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STATE OF HAWAII DAVID Y. IGE CATHERINE P. AWAKUNI COLÓN GOVERNOR OFFICE OF THE DIRECTOR DIRECTOR

DOUGLAS S. CHIN DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS JO ANN M. UCHIDA TAKEUCHI LT. GOVERNOR DEPUTY DIRECTOR 335 MERCHANT STREET, ROOM 310 P.O. Box 541 HONOLULU, HAWAII 96809 Phone Number: 586-2850 Fax Number: 586-2856 cca.hawaii.gov

TO THE HOUSE COMMITTEE ON INTRASTATE COMMERCE

TWENTY-NINTH LEGISLATURE Regular Session of 2018

Wednesday, March 14, 2018 9:00 a.m.

TESTIMONY ON SENATE BILL NO. 2773, S.D. 2, RELATING TO THIRD PARTY ADMINISTRATORS.

TO THE HONORABLE TAKASHI OHNO, CHAIR, AND MEMBERS OF THE COMMITTEE:

The Department of Commerce and Consumer Affairs (“Department”) appreciates the opportunity to testify on S.B. 2773, S.D. 2, Relating to Third Party Administrators. My name is Gordon Ito, and I am the Insurance Commissioner (“Commissioner”) for the Department’s Insurance Division. The Department strongly supports this administration bill and offers the following comments. This bill provides for regulation of third party administrators (“TPAs”). TPAs collect charges or premiums from, or adjust or settle claims on, life insurance coverage or accident and health or sickness insurance coverage. This bill is based on the National Association of Insurance Commissioners' (“NAIC”) Registration and Regulation of Third Party Administrators Guideline. NAIC Guidelines, in general, differ from NAIC Model Acts and Model Rules in that NAIC accreditation for a state is not dependent on the state’s adoption of Guidelines. Rather, NAIC Guidelines offer states opportunities to tailor bright lines of Senate Bill No. 2773, S.D. 2 March 14, 2018 Page 2

insurance law to guide states when they are adopting measures particular to their own needs and purposes. Hawaii is one of nine states that do not regulate TPAs. Currently, 19 states require TPA licenses from their respective departments of insurance, 12 states require certificates of registration, eight states require certificates of authority, and two states require either licenses or registrations. The differences in states’ approaches are reflective of NAIC Guidelines’ flexibilities and deferences given to states in knowing their own required needs. Regulation of TPAs as proposed in this bill would ensure adequate consumer protection and promote transparency of TPAs operating in Hawaii. The Department believes that licensing TPAs will encourage disclosure of contracts between insurers and TPAs, both to potential insureds and the Commissioner; promote the financial responsibilities of TPAs; regulate practices of TPAs in conformity with the general purposes of this bill; and govern the qualifications and procedures for the licensing of TPAs. In furthering the Department’s desire to ensure the qualifications of TPAs in areas concerning health insurance, we are respectfully requesting an amendment on page 2, lines 1 though 6, of this bill, which will require the licensing of TPAs which work with self insureds, stop-loss, and workers’ compensation insurers. The proposed amendment reads as follows: "Administrator" or "third party administrator" means a person who collects charges or premiums from, or who adjusts or settles claims on, residents of this State in connection with self-insurance, stop loss, workers’ compensation, or life insurance coverage; accident and health or sickness insurance coverage; or article 1 of chapter 432, except the following: ...." Thank you for the opportunity to testify in strong support of this measure, and we ask for your favorable consideration.

HWMG Page 1

BEFORE THE

SENATE COMMITTEE ON INTERSTATE COMMERCE

Senator Takashi Ohno, Chair Senator Issac W. Choy, Vice Chair

SB 2773 SD2 RELATING TO THIRD PARTY ADMINISTRATORS

TESTIMONY OF PAUL KAISER Chief Operating Officer, Hawaii-Western Management Group

March 14, 2018, 9:00 a.m. State Capitol Conference Room 429

Chair Ohno, Vice Chair Choy, and Committee Members:

My name is Paul Kaiser, currently the Chief Operating Officer of Hawaii-Western Management Group (HWMG). HWMG supports the intent of SB 2773 SD2, but respectfully requests the following amendments to SB 2773 SD2. These amendments seek to conform the language of the bill to the model act promulgated by the National Association of Insurance Commissioners (NAIC), which is attached and held out as an example of national standards and best practices, not just a “starting point”.1

By way of background, HWMG is a small, kama‘aina third-party administrator providing health insurance management services for a wide range of organizations including Hawaii Medical Assurance Association (HMAA), Charter Communications, Hawaii Electricians Local Union 1186, and labor unions. HWMG is proud to be 100% employee-owned through its Employee Stock Ownership Plan (ESOP).

The purpose of SB 2773 SD2 is to encourage disclosure of contracts between insurers and administrators, promote financial responsibility of administrators, and govern the qualifications and procedures for the licensing of administrators. HWMG fully support these purposes. As drafted, however, SB 2773 SD2 departs in several respects from the NAIC model bill, and these departures present challenges to administrators.

First, the proposed SB 2773 SD2 does not adequately protect any books and records examined by the Insurance Commissioner. For instance, under SB 2773 SD2,

1 See http://www.naic.org/index_about.htm (“Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight.”). HWMG Page 2 documents in the administrator’s possession that may be protected by the attorney- client privilege will no longer be privileged if in the Commissioner’s possession. To ensure that privileged documents remain privileged and confidential, HWMG respectfully requests the Committee’s adoption of the NAIC model act’s language as to the following provision of SB 2773 SD2:

§431- Recordkeeping required; commissioner's access to records. (b) The commissioner shall have access to the books and records for examination, audit, and inspection. [Trade secrets in the books and records, including the identity and addresses of insureds, shall be confidential and privileged. However, the commissioner may use the information in proceedings brought against the administrator.] Any documents, materials or other information in the possession or control of the commissioner that are furnished by the administrator, payor, insurance producer or an employee or agent thereof acting on behalf of the administrator, payor or insurance producer, or obtained by the commissioner in an investigation shall be confidential by law and privileged, shall not be subject to freedom of information or sunshine requests, shall not be not subject to subpoena, and shall not be subject to discovery or admissible in evidence in any private civil action. However, the commissioner is authorized to use such documents, materials or other information in the furtherance of any regulatory or legal action brought as a part of the commissioner's official duties.

(Additional language bolded and underscored; deleted language bracketed and struck- through.)

Second, SB 2773 SD2 does not set forth ascertainable standards as to when an administrator is considered “solvent” or “insolvent.” As drafted, SB 2773 SD2 requires prospective administrators to show annual audited financial statements for the two most recent years to prove solvency. The NAIC model act, however, sets forth a specific, qualitative standard to prove “solvency” by requiring financial statements showing the applicant had a positive net worth. HWMG respectfully submits the following amendments to the licensing requirements in SB 2773 SD2 to conform it to the NAIC model act and account for HWMG’s structure as an ESOP where audited financial statements currently do not exist:

§431- License required; application. (a) No person shall act as or hold out to be an administrator in this State without a license as an administrator issued by the commissioner. HWMG Page 3

(b) An administrator shall apply to the commissioner on a form prescribed by the commissioner and shall include the following: * * * (5) Annual [audited] financial statements for the two most recent years that prove the [applicant is solvent] applicant has a positive net worth and information the commissioner may require to review the current financial condition of the applicant; and

(Additional language bolded and underscored; deleted language bracketed and struck- through.)

Third, SB 2773 SD2 places licensing requirements on individuals who adjust claims for the administrator, even though the NAIC model act imposes no such requirement. Requiring licensure for such adjusters is unnecessary and will be administratively and financially burdensome. In addition, it may be discriminatory to focus solely on adjusters employed by administrators, when adjusters that are not employed by administrators would not be subject to a similar licensing requirement. Therefore, our recommendation would be to delete this requirement.

§431- License required; application. (a) No person shall act as or hold out to be an administrator in this State without a license as an administrator issued by the commissioner. (b) An administrator shall apply to the commissioner on a form prescribed by the commissioner and shall include the following: * * * [(d) If an administrator employs or has contracted individuals to adjust claims for the administrator, the employees or contracted individuals shall first be licensed as individual adjusters.]

(Additional language bolded and underscored; deleted language bracketed and struck- through.)

However, if the Insurance Commissioner believes strongly this licensing requirement is necessary, then HWMG simply asks this requirement be applied consistently across all entities who employ individuals to adjudicate claims, including, but not limited to Insurers as identified in HRS Section 431:1-202. If deemed beneficial, this requirement should be imposed across the board.

Fourth, SB 2773 SD2 includes a surety bond requirement for administrators of up to $300,000, which is threefold the amount recommended by the NAIC. HWMG HWMG Page 4 respectfully urges the amendment to SB 2773 SD2 such that the surety bond requirements are consistent with the NAIC model act:

§431- Surety bond required. Prior to the issuance or renewal of the administrator license, the administrator shall file and maintain with the commissioner a surety bond in the form and penal sum acceptable to the commissioner, but in no event shall be less than [$300,000] $100,000, and shall provide that the bond may not be canceled or otherwise terminated until two years have elapsed from the last day the applicant was an administrator, unless the commissioner has given prior written consent. The surety bond shall be undertaken and may be enforced in the name of "Commissioner of Insurance, State of Hawaii."

(Additional language bolded and underscored; deleted language bracketed and struck- through.)

Lastly, SB 2773 SD2 as written does not address third party administrators whose focus are annuity or workers compensation coverage. We believe legislation should apply consistently to all third party administrators to create an equitable business environment. HWMG respectfully urges the amendment to SB 2773 SD2 such that this legislation applies to all third party administrators domiciled in the state of Hawai‘i:

§431- Definitions. For purposes of this article: “Administrator” or “third party administrator” means a person who collects charges or premiums from, or who adjusts or settles claims on, residents of this State in connection with life [insurance coverage], annuity, accident and health or sickness, stop-loss or workers’ compensation insurance coverage, or article 1 of chapter 432, except the following:

(Additional language bolded and underscored; deleted language bracketed and struck- through.)

The foregoing amendments would better conform SB 2773 SD2 to the model act promulgated by the NAIC, thereby balancing the State’s need for licensure but also reducing unnecessary burden to administrators. HWMG respectfully urges the passage of this measure as amended. HWMG met with the Insurance Commissioner nearly two weeks ago to discuss the issues raised herein, but has not received feedback thus far. Thank you for the opportunity to testify on this matter of critical importance.

*****

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 Registration and Regulation of Third Party Administrators (TPAs) (An NAIC Guideline)

an employer that is not their policyholder, it subjects such insurer/TPAs to many other operational requirements of the Act for workers’ compensation. (C) The Guideline adds cease & desist orders to those actions available to the commissioner and also addresses concerns that the 2001 model may have been deficient with regard to due process. (<1) The Guideline extends the life & health scope of the 2001 model to so-called “stop-loss” insurance. This may be viewed a clarification in states where stop-loss is already considered to be health insurance and cannot be written as liability insurance, but it will be a modest expansion in other states. (9) Version 1 extends the scope of the 2001 model to workers’ compensation insurance. One should note, however, that various provisions of the model applying to life & health are not uniformly extended to workers’ compensation. There is an extensive new section dealing with workers’ compensation contracts between insurers and TPAs, and between TPAs and insured employers. (i) Version 1 will not allow a TPA to agree with an employer to have the employer adjust its own workers’ compensation claims, and an employer cannot avoid this prohibition by simply licensing an affiliated business entity as a TPA in order to handle its own workers’ compensation claims. (g) Version 1 exempts payments made by employers to TPAs for handling workers’ compensation claims under a large deductible contract from premium taxes. (h) The account-related provisions in the 2001 model were substantially revised. Most notably, the Guideline deletes the requirement that accounts administered by the TPA must be in the name of the insurance company, as long as claims trust funds held by the TPA are not commingled with premium trust funds.

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E. “Control” (including the terms “conimolled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent (10%) or more of the voting securities of any other person. This presumption may be rebutted by a showing made in the manner provided by [insert appropriate reference to state law regulating holding companies] that control does not exist in fact. The commissioner may determine, after furnishing all persons in interest notice and opportunity to be heard and making specific findings of fact to support the determination that control exists in fact, notwithstanding the absence of a presumption to that effect.

F. “GAAP” means United States generally accepted accounting principles consistently applied.

G. “Home state” means the United States jurisdiction that has adopted this Act or a substantially similar law governing TPAs and that has granted the TPA a home state TPA license.

H. “Insurer” means an entity licensed in a United States jurisdiction to provide life, annuity, health or stop-loss coverage as an insurance company, health maintenance organization, fraternal benefit society or prepaid hospital or medical care plan.

Drafting Note: States that license multiple employer welfare arrangements (MEWAs) or workers’ compensation self- insuranoe groups, or that authorize employee leasing companies or professional employer organizations (PEOs) to provide employee welfare benefits on a self-funded basis, will want to include these entities in the list of entities that are included in the definition of insurer for purposes of this Act, but only to the extent of their license or authorization. It is not the intention of this drafting note to include employee leasing companies or PEOs authorized to self-insure workers’ compensation within the definition of "insurer." Rather, this Act contemplates that such an entity, when authorized as a workers' compensation self-insurer, will be considered to be a “workers compensation self-insurer,” which is a term that is already defined under this Act.

I. “Insurance producer” means a person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.

Drafting Note: States that use different terminology such as “agent” and/or “broker” should make appropriate adjustments to this language. In states that do not license business entities as insurance producers, use the following definition;

I. “Insurance producer” means a person required to be licensed under the laws of this state to sell, solicit or negotiate insurance, and also includes a business entity whose primary activities are the sales, solicitation and negotiation of insurance.

J. “Master services agreement” means a written agreement between an insurer and a TPA that specifies standards for the handling of workers’ compensation claims and the handling of funds belonging to the insurer or policyholder in connection therewith.

K. “Nonresident TPA” means a TPA whose home state is any jurisdiction other than this state.

1090-4 O 2011 National Association of Insurance Commissioners Model Regulation 5ervioe—Oct.ober 2011

L. “Payer” means an insurer, a workers’ compensation self-insurer, or an employer administering its employee benefit plan or the employee benefit plan of an affiliated employer under common management and control.

M. “Person” means an individual or a business entity.

N. “Stop-loss insurance” means insurance protecting an employer or other person responsible for an otherwise self-insured health or life benefit plan against obligations under the plan, but “stop-loss insurance” does not include reinsurance written for an insurance company.

Drafting Note: The inclusion of the stop-loss definition and the inclusion of stop-loss throughout this law are not necessary in states where stop-loss is clearly stipulated to be health insurance and cannot be interpreted to be liability insurance or some other form of insurance. In such states, references to stop-loss may be deleted or — if retained — viewed as a clarification (as stop-loss is considered to be liability insurance in some states).

O. “Third party administrator” or “TPA” means a person who directly or indirectly underwrites, collects charges, collateral or premiums from, or adjusts or settles claims on residents of this state, in connection with life, annuity. health, stop-loss or workers’ compensation coverage, except that a person shall not be considered a TPA if that pers0n’s only actions that would otherwise cause it to be considered a TPA are among the following:

(1) A person working for a TPA to the extent that the person’s activities are subject to the supervision and control of the TPA;

(2) An employer administering its employee benefit plan or the employee benefit plan of an affiliated employer under common management and control, except that workers’ compensation shall not be considered as an “employee benefit plan;”

(3) The administration of a bona fide employee benefit plan established by an employer or an employee organization, or both, for which the insurance laws of this state are preempted pursuant to the Employee Retirement Income Security Act of 1974, as the act existed on [an appropriate recent date should be selected];

(4) A workers’ compensation self-insurer that has been approved by [agency responsible for the approval of workers’ compensation self-insurance] or an employer otherwise authorized by law to administer its Workers’ compensation obligations to its employees or oo-employees, while administering workers’ compensation benefits for its employees or co- employees;

(5) A union administering a benefit plan on behalf of its members;

(6) An insurer administering insurance coverage for its policyholders, subscribers or certificate holders, or those of an affiliated insurer under common management and control;

(7) An insurer directly or indirectly underwriting, collecting charges, collateral or premiums from, or adjusting or settling claims for life, annuity, health or stop-loss insurance on behalf of a client that is not a policyholder, subscriber or certificate holder, and that has its United States headquarters or principal

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agreements shall be treated as proprietary and this availability shall not be used to disclose an agreement to a third party without the permission of all parties to the agreement.

D. If provision for such cancellation is contained in the insurance policy, an insurer may cancel the policy for nonpayment if the employer fails to pay the TPA for services relating to claims that are the ultimate responsibility of the insurer. The endorsement addressing the use of the TPA and the employer’s or co-employer-’s obligation to pay the TPA may provide that the employer or co-employer is also obligated to pay the insurer for any amounts that the insurer pays the TPA should the employer or co-employer not pay the TPA on a timely basis.

E. No contract between an employer and a TPA may provide or allow administration of claims by the employer or co-employer 1].I1l€SS self-administration of claims by the employer or co-employer has either been approved by the [agency responsible for approval of workers’ compensation self-insurance] or the employer or co-employer is otherwise authorized by law to administer its own claims in this state.

F. No contract or agreement between an employer and a TPA or an insurer may give the employer the right to deny a claim. If an employer recommends that a TPA deny a claim, then the TPA may do so if such action is consistent with the claims handling standards provided by the insurer.

Drafting Note: Subsection F should be amended as necessary in those states that give the employer specific rights to dispute or deny workers compensation claims. The section is not intended to reduce the rights of the employer to less than it would otherwise have under state law.

G. An insurer shall not permit a TPA to delegate authority to an employer or co- employer in violation of this section.

H. A contract or an agreement between an employer and a TPA may give the employer the right to have amounts paid that otherwise may be disputed by the insurer or the TPA. In the event that a contract or agreement has this provision, the insurer must be given a copy of the contract or advised of the existence of these provisions on a timely basis after the contract or agreement is entered into or amended to include a provision of this nature, except when the insurer has aheady given the TPA or the policyholder written permission for this arrangement. This subsection shall not be interpreted, however, to give this right to an employer absent a provision in the contract or agreement between it and the TPA, and it shall not be interpreted as meaning that the insurer that has not already given permission cannot refuse to accept such provisions within a reasonable time after their receipt by the insurer.

I. When a contract or agreement exists between the TPA and the employer, there must be an endorsement attached to each related statutory workers’ compensation policy to indicate the existence of that contract or agreement. If applicable, the endorsement must recognize the obligations of the policyholder to pay the TPA. If applicable, this endorsement must recognize the obligation of the employer or co-employer to reimburse the insurer if the insurer pays the TPA to assure continued claims services in the event of the employer’s or co-employer’s failure to pay. In addition, the endorsement shall provide that, in the event that the insurer terminates the TPA’s role in handling claims for the employer, the employer or co-employer shall have the ability to cancel the policy without a short rate penalty if it replaces its insurance with another insurer, but using the same TPA.

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substantially similar provisions as are contained in this Act to that TPA, then that omission shall not operate to disqualify the TPA from receiving a Nonresident TPA license in this state.

Except as provided in Subsection B of this section and in section 17, the commissioner shall issue a nonresident TPA license to the TPA promptly upon receipt of a complete application.

Unless notified by the commissioner that the commissioner is able to verify the nonresident TPA’s home state certificate of authority or license status through an electronic database maintained by the National Association of Insurance Commissioners, its affiliates or subsidiaries, each nonresident TPA shall annually file a statement that its home state TPA certificate of authority or license remains in force and has not been revoked or suspended by its home state during the preceding year.

At the time of filing the statement required under Subsection D of this section or, if the commissioner has notified the nonresident TPA that the commissioner is able to verify the nonresident TPA’s home state certificate of authority or license status through an electronic database, on an annual date determined by the commissioner. the nonresident TPA shall pay a filing fee as required by the commissioner.

Drafting Note The of the statement or time set for payment of the fee should be after September 1 so that it follows the nonresident TPA's annual renewal of its home state certificate of authority or license.

A TPA licensed or applying for licensure under this section shall produce its accounts, records and files for examination, and make its officers available to give information with respect to its affairs, as often as reasonably required by the commissioner.

A nonresident TPA licensed in its home state is not required to hold a nonresident TPA license in this state if the TPA’s duties in this state are limited to the administration of group policies or plans of insurance and no more than one hundred (100) certificate holders for all such plans reside in this state.

A nonresident TPA licensed in its home state is not required to hold a nonresident TPA license in this state if the TPA’s duties in this state are limited to the adnlinistration of workers’ compensation claims and the TPA administers less than twenty-five workers’ compensation claims per calendar year in this state. This exemption shall continue to apply to a nonresident TPA exempted by this subsection until ninety days after the date that it has had twenty-five claims reported to it during a calendar year by employees whose claimed injury or disease arose from employment in this state. A TPA with a current nonresident TPA license shall be eligible for this exemption at its next renewal date following a calendar year in which it has had less than twenty-five claims reported to it during that calendar year by employees whose claimed injury or disease arose from employment in this state. The exemption described in this subsection shall not apply, however, to a TPA with a client that is an employer principally based in this state, or that has a professional employer organization as a client that is responsible for the workers’ compensation obligations of a client that is principally located in this state.

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THIRD PARTY ADMINISTRATOR ACT (NAIC Guideline Version 2)

Drafting Note: This “version 2” guideline excludes workei-s' compensation, while the “version 1" guideline includes workers compensation. A state that intends to adopt a TPA law should start with the version that is appropriate for its needs.

Table of Contents

Section 1. Definitions Section 2. Licensing Necessary Section 3. Payment to a TPA Section 4. Maintenance of Information Section 5. Approval of Advertising Section 6. Responsibilities of the Payor and TPA Section 7. Premium Collection and Payment of Claims Section 8. Compensation to the TPA Section 9. Disclosure of Charges and Fees Section 10. Delivery of Materials to Covered Individuals Section 11. Home State TPA License Section 12. Registration Requirement Section 13. Nonresident TPA License Section 14. Annual Report and Filing Fee Section 15. Grounds for Suspension or Revocation of Licensure Section 16. Effective Date

Section 1. Definitions

For purposes of this Act:

A. “Affiliate or affiliated” means a person who directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another specified person.

B. “Business entity” means a corporation, association, partnership, limited liability company or other legal entity.

Drafting Note: Many laws use very broad definitions of “entity” that include individuals. Provisions of this Act referring to business entities are specifically intended to exclude individuals, as the full scope of TPA responsibilities and requirements are not well-suited to licensure of an individual. In addition, an overbroad definition of entity or "business entity” could result in individuals working for TPAs being required to be individually licensed as TPAs.

C. “Collateral” means funds, letters of credit or any item with economic value owned by the payor but held by an insurer or TPA in case it needs to be used to fulfill premium or loss reimbursement obligations in accordance with a contract between the insurer or TPA and the payor. “Collateral” shall include anticipated loss prepayments made prior to the payment of losses, pursuant to arrangements where reimbursement is not due until after losses have been paid.

D. “Commissioner” means the Commissioner of Insurance of this state.

E. “Control” (including the terms “controlled by’’ and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement

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payments;

(13) A credit card issuing company advancing or collecting insurance premiums or charges from its credit card holders who have authorized collection;

(14) An individual adjusting or settling claims in the normal course of that individual’s practice or employment as an attorney at law and who does not collect charges or premiums in connection with insurance coverage;

(15) A person licensed as a managing general agent in this state when acting within the scope of that license; or

(16) A business entity that is affiliated with a licensed insurer while acting as a TPA for the direct and assumed insurance business of an affiliated insurer;

O. “Underwrites” or “underwriting” means, but is not limited to, the acceptance of employer or individual applications for coverage of individuals and the overall planning and coordination of a benefits program.

P. “Uniform Application” means the current version of the NAIC Uniform Application for Third Party Administrators.

Section 2. Licensing Necessary

No person shall act as a TPA in this state unless that person is licensed as a TPA pursuant to this Act or unless the TPA is exempted from this Act’s licensing requirement pursuant to subsection G of section 13 of this Act. This prohibition shall not apply to a person while employed by, or when operating under contract to, a TPA that is licensed pursuant to this Act, or exempted from this Act’s licensing requirements pursuant to subsection G of section 13 of this Act.

Section 3. Payxnent to a TPA

If an insurer utilizes the services of a TPA, any premiums or charges for insurance paid to the 'I'PA by or on behalf of the insured party, or any collateral furnished to the TPA by or on behalf of the insured party, shall be deemed to have been received by the insurer, and the return of collateral or the payment of return premiums or claim payments forwarded by the insurer to the TPA shall not be deemed to have been paid to the insured party or claimant imtil the payments are received by the insured party or claimant. Nothing in this section limits any right of the insurer against the TPA resulting from the failure of the TPA to make payments to the insurer, insured parties or claimants.

Section 4. Maintenance of Information

A. A TPA shall maintain and make available to the payor complete books and records of all transactions performed on behalf of the payor. The books and records shall be maintained in accordance with prudent standards of insurance record keeping and shall be maintained for a period of not less than five (5) years from the date of their creation.

B. The commissioner shall have access to books and records maintained by a TPA for the purposes of examination, audit and inspection. Any documents, materials or other information in the possession or control of the commissioner that are furnished by a TPA, payor, insurance producer or an employee or agent thereof acting on behalf of the TPA, payor or insurance producer, or obtained by the commissioner in an

1090-26 Q 2011 National Association of Insurance Commissioners Model Regulation Servic¢.-October 2011

investigation shall be confidential by law and privileged, shall not be subject to [insert open records, freedom of information, sunshine or other appropriate phrase], shall not be not subject to subpoena, and shall not be subject to discovery or admissible in evidence in any private civil action. However, the commissioner is authorized to use such documents, materials or other information in the furtherance of any regulatory or legal action brought as a part of the commissioner’s official duties.

C. Neither the commissioner nor any person who receives documents, materials or other information while acting under the authority of the commissioner shall be permitted or required to testify in any private civil action concerning confidential documents, materials, or information subject to Subsection B of this section.

D. In order to assist in the performance of his or her duties, the commissioner:

(1) May share documents, materials or other information, including the confidential and privileged documents, materials or information subject to Subsection B of this section, with other state, federal and international regulatory agencies, with the National Association of Insurance Commissioners, its affiliates or subsidiaries and with state, federal and international law enforcement authorities, provided that the recipient agrees to maintain the confidentiality and privileged status of the document, material or other information;

(2) May receive documents, materials or information, including otherwise confidential and privileged documents, materials or information, from the National Association of Insurance Commissioners, its affiliates or subsidiaries, and from regulatory and law enforcement officials of other foreign or domestic jurisdictions, and shall maintain as confidential or privileged any document, material or information received with notice or the understanding that it is confidential or privileged imder the laws of the jurisdiction that is the source of the document, material or information; and

(3) [OPTIONAL] May enter into agreements governing sharing and use of information consistent with this subsection.

Drafting Note: The language in Subsection D(1) assumes the recipient has the authority to protect the applicable confidentiality or privilege, but does not address the verification of that authority, which would presumably occur in the context of a broader information sharing agreement.

E. No waiver of any applicable privilege or claim of confidentiality in the documents, materials or information shall occur as a result of disclosure to the commissioner under this section or as a result of sharing as authorized in Subsection D of this section.

F. Nothing in this Act shall prohibit the commissioner from releasing final, adjudicated actions including for cause terminations that are open to public inspection pursuant to [insert appropriate reference to state law] to a database or other clearinghouse service maintained by the National Association of Insurance Commissioners, its affiliates or subsidiaries.

G. Notwithstanding any contractual agreements between the payor and the TPA that operate to the contrary, the TPA shall retain the right to sufficient continuing access to books and records to permit the TPA to fulfill all of its contractual obligations to

0 2011 National Association of Insurance Commissioners I090-27 Registration and Regulation of Third Party Administrators (An NAIC Guideline)

insured parties, claimants, and the payor.

H. In the event the payor or the TPA cancel their agreement; notwithstanding the provisions of Subsection A of this section, the TPA may, by written agreement with the payor, transfer all records to a new TPA rather than retain them for five (5) years. In such cases, the new TPA shall acknowledge, in writing, that it is responsible for retaining the records of the prior TPA as required in Subsection A of this section.

Section 5. Approval of Advertising

A TPA that advertises on behalf of its client may only use advertising that has been approved in writing by the client in advance of its use. A TPA that mentions any current or former client in its advertising must obtain the client’s prior written consent.

Section 6. Responsibilities of the Payor and TPA

A. No TPA shall act as such without a written agreement between the TPA and the payor. A copy of the agreement shall be retained by the TPA for the duration of the agreement and for five (5) years thereafter. The agreement shall contain all provisions required by this section, except insofar as the TPA does not perform all of the functions referenced in this section.

B. A payor that utilizes the services of a TPA shall retain responsibility for the benefits, premium rates, collateral and reimbursement procedures, underwriting criteria and claims payment procedures applicable to the coverage and for securing reinsurance or stop-loss insurance, if any. The rules pertaining to these matters, to the extent that they are relevant to the duties of the TPA, shall be agreed to in writing by the payor and the TPA.

C. An insurer utilizing the services of a TPA is responsible for the acts of the TPA and is responsible for providing the TPA’s books and records relevant to the insurer to the commissioner upon request.

D. The written agreement between the TPA and the payor shall provide that communications between the TPA and claimants shall avoid deceptive statements with regard to the responsibilities of the TPA, payor and any insurer with regard to claims or premiums.

E. In the event of a dispute between the payor and the TPA regarding which of them is to fulfill a lawful obligation with respect to a policy, certificate or claim subject to the written agreement, the payor shall fulfill such obligation.

F. The payor has the duty to provide for competent administration of its programs administered by a TPA and within the scope of this Act.

G. When a TPA administers benefits in connection with life, annuity, health and employee benefit stop-loss coverage for more than one hundred (100) certificate holders, subscribers, claimants or policyholders on behalf of an insurer, the insurer shall, at least semiannually, conduct a review of the operations of the TPA. At least one such review shall include an on-site audit of the operations of the TPA. The cost of such reviews or audits shall be borne by the insurer and not reimbursed by the TPA. The requirements of this subsection shall not apply when the TPA and the

1090-28 O 2011 National Association of Insurance Commissioners Model Regulation Se.rv'iee——October 2011

insurer are affiliated.

Section 7. Premium Collection and Payment of Clailns

A. All insurance charges, premiums, collateral and loss reimbursements collected by a TPA on behalf of or for a payor, the return of premiums or collateral received from a payor, and any funds held by the TPA for the payment of claims, shall be held by the TPA in a fiduciary capacity. Funds shall be immediately remitted to the person entitled to them or shall be deposited promptly in a fiduciary account established and maintained by the TPA in a federally insured financial institution. The TPA shall render a periodic accounting to the payor detailing all transactions performed by the TPA pertaining to the business of the payor, and the written agreement between the payor and the TPA shall include the specifications of this reporting.

B. The TPA shall keep copies of all records of any fiduciary account maintained or controlled by the TPA, and, upon request of a payor, shall furnish the payor with copies of the records pertaining to the deposits and withdrawals made on behalf of the payor. If funds deposited in a fiduciary account have been collected on behalf of or for more than one payor, or for the payment of claims associated with more than one policy, the TPA shall keep records clearly recording the deposits in and withdrawals from the account on behalf of each payor and relating to each policyholder.

C. The TPA shall not pay any claim by withdrawals from a fiduciary account in which premiums or charges are deposited. Withdrawals from a fiduciary account shall be made as provided in the written agreement between the TPA and the payor, and only for the following purposes:

(1) Remittance to a payor entitled to remittance;

(2) Deposit in an account maintained in the name of the payor;

(3) Transfer to and deposit in a claims-paying account, with claims to be paid as provided in Subsection D of this section;

(4) Payment to a group policyholder for remittance to the payor entitled to such remittance;

(5) Payment to the TPA of its earned commissions, fees or charges;

(6) Remittance of return premium to the person or persons entitled to such return premium; and

(7) Payment to other service providers as authorized by the payor.

D. All claims paid by the TPA from funds collected on behalf of or for a payor shall be paid. only as authorized by the payor. Payments from an account maintained or controlled by the TPA for purposes including the payment of claims may be made only for the following purposes:

(1) Payment of valid claims;

(2) Payment of expenses associated with claims handling to the TPA or to other service providers approved by the payor;

O 2011 National Association of Insurance Commissioners 1090-29 Registration and Regulation of Third Party Administrators (TPAs) (An NAIC Guideline)

(3) Remittance to the payor, or transfer to a successor TPA as directed by the payor, for the purpose of paying claims and associated expenses; and

(4) Return of funds held as collateral or prepayment, to the person entitled to those funds, upon a determination by the payor that those funds are no longer necessary to secure or facilitate the payment of claims and associated expenses.

Section 8. Compensation to the TPA

A. A TPA shall not enter into an agreement or understanding with a payor in which the effect is to make the amount of the TPA’s commissions, fees, or charges contingent upon savings effected in the payment of losses covered by the payor’s obligations. This provision shall not prohibit a TPA from receiving performance-based compensation for providing hospital or other auditing services, from providing managed care or related services, or from being compensated for subrogation expenses.

B. A payor shall not enter into an agreement with a TPA in violation of this section.

C. This section shall not prevent the compensation of a TPA from being based on premiums or charges collected or the number of claims paid or processed.

Section 9. Disclosure of Charges and Fees

A. VVhen a TPA collects funds, the reason for collection of each item shall be identified to the insured party and each item shall be shown separately from any premium. Additional charges may not be made for services to the extent the services have been ah'eady paid for by the payor.

B. The TPA shall disclose to the payor all charges, fees and commissions that the TPA receives arising from services it provides for the payor, including any fees or commissions paid by payors providing reinsurance or stop-loss insurance.

Section 10. Delivery of Materials to Covered Individuals

Any policies, certificates, booklets, termination notices or other written communications delivered by the payor to the TPA for delivery to insured parties or covered individuals shall be delivered by the TPA promptly after receipt of instructions from the payor to deliver them.

Section 11. Home State TPA License

A. If a TPA is incorporated in this state or this state is its principal place of business Within the United States, then the TPA may designate this state as its home state and apply to this state for licensure as a TPA. If neither the state in which a TPA is incorporated nor the state that is its principal place of business have adopted this Act or a substantizflly similar law governing TPAs, and if the TPA has not designated any other state that has adopted this Act or a substantially similar law governing TPAs as its home state, then the TPA may apply for licensure to this state as its home state.

1090- 30 Q 2011 Nafional Association of Insurance Commissioners Model Regulation Serviee—October 2011

B. A TPA applying to this state as its home state shall apply for licensure using the Uniform Application and designate an individual as the TPA’s contact person for department communications.

Drafting Note: The contact person requirement in subsection B and the related part of the notification requirement in subsection J are recommended options for those states with computer systems or licensing and procedures for which the designation of a “responsible person" is necessary.

C. If a TPA designates this state as its home state because neither its state of incorporation nor the state that is its principal place of business within the United States have adopted this Act or a substantially similar law governing TPAs, but if one or both of these other jurisdictions have licensed the TPA, then the commissioner may consult with that state or states and may give due consideration to any relevant findings made by that state or states in order to avoid an unnecessarily duplicative review of the application.

D. The Uniform Application shall include or be accompanied by the following information and documents:

(1) All basic organizational documents of the applicant, including any articles of incorporation, articles of association, partnership agreement, trade name certificate, trust agreement, shareholder agreement and other applicable documents and all amendments to such documents;

(2) The bylaws, rules, regulations or similar documents regulating the internal affairs of the applicant;

(2) NAIC Biographical Affidavit for the individuals who are responsible for the conduct of affairs of the applicant; including all members of the board of directors, board of trustees, executive committee or other governing board or committee; the principal officers in the case of a corporation or the partners or members in the case of a partnership, association or li.mited liability company; any shareholders or member holding directly or indirectly ten percent (10%) or more of the voting stock, voting securities or voting interest of the applicant; and any other person who exercises control or influence over the affairs of the applicant;

(4) Audited annual financial statements or reports for the two (2) most recent fiscal years that prove that the applicant has a positive net worth. If the applicant has been in existence for less than two (2) fiscal years, the Uniform Application shall include financial statements or reports, certified by an officer of the applicant and prepared in accordance with GAAP, for any completed fiscal years, and for any month during the current fiscal year for which such financial statements or reports have been completed. An audited financial/annual report prepared on a consolidated basis shall include a columnar consolidating or combining worksheet that shall be filed with the report and include the following: a) amounts shown on the consolidated audited financial report shall be shown on the worksheet; b) amounts for each entity shall be stated separately, and c) explanations of consolidating and eliminating entries shall be included. The applicant shall also include such other information as the commissioner may require to review the current financial condition of the applicant.

O 2011 National Association of Insurance Commissioners 1090-31 Registration and Regulation of Third Party Administrators (TPAs) (An NAIC Guideline)

(5) A statement describing the business plan including information on stafing levels and activities proposed in this state and nationwide. The plan shall provide details setting forth the applicant’s capability for providing a sufficient number of experienced and qualified personnel in the areas of claims processing, record keeping and underwriting; and

(6) Such other pertinent information as may be required by the commissioner.

E. A TPA licensed or applying for licensure under this section shall make available for inspection by the commissioner copies of all contracts with payors or other persons utilizing the services of the TPA.

F. A TPA licensed or applying for licensure under this section shall produce its accounts, records and files for examination, and make its officers available to give information with respect to its affairs, as often as reasonably required by the commissioner.

G. The commissioner may refuse to issue a license if the commissioner determines that the TPA or any individual responsible for the conduct of affairs of the TPA is not competent, trustworthy, financially responsible or of good personal and business reputation, or has had an insurance or a TPA certificate of authority or license denied or revoked for cause by any jurisdiction, or if the commissioner determines that any of the grounds set forth in Section 15 of this Act exists with respect to the TPA.

H. A license issued under this section shall remain valid, unless surrendered, suspended or revoked by the commissioner, for so long as the TPA continues in business in this state and remains in compliance with this Act.

I. An individual may not qualify for licensure under this section, except that an individual previously licensed as a TPA with this state as its home state shall retain that license, unless surrendered, suspended or revoked by the commissioner, for so long as the TPA continues in business in this state and remains in substantial compliance with this Act.

Drafting Note: The “grandfather” provision in Subsection I addresses situations where states amending their TPA Act may already have individuals licensed under their current TPA law. The old TPA model allowed (and ostensibly required) individuals fulfilling TPA functions to be licensed as TPAs. It was never the intent of the previous drafting to require that every individual employed by a TPA to be individually licensed, although it arguably may have been intended that an individual could form a TPA without incorporating and get a license for that operation. This subsection can be removed in states that have an existing TPA law, but where all current licensees qualify as “business entities." States that are newly adopting a TPA law can also delete this subsection, as no entity could have previously held a license as a TPA

J. A TPA licensed or applying for licensure under this section shall notify the commissioner within thirty days of any material change in its ownership, control, contact person for the TPA or other fact or circumstance affecting its qualification for a license in this state. The commissioner shall report any such changes to (insert name of the appropriate electronic database).

K. A TPA licensed or applying for a license under this section that administers or will administer governmental or church self-insured plans in this state or any other state shall maintain a surety bond for the use and benefit of the commissioner and the insurance regulatory authority of any additional state in which the TPA is authorized to conduct business and cover individuals and persons who have remitted

1090- 32 O 2011 National Association of Insurance Commissioners Model Regulation Servicc.»October 2011

premiums or insurance charges or other monies to the TPA in the course of the TPA’s business in the greater of the following amounts:

(1) $100,000; or

(2) Ten percent (10%) of the aggregate total amount of self-funded coverage under church plans or governmental plans handled in this state and all additional states in which the TPA is authorized to conduct business.

Section 12. Registration Requirement

A person who is not required to be licensed as a TPA under this Act and who directly or indirectly underwrites, collects charges or premiums from, or adjusts or settles claims on residents of this state, only in connection with life, annuity or health coverage provided by a self-funded plan other than a governmental or church plan, shall register with the commissioner annually, verifying its status as herein described. This section shall not apply to an insurer or to an individual performing these actions as an employee of an insurer. This section shall also not apply to a person performing these actions under contract to or as an employee of a TPA.

Section 13. Nonresident TPA License

A. Unless a TPA has obtained a license in this state under Section 11, any TPA who performs TPA duties in this state shall obtain a nonresident TPA license in accordance with this section by filing with the commissioner the Uniform Application, accompanied by a letter of certification. In lieu of requiring a TPA to file a letter of certification with the Uniform Application, the commissioner may verify the nonresident TPA’s home state certificate of authority or license status through an electronic database maintained by the National Association of Insurance Commissioners, its affiliates or subsidiaries.

B. A TPA shall not be eligible for a nonresident TPA license under this section if it does not hold a home state certificate of authority or license in a state that has adopted this Act or that applies substantially similar provisions as are contained in this Act to that TPA. If the Act in the TPA’s home state does not extend to stop-loss insurance, but if the home state otherwise applies substantially similar provisions as are contained in this Act to that TPA, then that omission shall not operate to disqualify the TPA from receiving a nonresident TPA license in this state.

C. Except as provided in Subsection B of this section and in section 15, the commissioner shall issue a nonresident TPA license to the TPA promptly upon receipt of a complete application.

D. Unless notified by the commissioner that the commissioner is able to verify the nonresident TPA’s home state certificate of authority or license status through an electronic database maintained by the National Association of Insurance Commissioners, its afliliates or subsidiaries, each nonresident TPA shall annually file a statement that its home state TPA certificate of authority or license remains in force and has not been revoked or suspended by its home state during the preceding year.

© 2011 National Association of Insurance Commissioners I090-33 Registration and Regulation of Third Party Administrators (TPAs) (An NAIC Guideline)

E. At the time of filing the statement required under Subsection D of this section or, if the commissioner has notified the nonresident TPA that the commissioner is able to verify the nonresident TPA’s home state certificate of authority or license status through an electronic database, on an annual date determined by the commissioner, the nonresident TPA shall pay a filing fee as required by the commissioner.

Drafting Note: The filing of the statement or tiine set for payment of the fee should be after September l so that it follows the nonresident 'I'PA's annual renewal of its home state certificate of authority or license.

F. A TPA licensed or applying for licensure under this section shall produce its accoimts, records and files for examination, and make its officers available to give information with respect to its affairs, as often as reasonably required by the OOIIIIDISSIOIIQT.

G. A nonresident TPA licensed in its home state is not required to hold a nonresident TPA license in this state if the TPA’s duties in this state are limited to the administration of group policies or plans of insurance and no more than one hundred (100) certificate holders for all such plans reside in this state.

Section 14. Annual Report and Filing Fee

A. Each TPA licensed under Section 11 shall file an annual report for the preceding calendar year with the commissioner on or before July 1 of each year, or within such extension of time as the commissioner for good cause may grant. The annual report shall include an audited financial statement performed by an independent certified public accountant. An audited financial/annual report prepared on a consolidated basis shall include a columnar consolidating or combining worksheet that shall be filed with the report and include the following: a) amounts shown on the consolidated audited financial report shall be shown on the worksheet; b) amounts for each entity shall be stated separately, and c) explanations of consolidating and eliminating entries shall be included. The report shall be in the form and contain such matters as the commissioner prescribes and shall be verified by at least two (2) officers of the TPA.

B. The annual report shall include the complete names and addresses of all payors with which the TPA had agreements during the preceding fiscal year.

C. At the time of filing its annual report, the TPA shall pay a filing fee as required by the commissioner.

D. The commissioner shall review the most recently filed annual report of each TPA on or before September 1 of each year. Upon completion of its review, the commissioner shall either:

(1) Issue a certification to the TPA that the annual report shows that the TPA has a positive net worth as evidenced by audited financial statements and is currently licensed and in good standing, or noting any deficiencies found in that annual report and financial statements; or

1090-34 Q 201 l National Association of Insurance Commissioners Model Regulation Service-October 2011

(2) Update any electronic database maintained by the National Association of Insurance Commissioners, its affiliates or subsidiaries, indicating that the annual report shows that the TPA has a positive net worth as evidenced by audited financial statements and complies with existing law, or noting any deficiencies found in the annual report.

Section 15. Grounds for Denial, Suspension or Revocation of Licensure

A. The commissioner shall, deny, suspend or revoke the license of a TPA, or shall issue a cease and desist order should the TPA not have a license if, after notice and opportunity for hearing, the commissioner finds that the TPA:

(1) Is in an unsound financial condition;

(2) Is using such methods or practices in the conduct of its business so as to render its further transaction of business in this state hazardous or injurious to insured persons or the public; or

(3) Has failed to pay any judgment rendered against it in this state within sixty (60) days after the judgment has become final.

B. The commissioner may deny, suspend or revoke the license of a TPA, or may issue a cease and desist order should the TPA not have a license if, after notice and opportunity for hearing, the commissioner finds that the TPA:

(1) Has violated any lawful rule or order of the commissioner or any provision of the insurance laws of this state;

(2) Has refused to be examined or to produce its accounts, records and files for examination, or if any individual responsible for the conduct of affairs of the TPA, including members of the board of directors, board of trustees, executive committee or other governing board or committee; the principal ofificers in the case of a corporation or the partners or members in the case of a partnership, association or limited liability company; any shareholder or member holding directly or indirectly ten percent (10%) or more of the voting stock, voting securities or voting interest of the TPA; and any other person who exercises control or influence over the affairs of the TPA; has refused to give information with respect to its affairs or has refused to perform any other legal obligation as to an examination, when required by the commissioner;

(3) Has, without just cause, refused to pay proper claims or perform services arising under its contracts or has, without just cause, caused covered individuals to accept less than the amount due them or caused covered individuals to employ attorneys or bring suit against the TPA or a payor which it represents to secure full payment or settlement of such claims;

(4) Is required pursuant to this Act to have a license and fails at any time to meet any qualification for which issuance of a license could have been refused had the failure then existed and been known to the commissioner, unless the commissioner issued a license with knowledge of the ground for disqualification and had the authority to waive it;

Q 2011 National Association of Insurance Commissioners 1090-35 Registration and Regulation of Third Party Administrators (TPAs) (An NAIC Guideline)

(5) If any of the individuals responsible for the conduct of its aflairs, including members of the board of directors, board of trustees, executive committee or other governing board or committee; the principal ofiicers in the case of a corporation or the partners or members in the case of a partnership, association or limited liability company; any shareholder or member holding directly or indirectly ten percent (10%) or more of its voting stock, voting securities or voting interest; and any other person who exercises control or influence over its affairs; has been convicted of, or has entered a plea of guilty or nolo contendere to, a felony without regard to whether adjudication was withheld;

(6) Is under suspension or revocation in another state; or

(7) Has failed to file a timely annual report pursuant to Section 14, if a resident TPA, or a timely statement and filing fee, as applicable, pursuant to Sections 13D and E, if a nonresident TPA.

C. (1) The commissioner, in his or her discretion, without advance notice, and before a hearing, may issue an order immediately suspending the license of a TPA, or may issue a cease and desist order should the TPA not have a license, if the commissioner finds that one or more of the following circumstances exist:

(a) The TPA is insolvent or impaired;

(b) A proceeding for receivership, conservatorship, rehabilitation or other delinquency proceeding regarding the TPA has been commenced in any state; or

(c) The financial condition or business practices of the TPA otherwise pose an imminent threat to the public health, safety or welfare of the residents of this state.

(2) At the time an order has been issued by the commissioner in accordance with Paragraph (1) of this subsection, the commissioner shall serve notice to the TPA that the TPA may request a hearing within ten business days after the receipt of the order. If a hearing is requested, the commissioner shall schedule a hearing within ten business days after receipt of the request. If a hearing is not requested and the commissioner orders none, the order shall remain in effect until modified or vacated by the commissioner.

D. If the commissioner finds that one or more grounds exist for the suspension or revocation of a license issued under this part, or for a cease and desist order, the commissioner may, in lieu of or in addition to the suspension, revocation or cease and desist order, impose a fine upon the TPA.

Drafting Note: States with disciplinary provisions of general applicability for regulated insurance entities may wish to incorporate such provisions by reference and should revise the provisions of this section to the extent inconsistent with the states general statutory scheme.

1090-36 O 2011 National Association of Insurance Commissioners Model Regulation Service-—~0cto'ber 2011

Section 16. Effective Date

Drafting Note: If a TPA act was already in efiect, but is now being amended to include stop-loss insuranee, it will be necessary to include a prospective effective date for this extension that does not afiect the applicability of the Act to other types of coverage‘

Chronological Summary ofAction (all references are to the Proceeding of the NAIC)

1977 Proe. I 26, 28, 31 7, 319-321 (adopted). 1991 Pmc. I 9, 17-18, 6'08, 612-6'13, 620-626 (amended and reprinted). 199.9 Proc. 4*" Quarter 15, 107, 111, 116, 119-120 (amended). 2001 Proc. 4th Quarter 6', 90, 3.95, 3.99, 400-409 (amended and reprinted). 2011 Proc. 2"‘ Quarter, Vol. I122, 220-251 (converted to guideline).

O 2011 National Association of Insurance Commissioners 1090-37 /30 &%6 %6 "0!'%6&66+46 0+2,6  .6
%6 6  #!%6

     


 661'%"6 .* 1(%6(6%-56 ($- )%+-6 Model Regulation Service—l" Quarter 2017

REGISTRATION AND REGULATION OF THIRD PARTY ADMINISTRATORS (TPAs) (An NAIC Guideline)

This chart is intended to provide readers with additional information to more easily access state statutes, regulations, bulletins or adniinistrative rulings related to the NAIC model. Such guidance provides readers with a starting point from which they may review how each state has addressed the niodel and the topic being covered. The NAIC Legal Division has reviewed each state’s activity in this area and has determined whether the citation most appropriately fits in the Model Adoption column or Related State Activity column based on the definitions listed below. The NAIC’s interpretation may or niay not be shared by the individual states or by interested readers.

This chart does not constitute a formal legal opinion by the NAIC staff on the provisions of state law and should not be relied upon as such. Nor does this state page reflect a determination as to whether a state meets any applicable accreditation standards. Every effort has been made to provide correct and accurate summaries to assist readers in locating useful information. Readers should consult state law for further details and for the most current information.

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REGISTRATION AND REGULATION OF THIRD PARTY ADMINISTRATORS (TPAs) (An NAIC Guideline)

NAIC MEMBER RELATED STATE ACTIVITY

Alabama NO CURRENT ACTIVITY

Alaska ALASKA smr. §§ 2127.630 to 2127.000 (1992/2009); ALASKAAnmm. CoDE 111;. 3, § 23.140 (2009); Buunrm 92-3 (1992);Bu1.1;1:'rm 97-0 (1997).

American Samoa NO CURRENT ACTIVITY

Arizona ARIZ. REV. STAT. ANN. 20-485 to 20-485.12 (1977/2002).

Arkansas ARK. CODE ANN. 23-92-201 to 23-92-208 (1985/2015).

California CAL. INS. CODE 1759 to 1759.10 (1977/1984).

Colorado NO CURRENT ACTIVITY

Connecticut CONN. GEN. STAT. ANN. 38a-720 to 38a-720n (2011); BULLETIN L-17 (2011).

Delaware DEL. CODE ANN. tit. 18,§ 102 (1953/2013) (Defines TPA, authority to adopt regulations); 18 DEL. CODE REGS. § 1406 (2003).

District of Columbia NO CURRENT ACTIVITY

Florida FLA. STAT. §§ 626.88 to 626.894 (1983/2014).

Georgia GA. (301312 ANN. §§ as-22.-100 to as-23-105 (1991/2005); GA. com». R. & REGS. 120-2-49 (1993/1991).

Guam NO CURRENT ACTIVITY

Hawaii NO CURRENT ACTIVITY

Idaho Advisory Notice 3-18-2010 (2010).

Illinois 215 ILL. COMP. STAT. 5/511.100 to 5/511.113 (1984/2013).

Indiana 760 IND. Ammx. com: 1-41-1 to 1-41-5 (1983/1990); IND. cons §§ 27-1-25-1 11> 27-1-25-15 (1980/2004).

Iowa IOWA Coma §§ 510.11 to 510.23 (1989/1996); IOWA ADMIN. Coors 1-. 191-58.1 to 191-58.20 (2009) (based on proposed guideline).

Kansas Km smw. ANN. §§ 40-3901 to 40-3810 (1978/1997).

O 2017 National Association of Insurance Commissioners ST- 1.090-3 Model Regulation Service—-1" Quarter 2017

REGISTRATION AND REGULATION OF THIRD PARTY ADMINISTRATORS (TPAs) (An NAIC Guideline)

NAIC MEMBER RELATED STATE ACTIVITY

Kentucky KY. REV. sm-r. ANN. §§ 304.9-051 to 304.9-052; §§ 304.9-371 to 304.9-3 77 (1980).

Louisiana LA. REV. STAT. ANN. § 22:108O (2014) ; 22:3031 to 22:3046 (I993/2004): §§ 22:1641 to 22:1651 (2008/2009) (portions of model).

Maine ME. REV. sm-r. ANN. st. 24-A, §§ 1901 to 1912 (1990/2000).

Maryland MD. Com: ANN., ms. §§ s-301 to s-322 (1991/2009); Buu.m'm 24-2009 (2009).

Massachusetts NO CURRENT ACTIVITY

lvlichigan MICH. COMP. LAWS 550.901 to 550.962 (1985/2002).

Minnesota MINN. STAT. § 60A.23 sub. 8 (1967/1999); § 79A.06 (1988/2011); MINN. R. 27670100 to 276‘7.0900 (1988/1995).

Mississippi MISS. CODE ANN. §§ 83-18-1 to 83-18-29 (1991/1997).

Missouri MO. CODE REGS. ANN. tit. 20, §§ 200-9.500 to 200-9.800 (1994/1999); MO. REV. STAT. 376.1075 to 376.1095 (1993/1999).

Montana MONT. CODE ANN. 33-17-601 to 33-1'7-618 (I979/I997).

Nebraska NEB. REV. STAT. §§ 44-5801 to 44-5816 (1992/2003).

Nevada NEV. ADMIN. CODE §§ 683A.10O to 683A.165 (1986/2003); NEV. REV. STAT. § 683A.025; §§ 683A.0805 to 683A.O893 (197772003).

New Hampshire N.H. CODE ADMIN. R. ANN. INS. 2301.01 to 2301.20 (1994/2009); N.H. REV STAT. ANN. 402-H11 to 402-H216 (I994/1998).

New Jersey N.J. STAT. ANN. 17B:27B-1 to 17B:27B-25 (2001); N.J.ADM1N. CODE §§ 11:23-1.1 to 11:23-5.10 (2005/2014).

New Mexico N.M. CODE R. §§ 13.4.5.1 to 13.4.5.22 (1992/1997); N.M. STAT. ANN. §§ 59A-12A-1 to 59A-12A-17 (1989/1999).

New York OGC Opinion No. 2001-189 (2001) (TPAs need not be licensed); O.G.C. 11 2-2006 (#1) (2006).

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REGISTRATION AND REGULATION OF THIRD PARTY ADMINISTRATORS (TPAs) (An NAIC Guideline)

NAIC MEMBER RELATED STATE ACTIVITY

North Carolina N.C. GEN. smw. §§ 58-47-150 to 58-47-205 (1997/2009); §§ as-47-210 to 58-47-220 (2002) (TPA for workers’ comp. self-insurers); 11 N.C. ADMIN. CODE 12.0332 (2010); 21.0101 to 21.0110 (1996); N.C. GEN STAT. §§ 58-56-2 to 58-56-66 (1991/2009); Memorandum 6-12-2012 (2012).

North Dakota N.D. cam. com: §§ 26.1-27-01 to 26.1-27-12 (1985/2005).

Northern Marianas NO CURRENT ACTIVITY

Ohio 01410 REV. CODE ANN. §§ 3959.01 to 3959.10; § 3959.99(19ss/1997); omo ADMLN. Coma § 3901-8-05 (2008).

Oklahoma 0141.4. 1-mum. Coma §§ 301441 to 36-1452 (1983/2008); Bmzm 3-21-2012 (2012).

Oregon on. REV. sum §§ 744.700 to 744.740 (1991/2013); on. Anmn. R. ass-075-0000 to sac-075-0070 (1992/2012); ass-074-0005 to 836-074-0050 (1988/2005).

Pennsylvania 40 PA. STAT. ANN. §§ 25-1001 to 25-1013 (1995).

Puerto Rico NO CURRENT ACTIVITY

Rhode Island 11.1. GEN. LAWS §§ 27-20.7-1 to 27-20.7-10 (2002).

‘ South Carolina s.c. com: ANN. §§ as-51-10 to as-51-120 (1988/1993).

South Dakota S.D. comm-:0 LAWS §§ 58-2913-1 to as-291)-34 (1993/2013).

Tennessee TENN. com ANN. §§ 56-0-401 to 50-6-412 (1980/1996).

0 2017 National Association of Insurance Commissioners ST- 1090-5 Model Regulation Service—1" Quarter 2017

REGISTRATION AND REGULATION OF THIRD PARTY ADMINISTRATORS (TPAs) (An NAIC Guideline)

NAIC MEMBER RELATED STATE ACTIVITY

Texas TEX. INS. CODEANN. 4151.001 to 4151.208 (2005/2013).

Utah UTAH CODE ANN. §§ 31A-25-102 to 31A-25-402 (1986/2014); UTAH ADMIN. CODE r. 590-232 (2009).

Vermont NO CURRENT ACTIVITY Virgin Islands v.1. Com: ANN. 111., 22 §§ so-1520 to 60-1544 (2016).

Virginia NO CURRENT ACTIVITY Washington E NO CURRENT ACTIVITY

West Virginia W. VA. CODE §§ 33-46-1 to 33-46-20 (2003).

Wisconsin WIS. ADMIN. CODE INS. 8.20 to 8.32 (1992/1997); WIS. STAT. 633.01 to 633.17 (1991/1999) (portions of model). Wyoming WYO. com; R. § 4 (1984).

ST- 1090-6 O 2017 National Association of Insurance Companies Model Regulation Servioe_O¢tober 2011

THIRD PARTY ADMINISTRATOR STATUTE

Proceedings Citations Cited to the Proceedings of the NAIC

The utilization of third-party administrators in connection with mass-marketed insurance programs increased significantly in the years before the NAIC began drafting a model in early 1976. As so often accompanies an increased volume of activity in any line of endeavor, there were abuses; and the insurance commissioners found insufficient regulatory controls available to them either that required measures designed to prevent abuses from arising in the first instance, or to enable appropriate remedial action to be taken after the fact. 1976 Proc. II 400.

In 1976, a joint meeting was held between NAIC representatives and the Joint Pension Task Force of the federal government. One of the agenda items discussed was the special problems of multiple employer trusts and how this related to the administrator statute. 1977 Proc. I 234.

A thorough review of the existing standards was needed by 1990. The model adopted in 1976 had been found to be cumbersome, to not adequately control abusive administrator practices, and to be outdated. 1990 Proc. II 602.

When the working group was considering amendments to the model, one industry attendee asked why a new model was necessary. The committee chair responded that the market had changed substantially in the past thirteen years. 1991 Proc. IB 627.

After the adoption of the Gramm-Leach-Bliley Act in 1999, the working group responsible for the producer licensing models talked about modifications to the third party administrator law to promote reciprocity and create greater uniformity. 1999 Proc. 4"‘ Quarter 111.

In 2000 a working group was again appointed to consider amendments to the model. An interested party presented recommendations that he said would streamline the licensing process for third party administrators (TPAs). 2000 Proc. 3“! Quarter 403.

Section 1. Definitions

A. The model defined an administrator and set out certain minimum standards by which the business of an administrator must be conducted. 1977 Proc. I 318.

The task force recognized the need for careful drafting of this section so that entities such as accounting firms or data processors would come within the exceptions. 1977 Proc. I 322.

The exception for an insurance company in Paragraph (3) of the definition was considered at some length before adoption. The first draft simply contained an exemption for an “insurance company.” The intent was for the statute to reach the nonadmitted carrier who was acting as an administrator, but as drafted the exemption would have excluded those carriers from the scope of the statute. The adopted version clarified the intent of the drafters. 1977 Proc. I 322.

The desired goal of Paragraph (4) was to exempt producers acting in the capacity of agents of an insurance company. If the producer should act in any capacity on behalf of the administrator, the exemption would not apply and the producer would be required to have an administrator’s certificate. 1977 Proc. I 322.

O 2011 National Association of Insurance Commissioners PC- 1090- I Model Regulation Service—October 2011

THIRD PARTY ADNIINISTRATOR STATUTE

Proceedings Citations Cited to the gs of the NQC

Section 1A (cont.)

The task force considered expanding the exemption for banks and credit unions in Paragraph (8) to say “all lending institutions,” but there was enough opposition so that the definition was not changed. 1977 Proc. I 322.

The initial draft did not include the parts of the definition referring to credit card companies or attorneys (Paragraphs (9) and (10)). The committee quickly realized that further study was needed on the inclusion of certain credit card organizations within the definition of administrator. 1976 Proc. II 401.

The commissioners extensively considered the possibility of exempting credit card companies from the coverage of the administrator statute. The point was made that if the credit card company is performing no functions other than advancing the premiums to the insurer and collecting a debt from the insured, it ought not be subject to the administrator statute, as this transaction was never intended to be within the terms of the statute. A possible solution which was discussed, other than granting a exemption directly, would be to redefine the word “charges.” 1977 Proc. I 321.

After concern was expressed about the definition of a third party administrator, the working group agreed to add Paragraph (12) to exempt managing general agents from the provisions of the Act to the extent the MGA was regulated under the Managing General Agents Act. 1991 Proc. IB 613.

As the NAIC began an extensive redraft of the model in 2000, the working group reviewed the definition of an administrator. In gathering additional background information, no states on the working group required entities handling property and casualty insurance to be licensed as TPAs. In terms of why states licensed TPAs, most indicated they did so to ensure that the insurance department had authority to take action against TPAs. 2000 Proc. 3"! Quarter 403.

Later in the drafting process a regulator commented that the definition of administrator did not appear to encompass property and casualty lines of business. An interested party opined that the administrator statute was designed to address life and health insurance and the Managing General Agent Act was designed to address property and casualty insurance. 2000 Proc. 4"‘ Quarter 326.

An interested party requested an exemption for associations because an association is usually the owner and administrator of the policy. She said this was an issue during market conduct examinations, as many examiners would assert that an association that administered a policy issued by an insurance company must be licensed as a TPA. 2000 Proc. 4"’ Quarter 326.

An interested party suggested adding the phrase “offered by an insurer” to make it clear that administrators acting on behalf of an entity that was defined as an insurer, including multiple welfare arrangements, must obtain licensure under the model act. 2001 Proc. 1" Quarter 294.

The working group considered how to word an exemption in Paragraph (1) that would provide an exemption for a company that administers a plan for a direct or indirect wholly owned afliliate. 2001 Proc. 1" Quarter 294.

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Section 1A (cont.)

The drafters considered the issue of insurers that administer for entities other than themselves. One regulator commented that her state required a licensed insurer to be licensed also as a TPA. An interested party opined that this was not necessary, as the company licensure process is more stringent than TPA licensure. 2001 Proc. 1" Quarter 297.

A regulator suggested an exemption for administrator who is affiliated with an insurer and who only performs the contractual duties (between the administrator and the insurer) of an administrator for the direct and assumed insurance business of the affiliated insurer. Several members of the working group commented that their states required licensed insurers to also obtain a TPA license if the insurer was working in the capacity of a TPA. The regulator clarified that the exemption would only apply to an affiliate of an insurer that performed work solely for the insurer. One working group member responded that his state still required such an entity to obtain a TPA license because the affiliate was a separate legal entity that could be bought or sold. The group decided to clarify that the exemption only applied if the acts of the administrator should be considered the acts of the insurer. 2001 Proc. 3"‘ Quarter 195.

A member of the working group expressed concern that Subsection A(13) could permit a company to form an affiliate to conduct self-insured business and then be exempt from licensure. The chair commented the Paragraph (13) exemption for administrators who were affiliated with an insurer was intended to be for fully insured business. The group decided to specify that for purposes of Section 1A(13) “insurer” meant a licensed insurance company, prepaid hospital or medical care plan or a health maintenance organization. 2001 Proc. 3"‘ Quarter 185.

B. During the extensive redraft that took place in 1990, a number of new definitions were added. Subsection B was first included at this time. 1991 Proc. IB 621.

D. “Control” was first included in the definitions section in 1990. It simply referenced the holding company act. 1991 Proc. IB 621.

During the development of amendments in 2001, a more extensive definition was added. 2001 Proc. 4"‘ Quarter 402.

E. Based upon comments submitted to the working group, the definition of GAAP was added because it was used in Section 11B(4) with respect to the financial statements submitted by administrators. 2001 Proc. 1“ Quarter 294.

F. During the drafting process begun in 2000, regulators discussed a definition for “home state.” One regulator commented that it is the state in which the TPA maintained its principle place of business and that a TPA could declare another state to be its home state if the state in which the TPA maintains its principle place of business has not adopted the TPA model act. Some regulators expressed concern about forum shopping, but an interested party responded that home state must be defined this way or a TPA from a state that has not adopted the model will not be able to obtain a nonresident certificate of authority. He also noted that forum shopping should not be an issue if all states adopted the uniform application, because this would create a uniform level of regulatory review. 2000 Proc. 4"‘ Quarter 327.

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Section IF (cont)

At the working group’s next meeting, an interested party submitted a suggestion for language to help alleviate the concerns surrounding potential forum shopping of applicants. 2000 Proc. 4"‘ Quarter 324.

The working group decided to add a clause, “or a substantially similar law governing administrators,” to take into account the fact that few, if any states will adopt the model act verbatim. 2001 Proc. 1*‘ Quarter 295.

G. The definition of insurance producer was added in 2001. 2001 Proc. 491 Quarter 402.

H. ‘Tnsuref’ was first defined in the 1990 revision of the model. 1991 Proc. IB 621.

The definition was the subject of considerable discussion, particularly the statement in the 1990 version about ERISA exempt plans. The early 2001 draft included a phrase about school districts or municipalities and one regulator expressed concern that the reference was too narrow. 2001 Proc. 1" Quarter 283, 295.

I-M. These definitions were added in 2001. 2001 Proc. 4"“ Quarter 402.

N. The defmition of “underwriting” first appeared in the model in the 1990 set of amendments. 1991 Proc. IB 621.

During the discussion of amendments in 2001, regulators questioned whether the model phrase “and the ability to procure bonds and excess insurance” at the end of the subsection might permit a TPA to procure insurance even if the TPA did not have a producer license. The working group recognized this language might he interpreted in this manner and agreed to eliminate the phrase. 2001 Proc. 1" Quarter 280.

A regulator suggested amending the definition of “u.nderwrites” in response to concerns about self- fimded plans. Other changes to the model also were made to address the concerns raised. 2001 Proc. 3'3 Quarter 199.

Section 2. Written Agreement Necessary

A. One of the specific requirements the drafters felt important was that no insurer should utilize the services of an administrator in the distribution of its products unless the agreement between the insurer and the administrator had been reduced to writing and the written contract was part of the official records of the insurer. 1976 Proc. II 401.

B. Subsection B was added to the model in the 1990 redraft without recorded discussions. 1991 Proc. IB 621.

C. This subsection was included in the 1990 redraft in the same form as it appears currently. 1991 Proc. IB 622.

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Section 3. Paynient to Administrator

Another general principal was a declaration that Where an insurer utilizes the services of an administrator, the administrator is an agent of the insurer for the collection of premiums, payment of return premiums, and payment of claims to the extent the administrator performs these functions. 1976 Proc. 1] 400.

The changes made in the 1990 rewrite of the model appeared to be technical clarifications. 1991 Proc. IB 622.

The chair of the drafting group commented that Section 3 may apply only to insured plans, since there would only be an employer and an insured under self-funded plans. An interested party commented that Section 3 was designed to protect an employer who may pay premium to an administrator. 2001 Proc. 1" Quarter 295.

Section 4. Maintenance of Information

A. The drafters felt it was important that the statute make clear that the insurer and the commissioner should have the right to examine the books and records of the administrator. 1976 Proc. II 401.

In March 1999 the NAIC president said there was a need to share information among state, federal and international regulators and to clarify existing law. He suggested charges for several NAIC committees to address freedom of information and subpoena efforts to obtain confidential information and documents and to achieve a coordinated approach that protects regulatory information. A technical group drafted language, which was forwarded to each of the groups drafting amendments to models. The Third Party Administrator Statute was one of the models identified for which regulators needed to consider the clarifying language. 1999 Proc. 1" Quarter 6, 10.

The parent committee chair noted that each group discussing the issue should try not to change the core language that was drafted. At the same time, if there is language specifically addressing agent licensing issues, the regulators on that committee can address those issues. 1999 Proc. 3*‘ Quarter 118.

B. The “proprietary restriction” language of Section 4 was some cause for concern among the industry advisory committee. It was thought by some that an administrator conceivably could rely upon this provision to deny access to its books and records by state department auditors. It was unanimous that access to the administrator’s books by regulators must be guaranteed. The intent of the section was to permit an administrator to protect his list of customers and was never intended to be a restriction upon the regulator. The suggestion was made that the written agreement between the administrator and the insurance company contain provisions for the transfer of necessary information to protect the insureds in those instances where the ins1n'er is utilizing a new administrator. 1977 Proc. I 322.

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)) % )##!&)) (") #"#) Model Regulation semokocwber 2011 THIRD PARTY ADMINISTRATOR STATUTE

Proceedings Citations Cited to the Proceedings of the NAIC

Section 4D (cont.)

Paragraph (4) was added to clarify that persons providing information to the commissioner do not waive any existing privilege or confidentiality protection by doing so. This provision was added in response to industry comments. The paragraph was further amended to clarify that neither disclosing the information to the commissioner nor the transmission of the information by the commissioner to another regulator or law enforcement official would create a waiver. 1999 Proc. 4'4“ Quarter 16.

E. This subsection was added as a part of the revisions regarding confidentiality of information. 1999 Proc. 4* Quarter 120.

F. This subsection was added as a part of the revisions regarding confidentiality of information. 1999 Proc. 4'-1‘ Quarter 120.

G. The draft of amendments proposed in 1990 shifted ownership of the records from the administrator to the insurer. An industry association suggested modifications to the provision on ownership of records, to say that ownership would be determined by the agreement between the TPA and the insurer. The working group felt it would be a mistake to change the draft in this regard; the records should belong to the entity that has the responsibility for paying the claims. 1991 Proc. IB 612.

H. The subsection first appeared in the 1990 version of the model. The language has remained the same since that time. 1991 Proc. IB 622.

Section 5. Approval of Advertising

All advertising by the administrator pertaining to the business underwritten by the insurer shall be subject to the insurer’s control. 1976 Proc. II 401.

When the model was revised this section was not amended. The advisory committee suggested the provision was unclear. The chair of the working group commented that the current language was sufficiently clear to regulators who would be required to enforce the requirement. 1991 Proc. IB 626.

Section 6. Responsibilities of the Insurer

The underwriting standards applicable to the business underwritten by the insurer shall be subject to the insurer’s control. 1976 Proc. H 401.

The original Section 6 contained only one sentence on underwriting standards. The revised model adopted in 1990 replaced that with three subsections outlining responsibilities of the insurer. 1991 Proc. IB 622.

C. The advisory committee suggested removal of the provision requiring semi-annual review of insurers of TPAs. While this is good business practice, they did not feel it was necessarily appropriate to try and legislate good business practices. It would also be difficult to enforce. The working group disagreed and retained the requirement. This is part of the insurer’s overall

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Section 6C (cont.) responsibility for the competence of the TPA. Problems generally arise when the insurer does not pay close attention to the TPA’s activities. Insurers would generally want to audit their TPAs at least semi-annually. An industry representative suggested a de minimus standard for semi-annual reviews: review a TPA only if it services more than a minimum number of certificates for the insurer. Concern was raised over the term “review of the operations of the administrator.” It was suggested the audit be substituted to suggest a more thorough review. Others though “review” was more appropriate because it provided insurers with more flexibility. The working group voted to provide for semi-annual review, but that at least one review should be an on-site audit. They also limited the requirement to situations when the TPA serviced more than 100 certificates for the insurer. 1991 Proc. IB 626-627.

D. A regulator questioned how Section 2 related to Section 6. The response was that Section 6 was designed to grant an insurer the ability to stop a rogue TPA from processing business. Another regulator suggested expanding Section 6 to encompass a plan sponsor in addition to an insurer. 2001 Proc. 1" Quarter 295.

Section 7. Premium Collection and Payment of Clainis

The initial draft of this model section contained only one sentence. The drafters indicated further consideration was needed on the nature of the accounts required by this section. Considerable expansion took place before the final draft was adopted. 1976 Proc. II 401, 403.

A. The fiduciary account requirement was the subject of much discussion in the task force meeting. In the first draft it was uncertain whether the statute mandated separate fiduciary accounts, or whether one account with separate subaccounts was sufficient. In any event, the regulators felt that the funds should be held in trust for the insurer, an analogous situation to an agent’s or broker’s fiduciary account. The point was made that the accounting practice for the monies held as a fiduciary may be agreed to beforehand by the insurer and administrator and reflected in the administrator agreement. It was felt that where an administrator is dealing with more than one insurance company, but has one fiduciary account with oommingled funds, there must be a separate claims account and recordkeeping sufficient to establish an audit trail. It was agreed that the administrator/insurance company contract would delineate who would receive the interest from the investment of fimds. Some of the committee members spoke in favor of requiring separate accounts for each insurer, so that audits would be made easier, although this had drawbacks for investment purposes. 1977 Proc. I 322.

Upon drafting amendments to the model in 1990, an industry spokesperson expressed concern about the requirement that TPAs deposit receipts in a separate account in the name of each insurer. He stated this was inconsistent with current market practices. The working group chair pointed out that the language was in the original model, and he believed current practices could be interpreted as consistent with this standard. The working group agreed that a change was not appropriate. 1991 Proc. IB 613.

The last sentence of this section was added when amendments to the model were adopted in 1990. It requires a periodic accounting to the insurers. 1991 Proc. IB 622-623.

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Section 7 (cont.)

B. Subsection B, which had been part of the original model, was amended in 1990 to clarify the language. 1991 Proc. [B 623.

C. Subsection C was also part of the original statute and was the subject of technical amendments in 1990. 1991 Proc. IB 623.

D. Included in the original model, this subsection was moved in 1990, from a separate section, to be included in Section 7. 1991 Proc. IB 623.

Section 8. Compensation to the Administrator

A. The drafters of the 1990 amendments were asked if they intended to prohibit compensation based on savings in an “audit” situation. The working group agreed it did not mean to prohibit compensation in these situations, and agreed to revise the draft. 1991 Proc. IB 613.

Section 9. Notice to Covered Individuals; Disclosure of Charges and Fees

A. A disclosure statement describing the relationship among the insurer, the policyholder, the administrator and the insured individual must be delivered to the insured individual. 1976 Proc. H 401.

B. Industry representatives objected, for mass marketed products, to the provision requiring premiums to be disclosed separately from other fees. The drafters didn’t change the provisions, believing consumers should be clearly informed about the actual premiums charged for insurance products separately from other amounts they are asked to pay. 1991 Proc. IB 613.

C. Subsection C was added as part of the 1990 amendments. 1991 Proc. IB 623.

Section 10. Delivery of Materials to Covered Individuals

This section was new in 1990, added without recorded discussion. 1991 Proc. IB 623.

Section 11. Certificate of Authority Required

VVhen the drafters made a list of things they thought were important to include in a model statute, they included a provision that administrators should be bonded and should register with the commissioner unless otherwise licensed. The bonding requirement was removed before final adoption. 1976 Proc. II 401.

The drafters again discussed whether a bonding requirement was necessary. It was reported that 26 states had enacted bonding requirements. The chair of the working group pointed out that ERISA contained bonding requirements with respect to self-funded plans, and that bonds were rarely sufficient to pay claims if plan solvency became threatened. Interested parties did not see a need for bonding in cases of TPAs administering insured groups. 1991 Proc. IB 627.

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Proceedings Citations Cited to the Proceedings of the NAIC

Section 11 (cont.)

A. VVhen revisions were being made to the model in 1990, the group discussed the need for TPAs to be licensed. Most members of the advisory committee believed that licensure was unnecessary and that state requirements would potentially be preempted by ERISA. The working group chair felt that at least registration was necessary so that the Insurance Commissioner would be informed of which TPAs were operating in the state. One state department representative explained some of the problems states were experiencing with self-funded MEWAs claiming to be exempt from state regulation due to ERISA. The group discussed whether the model should require a TPA to disclose to participants the fact that a plan is self-funded. Some employers may not necessarily want participants to know this. 1991 Proc. IB 627-628.

B. “Then asked for clarification of the term “soliciting” as used in the draft, the chair responded that soliciting means seeking business in a state. The group decided that if the TPA was soliciting a buyer of insurance, it should be licensed as an agent. They decided to explicitly add this requirement to the model act. 1991 Proc. IB 627.

Industry comments suggested that insurance departments should not pass judgment on a TPA before it began operations. They agreed that the TPA’s qualifications should be judged by the insurer that contracts with it and that the Act's license requirements would be a burden to smaller TPAs. The working group chair strongly disagreed. He said that the reason states license TPAs is because they had a responsibility to assure that those entities, replacing functions otherwise performed by regulated insurance companies, were sufficiently structured to undertake those functions. The original need for a TPA model act was because insurance companies were unable to satisfactorily qualify TPAs. This need for state review and qualifications still prevailed. 1991 Proc. IB 613.

Subsection B’s extensive list of required documents was added with the 1990 redraft of the model. 1991 Proc. IB 624.

The working group drafting amendments in 2000-2001 discussed Paragraph (4) and the provision requiring the last two years of financial statements for a new TPA. One regulator said his state required the TPA to show a positive net worth. Another asked on what basis financial statements were prepared, and was told that the standard used was generally accepted accounting principles (GAAP). An interested party said that an officer of the company could certify that the financial statements were prepared in accordance with GAAP, but he did not want to see a requirement that financial statements be audited due to the small size of many of these companies. 2000 Proc. 4*!‘ Quarter 325.

The working group agreed to change the requirement to a positive net worth, rather than solvency. A regulator expressed concern that Paragraph (4) would serve as a bright line as to what information could be requested. The chair responded that Paragraph (4) would not prevent other items from being reviewed. An interested party noted that Section 14 says a state may deny, suspend or revoke a TPA’s certificate of authority if the state finds the TPA is in unsound financial condition. Because of this, a state could take action against a TPA even though the TPA was able to show a positive net worth. 2001 Proc. 1" Quarter 295.

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Proceedings Citations Cited to the Proceedings of the NAIC

Section 11B (cont.)

A regulator pointed out that this amendment would only address the filing of financial statements for resident TPAs because of language added to Section 14A that references Section 11. The regulator also recommended revising Section 11B(4) to reference an audited financial report. Regulators identified other sections in need of similar revision. 2001 Proc. 2“ Quarter 277.

The drafting group agreed to clarify Paragraph (4) to show that if a TPA has been in existence for less than two years. the financial statements of the TPA did not need to be audited but that if a TPA had been in existence for more than two years, the TPA must submit audited financial statements. 2001 Proc. 3"‘ Quarter 199.

C. Subsection C was added in 1990. 1991 Proc. IB 624.

A regulator opined that Subsection C was written too broadly and may inadvertently encompass ERISA contracts. In response to this concern, an interested party commented that this language was needed to ensure that regulators could verify if the TPA was ERISA exempt. The chair added that states need to review contracts to determine if a TPA was truthful in claiming it only administered ERISA exempt plans. The working group agreed not to change Subsection C. 2001 Proc. 1" Quarter 295.

D. This subsection was added in 2001. 2001 Proc. 4”‘ Quarter 406.

E. This subsection first appeared in the 1990 version of the model. It was added without recorded discussion. 1991 Proc. IB 624.

While considering reciprocal licensing in 2000, a regulator commented that even if there was a uniform application, states would need assurances that the TPA’s resident state was reviewing the information provided on the application. 2000 Proc. 4"‘ Quarter 326.

F. This subsection was first included in 1990 and has been little changed since that time. 1991 Proc. IB 624.

During discussion in late 2000 an interested party noted that the licenses for third party administrators were perpetual. 2000 Proc. 4”“ Quarter 324.

A regulator asked if a TPA license was to be perpetual or renewed by the TPA’s home state. The model act required the filing of a report and fee, and if the TPA failed to make such a filing, a state could only revoke a TPA’s license via a formal hearing process. Because of this, a TPA’s license should be considered perpetual. 2001 Proc. 1" Quarter 296.

Several states indicated their licenses were annually renewed. One indicated she did not want to see a perpetual license. Other regulators stated they would like to see the implementation of a perpetual license as states could always revoke the license if a TPA did not file its annual report. The working group agreed to keep the perpetual licensing framework in place. 2001 Proc. 1" Quarter 296-297.

O 2011 National Association of Insurance Commissioners PC-1090-1 1 Model Regulation Service-October 2011 THIRD PARTY ADMINISTRATOR STATUTE

Proceedings Citations Cited to the Rroceedings of thg QQC

Section 11 (cont.)

G. The subsection was added in 1990 without recorded discussion. 1991 Proc. IB 625.

When the NAIC was beginning consideration of amendments in 2000, an interested party suggested deleting this subsection because an annual statement was filed and the insurer was responsible for the actions and performance of the TPA. He opined that his proposal would eliminate a lot of administrative work in the states. 2000 Proc. 3'4 Quarter 404.

H. The group decided to add Subsection H in an attempt to resolve the bond requirement for TPAs that administered self-insured business. The intent was to require a bond for self-insured business for which a license was required. An interested party suggested the working group specify that the bond requirement was only applicable to TPAs that administered “governmental or church self-insured plans.” The working group agreed to that approach. 2001 Proc. 3"‘ Quarter 185.

Section 12. Registration Requirement

As the working group began to receive comments on the revisions begun in 2000, one regulator commented that prosecuting a TPA for fraud may be diflicult if the TPA files a registration with a state but does not have any other physical presence in the state. An interested party reminded everyone that a TPA always has to register with the Secretary of State as a foreign corporation, and that this registration would give the insurance department and the attorney general appropriate authority over a TPA. 2000 Proc. 3'3 Quarter 403.

The working group reviewed a memo written to help clarify issues related to ERISA preemption and the TPA model act. The memo suggested that what had been Section 11G be revised and renumbered as a stand-alone section of the model act. An interested party questioned the use of the word “underwrites.” He indicated that a TPA would review an application but would not actually underwrite and accept a risk. After a brief discussion, the group recognized the word “underwrites” was defined in Section 1 of the model act. The working group decided to amend the definition of “underwrites.” 2001 Proc. 3"‘ Quarter 199.

The rationale given for the suggested changes was that this revision required an administrator of self-funded plans that were not govemmental or church plans to register. The language excepting TPAs of self-funded plans from the rest of the model would be unnecessary because the rest of the model did not apply to them. By referencing “self-flmded plans,” there was no literal reference to ERISA. In addition “self-funded plan” was a broader term than “self-fimded plans governed by ERISA.” This approach added another basis for the position that this section would not “relate to” or “reference” ERISA. This amendment localized the threat of ERISA preemption to this section only. The drafter of the memo said he believed this provision would withstand an ERISA preemption challenge for three reasons: 1) It did not “reference” ERISA because it applied to a broader class than ERISA self-funded plans, and 2) It did not have a “connection” to ERISA because its operation was not determined by reference to ERISA. It did not “relate to” ERISA self-fimded plans because it affected the plan only indirectly (it applied only to the TPA, not the plan) ) in a manner that does not dictate the choices of the plan or interfere with its administration. 2001 Proc. 3" Quarter 201.

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Proceedings Citations Cited to the Proceedings of the NAIC

Section 13. Nonresident Administrator Certificate of Authority

All of Section 13 was new language developed in 2000-2001. 2001 Proc. 4"‘ Quarter 407-408.

A. During the development of amendments to the model begun in 2000, the chair commented that a TPA should not necessarily have to undergo the same licensing scrutiny it underwent in its home state when it expanded into a new state, but a TPA should have to undergo some type of registration process when it expanded into a new state. He suggested that TPA information could be added to the NAIC electronic database, thus allowing states to quickly verify if a TPA was licensed and in good standing in its home state. 2000 Proc. 3"! Quarter 403.

An interested party commented that it would be helpful to have a uniform TPA application. A regulator agreed, stating that a uniform application would be necessary if states were going to accept a TPA’s licensure in its home state, because a uniform application would insure that a TPA met a minimum standard prior to licensure by any state. 2000 Proc. 3"‘ Quarter 404.

A regulator expressed concern over the regulatory authority a nonresident state could have over a TPA. An interested party responded that pursuant to Section 13A, the nonresident state issues a TPA license automatically if the TPA has a home state license. Review by the nonresident state is more limited than home state review. He also pointed out that the nonresident state could still revoke the license based on the reasons set forth in Section 14. 2001 Proc. 1“ Quarter 295.

D. The working group agreed to break Section 13 down into several subsections for ease in reading. Additionally, Subsection D was amended to allow for verification of a nonresident administrator’s license status through an electronic database maintained by the NAIC. 2001 Proc. 1" Quarter 295.

F. Subsection F was inserted to allow commissioners to require nonresident administrators to produce records for examination. 2001 Proc. 1" Quarter 296.

G. While reviewing a draft of the new Section 13, a regulator questioned the reference in Subsection G to “the lesser of 5% or 100 certificate holder.” He said it was difficult to obtain an accurate number of certificate holders. An interested party asked if a TPA would be considered to be administering in Florida if it had an Indiana policy but one employee in that group resided in Florida. The regulator confirmed that the administrator would be deemed to be administering in Florida. The interested party responded that the problem with this was that the employer may not know there is an employee under the plan residing in another state. A regulator said he would like to see the 100 certificate holder threshold retained because retirees of a company may move to Florida and without that threshold, a TPA would have to get licensed in Florida where a very limited number of retirees under the plan moved. 2001 Proc. 1" Quarter 296.

Another regulator said her state required a TPA to be licensed if they were administering for one or more individuals. Without clear regulatory oversight, a state might have difficulty getting information from a TPA. She thought her state would issue a cease and desist order and the TPA would have to prove it was administering for less than 100 people. 2001 Proc. 1"" Quarter 296.

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Proceedings Citations Cited to the fiocgedings of the EAIC

Section 13G (cont.)

At the spring meeting there was again considerable discussion of this subsection. An interested party suggested saying that the administrator should calculate the number of residents 30 days prior to applying for renewal of the home state certification. Several regulators expressed concern with this approach. One said it established a twelve-month grace period for a TPA to become licensed. 2001 Proc. 1" Quarter 280.

A regulator questioned the need for the exemption and recommended its deletion. Another regulator agreed, saying that the 100 certificate holder threshold was proportionately higher for small states. An interested party raised the concern that a market conduct examination might cite an insurer for contracting with an unlicensed TPA. A regulator countered that market conduct examinations of unlicensed TPAs do not take place. The working group agreed to retain the subsection but to simplify the language. 2001 Proc. 1*‘ Quarter 281.

A regulator again raised concerns about Subsection G, which exempted a TPA from non-resident licensure if the TPA’s activities were limited to the administration of a group policy or plan of insurance in a state where 100 lives or less fell within the purview of the TPAs administration. He asked if this exemption equated to 1) an aggregate total of 100 lives or less for all plans the TPA administered or 2) 100 lives or less for each plan the TPA administered. The working group agreed the exemption equated to an aggregate total of 100 lives or less for all plans the TPA administered and suggested clarifying language. 2001 Proc. 3'3 Quarter 185.

H. VVhile discussing nonresident licensing, a regulator commented that a nonresident state should rely on the resident state’s review, but should retain the authority to deny, suspend or revoke a TPA certificate of authority because regulatory issues may have arisen subsequent to original issuance of the TPA’s certificate of authority. The other drafters agreed with that assessment. 2000 Proc. 49' Quarter 326.

Section 14. Annual Report and Filing Fee

Subsections A through C were added in 1990 without recorded comment. 1991 Proc. [B 625.

A. While developing amendments in 2001, a regulator recommended adding a requirement for an annual audited financial statement. The working group agreed to follow this recommendation from a financial examiner. 2001 Proc. 2'“! Quarter 276.

An interested party expressed opposition to the language because it would be expensive for TPAs. He also opined that the amendment was not needed because an insurance company would “step in the shoes” of the TPA if it became insolvent. A regulator responded that her state had experienced TPAs fronting for unauthorized insurers and that this had led to solvency issues. Another regulator stated that the requirement for audited financial statements would provide additional information for regulators and may allow them to identify problems earlier. 2001 Proc. 2"‘ Quarter 276-277.

A regulator pointed out that this amendment would only address the filing of financial statements for resident TPAs because of language added to Section 14A that references Section 11. The regulator also recommended revising Section 11B(4) to reference an audited financial report. Regulators identified other sections in need of similar revision. 2001 Proc. 2'“‘1 Quarter 277.

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Proceedings Citations Cited to the Proceedings of the NAIC

Section 14 (cont.)

D. The drafters of the amended model discussed the filing of the annual report. They decided that a TPA should obtain a certificate of good standing from its resident state so that a nonresident state could rely on the resident state’s review of the annual report. The chair reminded everyone that TPA information could be added to the NAIC electronic database and that would permit the issuance of electronic certificates of good standing. 2000 Proc. 4*!‘ Quarter 327 .

Based on comments submitted, an interested party urged the regulators to add this subsection to require the home state commissioner to annually, after receipt of the annual report, issue the administrator a certificate indicating that the annual report showed that the administrator was solvent and complying with all laws. Alternatively, the subsection could allow the home state commissioner to update the NAIC’s electronic database with the same information, thereby avoiding issuance of a paper certification. 2001 Proc. 1" Quarter 296.

A regulator questioned whether financial examiners were able to determine an entity’s net worth without audited financial statements. She said she was comfortable with positive net worth based on unaudited financial statements since regulators could always review the personal financial statements of the administrators. 2001 Proc. 1" Quarter 296.

Section 15. Grounds for Denial, Suspension or Revocation of Certificate of Authority

Section 15 first appeared in the model as part of the 1990 amendments. 1991 Proc. IB 625-626.

While discussing revisions to the model, the drafters agreed to amend this section to clarify the grounds for a state to deny, suspend or revoke a license. One regulator said the model should be clear that these provisions apply to both resident and nonresident TPAs. 2000 Proc. 4'1“ Quarter 326.

B. The group drafting amendments in 2001 discussed the need to change the reference in Paragraph (2) to “officer” to include directors or other persons responsible for the affairs of the administrator. 2001 Proc. 1" Quarter 296.

Paragraph (5) was added with the 2001 amendments. 2001 Proc. 4*‘ Quarter 409.

Paragraph (7) was added with the 2001 amendments to allow commissioners to suspend or revoke a nonresident administrator’s certificate of authority or license if the nonresident administrator failed to make any required annual filing and pay the related filing fee. 2001 Proc. 1" Quarter 296.

O 2011 National Association of Insurance Commissioners PC-1090-15 Model Regulation Service—0ctober 2011

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Proceedings Citations Cited to the Proceedings of the QAKZ

Chronological Surnmary of Actions

December 1976: Model adopted.

December 1990: Model extensively amended.

January 2000: Section 4 amended to strengthen confidentiality provisions.

March 2002: Model extensively amended to provide standards for a resident license and expedited procedures for nonresident licensing. Other charges were made to meet the standards for reciprocity included in the Gramm-Leach-Bliley Act.

PC-l.090- 16 O 2011 National Association of Insurance Commissioners TESTIMONY OF THE AMERICAN COUNCIL OF LIFE INSURERS COMMENTING ON SB 2773, SD 2, RELATING TO THIRD PARTY ACMINISTRATORS

March 14, 2018

Honorable Representative Takashi Ohno, Chair Committee on Intrastate Commerce State House of Representatives Hawaii State Capitol, Conference Room 429 415 South Beretania Street Honolulu, Hawaii 96813

Dear Chair Ohno and Committee Members:

Thank you for the opportunity to comment on SB 2773, SD 2, Relating to Third Party Administrators.

Our firm represents the American Council of Life Insurers (“ACLI”), a Washington, D.C., based trade association with approximately 290 member companies operating in the United States and abroad. ACLI advocates in state, federal, and international forums for public policy that supports the industry marketplace and the policyholders that rely on life insurers’ products for financial and retirement security. ACLI members offer life insurance, annuities, retirement plans, long-term care and disability income insurance, and reinsurance, representing 95 percent of industry assets, 93 percent of life insurance premiums, and 98 percent of annuity considerations in the United States. Two hundred twenty-one (221) ACLI member companies currently do business in the State of Hawaii; and they represent 96% of the life insurance premiums and 100% of the annuity considerations in this State.

The apparent intent and purpose of SB 2773, SD 2 is to regulate third party administrators administering life insurance coverage, accident and health or sickness insurance coverage, or insurance providing health care coverage issued by a mutual benefit society – not life insurers issuing and administering life and disability insurance policies and annuity contracts.

In prior hearings of HB 2346, the companion bill to SB 2773, this committee amended HB 2346 to also include (among others) life insurers issuing and administering annuities. The need for annuities administered by a life insurer to be included in the definition of “administrator” or “third party administrator” has not been demonstrated by the proponent of the amendment, Hawaii-Western Management Group.

Accordingly, ACLI supports SB 2773, SD 2, in its current form which does not include annuities,

If, however, this Committee is inclined to amend SB 2773, SD 2 to include annuities, ACLI requests that its amendment exclude from the definition of an “administrator” – in the first section of the proposed new Article in the numbered paragraphs (3) and (4) on page 2 of the bill at lines 11 – through 17 – annuity contract(s), as set forth below.

(3) An insurer authorized to transact insurance in this State with respect to a policy or an annuity contract lawfully issued and delivered in, and pursuant to, the laws of this Stat or another state;

(4) A producer licensed to sell life insurance coverage accident and health or sickness insurance coverage or to sell an annuity contract in this State, whose activities are limited exclusively to the sale of insurance;

Again, thank you for the opportunity to comment on SB 2773, SD 2, Relating to Third Party Administrators Relating to Annuities.

LAW OFFICES OF OREN T. CHIKAMOTO A Limited Liability Law Company

Oren T. Chikamoto 1001 Bishop Street, Suite 1750 Honolulu, Hawaii 96813 Telephone: (808) 531-1500 E mail: [email protected]