Property and Casualty Insurace (C) Committee
October 1, 2007

The Property and Casualty Insurance (C) Committee met on Monday, October 1, 2007.

During this meeting, the Property and Casualty Insurance (C) Committee:

• Heard on update on ACORD 28 from the Mortgage Bankers Association (MBA) and ACORD’s perspective. The primary problems from MBA’s viewpoint relate to the form being information only, it is no longer a true proof of coverage, and an insurance company is not obligated to notify interested parties in the event of policy cancellation. MBA will continue to work with ACORD to hopefully resolve the issue as lenders require evidence of insurance at time of closing and annually.
• Heard an update on the Catastrophe Modeling Hearing held on September 28, 2007. The purpose of the hearing was to gather information on the appropriate regulatory framework for monitoring the activities of catastrophe risk modelers and to explore whether laws and regulations governing rating or advisory organizations are broad enough to be applied to catastrophe modeling vendors. In addition, the committee explored the use of near-term catastrophe models for pricing property insurance. The Committee heard from J. Robert Hunter of the Consumer Federation of America who provided insight into consumer’s perspectives. He said that consumers feel that insurers have not honored promises made when the use of catastrophe models was introduced. He was critical of the use of what is known as “near-term” models―models that use a five-year projection that emphasizes the use of the adverse experience from 2004 and 2005. These models have resulted in rapidly escalating rates for policyholders and record profits for insurers, he maintained. He urged greater regulatory oversight of the modelers. Howard Eagelfeld representing the Florida Commission on Hurricane Loss Projection Methodology explained how the commission analyzes catastrophe models in Florida. A panel of modelers responded to questions regarding their regulation and the use of near-term models who said that there is already significant regulation of catastrophe modelers. They did not think that the regulatory framework for rating organizations fit with oversight of catastrophe modelers. Some suggested that another layer of regulation would be unwelcome, however, if a central framework could be developed that replaced the existing oversight; it might be preferable if consistently applied. Each maintained that an unbiased model with consistent results was the goal. Catastrophe models use historical information and apply scientific and engineering principles to the information to predict future losses. The modelers suggested that near-term models provided another option for insurers to consider when assessing future catastrophe losses. A panel of representatives of insurer trade associations defended insurers’ use of near-term catastrophe models and agreed with modelers that the framework for regulating advisory organizations was inappropriate for modelers and encouraged regulators to continue to allow insurers to select whether a near-term or other model best fits their needs. They observed that financial rating agencies have encouraged insurers to move toward near-term models for financial ratings. Birny Birnbaum from the Center for Economic Justice presented his perspectives on what was said by the modelers and the insurer trade organization representatives. He encouraged regulators to investigate whether there was collusion among insurers or modelers, to regulate the modelers as advisory organizations, to develop a public model for benchmarking purposes, to provide guidance to modelers for key modeling components that are public policy, rather than scientific, decision points and to get insurers and modelers involved in loss mitigation efforts.
• The Committee considered and adopted proposed charges for 2008.
• Adopted the report of the Surplus Lines (C) Task Force which recently heard a status report on pending Federal legislation that, if enacted, will preempt certain aspects of State regulation of multi-state surplus lines policy placement and premium taxation. The Task Force adopted a motion to amend one of its charges. The charge currently reads “Consider the NAIC Model Allocation of Surplus Lines and Independently Procured Insurance Premium Tax on Multi-State Risks Regulation and any other surplus lines issues in light of the NAIC RoadMap Goals.” The Task Force voted to recommend amending the charge to read: “Consider a uniform method of allocating surplus lines and independently procured insurance premium tax on multi-state risks and any other surplus lines issues.”
• Adopted the report of the Casualty Actuarial (C) Task Force. The Task Force adopted interim conference call minutes and 2008 charges. A change was made to the charges to focus the Task Force’s international efforts on work requested by the International Solvency and Accounting (E) Working Group and on International Actuarial Association papers. The Regulatory Guidance for 2007 Statements of Actuarial Opinion and Actuarial Opinion Summaries was discussed. The Subgroup will re-draft the documents for a vote at the next conference call. The Actuarial Opinion Subgroup made a presentation regarding regulatory guidance at the Casualty Actuarial Society’s Casualty Loss Reserve Seminar and will make another at the NAIC Financial Summit. The Profitability (C) Working Group has reviewed preliminary work for the Profitability Report using 2006 data. The Working Group reported it was reviewing methodologies. The P&C Actuarial Role in Risk Focused Surveillance Subgroup reported to the Task Force, indicating it was close to finalizing of information on reserving, underwriting/rating, and liquidity risks that can be used to develop training by the Risk Implementation (E) Subgroup. The Workers’ Compensation Large Deductible Subgroup asked the American Academy of Actuaries (AAA) Workers’ Compensation Committee for a proposal. Once the AAA responds, the Subgroup will discuss that proposal and any additional surveys received. The Extended Loss Subgroup will suspend activity pending review of the results from the new Schedule P interrogatories. The Task Force also discussed principles-based reserving activities. There is still some concern that aspects of the project will impact property and casualty insurers, especially because accident and health business is sometimes reported on the property and casualty blank and because issues such as governance are not currently drafted to exclude property and casualty. Members were also asked to review the Standard Valuation Law to determine if there could be impact on property and casualty. Task Force members are encouraged to continue to provide support in the process to offer guidance on how principles-based reserving works for P&C and also on how statistical information is collected. The AAA reported on activities at their Committee on Property/Liability Financial Reporting. The AAA is developing risk transfer training and will present some initial training at the Third Annual NAIC Financial Summit. The committee is also developing a first draft of a risk transfer survey that the Task Force will consider on the next call. Expectations are that the survey will be distributed to companies at the beginning of 2008. The AAA also reported on international work and emphasized the need for actuaries to be involved in these international accounting and solvency changes. The AAA and interested parties said focus on issues such as internal models, risk margin calculations, and country-specific differences would be helpful.
• Adopted the report of the Statistical Information Task Force including the blanks proposal to Supplement A to Schedule T of the annual statement that the Task Force adopted June 19, 2007. In addition the Task Force approved publication of the 2004/2005 Auto Insurance Database Report, the 2005 Commercial Lines Competition Database Report and 2008 proposed charges. Various concerns were raised by interested parties regarding the need for reporting of surplus lines entities and risk retention groups in reviewing the June 11, 2007, draft of the Medical Malpractice Closed Claim Reporting Model Law. However, the Task Force believes the reporting from all entities is needed and will remain in the model. The confidentiality provisions of the draft were also discussed and since Task Force consensus on confidentiality issues may be impossible, the Task Force decided to seek Property and Casualty Insurance (C) Committee guidance as this is a public policy issue. The Task Force approved a letter dated September 26, 2007, regarding the confidentiality issue. The Task Force is seeking guidance from commissioners on whether the model law should include a provision that ensures that individual closed claim data will be kept confidential by the state insurance department that collects the data required by the model law and if so, the level of confidentiality that should be conferred upon the data. Once this issue is resolved, the Task Force believes that it can move fairly quickly to complete the drafting of the model law and submit it to the Property and Casualty Insurance (C) Committee for approval in a timely fashion. Commissioner McCarty indicated perhaps the Property and Casualty Insurance (C) Committee will hold an interim meeting at the conclusion of the Third Annual NAIC Financial Summit in Atlanta, Georgia which is scheduled November 5-7, 2007, to consider a reply to the Task Force’s request for guidance.

• Adopted the report of the Workers’ Compensation (C) Task Force. The Task Force received the annual “State of the Line” report from the National Council on Compensation Insurance and received an update from the Large Deductible Study Implementation (C) Working Group. The Working Group reported continued efforts drafting its Third Party Administrator (TPA) Guidelines and Guidelines for the Filing of Workers’ Compensation Large Deductible Policies and Programs. It was mentioned that one key area remaining to resolve under the draft TPA Guidelines involves how much oversight should be required regarding bank accounts held by TPAs for their carriers. The draft Large Deductible Guidelines were reported as becoming very mature, but with possible revision remaining in regards to recommendations pertaining to TPAs. The Task Force received an update from the NAIC/IAIABC Joint Working Group which continues to work on an Independent Contractor white paper with remaining issues pertaining primarily to “if any” workers’ compensation policies and state pre-certifications (e.g., certificate of non-coverage). The Professional Employer Organization Model Law (C) Working Group reported to the Task Force that the Guidelines for Regulations and Legislation on Workers’ Compensation Coverage for Professional Employer Organization Arrangements (NAIC PEO Guidelines) adopted by the NAIC June 4, 2007, recently received two technical only amendments to correct the Table of Contents and to correct a subsection reference. A motion was made to also add a drafting note under Section 12 and to amend language to broaden its Subparagraph 12A. The Task Force adopted these two suggested Section 12 changes with the caveat that they should receive wider circulation to regulators and interested parties before next going before the Property and Casualty Insurance (C) Committee for consideration of adoption. The Working Group will focus its attention on development of a paper to be of assistance to states in implementation of the NAIC PEO Guidelines. The Task Force learned that the NAIC NCOIL PEO Model Focus Group of the Professional Employer Organization Model Law (C) Working Group has considered providing comments to the National Conference of Insurance Legislators (NCOIL) draft PEO Model Act. A letter addressing NAIC concerns was submitted to NCOIL July 13, 2007. NCOIL plans to consider a later revised draft and review comments received during its interim meeting Oct. 27, 2007. The Task Force received an update from the Settlement Review (C) Working Group which reported that a second amendment to the New York/American International Group Settlement was recently filed which extended the documents release deadline from September 1, 2007 to November 30, 2007. The Task Force adopted the proposed 2008 charges.

• Adopted the Catastrophe Insurance (C) Working Group report which included a legislative update on the House Financial Services Committee was using H.R. 3355 as the vehicle for moving natural disaster legislation. The bill has two titles. The first title establishes a consortium of participating states to package catastrophe risk and sell it to reinsurers or the capital markets. The second title enables liquidity and catastrophe loans that allow state reinsurance mechanisms or residual market mechanisms to partner with the Federal Government to spread the risk of catastrophe loss over a long time period. A proposal developed by South Carolina was discussed that enables a system that allocates insurance loss between wind and water events. The proposal suggests that when both wind and water perils are involved, the damage would be allocated using a predetermined pro rata allocation method when the cause of loss is indeterminable. The Working Group plans to further explore this concept. The Working Group discussed a proposal from The Travelers to create a private market solution to address hurricane risk by enabling a coastal zone from Texas to Maine for homeowners policies. The proposal would create a federal mechanism to oversee rates and policy provisions to ensure a stable, uniform environment. Risk-based rates would be used with premium adjustment mechanism created to adjust rates if modeled rates do not match actual experience over a 10-year time period. Phase-in subsidies would be provided for the economically disadvantaged to help them afford the coverage. Enactment of a tax-deferred catastrophe reserve and mandatory participation in the National Flood Insurance Program are program features. The Working Group agreed to hold another public hearing in conjunction with the NAIC’s 2007 Winter National Meeting. The focus of the hearing would be the impact that financial rating agencies have on catastrophe insurance markets. The Working Group decided that a final vote would be taken on its white paper Natural Catastrophe Risk: Creating a Comprehensive National Plan at the 2007 Winter National Meeting.
• Received the report of the Terrorism Insurance Implementation (C) Working Group which had been apprised of the House approval of H. R. 2761 on September 19, 2007. The bill will move forward to the Senate. The main highlights of the bill include a fifteen year extension, coverage of potential nuclear, biological, chemical and radiological (NBCR) losses, domestic acts of terrorism and group life insurance. The White House, the Department of the Treasury and the Office of Management and Budget oppose the bill for three reasons. They feel the extension should be short term, there should be increases in the retention amount in the private sector and there should not be an expansion of the program. To avoid any market disruptions a final bill was needed but may not occur until late 2007.
• Learned that the Risk Retention (C) Working Group did not meet during the third quarter.
• Adopted the report of the Crop Insurance (C) Working Group. The Working Group received a report from the Risk Management Agency highlighting the Federal Crop Insurance Corporation’s manager’s report. The report highlighted the continued interest in pasture, rangeland and forage insurance products, the development guidance for conflict of interest disclosures used by Approved Insurance Provider in the federal crop insurance program, and notification that the Cooperative and Trade Association Rebating Program has been put on hold pending changes to the program in the current federal farm bill in Congress. The Working Group heard a presentation from the Risk Management Agency on a proposed crop adjuster licensing program, which would provide a minimum level of adjuster training specific to crop insurance for anyone providing adjuster services for Approved Insurance Providers in the federal crop insurance program. The Working Group also heard a presentation from the National Crop Insurance Program (NCIP) on its proposed Crop Adjuster Proficiency Program. The program is being developed as an application of the Risk Management Agency’s crop adjuster licensing program. This program would provide uniform, standardized testing of all insurance adjusters working with Approved Insurance Providers in the federal crop insurance system.

• Received the report of the Title Insurance Issues (C) Working Group. The Working Group decided to address some of the recommendations made within the Government Accountability Office’s (GAO) April 2007 report Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers.” The Working Group also analyzed a proposal for a Schedule T, Supplement A, for title insurers to provide information that can be used to assess the results of title insurance operations by state. The report would show state experience for four segments, (1) residential direct operations, (2) residential independent agent operations, (3) residential affiliated agent operations, and (4) commercial. An update on the new NAIC model law development framework which would address potential changes to the Title Insurer Model Act and the Title Insurance Agent Model Act as well as an update on potential blanks changes concerning title insurance was explained to the Working Group. Members also heard a presentation concerning potential alternatives to title insurance concerning lenders pay. The Title Insurance Agent Model Act and the Title Insurer Model Act are currently outdated and need to be updated, and that the models should be addressed as guidelines while the Working Group could still have a model law concerning any data collection procedures.
• Received a report of the Advisory Organization Examination Protocol (C) Working Group. The Working Group is currently revising the latest draft of the Market Regulation Handbook Chapter Twenty-Five, Conducting the Statistical Agent and/or Advisory Organization Examination. A separate review of the information systems controls is being conducted for inclusion in Chapter Twenty-Five. The Working Group will also review the various standards contained in the Market Regulation Handbook and recommend revisions if deemed necessary to the Market Regulation Handbook (D) Working Group.
• Adopted the report of the Consumer Guides Review (C) Working Group. After discussing content, layout, availability and what purpose A Consumer’s Guide to Homeowners guide should serve the Working Group decided to reformat and shorten the August 8, 2007, draft. The Working Group envisioned a guide to be something that is easy to read, eye catching and informative. Important issues, such as, the need for insurance, how the premium is determined, important questions one should ask an agent, wind vs. flood and how deductibles apply will be included. Some of these issues will be described in a checklist format. Thought was also given to drafting a more detailed document that would supplement the guide that someone could reference should they choose to.

Action Items:

The Property and Casualty Insurance (C) Committee:

• Approved a public hearing at the 2007 Winter National Meeting by the Catastrophe Insurance Working Group to focus on the impact that financial rating agencies have on catastrophe insurance markets.
• Adopted proposed charges for 2008.
• The Statistical Information (C) Task Force approved the publication of the 2004/2005 Auto Insurance Database Report.
• The Statistical Information (C) Task Force approved the publication of the 2005 Commercial Lines Competition Database Report.
• The Statistical Information (C) Task Force exposed a June 11, 2007, draft of the Medical Malpractice Closed Claim Reporting Model Law.
• The Title Insurance Agent Model Act and the Title Insurer Model Act are currently outdated and need to be updated, and that the models should be addressed as guidelines by the Title Insurance Issues Working Group.