Kathleen McCain Education Committee Co-Chair IAIR ISSUES FORUM - PowerPoint PPT Presentation

Kathleen McCain Education Committee Co-Chair

IAIR ISSUES FORUM Risk Corridor Litigation/Options Denver, CO. April 9, 2017

Panelists • Frank O’Loughlin and Cindy Oliver-Lewis Roca Rothgerber Christie- Moderators • Mike Conway-Deputy Commissioner of Consumer and Compliance Service, Colorado Division of Insurance • Kevin Baldwin-General Counsel and Director of Receivership Operations, Illinois Office of Special Deputy Receiver

Risk Corridor Agenda • Litigation Update • Pros and Cons- • Class Action Opt-in Decision • Individual Litigation • Sale of Risk Corridor Receivable • Wait and Watch • Set Off Issues • Instigate Litigation • Administrative Appeal

Risk Corridor Litigation Update • 22 Suits in Federal Claims Court • Land of Lincoln • U.S. MTD Granted-Nov. 10, 2016 • On Appeal • Moda Health • U.S. MTD Denied • Moda MSJ Granted-Feb. 9, 2017 • $209 Million Judgment Entered-March 6, 2017 • Appeal Deadline-May 5, 2017

Litigation Update (continued) • Health Republic Class Action • Class Definition • Class Certified-Jan. 3, 2017 • MTD Denied-Feb. 24, 2017 • Health Republic MSJ Filed-March 1, 2017 • Response to MSJ Due-April 12, 2017 • Opt in Decision-May 12, 2017

Class Action Lawsuit Potential Pros: • Experienced Law Firm • The Contingency Fee is 5% or Less of Any Net Recovery • Favorable Rulings by Court • Motion for Summary Judgment Filed 3-1-17 Potential Cons: • Significant Control of the Litigation is Ceded to the Class Action Attorneys • How to Deal With Estate Offset Issues

Commence Individual Litigation Potential Pros: • More Individual Control and Direction of the Litigation. • Various Firms are Offering to Match Contingency fee of 5%. • Other Firms Offering Hourly or Fixed Fee Approaches Potential Cons: • Assignment of Judge is Unknown-Could be Good or Bad • Case Not Yet Filed-May be Months to Get MSJ Filed

Sell the Risk Corridor Receivable to Investors Potential Pros: • Liquidation of an Illiquid Asset • The Proceeds Could Be Used to Distribute to Creditors • May Allow for Earlier Closure of Estate Potential Cons: • Substantial Discount Applied to the Risk Corridor Receivable • Smaller Distribution to Creditors Compared to Full Recovery • Purchaser Likely to Insist on Receiver Pursuing Litigation

Sit on the Fence Potential Pros: • No Fees or Expenses Incurred by Estate • Not Bound by An Adverse Decision in Class Action • However, U.S. May be Bound by a Favorable Decision in the Class Action or Other Action Potential Cons: • Statute of Limitation issues • A Litigating Estate May Be in a Better Legal Position if Congress Attempts to Limit Payments from the Judgment Fund

Set et Off Issue ues Offset Amounts Due to U.S. Against Amounts U.S. Owes Estate • Notice to U.S. • Pursue Offset in Receivership Court • Pursue Offset in Federal Court • Administrative Appeal-CMS

Discussion • Questions/Ideas from Audience

Commissioner Marguerite Salazar Colorado Division of Insurance

Receivership Insolvency Task Force Update James Kennedy Counsel, Texas Department of Insurance Chair, Receivership Model Law Working Group

Networking Break

Chad Anderson MULTI-STATE GUARANTY President ASSOCIATION MANAGEMENT Western Guaranty Fund Services

HISTORY Paul Gulko Godfather of GFMS

HISTORY ¡ New England Association of Insurance Guaranty Funds § 1970 – 1975 Informal arrangement between NH, ME, VT, RI, CT and MA § 1976 – Arrangement was formalized and MA provided support § 1981 GFMS was formed § 1982 DC joined, 1984 VA joined

HISTORY

HISTORY George Hatchell CIGA Chair 1972-1984 WGFS President 1984-1990

HISTORY ¡ 1980 George Hatchell identifies a need to combine efforts of GAs ¡ 1984 WGFS is formed with Paul Gulko’s help § CO, WY, OK, ID, and MT were the charter members ¡ 1985 KS joined WGFS, 1986 OK left, 1995 WA joined, 2014 NE joined ¡ Staff has flexed from 4 in 1999 up to nearly 40 in 2004

HOW’S IT WORK? Western Guaranty Fund Services A Non-Profit Association Providing Management Services for the Guaranty Associations in: Ø Colorado Ø Idaho Ø Kansas Ø Montana Ø Nebraska Ø Washington Office building since 1991 Ø Wyoming

HOW’S IT WORK? WGFS Boards of Directors MIGA NPLIGA WAGA WYGA CIGA IIGA KIGA WGFS

GA CASH FLOW ASSESSMENTS RECEIVED FROM MEMBERS INTEREST & RECOVERIES INCOME FROM FROM INVESTMENTS LIQUIDATORS GUARANTY ASSOCIATION BANK AND INVESTMENT ACCOUNTS LOSSES & GENERAL AND UNEARNED ADMINISTRATIVE PREMIUMS PAID EXPENSES PAID TO CLAIMANTS TO WGFS CLAIM HANDLING EXPENSES PAID TO PROVIDERS

WGFS CASH FLOW GUARANTY ASSOCIATIONS PAY ONE WGFS PAYS TIME ADVANCE TO DIRECT EXPENSES WGFS FOR THE MONTH WGFS CHECKING ACCOUNT CAPITALIZED WGFS PAYS EXPENSES - ALLOCATED PAID BY OPERATING WGFS EXPENSES FOR THE MONTH

WGFS CASH FLOW GUARANTY FUNDS REIMBURSE FOR DIRECT EXPENSES GUARANTY WGFS FUNDS CHECKING REIMBURSE ALLOCATED ACCOUNT EXPENSES CAPITALIZED EXPENSES – REIMBURSED IN EQUAL SHARES

BOARD MEETINGS

COST SHARING CONCEPT ¡ Life and Health / Property and Casualty § GA, MO, IN, WI ¡ State Affiliated § AZ, AR, NY . . . . Others? ¡ Other Combinations § FL, NJ, SC, NC ¡ OH/WV + OH-Life and Health ¡ Other Life and Health

COST SHARING CONCEPT CONTINUED ¡ GFMS - Guaranty Fund Management Services ¡ WGFS - Western Guaranty Fund Services

GFMS AND WGFS CONNECTION GFMS WGFS Provides GA Management for . . . Provides GA Management for . . . ¡ 8 State Guaranty Associations ¡ 7 State Guaranty Associations ¡ 7 States and DC ¡ 5 States, 2 Commonwealths, and DC

MAYBE SOMETHING MORE MEANINGFUL Assessable State U.S. Rank P & C Premium 11,371,588,849 13 Virginia 12 12,247,003,037 Massachusetts 25 7,349,849,021 Connecticut 44 1,832,434,065 Maine 40 2,101,528,271 New Hampshire 43 1,833,714,336 Rhode Island 49 1,229,213,393 District of Columbia 50 1,114,009,391 Vermont 44,596,755,319 19 9,227,740,495 Washington 21 8,572,305,568 Colorado 29 5,196,859,941 Kansas 36 3,376,849,366 Nebraska 39 2,209,645,872 Idaho 45 1,726,744,060 Montana 51 969,004,440 Wyoming 31,279,149,742

P & C INSOLVENCIES Of the 48 insolvencies since 2010, 11 impacted WGFS states.

P & C INSOLVENCIES Significant Estates •2000- Superior Cos. $3.4B •2001- Reliance $5.35B •2002- PHICO $.98B •2003- Legion $2.6B Home $2.4B, Fremont $2.0B •2013- Lumbermens $1.4B Coordinating Committee Liquidations indicate large, multistate insolvencies.

CONSOLIDATION AND ECONOMY OF SCALE

JUGGLING

QUESTIONS?

Impact of NAIC Cybersecurity Model Act & NY DFS Cybersecurity 2017 Jenny Jeffers Jennan Enterprises, LLC Michael Morrissey Morrissey Consultants, LLC

2016 Breaches Up Again

Focus: Requirements for Insurers • What’s new and proposed • State and Federal regulations • Trends • What to know and do? • Who is affected • Management changes • Infrastructure changes • Incident Response • Breach response rules

NAIC Model Law Overview • Definitions: PII, “encryption”, “breach”, “3 rd party, “consumer” • Licensee Requirements: • Security Program - but not if one exists in compliance with state or fed. • Risk Assessment – the basis for all controls • Risk Management - including multi-factor authentication, incident response plan, vendor (3 rd Party) oversight. • “Breach” Reporting

NAIC Model Law – 3 rd Parties “a person or entity, that contracts with a Licensee to maintain, process, store or otherwise have access to Nonpublic Personal Information under the Licensee’s possession, custody or control.” All the same security measures that derive from the risk assessment must include 3 rd Parties: agents, brokers, IT vendors. Who else?

NAIC Model Law Breaches – Investigate and Notify • Defined: “ the acquisition of unencrypted Personally Identifiable Information by an unauthorized person.” • Responsibility to investigate the breach - including a breach by 3rd Party • Notification of Breach • "within 3 days" • Consumer Reporting Agencies • Consumers - by mail and electronic • Beaches may be reported by insurer or 3rd party • Reinsurers must also be notified • Independent producers also notified

State Reg Changes • NY – First major cybersecurity regulation for banks and insurers • 2016 – New breach notification laws states went into effect in CA, NE, OR, RI, TN • 20+ other states with proposals

New York’s New Rules • Effective March 1, 2017, phased in over two years. • Companies with < $5 million in revenues and < $10 million in assets are exempt from more costly aspects • ALL companies must implement and document a security policy and program. • Third Parties are included as extensions of the company. • Compliance attestations with tight breach reporting timelines. • NY’s law is considered by many to be a baseline for other states. https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/Cybersecurity_Requirements_Financial_Services_23NYCRR500.pdf