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August 19, 2019

Stroock Special Bulletin

Proposed Revisions to Model Regulation #275

The Annuity Suitability Working Group of the NAIC Life Insurance and Annuities Committee held an open meeting on Saturday, August 3, during the NAIC 2019 Summer National Meeting in New York City. The working group discussed revising the Suitability in Annuity Transactions Model Regulation #275 by incorporating a “best interests” standard of conduct and other broker-dealer obligations.  Director Jillian Froment of Ohio led the discussion.

The Model #275 revisions incorporate a care obligation through two provisions: 1) “reasonable basis to believe consumer would benefit from features of annuity” [Model #275, Section 6A(2)] and 2) “reasonable basis to believe product as a whole would address consumer’s needs” [Model #275, Section 6A(3)]. During the discussion, participants raised questions as to whether the care obligation language should harmonize with SEC Regulation BI so as to assuage consumer confusion while allowing for ease of compliance oversight and regulation due to uniformity of the regulations. SEC Regulation BI limits broker-dealer recommendations to financial products that are in the customer’s “best interests” and requires broker-dealers to relay potential conflicts of interests associated with their recommendations.

The working group noted that SEC Regulation BI contains a “best interests” standard but does not define the term and does not specify whether states are free to enact more stringent standards.  The working group discussed whether Model #275 should also incorporate a “best interests” standard.  Notwithstanding SEC Regulation BI, interested parties offered that if a “best interests” standard is adopted, the provision should define “best interests” for added clarity and enforcement purposes.  To the extent the “best interests” is designed to merely prevent broker-dealers from placing their interests ahead of the consumer’s (as opposed to requiring broker-dealers to consider the consumer’s interests first), interested parties were concerned that a “best interests” standard could limit the type and scope of products available to consumers to their detriment.

The working group discussed whether Model #275 revisions should include either a written or oral disclosure obligation, requiring producers to disclose their qualifications, potential conflicts of interest (e.g. commissions and other financial incentives linked to product recommendations), and limitations as to what products the producer can recommend or sell to a consumer.  Participants also discussed whether disclosures should be detailed (such as a broker-dealer’s specific compensation for a recommended product) or broad (leaving it to the consumer to ask more questions about big picture disclosures).  As for consumer disclosures, the working group considered whether consumers who refuse to provide necessary consumer profile information, such as financials, should sign a statement reflecting their refusal to do so.  Interested parties suggested that more seasoned, sophisticated consumers should not be required to provide such documentation as compared to less sophisticated consumers who need more protection.

The working group will form a technical drafting group to craft an initial draft incorporating proposed revisions to Model #275.  The technical drafting group will meet in early September and once an initial draft is ready, a public comment period will follow.  The working group will host conference calls to discuss the comments received then present a draft to the Life Insurance and Annuities Committee by the 2019 Fall National Meeting.

Model #440 and Confidentiality Protections

The Group Calculation Working Group of the NAIC Financial Condition Committee held an open meeting on Saturday, August 3, during the NAIC 2019 Summer National Meeting in New York City.  During the meeting, Commissioner David Altmaier of Florida led a discussion on the need for confidentiality protections for the Group Capital Calculation (“GCC”).

The GCC Working Group was tasked with creating and testing a United States capital calculation using a risk-based capital aggregation methodology.  The GCC would include a component that tracks financial information trends, such as net income, revenues, assets, debts, etc. over time, which necessitates that the GCC be filed with the NAIC and held confidential under state law. As 33 insurance groups are testing the GCC, the working group recognized that it is crucial to implement a method of confidentiality both during the testing period and after the GCC has been adopted.

Any adopted confidentiality measure would have to strike a delicate balance between allowing for an on-going dialogue and analysis of testing results while protecting the information of volunteer insurance groups. While working group members would have access to all data resulting from insurance group participation, such information should only be further disseminated on a need-to-know basis. Accordingly, the working group agreed that the Insurance Holding Company System Regulatory Act Model #440 should be modified to incorporate confidentiality protections.  The working group will continue discussions on what confidentiality protections can be adopted and how they should be implemented.

Section 1332 Waivers – Affordable Care Act

On Saturday, August 3, the NAIC Health Innovations Working Group held an open meeting during the NAIC 2019 Summer National Meeting in New York City.  The meeting focused on state updates regarding State Innovation Waivers under Section 1332 of the Affordable Care Act (“Section 1332 Waivers”).  Section 1332 Waivers, also known as State Relief and Empowerment Waivers, allow states to develop their own approach to providing access to affordable health care for their residents in tandem with the protections provided under the Affordable Care Act.

The working group discussed the various challenges states have encountered in procuring greater healthcare access and affordability.  Interested parties revealed how large rate increases and the loss of the individual mandate have exacerbated access and affordability issues in many states.  Members discussed hindrances such as a lack of transparency on federal funding for waivers, the difficulty in setting up new state programs, and the latency period of two and a half years between an issuers’ rate setting and reinsurance payments. States have utilized Section 1332 Waivers to troubleshoot access and affordability hurdles to adopt solutions that best serve their residents.  Though many states have created programs under Section 1332 Waivers, those programs have expiration dates.  Participants discussed how rates will increase once state waiver programs expire.  The working group also questioned whether reinsurance waivers truly lead to increased healthcare enrollment or if they are more likely to slow declines in enrollment.

Chapin White, the president of Freepricer LLC and an adjunct senior policy researcher at Rand, presented findings from an employer-led hospital price transparency study that examined implications for state regulators.  The study showed that commercial plans pay hospitals more than twice the amount that Medicare pays those same hospitals for the exact same services.  Data from 2012-16 showed that inpatient use continued to decline but prices rose substantially, as outpatient prices drove spending growth.  Mr. White explained that the prices private health plans paid to hospitals do not reflect a functioning competitive market due to a “three-legged glitch”: 1) bilateral negotiations over prices and networks 2) uncapped obligation for out-of-network care and 3) widespread “unshoppability” stemming from both natural and artificial monopolies and emergencies.  Mr. White concluded that hospital shopping should be a “team sport” with cooperation amongst patients, physicians, health plans, policymakers and employers.

Joel Ario, the managing director of Manatt Health Strategies, and Kathy Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation, presented on the “Landscape of State Cost-Containment Initiatives.”  The presentation was an overview of several cost-containment initiatives adopted by several states that can inform a national approach to achieving greater healthcare access and affordability.  Mr. Ario and Ms. Hempstead noted that states now face a different market dynamic that has diminished affordability, which impedes expanded healthcare access.

The presentation focused on initiatives adopted by Washington state, New Mexico, Rhode Island and Maryland.  Washington state is the first state to adopt a state public option.  The option is a state sponsored plan on the state’s exchanges to address limited insurer participation.  It is expected that insurance departments will play a major role in the plan’s development and implementation.  New Mexico has adopted targeted Medicaid buy-ins to expand affordable coverage to those who would not otherwise qualify for subsidies, such as non-residents or those with incomes above 400% of the federal poverty line.  Mr. Ario and Ms. Hempstead explained that challenges of Medicaid buy-ins include a level of state risk involved in an off-exchange buy-in, the likelihood that the product may still be unaffordable for subsidized populations, and the reality that the product could disrupt the existing individual market.

Rhode Island is adopting a cost benchmarking program to consistently evaluate health system performance to better understand cost-drivers against a pre-set benchmark.  This approach provides a concrete, data-driven basis from which policymakers can tackle affordability and access issues.  Maryland has created a Prescription Drug Affordability Board (“PDAB”) tasked with studying pharmaceutical distribution and payment systems, proposing policy options for government purchased drugs and implementing adopted approaches.  The purpose of the PDAB is to reduce drug costs for public and private purchasers as a complement to its leadership with containing hospital rates. Mr. Ario and Ms. Hempstead anticipate resistance to the PDAB from the governor and the pharmaceutical industry.  Additional challenges include a lack of mandatory state prescription drug cost reporting, which could adversely affect data integrity.

Implementation of Revisions to Model #785 and #786

During the NAIC 2019 Summer National Meeting in New York City, the Reinsurance Task Force held an open meeting on Sunday, August 4, to discuss next steps in implementing revisions to the Credit for Reinsurance Model Law (“Model #785”) and the Credit for Reinsurance Model Regulation (“Model #786”).

The task force discussed revisions to Model #785 and #786 that incorporate provisions of the bilateral agreement between the United States and the European Union (the “Agreement”).  Under the Agreement, signed on September 22, 2017, EU reinsurers would no longer be required to maintain a $250 million minimum amount of their own funds and a 100% solvency capital requirement pursuant to Solvency II.  Solvency II is the EU law that codifies EU insurance regulations.

The Agreement also eliminates the requirement that U.S. reinsurers maintain a local presence to do business or post collateral in the EU if those reinsurers maintain capital and surplus equivalent to £226 million and a risk based capital of 300% of authorized control levels.  The U.S. and the United Kingdom entered a similar agreement on December 18, 2018.  Under the Agreement, states must take action within five years with respect to reinsurance collateral provisions or they could be preempted under the federal Dodd-Frank Wall Street Reform and Consumer Protection Act.

Accordingly, the current NAIC reinsurance ceded accreditation standard, which permits reduction of reinsurance ceded  but not total elimination of reinsurance collateral, must be modified so that states adopting the revisions to Model #785 and #786 are also compliant with the NAIC standard.  The task force encouraged states to adopt the 2019 revisions within the 60-day timeframe set forth in the Agreement to avoid federal preemption before the accreditation standard is modified.

Anti-Rebating

The Innovation and Technology Task Force held an open meeting on August 5, during the NAIC 2019 Summer National Meeting in New York City.  The discussion centered on anti-rebating issues that arise with the introduction of innovative, value-added products, services and programs.

Commissioner Jon Godfread of North Dakota presented his state’s draft guidelines for handling anti-rebating matters.  In most states, insurers are prohibited from offering anything of value outside of the insurance policy as a means to solicit business.  North Dakota’s guidance analyzes whether a value-added product, service or program is acceptable by determining whether the product, service or program 1) protects consumers and the solvency of applicable insurers, 2) protects consumers against unfair discrimination, 3) relates to the insurance coverage being provided, and 4) mitigates loss or provides loss control that aligns with the risks of the policy, assesses risk, identifies sources of risk, or develops strategies for eliminating or reducing risks.

If the product, service, or program affirmatively incorporates each of the four criteria, it would likely be allowed in North Dakota.  However, the product, service, or program must comply with other North Dakota statutes and the insurance department may request additional information or impose additional criteria within its discretion.

The task force adopted a motion to develop a model law based on the draft North Dakota guideline as an amendment to the NAIC Unfair Trade Practices Act Model #880.  Regulators and interested parties are encouraged to submit comments by September 6, 2019.

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For More Information:

Huhnsik Chung

TaLona Holbert

This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such.

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