NATIONAL INSURANCE CHARTER MOVING FORWARD IN 2002 RECENTLY INTRODUCED BILLS
Jan 10, 2016
NATIONAL INSURANCE CHARTER
MOVING FORWARD IN 2002
RECENTLY INTRODUCED BILLS
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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
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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
PRIOR TRADE GROUP PROPOSALS
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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
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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
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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
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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
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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
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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
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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”)
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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
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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
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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
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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
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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
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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
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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]
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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
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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
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REGULATOR ENFORCEMENT POWERS
GENERAL ENFORCEMENT AUTHORITY
LAFALCE, SCHUMER, ABIA and ACLI: Akin to 12 U.S.C. 1818 enforcement authority for banks
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
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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)
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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
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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
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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
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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
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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
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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
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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
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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
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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))
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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
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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
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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
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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)
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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
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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
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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
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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
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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:
Life companies – minimum $7 million
Property & casualty – minimum $3 million
Reinsurance – minimum $35 million
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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
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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, “risk-based or otherwise”
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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)
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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
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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
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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
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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
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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
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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 actsand omissions that are made knowingly and with intent to defraud
Civil as well as criminal liability
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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 company-affiliated 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
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DEMUTUALIZATION (CONT’D)
ACLI
Judicial review of DONI decision, but silent on what court
AIA
Does not address
64
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
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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
66
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
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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
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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 non-rata
69
SOLVENCY (CONT’D)
Non-rata assessments capped at $150 per calendar year
Pro rata can be credited against future Class B assessments
Class B 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
70
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
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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 semi-annually
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
72
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
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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
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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
75
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
76
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
77
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
78
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
79
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
80
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
81
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”
82
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
83
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”
84
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
85
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
86
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
87
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
88
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.
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