NAIC 2007 FALL NATIONAL MEETING. Executive Summary

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1 NAIC 2007 FALL NATIONAL MEETING The National Association of Insurance Commissioners held their 2007 Fall National Meeting in Washington DC September 28-October 1. This newsletter contains information on activities that occurred in some of the committees, task forces and working groups that met there. For questions or comments concerning any of the items reported, please feel free to contact us at the address given on the last page. Executive Summary At their Executive and Plenary sessions, the Commissioners adopted two new model regulations and adopted the Property and Casualty Actuarial Opinion Model Law as an accreditation standard effective January 1, (page 3) The Principles-Based Reserving Working Group discussed comments on its exposure draft Life and Health Insurance Principles and Related Principles-Based Initiative Activities document. The principles are meant to guide NAIC task forces and working groups in completing and evaluating all work related to the PBR initiative. (pages 3-4) The Statutory Accounting Principles Working Group held a public hearing and re-exposed for comment SSAP No. 97, Investments in SCA Entities, which would replace the current standard SSAP No. 88. The working group also re-exposed for comment revised amendments to SSAP No. 43 to address the accounting for impaired loan-backed securities. The working group adopted a change to SSAP 55, Unpaid Losses, to clarify the consideration of changes in estimates to loss reserves after the filing of the annual statement. The regulators continued discussion of significant issues related to pensions (consideration of FAS 158) and uncertain tax positions (consideration of FIN 48), but no guidance was exposed for comment on these two issues. (pages 4-9) The International Solvency and Accounting Working Group reported that it had drafted and submitted to the IAIS its initial comments on twenty issues on the IASB's Insurance Contracts paper. The working group continues to work on additional issues with the IAIS on their joint comment letter, which is due to the IASB November 16. (pages 9-10) The Blanks Working Group adopted eleven blanks proposals as final, and exposed twelve new issues for comment. The working group also received a report from its Schedule T subgroup. (pages 10-11) The NAIC/AICPA Working Group updated its survey on the progress of adopting the revised Model Audit Rule (MAR) noting that six states are planning to have the revised MAR adopted by the end of The working group heard a presentation from the AICPA on the newly issued Auditing Standard 2, which includes a revised definition of significant deficiencies and material weaknesses in internal control and which differs from the current guidance in SAS 112 adopted by the Model Audit Rule. (pages 11-12) The Valuation of Securities Task Force approved a proposal to allow insurance companies to "self- Insurance Industry NAIC Meeting Notes Fall 2007

2 determine" the fair value of certain securities and use sources other than the SVO for fair value. The task force also adopted amendments to the SVO Purposes and Procedures Manual including controversial guidance on "enhanced broker-dealer access" to the SVO. (pages 12-13) The Capital Adequacy Task Force exposed for comment proposed changes for risk charges related to securities lending transactions as proposed by its Securities Lending Subgroup and adopted revised formula instructions related to the Medicare Part D premium stabilization calculation. The Hybrid Risk- Based Capital Working Group heard a final report from its AAA work group developing a long-term solution for the appropriate risk-based capital charges for hybrid securities that concludes that the shortterm solution for notching should be reversed; the report was exposed for comment. The Life RBC Working group exposed for comment an updated C-3 Phase 3 report. The P/C RBC Working Group's Catastrophe Risk Subgroup continued its discussion of the use of catastrophe models to develop a catastrophe RBC charge. (pages 14-17) The Reinsurance Task Force replaced its Reinsurance Evaluation Office proposal with a completely revised reinsurance regulatory modernization proposal which was developed through closed meetings with its subgroup this summer. The revised proposal introduces the concept of the Reinsurance Supervision Review Department which would evaluate whether non-u.s. jurisdictions are "functionally equivalent" to the U.S. Collateral requirements have also been revised. At this meeting, the working group heard comments from interested parties and extended the comment deadline to October 19. (pages 17-18) The Life Insurance and Annuities (A) Committee reviewed comments received on a revised draft of proposed revisions to the Unfair Trade Practices Act, related to the use of past lawful travel and future lawful travel plans in life insurance underwriting; a new draft is expected is the next few weeks. (page 18) The Life and Health Actuarial Task Force heard detailed updates from the various American Academy of Actuaries' work groups on the principle-based reserving project, which reported that most of technical work on PBR is completed and the conceptual framework is now final. The Academy suggested a "best scenario" timeline that showed completion of the changes to the Standard Valuation Law by 2008 so that states can adopted the new law in 2009 with an effective date of January 1, 2010 (pages 18-21) The Casualty Actuarial Task Force reported that it will be reissuing its Risk Transfer Survey to companies later this year to measure the improvements in corporate governance in risk transfer since the survey was first done in The task force also noted a training course on reinsurance and risk transfer will be provided at the NAIC's Financial Summit in November. (pages 22-23) The Financial Guaranty Insurance Model Act Revisions Working Group completed its project to revise the Financial Guaranty Insurance Model Act to reflect changes in the regulatory environment since the model was developed in the 1980s. (page 23) The Terrorism Insurance Implementation Working Group reported and discussed that the U.S. House of Representatives approved H.R. 2761, the Terrorism Risk Insurance Extension Act. The bill has not yet been approved by the Senate. (page 24) The Climate Change and Global Warning Task Force continues to discuss what disclosures, if any, should be required by insurers regarding the impact of climate change and global warming on their businesses. (page 24) Insurance Industry NAIC Meeting Notes Fall 2007

3 Executive Committee and Plenary At its meeting in Washington DC, Commissioner Walter Bell, NAIC President, outlined plans to focus in the coming year on continued reforms in market regulation processes and in the nation s health care regulation. Commissioner Bell also discussed recommendations from the Executive Committee retreat. These recommendations include the continued emphasis of developing model laws that represent national issues and need commissioner-level commitment. Commissioner Bell stated that a key initiative this year is to make progress towards producer licensing uniformity amongst the states. This will be accomplished through a coalition of regulators and national producer trade associations. Through the coalition, the Executive Committee will review options to simplify the licensing of business entities, begin to implement a national on-site assessment of the states compliance with the reciprocity requirements of the Gramm-Leach- Bliley Act and progress toward full implementation of the national uniform licensing standards. The coalition also plans to develop more uniform practices in the reporting and approval of continuing education standards across the states. In conjunction with this initiative, the committee adopted a new charge for the Market Conduct and Consumer Affairs (D) Committee to charge the Producer Licensing Working Group with developing a national handbook of best practices in the producer licensing process. The committee determined that the following models met the criteria for development of or revisions to a Model Act in accordance with the recently issued Model Law Development Framework: Model Regulation to Implement the NAIC Medicare Supplement Minimum Standards Model Act (#651) Standard Nonforfeiture Law for Life Insurance (#808) Standard Valuation Model Law (#820) Life and Health Guaranty Association Model Act (#520) Property and Casualty Insurance Guaranty Association Model Act (Model #540) Determining Reserve Liabilities for Pre-need Life Insurance Model Regulation The approval for the development of the Standard Nonforfeiture Law for Life Insurance and the Standard Valuation Model Law represents a key milestone in movement towards principles-based reserving for life insurance products. (See Principles-Based Reserving Working Group at??) At their subsequent Executive and Plenary session, the Commissioners adopted the following new or revised models or guidelines: Actuarial Guideline TAB, The Application of the Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities - AG TAB provides guidance to actuaries in choosing the correct preferred mortality table for calculating reserves in support to the interim solution regarding Actuarial Guideline 38. Long-Term Care Insurance Model Act, Section 9 Producer Training Requirements - This section of the Model Act prescribes the minimum training requirements for producers of long-term care insurance. The Commissioners also adopted the Property and Casualty Actuarial Opinion Model Law as an accreditation standard effective January 1, It was noted that 25 states have already included this law in their statutes. The Commissioners voted to expose the following changes to accreditation standards for a one-year exposure period ending December 1, 2008: Revisions to the Risk-Based Capital Insurers Model Act The Insurer Receivership Model Act (IRMA) as replacement to the current reference to the Insurers Rehabilitation and Liquidation Model Act Revisions to the Annual Financial Reporting Model Regulation (aka Model Audit Rule). These revisions incorporate new requirements for assessments by management of its internal accounting controls. Principles-Based Reserving Working Group The working group discussed comments received from NAIC working groups and task forces and Insurance Industry NAIC Meeting Notes Fall 2007

4 interested parties on the draft Life and Health Insurance Principles and Related Principles-Based Initiative Activities that was exposed at the Summer National Meeting. The materials distributed prior to meeting classified 13 comments from various respondents as "substantive." However, the chair of the working group expressed his desire to focus on the broader concepts and charged the NAIC staff with modifying the document to incorporate or address the comments received. The working group will review the revised document in the future, and consider any decisions that need to be made by the group as a result of the comments. The principles are meant to guide the NAIC task forces and working groups in completing and evaluating all work related to the principles-based approach (PBA) initiative. The draft principles include the following sections: principles-based regulatory framework; reserve liabilities; capital adequacy; corporate governance; public disclosure, supervisory reporting and financial analysis; and financial examinations. Some of the more significant excerpts from the draft exposed in June are as follows: Principles should converge towards IAIS international solvency principles and international standards to the extent appropriate for the U.S. Significant differences from these international principles should be noted and explained. A "total balance sheet" methodology should be employed to consider the overall level of liabilities and capital. The total of reserve liabilities and required capital should be able to absorb significant unforeseen losses. The RBC requirements should be calibrated based on the level of reserve liabilities. Corporate governance principles and standards should be established. Regulators should require insurers to have and maintain corporate governance policies, practices and structures and undertake sound risk management in relation to all aspects of their business. The working group established a Corporate Governance Subgroup to develop specific requirements dealing with corporate governance in a principles-based reserving system. In developing these requirements, the subgroup will specifically consider work products previously developed by the Capital Adequacy Task Force as well as the American Academy of Actuaries. The working group heard a report of the activities of the Life and Health Actuarial Task Force (LHATF) including a status update on the Standard Valuation Law (SVL) and the valuation manual, as well as LHATF's work on the process of selecting a statistical agent and the format for data submission. LHATF intends to hold significant discussion on both the SVL and the valuation manual during the next few months with the intent of having finalized and ready for adoption by the 2008 Spring National Meeting. (The detailed discussion regarding LHATF activities at the Fall National Meeting are summarized on page 18.) The working group voted to recommend to the Executive Committee that LHATF continues with its efforts to develop the Standard Valuation Law and the Standard Nonforfeiture Law for Life Insurance as NAIC model laws. The working group also discussed the need for a formal communication process between the various technical task forces and working groups that are assigned action items and requested that LHATF work with the NAIC staff to develop a timeline for completion of key milestones to be shared with the working group prior to the Winter National Meeting. Statutory Accounting Principles Working Group Public Hearing The working group held its regular quarterly hearing to discuss proposals exposed at its prior National Meeting. All issues exposed or reexposed for public comment have a comment deadline to NAIC staff of November 9, 2007 with a public hearing at the Winter National Meeting. This is a shortened comment period due to the Fall National Meeting being held several weeks later than usual. SSAP 97, Investments in SCA Entities, A Replacement of SSAP 88 The working group exposed for comment at the Summer National Meeting a new SSAP on accounting for investments in subsidiaries, controlled and affiliated entities. The working group held a public hearing via conference call on August 20, revised the exposure draft and had a second public hearing in Washington DC. As a result of the two public hearings, the following changes, among others, have been made to the proposed SSAP: Insurance Industry NAIC Meeting Notes Fall 2007

5 Ten questions and answers from the SSAP 88 Q&A Implementation Guide not initially included in SSAP 97 have been incorporated into a new Q&A. Paragraphs a. and b. of par. 19 were deleted to clarify that downstream noninsurance holding companies are required to be audited when the limited exception (in par. 22) is not met. Without an audit of the holding company, the insurance entity parent cannot admit any value for the holding company or its SCAs, regardless of whether its SCAs have standalone audits. Guidance was added to clarify that consolidated or combined financial statements are permitted for one or more downstream holding companies with consolidating or combining schedules shown as other financial information. The working group also approved a clarification that consolidated or combined financial statements are permitted for insurance entities when done in accordance with the requirements of Section 8 of the Model Audit Rule. Most of the changes made were for clarification. The primary requirements of SSAP 97, e.g. lookthrough for SCAs meeting the limited exception requirements, and a reconciliation required to U.S. GAAP equity and net income when a foreign basis audit is obtained, did not change. The working group also reviewed comments and did not adopt the following suggestions from various interested parties: Requests to allow "balance sheet only" audits to comply with the audit requirement were rejected. A proposed revision from interested parties to expand the limited exception to downstream noninsurance holding companies with material assets provided those assets are nonadmitted was also rejected. Therefore only those holding companies with immaterial assets and liabilities, outside their investments in SCAs and SSAP 48 entities, can meet the limited exception. The revised exposure draft will be posted to the NAIC's website shortly and an interim conference call will be scheduled to review any final comments. The working group still plans to adopt a final Standard by year-end effective for 2007 financial statements. Clarification of Treatment of Cash Flows when Valuing Impairment The working group discussed comments to proposed revisions to SSAP 43 requested by the Valuation of Securities Task Force exposed at the Summer National Meeting. The proposal would amend paragraphs 14 and 16 and requires that other-than-temporarily impaired loan-backed securities be written down to the discounted (compared to the current guidance of undiscounted) estimated future cash flows. Guidance had also been proposed as follows: Unless there are sufficient unimpaired assets to secure the full payment of principal, in which case the discount shall be amortized, the new cost basis shall not be change for subsequent recoveries in fair value. A request from interested parties to allow audits for foreign limited partnerships (called Alternative Investments) to be in accordance with IFRS or U.K. GAAP without reconciliation to U.S. GAAP. Previous requests to allow IFRS or any audited basis of accounting without reconciliation to U.S. GAAP for all foreign SCAs have also been rejected. A request to allow audits of SCAs and SSAP 48 entities to be valued at audited tax basis equity in addition to audited U.S. GAAP equity. The working group suggested that interested parties narrow of scope of the Form A to SSAP 48 entities only that are not able to obtain U.S. GAAP audits. Comments from Interested Parties asked that current guidance in SSAP 43 be retained for specific securities guaranteed by GNMA, FNMA and FHLMC. NAIC staff then worked with interested parties and the working group after submission of the comment letter and suggested revisions that address the concern of impairing federally guaranteed mortgage-backed securities that have unrealized losses due to changes in interest rates. The working group voted to include a new sentence to par. 16 of SSAP 43 as follows and exposed the revised proposal for comment: "An interest related decline in value should be deemed other-than-temporary only when the investor has the intent to sell the investment, at the reporting Insurance Industry NAIC Meeting Notes Fall 2007

6 date, before recovery of the investment." The working group also exposed for comment guidance that the interest related decline in value be classified as an IMR event, which was also suggested by interested parties. SSAP 55 and Subsequent Events The working group adopted a proposed change to par. 13 of SSAP 55, Unpaid Losses, to clarify that additional information obtained subsequent to the filing of the annual statement, which is not the result of an error in the estimation process, should not result in adjustment to the audited financial statements. If material, the loss reserve development would be disclosed in a note to the audited financial statements. Prior to adoption, the working group discussed a comment letter from the AICPA. The working group had asked the task force to identify areas other than unpaid claims, losses and loss adjustment expenses for which reassessments of judgments and estimates made in the preparation of the annual statement could potentially have a significant effect on amounts recorded in the audited statutory financial statements. The AICPA's comment letter noted that theoretically any financial statement balance could change based on new information, but the following items are among the most common: other-than-temporary impairment of investments, tax provisions, accruals and contingencies, guarantee fund and similar assessments, litigation and regulatory matters, self insured losses, reinsurance balances, premium adjustments on retrospectively rated contracts, contingent commissions and health care receivables. Despite recognition of the pervasiveness of these items to statutory financial statements, the working group chose not to consider any changes to SSAP 9. As a result, insurance companies will have to consider additional information obtained subsequent to the filing of the annual statement when preparing the audited statutory financial statements except with respect to unpaid claims, losses and LAE. For unpaid claims, losses and LAE, insurers must still consider information obtained through the annual statement filing date. Additional Disclosures of Dividends Paid The working group adopted amendments to SSAP 72 to require disclosure of the dates and amount of dividends paid, and for each payment, disclosure of whether the dividend was ordinary or extraordinary. As a compromise as a result of comments received, and after significant discussion, the requirement to disclose whether timely notice was given or approval obtained for each dividend was deleted. Disclosure in Quarterly Statement of Loss Reserve Development The working group adopted a proposal to add a new note to the quarterly statement when there is material loss reserve development from the amounts reported at yearend. This new requirement adds the disclosure requirements of par. 14 of SSAP 55 and Note 25 of the annual statement to the quarterly statement. Amendments to SSAP 26 Investment Categories The working group deferred final action on proposed amendments to SSAP 26 to conform the investment categories to those recommended by the Investment Schedules Subgroup until the Blanks Working Group concludes on the related blanks proposal BWG. Update of SSAP 62 Disclosures The working group adopted changes to the SSAP 62 finite risk reinsurance disclosures to conform the disclosures to those required in the annual statement interrogatories, which were amended in December The adopted revisions increase the threshold from 3% to 5% of surplus for certain reinsurance contracts. Consideration of Other GAAP Guidance The working group adopted as final revisions to reject the following guidance as not applicable to statutory accounting: FAS 134: Accounting for Mortgage-Backed Securities Retained after Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise FASB Staff Position No. AUG AIR-1, Accounting for Planned Major Maintenance Activities FASB Staff Position No. APB 18-1, Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence FASB Staff Position No. FAS 143-1, Accounting for Electronic Equipment Waste Obligations SAP Maintenance Agenda Discussion Consideration of FIN 48, Accounting for Uncertainty in Income Taxes The chair briefly discussed the status of the SAP Working Group's Insurance Industry NAIC Meeting Notes Fall 2007

7 consideration of this new GAAP interpretation, which has both accounting and disclosure requirements. The chair reported that the FIN 48 Subgroup held two conference calls since the Summer National Meeting but has not reached a consensus on whether to adopt the guidance in FIN 48; additional meetings will be scheduled for the fourth quarter. As it seems unlikely that the subgroup will reach a consensus for 2007 on the accounting guidance, interested parties may work with the regulators to address proposed disclosure requirements for Many believe it is important for the NAIC to adopt some guidance in the fourth quarter; otherwise the disclosure requirements of FIN 48 would be required in the 2007 audited statutory financial statements due to generally accepted auditing standards guidance on disclosures in Other Comprehensive Basis of Accounting (OCBOA) financial statements which require GAAP-like disclosures if statutory accounting principles do not specifically reject or modify the GAAP requirements. As a result, it appears likely that FIN 48-like disclosures will be required in 2007 reports either through NAIC efforts or GAAS requirements. Consideration of FAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans The chair noted that NAIC staff is still drafting an issue paper. The chair also noted that the working group had received a comment letter from a large insurance company asking for full adoption of FAS 158 for statutory accounting purposes as it "provides for representationally faithful and more understandable financial information about a sponsor's exposure to benefit plans." The working group also heard a brief report from interested parties on the survey results of the potential effect of adoption for FAS 158 for statutory accounting. Individual company responses are being maintained confidential; the survey results were compiled by PricewaterhouseCoopers. Responses were classified by type of company: stock, mutual and other. Twelve stock companies responded representing $54.8 billion surplus; twenty-six mutual companies responded, representing $96.5 billion in surplus and eighteen "other" entities representing $18.1 billion in surplus also responded. For the companies that responded, the estimated total effect on surplus of full adoption of FAS 158 (which includes vested and non-vested participants) is an approximate 4.2% reduction in surplus for stock companies, an approximate 1.5% reduction in surplus for mutual companies and an approximate 8.1% reduction for other entities. The compiled surveys have been provided to the working group and NAIC staff for further analysis and will be used as the discussion of FAS 158 continues. Accounting for the Gain or Loss on Sale of Real Estate included in a Leaseback Transaction The working group had deferred action for several meetings on this item, which would allow gain recognition when cash is received in a sale/leaseback transaction and the gain is segregated in surplus. At its meeting in Washington DC, the working group exposed a proposed amendment to SSAP 22 to allow such recognition when the transaction is fully settled in cash. The gain will be segregated as special surplus throughout the term of the lease. Accounting for Debt Securities Subsequent to an Other-Than-Temporary Impairment As discussed at the 2006 Winter National Meeting, INT on OTTI does not address paragraph 16 of FSP FAS115-1/ 124-1, which provides guidance as to whether a reporting entity should consider amortizing/ accreting a previous premium/discount once impairment occurs. At this meeting, the chair noted that the issue paper is in the final stages of drafting and should be available for the Winter National Meeting. Accounting for Life Settlement Contracts by Third- Party Investors The working group had referred the issue of the appropriate valuation method for these contracts, either the investment method or the fair value method, to the Valuation of Securities Task Force. (Both methods are permitted under FSP FTB ) At its meeting in Washington DC, the working group reviewed the written report of the task force and heard comments from a representative of the SVO, who stated that three public hearings have been held on the issue but that most of the data on life settlement contracts is private. Per the SVO, there is not enough public date to judge the liquidity of these investments, and no contracts have been submitted for rating by the SVO. As a result, the task force is not able to reach a conclusion on the appropriate valuation of life settlement contracts. The working group asked interested parties and the ACLI to work with the SVO to provide them with the necessary data to perform adequate analysis. The chair stated that they need also need more input from interested parties on how insurers Insurance Industry NAIC Meeting Notes Fall 2007

8 own these instruments, e.g. through trusts, securitizations or other vehicles. Interested parties agreed to work with SVO and the working group. Consideration of FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity The working group is waiting on a formal response on this issue from the Valuation of Securities Task Force. See page 13 for that discussion. Clarification of SSASP 26 for Reporting Investments in Commercial Paper The working group exposed for comment a nonsubstantive change to SSAP 26, Bonds, that commercial paper should be classified as a bond regardless of the remaining time to maturity at the time of the purchase. FAS 129, Disclosure of Information about Capital Structure The working group exposed a nonsubstantive change to SSAP 72 to adopt paragraphs 6, 7 and 9 of FAS 129 and reject all other paragraphs. SOP 97-1: Accounting by Participating Mortgage Loan Borrowers The working group voted to have NAIC staff draft an issue paper to incorporate the guidance from this SOP into SSAP 40, Real Estate Investments. ASO and ASC Fee-For-Service Income Recording The working group voted to reject a Form A from an interested party that proposed recording all feefor-service income as revenue. This action retains the current SSAP 47 guidance that prescribes revenue accounting in some situations and expense offset in other situations. The working group exposed for comment nonsubstantive revisions to Issue Paper 99 to reject the following GAAP guidance as not applicable to statutory accounting: SOP 02-2, Accounting for Derivative Instruments and Hedging Activities by Not-for- Profit Health Care Organizations, and Clarification of the Performance Indicator SOP 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising SOP 03-2, Attest Engagements on Greenhouse Gas Emissions Information Principles-Based Reserving Project At the Summer National Meeting, the working group heard a detailed proposal from an interested party on a suggested process to incorporate PBR Standards into the APP manual. At this meeting, the working group discussed a comment from the Interested Parties' comment letter that they do not object to the proposal but "strongly suggest that LHATF incorporate a robust and thorough maintenance process around the Valuation Manual that explicitly involves the SAP Working Group regarding any changes to the Valuation Manual which could modify the accounting standards." The working group directed NAIC staff to draft a letter to LHATF for review by the working group. Survey of Finite Re Disclosures At the request of interested parties, the NAIC surveyed regulators on the usefulness of the finite reinsurance disclosures first required in Of the twenty-five responses, 92% stated that the disclosures are useful in the financial review of insurers; 80% of those responded stated that the right amount of detail is disclosed. The working group will forward the survey to the P/C Reinsurance Study Group along with the detailed comments from survey respondents for further consideration by the study group, if they so desire. Definition of Extra Contractual Obligations At the Summer National Meeting, the working group adopted as final new disclosures of extra contractual obligations. At this meeting, the working group reviewed a letter from a health trade association asking for guidance for 2007 on definitions of such obligations. The working group agreed to document in the minutes of the meeting as interim guidance that attorneys' fees not determined to be extra-contractual, arbitration and external review documentation, prompt payment interest and claim settlements within the ultimate policy limits do not require reporting under the new disclosures. Interested parties will work with the Blanks Working Group to develop more formal guidance for FASB Invitation to Comment on IASB ED, Accounting for Insurance Contracts by Insurers and Policyholders The working group discussed the Invitation to Comment and directed NAIC staff to draft a comment letter for review by the working group and interested parties to be submitted to the FASB by the November 16 deadline. There was no discussion of any comments that would be included in the letter, but the chair noted that it would include a caveat that the NAIC has not Insurance Industry NAIC Meeting Notes Fall 2007

9 reached a decision of whether the accounting proposed is appropriate for statutory accounting principles. Interested parties noted that a joint letter from many of the insurance industry trade associations will be sent to the FASB and IASB. The working group also noted that the NAIC's International Solvency and Accounting Working Group has provided an initial comment letter to IAIS on the IASB ED (see discussion starting on page 9.) SSAP 63, Underwriting Pools The working group briefly discussed a request from an interested party to revisit the accounting specified in SSAP 63 as some believe the current guidance is vague and should address issues in addition to reinsurance. The chair asked that a list of issues be drafted for discussion at the Winter National Meeting. Additional Items There was no discussion of Issue Paper 129, Share-Based Payments at the meeting in New York. The working group had exposed this issue paper in 2006 Fall National Meeting. There was no status report from the Guaranty Fund Subgroup, which is considering revisions to SSAP 35. Emerging Accounting Issues Working Group The working group took the following actions with respect to its tentative positions: INT 07-02, EITF 06-1: Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider - The working group reached a final consensus to reject this EITF as not applicable to statutory accounting INT 07-03, EITF 06-3: How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation) The working group adopted a tentative consensus as final, which adopts the EITF with certain modifications. For example, for charges which are the ultimate responsibility of the policyholder, SSAP 35, par. 10 will apply. The working group then addressed new and outstanding issues. Tentative consensuses exposed have a comment deadline of November 9. EITF 06-4: Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements - The working group reached a tentative consensus to adopt the EITF with modifications to the transition guidance so that it is consistent with SSAP 3, Accounting Changes. EITF 06-5: Accounting for Purchases of Life Insurance Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin The working group referred this issue to the SAP Working Group for its consideration of whether an interpretation is sufficient or whether additional detail would be helpful in SSAP 21, Other Admitted Assets, with respect to the amount that can be admitted as the purchaser of a life insurance contract. EITF 06-10: Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements - The working group reached a tentative consensus to adopt the EITF with modifications to the transition guidance to be consistent with SSAP 3, Accounting Changes. FSP EITF : Application of EITF Issue No When Cash for the Right to Future Distribution Fees for Shares Previously Sold is Received from Third Parties - The working group reached a tentative consensus to reject the FSP EITF as not applicable to statutory accounting. Goodwill of a Merged Subsidiary - The working group briefly discussed a Form B prepared by Wisconsin and presented at the Summer National Meeting which proposes clarification on the accounting for goodwill in three hypothetical situations. NAIC Staff noted that similar issues were discussed in 1994 prior to the adoption of Issue Paper 68 on business combinations. The working group voted to refer the issue to the SAP Working Group for further clarification. The chair suggested that SSAP 68 be amended to clarify that the parent insurer should write off goodwill to surplus when downstream entities are merged, i.e. even when the insurer is not one of the merged entities. International Solvency and Accounting Working Group The working group continues to work with the International Association of Insurance Supervisors on a comment letter to the IASB on its Accounting for Insurance Contracts by Insurers and Insurance Industry NAIC Meeting Notes Fall 2007

10 Policyholders exposure draft. Since the Summer National Meeting the working group met via conference call in July and met in Kansas City for a day and half meeting August At that meeting the working group heard presentations from GNAIE (Group of North American Insurance Enterprises) and the American Academy of Actuaries on their respective views of the IASB's discussion paper. The remaining of the meeting was spent revising the comment letter from the working group to the IAIS, which will be used by the IAIS in drafting its comment letter to the IASB. The letter with the initial comments addressing twenty issues from Insurance Contracts paper was submitted to the IAIS August 23 (and is posted to the ISAWG's webpage on the NAIC's website). examination report have been accounted for in a subsequent reporting period and whether all recommendations included within the latest examination report have been complied with. These new interrogatories are effective for the first quarter of The working group agreed to remove the "Public Utilities" and "Banks, Trusts and Insurance Companies" categories contained in Schedule D and other related schedules and approved definitions for the remaining investment categories to be added to the Investment Schedules General Instructions. These changes are effective for the first quarter of At its meeting in Washington DC, the working group summarized the IAIS Insurance Contracts Subcommittee meetings in London, Basel and Sydney. The chair noted that there are three primary issues that the IAIS Subcommittee continues to work on with respect to the IASB's Insurance Contracts paper: recognition of bound but not incepted insurance contracts, policyholder behavior, and service margins. The working group will continue to work with the IAIS on its comment letter, which is due to the IASB November 16. If the working group determines IAIS's response to the IASB does not adequately represent U.S. interests, the working group will submit a letter to the IASB directly. That letter would likely support the IAIS document and offer any differing opinions or additional issues for the IASB to consider. At the meeting of the working group's parent Financial Condition Committee, the chair noted that a full-time NAIC employee is being placed on sabbatical to the IAIS in Basel, Switzerland, "in order to provide support and enhance IAIS internal administration and transparency related to the NAIC." Blanks Working Group The working group adopted eleven blanks proposals as final, including those discussed below which are effective for the 2008 annual statement unless otherwise stated. The working group approved new interrogatories to the quarterly and annual statements which will require preparers to disclose whether financial statement adjustments identified in the latest financial The Investment Schedules General Instructions were modified to add a new code for columns that disclose information regarding investments that are not under the exclusive control of the insurer. The new code, "M," indicates that there are multiple reasons that the referenced security is not under the exclusive control of the insurer. Instructions to Schedule D, Part 1A, Sections 1 and 2 were revised to clarify that SEC Rule 144 and 144A securities, private placement securities, should be excluded from column 10 and included in column 11. The quarterly and annual statement instructions were revised to clarify that nonadmitted negative IMR should be reported as detailed write-in on line 23 of the Assets. This change is effective for the first quarter of The Notes to Financial Statements were modified to conform to the new disclosure requirements under SSAP No. 10, Income Taxes, regarding protective tax deposits which are described in INT The working group also exposed twelve new proposals for comment. The comment period ends November 5, Some of the more significant exposed proposals would: Provide detailed quarterly and annual statement instruction for the allocation of premiums by state for Schedule T and Schedule T, Part 2 applicable to insurers that file on the Life and Accident & Health, Property & Casualty or Fraternal blanks. (Agenda items BWG & BWG). The portion of the proposal that would have applied to Insurance Industry NAIC Meeting Notes Fall 2007

11 insurers that file on the Health blank was referred back to the Schedule T Subgroup pending the results of the recently approved Health Industry Survey. Add a code to Schedule D instructions for TBA (To Be Announced) securities. ( BWG) Add language to the instructions of the Supplemental Investment Risk Interrogatories regarding the use of CUSIP numbers for determining the single 10 largest exposures to a single issuer/borrower/investment. ( BWG) Add instructions to report income received columns net of foreign withholding tax for Schedules D and E. ( BWG) Modify the Statement of Actuarial Opinion and Actuarial Opinion Summary instructions regarding Intercompany pools. ( BWG) Modify instructions to the Summary Investment Schedule to include Class One bond mutual funds and exchange traded funds in line 2 and to include mutual funds reported on Schedule D, Part 2, Section 2 in line 3.1 ( BWG) All Blanks proposals, including those adopted and exposed for comment, can be viewed at the NAIC s webpage for the Blanks Working Group. Report from the Schedule T Subgroup The subgroup's objective is to standardize the allocation method of premiums by state which are reported on Schedule T. The results are intended to produce consistent and more accurate state premium tax assessments for reporting by all types of insurers. At the Summer National Meeting, the subgroup presented a proposal for the Life and Health blank ( BWG) that contained a provision which would have exempted allocation of premiums from group policies with less than 200, referred to as the "rule of 200." The working group referred the proposal back to the subgroup for further consideration as it was believed that common practice within the industry was to apply a rule of thumb of 500 rather than the proposed rule of 200 and some interested parties had stated that the change would be costly. The subgroup held conference calls in June, August and September, where it was noted that at least 3 states (Maryland, Nebraska, and North Carolina) have codified the rule of 500 in their statutes and California has the rule of 500 included in the statement filing instructions. After discussion, members of the subgroup agreed that it was appropriate to change the rule of 200 in the proposal to a rule of 500. This rule of 500 will also be included in the P/C blank proposal, but will apply only to group health business. Members of the subgroup noted that the rule of 500 is meant to establish a threshold as to when allocation is required; it is still acceptable for companies to apply a lower threshold (e.g. 300 members). Interested parties from two health insurance company associations requested that a cost/benefit study be performed before the subgroup commits to any mandatory threshold for group policies. In September the subgroup reported that a survey has been submitted by the two associations that will ask whether the company is a single state writer and if they currently apply the rule of 500. The survey will also ask about the percentage of the company's group insurance contracts that have more than 500 covered members and whether changes to the company's current allocation method would result in a significant cost impact to the company. Because the survey is being conducted by the associations, it did not require formally approval by vote of the subgroup. The survey is expected to be issued in October with a 60-day response period; association representatives will then need approximately 30 days to compile the results and report back to the subgroup sometime after the Winter National Meeting. NAIC/AICPA Working Group MAR Discussion Items The working group updated its ongoing survey of the progress of adopting the revised Model Audit Rule (MAR); six states are planning to have the revised MAR introduced or adopted by the end of Another 19 states plan on presenting amendments to their legislatures or revising their regulations in For the six states that have begun the process, none have noted any significant problems with adoption. The effective date of the revisions is January 1, Update from the AICPA The working group heard an update on AICPA projects that may affect insurance accounting and auditing. The AICPA's representative noted that the Auditing Standards Board will be revising AU Section 325, Communicating Internal Control Related Matters Identified in an Audit (SAS 112), as well as AT Section 501, Reporting on an Entity s Internal Control Over Financial Reporting in response to the issuance of AS 5 (discussed Insurance Industry NAIC Meeting Notes Fall 2007

12 below) and international auditing standards on the same topic. It was noted that because auditors have just begun to implement SAS 112, the ASB believes that asking auditors to adopt changes to the terms and definitions related to control deficiencies, and the factors the auditor considers in evaluating control deficiencies so soon after SAS 112 was issued would be unduly burdensome to auditors. As a result, the ASB will defer revising the guidance until Note that the AICPA updated in January 2007 its guidance A Statutory Framework for Reporting Significant Deficiencies and Material Weaknesses in Internal Control to Insurance Regulators because of the issuance of SAS 112. The AICPA representative also briefly discussed the issuance of SOP 07-2, Attestation Engagements That Address Specified Compliance Control Objectives and Related Controls at Entities That Provide Services to Investment Companies, Investment Advisers, or Other Service Providers, which provides guidance to CPAs on examining an assertion by management of a service provider about its controls over compliance that affect user organizations. The SOP will be available from the AICPA later in October. Presentation on PCAOB Auditing Standard No. 5 At the request of the working group, an AICPA representative gave a presentation on AS 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements, which supersedes AS 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements. The new standard was approved by the SEC in July and is designed to be a principles-based standard that directs the auditor to conduct a top-down, risk-based integrated audit. During the discussion, it was again noted that AS 5 and AU 325/SAS 112 have different definitions and criteria for significant deficiencies and material weaknesses, which will affect 2007 audits. Insurance entities which are subject to the PCAOB and AS 2 will be required to follow the new definitions for reporting to the SEC and will also be required to follow the SAS 112 definitions when reporting to insurance regulators. The working group asked that the AICPA keep them informed of the status of the project to revise SAS 112, which the NAIC will then consider for statutory reporting as part of the Model Audit Rule. Valuation of Securities Task Force Report from the Invested Asset Working Group The task force heard a report from the working group. On a conference call held on August 29, the working group began discussions on its expanded charge to (1) consider whether improvements can be made in the way that potential risks in securities or financial products are evaluated and monitored, (2) evaluate the manner in which decisions about how new products fit into the regulatory framework are communicated to the marketplace, and (3) investigate whether the annual statement schedules can be made more transparent to better reflect non-credit risk in new securities. No decisions were reached. Report from the Derivatives Market Study Working Group The task force heard a report from the working group, which held an interim meeting on September 5. The working group agreed that the Derivative Instruments Model Regulation should be retained and amended to add a limit on counterparty exposure and credit quality, a requirement for a written derivatives use plan, a requirement for management oversight to determine whether derivative transactions are occurring within the approved guidelines, and a requirement for commissioner approval of the derivatives use plan. The amendments will be drafted and distributed to the working group in order for the working group to vote on the changes on its next conference call. Additionally, the working group agreed to send a recommendation to the Valuation of Securities Task Force that would allow a RBC credit for hedging activities using derivatives. The working group will also recommend that the Financial Examiners Handbook Technical Group add language to the interrogatories to permit examiners to identify derivative risks assumed by insurance companies outside of those identified in Schedule DB. Report of the Filing Procedures Working Group At the Summer National Meeting, the task force agreed to expose for 30 days a recommendation that (1) the NAIC form a subgroup to conduct a review of the regulatory needs under the riskbased regulatory model and the most efficient way to meet those needs, (2) the task force establish another working group to assist the NAIC subgroup in analyzing the SVO process, and (3) the task force disband the Filing Procedures Working Group. On a conference call on July 18, the task Insurance Industry NAIC Meeting Notes Fall 2007

13 force discussed the comments received on the recommendations, including discussion of a report performed by a consultant over 10 years ago on this topic. The task force agreed to refer the report and recommendations in the report to the Internal Administration Subcommittee. Statement of Securities under Regulatory Review The task force discussed a referral from the Securities Valuation Office on the use of the administrative symbols NR* and Z*. Specifically, the SVO recommended that the task force (1) clarify that hybrid securities should follow the reporting guidance in the "short-term solution" and should not be given the symbol NR* or Z,* (2) confirm that there are no classes of securities under regulatory review and that no insurance company should be using the administrative securities NR* or Z*, and (3) clarify that the SVO was instructed to assign the administrative symbol NR* to some hybrids temporarily. Proposed Revision to SVO Valuation Methodology The task force continued its discussion of a proposal that would permit insurance companies to "self-determine" the fair value of certain securities. Under the proposal, the insurance company would be permitted to use sources for fair value other than the SVO but would be required to disclose the approach it used (broker-quote, matrix pricing, etc.) in Schedule D. At the Spring National Meeting, the task force agreed to work with the NAIC staff to create a survey for the chief examiners to determine the current needs of the regulators on valuation of securities. At the Summer National Meeting, the NAIC staff discussed that the survey of chief examiners and financial analysts was completed. On a conference call in July, the NAIC staff discussed that a majority of those chief examiners who responded to the survey were in favor of the proposal. At the Fall National Meeting, the task force adopted the proposal and will refer the proposed changes to Schedule D and the instructions to the Blanks Working Group. The task force noted that the SVO will continue to provide valuations to serve as benchmarks of reported values. NAIC staff will work to develop systems to identify when insurers report different values for the same security. Amendments to SVO Purposes and Procedures Manual The task force discussed comments received on its proposal that would permit broker-dealers to seek the probable regulatory treatment of new securities from the SVO without being sponsored by an insurance company. The proposal would not allow a broker-dealer to provide the "probably regulatory treatment" to non-insurers, i.e. communications with the SVO would be confidential. Several interested parties expressed that such an approach may actually limit transparency. After significant discussion, the task force adopted the proposed amendments to the P&P Manual. The issue again arose at the Financial Condition Committee meeting and the committee did not reverse the task force's decision. The task force also adopted amendments to the Purposes and Procedures Manual related to the following: clarified instructions and expectations pertaining to SVO responsibility for classifying securities, specified that making classification decisions is an activity of the SVO, and clarified the role of the SVO in assisting the NAIC in investigating investment risks in new securities and financial products; clarified that the SVO can direct an insurance company to the appropriate schedule for reporting a security that it has submitted for analysis if that security does not specifically qualify under the applicable rules for that schedule. Referrals from the SAP Working Group The task force received a referral from the Statutory Accounting Principles Working Group on whether to allow market prices from certain foreign exchanges using the market valuation method under SSAP 97. Currently only SCAs that are traded on the NYSE, NASDAQ and the American Stock Exchange can use the market valuation method. The task force concluded that it would make no recommendation in response to a referral from the Statutory Accounting Principles Working Group on FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, because most insurers do not issue such instruments. Other Items The task force agreed to ask the SVO and NAIC staff to develop a comprehensive proposal for a reporting mechanism for securities and financial products under regulatory review. Insurance Industry NAIC Meeting Notes Fall 2007

14 Capital Adequacy Task Force The task force met via conference call four times since the Summer National Meeting and discussed the following items. Medicare Part D Instructions The task force voted on proposed changes from the American Academy of Actuaries to the instructions and formula for the Medicare Part D premium stabilization RBC calculation which had been exposed at the Summer National Meeting. Without the change, the RBC charge would be understated for stand-alone Medicare Part D carriers. The task force noted that no comment letters had been received on the proposed changes. New York Dividend Adjustments to Total Adjusted Capital Proposal The working group adopted revisions to the 2007 Life RBC instructions for dividend adjustments to total adjusted capital. For 2006 actuarial judgment was permitted to take partial dividend liability credit for such reinsurance; for 2007 this partial credit was eliminated. The Life RBC Working Group will study whether this guidance should apply to reinsurance of a closed block. Response to the Principles-Based Working Group The task force discussed extensively on two interim conference calls its response to the PBR Working Group's paper Life and Health Principles and Related Principles-Based Initiative Activities. The task force submitted detailed comments to the working group but overall believes that the "principles were complete and appropriate." All of the comment letters submitted by the various NAIC task forces and working group to the PBR Working Group were discussed in detail at its meeting in Washington DC. Corporate Governance for Risk Management Act As part of its response to the PBR Working Group, the task force state it would consider its work started last year on a corporate governance standard. During its September 10 conference call, the task force reviewed and discussed a draft Corporate Governance for Risk Management Act, prepared by New York. The draft focuses on board of director responsibilities and enforcement; it requires the board to approve "a risk management system with risk management system controls that includes risk management policies so that all material risks are identified, assessed, monitored, reported, controlled and financed on an on-going basis." The task force voted to expose the draft for comments until October 29. C-3 Phase II Results This subgroup of the task force is continuing to analyze the results of C-3 Phase II reporting. The subgroup has not met for three months. The chair noted that although other issues had become priorities, the work of the subgroup is critical to developing further refinements to C-3 Phase II. Collateral Held for Authorized Reinsurance The task force discussed a new issue brought by the Virginia Department of Insurance related to the Life RBC treatment of collateral held by an authorized reinsurer. The key issue is that the Life RBC calculation does not contemplate that a reinsurance transaction between an authorized reinsurer and a non-affiliate will have secured collateral. As a result, the calculation does not provide for any RBC reinsurance credit and the ceding company is charged counterparty risk. The proposal from the Virginia DOI suggests a technical amendment to the RBC instructions to reduce the net statement value upon which RBC is calculated by the amount of collateral held. After significant discussion among the regulators, the task force decided they want to study the issue further before deciding how to address the issue. Securities Lending Subgroup The subgroup held three interim conference calls since the Summer National Meeting to gain a better understanding of types and related risks of securities lending programs. As a result of meetings, the subgroup submitted to the Capital Adequacy Task Force a proposal for a reduced RBC charge for securities lending programs that conform to specific requirements. Those "operating criteria and safeguards" are as follows: - Board of director oversight of securities lending programs through a written plan - Written operational procedures to monitor and control risks - A binding securities lending agreement - Acceptable collateral can include only cash, cash equivalents, full faith and credit US securities and NAIC 1 securities. Insurance Industry NAIC Meeting Notes Fall 2007

15 A company meeting the requirements would qualify for a reduced RBC charge of.2% of "noncontrolled assets." The current charge is 1.3% for life companies and 1% for P/C companies. After some discussion, the task force voted to expose the subgroup's recommendation, which includes revisions to RBC instructions, formula pages and annual statement instructions, for a 45 day comment period. Another issue addressed by the subgroup has been the definition of restricted versus unrestricted collateral as currently prescribed by SSAP 91, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The chair of the subgroup observed during the interim conference calls that there is significant diversity in practice as to whether the balance sheet is shown gross or net of the securities lending transactions and that the definition of restricted and unrestricted collateral need to be refined. Interested parties have developed a revised definition that focuses on whether the collateral is segregated and/or can be used to pay policyholder dividends. Hybrid Risk-Based Capital Working Group The working group held three conference calls following the Summer National Meeting in San Francisco, but did not meet in Washington, DC. During these conference calls the working group considered accounting and reporting options related to hybrid securities. The working group discussed three possible approaches for reporting of hybrid securities for year-end 2008: Option 1, account and report for hybrid securities as bonds Option 2, account and report as Schedule BA assets Option 3, account and report as preferred stock (consistent with short-term solution) The working group and interested parties discussed the advantages and disadvantages of each approach, but determined that it was premature to conclude on any approach until it received the final written report from the American Academy of Actuaries Invested Asset Work Group on its consideration of the risks associated with hybrid securities. The Academy presented its written report on the working group's September 20 conference call entitled "Report on Capital Requirements for Hybrids from the American Academy of Actuaries' Invested Asset Work Group." The report reiterated the "preliminary conclusions," which have previously been communicated by the Academy on several occasions, that: Most hybrids are rated by Nationally Recognized Statistical Rating Organizations (NRSRO), and that these ratings reflect varying levels of debt-like risks and equitylike risks. NRSRO ratings capture the credit risk or risk of default; but do not capture other investment risks, such as extension, market, or event risk. However, the most significant investment risks are captured in the current formula. Hybrids more closely resemble preferred equity, versus debt or common equity. The primary distinction being that debt and preferred equity contain a maturity schedule, while common equity does not. Based on these conclusions the Academy recommended that the RBC for hybrids should be based upon the factors for preferred stock and that the short-term solution for notching be reversed "since illogical results can be produced (e.g. hybrids that are higher in the capital structure can carry a higher RBC charge than those with lower ratings due to the effect of notching on the NAIC rating basis.)" The recommendation is based in part on a comparative analysis of hybrid risks versus other types of securities and how investment risks are captured in the NAIC RBC formulas. The Academy also recommended further study be conducted with regard to the loss experience for hybrid securities and commented on the importance of accurately capturing hybrid risks and features in cash flow projections and provided initial guidance on considerations for modeling hybrids. The working group voted to expose the AAA report for a 30-day exposure period ending October 22. The report has been posted to the Hybrid RBC Working Group's webpage on the NAIC's website. The Hybrid RBC Working Group expects to hold interim conference calls throughout the fourth quarter to review comments received on the AAA report and to continue its discussion of a potential accounting and reporting solution for hybrid securities. However, "the short-term solution" will be in effect for 2007 since the working group has not reached a final decision and the 2007 Annual Statement and RBC formula have been finalized for Insurance Industry NAIC Meeting Notes Fall 2007

16 Life Risk-Based Capital Working Group The working group did not meet at the Fall National Meeting, but held three interim conference calls prior to the meeting LRBC Formula and Instructions The working group adopted the 2007 Life riskbased capital formula and instructions. The changes from the 2006 formula and instructions were relatively minor. C-3 Phase 2 The working group continued to discuss a memo from the NYID listing about a dozen recommended changes to C-3 Phase 2. These changes involve various items including assumptions for policyholder behavior, CTE level, assumption margins, revenue sharing, aggregation and reinsurance. At this point, changes that result from the NYID's suggestions will not be effective for 2007 so the working group has until June of 2008 to work on this. Some suggested that it would be helpful to coordinate changes to C-3 Phase 2 with the anticipated changes to AG VACARVM on the reserve side. The reserve changes are awaiting the results of a survey that LHATF made of 26 companies. Those results are not expected until December of this year. Regulators agreed that waiting a little longer would not jeopardize their ability to address NYID's suggestions in time to adopt any changes by June C-3 Phase 3 The Academy discussed their latest C-3 Phase 3 report. A number of changes had been made that mostly parallel the changes made on the reserve side by the Academy's Life Reserves Work Group. After a detailed discussion of these changes, the Academy presented their list of open issues. This list included whether RBC should use CTE 65 as a proxy for the reserve or use actual reserves, safe harbors to allow for a simplified approach, and prescribed spread to treasuries. In addition, there is an outstanding issue regarding using prior period data to complete the RBC work in time to file the annual statement blank and then re-computing RBC by June 15th of the following year using actual year end data. There was a discussion that this was a significant amount of work yielding little benefit and essentially was contrary to the current PBR drafts for life insurance reserves. No conclusions were reached. The working group voted to expose the Academy's report for comment, noting that this is an interim report and it is not intended to be a final exposure. P/C Risk-Based Capital Working Group The Catastrophe Risk Subgroup of the working group held a conference call August 14. The subgroup, comprised of regulators from Alabama, California, Connecticut, New Jersey, New York and Texas discussed the following issues: Are catastrophe models accurate enough to use? Which models should be used and how should such models be validated for use? What assumptions should be required in the models? How should the data input into the model be validated? Which companies should exempted from the model-based catastrophe risk charge What should the RBC charge be? Tentative conclusions reached on these complex issues include the following. The subgroup concluded it should continue to pursue the use of modeling because the current RBC formula is insufficient in measuring catastrophe risk and there are no better alternatives. The chair noted that averaging several model results would be more accurate, but it would also be costly. Models could be validated annually via a brief annual review. It should be the companies' responsibility to validate the data. Companies with immaterial cat exposures should be exempted from the catastrophe risk charge requirement. Finally, the chair stated that based on previous conference calls, the RBC charge should be the expected annual loss at the 1 in 250 year event consistent with what rating agencies use. Additional conferences calls will be scheduled to continue discussion of these issues. The working group will hold a conference call on October 9 to discuss the American Academy of Actuaries report on its update of the P/C RBC underwriting factors. The comprehensive report was distributed at the Fall National Meeting and it proposes adoption of revised underwriting factors resulting from the Academy's revised methodology. Health Risk-Based Capital Working Group The working group met via conference June 26 and discussed the following issues Health RBC Report and Instructions The working group approved the Report and Instructions which include eleven changes from the Insurance Industry NAIC Meeting Notes Fall 2007

17 prior year including revisions related to hybrid securities and clarification of the treatment of Medicare D premium stabilization reserves discussed at the Summer National Meeting. Treatment of Vision Business The working group discussed a request from industry to move stand alone vision coverage from the "other health" category to combine it with dental coverage. The other health coverage has a flat 13 charge while dental coverage of 12% factor that grades down to 7.6%. There were no objections to the proposal and it was exposed for comment for 30 days. At its next meeting scheduled for October 11, the working group will consider adoption of this proposal, which would be effective for Health RBC Trend Test There was no discussion of a potential Health Trend Test during the June conference call and the issue is not on the agenda of the October 11 call. Reinsurance Task Force In November 2006, the Reinsurance Task Force introduced the concept of the Reinsurance Evaluation Office as the primary initiative in its reinsurance regulatory modernization proposal. The REO proposal was discussed at length at the 2006 Winter National Meeting and the 2007 Spring and Summer National Meetings. Since the exposure of the REO proposal, the task force has received comments that the REO charge "focuses simply and in a limited manner on the refinement of a commercially feasible design and calibration of the REO concept" and that collateral is only part of the U.S. regulatory regime for reinsurance. In addition, per a presentation from the task force staff, the previous proposal was "biased against the U.S. own regulatory system and would have provided little reason for U.S. reinsurers to remain domiciled in this country." As a result, the study group of the task force worked this summer in closed meetings to revise the modernization proposal, which was exposed for comment on September 7, and which was discussed in detail at the Fall National Meeting. The revised proposal is classified into three components: 1) regulatory equivalence and mutual recognition, 2) a single state U.S. regulator for U.S. reinsurers and 3) a single jurisdiction port of entry for non-u.s. reinsurers. Mutual recognition would be determined by a tobe-formed NAIC group, the Reinsurance Supervision Review Department, which would evaluate which jurisdictions are equivalent to U.S. insurance regulation. The RSRD would make a recommendation to be voted on by U.S. regulators. Once a foreign jurisdiction is designated as functionally equivalent, insurance companies from that jurisdiction can apply to be certified to access the U.S. market through the single state port of entry. Certified non-u.s. reinsurers will still be required to post collateral, but at reduced requirements, as discussed below. U.S. reinsurers would also apply to one jurisdiction to reinsure U.S. ceding companies. Minimum standards are being developed that U.S. companies would be required to meet. The proposed collateral requirements are as follows: Class 1 companies (rated A++ by Best and AAA or AA+ by S&P and Fitch, and Aaa by Moody's) would be required to post collateral at 60% of gross liabilities. The remaining classes are as follows: Class 2-70% collateral Class 3-80% collateral Class 4-100% or a higher amount if the Port of Entry state requires it Class 5, 100% for U.S. domestic reinsurers. No collateral will be required for any affiliated reinsurance assumptions by U.S. reinsurers including intercompany pools unless the reinsurer is rated Class 5. Based on comments received on the September 7 draft, the task force agreed to revise the requirement to require collateral for affiliated reinsurance transactions from a U.S. licensed insurer to its non-u.s. parent corporation. The revised requirement would not require collateral for other than for Class 4 and Class 5 reinsurers or groups provided that the U.S. ceding company complies with the notice and/or prior approval requirements of holding company law of the ceding company's state of domicile. Per the NAIC staff presentation, the effect of the change in collateral requirements would reduce collateral posted by non-u.s Class 1-4 reinsurers by $22.7 billion and increase collateral requirements for Class 5 U.S. reinsurers by $67.3 billion. The staff noted that this increase would be reduced to $14.2 billion if the proposal included only unaffiliated reinsurance assumptions. (The presentation has been posted to the Reinsurance Task Force's webpage on the NAIC's website.) Insurance Industry NAIC Meeting Notes Fall 2007

18 At its meeting in Washington DC, in addition to reviewing the major components of the new proposal, the task force heard comments from U.S. and foreign reinsurers and ceding companies, trade association representatives and insurance departments; fifteen entities submitted comment letters within the two week comment period. Many commented that the new modernization proposal is an improvement to the REO proposal but that it needs additional work. One comment made by several regulators and interested parties was specific guidelines should be developed for port of entry states to follow so that there is not a "race to the bottom" as various states compete to attract non-u.s. reinsurers as their port of entry. The chair of the task force noted that they are considering minimum standards for states to be an approved port of entry state. Given the short comment period and significance of changes to the last proposal, the comment period was extended to October 19. The task force will hold an interim meeting November 7-8 in conjunction with the NAIC's Financial Summit to hear additional comments on the revised modernization proposal. Conference calls are anticipated before and after the interim meeting. Life Insurance and Annuities (A) Committee Unfair Trade Practices Act The committee discussed comments received on the current draft dated June 21 of proposed revisions to the Unfair Trade Practices Act related to travel underwriting in life insurance. The committee anticipates distributing a new draft shortly after the Fall National Meeting. The task force expects that the new draft will have two options: one will reflect comments from the Alabama Insurance Department, which believes the current model adequately addresses the issue of unfair discrimination. The other option will reflect comments from Florida, which proposes significant additional guidance as to what constitutes "unfair discrimination." The committee believes that some optionality in the model act is preferable to having each state develop a unique statute. The committee will hold a conference call prior to the Winter National Meeting to discuss the comments received on the revised draft and may vote to adopt the draft at that time. Suitability in Annuity Transactions The committee discussed the ACLI Suitability Certification Template proposal related to the NAIC Suitability in Annuity Transactions Model Regulation and heard comments from interested parties and consumer representatives. The proposal is to include the template in the Market Regulation Handbook; it would be used by third parties, such as broker-dealers, to certify to insurers with whom they have contracts that they comply with the supervisory responsibilities for recommendations of annuity transactions required by the Suitability model. The committee wants more time to review the proposal and will hold a conference call prior to the Winter National Meeting to discuss it further. Life and Health Actuarial Task Force (LHATF) A significant portion of the two day LHATF meeting was spent on principles-based reserves now referred to as PBR by the American Academy of Actuaries (Academy). For much of the meeting, the Academy made presentations on the status of its work through numerous work groups. Academy's Overview Report on PBR and Standard Valuation Law Work Groups The Academy reported that most of technical work is completed and that the conceptual framework is now final. The Academy suggested a "best scenario" timeline that showed completing the changes to the Standard Valuation Law (SVL) by 2008 so states can adopted the new law in 2009 with an effective date of January 1, Life Risk- Based Capital, although related to but not part of LHATF's responsibilities, is expected to be completed for a year-end 2008 or 2009 effective date. Regulators believe that they will need to have a completed revised SVL and a substantially completed valuation manual before state regulators would consider discussing legislation needed to support PBR. If the valuation manual needs to be 100% complete before going to state legislatures, that could delay PBR, as it is estimated that it may take another two years to fully complete the valuation manual. Timing is also important as it was noted that many legislatures set their legislative agenda in August for the following year. All of this implies that the NAIC needs to complete the majority of their work by the summer of 2008 if PBR will be effective in Report of the Academy's Life Reserves Work Group The work group gave an update on its progress. With the valuation manual now taking shape as discussed below, the Academy is now referring to Insurance Industry NAIC Meeting Notes Fall 2007

19 different sections of the valuation manual when discussing various PBR concepts. The work group reviewed changes to section VM-20, the section of the valuation manual that contains the PBR requirements for life insurance. The work group is now recommending using CTE 65 for life insurance reserves under PBR. Previously, the CTE level was not defined for life insurance. This recommendation is different than the CTE 70 level that is currently in the draft Actuarial Guideline VACARVM for variable annuities with guaranteed benefits. The Academy did not explain its rationale for the recommendation or why the CTE levels would be different. The LRWG continues to work on developing simplified approaches for blocks of business that demonstrate little or no material tail risk. In addition, the work group is following the discussions between the ACLI and the U.S. Department of Treasury regarding the effects of PBR on tax reserves. The work group met with actuaries from the New York Insurance Department to discuss differences between the LRWG's proposal and NYID's views. There are several significant unresolved issues at this time. Brief discussions of the more significant differences are as follows. With regard to aggregation, NYID believes that policies with nonhomogeneous risks should be modeled separately and not allow risk offsets with other blocks of business. Their concern is that the company could sell off one block of business resulting in an increase in reserves for the remaining businesses. The LRWG favors full aggregation. With regard to the discount rate, NYID supports the use of a prescribed spread over risk-free rates while the work group supports the use of a projected asset earnings rate as the discount rate. With regard to the choice of economic scenarios, NYID wants all companies to run scenarios under a prescribed set of economic scenarios. This will allow regulators to more easily audit and compare results. The NYID does not believe that the calibration criteria will be rigorous enough to prevent companies from choosing scenarios that minimize reserves. The LRWG opposes this view. In a non-binding straw poll of LHATF members, no regulator voted that he is ready to adopt PBR for life insurance. The main reason given included the issues unresolved with NYID, more guidance needed with respect to assumptions, concerns surrounding the ability to audit and reinsurance. Report of the Academy's Annuity Reserves Work Group The ARWG gave a brief update of their progress on PBR requirements for annuities (other than variable annuities with guaranteed benefits), which is contained in section VM-22 of the valuation manual. This work is not as far along as the LRWG's work but is following a similar path with similar requirements. The ARWG studied the variances in reserves that result from using different projection systems. There was a concern among regulators that different projection systems would have significantly different reserves under PBR. The ARWG concluded that although there are noted differences in single scenarios that could be a concern, calculations using CTE 70 showed only marginally different reserves from using different projection software. Report of the Academy's Valuation Manual Work Group The Academy made a presentation on its progress to develop a valuation manual as one of the components of PBR. The manual is intended to contain detailed reserve instructions for calculating PBR. The Academy provided LHATF with an overview of the various sections of the valuation manual. Many of the sections to be included in the valuation manual were discussed by other Academy work groups during their presentations. The Academy also reported on two surveys that were conducted with regard to the valuation manual. The first survey, focusing on the experience reporting portions of the valuation manual, had 8 responses from the 19 states represented on LHATF. The majority of LHATF members responding were in favor of receiving experience information for all policies, not just new issues, excluding only those products excluded from PBR. Most also favored some reduced reporting requirements for smaller companies. The purpose of the second survey was to get LHATF's opinion as to what products should be subject to PBR on the operative date of the valuation manual. Of the 7 responses, most favored some exemption of certain A&H products, credit life and disability, and group term life insurance. It was during this discussion that representatives of the NYID stated their opinion that they preferred a dual valuation requirement during the early years of PBR implementation, with the requirement that Insurance Industry NAIC Meeting Notes Fall 2007

20 companies hold the greater of the current valuation requirements and PBR. Academy Report on PBR Reporting and Independent Review The Academy made a presentation regarding PBR reporting and independent review. These requirements are contained in the draft valuation manual. With regard to PBR reporting, the Academy is recommending dropping the PBR Valuation Actuary designation as it believes that the definition of Valuation Actuary will encompass these responsibilities. In addition, the Academy is no longer recommending a separate PBA certification. The Academy is also looking to develop a common report template that all companies will follow to help regulators review PBR reports from various companies. There were some minor revision to the suggested requirements of the PBR review opinion, mostly dealing with required notification to the domiciliary commission when disagreements occur between the company and the PBR Review Actuary. During the discussions on these issues, regulators appeared to be concerned with allowing the Appointed Actuary to rely on the opinion of others related to compliance with PBR requirements. Academy Report on PBR Reinsurance The Academy's group working on the reinsurance aspects of PBR presented their preliminary conclusions on adjusting PBR requirements for reinsurance. The Academy's reinsurance working group, which is led by a regulator from California, recommended eliminating many of the risk transfer reserve credit rules found in Appendix A-791 of the Accounting Practices and Procedures Manual. Under current reserve requirements, if all of the current rules are satisfied, then full reserve credit may be determined. If not, no reserve credit is generally considered applicable under today's rules. The Academy's proposal to eliminate many of these requirements stems from its belief that PBR will be able to accurately handle situations where a company does not cede all of the risks in the contracts. It is expected that regulators will take a close look at this proposal and will provide comments in time to discuss at the Winter National Meeting. Two issues that arose during these discussions were how to treat a block of ceded business where some policies are covered under PBR but others are not, and how will a company be able to calculate easily its direct and ceded reserve amounts. Revisions to SVL for PBR LHATF voted to expose for comment revisions to the SVL to support PBR. A LHATF subgroup had been working on these revisions. Given the time line discussed earlier, LHATF thought it was prudent to get the current version exposed now while it continues to work on PBR changes. NYID was the only LHATF member to vote no on exposing the SVL revisions. They again stated that they favored keeping the old reserve requirements in place during the first years of PBR. They also want a provision to allow regulators to assess penalty reserves when companies are found to have violated PBR. In addition, they are not in favor of using a projected portfolio earnings rate as a discount rate for PBR calculations. Reserves for Variable Annuities (Actuarial Guideline VACARVM) For the last six months, LHATF had deferred exposing any revisions to AG VACARVM because they did not want those changes to confuse the companies that were responding to their survey whose purpose is to estimate the effects of AG VACARVM on reserves. Now that the surveys have been submitted, LHATF voted to expose a revised version of AG VACARVM. None of the changes were significant. LHATF is still analyzing the survey submissions. They received responses from 14 companies of the 26 companies that were requested to participate. LHATF hopes to have results available in time to discuss at the Winter National Meeting. A suggestion was made to include AG VACARVM into the valuation manual, partly to give the manual at least one product section that is essentially completed. Many regulators and industry representatives wanted the AG to be adopted first so that it will be applicable as soon as it is adopted and not wait until the SVL and valuation manual have been approved by each state's legislature. In a related issue, LHATF voted to expose suggested revisions to AG 39, Reserves for Variable Annuities with Living Benefits. The revisions included the removal of the January 1, 2008 sunset date when the AG will no longer be applicable, and a provision to release 2.5% of the existing AG39 liability each quarter, starting in the first quarter of Insurance Industry NAIC Meeting Notes Fall 2007