CAGNY NOVEMBER 2002 MEETING

1. CAGNY NOVEMBER 2002 MEETING Federal Charters for P&C Companies Impact on Property/Casualty Actuaries

2. Outline of Discussion • Political Viewpoint • P&C Federal Charters Task Force • Impact of Federal Charters On Regulation • How The Academy Will Protect The Public Interest In Effective Regulation • How The Academy Will Explain The Casualty Actuarial Role • How Your Voice Can Be Heard

3. POLITICAL VIEWPOINT • NAIC • Modernization Program • Deregulation of Commercial Rates • Interstate Compact • ACLI • ABIA • AIA • OTHERS • STATES RIGHTS VS. DEREGULATION

4. ARGUMENTS FOR OPTIONAL FEDERAL CHARTERS • Redundant licensing • Higher compliance costs in rate and form filings • Need for complex corporate structures to satisfy state requirements • Delayed implementation of new products • Subsidation a common part of rate regulation • Redundant regulatory costs due to regulatory structures in 50 states • Restrictions lead to self insurance and alternative markets • Reduced and slowed product innovation

5. AIA PROPOSED PRINCIPLES FOR FEDERAL REGULATION • Market based approach using competition • National treatment available • Uniform requirements that do not vary by state • Timely implementation of products and prices • Level playing field with other financial services such as banks • Uniform technology requirements

6. ARGUMENTS FOR STATE REGULATION • State regulation is already in place/ federal regulation may have equal disadvantages when implemented • NAIC Modernization is well underway and will solve most of the current problems • State regulation takes advantage of the federal system and allows different types of regulation to coexist and for the best regulation to emerge • For insurance covering liabilities, the liability system and associated rules and precedent is state based and state regulation of this type of insurance is the best fit • State regulation is closer to the people who buy insurance and problems get solved faster • A federal regulatory system will require a new bureaucracy and will not ultimately replace state regulation

7. Federal Charters CAS AAA SOA Financial Reporting Council P/C Practice Council Life Practice Council Health Practice Council Pension Practice Council P/C Federal Charters Task Force Chair: Chuck Bryan, FCAS, MAAA Banking and Financial Services Task Force Chair: Tim Tongson, FSA, MAAA

8. P&C Federal Charters Task Force • Members include Chuck Bryan, John Pedrick, Mavis Walters, Jim Rech, Rich Hoffman, and Rade Musulin and Greg Vass(Academy Staff) • This task force has three objectives: • Coordinating with other Academy task forces and committees on appropriate responses to the proposals • Communicating the major features of the proposals to casualty actuaries and soliciting their viewpoints on these issues so that there is a strong awareness of these issues in our profession • Developing position papers in critical areas that communicate to policy-makers the role casualty actuaries should play in the Federal Regulatory Structure

9. Federal Charters Task Force The charter we are using is the following: “The P&C Federal Charters Task Force will inform casualty actuaries of the issues in this area, solicit views from casualty actuaries on these issues, and develop a viewpoint and position on the principal legislative proposals with respect to how such proposals would affect the role of casualty actuaries in P&C risk transfer mechanisms such as insurance companies, self-insurance plans, and similar mechanisms. This Work Group anticipates that its efforts will form part of a larger Academy effort and so its audience will include the casualty actuarial profession, other Academy committees and work groups and regulatory and legislative decision makers.”

10. MAJOR EFFECT OF FEDERAL REGULATION ON CASUALTY ACTUARIES • Traditional rate regulation will be eliminated • Solvency focus and the need for methods and techniques to support solvency will be even stronger than today • Many of the technical skills that actuaries have offered to companies will no longer be as valuable under a Federal regulatory structure • Actuarial Skills will be in demand but will be challenged by other disciplines.

11. Position Papers • The task force has developed eight position papers to focus thought on key issues where casualty actuaries have a unique expertise • These position papers have been forwarded to the AAA Committee charged with coordinating the involved disciplines (casualty, life, and health) and writing a monograph • Members will have an opportunity to comment on these positions

12. Eight Position Papers • Staffing of Federal Regulatory Structure • The agency should have a chief casualty actuary. • Rate Standards • No need for rate standards • Loss Reserve Opinion: KEEP IT • RBC and Related Solvency Measures: KEEP THEM • Cash Flow Testing: DEVELOP AND MAKE TOOL AVAILABLE • Role of Statistical Agents • Recognize need in the legislation • Permit advisory rates • Basis of Accounting • No actuarial need for statutory • Coordinate with accountants • Definition of Insurance For Regulatory Purposes

13. Next Steps And How You Fit In • We expect the federal charter legislation to be actively considered in 2003 • Our work has been forwarded to the Coordinating Group • The P&C Task Force will actively participate in the writing of a monograph and position papers that will be used in how the Academy responds to and testifies on legislation • You can be heard by conveying your thoughts to me or to any committee member or to Greg Vass who is the Academy staff supporting us.

14. ACADEMY WEB SITE ON FEDERAL CHARTERS • The website contains the major pieces of federal legislation and related material. • It contains the position papers and the minutes of the teleconferences so you can see how the task force reached consensus on the position papers. • The web site address is available from Greg Vass of the Academy staff at 202-223-8196.

15. CAGNY November Meeting Speaker Contact Information: Charles Bryan President CAB Consulting, LLC 600 South High Street Columbus, Ohio Phone 614-221-1919 Fax 614-221-2881 E-mail: chuckbryan66@hotmail.com