By Richard J. Fidei and Elizabeth M. Fohl, Attorneys, Colodny, Fass, Talenfeld, Karlinsky & Abate
In their commentary “Ten Key Insurance Regulatory Topics That Shaped the Year,” Richard J. Fidei and Elizabeth M. Fohl of of Colodny, Fass, Talenfeld, Karlinsky & Abate highlight what they deemed to be the most significant regulatory developments in 2010 affecting the insurance industry. It is particularly focused on state regulation, but also includes major federal legislation and NAIC and NCOIL initiatives. The authors state that many of these matters will continue to be prominent issues in 2011 and beyond, which underscores their importance as key developments in 2010. The key regulatory issues for the insurance industry in 2010 spanned a wide range of subjects and geographic areas.
Here in brief are the ten top regulatory developments of the year as selected by the authors—analyses and details of each development are found in their article:
• Dodd-Frank Wall Street Reform and Consumer Protection Act—The authors focus their analysis on Title V of the Dodd-Frank Act which (1) created the Federal Insurance Office, (2) established under the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA") provisions of the Dodd-Frank Act that surplus lines agents and transactions are subject to regulation by the insured's state of domicile only and (3) provided that states cannot deny credit for reinsurance for foreign ceding carriers if certain conditions exist. The authors note that “[t]he NAIC and the NCOIL have separately expended a significant amount of time and resources to promulgate competing model acts for the states to adopt pursuant to the NRRA.” The authors then describe the provisions of those model acts.
• Retained Assets Accounts for Insurance Death Benefits--In general an RAA involves an interest-bearing account funded by life insurance death benefits held by the life insurer that can be drawn upon by draft. RAAs are not insured by the FDIC because they are not held by insured banks. Drafts on RAAs have not been universally accepted in commerce, e.g., they have been rejected by several retail stores. Officials have proposed remedies to the perceived issues with insurers utilizing RAAs as the depository for death benefits without fully explaining to the insured or beneficiary the nature and effect of RAAs. The NAIC drafted a model bulletin to provide beneficiaries with additional information when death benefits are disbursed into an RAA. Delaware, Kentucky, and Montana adopted notices which were based on the NAIC model bulletin. A few other states took regulatory action with regard to RAAs as well. NCOIL also drafted model legislation on the subject.
• Credit Scoring--Credit information has long been used to assist underwriters in deciding whether or not to accept a particular risk and to determine the appropriate corresponding rate. The majority of the states have promulgated or adopted laws to regulate an insurer's use of credit information to accept or rate a particular risk. Several states amended or enacted legislation or regulations in 2010 pertaining to insurer use of credit scoring, including Connecticut, Kansas, Iowa, and New Hampshire.
• Fraud Initiatives--Several states enacted insurance fraud-related laws in 2010 including Arizona, California, Colorado, Louisiana, Maine, New York, Pennsylvania, and Rhode Island.
• Broker Commission Fees in New York--Contingent commissions payable to brokers remain an ongoing issue. The New York State Insurance Department adopted a regulation that would expressly permit insurance producers to accept contingent commissions subject to certain disclosures and restrictions. Effective January 1, 2011, an insurance producer selling an insurance contract is required to disclose certain information to the purchaser orally or in a prominent writing. Such disclosure is required to be made at or prior to the time of application for insurance.
• Cancellation/Nonrenewal--One of the top market conduct examination concerns based on insurer examinations in 2009 was improper cancellation and nonrenewal of insurance policies. Louisiana and Maryland enacted legislation in 2010 related to the cancellation and nonrenewal of insurance policies.
• Annuity Suitability--In early 2010, the NAIC adopted revisions to its existing Suitability in Annuity Transactions Model Regulation. The revised Annuity Model aimed to strengthen consumer protections against inappropriate and abusive annuity marketing practices. The authors examine the provisions of the model regulation. Iowa and Wisconsin adopted the new Annuity Model. Florida, Oklahoma, and Texas have recently enacted producer training requirements for the sale of annuities.
• Credit For Reinsurance--One of the key challenges for any U.S. ceding insurer and its regulators is assessing the solvency and claims-paying reliability of the ceding insurer's assuming reinsurers. Under model laws and regulations adopted by the NAIC, a ceding carrier can receive credit on its financial statement for the reinsurance it purchases from an authorized or accredited reinsurer. If the reinsurer is unauthorized, the ceding carrier can receive credit on its financial statement for reinsurance purchased if the unauthorized reinsurer posts 100% collateral for its reinsurance obligations. At its December 16, 2010 Joint Executive Committee/Plenary Meeting, the NAIC agreed to consider recommendations for amendments to the models related to the standards for credit for reinsurance and the development of accreditation standards for states that decide to proceed with a reduced reinsurance collateral initiative. Florida, New Jersey and New York have decided to take action without waiting for the NAIC.
• Stranger Originated Annuity Transactions--One of the hottest topics for the life insurance and annuity industry in 2010 was stranger originated annuity ("STOA") transactions. Much of the debate in 2009 revolved around stranger originated life insurance ("STOLI") transactions. Like STOLI transactions, STOA transactions involve producers and/or investors offering individuals a nominal fee for the issuance of an annuity in the name of the individual whereby the individual is the annuitant or measuring life for the annuity investment. Generally, the individual is of poor health and not expected to live past the first year of the policy. Often annuity policies provide for guaranteed minimum death benefits that are payable if the annuitant or individual dies within a short period after the effective date of the annuity. Two state insurance departments, those of Louisiana and New Jersey, issued bulletins encouraging insurers to detect, mitigate, and report STOA transactions. The NAIC has been actively drafting a proposed model bulletin for the states to adopt. The model bulletin would explain STOA transactions and provide suggestions (which the authors of this commentary describe) for companies to follow to prevent STOA transactions.
• Ban on Iranian Investments--U.S. sanctions in place against Iran have been enhanced by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. In addition, The California Department of Insurance's (CDI’s) ban on Iranian investments began in 2009 was followed by a letter from the Commissioner in February of 2010 concerning the treatment of insurer investments in such companies. Several large trade associations filed a petition with the California Office of Administrative Law ("OAL") challenging the CDI's "rule" arguing that it was a "regulation" under California law and not adopted in accordance with the California Administrative Procedure Act ("APA").The OAL agreed. In response to the OAL's decision, the Commissioner brought suit against the OAL challenging its administrative decision and retained the California Attorney General's Office to file and prosecute the lawsuit. At the time of the author’s commentary no decision had been reached on the lawsuit.
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Richard J. Fidei, Esq., a partner at the law firm of Colodny, Fass, Talenfeld, Karlinsky & Abate (www.cftlaw.com), represents insurance and reinsurance companies, brokers and other related entities in a broad spectrum of transactional, compliance, claim and corporate matters.His practice includes all elements of the insurance and reinsurance business, as well as operational issues such as start-up activities, structuring and financing, reinsurance contracts and alternate mechanisms, vendor relationships, regulatory issues and administrative and court proceedings, including administrative supervision, liquidation and insolvency issues.A member of the Florida and Pennsylvania Bars, Mr. Fidei serves in leadership positions with several national insurance trade associations, including the Association of Insurance Compliance Professionals, which he serves as General Counsel and Gulf States Chapter President, the Federation of Regulatory Counsel and American Bar Association, both of which he serves as a Journal Contributor.Mr. Fidei can be reached at firstname.lastname@example.org and +1 954 332 1758.Elizabeth M. Fohl, Esq., an associate at the law firm of Colodny, Fass, Talenfeld, Karlinsky & Abate (www.cftlaw.com), practices in the areas of insurance regulatory and compliance law, commercial transactions and corporate matters.Her practice includes the acquisition, expansion and financing activities of insurers and insurance related entities and counseling clients on a variety of regulatory compliance issues, including financial and market conduct examinations, rate and form filings and solvency issues. Ms. Fohl also handles complex commercial loan and real estate transactions as well as general business entities matters.Ms. Fohl can be reached at email@example.com and +1 954 492 4010.