MEMORANDUM

To:                  Guaranty Fund Managers, Trade associations, other interested parties

From:              Kevin Harris

Date:               February 28, 2005

Re:                   Finalized NCIGF Board Task Force Legislative and Other Proposals

The NCIGF Board of Directors organized a Task Force in 2002, the charge of which was to: (i) identify and analyze problems and issues raised by recent large insolvencies, and (ii) develop potential solutions.  The Task Force members are as follows: Sonja Larkin-Thorne (chair), Steve Bennett, Paul Gulko, John Hartman, Mike Koziol, Mike Marchman, Larry Mulryan, Randy Seiner, Dale Stephenson and Deb Wozniak.  Kevin Harris provided staff support.  Rowe Snider of Lord, Bissell & Brook was retained to assist the task force.

The Task Force has been working diligently for over two years now.  The Task Force finalized and issued a number of legislative proposals on the most pressing issues last year.  Last year’s proposals addressed guaranty funds’ rights and obligations concerning large deductible policies, limits on coverage of claims by or against large commercial insureds, strengthened access to records of insolvent insurers held by TPA’s, and coordination with and cooperation of regulators and receivers.

The Task Force has been reviewing other issues since that time and exposed last September a second round of proposals.  We received a number of comments on the various proposals, that were very helpful and in the end contributed to improved proposals.  A sincere thanks to those of you who took time to review and comment on last year’s exposure drafts.  Special thanks also go to each of the members of the Task Force for the time and effort that continues to be required, and also to Mr. Snider and Barb Cox and Ed Wallis of the NCIGF who both again served in important roles in developing the Task Force’s recommendations.

The Task Force is now issuing a finalized second round of proposals.  As was the case last year, the recommendations include legislative proposals (three in total) that deal with particular issues presented by recent commercial insolvencies (see Exhibits 1-6).  Included with each legislative proposal is a short memo explaining the need for the proposed legislative revision.  The legislative proposals are briefly described as follows: (i) Strengthened Liquidation Act “Early Access” provision (Exhibits 1 and 2) – needed to ensure that early access provisions work as originally intended, permitting available assets of an insolvent insurer to be promptly distributed to guaranty funds for the payment of covered claims, (ii) Right to Intervene/Estate Administrative Conference provision (Exhibits 3 and 4) – required to ensure guaranty funds’ have a “voice” in insolvency proceedings, (iii) “Unit stat” reporting requirement (Exhibits 5 and 6) – needed to ensure receivers continue to report worker’s compensation loss data to licensed statistical, rating or advisory organizations to minimize market-place disruption.

The work-product of the Task Force also includes a formal report (Exhibit 7).  The purpose of this report is to educate various stakeholders of an insurance insolvency concerning liquidations and guaranty funds in general, and in particular, issues affecting guaranty funds and potentially other parties for which education or reform is needed, but a legislative solution was not considered appropriate.  The report explains very clearly the challenges presented by applying liquidation and guaranty association act laws drafted many years ago to insolvencies involving the current generation of insurers many of which marketed the latest cutting edge insurance products and services.  It is the hope of the Task Force that the enclosed report will serve not only as an educational tool, but as a well-articulated “call to action” to: reform state insolvency laws, and to continue efforts to cause the response by guaranty associations, regulators, receivers and others to insurer insolvencies to evolve as needed to meet the various and new challenges that are involved.

The Task Force has also begun a dialogue among the various parties particularly affected by an insurance insolvency, including reinsurers, receivers and primary companies concerning problems associated with delayed recoveries of reinsurance by insolvent ceding companies.  Recovery of billed receivables not subject to dispute almost always slows dramatically when the ceding company becomes insolvent.  This slowdown is in part due to the unavoidable initial disruption in the payment of claims and reporting of data to reinsurers.  However, there are other contributing factors.  This delay has the effect of significantly reducing estate assets initially available for distribution to guaranty funds under early access statutes, which in turn forces up guaranty fund assessments on primary companies that are initially required.

The Task Force’s proposals that were exposed last year included two proposals that the Task Force, due to comments received, decided to hold for further study and not finalize at this time.  These proposals excluded guaranty association coverage for claims under captive programs and “matching” programs, the latter involving policies for which the deductible amount matches policy limits.

The Board of Directors of the National Conference of Insurance Guaranty Funds recommends to trade associations and companies that the finalized legislative proposals (Exhibits 1-6), concerning strengthened early access, right to intervene/estate administrative conference and unit stat reporting, together with last year’s proposals be treated as a legislative priority for 2005.   The NCIGF Board also asks that trade associations, primary companies and the guaranty fund community embrace, adopt and use the Task Force Report to help advocate for the need for our insolvency laws and response to insolvencies to change and evolve.

The Task Force continues its work on a small number of remaining issues, and may be offering up at a later date additional recommendations.

On a final note, it is important to point out that, as with all NCIGF model legislation, while the NCIGF Board will endorse and recommend the finalized proposals, a separate analysis on the part of the companies and the trade associations will be required to determine which proposals should be considered for action in a specific state.  We strongly recommend that, as with our past proposals, this analysis include consultations with representatives of the local guaranty fund and others involved locally.

Thank you for your consideration of this matter.   Please contact Kevin Harris if you have questions. 

Exhibit 1, Exhibit 2, Exhibit 3, Exhibit 4, Exhibit 5, Exhibit 6, Exhibit 7