Summer 2009

NAIC Update

Minneapolis, MN With the question of a federal regulatory mechanism for insurance actively being discussed in Washington, D.C., regulators and industry representatives attending the National Association of Insurance Commissioners Summer 2009 National Meeting focused on measures meant to improve and strengthen the state-based system for insurance regulation thats been in place for more than 150 years. From considering enhancements to the supervision of insurance groups to adopting a complete revision to the NAICs approach to derivative investments, regulators continued the work of dusting off and revising existing models and creating new ones all in the name of meeting the challenges of todays marketplace. Another focus has been to maintain consumer protection and the strength and solvency of the insurance industry in the face of a significant natural catastrophe, or mega cat. To this end and after several years of deliberation regulators passed out of a parent committee a catastrophe white paper that represents divergent views on addressing this important area of industry risk. In this arena, too, the NAIC is

considering the construction of a catastrophe model for varied natural disasters. The tool would be of similar caliber to those used by professional modeling firms and would allow regulators a window on learning the risks so that they might better know what are the appropriate rates and policy pricing for insurers who cover these risks. The topic of climate change continued to take the floor as well. After adopting its climate change disclosure survey at the spring meeting in March, the NAIC and industry continued discussion on next steps, including a regulator proposal to have companies file their disclosure forms on the NAIC web site, rather than with the regulator of their state domicile, as had previously been discussed. While the answer to the question of a federal regulator has yet to be revealed, items serving to keep up the momentum at future meetings include credit-based insurance scoring; the advancement of the Standard Valuation Law and changes to the group insurance model law.

Top stories
Regulators move to enhance the system NAIC principals weigh in on systemic risk Credit scoring debate takes center stage NAIC ponders natural catastrophe solutions Next steps for climate change disclosure Reinsurance modernization efforts advance

Also in this issue

NAIC accounting update

Whats next
July 9-12, 2009: NCOIL 2009 Summer National Meeting, Philadelphia, PA September 21-24: NAIC 2009 Fall National Meeting, Washington, D.C.

Top stories
Regulators move to enhance the system With globalization of the insurance industry ever at hand and proposals both great and small in Washington, D.C. to do everything from tweak to overhaul the current state-based system of insurance regulation, regulators at the summer meeting drove forward several important model laws and revisions meant to modernize insurance regulation. Some top items included: The passage of a complete revision of the derivatives model law; the advancement of principles-based reserving; and new attention given to the supervision of insurance groups. Derivatives Regulators at the joint Executive Committee/Plenary adopted amendments to the Derivatives Instrument Model Regulation as part of a broader effort to modernize the NAIC regulatory framework for these financial instruments. Since the 1990s, derivatives, including credit default swaps, have become a significant financial instrument for insurers, and therefore require more uniform and stringent oversight, according to the NAIC. One of the chief changes to the law is to require of insurers a derivative use plan that has been reviewed and approved by the state insurance regulator before a company would be authorized to engage in derivatives transactions. The plan must also be approved by a companys board of directors. The board would also be required to take action to correct any deficiencies in internal controls relative to derivative transactions. Standard valuation law Regulators took a significant step towards making principles-based reserving approach to the valuation of life and annuity products a reality. Passed out of the Life and Health Actuarial Task Force following years of discussion, the revised Standard Valuation Law was met with caution by the parent Life Insurance and Annuities (A) Committee. Rather than pass the item out to the Executive Committee, the A Committee opted to open the item for a 30-day comment period to be followed by a teleconference by the Principles-Based Reserving Working Group and the Solvency Modernization Initiative Task Force. Insurance groups The NAICs Group Solvency Issues working group is moving ahead with its investigation into the feasibility of changes to the NAIC Holding Company Model Act to better reflect challenges being seen in the marketplace. At its meeting during the summer conference, the group set its sights on scheduling an interim meeting that would position regulators and industry to discuss divergent points of view with hopes of coming to a consensus. Comments received so far include those from regulators in Illinois, Kansas, Missouri, Nebraska, North Carolina, South Carolina, Virginia, Washington, and Wisconsin. Meanwhile, interested parties weighing in include the Property Casualty Insurers Association of America, the American Insurance Association and the American Council of Life Insurers. Emboldening oversight of insurer groups has been one of the major goals of the NAICs Solvency Modernization Initiative since it was formed amid notable changes in the marketplace in the fall of 2008. The 2009 charge of the working group regarding insurance groups is to study the need to modify the model act to the extent it addresses issues identified in the current environment. At the conclusion of the study, the working group is to decide whether a model law development/revision is in order.

With globalization ever at hand, regulators at the summer meeting drove forward several model laws meant to modernize insurance regulation.

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Top stories, cont.

State regulators weigh in on systemic risk The future of the state-based insurance regulation and how that fits into what is being contemplated by the Obama administration and the 111th Congress in regards to changes in the oversight of the financial sector are very much top of mind for officials at the NAIC. As the current environment has sparked considerable interest to repair what are seen as gaps in the broader financial system, NAIC principals have found themselves facing federal lawmakers a number of times in recent months in an effort to both educate and to state the case for state-based insurance regulation. And while attendees at the Minneapolis meeting seemed to fall on both sides of the issue some in favor of a federal regulator, others wanting to stick with the current regulatory regime NAIC President and New Hampshire Insurance Regulator Roger Sevigny and NAIC CEO Terri Vaughan made their thoughts very clear at the summer meeting. The rhetoric being tossed back and forth on Capitol Hill questions the oversight offered by a state-based system, Sevigny said during the summer meeting opening session. As a whole, the insurance industry continues to be strong in this erratic economy in part because of the strengths of our system. So the question is, why reinvent the wheel? For her part, Vaughan asked state regulators in attendance to offer their input on how states might fit into the council approach being discussed on the federal level. In response, NCOIL past President and Rhode Island Rep. Brian Kennedy said that his group continues to be against insurance regulation at a national level but were warming to the idea of a council, sharing thoughts on a state and federal level.

The inter-agency council approach has been advocated by Sen. Susan Collins (R-Maine) as part of a broader package to reform U.S. financial regulation. More recently, President Obama has released a white paper via the U.S. Treasury which suggests a council of regulators. NCOIL officials cautioned, however, that while it was good to have a seat at the table on the federal front; it should be kept very clear that the overall system of statebased insurance supervision should continue to be the key overseer of insurance regulation.
Credit scoring debate takes center stage The heated topic of credit-based insurance was vetted at no less than six sessions of the summer meeting as industry representatives, consumers and regulators clashed on the fairness of the long-time underwriting tool. While the debate is not new, recent attention to the issue stems in part from the current challenges in the marketplace and fears that the newly jobless might unduly be penalized as their bills go unpaid and their credit scores begin to drop thus, putting them in line to pay higher policy premiums. At the main event a two-hour hearing the NAICs Property and Casualty Insurance Committee and Market Regulation and Consumer Affairs Committee took comments from an array of interested parties. However, the joint group failed to take action on the matter as testimony ran long. A continuation of the debate is scheduled for a conference call in the near future. As it stands, consumer representatives, believing that the practice unfairly discriminates against low income and minority populations, are urging regulators to ban the use of credit-based insurance scoring or at the minimum, issue a temporary moratorium on the tool until a consensus can be reached by competing interests. Proponents of the underwriting tool, such as the National Association of Mutual Insurance Companies, cite the success of a credit-based insurance scoring model issued by the National Conference of Insurance Legislators, which balances the interests of both consumer and industry. Since adopted by NCOIL in 2003, 22 states have passed some version of the NCOIL law. Speaking at the meeting, Candace Thorson of NCOIL noted that an amendment to the model that targets consumers whose fallen credit is traceable to the financial crisis is expected to be considered by legislators at the groups summer meeting in July.

NAIC principals leading effort to maintain state-based regulation

Roger Sevigny, NAIC President, New Hampshire Insurance Commissioner

Photos courtesy of the NAIC

Therese M. (Terri) Vaughan NAIC Chief Executive Officer

Top stories, cont.

NAIC ponders natural catastrophe solutions Fifteen is a charm. At least it is for the NAICs Property and Casualty Insurance (C) Committee, which, after 14 tries over four years, has adopted a white paper that opines on what consumers, insurers, and elected officials might do to curb the impact of a so-called, "mega catastrophe." While on the radar screen of the NAIC for years, the effort toward the current white paper draft, Natural Catastrophe Risk: Creating a Comprehensive National Plan, began in 2005, shortly following Hurricane Katrina. Since that time, the document has been vetted by industry, state regulators, consumer representatives, and other state governing groups, such as the National Conference of Insurance Legislators. Over time, controversial provisions, as with the suggestion that insurers provide an all perils for properties in high-risk zones, drew much disagreement, making consensus difficult to achieve. The final framework outlines steps that regulators believe must be taken to accomplish the dual purpose of providing a comprehensive plan that protects the public, while simultaneously providing assurances (such as a federal backstop) to the insurance industry in the event of a catastrophic natural event such as a major hurricane or earthquake. The multilayered plan includes provisions such as incentives to hurricane-proof properties (such with the installation of wind-resistant garage doors), providing tax-deferred catastrophe reserves for insurers, and making mandatory offers of all-perils homeowners insurance, creating state and regional catastrophe backstops, and installing a national catastrophe backstop. The final draft passed out of C Committee on June 15, officially cited as version 15a, contains a good portion of the original framework, plus an assortment of opinions and 11th-hour edits made by a collection of states. The white paper now includes a disclaimer on the cover which notes that the document represents various opinions and a number of approaches to addressing natural catastrophe risk. NAIC Minneapolis meeting by the numbers
Average annual temperature in Minneapolis: Attendees: Sessions: Number of drafts to catastrophe white paper: Changes to 2009 winter meeting location: (Honolulu to San Francisco) 45 1,500 72 15 1

Next steps for climate change disclosure With mandatory disclosure of large insurers climate change-related business practices slated to begin in the 2009 reporting year, the NAIC Climate Change and Global Warming Task Force is contemplating reporting options. At the task forces session during the summer conference, regulators gathered information on which insurance companies would volunteer to do a test run of the survey submissions. So far, a collection of life and health insurers have stepped up to the plate to volunteer and are expected to submit anonymous results to be released by the fall meeting. NAIC staff at the session presented regulators with options by which survey results might be submitted, compiled, and distributed to the public. These include use of the NAICs Consumer Information Source website, which is available to regulators and the public, and/or use of the System for Electronic Rate Form Filing. As the program was originally slated to operate though each insurers state domiciliary regulator, industry groups such as the Property Casualty Insurers Association (PCI) have expressed concern that the test run lays the groundwork for the NAIC to eventually become the repository of companysensitive information. (This) opens the much larger question of (the NAICs) authority as a trade association to collate and make available industry data, PCI director of policy analysis David Kodama said in a statement issued by the trade. As to questions on the uniformity of responses, task force Chairman and Pennsylvania Insurance Commissioner Joel Ario indicated that the NAIC would not be issuing guidance as to how to fill out the survey questions. Adopted at the spring national meeting, the Climate Risk Disclosure Proposal includes eight questions that require companies to disclose everything from the actions they are taking to manage climate change risks to how they are building climate change awareness into their investment management strategies. The proposal requires mandatory disclosure by insures with premiums over $500 million in the 2009 reporting year and insurers with premiums over $300 million in the 2010 reporting year.

Top stories, cont.

Reinsurance modernization efforts advance Momentum of the NAICs reinsurance modernization initiative has met a slight bump along the road to Washington, where regulators hope to see the creation of enabling legislation that would allow for uniformity across states. Having adopted its Reinsurance Regulatory Modernization Framework in December, the NAIC set about drafting enabling legislation to be considered by Congress. However, when vetted at an interim meeting in New York in March, the first draft was met by much industry criticism primarily centered around the items constitutionality. While regulators at first had their sights set on seeing the draft legislation included in the Nonadmitted Reinsurance Act of 2009, NAIC Washington staff informed regulators at the Reinsurance Task Force meeting that the bills sponsor, Rep. Dennis Moore (D-Kansas), has indicated that it is too late to include the language in the present bill. However, Moore indicated to the NAIC staffers that he would be willing to advocate for its inclusion in the Senate version of the bill.

The NAIC has retained the services of a law firm to review the current draft of the legislation and regulators are expected to produce a revised draft by early July. The draft legislation is being built upon the Reinsurance Regulatory Modernization Framwork. In short, the framework calls for a reduction in collateral requirements for nonadmitted reinsurers. Under the proposal, two new classes of reinsurers are defined (domestic port of entry reinsurers and non-U.S. reinsurers). It also includes the concept of an NAIC Reinsurance Supervisory Review Department.

Update on state Model Audit Rule revisions

Revisions to the NAIC's Model Audit Rule were adopted in 2006 with a uniform effective date of January 1, 2010. The revisions are meant to strengthen corporate governance in the areas of auditor independence, corporate governance and internal control over financial reporting. To date, 29 states have either finalized orders to adopt or are formally in the process of doing so. Those states with no formal action as yet have reported to the NAIC that they plan to adopt the revisions prior to the effective date.
States that have finalized orders to adopt revisions to the NAIC Model Audit Rule States that have publicly released proposed revisions to their regulations/statutes No formal action

NAIC accounting update

The National Association of Insurance Commissioners (NAIC) held their 2009 Summer National Meeting in Minneapolis, Minnesota from June 12 to June 16, 2009. This section of the newsletter contains a summary of the significant matters impacting statutory accounting discussed at the NAIC Summer 2009 National Meeting. Summary The Statutory Accounting Principles Working Group (SAPWG) conducted hearings and meetings to address comments on certain substantive and nonsubstantive issues (refer to pages 7 through 9 for details). The comment deadline for the issues newly exposed at the meeting is August 7, 2009. Refer to page 9 for details of certain specific hot topics facing the industry including Re-REMIC transactions Changes to deferred tax asset admissibility Deferred premium asset and unearned premium reserve The Emerging Accounting Issues Working Group (EAIWG) held a meeting to take action on certain tentative positions and to address certain outstanding issues (refer to page 10 for details). The comment deadline for the issues newly exposed at the meeting is August 7, 2009. The NAIC/AICPA Working Group updated the previously provided results of a survey sent out to the states regarding how the states plan on incorporating the NAIC Model Audit Rule (MAR) in their state. Surveys are being sent quarterly and the results of the May 2009 survey were as follows (includes District of Columbia in the survey): Statute/Law 13 states Regulation/Rule 32 states Combination 6 states The survey also addresses when states plan to present the MAR amendments to their legislature or when they plan to change the related regulation. As of the May 2009 survey, twenty-three (23) states have adopted changes to address the MAR and the remaining twenty-eight (28) states (includes District of Columbia in the survey) are expected to present amendments or adopt changes to address the MAR in 2009. For those states that have presented the adopted changes to the MAR to their respective legislature, none of the states indicated any significant problems with the proposed rule. NAIC staff will continue to revise the implementation guide and, specifically, will address the questions related to certain exposed wording which appeared to contradict the disclaimer within Section 14 indicating that the section shall not apply to SOX Compliant Entities or wholly owned subsidiaries of SOX Compliant Entities. Regulators also commented that it is their interpretation and expectation that managements report on internal control would consider materiality at the regulated entity level and not on a group basis.

Statutory Accounting Principle Working Group

Current Developments: The SAPWG adopted the following amendments as final:

Reference
2009-02

Title
SSAP No. 91R Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

Sector
P&C Life Health

Amendments Exposed
Nonsubstantive Change Adopted as final changes to SSAP No. 91R adopting the guidance of FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.

FS Impact
Y

Disclosure
N

Effective Date
Immediate

2009-01 2009-03 2009-04 2009-05

Various

P&C Life Health

Nonsubstantive Change - Adopted as final changes to Issue Paper No. 99 rejecting the following as not applicable to statutory accounting: FSP FAS 117-1, Endowments of Not-For-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosure for All Endowment Funds FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20-1 Statement of Position 07-2, Attestation Engagements That Address Specified Compliance Control Objectives and Related Controls at Entities That Provide Services to Investment Companies, Investment Advisors, or Other Service Providers Statement of Position 07-1,Clarification of the Scope of the Audit and Accounting Guide for Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies and FASB Staff Position 07-1-1, Effective Date of AICPA Statement of Position 07-1

Immediate

2003-12

IP No. 135 FASB Interpretation 45: Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others, and Interpretation of FASB Statements No. 5, 57, and 107 and Recession of FASB Interpretation No. 34 (FIN 45)

P&C Life Health

Exposed proposed Issue Paper No. 135 The proposed issue paper requires reporting entities to recognize, at inception of a guarantee, a liability for the obligations it has undertaken. Intercompany or related party guarantee would be recognized unless such is considered an unlimited guarantee.

TBD

Current Developments: The SAPWG adopted the following amendments as final:

Reference
2008-28

Title
IP No. 137 Transfer of Property and Casualty Reinsurance Agreements in Run-off

Sector
P&C

Amendments Exposed
Substantive Change - This issue paper proposes amending SSAP No. 62, Property and Casualty Reinsurance, allowing run-off reinsurance contracts, meeting specified criteria, to receive prospective accounting treatment.

FS Impact
Y

Disclosure
Y

Effective Date
2010

2007-24

IP No. 138 Fair Value Measurements

P&C Life Health

Substantive Change This issue paper proposes adopting with modification FASB Statement No. 157, Fair Value Measurements, and FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The definition of fair value and the three-level fair value hierarchy are accepted for statutory accounting. This issue paper rejects the consideration of an entities own credit risk in determining the fair value of a liability. Nonsubstantive Change Exposed revisions proposing the disclosures similar to the intent of disclosures required by FASB No. 163, Accounting for Financial Guarantee Contracts, but modified to be applicable under current statutory accounting guidance for financial guarantee insurance contracts. This change impacts disclosures only, with review of possible accounting changes occurring at a later date. Nonsubstantive Change - Exposed changes to Issue Paper No. 99 rejecting as not applicable to statutory accounting.

TBD

2009-09

SAAP No. 60 Financial Guaranty Insurance

P&C Life

2009

2009-08

FSP SOP 94-3-1 and AAG HCO-1 Omnibus Changes to Consolidation and Equity Method Guidance for Not-ForProfit Organizations

P&C Life Health

TBD

The SAPWG took the following other actions:

Reference
2006-30

Title
SSAP No. 92 Accounting for Postretirement Benefits Other Than Pensions, A Replacement of SSAP No. 14 SSAP No. 100 Accounting for Pensions, A Replacement of SSAP No. 89

Sector
P&C Life Health

Amendment status update

NAIC staff was directed to consider comments received from the exposures of these proposed SSAPs and modify as considered appropriate for statutory accounting. SSAP Nos. 92 and 100 are to be re-exposed at a future date.

FS Impact
Y

Disclosure
Y

Effective Date
2011 (tentative)

Other SAPWG Matters: The SAPWG, EAIWG and Valuation of Securities Task Force discussed re-REMIC transactions (re-securitization asset backed securities). Although regulators noted that facts and circumstances may vary, generally a transfer would fall under the guidance of SSAP No. 25 and not SSAP No. 91R; thus be expected to occur at fair value under SSAP No. 25 and considered a non-economic transaction. States were encouraged to involve the NAIC staff if they were approached by a company contemplating such transactions. No further action is planned. The SAPWG agreed to defer the item on consideration of increasing the admission of deferred tax assets related to the Capital and Surplus Relief Working Group (Reference #2009-06). The SAPWG continues to work on the deferred premium asset and unearned premium reserve matter (Reference #2009-10) and is expecting to hold a joint call with the Life and Health Actuarial Task Force to further discuss the issues. A subgroup was formed to consider changes to the Accounting Practices and Procedures Manual to address changes necessitated by current projects including the FASB Accounting Standards Codification and the Principles-Based Reserving project.

Emerging Accounting Issues Working Group

The Emerging Accounting Issues Working Group (EAIWG) continues to address the many questions that are developing as new accounting pronouncements are issued. The EAIWG adopted as final the following tentative consensus positions: INT 09-04: Application of the Fair Value Definition. The Working Group adopted this interpretation which clarifies the application of the NAIC Accounting Practices and Procedures Manual glossary definition of fair value in situations where the volume and level or activity for the asset or liability have significantly decreased and transactions which are forced sales or liquidation sales. INT 09-03: EITF 08-7: Accounting for Defensive Intangible Assets (EITF 08-7). The consensus adopts, with modification, EITF 08-7 and clarifies that defensive intangible assets are assets, but nonadmitted for statutory accounting and reporting purposes. The EAIWG exposed the following tentative consensus positions:  EITF 08-3: Accounting by Lessees for Maintenance Deposits (EITF 08-3). The Working Group exposed a tentative consensus clarifying that refundable maintenance deposits shall be accounted for as assets which are nonadmitted. Other costs that do not increase the value or the usefulness of the leased assets shall be expensed when incurred. EITF 08-8: Accounting for an Instrument (or an embedded feature) with a Settlement Amount That is Based on the Stock of an Entitys Consolidated Subsidiary (EITF 08-8). The Working Group exposed a tentative consensus rejecting EITF 08-8 as not applicable to statutory accounting.
This summary was prepared by Matt Wangard and Carolyn Estrada. For your comments and suggestions please contact the authors mwangard@deloitte.com or cestrada@deloitte.com.

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Contacts
For more information, please contact:

Rebecca C. Amoroso Vice Chairman U.S. Insurance Leader Deloitte LLP +1 (973) 602 5385 ramoroso@deloitte.com

Steve Foster Director Deloitte & Touche LLP +1 (804) 697 1811 sfoster@deloitte.com

Howard Mills Director & Chief Advisor Insurance Industry Group Deloitte LLP +1 (212) 436 6752 howmills@deloitte.com

Naru Navele Partner Deloitte & Touche LLP +1 (973) 602 16801 nnavele@deloitte.com

Mark Parkin Partner Deloitte & Touche LLP +1 (212) 436 4761 mparkin@deloitte.com

Donald Schwegman Partner Deloitte & Touche LLP +1 (513) 784 7307 dschwegman@deloitte.com

Ed Wilkins Partner Deloitte & Touche LLP +1 (402) 444 1810 ewilkins@deloitte.com

Contributors
Eleanor Barrett Senior Manager Deloitte LLP +1 (212) 436 2954 elbarrett@deloitte.com Carolyn Estrada Senior Manager Deloitte & Touche LLP +1 (212) 436 2954 cestrada@deloitte.com Matt Wangard Partner Deloitte & Touche LLP +1 (312) 486 3224 mwangard@deloitte.com

For further information, visit our website at www.deloitte.com/us/insurance

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About this newsletter This newsletter is distributed for promotional purposes and is not intended to represent investment, accounting, tax or legal advice. Any opinions and analyses presented or expressed herein are those of the authors and are not intended to represent the position of Deloitte & Touche LLP or other individual members of the firm. Data presented herein has been obtained from sources believed to be reliable. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which isa legally separate and independent entity. Please see www.deloitte.com/aboutfor a detailed description of the legal structureof Deloitte Touche Tohmatsu and its member firms. Please see www.deloitte. com/us/aboutfor a detailed description of thelegal structure of Deloitte LLP and its subsidiaries. Copyright 2009 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu