Casualty Practice Council Cycle Report Vice President, Casualty: Jan A. Lommele Staff Liaison: Greg Vass September 2004

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1 Casualty Practice Council Cycle Report Vice President, Casualty: Jan A. Lommele Staff Liaison: Greg Vass September 2004 I. ISSUES A. Catastrophic Events/Natural Disasters The Extreme Events Committee has completed their update and extension to the 2002 terrorism risk monograph. There was also a Capitol Hill briefing in June on terrorism risk and workers compensation insurance issues that was well attended. Outlook: There have been both Democratic and Republican versions of bills to extend the Terrorism Risk Insurance Act (TRIA) introduced into Congress. However, critics of the bills have alleged that it TRIA was an inadequate solution and that Congress should consider a permanent terrorism risk transfer mechanism. B. Fair Value of Liabilities Members of the Committee on Property and Liability Financial Reporting (COPLFR) will continue to work with the Financial Reporting Council s Fair Value Task Force on a response to the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) proposals on fair value accounting. This dialogue has been accelerated due to the IASB planned implementation of fair value this decade in the European Union and the (FASB s) convergence objective with IASB rules. Outlook: This is an ongoing issue. C. Federal/State Regulatory Framework The CPC will continue to monitor the work of the NAIC s Gramm-Leach-Bliley task force and other issues concerning the changing financial services environment. Outlook: This is an ongoing issue but there has been significant discussion in Congress about creating a hybrid state and federal system, with the federal government regulating less actuarial items such as form fillings and licensing, but also perhaps regulating rate fillings which would be strongly deregulated. At the spring 2004 NAIC meeting, Oxley called for uniform standards and permit the market to determine insurance prices rather than have them determined by regulators as is generally the case now and said that national regulation would end "the travesty of price controls. The CPC is now considering the latest congressional staff draft of this legislation.

2 D. Financial Reporting Issues, Comment on SAO Practice Note, and Law Manual The Academy also participated at a meeting of the NAIC s Financial Condition Committee Rating Agencies Working Group at the March 2004 NAIC meeting. A primary topic of discussion was the S&P report issued in November 2003 criticizing reserving P/C actuaries. Outlook: Schedule P, Blanks, and actuarial opinion revisions are ongoing issues E. Medical Malpractice The Medical Malpractice Subcommittee is planning a monograph outlining the current state of the medical malpractice insurance market, which will be based on the recent testimonies. They have also distilled comments from the various testimonies into a one-page letter sent to Congress in late March before a key vote. Outlook: Medical malpractice is a contentious and center stage issue in the debate on health care reform. There is continuing pressure to reform the system as doctors from states have gone on limited protests demanding reform of the system and President Bush has urged swift reform. The House passed medical malpractice reform legislation (H.R. 5) in mid-march 2003 but the Senate failed to act in mid-july of the same year and has failed to invoke cloture on smaller reform bills through It is unlikely Congress will address this issue again this year. F. Mass Tort Liabilities The Mass Torts Subcommittee plans to update its primer monograph primer on the issues surrounding increasing severity of asbestos liabilities. The subcommittee also conducted a briefing on the subject for Capitol Hill staff on April 7 Outlook: The asbestos situation is drawing increasing congressional interest, and tort reform has been discussed in the context of terrorism insurance proposals. However, congressional measures have failed a few times in 2004 and currently there is a lack of consensus to pass a bill. G. Risk-Based Capital The NAIC has undergone major revisions in its committee structure and of its line-specific subgroups. They asked the Property and Casualty Risk-Based Capital Committee to report on a number of issues at the June NAIC meeting, including an analysis of factors for Reinsurance A&C and retroactive reinsurance. An analysis of treatment of deferred tax assets and deferred tax liabilities was submitted prior to the March 2004 NAIC meeting. Also an analysis of terrorism risk and RBC was given to the NAIC at the December 2003 meeting. A report on trend test for P/C RBC was also submitted in June Outlook: RBC is an ongoing issue 2

3 H. Financial Solvency and Risk Management Because of a minimal response to the surveys sent to regulators in all the states regarding recent insolvencies, the CPC is considering expanding the charge of the Financial Soundness/Risk Management Committee to further review the causes of the insolvencies and the application of actuarial techniques like enterprise risk management. Outlook: This is an ongoing issue, but the financial soundness committee will be working closely with the NAIC in II. PEOPLE ISSUES None. III. BOARD OF DIRECTORS/EXECUTIVE COMMITTEE ATTENTION None. IV. EXTERNAL CONTACTS Academy staff and volunteers conducted Capitol Hill visits on March 24,2004. Meetings included Congressional and agency staff on issues related to terrorism risk, federal regulation of insurance, natural catastrophes, risk retention groups, and asbestos liabilities. P/C Academy volunteers met with S&P staff in November to discuss the S&P report criticizing the profession. On behalf of the CPC, Academy members and staff continue to have extensive contacts with congressional staff, industry groups and other policy organizations in addressing the terrorism insurance risk issue. There was an asbestos briefing on the Hill in April and a TRIA briefing in June. V. PUBLICATIONS The following Casualty Practice Council public statements have been issued in the past year: Publication Audience Publication Date Testimony: Medical malpractice crisis in the U.S. Issue Brief: "Actuarial Opinions in Property/Casualty Insurance Letter: Deferred Tax Assets and Deferred Tax Liability Treatment in Risk Based Capital Letter: Workers Compensation Ratefiling South Carolina House Judiciary October 30, 2003 Committee General Public December 5, 2003 NAIC Capital Adequacy Task Force March 9, 2004 California Commissioner Garemendi March 12,

4 Ratefiling Letter: Medical Malpractice U.S. Senate March 26, 2004 Considerations Letter: Clarification in Medical NAIC April 16, 2004 Malpractice Report Monograph: P/C Terrorism Insurance Coverage: Where Do we Go Post Terrorism Risk Insurance Act? Congress, states May 2004 Letter: Asbestos Considerations U.S. Senate May 16, 2004 Letter: Extra Contractual NAIC CATF May 18, 2004 Liabilities in P/C Annual Statements Letter: Comment on AICPA paper AICPA May 18, 2004 on risk transfer in short-duration contracts Report: Factor Updates in P/C NAIC Capital Adequacy Task Force June 25, 2004 RBC Report/Survey: Large Deductible Workers Compensation Policies NAIC IAIBC Joint Working Group July 28, 2004 Report: Trend Test in P/C RBC NAIC Capital Adequacy Task Force August 26, 2004 The CPC was also very active in reviewing various statements made by the Academy Communications Crisis plan regarding the S&P report and the issue of actuarial reserve opinions and alleged reserve deficiencies. VI. ISSUES/PRIORITIES FOR 2004 Key Issues: Medical Malpractice Extreme Events Mass Torts Loss Reserving/Insolvencies Ongoing Priorities: Workers Compensation Enterprise Risk Management for Insurers Monitoring Issues: Credit Scoring P/C Risk-Based Capital 4

5 Auto Insurance Tort Reform/Construction Defect International Accounting VII. STRATEGIC PLAN Strategic Direction: Increase the influence of the Academy and actuaries on the creation of public policy. In March 2004, short public statements were released to Capitol Hill regarding medical malpractice and asbestos legislation in anticipation of imminent Senate floor votes. Identify timely research needs on public policy issues. The CPC is engaged in dialogue with the CAS about the role of reserving actuaries and solvency. Strengthen relationships with accounting standards organizations (IASC, FASB, GASB, SEC, FASAB, AICPA to increase the Academy s influence in the establishment of U.S. standards...where assessment of future risk is a major factor. COPLFR regularly dialogues with both FASB and AICPA to discuss issues of common interest to both actuaries and accountants. Establish or strengthen relationships with think tanks and other important policy organizations such as NCSL, NCOIL, and NGA. The Workers Compensation Subcommittee has agreed to initially review how the National Academy of Social Insurance calculates premium estimates for self insured, to improve the accuracy of National Academy s reports to key policy makers. The asbestos monograph and the terrorism insurance report (subsequently reconstituted as a monograph) have been distributed to a very wide range of stakeholders, both within and outside the insurance industry. Strategic Direction: Build awareness and support for standards and the disciplinary process among members, news media, regulators, and policy-makers. As part of the crisis communications response to the S&P article, the Academy made numerous statements explaining the discipline process and standards. At a meeting at the NAIC s Casualty Actuarial Task Force, an Academy leader suggested that regulators more readily invoke the ABCD process rather than attempt to fundamentally revise the actuarial opinion on loss reserves. There have also been sessions at the last two NAIC meetings that facilitated discussion between regulators and practicing actuaries on the issues of professionalism. There has also been discussion within COPLFR regarding compilations of questionable actuarial 5

6 practice regarding loss reserve opinions and disclosure of risk of material adverse deviation. COPLFR, working closely with the NAIC, would submit these examples to the ABCD so they could develop a preemptive philosophical approach to these potential violations of requirement of ASOP 36. The recent indemnification discussion addressed the function of the ABCD and ASOPs. Strategic Direction: Improve the effectiveness of the Academy s communication process with its members. The S&P crisis has actually given the Academy numerous opportunities to show the profession the type of advocacy that is done on their behalf. The CPC also participated in reviewing the initial response to the S&P study and we also reviewed subsequent letters including a letter written by the CAS Committee on reserves. Specifically, there will be an article in the next Update to explain the PR steps the Academy took in response to the S&P report. 6