National Conference of Insurance Legislators (NCOIL) 2013 Annual Meeting Highlights

Nov 26, 2013



The National Conference of Insurance Legislators (“NCOIL”) held its 2013 Annual Meeting during November 21-24 in Nashville, Tennessee.

At the meeting, legislators took the following actions, among others (click on the hyperlinks to view the corresponding NCOIL news releases):

To view the meeting program, click here.  To view the 30-day meeting materials, click here.

Following are highlights from the various sessions and meetings held at the event:


Workers’ Compensation Insurance Committee

At NCOIL’s Workers’ Compensation Insurance Committee, which met on Thursday, November 21, members discussed a draft model law entitled “Model Act on Workers’ Compensation Coverage for Volunteer Firefighters.”  Committee Chairman and Vermont State Representative Bill Botzow sponsored the item for discussion.  To access the full Model text, click here

While the proposal’s basic objective is to provide some benefits for injuries sustained by volunteer firefighters in the line of duty, the challenge for individual states is how their resulting costs would be covered.  The Model sets forth a definition of “public employment” that would provide eligibility for workers’ compensation insurance benefits for non-emergency response line-of-duty injuries.   It also requires the reporting of personnel rosters and hours worked, along with a process for insurance commissioners to establish a minimum annual payroll per volunteer firefighter for the purpose of setting rates.  Enforcement provisions are included.

A drafting note accompanying the Model suggests various funding sources or mechanisms-such as private market assigned risk pools and surcharges-that other states have employed or considered.  To access the drafting note, click here.

The Committee voted to adopt the Model.

As part of the agenda, Workers’ Compensation Insurance Committee members also heard a report on recently enacted workers’ compensation reform in Tennessee, which provides for rapid dispute resolution through initial mediation, after which an administrative resolution process would follow if needed. 

Heretofore, workers’ compensation disputes in Tennessee were subject to litigation, the outcome of which would depend on the varied interpretations of Tennessee courts in different regions-an ongoing issue for stakeholders.  The new language is expected to provide more legal consistency and predictability.  It is also designed to expedite the return of a worker to his or her job through speedier delivery of medical care and cost reimbursement.   Available benefits are more easily defined in the new statute, with the goal of removing areas of contention to simplify the process.

Effective for injuries occurring on and after January 1, 2014, Tennessee’s new law also provides for new administrative workers’ compensation judges. 

Finally, Workers’ Compensation Insurance Committee members heard a report from a Kentucky legislator that coincided with NCOIL’s ongoing development of model law language for farmworker coverage.  Traditionally, some states cover farmworkers with workers’ compensation, while others do not require it.  Some provide restricted benefits.

Historically, the legislator explained, farms have been smaller, family operations or a second occupation for their owners.   Today, many are corporate-owned, large-scale operations. 

In subsequent discussion on the issue, Committee members voiced concern about the price of workers’ compensation coverage and the possibility of now requiring smaller family farmers to purchase it.  Whether sufficient insurer capacity exists to provide the suggested coverage was also debated.

Ultimately, no action was taken on the issue.  The Committee will continue its model development work.


Life Insurance and Financial Planning Committee

NCOIL’s Life Insurance and Financial Planning Committee November 21 agenda included a report on the regulation of captives by a Vermont Deputy Insurance Commissioner, who said there is solid authority that the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”) was not intended by Congress to apply to the assessment and collection of taxes for premium paid to captive insurers.  However, doubt remains on this issue because of the law’s broad language. 

Meanwhile, he said, an insignificant number of companies with captive insurers have changed domiciles in order to manage issues related to the payment of surplus lines premium tax.  Legislative clarification to the NRRA is being sought to remove the uncertainty about its applicability to captive insurer placements. 

The Vermont Deputy Commissioner described the current post-NRRA surplus lines premium taxation system:  Some states are members of the Nonadmitted Insurance Multi-State Agreement (“NIMA”), while the Surplus Lines Multi-State Compliance Compact (“SLIMPACT”) is not operational.  Elsewhere, home-state taxation is otherwise in effect, resulting in bigger states receiving more tax revenue than they did under the old surplus lines allocation methodology.  The smaller states, which have fewer home-state insureds, are losing net tax revenue. 

The Committee also discussed the recently enacted Texas Medicaid Life Settlement law (HB 2383)–the first of its kind in the nation–which also has been under favorable consideration for passage in Kentucky. 

Many Medicaid recipients throughout the country have life insurance policies offering a cash benefit.  These policies are considered to be an asset that may result in the insured’s exclusion from Medicaid eligibility.  If, at some point, the insured must cash in the policy to pay for life expenses (including medical expenses) he or she usually receives small amounts as a cash settlement under most circumstances. 

Some industry advocates argue that entering into a life settlement arrangement providing for the assignment of death benefits to a third-party beneficiary will result in a larger cash payment to the insured when he or she needs it most, compared with the small cash benefit payable under the policy.   

These supporters say the arrangement creates more money to pay expenses such as medical bills, thereby keeping people off of Medicaid, rather than having them, as the insureds, take a small cash payment under their policy, and ultimately ending up on the Medicaid rolls, anyway.

Notably, the new Texas law (HB 2383) specifically authorizes life settlement arrangements, but does not mandate them.  Thus, prospective Medicaid beneficiaries would have the option of entering into a life settlement transaction to generate more money at a time of great personal need.  Kentucky is reviewing the issue carefully and there are proponents who believe that millions in funds could be available if these transactions were permitted–with appropriate consumer protections. 

The Committee also heard a report on unclaimed property from a trade association executive, who reflected the sentiment that state department heads–insurance commissioners and secretaries of treasury–are making policy and essentially legislating by conducting wide-scope audits of an industry practice that did not customarily use the Social Security Administration’s Death Master File to find beneficiaries of life insurance for policyholders who have died. 

The trade association, as well as the life insurance industry are advocating enhancements to NCOIL’s Unclaimed Property Model Law in select states.  To date, this Model has been adopted in nine states and further changes are being sought in North Dakota, Nevada and Rhode Island.  

One committee member noted that the NAIC and several state insurance and treasury departments are engaging private audit firms on a contingent fee–a formula that encourages maximizing recovery.  He added his sentiment that these states have “gone too far” in their efforts, and that the imposition of significant fines and requirements for targeted insurers to pay some or all of the auditing fees is unfair. 

Discussion also took place on the fact that this type of activity is occurring in at least one state that already has passed the NCOIL model, which–as a Committee member pointed out–was intended to create standards for in-force policies.

Lately, there has been a “major audit run” against most of the largest carriers.  Now, regulators are focusing on mid-size and smaller insurers, which may not be as well-equipped as their bigger counterparts to deal with the fines, expenses and internal audit-related costs. 

In summary, it was expressed by those in attendance that legislatures create law and policy, and that these audits are sometimes circumventing that authority. 

The Committee heard several presentations on longevity risk and the need to ensure that certain insurance products are carefully regulated in consideration of it. 

For insurers, longevity risk refers to advancing survival rates and life expectancy in the U.S. exceeding previous expectations, while pricing and claims assumptions are resulting in greater-than-anticipated surplus needs to cover payments required under products previously issued. 

For individuals, longevity risk is the risk of outliving ones’ assets, resulting in a lower standard of living, reduced care, or a return to employment.  Many products have been developed that are intended to address the risk that people will outlive their savings.  

The Committee was advised that the marketing and sale of these products needs to be carefully scrutinized in regard to issues such as the suitability of the product for the consumer and circumstances involved.  Suitability laws based on the National Association of Insurance Commissioners’ (“NAIC”) Longevity Risk Model have been enacted in 30 states so far.  Two other states are currently considering the corresponding NAIC Model Law for passage.  

Longevity risk also raises questions about insurer solvency risk, since some of these products have guaranteed product features assumed by insurers.  These will be susceptible to market and economic conditions that may, as an example, affect interest rates and investment returns available to insurers.  

NCOIL’s Life Insurance and Financial Planning Committee also heard a presentation on contingent deferred annuities, during which members learned that the NAIC’s Life Insurance and Annuities (A) Committee will be studying these types of annuities further for purposes of reviewing applicable law, disclosure checklists and issues

Members also discussed the creation of a permitted activities best practices document for product sales, since there are so many different types of annuity, life and securities products that often require different licenses for a sales force–meaning, some salespeople require a securities license, while others need an agent’s license.  The objective would be to establish standards on what sales representatives can discuss and sell, and how they should be regulated. 

Iowa and Tennessee have adopted permitted annuity, life and securities activities rules.    

No action was taken on any of the items discussed.


State-Federal Relations Committee

NCOIL’s State-Federal Relations Committee also met on November 21 and reviewed a number of issues.

Consumer Financial Protection Bureau

First on the State-Federal Relations agenda was a special report on the Consumer Financial Protection Bureau (“CFPB”), which was described as a federal consumer “watchdog” created by the Dodd-Frank Act of 2010.  Only tangentially involved in insurance, the CFPB has no direct authority to regulate it, but has some overlap with other agencies involving issues such as lender-placed insurance issues, claims of illegal payments for the placement of mortgage insurance, and senior investment protection. 

One speaker remarked that the CFPB is needed in order to have at least one federal agency dedicated to consumer protection, inasmuch as others are more focused on financial regulation.  Another speaker criticized state regulation of credit insurance and asserted that pricing was not correlated to loss ratios for these products.

Terrorism Risk Insurance Act

While bills have been filed to extend U.S.-backed terrorism coverage, most believe Congress will not pass a long-term Terrorism Risk Insurance Act (“TRIA”) extension this year.  There may be an effort to pass a temporary fix, like Congress did in the case of the National Flood Insurance Program. 

Meanwhile, the uncertainty surrounding TRIA is creating market disruption, manifested, for example, by certain projects that are likely to be delayed or halted altogether because they are conditioned on having appropriate coverage, which would include terrorism insurance.

A lack of private market capacity for terrorism risk was a point of concern raised by Committee members, since one of the existing TRIA bills would require property and casualty carriers to offer the coverage.  

NAIC President and Louisiana Insurance Commissioner Jim Donelon told State-Federal Relations Committee members that the NAIC supports a TRIA extension.

GAO Report on Insurance

The Committee heard a brief summary on a recent U.S. Government Accountability Office report on insurance that was positive about state-based regulation.  As an example, it highlighted the NAIC’s initiatives in solvency modernization geared to maintaining market stability.  To read the report, click here.

Commissioner Donelon related that he, along with a few other key insurance commissioners, recently had the honor of visiting the White House and meeting with President Obama to discuss Affordable Care Act implementation issues.  During his visit, he took the opportunity to outline the U.S. state-based insurance regulatory system to the President, who indicated his support of it. 

In his conversation with the President, Commissioner Donelon also related recent international criticism of the U.S. regulatory system.  The Commissioner pointed out that it seems the U.S. is being pressured internationally toward a bank-centric regulatory system like that of Europe’s.  President Obama suggested that the NAIC meet with the Secretary of the U.S. Treasury about states’ fundamental and primary role in insurance regulation. 

The NCOIL has pledged its support of efforts to preserve state-based regulation and has committed to work with the NAIC and U.S. Treasury in defending the U.S. state-based system before two key international organizations–the Financial Stability Board and the International Association of Insurance Supervisors (“IAIS”).

Update on NARAB II

There has not been much activity since September 2013 on H.R. 1155, the “National Association of Registered Agents and Brokers Reform Act of 2013,” (“NARAB II”) which passed the U.S. House by a 397-6 vote, but has not yet progressed through the U.S. Senate. 

NARAB II would create a non-profit, independent board to allow multi-state licensing for insurance producers.  A key component of the bill is that it does not authorize federal regulation, but provides for national uniformity.  It is not expected to pass in the U.S. Senate this year.


Especially since both systems agree on a collection and allocation formula, the NCOIL is working to combine SLIMPACT and NIMA–two systems of collecting and allocating surplus lines premium taxes developed pursuant to the Dodd-Frank Act of 2010, each for the purpose of establishing a single national clearinghouse.

It was pointed out that both NIMA and SLIMPACT are willing to allocate surplus lines taxes collected under formula known as the “Kentucky Compromise”–a proposal in which participating states would divide tax receipts based on calculations applicable to the insurance products involved.

The Committee was advised that South Dakota Insurance Commissioner Merle Scheiber has suggested that his state may pursue becoming a member of both NIMA and SLIMPACT. 

Inquiries have been made as to whether those states pledged to SLIMPACT would agree to admit a state that also participates in NIMA. 

NCOIL Market Conduct Working Group

The NCOIL is working collaboratively with the NAIC in studying the cost and effectiveness of market conduct examinations.  Some problem areas have emerged that will require further study.

Interstate Insurance Compact

It was reported that there has been a 20 percent growth in revenue for the Interstate Insurance Compact (“Compact”), the parent of the Interstate Insurance Product Regulation Commission (“IIPRC”), a multi-state public entity.

During late August, Arkansas and Montana joined the roster of 43 compacting states (including Puerto Rico), to represent a combined 72 percent of the nationwide premium volume written for asset-based insurance products including life, annuities, long-term care and disability income.

Created when the first two states–Colorado and Utah–enacted enabling legislation, the Compact is designed to enhance the efficiency and effectiveness of the way insurance products are filed, reviewed and approved, as well as to promote uniformity through the application of national product standards embedded with strong consumer protections.

The IIPRC was created upon the Compact meeting the threshold requirements of 26 states or 40 percent of premium volume nationwide–both of which were met in May 2006.  It held its Inaugural Meeting in June 2006 in Washington, D.C. and adopted the System for Electronic Rate and Form Filing (SERFF) as its electronic filing platform.  The IIPRC serves as an instrumentality of the Compact Member States, with SERFF as the central point of electronic filing.

Arkansas enacted the Compact legislation in April 2013, which became effective in August 2013.  Insurers can now add Arkansas to new, pending and previously approved product filings as of August 29, 2013.

Montana also enacted the Compact legislation, which became effective in October 2013 for life and annuities uniform standards and product lines.



During the NAIC/NCOIL Dialogue held during the late afternoon of November 21, most of the discussion centered on issues related to state and federal Affordable Care Act-driven health insurance exchanges, such as enrollment concerns.  Some observed that the state exchanges have operated better than the federal exchanges.

Insofar as international regulatory issues, all speakers recognized that the current insurance regulatory system is being challenged internationally.  There is concern that rules and standards being developed internationally will be imposed in the US without adequate feedback and input from state legislators and regulators.  They acknowledged the need for the NAIC and NCOIL to collaborate on dealing with the issue. 

Of note, there does not seem to be a Congressional appetite for federal regulation of insurance.  NAIC representatives related that they had brought a consumer representative with them to the most recent IAIS meeting to better demonstrate the merits of consumer protection–one of the true values of state regulation, they explained.

It was announced that Tennessee Insurance Commissioner Julie Mix McPeak has been selected by Commissioner Donelon to lead an NAIC committee in studying and possibly preparing a model law or guidelines related to unclaimed property.  A December 4 meeting will the held to consider the charges for this initiative.

As part of the Dialogue, a Kentucky legislator voiced his concerns that current unclaimed property audits being undertaken by the NAIC and certain states could have a negative effect on smaller and mid-sized insurers that may have to incur significant time and expense during the audit, as well as for audit costs and fines if they are levied.


International Insurance Issues Committee

NCOIL’s International Insurance Issues Committee also met on November 21.  It was reported that NCOIL leadership has clearly stated a resolve to become more involved in international insurance issues based on the continuing groundswell of international influence and pressure for Congress to move toward more federal regulation. 

With sentiment that recent criticism of U.S. state-based regulation has created an emerging threat to the nation’s system of regulation, members discussed that NCOIL needs to assure that federal officials do not use this development as a rationale to assert more regulatory authority in insurance.  Concern also exists that, with the increasing globalization of insurance, these international developments may affect U.S. insurers doing business abroad and even those only operating domestically.  This could, among other issues, create a competitive disadvantage for U.S. insurers.

The International Insurance Issues Committee approved a resolution re-affirming state-based regulation and indicating that NCOIL needs to take a more active role in preserving state authority. 

Entitled “Reaffirming Support for the U.S. State-Based System in International Insurance Regulatory Discussions” and sponsored by former International Committee Chairs, Texas State Representative Craig Eiland, Indiana Senator Travis Holdman, Vermont State Representative Kathie Keenan and current Chair, New Mexico Senator Carroll Leavell, the resolution re-affirms support for state insurance oversight in response to a recent Financial Stability Board report suggesting that the U.S. consider migrating to a federalized regulatory approach, as well as other similar suggestions.  The resolution requests that all representatives of the U.S. in international insurance regulatory discussions advocate positions that are consistent with U.S. state-based oversight.

To view the resolution, click here.


Special Life Insurance Committee

Principle-Based Reserving Coming to the States:  How Do Captives Play In?”

NCOIL’s Special Life Insurance Committee met on Friday, November 22 in a special forum entitled “Principle-Based Reserving Coming to the States:  How Do Captives Play In?”

The debate included various issues related to the reliability of insurer reserves, proposed changes to the principle-based reserving methodology and regulatory scrutiny of insurer reserves for various life insurance products.

Reserving and reliability of the methodology form a foundation for assuring the solvency of the industry and any particular company, it was explained.

Currently, reserving is formulaic and based on certain assumptions that do not fully account for policyholder decisions related to their in-force policies.  According to some of the forum panelists, this approach worked well when the products involved were more basic in nature, but does not work in today’s more complex market.

The NAIC has been working on a principle-based reserving approach for life products for approximately 10 years.  Concurrently, it also has established related model laws and guidance for states’ adoption.  The NAIC Principle-Based Reserving Implementation Task Force has prepared an implementation plan, legislative package and educational briefing on the issue, which originally arose over concerns about captive insurance financial arrangements characterized by some as finance reserving mechanisms.

As the process continues, key issues include accounting, public records requirements, preservation of confidentiality, enhancing regulatory tools to evaluate the reserving, international guidance, possible issues relating to credit for reinsurance, enhanced disclosure requirements, and changes to the NAIC’s Financial Analysis Handbook.  

The NAIC’s Standard Valuation Model Law has been adopted in seven states, but must garner super majority support throughout the U.S. in order to be implemented.   The Model Law is designed to improve the way life insurers calculate the reserves held to protect consumer’s financial interests in insurance products.

The NAIC’s Valuation Manual provides specific guidance for each product to ensure a life insurer is holding the correct amount in reserve to meet its obligations to policyholders.  Changes made to the Standard Valuation Model Law in 2009 added reserves for certain benefits, options and guarantees that involve significant risks, but previously had little or no reserves required under static formulas; and “right-sized” other reserves for products that consumers found beneficial, but previous formulas had caused insurers to maintain reserves in excess of what could have been considered reasonably conservative.

New York’s Insurance Department representative in attendance at the meeting raised serious concerns about the need for, and use of Principle-Based Reserving, explaining that he felt this approach cedes authority for reserve setting to insurers, rather than maintaining regulatory control through satisfaction of certain formula.  He characterized it as “financial alchemy,” with possible disastrous results if the economy or market significantly decline.  In his view, the real problem is the improper use of captive insurers to provide relief from standard statutory accounting practices that all insurers are required to adhere to.  To address this issue, New York has adopted reporting requirements on captives in all holding companies of any insurer doing business in New York.

A consumer representative on the panel expressed concern with a perceived lack of actuarial depth within state departments of insurance to analyze company reserving, warning that much of the responsibility for could ultimately fall on the NAIC, which would likely provide support expertise.


Joint Session:  Workers’ Compensation and Health Insurance Committees

Throughout 2013, NCOIL members worked to advance a slate of best practices designed to curb opioid abuse, misuse and diversion that are designed to give states a broad framework for enactment of their own reforms.  The resulting draft NCOIL guideline addresses prescription drug monitoring programs, physician prescribing practices, education and outreach, and treatment and recovery.  

Culminating nearly two years of debate on the issue, legislators finally agreed on an enhanced version of the “Proposed Best Practices to Address Opioid Abuse, Misuse, and Diversion,” which reflects recently submitted comments.

In general, the proposal offers guidelines to:

  • Establish, evaluate, and fund prescription drug monitoring programs
  • Create evidence-based prescribing standards that recognize “one-size-does-not-fit-all” and that crack down on “pill mill” clinics
  • Promote education of physicians and the public, including opportunities for safe drug disposal
  • Encourage prevention and treatment, including use of certain drug treatments and of drug courts

To view the Opioid Best Practices document, click here.


Property-Casualty Insurance Committee

The Property-Casualty Insurance Committee, which met on both November 22 and 23, heard reports from the Federal Emergency Management Agency (“FEMA”), as well as others on the issue of flood insurance. 

According to the FEMA representative, most of the Superstorm Sandy claims have been closed, with $7.2 billion in payments, for an average of $57,000 per claim. 

The intent of the BiggertWaters Flood Insurance Reform Act of 2012 (“Biggert-Waters”), the representative explained, was to bring actuarial soundness to national flood insurance coverage.  Historically, policyholders of residential properties built to current standards have not been penalized by having to pay full actuarial rates, since these homeowners essentially did what they were required to do. 

It was pointed out that, in order to promote local growth, many counties have been lax in applying building standards.  Ironically, these regions benefited from that rapid development, but later came to the federal government for subsidies when disaster struck.

The Property-Casualty Insurance Committee passed a resolution in support of the “Homeowners Flood Insurance Affordability Act,” (H.R. 3370 and the identical S. 1610), which would delay implementation of Biggert-Waters’ National Flood Insurance Program changes until two years after the Federal Emergency Management Agency completes the affordability study on the impact of the rate increases.

To view the resolution, click here.

However, there was significant debate on whether NCOIL’s resolution goes far enough, and whether it should provide solutions to the National Flood Insurance Program subsidy issue.  NCOIL leadership indicated a need to study the issue further and evaluate private market options. 

A representative from a reinsurer association in attendance indicated that reinsurance capacity exists to cover 1-in-100-year-type flood events.   Additional discussion took place about whether the NCOIL should advocate for a return to (what most would agree) is a “broken and overspent” federal flood insurance system.

Another attendee remarked that, on one hand, NCOIL advocates for state-based solutions and less federal involvement, but in regard to flood insurance, the organization conversely wants federal involvement and subsidization.

Proposed amendments to NCOIL’s “Post-Assessment Property and Liability Insurance Guaranty Association Model Actwere not taken up during the meeting.  To view this Model, click here.

Originally adopted in 2007, NCOIL’s Guaranty Association Model Act establishes a comprehensive framework for the protection of claimants when a property and casualty insurer becomes insolvent.  Proposed amendments would further limit how much a guaranty fund will pay, by making the Model’s $300,000 cap per covered claim apply to the aggregate number of claims stemming from a bodily injury or death, no matter how many, and more closely align the Model’s claim-filing deadline requirement to a typical, 24-month state statute of limitations.

Binder Form 875 Update

Property-Casualty Insurance Committee members also heard a brief report from an Association for Cooperative Operations Research and Development (“ACORD”) representative on Binder Form 875–a proposed new commercial property binder form that would contain more coverage details.  ACORD’s Property and Casualty Certificate Forms Working Group (“Working Group”) has been receiving feedback on the proposed Binder Form 875 and may take action when it soon meets again.  

The debate over the proposed Form originally began with a 2012 maintenance request (“MR”) to ACORD from the Mortgage Bankers Association (“MBA”), which suggested melding an ACORD 28 insurance certificate, which the property and casualty industry asserts is purely informational, with an ACORD 75 binder form, which is less detailed, but does count as official proof of coverage before a commercial property policy is issued.

In response, ACORD developed the proposed Binder Form 875 for commercial property insurance.  While not necessarily opposed to the proposed Form in principle, producer and insurer groups were not ready to sign off on the draft, however, and ultimately defeated the initial proposal in late 2012.  Lenders argued that, when NCOIL was considering a Certificates of Insurance Model Act in 2011 and 2012, certificates could not be for “information-only” because, if a policy is not available, then lenders need some other detailed form to prove coverage before closing on a loan.

Six months later, in an effort to resolve the now-long-running dispute between the lender and property/casualty industries over Form 875, the NCOIL urged the parties to develop an expanded ACORD binder form, rather than resurrect debate over a 2012 NCOIL binder model law.   The NCOIL Model Act Regarding Use of Insurance Binders as Evidence of Coverage, which was adopted in response to lender concerns with the NCOIL certificates model, keeps binders in force until a policy is issued or canceled by an insurer.

To view proposed amendments to the enhanced version of Form 875, click here.

Legal Funding Models

Property-Casualty Insurance Committee members also heard a report on the question of whether a third-party advance of money to litigation participants was a loan or an investment.  If the money is defined as a loan, then usury laws limiting the amount of interest that can be charged would apply.

However, a Tennessee legislator present at the meeting who is working on related legislation in his home state indicated he believes such an arrangement constitutes an investment, since it provides for an advance and there is no repayment if the receiving party loses the case.  Further, no maturity, due date or guarantee of return exists in these circumstances, leading to the conclusion that this type of transaction is an investment

Another legislator present at the meeting who is also an attorney said that legal funding mechanisms are needed to level the playing field in situations where plaintiffs cannot match insurers’ financial resources in order to fully pursue matters.  The disparity often leads to low settlements, given insurers’ bargaining leverage. 

The Committee will continue to review proposed NCOIL model proposals to regulate third-party lending to consumers bringing legal action, which are outlined below:

Consumer Legal Funding

The Consumer Legal Funding Model Act, sponsored for discussion by Tennessee State Representative Charles Curtiss, would require disclosure of fees/charges and of a consumer’s right of rescission, among other things; ban commissions, referral fees, conflicts of interest, and the ability of a funding provider to have a say in the underlying legal claim; establish that the amount a consumer would pay a funding company would not be a percentage of the award/settlement; and state that consumer legal financing transactions are not loans.  Representative Curtiss’ model also would ban a funding company from assessing fees more than three years after giving the consumer his or her funded amount; require fees to be assessed no less than semi-annually; say that the proceeds of a legal claim cannot be purchased more than three times after a consumer receives his or her initial funding; prohibit a funding company from requiring arbitration; and, among other things, allow the funding provider and the consumer to negotiate how much the consumer will pay the provider if, after all liens to a settlement/award are paid, there are insufficient proceeds to pay the funding provider what the consumer owes it.  To view this Model, click here.

Civil Justice Funding

A substitute Civil Justice Funding Model Act, sponsored by New York Senator Neil Breslin, would require various disclosures; ban certain behavior on the part of funding companies and attorneys; establish that the money owed to a funding provider will not be a percentage of the settlement/award; and establish that consumer legal financing transactions are not loans.  It would set no limit on the length of time that a funding provider can assess fees; would not address how often fees could be compounded; would allow multiple funding companies to provide funds to a consumer contemporaneously; and would establish a detailed process by which funding companies must register with a state before doing business there.   To view this Model, click here

Consumer Lawsuit Lending Alignment Bill

A third model, the proposed Model Consumer Lawsuit Lending Alignment Bill, sponsored by Indiana State Representative Matt Lehman, would subject consumer legal funding to state laws regarding consumer credit transactions, including disclosure requirements and caps on allowable interest rates.  It also would require a plaintiff who has accepted third-party funding to file information regarding the transaction with the opposing party and with the court.


Financial Services and Investment Products Committee

Update on Dodd-Frank implementation and new insurer capital rules (Basel III)

On Saturday, November 23, NCOIL’s Financial Services and Investment Products Committee met and discussed a number of issues, beginning with an update on Dodd-Frank implementation and new insurer capital rules, also known as Basel III (or the “Third Basel Accord”).

Basel III is a global, voluntary regulatory standard relating to bank capital adequacy, stress testing and market liquidity risk.  It was scheduled to be introduced from 2013 until 2015; however, changes from April 1, 2013 extended implementation until March 31, 2018.

It appears that the U.S. Federal Reserve will not provide separate rules for insurer capital, but will evaluate avoiding bank-centric rules for insurers altogether, with a seeming recognition that such rules would not work for most insurers, but may be needed for select companies under certain circumstances.

Given that, a number of recent federal bills seek various exemptions from the Basel III rules.  Filed in April 2013, H.R. 1693 would provide an exemption for community banks from the application of Basel III capital standards.  Another bill, H.R. 2140, the “Insurance Capital and Accounting Standards Act,” would address a question created by the Dodd-Frank financial reform act about whether banks and non-bank financial institutions like insurance companies must meet the same capital standards.  The Federal Reserve Board has interpreted a provision in the Dodd-Frank Act as requiring insurers to comply with the Basel III global capital standards, according to a May 2013 news report in

White House Executive Order on Cyber-Security

In an Executive Order issued during February 2013, President Obama noted repeated cyber-intrusions into the nation’s critical infrastructure that demonstrate America’s need for improved cyber-security.  This growing threat represents one of the most serious national and economic security challenges, since the United States depends on the reliable functioning of its critical infrastructure, particularly in the face of such threats, he explained. 

The Executive Order policy statement read, in part:  “It is the policy of the United States to enhance the security and resilience of the Nation’s critical infrastructure and to maintain a cyber environment that encourages efficiency, innovation, and economic prosperity while promoting safety, security, business confidentiality, privacy, and civil liberties.  We can achieve these goals through a partnership with the owners and operators of critical infrastructure to improve cyber-security information sharing and collaboratively develop and implement risk-based standards.”

All NCOIL Financial Services and Investment Products Committee members agreed that cyber-security is an evolving issue and will become more significant.  Several bills have been introduced in Congress with the overall purpose of protecting personal data, however nothing has passed to date. 

The President’s Executive Order led to the charge for the National Institute of Standards and Technology (“NIST”) to begin development of a voluntary framework (“framework”) to manage and mitigate cyber-vulnerabilities.  The effort is focused on critical infrastructure. 

Under the Executive Order, the U.S. Secretary of Commerce is tasked to direct the Director of NIST to work with stakeholders to develop the framework.

An insurer representative in attendance at the Financial Services and Investment Products Committee meeting spoke positively of the framework, which is presently in a comment period (detailed below).  However, he expressed concern with the complexities involved in the effort, which he felt will cause much confusion–particularly for small business.  According to the representative, the framework initiatives may offer certain incentives to promote compliance that may include a safe harbor from certain liability.  Also, he is concerned about how the framework will be enforced, whether by audits, inspections or otherwise.  He is worried about the burdens some companies might bear in implementing the expected increase in requirements.

About the Framework Comment Period

On October 29, 2013, the NIST announced a 45-day public comment period on the preliminary Framework in the Federal Register.  Comments are due no later than 5:00 p.m. (EST) on December 13, 2013 and should be submitted to NIST using the comment template form (click here to access the form).

Electronic comments concerning the preliminary Framework should be submitted in Microsoft Word or Excel formats to:, with the subject line:  “Preliminary Cybersecurity Framework Comments,” or mailed to: Information Technology Laboratory, ATTN:  Adam Sedgewick, National Institute of Standards and Technology, 100 Bureau Drive, Stop 8930, Gaithersburg, MD  20899-8930.  All comments will be posted at  without change or redaction, so commenters should not include information they do not wish to be posted (e.g., personal or business information).

Comments are also sought to determine if the informative references (standards, guidelines and best practices) are presented in the Framework in a manner that allows for their effective use.

The alternative presentation of Appendix A (Framework Core) below is one such presentation.

As part of the agenda, the “SAFE Retirement Act” was summarized to the Committee.   Introduced on the U.S. Senate floor during early July 2013 by Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) the Secure Annuities for Employee (SAFE) Retirement Act of 2013, the legislation is intended to address issues with the nation’s public and private pension benefit system.   To read more about the bill, click here.

Proposed Pension De-Risking Model Act

According to the U.S. Department of Labor, there has been an increased level of activity during the past several years for single-employer defined benefit pension plans to either terminate the plans in their entirety, or purchase annuities or offer lump sum distributions to some or all of their plan participants.  These participants can include former employees with vested deferred benefits or even retirees currently receiving pension distributions from the plan. 

This is sometimes referred to generally as “de-risking” or “risk transfer,” one of the purposes of which is to reduce or eliminate a plan sponsor’s risk for current and future liabilities.  However, by doing so, it also transfers the risks surrounding the current or future pension obligations to another party, which is either the participant (in the form of a lump sum), an insurance company (in the form of a distributed annuity), or both.

The U.S. Department of Labor cites other concerns with risk transfer to include:  ” . . . participants’ lack of understanding about the benefits of lifetime income streams; challenges for individuals in investing effectively or in adequately addressing longevity risk; the adequacy, scope and independence of investment advice to participants as to where they should invest their distributions; the potential for adverse tax consequences for current retirees who receive a lump sum after commencing retirement distributions; absence of plan sponsor oversight and Pension Benefit Guaranty Corporation protection following distributions or annuity purchases; the capacity of insurance companies to support a substantial growth in demand for annuities; the capacity of state insurance guaranty associations to backstop insurance company guarantees; and potential impacts on employee retirement security and adequacy.”

The NCOIL has proposed a Pension De-Risking Model Act to address these activities, which typically involve moving underfunded pension plans from their existing format with ERISA (the Employee Retirement Income Security Act) guarantee coverage to annuitization–the purchase of annuities subject to state regulation.

It was explained to the Financial Services and Investment Products Committee members that states will need to develop appropriate regulatory policies on this type of risk transfer.  Corresponding disclosure and consumer protection also will be important issues.   However, the Committee took no action on the proposed NCOIL Pension De-Risking Model Act at this time.