Federal and International Initiatives Impacting Compliance

Transcription

1 Federal and International Initiatives Impacting Compliance AICP Mid-Atlantic E-Day Baltimore, MD June 3, 2013 Rich J. Fidei, Esq., Shareholder Colodny, Fass, Talenfeld, Karlinsky, Abate & Webb

2 DISCLAIMER The information in this presentation is intended to provide a general overview of the issues contained herein and is not intended, nor should it be construed, to provide specific legal or regulatory guidance or advice. If you have any questions or issues of a specific nature you should consult with appropriate legal or regulatory counsel to review the specific circumstances involved.

3 TALKING POINTS International Issues Solvency Risk Management Supervision National- State Confluence Pricing and Availability - Too Big for States Unique Products Consumer Protection

4 INTERNATIONAL ISSUES Early 2000 s, UK s Financial Services Authority developed a new solvency framework. Sufficient capital to cover potential risks. Create greater transparency in the arrangements for setting regulatory capital levels, while at the same time promoting a strong culture of risk management.

5 INTERNATIONAL ISSUES 2005 The FSA adopted the Individual Capital Adequacy Standards (ICAS) Further evaluation led to adaption of Solvency II

6 INTERNATIONAL ISSUES Solvency II Update o Planned implementation date: January 1, 2014 o More likely: January 1, 2016

7 HOW MUCH WILL THIS COST? Lloyd s has invested more than 300 million in its platform alone. UK Treasury estimates all insurers cost of compliance could be $300 million per year.

8 INTERNATIONAL ISSUES NAIC Solvency Modernization Initiative o Review international developments and consider needs for convergence o Review international accounting standards and potential use in U.S. o Group-wide supervision issues

9 INTERNATIONAL ISSUES NAIC Reinsurance Collateral revisions: A product of international pressure coupled with solvency protection. Revised NAIC models provide for state authority to authorize reduced collateral requirements for certain certified unauthorized reinsurers. Changes adopted in 10 states: FL; NY; NJ; IN; VA; CA; CT; LA; PA and DE. o FL and NY have certified reinsurers

10 INTERNATIONAL ISSUES IAIS o International Association of Insurance Supervisors o Based in Basel, Switzerland o Global version of the NAIC o Its recommendations will need to be adopted into law by member countries

11 INTERNATIONAL ISSUES IAIS - Enterprise Risk Management Insurance Core Principle 16 o Requires insurer to conduct an Own Risk and Solvency Assessment (ORSA) to regularly assess the adequacy of its risk management in supporting current and expected future solvency positions. o Applies to insurance legal entities and insurance groups with regard to the risks posed to them by noninsurance entities.

12 INTERNATIONAL ISSUES NAIC - Enhancing Windows and Walls NAIC changes holding company models to better access and collect information Group capital and solvency assessment More authority over affiliates and group financials More defined affiliate enforcement measures

13 INTERNATIONAL INFLUENCE ON STATES NAIC Enterprise Risk Form F Ultimate controlling parties will need to file a Form F enterprise risk disclosure. Enterprise risk is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole

14 INTERNATIONAL ISSUES NAIC RMORSA Model Law Risk Management and Own Risk and Solvency Assessment. Insurers required to: o Assess amount and quality of capital. o Make risk assessments and review risk management practices. o Determine sufficiency of group-wide capital resources o Develop Action Plans.

15 INTERNATIONAL ISSUES IAIS ComFrame Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). o Developing methods of operating group-wide supervision of IAIGs; o Establishing a comprehensive framework for supervisors to address group-wide activities and risks; and o Fostering global convergence and reduce complexity.

16 INTERNATIONAL ISSUES US-EU Joint Draft Report The Way Forward Project for greater collaboration o Professional Secrecy/Confidentiality o Group Supervision o Solvency & Capital Requirements o Reinsurance and Collateral Requirements o Supervisory Reporting & Data Analysis o Peer reviews o Independent Third Party Review

17 INTERNATIONAL ISSUES What s Next? G-SIIs Global Systemically Important Insurers Too Big to Fail Under purview of FSB and G20 Assessment Methodology Policy Measures

18 NATIONAL-STATE CONFLUENCE

19 NATIONAL STATE CONFLUENCE Federal Insurance Office (FIO) o Reports due from FIO per Dodd Frank and NFIP reenactment How to modernize and improve the system of insurance regulation in the U.S. Breadth and scope of global reinsurance market Catastrophe issues o FACI Report o NAIC collaboration nationally and internationally

20 NATIONAL STATE CONFLUENCE FIO s International Role o Represent the U.S. in the IAIS o Authority to recommend insurers to Financial Stability Oversight Council (FSOC) for designation as a SIFI o Member of the Steering Committee, U.S.-E.U. Insurance Dialogue Project

21 NATIONAL STATE CONFLUENCE Pricing and Availability National Flood Insurance Program o Needs to raise rates to reflect the true flood risk in order to make NFIP more financially stable. o Its biggest challenge: the grandfathering of preexisting homes and businesses at subsidized rates. o Significant deficit compounded by Superstorm Sandy.

22 NATIONAL STATE CONFLUENCE Pricing and Availability National Flood Insurance Program (cont.) o Subsidized rates to be phased out over time, starting in o Phase-out of discounts and the use of risk-based rates when a community adopts a new Flood Insurance Rate Map. Beginning in 2014 Increase of approximately 20% per year, for 5 years

23 NATIONAL STATE CONFLUENCE Pricing and Availability State-Created Wind pools o Texas Windstorm Insurance Association o FL Citizens Property Insurance Corp. o LA Citizens Property Insurance Corp. o NC BEACH/FAIR Plan o SC Wind Pool

24 NATIONAL STATE CONFLUENCE Pricing and Availability National Catastrophe Program? o NAIC adopted a set of Guiding Principles for Consideration of Federal Catastrophe Insurance in 1999 to evaluate federal legislation related to coverage for national disasters. o Federal legislation first introduced in o Currently, there are three main federal proposals for catastrophe management.

25 NATIONAL STATE CONFLUENCE Pricing and Availability 1. H.R. 737 Homeowners Defense Act of 2013 Creates the National Catastrophe Risk Consortium: o Any state wind pool can participate o Create an inventory of the state entities cat risk obligations. o Issue securities and other financial instruments (on a conduit basis) linked to state catastrophic risk. o Coordinate reinsurance contracts.

26 NATIONAL STATE CONFLUENCE Pricing and Availability 2. H.R. 240 Homeowners Insurance Protection Act of 2013 Would create the National Commission on Catastrophe Preparation and Protection. Authorize a tax-exempt program to provide reinsurance coverage above a retention level for eligible state programs.

27 NATIONAL STATE CONFLUENCE Pricing and Availability Would cover most natural disasters except flood. Would create the Consumer Hurricane, Earthquake, Loss Protection (HELP) fund to pay eligible losses reinsured by the federal reinsurance program.

28 NATIONAL STATE CONFLUENCE Pricing and Availability 3. H.R. 549 Homeowner Catastrophe Protection Act of 2013 Amends IRS Code to: o Permit insurers to create a tax-deferred reserve to cover cat losses; o Permit individuals to create tax-exempt Cat Savings Accounts; and o To provide for a tax credit equal to 25% of mitigation expenditures (up to $5,000) to qualified homeowners.

29 NATIONAL STATE CONFLUENCE Pricing and Availability Terrorism Risk Insurance Act (TRIA) Background o Passed in 2002 o Temporary program that has been extended twice (in 2005 and 2007) o Currently slated to expire at the end of 2014 o The 2007 reauthorization expanded the program to cover losses from acts of domestic terrorism

30 NATIONAL STATE CONFLUENCE TRIA Today Pricing and Availability o Approx. 60% of commercial policyholders have purchased coverage over the past few years. o H.R. 508 would extend TRIA through the end of o Another bill filed 5/23/13 would extend TRIA through 2024.

31 NATIONAL STATE CONFLUENCE TRIA Mechanics Pricing and Availability o The amount of government exposure depends on the size of the loss. o For a small loss, private industry covers the entire loss.

32 NATIONAL STATE CONFLUENCE Pricing and Availability TRIA Mechanics (cont.) o For a medium loss, the federal exposure is spread over time and the insurance industry. The government assists insurers initially but then recoups the payments through a broad levy on insurers afterward. o For a large loss, the federal government would cover most of the losses, but recoupment is available.

33 NATIONAL STATE CONFLUENCE Pricing and Availability Affordable Care Act o 2014 Employer Mandate Anti-discrimination No annual limits for essential benefits Individual mandate penalty Insurance Exchanges

34 NATIONAL STATE CONFLUENCE Pricing and Availability Affordable Care Act (cont.) o NAIC Focus Implementation of state-based insurance exchanges, federally facilitated exchanges, and the funding sources available for the different options. The role of navigators, who will provide information to insurance consumers regarding coverage options and the availability of subsidies.

35 HOW MUCH WILL THIS COST? Implementing ACA reforms will cost approximately $1,168 Billion over the period.

36 NATIONAL STATE CONFLUENCE Lender-Placed Coverage Dual Regulation This niche industry attracted attention on several fronts: o Fannie Mae o Consumer Financial Protection Bureau (CFPB) o NAIC o Multiple State Investigations and Rate Filing Issues

37 NATIONAL STATE CONFLUENCE Dual Regulation Lender-Placed Coverage (cont.) Concerns were related to its allegedly high profit margins and certain practices unique for this product. Settlements with CFPB and with state investigators.

38 COST OF NON-COMPLIANCE Insurer #1- $10 million to NY DFS and $19.3 million to Florida OIR. Insurer #2 - $14 million to NY DFS Plus $15 million to the CFPB

39 NATIONAL STATE CONFLUENCE Consumer Protection Unclaimed Property o Life and annuity companies are under significant scrutiny o Numerous settlements were entered into and many investigations pending Regulation by targeted exams?

40 NATIONAL STATE CONFLUENCE Consumer Protection Unclaimed Property (cont.) o The underlying concern: some companies used the Social Security Administration s Death Master File ( DMF ) to stop paying policy or contract benefits, but did not use the DMF to initiate a claims process to pay policy and contract proceeds to beneficiaries of decedents.

41 NATIONAL STATE CONFLUENCE Consumer Protection Unclaimed Property (cont.) o In 2012, there was a flurry of legislative and regulatory activity in multiple states o For example, NY Regulation 200 Quarterly cross-checks of the DMF Fuzzy matching procedures Applies to all life and annuity policies issued by NYauthorized insurers doing business in NY

42 NATIONAL STATE CONFLUENCE Consumer Protection Unclaimed Property New State Laws o The new Unclaimed Life Insurance Benefits Acts passed in Alabama and Kentucky are similar to NY Regulation 200. o Delaware: Secretary of State has the power to resolve abandoned property claims.

43 NATIONAL STATE CONFLUENCE Consumer Protection Unclaimed Property New State Laws (cont.) o Maryland: cross-checks of DMF on a semi-annual basis. o South Dakota s Unclaimed Property Act was revised effective July 1, Federal GAO interim update on DMF

44 COSTS OF NON-COMPLIANCE Insurer #1 - paid a $40 million fine to be divided amongst multiple states Insurer #2 - $17 million Insurer # 3 - $13.3 million Insurer #4 - $11 million Insurer #5 - $7.2 million

45 TO RECAP Costs of non-compliance with new lender-placed coverage requirements Costs of non-compliance with new unclaimed property laws

46 TO RECAP A world-class team of compliance professionals PRICELESS!

47 QUESTIONS?

48 FOR MORE INFORMATION Rich J. Fidei, Esq. Direct: (954) Colodny, Fass, Talenfeld, Karlinsky, Abate & Webb South Florida Office One Financial Plaza, 23rd Floor 100 SE 3rd Avenue Fort Lauderdale, FL Main: (954) All rights reserved.