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

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1 Casualty Practice Council Cycle Report Vice President, Casualty: Jan A. Lommele Staff Liaison: Greg Vass May 2004 I. ISSUES A. Catastrophic Events/Natural Disasters The Extreme Events Committee is now focusing on updating their last monograph with data that describes the market in the presence of the federal backstop. It also will examine options policymakers can choose when the backstop expires in Outlook: Although Treasury and the NAIC still need to work out implementation issues and send out guidance, much of the TRIA has already been addressed in published regulation. However, critics of the bill have already alleged that it is an inadequate solution and that Congress should consider a permanent terrorism risk transfer mechanism. The mandatory offer section of the law is due to expire at the end of 2004 and since renewals are coming up, the market is beginning to respond negatively to the potential lack of coverage. The updated monograph is slated for release in April 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 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 International Accounting Standard Board s (IASB) planned implementation of fair value this decade in the European Union and 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 forces 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

2 D. Financial Reporting Issues Comment on SAO Practice Note and Law Manual At the June 2003 NAIC meeting, the NAIC Casualty Actuarial Task Force (CATF) passed model law and model regulation language creating the Actuarial Opinion Model Law and Summary Report. These were also approved by the NAIC P/C (C) Committee, and were considered at Executive Committee at the September 2003 meeting. Andrea Sweeny also reported that the NAIC/AICPA working group discussed new considerations for actuaries to act in an audit role and members of the Committee on Property Liability Financial Reporting (COPLFR) posed questions to the group and addressed concerns. The NAIC moved this reporting standard at the December 2003 meeting into the accreditation process and it is likely to be adopted by almost all the states. The Academy also participated at a meeting of the NAIC s Financial Condition Committee Rating Agencies Working Group. Outlook: Schedule P, Blanks, and actuarial opinion revisions are ongoing issues E. Medical Malpractice Jim Hurley, chairperson of the Medical Malpractice Subcommittee, testified or submitted testimony for the record in Congress seven times from July 2002-October 2003 on trends leading to recent large increases in premiums. The subcommittee chair also testified at an Ohio state commission hearing on medical malpractice and testified before the South Carolina House Judiciary Committee as well. The subcommittee is also 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 2004 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. F. Mass Tort Liabilities Members of the Mass Torts Subcommittee have published a monograph primer on the issues surrounding the increasing severity of asbestos liabilities. The subcommittee also plans to update the monograph in early The subcommittee chairperson testified July 10 at the National Conference of Insurance Legislators 2003 summer meeting before the Committee on Property Casualty Insurance. The monograph will be updated in early 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. The Senate Judiciary Committee passed a bill in July 2003 largely along party lines. A vote is scheduled for the full Senate in late April G. Risk-Based Capital 2

3 The NAIC has undergone major revisions in its committee structure and now all the line-specific subgroups and has 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. The committee is also analyzing insolvencies and trend tests, deferred tax assets and deferred tax liabilities, and fair value accounting, and a macro review of all the RBC factors to be completed by the end of the year. Outlook: RBC is an ongoing issue 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 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. In preparation for the testimonies on medical malpractice, Academy members and staff had extensive contact with congressional committee staff and representatives of other interest groups. Officials from the General Accounting Office (GAO) met separately with Academy staff and Jim Hurley to discuss the basics of the medical malpractice crisis. There has been contact with Senate Judiciary on the issue of asbestos reform related to our submission of testimony for the March 2003 hearing. 3

4 V. PUBLICATIONS The following Casualty Practice Council public statements have been issued in the past year: Publication Audience Publication Date Letter: actuarial opinion summary issues Letter: workers compensation treatment in the Terrorism Risk Insurance Act Testimony: fair credit reporting act and ratemaking issues NAIC Casualty Actuarial Task Force April 8, 2003 U.S. Treasury Terrorism Risk Insurance Act Public Comment Record May 16, 2003 U.S. House Committee on Financial June 4, 2003 Services, Subcommittee on Financial Issues and Consumer Credit Ohio Medical Malpractice June 11, 2003 Commission NCOIL P/C Committee July 10, 2003 Testimony: Medical malpractice crisis in the U.S. Testimony: primer on asbestos exposure and litigation Testimony: Medical malpractice South Carolina House Judiciary October 30, 2003 crisis in the U.S. Committee Issue Brief: "Actuarial Opinions in General Public December 5, 2003 Property/Casualty Insurance Letter: Deferred Tax Assets and NAIC March 9, 2004 Deferred Tax Liability Treatment in Risk Based Capital Letter: Workers Compensation California Commissioner Garemendi March 12, 2004 Ratefilling Letter: Medical Malpractice U.S. Senate March 26, 2004 Considerations Letter: Asbestos Considerations U.S. Senate March 29, 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 4

5 Ongoing Priorities: Workers Compensation Enterprise Risk Management for Insurers Monitoring Issues: Credit Scoring P/C Risk-Based Capital 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. In February, March, and June 2003 Jim Hurley participated as a witness representing the Academy at a series of hearings on medical malpractice before Congress. These hearings prompted a request for the meeting mentioned above with GAO officials. 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 meets 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. As mentioned above, the Risk Classification Subcommittee presented the credit score report as testimony for a hearing on the topic at NCOIL s fall meeting. The Mass Torts Subcommittee also testified at an NCOIL hearing on asbestos issues in July The asbestos monograph and the terrorism insurance report (subsequently reconstituted as a 5

6 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 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