Life and Health Insurance Guaranty Association Model Act Legislative History

LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION MODEL ACT

Legislative History
Cited to the Proceedings of the NAIC

Section 1. Title

Amendments to the model proposed first in early 1996 included deletion of a comment that had been in the model since its adoption in 1970. The comment highlighted the difference between the property/casualty and life/health guaranty funds. The set of proposed amendments included both substantive and technical revisions and reflected changes in the life insurance industry and the products offered by insurers as well as lessons learned in connection with major life insurance insolvencies in recent years.

Those presenting suggestions on behalf of the life insurance industry suggested that large insurance insolvencies in the early 1990s demonstrated that some parts of the model act worked well and others did not. The intent of the drafters of the amendments was to make the act more workable and clarify the authority of the guaranty associations with respect to multi-state rehabilitation plans.

Among the issues addressed in the 1996 amendments were (1) the need for a different method of covering guaranteed investment contracts and structured settlement annuities to avoid concentration of coverage in a few guaranty associations and the concomitant capacity problems; (2) the need to change the assessment process to allow assessments to be called in one year and collected in another and to delete the current 1% spillover requirement; and (3) implementation of national rehabilitation and reinsurance plans.

Section 2. Purpose

After development of the guaranty association for property and casualty insurance, it was questioned whether there was need to develop legislation specifically to deal with insolvencies of life and health insurers. However, industry representatives cautioned that the approaches and solutions developed for property and casualty insurers were not only inadequate, but inappropriate for the life and health insurance business.

Industry organizations maintained the position that the NAIC should be concentrating on legislation for solvency rather than insolvency. The primary purpose of state regulation is not fulfilled if a preventable insolvency occurs.

When the model was being considered, the insurance company representative expressed the opinion that the guaranty fund encouraged improvident management and the creation of marginally financed companies, which would hurt the industry.

Section 3. Coverage and Limitations

A. The model as originally enacted had a Section 3 entitled “Scope.”

A memo from an insurance industry organization included a proposal that the guaranty association be responsible for covering only residents of its own state.

The focus of the amendments proposed in 1996 was to shift the situs of coverage of guaranteed investment contracts issued to pension plans and of structured settlement annuities.

B. Revisions to the model were made necessary by the nature of new products now being sold by life insurance companies.

The list of exceptions in B(2) was expanded to include some aspects of variable life contracts.

C. An industry draft prepared in 1984 suggested this section be changed by adding limitations to terminate the guaranty associations obligation by the next renewal date or 180 days, whichever is earlier.

Section 4. Construction

When the model was amended in 1996 this provision was modified so that it no longer said the act “shall be liberally construed . . . .”

Section 5. Definitions

C. Subsection C was added with the 1996 revisions.

D. Subsections D and E were added with the amendments considered in 1996.

I. Subsection I was an addition included with the 1996 amendments.

J. When the model was revised in 1975 the definition of impaired insurer was modified and a definition of insolvent insurer added.

L. A suggestion was made in 1984 to expand the definition of member insurer to include entities whose license may have been suspended or revoked.

N. The working group agreed to add a definition of “owner” when discussing the 1996 proposed amendments.

P. The definition of “plan sponsor” was included in the amendments discussed in 1996.

Q. The subsection was modified to eliminate premiums from the assessment base for unallocated annuities when coverage is not provided.

R. The definition of “principal place of business” was added to the model in the amendments discussed in 1996.

S. Subsection S was also added in 1996.

T. When considering amendments in 1996, the working group agreed that Subsection T should be amended to provide coverage for U.S. citizens residing in foreign countries and residents of U.S. possessions.

U. This subsection was added as part of the 1996 amendments.

V. This definition was added as part of the 1996 amendments.

Section 6. Creation of the Association

A. The model originally adopted in 1970 provided for three accounts: the health insurance account, the life insurance account, and the annuity account.

Suggestions to revise the model were first presented in June 1994.

Section 7. Board of Directors

A. An advisory group was asked to consider the issue of public representation on guaranty association boards in 1992.

The consumer representative who authored the minority report restated her position.

Section 8. Powers and Duties of the Association

A. Industry spokespersons urged adoption of provisions giving more authority to the insurance companies.

B. A policyholder with a life or health insurance contract in an impaired company is concerned with preserving the full benefit of his contract.

F. The working group suggested that Subsection F be amended to grant the local court jurisdiction over the imposition of moratoria or policy liens.

G. As originally written in 1996, the subsection conflicted with Section 56 of the Insurers Rehabilitation and Liquidation Model Act.

H. The working group suggested a nonsubstantive revision to Subsection H to make it clear that the commissioner’s authority to act for the guaranty association is limited to the insolvent insurer in question.

J. The working group discussed at length a proposal made in 1996 to allow NOLHGA to intervene in receivership proceedings.

K. The working group considered an amendment to Subsection 3B to exclude a structured settlement annuity where the liability insurer or other person remains able to pay any remaining amount due.

L. Paragraph (7) was added to address recent litigation regarding discovery requests served upon a guaranty association.

N. The Subsection N added with the 1996 amendments was proposed to make it clear that a guaranty association may elect to succeed to the rights of the insolvent insurer regarding any reinsurance agreements.

O. An interested party opined that the new Subsection O proposed in 1996 afforded the board of directors of a guaranty association the benefit of the “reasonable business judgment” rule.

P. Subsections P and Q were added in 1996 without comment.

R. When discussion of coverage for equity-indexed products commenced, an industry committee recommended receivers have the authority to convert equity-indexed products to simpler products.

Section 9. Assessments

B. Prior to the amendments adopted in 1985, the model provided for three classes of assessments.

C. In 1985 the assessment for administrative expenses increased from $50 to $150 per member insurer.

E. The model contained a two percent cap on assessments from the beginning.

H. In the first draft of the model prepared, provision was made for the issuance of certificates of contribution.

I. Subsection I was entirely new in the 1996 amendments.

J. Subsection J was new material added with the 1996 amendments.

Section 10. Plan of Operation

A model plan of operation to complement this section was adopted.

Section 11. Duties and Powers of the Commissioner

C. When the model was amended in 1985, this subsection was revised, including a change in the appeal period from 30 to 60 days.

When revisions to this subsection were considered in 1996, a working group member suggested that the provision might conflict with the laws of some states regarding administrative procedures.

Section 12. Prevention of Insolvencies

When consideration was being given to the adoption of a life and health guaranty association model, those opposed to the model argued that the real need was prevention of insolvency.

The model amendments adopted in 1975 included revision of this section.

Section 13. Credits for Assessments Paid (Tax Offsets)

Industry representatives urged the inclusion of a section providing for tax write-offs for assessments paid.

Despite the urging of industry spokespersons, the majority of the subcommittee voted against the inclusion of a premium tax offset.

Section 14. Miscellaneous Provisions

C. The industry draft of the new model suggested the addition of this section so that the guaranty association was a creditor of the impaired insurer.

D. Subsection D was added as part of the 1996 amendments.

E. This provision was patterned after a section of the Wisconsin law.

Section 15. Examination of the Association; Annual Report

The last sentence, allowing members to request a copy of the report, was added in 1996.

Section 16. Tax Exemptions

Section 17. Immunity

Section 18. Stay of Proceedings; Reopening Default Judgments

Section 19. Prohibited Advertising of Insurance

The model prohibits mentioning the guaranty association in the sale or inducement to sell insurance policies.

A. When the model was originally adopted a sentence in Section 14 stated that it was an unfair trade practice to make use of the guaranty fund protection in the sale of insurance.

B. The draft adopted in December 1985 contained an expanded Section 19 in an effort to deal with the recognized problems.

C. More detail was added to the disclosure document to be prepared by the association and provided to the policyholder prior to or at the time of delivery of the policy or contract.

D. Subsection D was added to the model in 1995 without specific comment.

Section 20. Prospective Application

This section was not in the original model, but was part of a package of suggestions from an industry association adopted in the extensive revisions of 1985.

Appendix. Alternative Provisions

When the NAIC adopted a suggestion to make guaranty coverage for unallocated annuities optional, the appendix was added to show how the existing model could be altered to exclude unallocated annuities.

Chronological Summary of Actions

December 1970: Adopted model.

December 1975: Technical amendments made, added section providing for tax offset.

June 1977: Clarified that tax offset is optional.

December 1985: Completely revised model to make applicable to residents only in most cases, to set out more extensively the limits of liability for covered claims, and to create a four-account approach.

June 1987: Decertification of four-account approach.

December 1987: Amended to create two accounts with subaccounts.

September 1993: Adopted amendment to Section 7 to provide for public representatives on the guaranty fund board.

December 1993: Amended Section 3 to clarify the limitation in regard to structured settlements and to exclude coverage for any policy where assessments are preempted by federal or state law.

June 1995: Amended Section 6 to provide for the assessment of governmental retirement plans under the annuity subaccount.

December 1995: Amended Section 3C to increase cap on coverage for health and disability insurance.

June 1997: Made amendments throughout model to update language and eliminate unnecessary comments.

March 1998: Revised Section 3 and 8 relative to structured settlements.

June 1998: Added drafting note to Section 3 suggesting coverage of unallocated annuities is a decision to be made by each state.

June 1999: Amended Section 5L to exclude charitable gift annuities from guaranty fund coverage.

October 1999: Amended Sections 3 and 8 to address issues related to equity-indexed products.

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