTS (CONT’D)

Pursuant to discretionary authority, receiver might be able to
disallow claim of security interest or priority with respect to
separate account assets

Risks born by policyholders, not guaranteed by insurer, are
not covered by National Insurance Guarantee Corporation
ACLI

Provides “asset insulation” comparable to NAIC Model
Variable Contract Law

Could apply to all assets not only to amount equal to reserves
and other contract liability of separate account

Class 2 priority in liquidations to the extent of related reserves
in general account
33
VARIABLE PRODUCTS (CONT’D)
AIA

Does not discuss variable products
Proposals may need to address Model Variable Contract
Law provisions:

“Sole authority” re: state securities law

Exemption from investment requirements and gains, income
and losses separately charged to separate account
(separate from insurer)
34
VARIABLE PRODUCTS (CONT’D)
EXCESS INTEREST AND EQUITY INDEXED PRODUCTS

ABIA and ACLI provide for minimum guarantees for 4 years
prior to insolvency

ACLI acknowledges coverage of equity indexed products

ABIA only acknowledges interest rate limits
35
FORM, GOVERNANCE, CAPITAL
FORM

LAFALCE, SCHUMER, ABIA and ACLI, allow national
insurance companies to be in stock or mutual form

LAFALCE, SCHUMER and ACLI permit establishment of
national fraternal organizations

AIA does not address
36
FORM, GOVERNANCE, CAPITAL (CONT’D)
GOVERNANCE

LAFALCE and SCHUMER permit an insurer to choose law of
state where “main office” (defined as any office designated by
insurer and provided for in its charter subject to approval by
DONI or NIC, where insurer conducts insurance operations)
is located or where holding company is incorporated and
provide, for purposes of jurisdiction, that a company is
deemed a citizen of a state in which its main office is located
and the state in which it has its principal place of business
37
FORM, GOVERNANCE, CAPITAL (CONT’D)

ABIA can choose law of state where “principal office” is
located, where holding company is incorporated, Delaware
General Corporation Law or the Model Business Corporation
Act subject to limits (e.g., as to minimum number of directors)

ACLI provides that applicable law is state where “main office”
(defined as any office designated by the insurer where insurer
is doing corporate business) is located or where holding
company is incorporated

AIA implies applicable law is state where insurer is
incorporated
38
FORM, GOVERNANCE, CAPITAL (CONT’D)
PAID-IN CAPITAL REQUIREMENT

LAFALCE no requirements

SCHUMER NIC to establish requirement – may prescribe
minimum that may be based upon the line(s) of insurance

ABIA by type of company:
39

Life companies – minimum $7 million

Property & casualty – minimum $3 million

Reinsurance – minimum $35 million
FORM, GOVERNANCE, CAPITAL (CONT’D)

ACLI and AIA no minimum specified
RISK-BASED CAPITAL STANDARDS

LAFALCE and SCHUMER NAIC model for risk-based capital
calculations and remedies – in effect until transition
termination date or effective date of standards set by DONI or
NIC

LAFALCE in addition to required reserves, establishes
minimum financial security benchmarks to provide security
against contingencies that are not fully covered by reserves
or reinsurance and prohibits public disclosure of risk-based
capital ratio, unless otherwise permitted by DONI
40
FORM, GOVERNANCE, CAPITAL (CONT’D)

ABIA established by regulation taking into account asset,
credit, underwriting, actuarial and other risks, required
reserves equal to estimated and actual claims and all
expenses and other revenue

ACLI uses NAIC model for risk-based capital calculations
and remedies - required for 5 years thereafter DONI can
establish capital requirements

AIA permits DFICO to establish capital requirements, “riskbased or otherwise”
41
FORM, GOVERNANCE, CAPITAL (CONT’D)
ACCOUNTING

ALL require qualified actuaries and independent audit

LAFALCE DONI to establish accounting principles and
auditing standards, but NAIC model standards in effect for 5
years

SCHUMER NIC to establish standards based on NAIC model
standards and/or GAAP but NAIC model standards in effect
until transition (at least 5 years)

ABIA GAAP with 5-year transition period

ACLI and AIA consistent with NAIC statutory financials (at
least 5 years for ACLI)
42
MARKET CONDUCT
LAFALCE and SCHUMER

Includes section on “market conduct”

The purpose of the section is to prevent:
 Unfair and deceptive acts and practices
 Unfair claims practices
 Discrimination in underwriting
 Insurance fraud

DONI and NIC granted broad rulemaking authority to carry
out purposes of the Act
43
MARKET CONDUCT (CONT’D)

Includes:
 A defined list of unfair or deceptive acts and practices
 Anti tie-in provisions
 Prohibited discriminatory practices

DONI and NIC granted rulemaking authority concerning
replacements

Establishes “fraudulent insurance act” as a federal crime,
which includes specified acts or omissions that are made
knowingly with intent to defraud

Establishes Division of Insurance Fraud
44
MARKET CONDUCT (CONT’D)
LAFALCE

Subjects national insurers and state licensed insurance
producers selling products of national insurers to the
provisions of this section and any implementing regulations

Any insurance company (including state and foreign) is
subject to the provision of the section as minimum standards
for market conduct

DONI required to conduct annual market conduct
examinations of state producers that sell products of national
insurers

Establishes Division of Consumer Affairs
45
MARKET CONDUCT (CONT’D)
SCHUMER

Prohibits a private right of action under this section

Requires mandatory reporting of insurance fraud by national
insurers
ABIA

The legislation does not include any section entitled “Market
Conduct”

Includes a list of unfair trade practices similar to LAFALCE
and SCHUMER and each national insurance agent and
agency is expressly made subject to the unfair trade practices
identified in proposal
46
MARKET CONDUCT (CONT’D)

Grants NIC the authority to promulgate regulations governing
the sales practices of national insurance agencies and
agents, and, to the extent appropriate, national insurance
companies
ACLI

The legislation includes section titled “Market Conduct”

The purpose of the section is to ensure appropriate regulation
of the sales and marketing practices of federal insurance
producers and national insurers
47
MARKET CONDUCT (CONT’D)

DONI is granted rulemaking authority to carry out the
purposes of the proposal, including promulgating rules
focusing on advertising, sales, issuance, distribution and
administration of the products of national insurers

Establishes “fraudulent insurance act” as a federal crime
includes specified acts
and omissions that are made knowingly and with intent to
defraud

Civil as well as criminal liability
48
MARKET CONDUCT (CONT’D)
AIA

DFICO to establish minimum standards for marketing

Prohibits unfair trade practices as defined by DFICO

Insurers must maintain copies of policy forms used

Policyholder complaints for market conduct and unfair trade
practices administratively adjudicated by DFICO in lieu of
private right of action
49
HOLDING COMPANIES

Registration
 LAFALCE, SCHUMER and AIA require registration of
federal insurers within a holding company system
 ABIA and ACLI require registration of holding companies

All limit affiliate transactions
 All except AIA -- proposals similar to federal banking law
limits
 AIA based on “reasonableness” standard, transactions
involving 5% or more of assets require prior approval and
transactions involving ½ of 1% of assets to 5% of assets
and certain material transactions require prior notice
50
HOLDING COMPANIES (CONT’D)

Specify limits on dividends
 All except ABIA -- out of available surplus only; may pay
extraordinary dividends to shareholders if DONI or NIC,
after thirty days prior notice, does not disapprove
 ABIA – only from net profits
51
PRODUCER LICENSING
LAFALCE and AIA

No provision for national producer licensing

LAFALCE provides for regulation of producers to remain at
state level and prohibits any state law that prevents,
impedes or discriminates against a state producer that sells
products of a national insurer

AIA relies on state law and Gramm-Leach-Bliley Act,
including NARAB
52
PRODUCER LICENSING (CONT’D)
SCHUMER and ABIA

Creates a National Insurance Agency charter with name
requirements (e.g., National Agency)

Significant “corporate” guidelines related to governance

ABIA proposal goes further and establishes capital
requirements ($100,000) and bonding requirements for
national insurance agencies
SCHUMER and ABIA

National insurance agency and federal producer can engage
in the “sale, solicitation and negotiation” of insurance issued
by either a national or state insurer
53
PRODUCER LICENSING (CONT’D)

SCHUMER state producers cannot sell national products
unless first obtain a national license or NIC determines by
regulation or order the licensing standard in a state is
equivalent to the federal standards; ABIA does not appear to
require federal license for state-licensed agent to sell a
national product

NIC or DONI will establish educational, character,
examination and other appropriate requirements for a federal
insurance license

No description of any appointment process

SCHUMER requires compliance with GLBA Consumer
Protection rules
54
PRODUCER LICENSING (CONT’D)
SCHUMER and ABIA

SCHUMER NIC must adopt regulation for creating an
electronic database for producers but may delegate authority
to an SRO to maintain the database

SCHUMER repeals NARAB
ACLI

No person (organization or individual) can sell an insurance
or annuity contract issued by a national insurer unless that
person holds a “federal producer” license for that line of
business

Does not appear to contemplate either an appointment
requirement, or a capital requirement
55
PRODUCER LICENSING (CONT’D)

Director will issue regulations governing the rules for
commissions and compensation based on sales

If an applicant has a state license as a producer, regulations
must provide for “prompt” federal licensing

License authorizes the federal producer to sell lines of
insurance authorized under the license, and only those
products issued by national insurers

Creates the framework for imposing supervisory
responsibilities on the insurer for its captive and independent
producers, as well as any of its applicable employees
56
CHANGE IN CONTROL
LAFALCE and SCHUMER

Requires prior approval by DONI or NIC

No conflict with other federal laws – e.g., BHC Act

No delegation of this power to SRO
ABIA

Based on Change in Bank Control Act

Opportunity for prior review by NIC of change in control, then
right to disapprove
ACLI and AIA

Requires prior approval by DONI or DFICO, as applicable
57
CONVERSIONS
ALL Except AIA

Allow for national to state charter conversions

LAFALCE, SCHUMER and ACLI allow state to national conversions

LAFALCE and SCHUMER allow mergers, consolidation or
acquisition between state insurer and national insurer where
national insurer or state insurer survives

ABIA only allows conversions from national to state charter in states
where state chartered companies can convert to national charter;
ABIA silent regarding state to national charter but allows mergers of
state and national companies where national company survives
AIA

Contains no provision
58
DEMUTUALIZATION
LAFALCE

State law will govern demutualization of a state insurer

Silent on demutualization of a national insurer
SCHUMER and ACLI

May convert from mutual to stock

NIC or DONI must approve plan only after holding a hearing
which determines that: plan is fair and equitable to insurer
and policyholders, does not violate law, and after conversion,
insurer still meets federal licensing requirements
59
DEMUTUALIZATION (CONT’D)

All membership interests and rights in surplus are
extinguished and will receive fair and equitable payment,
does not have to be stock, can be cash, premium credits,
credit to insurance policy, account values or enhanced
insurance benefits

Can establish stock option or incentive plans customary for
publicly traded companies and subject to regulations
promulgated by the NIC or DONI
60
DEMUTUALIZATION (CONT’D)
SCHUMER

No state interference

No delegation to an SRO permitted

Certain violations or actions may be enforced or enjoined in
district court in the District of Columbia or for the district where
the converted insurer’s main office is located

Contractual rights and liabilities are preserved unless effected
by the conversion plan

No person shall acquire more than 5% of any class of voting
stock of a converted insurer or a person that controls a
converted insurer without prior approval of DONI or NIC for 5
years after effective date of plan
61
DEMUTUALIZATION (CONT’D)
ABIA

May convert from mutual to stock and from stock to mutual
form

Must obtain prior approval of conversion plan by
Commissioner

After consummation of a mutual to stock conversion,
members must have the same rights as before the conversion

Cannot award any additional stock options to any companyaffiliated party or a company that owns or controls the insurer
that they would not otherwise be entitled to as members

Contractual rights of members preserved

Can appeal NIC decision to Federal Court of Appeals
62
DEMUTUALIZATION (CONT’D)
ACLI

Judicial review of DONI decision, but silent on what court
AIA

Does not address
63
SOLVENCY
All Except ABIA

Overlays on current state guaranty association structure

All national insurers would remain members of the state
guaranty association in each state where the national insurer
does business

Subject to assessments in each state in which insurer does
business
64
SOLVENCY (CONT’D)
LAFALCE, SCHUMER and ACLI

National guaranty fund(s) serve as “fall back” if a state fund
fails to meet certain federal criteria

If state fails to meet federal standards, national and state
insurers in that state automatically become members of
national guaranty fund(s)

No provisions for unallocated annuities

No authority to take action against insurers bordering on
default

Guaranty fund(s) have discretion to guarantee, assume or
reinsure any or all policies of an impaired insurer
65
SOLVENCY (CONT’D)
LAFALCE and SCHUMER

Establishes two federal guaranty funds: 1) life and annuity
products; 2) property and casualty

SCHUMER – life guaranty fund also includes health products;
LAFALCE is silent on health products

Both funds are established as nonprofit District of Columbia
corporations and are not agencies of the U.S. government,
but subject to oversight by DONI or NIC

Directors of both corporations are selected by member
insurers
66
SOLVENCY (CONT’D)

Neither corporation is backed by “full faith and credit” of the
United States

Benefits to policyholders under property and casualty fund
include:
 $10,000 per policy
 Full coverage of worker’s compensation claims

LAFALCE benefits to policyholders under life fund include:
 $300,000 in death benefits
 $100,000 in cash value of life insurance and annuity
benefits
 Aggregate limit of $300,000 for all benefits
67
SOLVENCY (CONT’D)

SCHUMER benefits under life fund same as ACLI and
include:

$300,000 in death benefits

$100,000 in cash value of life insurance and annuity
benefits

Two kinds of Assessments to pay funds:

Class A

To meet administrative and legal costs and not based
on any particular impaired or insolvent insurer

Assessed on ongoing basis, may be pro rata or nonrata
68
SOLVENCY (CONT’D)


Non-rata assessments capped at $150 per calendar
year
Pro rata can be credited against future Class B
assessments
 Class B



69
Made post-insolvency
Assessed to provide protection and benefits with regard
to a particular impaired or insolvent insurer
No cap, but total assessments capped at 2% of average
annual
premiums
SOLVENCY (CONT’D)
ABIA

Establishes National Insurance Guaranty Corporation (NIGC)
patterned after FDIC

5 person board made up of Commissioner, SEC Chairman,
FDIC Chairman and two individuals (one chosen as Chair)
appointed by President for a six year term

NIGC serves as both guarantor for policyholders and receiver

National insurers are required to be shareholders

State chartered insurers may apply for membership and
state-members of NIGC are not required to comply with state
guaranty fund law
70
SOLVENCY (CONT’D)

2 funds under NIGC and administered separately—National
Life and Health Guaranty Fund and National Property and
Casualty Guaranty Fund

Shareholders are a member of a fund based on their line of
business and can only be a member of one fund

Assessments are risk-based and when necessary to maintain
the designated reserve ratio for each fund will be paid semiannually

Designated reserve ratio is either set by the Board or is
between 0.5% and 1.25% of estimated insured liabilities

Refunds may be given of funds in excess of the designated
reserve ratio
71
SOLVENCY (CONT’D)
ABIA

Specified benefits to policyholders and beneficiaries for both
funds (certain exceptions apply)
Life and Health Fund:
 $400,000 in life insurance death benefits
 $135,000 in net cash surrender value of life insurance and
annuities
 $6,600,000 aggregate of unallocated annuities by one
owner
72
SOLVENCY (CONT’D)

Separate Enforcement Powers:
 NIGC may also take a series of actions when it finds that
an insurer is in a troubled condition depending on their
capital and reserve category similar to “prompt corrective
action” under banking law
 NIGC may also provide financial assistance to insured
institution prior to being placed in receivership, make
loans to, purchase assets of, securities of, assume
liabilities of, or make contributions to any insured
institution if assistance may prevent a default, restore an
institution or lessen risk to the NIGC
 NIGC has authority to examine shareholders
73
SOLVENCY (CONT’D)
ACLI

Provides for 1 federal guaranty fund – National Insurance
Guaranty Commission (NIGC)

No provisions for property and casualty benefits

Directors of NIGC selected by member insurers

Assessments based on current NAIC Model Act provisions

Assessments are made post-insolvency and are capped at
2% of premiums
74
RECEIVERSHIP AND
CONSERVATORSHIP
ALL Except ABIA

Based on Uniform Receivership Law

Only DONI, NIC or DFICO as applicable, may institute
receivership proceeding in federal district court

DONI, NIC or DFICO as applicable, serves as conservator,
rehabilitator or liquidator under the authority of the federal
district court

DONI, NIC or DFICO as applicable, subject to court’s
oversight and prior approval of certain actions
75
RECEIVERSHIP AND
CONSERVATORSHIP(CONT’D)

Functions of liquidating an insurer

ACLI and AIA – Pay close attention to specific insurance
related issues (e.g., reinsurance claims of ceding companies)
under priority of claims
LAFALCE, SCHUMER and ACLI

Providing guaranty fund protection is separate but
coordinated

Authority to transfer insurance liabilities during liquidation is in
the guaranty funds
76
RECEIVERSHIP AND
CONSERVATORSHIP(CONT’D)

Under ACLI, only DONI may disaffirm “executory” contracts,
under LAFALCE and SCHUMER, DONI or NIC, as
applicable, may disaffirm “executory” contract subject to court
approval, but authority not applicable to insurance policies or
reinsurance contracts
LAFALCE and SCHUMER

Receivership proceedings may be initiated against national
insurer, and persons affiliated with a company in receivership
including insurance producers, managing general agents,
premium finance companies and insurance holding
companies
77
RECEIVERSHIP AND
CONSERVATORSHIP(CONT’D)

Immunity and indemnification for receivers and their
employees

Document depository required during pendency of
proceedings
ABIA

NIC required to appoint NIGC as receiver of any national
insurer failure
78
RECEIVERSHIP AND
CONSERVATORSHIP(CONT’D)
ABIA

Role similar to FDIC under federal banking law

NIC has discretion to appoint NIGC as conservator

State may appoint NIGC as conservator or receiver of state
member insurer

State member insurer in conservatorship remains under
supervision of state

NIGC does not obtain permission from a court to place an
insurer in conservatorship or receivership
79
RECEIVERSHIP AND
CONSERVATORSHIP(CONT’D)

No judicial oversight of NIGC role

Institutions must seek redress from federal court

Little attention paid to specific insurance related issues in
priority of claims

Authority to disaffirm or repudiate “burdensome” contracts,
damages for repudiation limited to compensatory damages
80
REINSURANCE
LAFALCE, SCHUMER and ACLI

Specific sections on reinsurance and bulk transfer

Subject reinsurance to federal regulation patterned after
existing state regulation

Bulk transfers (assumption reinsurance) between national
insurers are subject only to national regulation

State or foreign chartered reinsurers may be licensed as
“federally qualified reinsurers”
81
REINSURANCE (CONT’D)

Reinsurance credit will be allowed a state insurer that cedes
any risk to a federal reinsurer or federally qualified reinsurer;
state credit-for-reinsurance regulations are preempted

Reinsurance contracts may provide for risk transfer of
broader categories of risk -- whether proportional or
nonproportional

Some provisions are directed toward improving U.S.
reinsurers' ability to compete internationally, e.g., LAFALCE
and SCHUMER – formation of commission to study
reinsurance regulation in U.S. and other countries
82
REINSURANCE (CONT’D)
LAFALCE and SCHUMER

A national company must obtain DONI’s or NIC’s prior
approval before effecting a bulk transfer and DONI or NIC
has discretion to decide if policyholder approval is required

State review or action only permitted in certain circumstances
as long as it serves a legitimate state interest and does not
frustrate the proposed bulk transfer

A “federally qualified reinsurer” must maintain a trust fund if it
is a national company that holds a federal license, and is a
"federally qualified reinsurer”
83
REINSURANCE (CONT’D)
ABIA

Very general reference – mere placeholder

Unclear how it relates to existing state regulation

No mention of bulk transfers
ACLI

Bulk transfers between national insurers and state insurers
are subject to federal and state regulation but if done as part
of a conversion of a state insurer to a national insurer or
formation and licensing of a new national insurer, exempt
from state regulation and policyholder approval
84
REINSURANCE (CONT’D)
AIA

Federally chartered insurer may engage in reinsurance

Imposes limits on affiliate reinsurance

DFICO may set limits and controls “on the use of reinsurance,
and standards for ceding, reporting on, and credit for such
reinsurance”

Detailed discussion under receivership section
85
TAX
LAFALCE, ABIA and AIA
Currently do not specifically address product taxation

LAFALCE, ACLI and AIA

Neutral treatment of national companies and state insurers
for state tax, including retaliatory tax, purposes
SCHUMER and ACLI

Federal tax neutrality of national insurers and policies and
contracts for at least five years
 National insurer treated as if it were a state insurer at
least during five year transition period
86
TAX (CONT’D)

National insurer policies and contracts treated the same
as contracts under state law at least during five year
transition period
ABIA

Neutral treatment of national companies and state insurers
for state tax, including premium tax, purposes
87
CONTACT INFORMATION

If you have any questions concerning the Lafalce or
Schumer bills or the National Insurance Charter
presentation, please do not hesitate to contact us.
88
Jamie Cain
202.383.0180
Eric Arnold
202.383.0741
Beth Knickerbocker
202.383.0647
Daphne Frydman
202.383.0656
NATIONAL INSURANCE CHARTER
MOVING FORWARD IN 2002
RECENTLY INTRODUCED BILLS