NATIONAL INSURANCE CHARTER MOVING FORWARD IN 2002 RECENTLY INTRODUCED BILLS

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

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.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.com

3. PRIOR TRADE GROUP PROPOSALS 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

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. 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. 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. 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. 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. 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. 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. 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. 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. 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 SCHUMERDONI 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. POWERS OF NATIONAL INSURERS (CONT’D) SCHUMER • Insurance company can underwrite either life, health and annuities or property and casualty insurance, butnotboth • 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. POWERS OF NATIONAL INSURERS (CONT’D) ABIA • Insurance companies can underwrite either life, health and annuities or property and casualty insurance, butnotboth • 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. 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. 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 “anyother business or activity engaged in by insurers” • No specific provisions regarding powers and activities of subsidiaries

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. FORM, GOVERNANCE, CAPITAL (CONT’D) ACCOUNTING • ALL require qualified actuaries and independent audit • LAFALCE DONI to establish accounting principles and auditing standards, but NAICmodel 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. 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. 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. 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. 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 andeach national insurance agent and agency is expressly made subject to the unfair trade practices identified in proposal

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. 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 actsand omissions that are made knowingly and with intent to defraud • Civil as well as criminal liability

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. 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