Navigating “The Quiet Times”

(Originally published in the Summer 2019 issue of The Insurance Receiver and is reprinted with the permission of IAIR)

A highly charged topic among insurance resolution practitioners is the obvious fact that insurance company failures are at an all-time low.  As a result, inevitable questions are raised about the resources—human and financial– committed to maintaining readiness for whatever insolvency activity may come along.

These conversations are not exclusive to the United States. NCIGF Vice Chair Chad Anderson of Western Guaranty Fund Services (WGFS) and I recently returned from a meeting in Taiwan with other resolution professionals from around the world. The resounding trend of these presentations? There is a lack of insurance company failures everywhere leading to some interesting outcomes for established guarantee mechanisms. For example:

  • Taiwan is spending their time changing their mission to become a risk management “think tank.”
  • Our neighbors in Canada do a series of research papers on why companies fail and are actively counseling regulators on ways to avoid liquidations.

Guarantee structures in some countries have never had an insolvency and others have only had a few. And with an emphasis on recovery of a troubled company in most of the rest of the world, it’s doubtful there will ever be a global spike in insurance insolvencies. In the United States, the decline in insurer failures requiring guaranty fund involvement can be traced to implementation of Risk Based Capital standards and the clearer picture this measurement to regulators of a company’s potential for peril.

That insurance insolvency is not a growth business is a win-win-win proposition. Regulators have sharpened tools like RBC to give consumers security in their insurance choices; the reputation of the competitive industry remains intact and carriers pay less in assessments allowing them to grow their business through investment and product development.

These are indisputably good outcomes but beg the question about the infrastructure in place to manage a dwindling volume of insurance insolvencies. Here are a few thoughts I’ve shared with the NCIGF board and our membership:

  1. Keep things in perspective. The property/casualty guaranty fund system is a bargain to stakeholders at around $70 million annually to operate. This is the cost of doing business to assure an effective safety net for insurance consumers. It’s not just my opinion; I often hear this point made by industry thought leaders. Besides, with 29 P/C guaranty associations already part of cost-sharing arrangements in their states, real efficiencies are already in place.
  1. Guaranty funds have plenty to do, even without new insolvencies. Claims are being managed every single day in guaranty fund offices across the country. Many these claims are worker compensation claims that are paid out at 100 percent over the claimant’s lifetime. Professional claims managers are actively involved in in assuring that those claimants are fully served, often making the difference in the life of that person and their family. Litigation Management, Data Security and other important tasks make for a busy daily existence in support of the insurance promise and policyholders.
  1. That there is a “resolution system” should remain the mantra of guaranty associations and insurance receivers. U.S. insurance regulation is seen as even more viable because there is a practiced and stable resolution mechanism. It’s also often forgotten that Title II of the Dodd-Frank Act expressly singles out the state-based insurance liquidation system as the designated forum for resolving an insurer failure of any size. We have no choice but to be ready.
  1. Maintaining a strong NCIGF is imperative. While not expressly statutory, NCIGF is mentioned over 40 times in the NAIC Handbook used by insurance receivers. An effective national coordinating entity is essential for numerous reasons, all vital but none more important than driving data management and security, now the highest priority in contemporary insurance resolutions. NCIGF also does the heavy lifting in relationships with industry, regulators (both nationally and internationally) and consumers. We provide trusted expertise to public policymakers who are not that familiar with how the safety net works.
  1. Recognition of the value the insurance industry derives from a statutory insurance resolution system is especially worthwhile when activity is subdued. Oddly, it’s the participants in the resolution mechanism itself that could do a better job acknowledging this linkage. And it’s not a tough sell. By protecting insurance policyholders, guaranty funds and insurance receivers uphold the insurance promise and provide a safety net that encourages the commercial enterprise of selling and buying insurance. The statutory resolution construct fills inevitable gaps in the larger insurance food supply chain. The system is built to work exactly this way. As a result, the insurance industry fully supports the GA system, even at times when we aren’t needed in great numbers on the front lines (like now).

NCIGF is always focused on providing operational support to our members and the entire resolution mechanism when the time comes. By looking at the big picture and addressing the right things in the right ways now, we can continue to present the P/C system as a dependable, flexible and durable consumer-protection mechanism fully capable of supporting the insurance promise as originally contemplated by policymakers and industry.

That’s why an impactful level of value-added non-insolvency engagement is not only warranted but necessary, regardless of the number of claims in the system. At NCIGF we call this “uncoupling claims from costs” and our Canadian colleague makes a presentation titled “In Times of Peace Prepare for War.” Taking a serious look at existing processes and challenging conventional wisdom is a wise and thoughtful course of action. To move these sentiments into pervasive thought will require candid, open discussions within NCIGF, regulators and the insurance industry.  We are regularly having those conversations.

Readiness for the nosier times is not negotiable. Being unprepared will draw attention and someone who knows much less about the purpose of the U.S. resolution mechanism will seek changes based on limited exposure to the realities of insurance resolution. Experienced insolvency practitioners will almost certainly be unhappy with that outcome. And anyway, if insolvency pros aren’t trying to do things better, then why are we here?

U.S. Leads Insurance Policyholder Protection Around the World

(Originally published in the Spring 2019 issue of The Insurance Receiver and is reprinted with the permission of IAIR)

On January 1, I began a one-year term as Chairman of the International Forum of Insurance Guarantee Schemes (IFIGS). My colleague at NOLHGA, Peter Gallanis has been involved since the earliest days of IFIGS and I joined him a few years ago.

The objectives of the Forum are to facilitate and to promote international cooperation between Insurance Guarantee Schemes and other stakeholders in the development of policyholders’ protection. From time to time it may communicate views, ideas and experiences to interested parties. IFIGS is a voluntary not for profit membership network. It is independent of any government authority.  Currently there are twenty-five members and the membership is growing.

I took on this responsibility because of my very strong sentiment that the insurance industry is absolutely essential to the world economy.  The insurance promise makes opportunity a possibility. Our support of it keeps the industry strong and gives comfort and peace of mind to policyholders. Guaranty mechanisms ready to protect insurance consumers undergird the sanctity of the insurance promise by assuring the viability, commitment and reputation of the insurance industry.

IFIGS is well-positioned to be the global definitive expert on supporting the insurance promise. All protections do not have to be structured the same way, but the important role of policyholder protection mechanisms must be articulated clearly and effectively to regulators as they work as overseers of the global insurance industry.

To build the value of the organization, IFIGS members have set three long-term strategic objectives:

  • Information Sharing. IFIGS will collect information and be the global expert regarding insurance guarantee schemes and will be an active resource for IFIGS members, supervisors and standard-setters.
  • Member Outreach. IFIGS will develop a plan for actively recruiting new members and encouraging more active participation and leadership by existing members.
  • Reputation Enhancement. IFIGS will work to heighten its profile with supervisors and standard setters, including those that may be involved in developing new insurance guarantee schemes.

Examples of IFIGS effectiveness are not hard to find:

1. The consultation paper published by the IAIS in mid-November, 2018 concerned a proposed holistic framework for the assessment and mitigation of systemic risk in the insurance sector. The initial IAIS consultation included the following statement:

“In addition to the direct economic effects of an insurer’s failure to pay claims on consumption, by a reduction of policyholders’ wealth, a number of correlated failures could have additional knock-on effects, such as through some insurance guarantee schemes.”

IFIGS, in partnership with NOLHGA and NCIGF, commented on the consultation paper and strongly objected to that statement. The offending comment was removed from the revised paper.

It would have been nothing short of a disaster for global regulators to continue their consideration of approaches to insurer oversight if they believed that policyholder protection schemes could spread contagion! It could take decades to change that thinking and no one country could do that alone. But by working together, IFIGS and its members played a strong advisory role that regulators took seriously. That is the value of being collaborative and building on that strategy.

2. A July 2017 paper published by EIOPA (European Insurance and Occupational Pensions Authority) stated that a minimum degree of harmonization of policyholder protection schemes in the European Union would benefit policyholders, the insurance market and the financial stability of the EU. IFIGS was invited to present on the role that insurance guarantee schemes can play in resolution during an EIOPA recovery and resolution seminar.

Thanks to our active participation in IFIGS, the U.S. made a joint presentation (with Greece) to an audience of European regulators and companies, and our presentation drew more interest from the audience than any other presentation over the day and half seminar. From this experience it was confirmed what we had already learned; that European regulators are very curious about our state-based system of policyholder protection. As EIOPA continues to deliberate on harmonization, the background we provided should prove useful.

3. Finally, on another occasion, Peter Gallanis and I, joined by a colleague from Canada, were asked to represent IFIGS before a working group of international regulators (including James Kennedy from the Texas DOI and Alex Hart from the Federal Insurance Office) who were drilling down on the relationship between regulators and policyholder protection mechanisms. My understanding is that we were helpful in providing background on ways to collaborate to provide a more effective safety net to consumers.

 

A primary goal is to spread the value of our engagement with IFIGS to IAIR and the NAIC. And to take that back to the IFIGS membership and international regulators. Our resolution mechanism—composed of receivers and guaranty funds– is by far the most experienced and effective system in the world. The broader the expertise we can bring to the table, the more impactful we can be on behalf of the individual policyholders and claimants we serve.

For more on particulars of other mechanisms around the world, a good, but not definitive, resource is a discussion paper published by EIOPA. https://eiopa.europa.eu/Publications/Consultations/EIOPA-CP-18-003_Discussion_paper_on_resolution_funding%20and.pdf)

I am happy to discuss this organization and the value of the United States’ participation.  Please feel free to contact me.

Further information may also be obtained from the IFIGS website at www.ifigs.org.

Insurance Business Transfer Model Bill Takes Center Stage at NCOIL

The National Conference of Insurance Legislators (NCOIL) met in Nashville and spent a good bit of time talking about the very hot topic Insurance Business Transfers (IBT). For many, this was the main event from the meeting. NCOIL is considering a Model IBT Law based on the Oklahoma IBT statute passed in 2018.  Here are highlights from the NCOIL discussion:

  • Beth Dwyer (RI) provided background on corporate division and IBT statutes passed to date and an overview of the NAIC Restructuring Mechanisms Working Group’s charges. She explained that working group will develop a white paper that will provide an overview of IBT/corporate division statutes and an explanation of the perceived need for these statutes. She noted that the working group is looking at consumer protections and that a subgroup has been developed to look at the financial standards used in reviewing these transactions. She explained that guaranty fund/association issues are relevant where the statute involves personal lines.
  • Buddy Combs (OK), who was instrumental in passing the Oklahoma IBT statute, provided an update on a current bill designed to help implement the IBT statute. Among other things, the bill (SB 885) tries to address two issues that have come up as Oklahoma thinks about implementing its statute – confidentiality and guaranty fund application. Combs noted that Oklahoma is not rushing to pass this bill and wants to make sure they get it right.
  • Robert Redpath (Enstar) gave a presentation on the benefits of IBT statutes – using UK Part VII transfers as an example of a transfer framework with effective process and established history of success. He noted that this allows companies to efficiently use capital and divest non-core business and redeploy capital.  He advocated for a model to ensure consistency between states and avoid potential disputes over conflict with other state’s laws.
  • Doug Wheeler (NY Life) argued that several companies are concerned about these laws because many lack necessary regulatory controls. He explained that this is an extraordinary process and suggested that the framework fundamentally changes the insurance promise without policyholder consent. He argued that division statutes have the potential to create a good company/bad company situation, which may increase the likelihood of insolvencies. He also noted that mono-line companies with long-tail business can create insolvency risks. He urged careful consideration of the proposed models, noting that additional insolvencies could erode trust in the state system. Finally, he encouraged NCOIL to reach out to Peter Gallanis from NOLHGA to get the benefit of his expertise in this area.  Here is the link to his presentation.
  • Karen Melchert (ACLI) noted that the ACLI is still developing its guidelines on these issues, and the core of the conversations to date center on policyholder protections, including the need for proper notice and process and ensuring appropriate guaranty association/fund coverage.
  • During the Q&A portion of the panel, NCOIL members had questions about how the independence of the independent experts is determined. The legislators and panelists agreed that any division or IBT involving long-term care (LTC) business should be carefully considered. Combs agreed and noted that not all lines of business will be treated the same under the Oklahoma; he explained that Oklahoma regulators are concerned about LTC failures and implied that any IBT transfer involving LTC business would be given heightened scrutiny.
  • Finally, a representative from the Reinsurance Association of America explained that the lack of policyholder consent in these laws may result in conflict with laws in other states that require policyholder consent when a policy is novated.
  • The Committee plans to continue discussion on this model at the Summer National Meeting in July.

NCIGF is paying close attention to all activity related to the IBT debate. I will be giving a brief presentation at the upcoming NCOIL meeting on the potential impact of IBT on policyholder protection. We will update you on that in due course.

NCIGF Reps Meet with Members of Congress

Recently, a number of NCIGF members, board members and staff took Capitol Hill by storm to do some updating on the state guaranty fund system. Meetings like these are critical, especially after an election year that saw a shift in power in the House of Representatives and the election of 100 new members of Congress, many of whom are without a background in financial services. Here are a few quick takes from the day:

  • 16 total meetings; 15 of which were with members of the Senate Banking and House Financial Services Committees.
  • Cross-section of senior members and freshman members, including:
    • Senate Banking Committee Chairman, Mike Crapo
    • Housing, Community Development, and Insurance Subcommittee Chairman, Lacy Clay
    • Housing, Community Development, and Insurance Ranking Member, Sean Duffy
    • 4 House Financial Services Committee freshmen
  • Overarching theme in the meetings was support for the state system.
  • Members and staff expressed appreciation for NCIGF’s engagement.

Many thanks to those who participated, along with John Blatt, Amy Clark and me (from NCIGF staff): Chad Anderson (WGFS), Charlie Breitstadt (Nationwide), Allan Patek (WI), Barbara Law (GFMS), Barry Miller (DE), Brad Roeber (CA) and Frank Knighton (GA). I feel confident we are off to a good start with this Congress. We’ve invested large amounts of resources, especially since the financial crisis, to assure federal lawmakers that the state-based safety net is prepared to protect consumers. Now is not the time to let up.

NCIGF Sees Progress at NAIC on LD and Troubled Co Regulation

NCIGF closed out 2018 on a very high note.  Regulators adopted very positive recommendations governing large deductible insolvencies, including that states be encouraged to adopt statutes that grant the receiver the authority to collect deductible recoveries.  If no statute is in place receivers are encouraged to execute an agreement with the guaranty funds to enable this process.  The Working Group noted that two large deductible model statutes are available – the NAIC and the NCIGF versions. 

While the issue is not quite wrapped up (NCIGF will be involved in continued discussions regarding the ultimate ownership of the deductible asset and the drafting of specific language for the Receivers Handbook) this progress is attributable the hard work of a number of our members.

Likewise, financial regulators invited NCIGF and NOLHGA to comment on the NAIC Troubled Company Handbook.  Our comments were supportive (and included some fine-tuning based on member liquidation experience) because the proposed revisions to the Handbook would improve guidance to regulators on issues NCIGF members have found especially challenging:

  • early communication with guaranty funds and pre-liquidation planning,
  • regulator attention to the condition and availability of digital data in a troubled company,
  • info on service arrangements (TPAs and MGAs),
  • gathering information on the type and location of collateral, such as that intended to secure large deductible obligations  

Especially impressive is the attention given to the importance of digital data in contemporary insolvencies.  There now appears to be universal agreement that this is a very critical element to a successful liquidation process and key to the collaboration between guaranty funds and receivers.

To be successful, NCIGF served as the “trusted expert” and the definitive source of information on insurance insolvency and its consequences.   As a result, we have enjoyed great cooperation from regulators on these issues, both of which matter to on a daily basis to NCIGF members and the policyholders you serve.  We will build on these developments in the coming year!

NAIC Chief Endorses Web of Trust

I recently received a report from an international insurance regulatory meeting in which U.S. insurance commissioners were participating.  The urgency and assertiveness of our regulators hit me like a ton of bricks.

NAIC president, Eric Cioppa—the Maine director of insurance– opined that cybersecurity regulation cannot be prescriptive, but instead must be principles based because it is too hard for the supervisors to keep pace with industry.  First, cybersecurity engagement must come from the very top of the company.  A culture that prioritizes cybersecurity is critical due to the weakest link phenomenon.  Second, an insurer must focus on total preparedness for when a breach occurs.  Without engaging in table topping, a breach could be devastating to the company.  The supervisors are not looking to second guess a company’s program, but are trying to focus on broad cybersecurity themes.

As we continue to push forward in implementing the Web of Trust, it’s not for nothing to understand how U.S. regulators are approaching the same problems at an industry level and to recognize that it’s not all that different from the work we have been doing and are prepared to do more of.  Given that our members’ claims-paying function is an extension of the insurance industry, what regulators think on the topic should very much matter to us. 

In my view the reasoning transfers to NCIGF’s role in making certain that our members are at the most effective level of cyber security; f regulators can require carriers to “open their kimonos” as part of their consumer protection mission when a company is in business, we should be doing the same on security, also for the purpose of protecting policyholders and claimants. Our goals are even more narrow than the regulator’s.

Beyond the cybersecurity piece, the report should provide a flavor for the scope of discussions at the IAIS and the active role U.S. regulators are playing in it.  This is a global version of the NAIC (and as Keith Bell reminds us, the NAIC actually created the IAIS).  I point this out because while some of our colleagues continue to digest the “international” aspect of insurance regulation and its application to the U.S., this report gives a tiny peek into its tangibility, importance and durability.