Property and Casualty Insurance (C) Committee
December 4, 2007

The Property and Casualty Insurance (C) Committee met on Tuesday, December 4, 2007.

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

• Adopted its November 14, 2007, conference call minutes.
  
  
• Heard an update on the Use of Catastrophe Models by Rating Agencies Public Hearing held on December 1, 2007. The purpose of the hearing was to gather information on the role of rating agencies and how rating agencies use catastrophe models to evaluate insurer’s credit risk. The Committee heard testimony from three organizations and written testimony was received by two organizations. Martin Simons of the American Academy of Actuaries discussed his recent activities with the Florida Commission on Hurricane Loss Projection Methodology. The hurricane activity during 2004 and 2005 was viewed as a wake-up call by some in the industry. These were very active years, and the increased two-year frequency, combined with increased coastal exposures, brought diverse methods of dealing with what the 2004 and 2005 hurricane seasons project for the future. Although the medium- or short-term hurricane models have not yet been determined to be acceptable for producing loss costs in Florida and other jurisdictions, these models are widely used by reinsurers and rating agencies in their analyses. Mr. Simon’s believed traditional ratemaking does not work for accurately measuring catastrophe exposures and catastrophe models can bridge the gap. He said there is no other method that can be used at this time. The testimony from A.M. Best Company indicated that A.M. Best expects insurers to use some sort of a model, it could be an internally developed model. They prefer the use of short-term models. They are looking to see the effect on insurer solvency and in doing so will evaluate its capacity to handle a second major catastrophe after the probability of the first major catastrophe occurring. Bottom line they are looking for strong risk management. Standard and Poors indicated their mission is to assign credit ratings. A company’s ability to handle catastrophic risk is incorporated in their ratings on quantitative and qualitative bases. Catastrophic loss activity can have a significant impact on a company’s overall financial strength. Their standards have changed and will be implemented next year. Incurred losses from all catastrophes will increase over the next ten years and the higher risk will be imbedded in the ratings they assign. Moody’s Investors Service contains seven key rating factors underlying an insurance company or a reinsures’ business and financial profile. Moody’s has long considered catastrophe risk to be the most significant and volatile risk to capital over the short term. Their analysis assesses a company’s risk appetite and its ability to monitor and manage its risk exposures and also considers its reliance on reinsurance as a risk management tool. Citizens for Homeowners Insurance Reform believes that since the rating agencies require an insurance company or reinsurer to use a catastrophe model, the rating agency should also be checking the accuracy of the models as the end result is that an insurance company charges its customers a higher rate. Insurance regulators asked many questions of the rating agencies to learn more about their procedures. Regulators encouraged the rating agencies to involve regulators as they make changes to risk modeling assumptions.
  
  
• Adopted the report of the Surplus Lines (C) Task Force. The Task Force approved a reduction for the Underwriters at Lloyd’s Joint Assets Trust Fund from $200,000,000 to $100,000,000. An update from the Government Relations Leadership Council (EX) Task Force meeting of December 4, 2007, was discussed as the Surplus Lines Task Force will need to respond later this month to some pending legislation in Congress; the response needs to contain specific recom mendations. House Bill 1065 has passed and is currently under consideration by the Senate and the main objection by the NAIC is the proposal effectively sets up a home-state deference system where the home state of the insured is the sole regulator for surplus lines.
  
  
• Adopted the report of the Casualty Actuarial (C) Task Force. The Task Force adopted interim conference call minutes including the adoption of the Regulatory Guidance for 2007 Statements of Actuarial Opinion and Actuarial Opinion Summaries and adoption of a comment letter to the Principles Based Reserving (EX) Working Group regarding clarification of the inclusion or exclusion of property/casualty insurance within the scope of their current work. The Task Force continued to discuss the use of catastrophe models for pricing and in determining reinsurance cost allocation. The Task Force is considering developing some guidance about the use of models. The Profitability (C) Working Group is publishing the Report on Profitability By Line By State in 2006. The Workers’ Compensation Large Deductible Subgroup expects a proposal from the American Academy of Actuaries (AAA) Workers’ Compensation Committee in December 2007. Once the AAA responds, the Subgroup will discuss that proposal and submit a plan of action to the Task Force. The International Subgroup continues to monitor the accounting and solvency work of the International Actuarial Association and will evaluate the need for comments in 2008. Focus is on issues such as internal models, enterprise risk management, current estimates, and risk margins. The Task Force discussed its proposal to modify Schedule P instructions to the Blanks (E) Working Group regarding discounting. The Task Force adopted a motion to ask the Statutory Accounting Principles (E) Working Group to modify SSAP 65 by clarifying that loss adjustment expenses can only be discounted if expressly prescribed or permitted by the domiciliary state insurance department. The AAA reported on activities at their Committee on Property/Liability Financial Reporting. The AAA updated the NAIC’s 2005 risk transfer survey and presented the draft to the Task Force. On the next call, the Task Force will consider a revised survey, with expectations of surveying companies in early 2008. The AAA also continues work on risk transfer training and will plan one or more Webinars to present the material to financial analysts, examiners, and actuaries.
  
  
• Adopted the Statistical Information (C) Task Force report which met via a Regulator to Regulator conference call on November 20, 2007, pursuant to item 3 of the NAIC Policy Statement on Open Meetings and approved the 2005 Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance report which is expected to be published mid December 2007. The Statistical Information (C) Task Force has a conference call scheduled for December 18, 2007, and during the next quarter it expects to approve the 2006 Commercial Lines Competition Database Report. Upon receiving direction from the Property and Casualty Insurance (C) Committee regarding confidentiality provisions, the Task Force believes that it can move fairly quickly to complete the drafting of the Medical Malpractice Closed Claim Reporting Model Law.
  
  
• Received the report of the Workers’ Compensation (C) Task Force which met on December 3, 2007. T he Large Deductible Study Implementation (C) Working Group reported stating that efforts continue in drafting its Third Party Administrator (TPA) Guidelines and Guidelines for the Filing of Workers’ Compensation Large Deductible Policies & Programs (Large Deductible Guidelines). The following two remaining matters were mentioned as in need of further attention regarding the draft TPA Guidelines: the amount of oversight that should be required regarding bank accounts held by TPAs for their carriers and whether the reporting of claims denials by a TPA should be required (particularly when precipitated by a recommendation made from an employer for the denial). Also discussed was a proposed drafting change to the definition of TPA, which had been limited to business entities. The new language would broaden the TPA definition to permit through a “grandfather clause” TPA licenses previously issued to individuals and partnerships. Both drafts are becoming mature and may be ready for consideration of adoption by the Working Group and Task Force during the first quarter of next year. Received the NAIC/IAIABC Joint (C) Working Group report stating that work continues on its development of a draft Independent Contractor white paper. Remaining issues pertaining to this draft primarily pertain to minimum premium and/or “if any” workers’ compensation policies, determination of appropriate recommendations, and completion of its two charts—Table 1 regarding state standards for determining independent contractor status and Table 2 regarding state methods of pre-certification. It was announced that the next meeting of the Working Group will be held in April 2008 during the International Association of Industrial Accident Boards & Commissions (IAIABC) All Committee Conference. The Professional Employer Organization (C) Working Group reported t he Guidelines for Regulations and Legislation on Workers’ Compensation Coverage for Professional Employer Organization Arrangements (NAIC PEO Guidelines) were adopted by the NAIC on June 4, 2007. Since that time a substantive change has been proposed to Section 12 of these guidelines which would broaden its scope. The proposed changes to Section 12 were adopted by the Workers’ Compensation (C) Task Force on September 29, 2007 and adopted by the Property & Casualty Insurance (C) Committee on November 14, 2007. The proposed changes now await consideration of adoption by Executive/Plenary during the NAIC 2007 Winter National Meeting. A new drafting group of the Working Group has been formed for the purpose of developing a paper to be of assistance to states in implementing the NAIC PEO Guidelines. This is important due to the complexity of the NAIC PEO Guidelines and the number of challenges regulators face in this area. Initial drafting has begun and implementation issues to be addressed are now being identified. The National Conference of Insurance Legislators (NCOIL) adopted its PEO Model Act on November 17, 2007. NCOIL generally integrated into its model suggestions made by the NCOIL PEO Model Focus Group of the Task Force. Received the Settlement Review (C) Working Group report which stated that an amendment to the New York/AIG Settlement has now extended its release deadline from November 30, 2007 to August 1, 2008.
  

• Learned that the Catastrophe Insurance (C) Working Group did not meet during the fourth quarter.
  
  
• Received the report of the Terrorism Insurance Implementation (C) Working Group which met on December 4, 2007. The Working Group had been apprised of the House approval of H. R. 2761 on September 19, 2007. The bill passed the Senate Banking Committee on October 16, 2007 and is much narrower in scope and would extend the program for seven years. The U.S. Treasury reported it would face several issues once a compromise bill is agreed upon. Treasury would issue interim guidance on the disclosure form, mandatory make-available provisions and the new required disclosures related to the $100 billion cap if those provisions appear in the final bill. The Working Group pledged to work closely with the Treasury to facilitate the development of the necessary disclosure documents and expedited filing procedures that will be needed.
  
  
• Learned that the Risk Retention (C) Working Group did not meet during the fourth quarter.
  
  
• Received the report of the Crop Insurance (C) Working Group which met on December 3, 2007. The Working Group received a report about an initiative jointly undertaken by the Risk Management Agency (RMA) and state insurance regulators to more closely monitor illegal multi-peril crop insurance (MPCI) rebating schemes. Several state insurance regulators, in coordination with the RMA, developed a model bulletin to notify insurance companies and agents that participate in the federal crop insurance program of their commitment to work together to find and end rebating schemes. States will be asked to sign a joint bulletin to be distributed to the insurers during the NAIC Plenary on December 4, 2007, and a separate model bulletin will be made available to states to distribute to their licensed crop insurance agents on the week of January 7, 2008. The Working Group discussed with the Producer Licensing (D) Working Group (PLWG) an RMA initiative to develop a proficiency testing program for MPCI adjusters. Since 2005, the RMA has required all MPCI adjusters to abide by state insurance adjuster licensing requirements. The RMA has discovered that individuals interested in MPCI-only adjusting are not going into the profession in states requiring a general property and casualty license. As a result, the RMA are asking these states to develop a program that would allow individuals to obtain a crop-only adjuster license using the individual’s proficiency testing results as the examination basis for the adjuster. The Crop Insurance Working Group agreed to provide additional information about the RMA’s proficiency program to the PLWG and schedule a joint conference call to further discuss this issue.
  
  
• Learned that the Title Insurance Issue (C) Working Group did not meet during the fourth quarter.
  
  
• Received the report of the Advisory Organization Examination Protocol (C) Working Group. The Working Group did not formally meet this quarter but continues to work on an August 20, 2007, draft of the Market Regulation Handbook Chapter Twenty-Five, Conducting the Statistical Agent and/or Advisory Organization Examination. A new draft will be exposed in December 2007. 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. The Working Group is planning to meet via conference call in December.
  
  
• Received a report of the Consumer Guides (C) Working Group which did not formally meet during the quarter. The Working Group however continued to work on an August 8, 2007, draft of A Consumer’s Guide to Homeowners. A new draft was exposed on November 30, 2007. The Working Group is planning to meet via conference call in January to consider the draft of A Consumer’s Guide to Homeowners.
  
  
• Discussed the implementation status of a model bulletin adopted by the Property and Casualty Insurance Committee in 2005. The bulletin was drafted in the spirit of functional regulation to advise insurers that the Federal banking agencies have regulations that in general prohibit the banks and savings associations they regulate from disclosing their CAMELS ratings as these ratings are confidential and may only be used by Federal bank and thrift regulatory agencies for assessing the safety and soundness of financial institutions. NAIC members are encouraged to issue the bulletin to inform insurers that it is unacceptable for them to request or require from a national bank, state bank, or savings association this or other, confidential regulatory information as part of the underwriting process. To date, only two states have issued the bulletin.
  
  
• Discussed the confidentiality request of the Statistical Information Task Force related to the drafting of the Medical Malpractice Closed Claim Reporting Model Law. The Committee asked the Task Force to complete all of its work on the model law with the exception of the confidentiality provisions. The confidentiality provisions of this important public policy issue will be debated at the Committee once the remainder of the work is completed by the Task Force.
  
  
• Heard from the Bureau of Justice Statistics on a recently completed study on Medical Malpractice Insurance Claims in Seven States. The study concentrated on closed claims and was conducted on seven states as there were only seven states at the time of the review that collect closed claim data. The data collected by each state is dissimilar. The report shows a majority of claims closed without any compensation; most claims stem from injuries that took place in hospitals and involved physicians or surgeons; minority of claims resulted in payouts over $1 million; less than 5% of the claims were closed after trial verdict or judgment, but claims closed after trial verdict or judgment produced higher payouts compared to claims settled prior to trial; payouts were highest for major or grave permanent injuries and lowest for temporary or emotional injuries; payouts have increased since early 1990’s; there is some indication that the injuries asserted are becoming more serious compared to those claimed in the early 1990’s; and, nearly as much time passes from the injury to the reporting date as from the reporting to the closing date.
  
  
• Heard an 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.
  
  
• Adopted a motion that all task forces and working groups and current members of the Property and Casualty Insurance (C) Committee be authorized to continue working on assignments during the period between the election of new NAIC officers and the appointment of members to the Property and Casualty Insurance Committee and its task forces and working groups.

Action Items:

The Property and Casualty Insurance (C) Committee:

1. Adopted interim conference call minutes of November 14, 2007.
   
   
2. Approved a reduction for the Underwriters at Lloyd’s Joint Assets Trust Fund from $200,000,000 to $100,000,000 within the Surplus Lines (C) Task Force.
   
   
3. Approved the Regulatory Guidance for 2007 Statements of Actuarial Opinion and Actuarial Opinion Summaries from t he Casualty Actuarial (C) Task Force .
   
   
4. Adopted the Casualty Actuarial (C) Task Force comment letter to the Principles Based Reserving (EX) Working Group.
   
   
5. Adopted the Casualty Actuarial (C) Task Force motion asking the Statutory Accounting Principles (E) Working Group to modify SSAP 65 by clarifying that loss adjustment expenses can only be discounted if expressly prescribed or permitted by the domiciliary state insurance department.
   
   
6. Published the Report on Profitability By Line By State in 2006 by the Profitability (C) Working Group.
   
   
7. Adopted the Statistical Information Task Force 2005 Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance report.
   
   
8. Exposed a November 30, 2007, draft of A Consumer’s Guide to Homeowners by the Consumer Guides (C) Working Group.
   
   
9. Encouraged states to issue a bulletin to inform insurers that it is unacceptable for them to request or require from a national bank, state bank, or savings association this or other, confidential regulatory information as part of the underwriting process.
   
   
10. Adopted a motion that all task forces and working groups and current members of the Property and Casualty Insurance (C) Committee be authorized to continue working on assignments during the period between the election of new NAIC officers and the appointment of members to the Property and Casualty Insurance Committee and its task forces and working groups.