National Conference of Insurance Legislators (NCOIL) 2014 Summer Meeting Highlights
Jul 16, 2014
The National Conference of Insurance Legislators’ (“NCOIL) 2014 Summer Meeting in Boston, Massachusetts concluded on July 13. During the three-day gathering, legislators and interested parties explored a variety of key issues.
Their actions included:
- Unanimous adoption of a resolution on global capital standards
- Unanimous adoption of resolutions relating to cooperation and transparency in international insurance discussions, as well as state sovereignty and trade negotiations
- Unanimous adoption of a resolution supporting Congressional legislation relating to natural disaster savings accounts
- Unanimous adoption of enhancements to NCOIL’s Best Practices to Address Opioid Abuse, Misuse & Diversion
- A determination to take final action on consumer legal funding at the November NCOIL Annual Meeting, while seeking compromise in the interim
- Advancement of proposed amendments to the NCOIL unclaimed benefits model and the planning of a final vote at the November Annual Meeting
Following are highlights from committee, task force and working group events held during the Summer Meeting:
Unclaimed Property Task Force
During its July 10 meeting, NCOIL’s Unclaimed Property Task Force (“Task Force”) considered proposed amendments to the Model Unclaimed Life Insurance Benefits Act (“ULIB Model”) submitted by North Dakota State Representative George Keiser.
To view the ULIB markup, click here.
The amendments address issues that have arisen in states since NCOIL originally adopted the ULIB Model in 2011, such as prospective versus retrospective application, the frequency and nature of Social Security Administration Death Master File (“DMF”) searches, asymmetrical matching, the amount of implementation discretion available to insurance commissioners, and insurer annual reporting.
Following extensive debate, the Task Force voted to retain the ULIB Model’s existing retrospective provisions, but considered affording regulators more discretion in determining insurer compliance to ease their implementation. The amendments under consideration would have allowed prospective or retroactive application of the ULIB Model only in cases where insurers practiced asymmetrical conduct-meaning, use of the DMF in connection with searching for information on whether annuitants under the insurer’s annuities might be deceased, but not in connection with whether the insureds under its policies might be deceased.
It was noted that Alabama, Georgia and Mississippi have enacted unclaimed life insurance benefits laws that apply on a prospective-only basis.
Task Force members also approved an amendment to allow life insurers searching the DMF to use corresponding updates as they conduct DMF searches. Prior to being revised, the ULIB Model required the use of the full DMF once a year and allowed for searches via the update files thereafter. The original ULIB Model required all searches to be conducted using the full DMF.
The markup version also adds a number of new definitions, including that of “account owner,” “annuity,” “assymetric conduct,” “knowledge of death,” “person,” “record keeping services” and “retained asset account.”
Proposed amendments also were submitted by the American Council of Life Insurers, the Center for Insurance Research, the Life Insurers’ Council, Kemper Corporation, the National Alliance of Life Companies, the National Association of State Treasurers, and the National Association of Unclaimed Property Administrators.
Representative Keiser and Kentucky State Representative Robert Damron, Task Force Co-Chair, expressed their desire to work with the National Association of Insurance Commissioners (“NAIC”) to identify appropriate circumstances under which regulators may allow certain exemptions to the ULIB Model’s provisions.
The NAIC was represented at this weekend’s meeting by New Hampshire Insurance Commissioner Roger Sevigny.
The Task Force did not complete its work on the ULIB Model, but will continue to do so via conference call over the next few months. The final version is expected to be ready for a vote by the time the NCOIL’s Executive Committee convenes at the organization’s Annual Meeting in San Francisco from November 20 through November 23.
Since the ULIB Model’s initial adoption in 2011, 15 states–including Alabama, Georgia, Indiana, Iowa, Kentucky, Maryland, Mississippi, Montana, Nevada, New Mexico, New York, North Dakota, Rhode Island, Tennessee and Vermont–have enacted versions of it. The legislation is pending in six additional states, including Illinois, Louisiana, Massachusetts, North Carolina, Oklahoma and Pennsylvania.
Joint Meeting of the Health, Long-Term Care and Retirement Issues Committee, and Workers’ Compensation Insurance Committee
Also on July 10, NCOIL’s Health, Long-Term Care and Health Retirement Issues Committee held a joint meeting with the Workers’ Compensation Insurance Committee, during which legislators unanimously adopted revisions to a 2013 NCOIL document entitled Best Practices to Address Opioid Abuse, Misuse & Diversion (“Best Practices”). The changes were subsequently approved by NCOIL’s Executive Committee on July 13.
To access the unamended Best Practices as approved click here.
Espousing NCOIL’s philosophy that the Best Practices should evolve in response to emerging concerns, the amendments relate to prescription drug monitoring programs (“PDMPs”), neonatal abstinence syndrome/addiction during pregnancy, and drug take-back/safe disposal programs. Privacy provisions designed to encourage compliance and participation were cited as a commonality among these key issues.
In regard to drug take-back programs and safe disposal of collected medications, it was noted that some states have enacted initiatives to deal with the environmental impact of drug disposal. These efforts, together with interested party comments on related topics, were among the input used to shape the Best Practices amendments. Those included:
- Laying out specific options for ensuring that PDMP data is kept private, including when law enforcement is involved and when delegates can access PDMP data on a physician’s behalf;
- Urging evidence-based treatment for addiction during pregnancy, as well as for newborns experiencing drug withdrawal, as well as the discouragement of a punitive approach to dealing with pregnant drug abusers; and
- Expanding on take-back provisions already included in the Best Practices by offering additional state examples, along with addressing location and environmental impacts related to take-back and other safe disposal programs.
In general, the Best Practices addresses how to (1) establish, evaluate and fund PDMPs that require real-time reporting; (2) create strong evidence-based prescribing standards that recognize “one-size-does-not-fit-all” and that tighten restrictions on unlawful “pill mill” pain clinics; (3) promote improved, effective education of physicians and the public; and (4) encourage treatment and prevention, including use of drug courts and certain drug treatments.
International Insurance Issues Task Force
NCOIL’s newly formed International Insurance Issues Task Force met on July 10. The agenda centered on reports and discussions generated by its three working groups.
Overall, strong support was voiced for the establishment of guiding principles to help ensure that state insurance regulators and legislators remain relevant in the course of international insurance-related discussions.
Reporting first was the Capital Standards Working Group, which is focusing on Comframe, Solvency II, reinsurance issues, and group supervision by lead regulators.
Sponsored by Arizona Senator Jason Rapert, Chairman of the Coordination and Transparency Working Group, a proposed resolution entitled Guiding Principles for U.S. and International Insurance Regulatory Discussions essentially reflected states’ thoughts about international recommendations on insurer solvency regulation.
Generally, legislators agreed that state regulation is effective, and that the international community should recognize the United States’ unique regulatory and solvency scheme. The Guiding Principles resolution noted that the U.S. system of insurance oversight is transparent and accountable to the public, and calls for similar openness and due process in international insurance dialogues. It also urged the creation of a meaningful mechanism for state legislators and regulators to contribute to global discussions, and committed the NCOIL to engaging with federal and global officials in the future.
NCOIL President and New York Senator Neil Breslin, who chairs the International Issues Task Force, stressed after the meeting that “State legislators need to be heard in international dialogues, particularly when it comes to initiatives that may be imposed upon the states, since legislators are the officials who effect insurance laws that govern markets around the country. Acting on behalf of state legislators, NCOIL will continue to press the importance of this with state, federal, and international entities ongoing.”
International Insurance Issues Task Force members felt that the most pressing international insurance issue involves capital standards and accounting, inasmuch as group capital requirements proposed by the international community are inconsistent with United States regulation. They emphasized that “one size does not fit all,” given legitimate state-by-state regulatory nuances. It was also suggested there should not be a different accounting standard for insurers beyond what the United States already uses-Generally Accepted Accounting Standards (GAAP) and the NAIC’s Statutory Accounting Principles (SAP).
The Coordination and Transparency Working Group outlined its objectives, which included proposed outreach to all related regulatory entities in an effort to promote and secure more collaboration on common international insurance goals.
Chaired by Vermont State Representative Kathie Keenan, the Trade Agreement Working Group presented its proposed resolution, entitled “Principles of State Sovereignty in International Trade.” This document, which relates to principles of state sovereignty in international trade, asserts that extreme caution is needed in international trade negotiations to avoid pre-empting state-level decisions about insurance and reinsurance. It notes that state legislators have been largely unheard in the context of international trade negotiations, and calls for their expanded and continuous involvement. Further, it urges more transparency and due process in conflict resolution proceedings. It also provides for NCOIL’s opposition to any international trade agreement that grants greater substantive or procedural rights to foreign investors than it does to U.S. citizens and domestic businesses.
In addition to the resolutions on coordination, transparency and trade activity, the International Task Force adopted a resolution sponsored by Capital Standards Working Group Chair and New York Senator James Seward, entitled States’ Response to International Proposals for Insurer Solvency Regulation and a Global Capital Standard.
To view the resolution, click here.
Amended the following day by the International Insurance Issues Committee to further recognize the need for coordination and cooperation, the States’ Response resolution cautions against imposing global capital standards on U.S. insurers that could result in the erosion of established policyholder protections. It also states that NCOIL will work with U.S. state insurance regulators and federal agencies to formulate a unified U.S. position on capital standards that is consistent with U.S. policies and laws.
The States’ Response resolution highlights various international insurance initiatives-including efforts relating to insurer solvency and capital standards. It also expresses concern about their impacts on U.S. insurance oversight and calls upon the NAIC, the Federal Insurance Office, and U.S. representatives on the Financial Stability Board (“FSB”) to oppose any international solvency standards that fail to appropriately accommodate the U.S. system, as well as the Fair Value accounting measurements favored by the International Association of Insurance Supervisors. The resolution also urges state officials to communicate their concerns to U.S. representatives on the FSB.
According to Senator Seward, “There is significant and understandable concern that foreign entities may create a one-size-fits-all international capital standard that would fail to recognize jurisdictional differences and successes, including the U.S. approach, and would do little to effectively prevent future financial disasters. Our resolution is an important step to address these concerns, but it is just our first.”
The NCOIL Executive Committee unanimously adopted the amended States’ Response resolution on July 13, along with the aforementioned two resolutions on trade negotiations, and coordination and transparency in international dialogues.
State-Federal Relations Committee
NCOIL’s State-Federal Relations Committee met on July 10, during which Massachusetts Insurance Commissioner Joseph Murphy updated legislators on NAIC activities relating to issues raised by the December 2013 Federal Insurance Office (“FIO”) report on regulatory modernization.
He also discussed the NAIC’s Corporate Governance Model Law, which is expected to soon be finalized. He further touched on the NAIC’s supervisory college initiatives, tribal native land insurance issues, federal oversight of mortgage insurers, and reinsurance collateral, among other issues.
During Commissioner Murphy’s FIO discussion, it was pointed out by a consumer advocate in attendance that the agency’s initial charges related to systemic risk and underserved markets. Nevertheless, most of its recent work has been on the international front.
Separately, the consumer advocate also noted that a number of data brokers are collecting consumer information from the Internet, as well as from mobile phones. He voiced concern about the potential for discrimination based on insurers’ use of this information. Insurance regulators have not been able to keep up with the technological advances in data collection, he added.
Meanwhile, the FIO has reportedly requested information on the monitoring of rating factors used by insurance companies. The consumer advocate indicated that states have not been receiving this type of data.
Another concern debated was the “mission creep” of the Consumer Financial Protection Bureau (“CFPB”), which appears to be venturing into areas of insurance regulation, some said. This activity was described as justified on the basis that the agency has a deeper understanding of market regulation related to mortgages and distribution channels, along with a broader scope and the experience to examine holding companies, including financial institutions and insurance companies.
Notwithstanding, some are concerned that the CFPB could impose standards on these holding companies, thereby effectively regulating insurers–possibly in ways that are inconsistent with state regulation. Legislators agreed that states should endeavor to work closely with the CFPB to harmonize regulation in this regard. There was also some concern that the CFPB is beginning to regulate by examinations, which could be problematic, since standard rulemaking procedures such as prior notice, stakeholder commentary and transparency may not yet be in place to govern the process.
The State-Federal Relations Committee also heard an update on Terrorism Risk Insurance Act (“TRIA”) legislation, which was recently approved by the U.S. Senate Banking, Housing and Urban Affairs Committee. In essence, the legislation is an extension of the existing TRIA program with a slight modification. A comparable bill that passed the U.S. House has material programmatic changes, including distinctions between Nuclear, Biological, Chemical and Radiological (“NBCR”) events and non-NBCR events. It also revises triggers for federal backstop coverage. While there is universal agreement that TRIA needs to be extended past its December 31, 2014 sunset, the August break on Capitol Hill, together with the upcoming November elections portends to Congressional last-minute action.
A report on the state of the surplus lines market prompted favorable sentiment by legislators toward collaboration on a uniform system for the collection and allocation of surplus lines taxes.
On the topic of market conduct surveillance laws, State-Federal Relations Committee members indicated their preference for the NAIC to begin using the applicable NCOIL model, and for more states to also adopt it.
After an update on the Interstate Insurance Product Regulation Compact, it was reported that the State of Arizona recently joined in July 2014, bringing the total of compacting states to 44.
The NAIC-NCOIL Dialogue meeting was held during the late afternoon on July 10. Collaboration by legislators and regulators, with the goal of speaking and strategizing with one voice on industry issues was the overriding theme.
As part of the agenda, Massachusetts Insurance Commissioner Joseph Murphy discussed principle-based reserving and indicated that, under the NAIC model, 42 states or 75 percent of the national premium base must enact it as law. However, only 17 states have done so thus far. Five states have pending bills. The NAIC will provide technical expertise to states on the issue as needed.
The NCOIL’s Unclaimed Property Life Insurance Model Act was also discussed. Once it is finalized, NCOIL will move to have it adopted by the states. The NAIC must then propose rules for its implementation.
The NAIC-NCOIL Dialogue group also discussed the Affordable Care Act and the lack of related state-by-state regulatory expertise within the U.S. Department of Health and Human Services. Commissioner Murphy said the NAIC is continuing its Affordable Care Act implementation efforts, which include work on navigators, state filing requirements and many other aspects of the new law.
He also touched on NAIC initiatives related to the FIO report, particularly in regard to insurance affordability and availability. He added that all of the FIO recommendations are being reviewed, including the current proliferation of ride-sharing services throughout the United States.
International Insurance Issues Committee
NCOIL’s International Insurance Issues Committee met on the morning of July 11, during which it reviewed, amended and passed the States’ Response resolution adopted the day before by the International Insurance Issues Task Force.
As part of the agenda, a presentation was given on global developments that overlap with state regulation. Much of the ensuing discussion centered on the need for NCOIL to take positions through the adoption of resolutions and become actively engaged.
The point was raised that, through the FIO, the federal government is engaging in a considerable number of international discussions on issues that ultimately pertain to state-based regulation. It was agreed that a consistent voice is needed, but one that should advocate for the national and state confluence of insurance regulation in which the states maintain the primary role–a system that has worked well in the United States, it was said.
Meanwhile, the International Association of Insurance Supervisors is focusing on four primary areas: finance, market conduct, corporate governance and group supervision. Compounding that, a number of international bodies are also weighing corporate governance issues.
Some feel that group supervision is complicated in the United States because of the state-based system of insurance regulation. It was explained that American corporate governance involves a combination of state laws, Securities and Exchange Commission regulations for publicly traded companies, and a legal system that imposes certain standards. Internationally, governance is more focused on corporate board involvement, whereas in the United States, it has been more of a management responsibility. U.S. holding companies do not exert the same type of governance and decision-making influence as they do in the international arena. States regulate at the subsidiary level, while international entities effect regulation more at the holding company and group levels, it was explained.
Financial resolution and recovery planning is another international issue expected to impact the United States. While guaranty funds exist in the U.S., they are not widely used elsewhere.
It was agreed that NCOIL should work more closely with Congress and federal authorities on capital standards, which involve some level of federal regulation of certain entities, such as bank holding companies and systemically important financial institutions.
Trade agreements were also discussed. From an international perspective, three principal trade agreements are currently at issue. They are:
- The Trans-Pacific partnership agreement, which is under development
- A trade agreement under negotiation between the United States and European Union
- The trade and services agreement, which is a 50-country agreement also under development.
The involvement of certain federal agencies in these agreements has been described as problematic because of the agreements’ insurance-related technicalities and the resulting need for involvement of state regulators and legislators. Notwithstanding, negotiations were said to be lacking in transparency. Concern was also expressed that federal stakeholders may be promoting messages that could be inconsistent with state-based regulation.
In regard to accounting standards, legislators felt that convergence with international authorities cannot take place. Rather, their preference is for the United States to continue using its current accounting systems.
General Session: “Flood Insurance–What’s Holding Back the Private Market?”
For its July 11 General Session topic, NCOIL delved into the reasons why private market insurers are reluctant to offer flood insurance, and what would happen if the private market was more involved in doing so. The Session included remarks from academic and actuarial professionals, a Federal Emergency Management Agency (“FEMA”) representative, and insurer, reinsurer, and state insurance regulator perspectives.
Panelists discussed what state or federal approaches might facilitate the development of a private flood insurance industry, as well as why flood coverage is considered an insurable risk in other countries, but not in the United States.
The FEMA representative assured that the federal government supports the privatization of flood insurance. Growing this market, however, will require addressing issues such as the need for enhanced floodplain mapping, together with better loss mitigation efforts. Current challenges to privatization include a lack of adequate flood-related data, the need to create more risk diversity through greater volume of flood coverage purchase, issues relating to regulatory oversight of pricing and policy forms, and risk-based rating that either accurately prices risk or establishes appropriate subsidies.
The FEMA representative also challenged the notion that his agency is a backstop for those without insurance coverage. He explained that the average FEMA claim payment is $9,000, while the average flood damage amount is approximately $30,000. He also reminded that the majority of FEMA funds are allocated to infrastructure, not individuals.
An analyst who spoke during the Session said that ample reinsurance capacity is currently available, some of which could be used in for the private flood insurance market. Meanwhile, rate suppression is a key issue. A bigger private market would invite more competition, with the anticipated result being lower premium.
Other hurdles in developing the private flood market include adverse selection and the need to match rates with risk. Political risk, underwriting restrictions, the infancy of flood catastrophe model development and ease of market withdrawal (should there be a need) ranked high among insurer considerations, as did competing with the National Flood Insurance Program (“NFIP”), inasmuch as it does not incur the same cost of capital as the private market.
The NFIP was described as having “institutional inertia” due to its longevity as a government program.
Richard Koon, Florida Office of Insurance Regulation Deputy Commissioner for Property and Casualty, spoke about Florida’s flood insurance issues and recent efforts to establish a private market through Senate Bill 542, which endeavors to afford more market flexibility.
Mr. Koon described the different options for writing flood insurance set forth by Florida’s new law and reported that flood risk models will now be evaluated by Florida’s Commission on Hurricane Loss Projection Methodology. There will still be a need in Florida for a residual market, he said, but its success will hinge on price adequacy based on a glide path, rather than dramatic and unaffordable rate increases.
Property-Casualty Insurance Committee
Natural disaster savings accounts, consumer legal funding and Medicaid interception of insurance payments were the main discussion topics at NCOIL’s July 11 Property-Casualty Insurance Committee meeting.
Sponsored by Rhode Island State Representative Brian Kennedy, a proposed model act entitled Medicaid Interception of Insurance Payments was first on the agenda. The proposed legislation would establish a reporting process by which Medicaid departments would learn of and recoup payments made by property-casualty insurers and self-insureds to Medicaid beneficiaries. It responds to the fact that, upon enrollment in Medicaid, beneficiaries automatically assign to the state their rights to reimbursement of Medicaid payments made on their behalf. The proposed model would apply to bodily injury claims of $2,000 or more and would (1) create an appeals process; (2) allow a beneficiary’s representative to assert a lien for attorneys’ fees; (3) provide for confidentiality of data; and (4) give immunity to the parties involved in interception of payments.
To date, NCOIL’s proposed Medicaid model has only been adopted in Rhode Island. Meanwhile, NCOIL will continue to review and consider the model for adoption.
Much of the Property-Casualty Insurance Committee session was devoted to discussion about the NCOIL’s litigation funding-related draft model, entitled Consumer Lawsuit Lending Alignment, which was sponsored for discussion by Indiana State Representative Matt Lehman. The proposal seeks to regulate consumer legal financing as a loan, while the proposed Civil Justice Funding Model Act sponsored by Senator Breslin would specify that such transactions are not loans. Moreover, Senator Breslin’s proposal would require certain disclosures, prohibit conflicts of interest and other items, require registration of third-party funders, and address how fees and charges can be calculated and for how long, among other provisions.
There was significant debate over whether there should be caps on the percentage of return that could be recovered from an individual who enters into a contract to obtain funding for certain expenses while that person is going through the litigation process. In essence, the advantage in doing so would be to allow consumers to receive money while they are disabled and unable to earn their normal income during the litigation process.
Concern was expressed by several legislators that this type of process could subject consumers to fraud, since they may not understand the ramifications of entering into an agreement to borrow money for pending litigation.
Others argued that it constitutes a non-recourse loan, meaning that the lender is taking a chance that the borrower would not recover any money in his or her litigation. If there is no recovery, then no obligation exists to repay the money, they explained. However, the NCOIL’s model law does not cap the interest rate that could be charged or other cost of capital charges that could be included in the loan.
Inasmuch as the Property-Casualty Insurance Committee has been deliberating over the two model laws for considerable time, some legislators believe that a decision must be made to either adopt the model laws or abandon the initiative. This question will be debated by NCOIL’s Executive Committee.
A second meeting of NCOIL’s Property-Casualty Insurance Committee was held on July 13, during which legislators addressing the issue of managing U.S. natural disaster risk through federal legislation that would amend the Internal Revenue Code of 1986 to let homeowners set aside tax-exempt money for loss mitigation and damage recovery. A proposed Resolution in Support of H.R. 3989, the Disaster Savings Account Act of 2013, was sponsored for discussion by Representative Lehman. In addition to advocating the bill’s approach, the proposed resolution promotes strong building codes and appropriate land use.
It also urges state and federal officials, and other stakeholders to further explore possible reforms that, like H.R. 3989, could be of long-term benefit in addressing natural disaster loss costs.
After NCOIL Executive Committee’s unanimous approval of the resolution, Representative Lehman said that H.R. 3989 ” . . . would make a difference for homeowners around the country, whatever natural hazard they face. It’s critical to remember that this isn’t only about floods and hurricanes.”
Financial Services and Investment Products Committee
During its meeting on July 12, NCOIL’s Financial Services and Investment Products Committee heard a report on federal initiatives relating to cyber-security, a multi-faceted issue that has spawned several bills pending in the legislative process.
Broadly, the initiatives are designed to protect government information-particularly confidential and non-public personal consumer information. One bill provides for information-sharing authority and protocols among governmental agencies and certain related stakeholders. Approved by the U.S. House, the proposal is now before the Senate. A key issue in its debate revolves around liability protection and immunity for those who report cyber-security threats.
It does not appear that the Obama Administration will advocate the imposition of mandatory cyber-security measures for businesses, but it is considering incentives such as tax credits that can be made available if the measures are implemented. The White House is studying cyber-insurance and learning about the nuances in its coverages and exclusions, availability and capacity, with the goal of fostering a robust and competitive market. There does not appear to be any inclination to require insurers to make certain mandatory coverages available, it was said.
The Financial Services and Investment Products Committee also heard a report on the municipal bond insurance market. Ratings of certain insurers in this area of business are apparently improving, although these insurers are not top-rated.
Three issues that have arisen in the municipal bond insurance market are:
- Possible unfavorable treatment of certain claims by unsecured creditors in municipal insolvencies. For example, some unfunded pension claims have appeared to be treated more favorably. Some feel that certain types of unsecured claims should be ranked and handled more favorably than others.
- Bond ratings based on a perceived “willingness to pay” by the affected municipal entity. Some feel that an amorphous standard exists that rates a municipal authority’s willingness to permit a bond default.
- Growing concern about Puerto Rico and its financial condition. Pressed by liquidity and operational issues, the U.S. territory passed a law to begin certain aspects of restructuring. The NCOIL will closely follow developments in the situation.
Issues with rating agencies were debated by several legislators, along with what appears to be some internal conflicts in those organizations about the standards they use. There was no call for specific action.
A report was also given on a bill that would “wind-down” the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and replace them with a new industry-financed agency that would offer a government guarantee on mortgage bonds–but one that would only begin after private interests sustained substantial losses. Related legislation has been filed, triggering concern that Congress may pass a law to selectively pre-empt corresponding state-based regulation such as mortgage insurance and lender-placed insurance, for example. NCOIL will continue to monitor this situation as well.
Legislators discussed NCOIL’s Pension De-Risking Model Act, sponsored by Representative Keiser. The proposal would establish certain state-level protections for retirees whose pension benefits were transferred from a pension plan protected under the Employee Retirement Income Security Act (“ERISA”) to a substitute pension benefit plan (such as an annuity) provided by an insurance company licensed and regulated under state law. The proposed model would require regulatory approval for de-risking transactions, mandatory disclosures to retirees, equal creditor protections, an opt-out provision, reinsurance or a third-party supplemental guarantee, and approval for subsequent transfers.
The prior model draft required the approval of each insurance commissioner from states where more than 25 percent of impacted retirees currently reside. It also provided for supplemental protections in the form of a third-party guarantee or reinsurance contract designed to equal the scope and breadth of coverage provided by the Pension Benefit Guaranty Corporation under ERISA. Mandatory disclosures were required to be provided to all retirees by the benefit-holder and those retirees would have at least 90 days within which to opt out from any pension de-risking transaction.
Under the former model version, if a retiree opts out, substitute pension benefits would be made available, including an up-front lump-sum payment. The protection of annuity payments from creditor claims of the retirees and restrictions on subsequent transfers by the owner or annuity provider would require prior approval by the state’s insurance commissioner.
The prior model version has undergone negotiations among stakeholders and a markup version was presented to the Financial Services and Investment Products Committee. The markup essentially provides for an alternate statement of purpose which focuses on certain consumer protections, among other changes. It also removes some of the provisions related to perceived insurance regulatory difficulties that could arise under the prior language. Notwithstanding, the consumer focus on the security of retiree benefits was described as critical.
From a consumer perspective, the three main issues with the model are 1) uniform insulation against creditor claims, 2) subsequent transfer issues, and 3) assuring retirees’ receipt of their earned benefits. Of key regulatory concern, however, is the fact that this process moves retiree benefits from a uniform protection safety net under ERISA to a state-based regulatory process.
The marked-up model also removes the requirement that a pension de-risking transaction be supported by reinsurance or a guarantee. Of course, this would not prevent regulatory authorities from inquiring into financial solvency issues relating to the insurance company assuming the obligations. In addition, the revised model does not include the opt-out option, but does include disclosures on any lump sum options and conditions, if any, under the proposed transfer plan.
Further, the revised model changes the regulatory approval process. It now provides that the commissioner in the state of domicile of the substitute benefit provider has to approve the transaction, and any state that meets the 25 percent retiree threshold has to provide a short-form consent to the transaction, which cannot be unreasonably withheld.
In addition, the new version of the model holds benefits providers to fiduciary standards applicable under state law.
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