1. NATIONAL INSURANCE CHARTER MOVING FORWARD IN 2002 RECENTLY INTRODUCED BILLS

2. 2 NATIONAL INSURANCE CHARTER INTRODUCED LEGISLATION INSURANCE INDUSTRY MODERNIZATION AND CONSUMER PROTECTION ACT (“LAFALCE”)  Introduced by Congressman John LaFalce (DNY) on February 14, 2002  Contains concepts from ACLI and ABIA proposals and SCHUMER Available at http://www.house.gov/banking democrats/lafalc 110.pdfhttp://www.house.gov/banking democrats/lafalc 110.pdf NATIONAL INSURANCE CHARTERING AND SUPERVISION ACT (“SCHUMER”)  Introduced by Senator Charles Schumer (DNY) on December 20, 2001  Endorsed by both the ABIA and ACLI  Contains concepts from both proposals Available through Senator Schumer’s office or http://www.acli.comhttp://www.acli.com

3. 3 AMERICAN BANKERS INSURANCE ASSOCIATION (ABIA)  The National Insurance Act of 2001  November 2000 (revised May 9, 2001) Available at http://www.aba.com/ABIA AMERICAN COUNCIL OF LIFE INSURERS (ACLI)  National Insurer Act  National Insurer Solvency Act  April 2001, updated December 2001 Available at http://www.acli.com AMERICAN INSURANCE ASSOCIATION (AIA)  Federal Insurance Chartering Act of 2001  July 2001 Available at http://www.aiadc.org PRIOR TRADE GROUP PROPOSALS

4. 4 NEW REGULATORY STRUCTURE LAFALCE National charter and licensing for underwriters Ability to write and sell insurance nationwide without being subject to state authorization; however, subject to state rate regulation Repeals McCarran-Ferguson Act antitrust exemptions for all insurers, state and national, except for two very limited exceptions

5. 5 NEW REGULATORY STRUCTURE (CONT’D) SCHUMER National charter for underwriters and agencies Insurers with a license to write and sell a “national” product can sell the product nationwide without state regulation of any kind Federally licensed producers can sell “national” and state insurance products nationwide without a state license or complying with other state regulatory requirements

6. 6 NEW REGULATORY STRUCTURE (CONT’D) U.S. antitrust laws apply to national insurers except to the “development, dissemination, or use” of policy forms, and to state laws applicable to national insurers that are not preempted by the bill ABIA National charter for underwriters and agencies Modeled after the regulation of national banks and federally chartered thrifts under the “dual banking system” Ability to write and sell insurance nationwide authorized by national charter not subject to state regulation

7. 7 NEW REGULATORY STRUCTURE (CONT’D) Agencies can sell products issued by national or state domiciled insurance companies without “significant interference” from states ACLI National charter for underwriters Generally regulates companies as if domiciled in a new “Federal” state, no express state law preemption language Insurers with a license to sell a “national” insurance product can sell the product nationwide

8. 8 NEW REGULATORY STRUCTURE (CONT’D) Federally licensed producers can sell “national” insurance products nationwide Products issued by state domiciled carriers can only be sold by producers licensed by the state where product sold, regardless of whether producer is federally licensed AIA National charter for underwriters Contemplates “dual” system similar to ABIA

9. 9 NEW REGULATORY STRUCTURE (CONT’D) Ability to write and sell insurance nationwide without state regulation or approval No antitrust protection for rates of federal insurers Producer licensing not addressed

10. 10 NEW REGULATOR LAFALCE and ACLI Office of National Insurers Headed by the Director of the Office of National Insurers (“DONI”) SCHUMER and ABIA Office of National Insurance Commissioner Headed by National Insurance Commissioner (“NIC”)

11. 11 NEW REGULATOR (CONT’D) AIA Federal Insurance Chartering Office Headed by Director of Federal Insurance Chartering Office (“DFICO”) STRUCTURE and TERM ALL bureau under Department of Treasury LAFALCE, SCHUMER and ABIA patterned after the Office of the Comptroller of the Currency and the Office of Thrift Supervision NIC, DONI and DFICO appointed by President with Senate approval LAFALCE appointment for 4 year term

12. 12 NEW REGULATOR (CONT’D) SCHUMER, ABIA and ACLI appointment for 5 year term AIA appointment for 6 year term Express independent regulatory and litigation authority under LAFALCE, SCHUMER, ABIA and ACLI, implied for AIA SELF FUNDING ALL provide for assessments of insurers for examination and application expenses, LAFALCE bill charges national insurer affiliates for examination costs LAFALCE provides for $10 million agency start up loan from Treasury to be paid in full with no interest within 5 years following date of enactment

13. 13 NEW REGULATOR (CONT’D) SCHUMER provides for agency start up loan from Treasury to be paid in full by agency with interest within 10 years following date of enactment of bill LAFALCE and SCHUMER DONI or NIC may also assess national insurers for a “working capital” fund, in addition to assessments to cover budget of agency AIA provides for appropriation of start up funds by Congress which is repaid out of assessments and fees

14. 14 REGULATORY AUTHORITY NATIONAL INSURANCE COMPANIES ALL provide for organization, operation, regulation and supervision of national insurance companies ALL provide for authority to charter national insurance companies LAFALCE, SCHUMER and ACLI provide for licensing of insurers to underwrite and sell national products LAFALCE requires DONI to approve the policy forms of national insurers and to set policy form standards by regulation

15. 15 REGULATORY AUTHORITY (CONT’D) SCHUMER NIC may set policy form standards for consumer policies by regulation, NIC prior approval NOT required for policy forms NATIONAL INSURANCE PRODUCERS SCHUMER and ABIA provide for chartering, regulation and examination of national insurance agencies Other proposals, including LAFALCE, do not provide for chartering of national insurance agencies

16. 16 REGULATORY AUTHORITY (CONT’D) SCHUMER, ABIA and ACLI provide for licensing of producers to sell national products LAFALCE and AIA contain no provisions on producer licensing EXAMINATIONS OF NATIONAL INSURERS LAFALCE and SCHUMER require annual examinations for financial condition and market conduct LAFALCE and SCHUMER permit DONI or NIC, as applicable, to determine that less frequent exams are warranted

17. 17 REGULATORY AUTHORITY (CONT’D) LAFALCE DONI cannot exempt insurer from annual market conduct exams LAFALCE provides for the public availability of exam reports and work papers ABIA provides for CAMELS rating system and annual examinations unless “adequately capitalized” then biannually ABIA requires ongoing onsite examination for “large” institutions (as defined by NIC) ACLI requires triennial examinations; more frequently at DONI’s discretion AIA provides initial and “special” examinations and [investigative authority of federal and state insolvencies]

18. 18 REGULATORY AUTHORITY (CONT’D) EXAMINATION OF AFFILIATES OF INSURERS LAFALCE and ACLI may examine only: To the extent that the activities of the affiliate may affect the operations, management, or financial condition of the insurer If examiners cannot obtain the necessary information from the insurer SCHUMER and ABIA may only examine to determine: Relationship and transactions between an insurer and the affiliate Risks to insurer as a result of the affiliate relationship

19. 19 REGULATORY AUTHORITY (CONT’D) The insurer’s systems for monitoring and controlling affiliate risk SCHUMER deference is given to the exam reports of functionally regulated entities by their primary regulator AIA Silent on affiliate examinations SCHUMER If the affiliate is functionally regulated, NIC must notify functional regulator of the examination and give that regulator an opportunity to participate in the examination

20. 20 REGULATOR ENFORCEMENT POWERS GENERAL ENFORCEMENT AUTHORITY LAFALCE, SCHUMER, ABIA and ACLI: Akin to 12 U.S.C. 1818 enforcement authority for banks Subject to Administrative Procedures Act, appeal to federal circuit courts Suspension, removal and prohibition of certain affiliated parties Cease and desist authority Civil money penalties - $5,000/day – tier 1, $1 million/day – tier 3 LAFALCE, SCHUMER, ABIA and ACLI have differing standards for violation – LAFALCE and SCHUMER have stricter standard, under certain circumstances

21. 21 REGULATOR ENFORCEMENT POWERS (CONT’D) LAFALCE and SCHUMER allow for revocation, suspension or restriction of federal licenses based on conduct of company or its board of directors ABIA separate enforcement authority for National Insurance Guaranty Corporation with respect to solvency issues JURISDICTION OVER: National insurance companies LAFALCE and ACLI also applies to “insurer affiliated parties” LAFALCE applies to state licensed producers (except for prohibition orders)

22. 22 REGULATOR ENFORCEMENT POWERS (CONT’D) SCHUMER and ABIA applies to agencies and “company affiliated parties” SCHUMER specifically permits NIC to take enforcement actions against holding companies of national insurers and any officer, director, employee or agent of a holding company AIA More limited than others Delinquent fees and penalties May suspend or revoke charter of an insurer that is knowingly in significant violation of the provisions of the bill

23. 23 REGULATOR ENFORCEMENT POWERS (CONT’D) Cease and desist authority to stop an activity, no authority to take affirmative or prospective action, except restitution and amending policy forms May make referrals to federal and state law enforcement authorities for possible civil or criminal investigation

24. 24 SELF-REGULATORY ORGANIZATIONS SCHUMER and ACLI One or more self regulatory organizations (“SROs”) (could be one for insurers, one for producers, one for life and annuity, one for property/casualty, etc.) Modeled after self regulatory provisions of Securities Exchange Act of 1934 – NASD and NYSE Can adopt rules and impose penalties on its own members and associated persons for rule violations No producer licensing authority for akin to that provided to the NASD with respect to registered representatives

25. 25 SELF-REGULATORY ORGANIZATIONS (CONT’D) NIC or DONI has review authority for significant rules and disciplinary actions, can require the SRO to pass rules, can suspend or revoke SRO status NIC or DONI can discipline SRO members and associated persons directly SCHUMER – NIC can affirm, set aside or remand SRO’s decision including ability to cancel, reduce or remit any sanction imposed LAFALCE, ABIA and AIA No provision for establishing SROs

26. 26 POWERS OF NATIONAL INSURERS LAFALCE and SCHUMER Can exercise all such “incidental powers” as shall be necessary to carry on insurance operations Further allows any company to “do all other things necessary or convenient to further its activities and affairs” LAFALCE National insurers with a federal license may underwrite and sell in any state any line of insurance permitted to it under its license without having to obtain a state license If approved by DONI, could underwrite and sell both life, and property and casualty products

27. 27 POWERS OF NATIONAL INSURERS (CONT’D) Does not provide for underwriting of health products A national insurer may not issue a policy unless it has filed the policy form with the DONI and received DONI approval LAFALCE Provides for DONI to report to Congress 3 years after enactment on whether national insurers should be authorized to underwrite health insurance Subsidiaries can engage in activities permitted for a subsidiary in the state where subsidiary is organized

28. 28 POWERS OF NATIONAL INSURERS (CONT’D) SCHUMER Insurance company can underwrite either life, health and annuities or property and casualty insurance, but not both Permits any company to sell and underwrite accident and health so long as the company has a license to also underwrite life, health and annuities or property and casualty Subsidiaries can engage in activities that insurer can directly and activities permitted for subsidiary in state where subsidiary is organized with certain limitations

29. 29 POWERS OF NATIONAL INSURERS (CONT’D) ABIA Insurance companies can underwrite either life, health and annuities or property and casualty insurance, but not both Can engage in activities that are “incidental” “to the issuance and sale of insurance contracts” Subsidiaries can engage in activities that insurer can directly and activities permitted for subsidiary in state where subsidiary organized Subsidiaries engaging in activity that is not permissible for an insurer is limited to 5% of parent company’s assets, and all subsidiaries in the aggregate cannot exceed 10% of insurer’s assets

30. 30 POWERS OF NATIONAL INSURERS (CONT’D) ACLI Insurer licensed to underwrite and sell life insurance can also underwrite disability, long-term care and annuities Silent on powers to specifically underwrite property and casualty insurance and limited reference to health insurance “May exercise all such incidental powers as shall be necessary to carry on insurance operations” (specifically based on 12 U.S.C. 24 (seventh))

31. 31 POWERS OF NATIONAL INSURERS (CONT’D) Subsidiary activities permitted to the extent allowed in state where organized No limitations on amount invested in subsidiary AIA “Business of insurance,” “activities incidental thereto,” and “any other business or activity engaged in by insurers” No specific provisions regarding powers and activities of subsidiaries

32. 32 VARIABLE PRODUCTS LAFALCE, SCHUMER and ACLI Specifically provide authority for the establishment of separate accounts Not chargeable with insurer liabilities to the extent provided by “applicable agreements” Risks born by policyholders, not guaranteed by insurer, are not covered by federal guarantee funds ABIA Does not specifically provide authority, may assume part of the activities incidental to the issuance and sale of such contracts No provision for separate account asset insulation

33. 33 VARIABLE PRODUCTS (CONT’D) Pursuant to discretionary authority, receiver might be able to disallow claim of security interest or priority with respect to separate account assets Risks born by policyholders, not guaranteed by insurer, are not covered by National Insurance Guarantee Corporation ACLI Provides “asset insulation” comparable to NAIC Model Variable Contract Law Could apply to all assets not only to amount equal to reserves and other contract liability of separate account Class 2 priority in liquidations to the extent of related reserves in general account

34. 34 VARIABLE PRODUCTS (CONT’D) AIA Does not discuss variable products Proposals may need to address Model Variable Contract Law provisions: “Sole authority” re: state securities law Exemption from investment requirements and gains, income and losses separately charged to separate account (separate from insurer)

35. 35 VARIABLE PRODUCTS (CONT’D) EXCESS INTEREST AND EQUITY INDEXED PRODUCTS ABIA and ACLI provide for minimum guarantees for 4 years prior to insolvency ACLI acknowledges coverage of equity indexed products ABIA only acknowledges interest rate limits

36. 36 FORM, GOVERNANCE, CAPITAL FORM LAFALCE, SCHUMER, ABIA and ACLI, allow national insurance companies to be in stock or mutual form LAFALCE, SCHUMER and ACLI permit establishment of national fraternal organizations AIA does not address

37. 37 FORM, GOVERNANCE, CAPITAL (CONT’D ) GOVERNANCE LAFALCE and SCHUMER permit an insurer to choose law of state where “main office” (defined as any office designated by insurer and provided for in its charter subject to approval by DONI or NIC, where insurer conducts insurance operations) is located or where holding company is incorporated and provide, for purposes of jurisdiction, that a company is deemed a citizen of a state in which its main office is located and the state in which it has its principal place of business

38. 38 FORM, GOVERNANCE, CAPITAL (CONT’D ) ABIA can choose law of state where “principal office” is located, where holding company is incorporated, Delaware General Corporation Law or the Model Business Corporation Act subject to limits (e.g., as to minimum number of directors) ACLI provides that applicable law is state where “main office” (defined as any office designated by the insurer where insurer is doing corporate business) is located or where holding company is incorporated AIA implies applicable law is state where insurer is incorporated

39. 39 FORM, GOVERNANCE, CAPITAL (CONT’D) PAID-IN CAPITAL REQUIREMENT LAFALCE no requirements SCHUMER NIC to establish requirement – may prescribe minimum that may be based upon the line(s) of insurance ABIA by type of company: Life companies – minimum $7 million Property & casualty – minimum $3 million Reinsurance – minimum $35 million

40. 40 FORM, GOVERNANCE, CAPITAL (CONT’D ) ACLI and AIA no minimum specified RISK-BASED CAPITAL STANDARDS LAFALCE and SCHUMER NAIC model for risk-based capital calculations and remedies – in effect until transition termination date or effective date of standards set by DONI or NIC LAFALCE in addition to required reserves, establishes minimum financial security benchmarks to provide security against contingencies that are not fully covered by reserves or reinsurance and prohibits public disclosure of risk-based capital ratio, unless otherwise permitted by DONI

41. 41 FORM, GOVERNANCE, CAPITAL (CONT’D ) ABIA established by regulation taking into account asset, credit, underwriting, actuarial and other risks, required reserves equal to estimated and actual claims and all expenses and other revenue ACLI uses NAIC model for risk-based capital calculations and remedies - required for 5 years thereafter DONI can establish capital requirements AIA permits DFICO to establish capital requirements, “risk- based or otherwise”

42. 42 FORM, GOVERNANCE, CAPITAL (CONT’D ) ACCOUNTING ALL require qualified actuaries and independent audit LAFALCE DONI to establish accounting principles and auditing standards, but NAIC model standards in effect for 5 years SCHUMER NIC to establish standards based on NAIC model standards and/or GAAP but NAIC model standards in effect until transition (at least 5 years) ABIA GAAP with 5-year transition period ACLI and AIA consistent with NAIC statutory financials (at least 5 years for ACLI)

43. 43 MARKET CONDUCT LAFALCE and SCHUMER Includes section on “market conduct” The purpose of the section is to prevent: Unfair and deceptive acts and practices Unfair claims practices Discrimination in underwriting Insurance fraud DONI and NIC granted broad rulemaking authority to carry out purposes of the Act

44. 44 MARKET CONDUCT (CONT’D) Includes: A defined list of unfair or deceptive acts and practices Anti tie-in provisions Prohibited discriminatory practices DONI and NIC granted rulemaking authority concerning replacements Establishes “fraudulent insurance act” as a federal crime, which includes specified acts or omissions that are made knowingly with intent to defraud Establishes Division of Insurance Fraud

45. 45 MARKET CONDUCT (CONT’D) LAFALCE Subjects national insurers and state licensed insurance producers selling products of national insurers to the provisions of this section and any implementing regulations Any insurance company (including state and foreign) is subject to the provision of the section as minimum standards for market conduct DONI required to conduct annual market conduct examinations of state producers that sell products of national insurers Establishes Division of Consumer Affairs

46. 46 MARKET CONDUCT (CONT’D) SCHUMER Prohibits a private right of action under this section Requires mandatory reporting of insurance fraud by national insurers ABIA The legislation does not include any section entitled “Market Conduct” Includes a list of unfair trade practices similar to LAFALCE and SCHUMER and each national insurance agent and agency is expressly made subject to the unfair trade practices identified in proposal

47. 47 MARKET CONDUCT (CONT’D) Grants NIC the authority to promulgate regulations governing the sales practices of national insurance agencies and agents, and, to the extent appropriate, national insurance companies ACLI The legislation includes section titled “Market Conduct” The purpose of the section is to ensure appropriate regulation of the sales and marketing practices of federal insurance producers and national insurers

48. 48 MARKET CONDUCT (CONT’D) DONI is granted rulemaking authority to carry out the purposes of the proposal, including promulgating rules focusing on advertising, sales, issuance, distribution and administration of the products of national insurers Establishes “fraudulent insurance act” as a federal crime includes specified acts and omissions that are made knowingly and with intent to defraud Civil as well as criminal liability

49. 49 MARKET CONDUCT (CONT’D) AIA DFICO to establish minimum standards for marketing Prohibits unfair trade practices as defined by DFICO Insurers must maintain copies of policy forms used Policyholder complaints for market conduct and unfair trade practices administratively adjudicated by DFICO in lieu of private right of action

50. 50 HOLDING COMPANIES Registration LAFALCE, SCHUMER and AIA require registration of federal insurers within a holding company system ABIA and ACLI require registration of holding companies All limit affiliate transactions All except AIA -- proposals similar to federal banking law limits AIA based on “reasonableness” standard, transactions involving 5% or more of assets require prior approval and transactions involving ½ of 1% of assets to 5% of assets and certain material transactions require prior notice

51. 51 HOLDING COMPANIES (CONT’D) Specify limits on dividends All except ABIA -- out of available surplus only; may pay extraordinary dividends to shareholders if DONI or NIC, after thirty days prior notice, does not disapprove ABIA – only from net profits

52. 52 PRODUCER LICENSING LAFALCE and AIA No provision for national producer licensing LAFALCE provides for regulation of producers to remain at state level and prohibits any state law that prevents, impedes or discriminates against a state producer that sells products of a national insurer AIA relies on state law and Gramm-Leach-Bliley Act, including NARAB

53. 53 PRODUCER LICENSING (CONT’D) SCHUMER and ABIA Creates a National Insurance Agency charter with name requirements (e.g., National Agency) Significant “corporate” guidelines related to governance ABIA proposal goes further and establishes capital requirements ($100,000) and bonding requirements for national insurance agencies SCHUMER and ABIA National insurance agency and federal producer can engage in the “sale, solicitation and negotiation” of insurance issued by either a national or state insurer

54. 54 PRODUCER LICENSING (CONT’D) SCHUMER state producers cannot sell national products unless first obtain a national license or NIC determines by regulation or order the licensing standard in a state is equivalent to the federal standards; ABIA does not appear to require federal license for state-licensed agent to sell a national product NIC or DONI will establish educational, character, examination and other appropriate requirements for a federal insurance license No description of any appointment process SCHUMER requires compliance with GLBA Consumer Protection rules

55. 55 PRODUCER LICENSING (CONT’D) SCHUMER and ABIA SCHUMER NIC must adopt regulation for creating an electronic database for producers but may delegate authority to an SRO to maintain the database SCHUMER repeals NARAB ACLI No person (organization or individual) can sell an insurance or annuity contract issued by a national insurer unless that person holds a “federal producer” license for that line of business Does not appear to contemplate either an appointment requirement, or a capital requirement

56. 56 PRODUCER LICENSING (CONT’D) Director will issue regulations governing the rules for commissions and compensation based on sales If an applicant has a state license as a producer, regulations must provide for “prompt” federal licensing License authorizes the federal producer to sell lines of insurance authorized under the license, and only those products issued by national insurers Creates the framework for imposing supervisory responsibilities on the insurer for its captive and independent producers, as well as any of its applicable employees

57. 57 CHANGE IN CONTROL LAFALCE and SCHUMER Requires prior approval by DONI or NIC No conflict with other federal laws – e.g., BHC Act No delegation of this power to SRO ABIA Based on Change in Bank Control Act Opportunity for prior review by NIC of change in control, then right to disapprove ACLI and AIA Requires prior approval by DONI or DFICO, as applicable

58. 58 CONVERSIONS ALL Except AIA Allow for national to state charter conversions LAFALCE, SCHUMER and ACLI allow state to national conversions LAFALCE and SCHUMER allow mergers, consolidation or acquisition between state insurer and national insurer where national insurer or state insurer survives ABIA only allows conversions from national to state charter in states where state chartered companies can convert to national charter; ABIA silent regarding state to national charter but allows mergers of state and national companies where national company survives AIA Contains no provision

59. 59 DEMUTUALIZATION LAFALCE State law will govern demutualization of a state insurer Silent on demutualization of a national insurer SCHUMER and ACLI May convert from mutual to stock NIC or DONI must approve plan only after holding a hearing which determines that: plan is fair and equitable to insurer and policyholders, does not violate law, and after conversion, insurer still meets federal licensing requirements

60. 60 DEMUTUALIZATION (CONT’D) All membership interests and rights in surplus are extinguished and will receive fair and equitable payment, does not have to be stock, can be cash, premium credits, credit to insurance policy, account values or enhanced insurance benefits Can establish stock option or incentive plans customary for publicly traded companies and subject to regulations promulgated by the NIC or DONI

61. 61 DEMUTUALIZATION (CONT’D) SCHUMER No state interference No delegation to an SRO permitted Certain violations or actions may be enforced or enjoined in district court in the District of Columbia or for the district where the converted insurer’s main office is located Contractual rights and liabilities are preserved unless effected by the conversion plan No person shall acquire more than 5% of any class of voting stock of a converted insurer or a person that controls a converted insurer without prior approval of DONI or NIC for 5 years after effective date of plan

62. 62 DEMUTUALIZATION (CONT’D) ABIA May convert from mutual to stock and from stock to mutual form Must obtain prior approval of conversion plan by Commissioner After consummation of a mutual to stock conversion, members must have the same rights as before the conversion Cannot award any additional stock options to any company- affiliated party or a company that owns or controls the insurer that they would not otherwise be entitled to as members Contractual rights of members preserved Can appeal NIC decision to Federal Court of Appeals

63. 63 DEMUTUALIZATION (CONT’D) ACLI Judicial review of DONI decision, but silent on what court AIA Does not address

64. 64 SOLVENCY All Except ABIA Overlays on current state guaranty association structure All national insurers would remain members of the state guaranty association in each state where the national insurer does business Subject to assessments in each state in which insurer does business

65. 65 SOLVENCY (CONT’D) LAFALCE, SCHUMER and ACLI National guaranty fund(s) serve as “fall back” if a state fund fails to meet certain federal criteria If state fails to meet federal standards, national and state insurers in that state automatically become members of national guaranty fund(s) No provisions for unallocated annuities No authority to take action against insurers bordering on default Guaranty fund(s) have discretion to guarantee, assume or reinsure any or all policies of an impaired insurer

66. 66 SOLVENCY (CONT’D) LAFALCE and SCHUMER Establishes two federal guaranty funds: 1) life and annuity products; 2) property and casualty SCHUMER – life guaranty fund also includes health products; LAFALCE is silent on health products Both funds are established as nonprofit District of Columbia corporations and are not agencies of the U.S. government, but subject to oversight by DONI or NIC Directors of both corporations are selected by member insurers

67. 67 SOLVENCY (CONT’D) Neither corporation is backed by “full faith and credit” of the United States Benefits to policyholders under property and casualty fund include: $10,000 per policy Full coverage of worker’s compensation claims LAFALCE benefits to policyholders under life fund include: $300,000 in death benefits $100,000 in cash value of life insurance and annuity benefits Aggregate limit of $300,000 for all benefits

68. 68 SOLVENCY (CONT’D) SCHUMER benefits under life fund same as ACLI and include: $300,000 in death benefits $100,000 in cash value of life insurance and annuity benefits Two kinds of Assessments to pay funds: Class A To meet administrative and legal costs and not based on any particular impaired or insolvent insurer Assessed on ongoing basis, may be pro rata or non- rata

69. 69 SOLVENCY (CONT’D) Non-rata assessments capped at $150 per calendar year Pro rata can be credited against future Class B assessments Class B Made post-insolvency Assessed to provide protection and benefits with regard to a particular impaired or insolvent insurer No cap, but total assessments capped at 2% of average annual premiums

70. 70 SOLVENCY (CONT’D) ABIA Establishes National Insurance Guaranty Corporation (NIGC) patterned after FDIC 5 person board made up of Commissioner, SEC Chairman, FDIC Chairman and two individuals (one chosen as Chair) appointed by President for a six year term NIGC serves as both guarantor for policyholders and receiver National insurers are required to be shareholders State chartered insurers may apply for membership and state-members of NIGC are not required to comply with state guaranty fund law

71. 71 SOLVENCY (CONT’D) 2 funds under NIGC and administered separately—National Life and Health Guaranty Fund and National Property and Casualty Guaranty Fund Shareholders are a member of a fund based on their line of business and can only be a member of one fund Assessments are risk-based and when necessary to maintain the designated reserve ratio for each fund will be paid semi- annually Designated reserve ratio is either set by the Board or is between 0.5% and 1.25% of estimated insured liabilities Refunds may be given of funds in excess of the designated reserve ratio

72. 72 SOLVENCY (CONT’D) ABIA Specified benefits to policyholders and beneficiaries for both funds (certain exceptions apply) Life and Health Fund: $400,000 in life insurance death benefits $135,000 in net cash surrender value of life insurance and annuities $6,600,000 aggregate of unallocated annuities by one owner

73. 73 SOLVENCY (CONT’D) Separate Enforcement Powers: NIGC may also take a series of actions when it finds that an insurer is in a troubled condition depending on their capital and reserve category similar to “prompt corrective action” under banking law NIGC may also provide financial assistance to insured institution prior to being placed in receivership, make loans to, purchase assets of, securities of, assume liabilities of, or make contributions to any insured institution if assistance may prevent a default, restore an institution or lessen risk to the NIGC NIGC has authority to examine shareholders

74. 74 SOLVENCY (CONT’D) ACLI Provides for 1 federal guaranty fund – National Insurance Guaranty Commission (NIGC) No provisions for property and casualty benefits Directors of NIGC selected by member insurers Assessments based on current NAIC Model Act provisions Assessments are made post-insolvency and are capped at 2% of premiums

75. 75 RECEIVERSHIP AND CONSERVATORSHIP ALL Except ABIA Based on Uniform Receivership Law Only DONI, NIC or DFICO as applicable, may institute receivership proceeding in federal district court DONI, NIC or DFICO as applicable, serves as conservator, rehabilitator or liquidator under the authority of the federal district court DONI, NIC or DFICO as applicable, subject to court’s oversight and prior approval of certain actions

76. 76 RECEIVERSHIP AND CONSERVATORSHIP(CONT’D) Functions of liquidating an insurer ACLI and AIA – Pay close attention to specific insurance related issues (e.g., reinsurance claims of ceding companies) under priority of claims LAFALCE, SCHUMER and ACLI Providing guaranty fund protection is separate but coordinated Authority to transfer insurance liabilities during liquidation is in the guaranty funds

77. 77 RECEIVERSHIP AND CONSERVATORSHIP(CONT’D) Under ACLI, only DONI may disaffirm “executory” contracts, under LAFALCE and SCHUMER, DONI or NIC, as applicable, may disaffirm “executory” contract subject to court approval, but authority not applicable to insurance policies or reinsurance contracts LAFALCE and SCHUMER Receivership proceedings may be initiated against national insurer, and persons affiliated with a company in receivership including insurance producers, managing general agents, premium finance companies and insurance holding companies

78. 78 RECEIVERSHIP AND CONSERVATORSHIP(CONT’D) Immunity and indemnification for receivers and their employees Document depository required during pendency of proceedings ABIA NIC required to appoint NIGC as receiver of any national insurer failure

79. 79 RECEIVERSHIP AND CONSERVATORSHIP(CONT’D) ABIA Role similar to FDIC under federal banking law NIC has discretion to appoint NIGC as conservator State may appoint NIGC as conservator or receiver of state member insurer State member insurer in conservatorship remains under supervision of state NIGC does not obtain permission from a court to place an insurer in conservatorship or receivership

80. 80 RECEIVERSHIP AND CONSERVATORSHIP(CONT’D) No judicial oversight of NIGC role Institutions must seek redress from federal court Little attention paid to specific insurance related issues in priority of claims Authority to disaffirm or repudiate “burdensome” contracts, damages for repudiation limited to compensatory damages

81. 81 REINSURANCE LAFALCE, SCHUMER and ACLI Specific sections on reinsurance and bulk transfer Subject reinsurance to federal regulation patterned after existing state regulation Bulk transfers (assumption reinsurance) between national insurers are subject only to national regulation State or foreign chartered reinsurers may be licensed as “federally qualified reinsurers”

82. 82 REINSURANCE (CONT’D) Reinsurance credit will be allowed a state insurer that cedes any risk to a federal reinsurer or federally qualified reinsurer; state credit-for-reinsurance regulations are preempted Reinsurance contracts may provide for risk transfer of broader categories of risk -- whether proportional or nonproportional Some provisions are directed toward improving U.S. reinsurers' ability to compete internationally, e.g., LAFALCE and SCHUMER – formation of commission to study reinsurance regulation in U.S. and other countries

83. 83 REINSURANCE (CONT’D) LAFALCE and SCHUMER A national company must obtain DONI’s or NIC’s prior approval before effecting a bulk transfer and DONI or NIC has discretion to decide if policyholder approval is required State review or action only permitted in certain circumstances as long as it serves a legitimate state interest and does not frustrate the proposed bulk transfer A “federally qualified reinsurer” must maintain a trust fund if it is a national company that holds a federal license, and is a "federally qualified reinsurer”

84. 84 REINSURANCE (CONT’D) ABIA Very general reference – mere placeholder Unclear how it relates to existing state regulation No mention of bulk transfers ACLI Bulk transfers between national insurers and state insurers are subject to federal and state regulation but if done as part of a conversion of a state insurer to a national insurer or formation and licensing of a new national insurer, exempt from state regulation and policyholder approval

85. 85 REINSURANCE (CONT’D) AIA Federally chartered insurer may engage in reinsurance Imposes limits on affiliate reinsurance DFICO may set limits and controls “on the use of reinsurance, and standards for ceding, reporting on, and credit for such reinsurance” Detailed discussion under receivership section

86. 86 TAX LAFALCE, ABIA and AIA Currently do not specifically address product taxation LAFALCE, ACLI and AIA Neutral treatment of national companies and state insurers for state tax, including retaliatory tax, purposes SCHUMER and ACLI Federal tax neutrality of national insurers and policies and contracts for at least five years National insurer treated as if it were a state insurer at least during five year transition period

87. 87 TAX (CONT’D) National insurer policies and contracts treated the same as contracts under state law at least during five year transition period ABIA Neutral treatment of national companies and state insurers for state tax, including premium tax, purposes

88. 88 CONTACT INFORMATION If you have any questions concerning the Lafalce or Schumer bills or the National Insurance Charter presentation, please do not hesitate to contact us. Jamie Cain202.383.0180 Eric Arnold202.383.0741 Beth Knickerbocker202.383.0647 Daphne Frydman202.383.0656

89. NATIONAL INSURANCE CHARTER MOVING FORWARD IN 2002 RECENTLY INTRODUCED BILLS