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House Insurance Committee Hears Insurance Regulatory Modernization Act (HB 313)

The Ohio House Insurance Committee took testimony Nov. 12 on HB 313 which would revise the insurance laws regarding alternative investments, holding company systems, risk management, reserves kept for life insurance policies, automated transactions, reinsurance, and mergers and consolidations.

Mike Farley, assistant director for legislative affairs at the Ohio Department of Insurance (ODI), gave extensive proponent testimony. He said the legislation is the result of two years' work, which included conversations with "a variety of interested parties." He said the intent is "more stable premiums and greater availability of products in Ohio."

He said the bill includes a number "of interconnected provisions … as we seek to modernize the regulatory climate …" Examples he gave included the interplay of the provisions of the Own Risk and Solvency Assessment with the investment code and the Credit for Reinsurance Model Act.

He highlighted the following major provisions in the bill:

Own Risk and Solvency Assessment (ORSA)

He said ORSA is a component of an insurer's enterprise risk management (ERM) framework, "a confidential internal assessment conducted by the insurer." Specifically, the bill requires "individual companies with $500 million of direct written premium and insurance groups with greater than $1 billion of direct written premium to implement ERM and to develop an ORSA Summary Report for the board." This report will also be filed with ODI and is "required for continued accreditation with the NAIC [National Association of Insurance Commissioners]."

Model Holding Company

Changes in the bill put Ohio in line with the most recent version of the NAIC Model Holding Company Act, Farley said. These changes "give the department more transparent authority to review various financial transactions and other enterprise risks in which insurance companies and their non-insurance affiliates engage that could impact the solvency of the insurance company."

Credit for Reinsurance Model Act

Farley said that currently, "an alien (non-U.S.) reinsurer or any other U.S. reinsurer not licensed in Ohio must post 100 percent cash (or cash equivalent) collateral on all risks that it assumes." NAIC model legislation allows "reduced posting of collateral for non-U.S. reinsurers … determined by the fiscal strength of the reinsurer." This reduced collateral, however, is offset by "new standards for reviewing the financial solvency of non-U.S. reinsurers and their jurisdictions' regulations" being in place.

"Never before have domestic insurance regulators been able to review the financials of non-U.S. reinsurers. …

"From a future competitive standpoint, allowing U.S. companies to enter in reinsurance treaties in a reduced collateral environment is an important tool for Ohio's domestic companies." He noted that other "reduced collateral states" include New York, New Jersey, Florida and Pennsylvania.

Farley predicted that reduced collateral "will likely lead to reduced reinsurance rates or the stabilization of reinsurance rates in an era of increased global risk."

He stressed that this provision affects only domestic Ohio companies. "This proposal does not eliminate collateral, but simply allows for a reduction in collateral posted by non-U.S. reinsurers. Nothing in this legislation prohibits a domestic company from requiring the reinsurer to post 100 percent collateral; this requirement can be accomplished by contract."

Investment Code

Farley explained that companies currently operate under a "defined limits" approach to investments, meaning they "are restricted to the categories they may invest and the amounts that may be invested inside" each category.

"HB313 proposes to maintain the defined limits method of investment regulation on certain amounts of investments but also provides insurance companies with an optional 'prudent person' standard of investment.

"HB313 will create a 'defined standards' approach to investment regulation. Under the defined standards regime, a company will invest assets equivalent to their policyholder liabilities plus a multiple of the companies [sic] authorized control level, consistent with the principles of the defined limits strategy. However, insurers with assets above this threshold will be permitted more flexibility in the investment strategy." This is what will be measured by the "prudent person" standard.

Farley also noted that this approach will provide "greater regulatory visibility in investments in derivatives. Companies planning to invest in derivatives must develop a "Derivative Use Plan," approved by their boards and filed with ODI.

"One goal of HB313 is to create a mechanism that requires companies to quantify and disclose the potential loss of certain derivative transactions to the board and to the company." 

He added that this is "still pretty restrictive -- the company must apply to the department to do it."

Voluntary Electronic Delivery of Documents

Under HB313, both the consumer and the insurance company must agree to the transmission of documents electronically. This will apply to all personal lines of insurance including property and casualty, health and life products.

RBC Trend Test

Farley explained that, "Risk-Based Capital (RBC) is a method of measuring the minimum amount of capital appropriate for a reporting entity to support its overall business operations in consideration of its size and risk profile." He said current law requires property and casualty carriers to meet the 300 percent RBC trend test and this bill requires life carriers to meet the same level. Farley referred to the RBC as "an early warning system" so the department can talk with a company before there is a problem. He also noted that "RBC is not designed to be used as a standalone tool in determining financial solvency of an insurance company; rather it is one of the tools that give regulators legal authority to take control of an insurance company."

Life Valuation Manual/Standard Nonforfeiture

Farley said these provisions relate to the ongoing national dialogue on Principles-Based Reserving (PBR). He explained that as the products of life companies have become more complicated, the NAIC has worked to "create a more dynamic principle based reserving system. This manual would provide guardrails to ensure that reserving stays within acceptable bounds. …

"Since companies must justify their calculations, this change from the formulaic approach should provide for better alignment of Ohio's regulatory requirements with company risk exposures and new risk management practices implemented as part of HB313."

In answer to a question from the committee chairman, Rep. Hackett, concerning derivatives and the relation to the regulation of banks in this regard, Farley stressed that "we are not loosening any regulations." He went on to say that HB313 is "putting good regulatory backstops" in place.

Rep. Bishoff had a couple of questions regarding ODI's staffing needs to handle the new kinds of reviews. Farley did not indicate for any of the areas that they needed to hire new staff, either because there will not be a lot of companies pursuing any one approach and/or because staff are already doing it to some degree. He also said they are looking to other regulators about approaches.

Rep. Retherford asked if there is any opposition, with Farley telling him they have worked through the issues. "Today, there is general consensus," he said, although he acknowledged "drafting issues."

Regarding the reserving provisions, Farley told Retherford that in many ways it is a "right-sizing" exercise.

Rep. Carney asked, if other states have already pursued these approaches, and what have been the savings. Farley said it is hard to do a good comparison to answer that. Carney also wanted to know who was weighing in on the Senate hearings, with Farley saying Sen. Bacon has had two or three interested party meetings