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National Association of Life Companies
An Association of Life & Health Insurance Companies

April 22, 1991



During my eleven years as editor of the NALC Newsletter, I have endeavored to present current insurance issues from the viewpoint of the smaller company in a fair and objective manner. The accompanying issue of the April 22, 1991 Newsletter covering the NAIC Spring Meeting in Charleston, West Virginia, continues that Tradition. However, I have decided that the "state of the industry" calls upon me to exercise my editorial prerogative to point out what I perceive to be an evolution of a cangerous and insidious trend in state insurance regulation. We must be alerted to The disastrous potential of this new trend which could eclipse the ongoing debate as io siaie or federal regulation. For lack of any "politically correct" nomenclature, I will iseire term "National Regulation" to describe this new evolving regulatory scheme.

What is National Regulation? National regulation of insurance is the culmination of a stare supported regulatory scheme whereby a select few insurance regulators are able to engineer methods by which the NAIC can usurp the legislative and judicial powers of the states by expanding existing NAIC regulatory vehicles to impose illegal and unconstitutional regulatory jurisdiction and requirements upon the Insurance industry in ail fifty states without the benefit of any state or federal cversight or legislative action. li might also be referred to as "Unchecked State Feguialion" or "Reguiaiion Without Representation."

How is it imposed? It is imposed by the NAIC's incorporating new regulatory requirements applicable to all states into the NAIC Annual Statement Blank or the instructions thereto. in the NAIC Handbook on Examinations, the official NAIC manuals such as the Accounting Manual, the Securities Valuation Office (SVO) Procedures Manual, and the myriad of technical Actuarial Guidelines. The newest vehicle to be used is the NAIC Financial Regulation Standards and Accreditation Program.

What are some examples?

the requirement in the instructions for the 1991 Annual Statement Blank that "all insurers shall have an annual audit by an independent certified public accountant and shall file an audited financial report as a supplement to the Annual Statement on or before June 1, for the year ended December 31, immediately preceding," Note: The regulators are


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now working on a recodification of the Accounting Manual. When it is
completed, they plan to require CPAS to certity that an insurer is in
compliance with the rules and procedures of the NAIC Accounting

the outlawing of various forms of bank securitizations of insurers' assets
as well as commission levelization programs by the addition of
prohibitive language to the Accounting Manual;

the hasty imposition of the new bond rating system by amending the
SVO Manual without conducting an adequate impact study:

the revision of requirements pertaining to credit for reinsurance, not
through the applicable Model Act, but by adopting reporting instructions
to the Annual Statement Blank forcing ceding insurers to deduct from
surplus 20% of any reinsurance claims outstanding for 90 days;

the proposal to require, as an addendum to the Annual Statement, a
detailed discussion and analysis of the financial position of an insurer by
management - similar to that required by the SEC.;

the requirement of the newly adopted NAIC Accreditation Program to
deny as of January 1, 1994, the acceptance of examination reports of
insurers from "unaccredited“ states in which the legislature has not
enacted the prescribed list of Model Acts;

the proposal to have insurance departments "encourage" companies to
state on the front of every long term care policy sold that it meets the
minimum standards of the NAIC Model Act on Long Term Care,"
regardless of whether the Model Act has been passed in that state;

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The proposal to "outlaw" the use of surplus notes by amending the
Accounting Manual to set forth strict conditions under which a surplus
note might be reported as a component of capital and surplus (example:
stock companies could use only in impairment situations); and, to deny
the reporting of accrued interest as a liability unless specifically approved
by the Commissioner.

The above examples are not intended to be all-inclusive, but illustrate the usurpation of the legislative functions of government which are, in my opinion, clearly illegal and unconstitutional. In addition, they impose substantial and unreasonable costs to insurers - especially the smaller and medium-sized companies.

How far can it go? It is a matter of conjecture as to just how far this "National Regulation" scheme can go. However, I got some indication at the NAIC meeting in Charleston. At the Life and Health Actuarial Task Force session, a representative of the life committee of the American Academy of Actuaries made a recommendation that the regulators consider incorporating the NAIC's newly adopted Model Standard Valuation Law (SVL), along with its proposed accompanying Regulation setting forth the requirements for a Valuation Actuarial Opinion and Memorandum, into the Annual Statement Blank in order to make instant law in all fitty states. Visualizing an ultimate Annual Statement Blank and instructions a foot thick with hundreds of regulatory and disclosure requirements which had never been enacted by a legislative body, I verbally expressed my outrage to the regulators present and resolved to try to warn membership and all interested parties to the dangers of this regulatory scheme. Note: As a matter of fairness, I must note with some satisfaction that ine regulator acting as chairman of the Task Force stated that he agreed with me.

How is it justified? In the NAIC's February 21, 1991, edition of a brochure enuitled Financial Regulation Standards and Accreditation Program, state solvency regulation is heralded as "a unique example of how a National Regulatory System (emphasis mine) can be built with its foundation at the state, not federal, level. Uniformity has always been a major and laudable goal of the NAIC, but it should not be gained at the expense of constitutional guarantees or the usurpation of the functions of state and!or federal legislative bodies. Obviously, the regulators who don't want to lose their regulatory jurisdiction and fiefdoms are reacting to the threat of a federal takeover. However, it is my opinion, and I have so expressed it to the Hill staff in Washington presently drafting federal solvency legislation, that the fear of losing their authority to regulate the business of insurance has driven the NAIC to try to do 100 much . in 100 short a time; and that the added burdens and expenses that smaller companies wi have to absorb in complying with the flurry of new state regulatory requirements could be sufficient to actually trigger additional insolvencies.

What next? If the NAIC continues to implement this "National Regulation" scheme, there won't be any need for state or federal laws - just the expanded Annual Statement Blank instructions and manuals drafted by a select few unbridled, anonymous, and autonomous regulators. Granted, uniformity may be achieved, and additional federal encroachment might even be temporarily stalled - but at what cost to our basic liberties and constitutional rights? It is my belief that such an abusive pyramiding of this regulatory scheme - without legislative authority or oversight, and with no direct responsibility on the part of most of its proponents to any electorate • could be challenged successfully in the courts and be brought to an abrupt end. The regulators themselves would then be responsible for the collapse of their own house of cards, and the federal government would inevitably seize the moment and move in to fill the regulatory void.

S. Roy Woodall, Jr.
President, NALC

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On behalf of the 0.s. General Accounting office, I want to
express our appreciation for the assistance NAIC has given us
over the past several years in doing our work related to
insurance regulation. We believe that muc should have the
opportunity to revier our work in this area in advance of
publication. Therefore, we are enclosing for your review
our draft report entitled Insurance Regulation Problems in
the State Monitoring of property/Casualty Insurer solvency.
This is a draft report and the findings and conclusions
contained in it are subject to revision, NAIC'S connents will
be incorporated into our final report. The use of this draft
report is restricted and its publication or other improper
disclosure should be prevented. Any copies of this drait
belong to GAO and must be returned on demand.
We would appreciate receiving your comments by me ut

. if you have any difiiculty in having comments ready by. that date, or if you have any questions concerning this request, please call steven Berke at (202) 275-4406.

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Thank you for allowing us to comment on your draft survey of state actions with respect to financially troubled property.casualty insurers. Our general feeling is that the survey needs to be restructured if it is going to yield meaningful results. Companies may pass through several phases of state action before they are liquidated. States differ as to what actions they use in these different phases, the definitions of the terms used to describe those actions, and the source of authority (administrative judicial). As it is

presently structured, the

survey questions confusing and unlikely give you consistent and meaningful responses. We suggest that you more clearly explain the objective of the survey in the introductory section and allow the state departments to identify and define the actions that they use in the different phases of regulatory activity.




Generically, one night identify seven basic phases in the financial regulation of troubled domestic insurers. Those phases are described below. It should be pointed out that, not all phases may be used by all states, some of the phases may overlap as they are used by a given state and the names of the various phases and other terminology may vary from state to state. The description of a particular phase is general and may vary from state to state and the phase say not watch the description in all particulars in a given state.

Phase One Informal conferences may take place between company and department with regard problem areas. Corrective actions may

be agreed upon voluntarily. No official administrative or judicial actions are taken.



Phase Two Orders or directives may be issued to a company which may be confidential or public and which generally are subject to a hearing 1f requested by the Insurers, Actions which


be taken in this phase include implementation of a corrective plan; prohibitions, conditions or limitations placed by a department on certain activities or transactions and may involve pre-approval of such activities or transactions; corrective orders or notices, including, but not limited to, correction of impairment or deficiency in statutory capital and/or surplus requirements, divestiture of assets, revised

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