Property and Casualty Insurance (C) Committee

Attachment XX

Property and Casualty Insurance (C) Committee

X/X/18

Draft: 1/10/18

Travel Insurance (C) Working Group

Conference Call

December 12, 2017

The Travel Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee met via conference call Dec. 12, 2017. The following Working Group members participated: Al Redmer Jr., Chair, and Cathy Grason (MD); DavidAltmaier, Vice Chair (FL); Susan Stapp and Dawn Withers (CA); Emily Rakieten (HI); MichaelP. Rohan (IL); JimMealer (MO); TracyBiehn (NC); Buddy Combs and Gordon Amini (OK); Brett J. Barratt and Tracy L. Klausmeier (UT); Phyllis Oates (VA); and John Haworth and Alan Hudina (WA). Also participating were: Debra Peirce (GA); Tate Flott (KS); Erin Hadrits (MN); Don Layson, Tynesia Dorsey and Karen Vourvopoulos (OH); Philip Reyna (TX); and BarbaraBelling (WI).

1.  Discussed Section 6—Travel Protection Plans, of the Draft NAIC Travel Insurance Model Law

CommissionerRedmer asked if there were any additional comments related to Section 6—Travel Protection Plans of the proposed NAIC Travel Insurance Model Act (Model Law). Denise Matthews (NAIC) clarified that the Working Group agreed to the language for the introductory part of Section 6 and Section 6(B) (previously Section 7 and Section 7(B), respectively) on the Working Group’s Oct. 11 conference call, so only Section6(A) is still open for discussion. Commissioner Redmer asked if there were any regulator suggestions for Section6(A) and there were none, so the next version of the Model Law will reflect the language as presented.

2.  Discussed Definitions in Section 6—Travel Protection Plans

a. Fulfillment Materials

Commissioner Redmer asked if there were suggestions related to the definition of “fulfillment materials” and referred attendees to the comment document related to this definition. He said the only recommendation submitted is from Louisiana.

Commissioner Redmer asked if the word “sent” in the proposed definition adequately covers documents that may be delivered electronically. John Fielding (Steptoe & Johnson LLP), representing the U.S. Travel Insurance Association (UStiA), said the word “sent” could encapsulate both hardcopy and electronic information. Mr.Birnbaum said the word “sent” does not necessarily ensure the documentation has been received by the consumer, so the CEJ suggests changing the word “sent” to “delivered.” Greg Mitchell (Frost Brown Todd LLC), representing the Tourism and Travel Industry Consumer Coalition (TTICC), said, for consistency throughout the Model Law, it should say what is used in other areas related to “delivery through electronic or other means.” Commissioner Redmer said NAIC staff would double-check that for wordsmithing when tweaking the language for consistency before finalizing.

Mr.Barratt proposed the language recommended by Louisiana. Mr.Fielding said the UStiA supports that definition, noting that the proposed language is what is in Louisiana’s current law. Mr.Birnbaum reiterated the CEJ’s proposal to change the word “sent” to “delivered” and said the words “if applicable” at the end are unclear in terms of how it makes the definition better. He said it is not needed, so the CEJ would recommend deleting those words. Mr.Barratt said Utah is agreeable to those changes.

Mr.Mitchell said the word “sent” is defined in another part of the Model Law, so to change it here would create an inconsistency, and the words “as applicable” have meaning as to what the fulfillment materials contain. Mr.Birnbaum said “sent” implies an action by the insurer but does not ensure the consumer receives the materials, so that is why the word “delivered” would be better.

Mr.Barratt said he would like to revise his proposal to leave the word “sent” in the definition as opposed to “deliver,” which implies a greater burden, but delete the words “as applicable,” because that is implied. Mr.Combs agreed with Mr.Barratt’s proposal. Commissioner Redmer asked if anyone opposed it. As no member of the Working Group on the call opposed it, the next version of the Model Law will include that definition for “fulfillment materials.”

b.  Cancellation Fee Waivers

Commissioner Redmer said there are three recommendations from interested parties. Mr.Birnbaum provided some background and said there are similarities here to something called a “debt cancellation contract” that the federal Office of the Comptroller of the Currency determined to be a banking product and, therefore, not subject to state-based insurance regulation. He said banks do not use a true two-party system and the same banks that had been selling consumers credit insurance now sell so-called “contractual liability policies” and operate their debt cancellation products the same way they handled credit insurance. He said, for all intents and purposes, it is the same as credit insurance but, by changing the names and the terms, they avoid regulation.

Mr. Birnbaum said the concern the CEJ has is that companies will simply change the name of an insurance product to avoid regulation, consumer protections and premium tax. He said the CEJ wants to modify the definition to ensure the products are true cancellation fee waivers between two parties and not an insurance product. He provided an overview of the language the CEJ believes supports ensuring that will not happen. He said this recommendation basically eliminates the sham cancellation fee waivers that are simply used to avoid premium tax and consumer protections available under an insurance policy, while not keeping a company from participating in a true cancellation fee waiver product.

Mr. Birnbaum said the industry has argued against this because companies engage in all sorts of risk management and this is just one form of that, but this is not really a risk management tool; it is simply an arrangement to offer it without any risk to the company, in effect getting around selling an insurance product to avoid paying premium taxes. He said the CEJ urges the Working Group members to take this under consideration.

Mr.Mitchell disagreed with the CEJ’s characterization of contractual waivers. He said this type of thing is used in many industries and there is an underlying body of case law that has found it to be proper and not something that should be regulated as insurance. He said some are regulated by other agencies that would cause a direct conflict it they were also to be under insurance regulation. He said they are simply a contract between two parties, agreeing to waive something such as a baggage fee or penalty related to an airline cancellation, and not being able to offer this would be considered by the TTICC to be anti-consumer. Mr.Mitchell said the TTICC supports the language offered by Oklahoma.

Commissioner Redmer asked where it fits into the regulated space of insurance and premium taxes if one of the parties to the two-party contract goes out and buys insurance to protect them. Mr.Mitchell said, for example, if the contract was between a consumer and Delta Airlines, income tax would be paid on that, and in the event insurance was purchased to protect Delta, which is usually a contractual liability insurance policy (CLIP) typically written under casualty, premium tax would be paid on that based on the volume of premium generated.

Caren Alvarado (United States Fire Insurance Company—U.S. Fire) agreed with Mr.Mitchell’s comments and said what is being talked about here is simply the difference between a refundable ticket and a non-refundable ticket. She said if the travel supplier wants to purchase pieces of a trip in advance and then sell that ticket and make it refundable, then that is not insurance and is a benefit to the consumer.

Mr.Birnbaum said that is different from buying a refundable ticket, but Ms.Alvarado explained that in exchange for an additional fee the travel supplier will waive the cancellation penalty and that is what a cancellation fee waiver is. Mr.Birnbaum said it is different because the waiver is only triggered by certain events, whereas a refundable ticket is refundable under any circumstance. Ms.Alvarado said that is not necessarily true.

Discussion followed regarding the case law previously mentioned and whether it was pertinent to this issue and what other entities regulate this area. Mr.Birnbaum said he is not trying to suggest cancellation fee waivers should not be offered, just that a product that is really an insurance product, but simply called something else, should not be allowed and could result in premium tax avoidance.

Mr.Fielding said the UStiA supports the comments made by Mr.Mitchell and Ms.Alvarado. He said the ability to manage risk this way is widespread, done across the board, premium tax is paid on it and there are consumer protection agencies in place to monitor it.

Mr.Barratt said Utah does not have a problem with a genuine two-party contract. He said Utah would have an issue if it was called a cancellation fee waiver but the risk was transferred to a third party, as that would be an insurance transaction. He said Utah would not have a problem with the party managing the risk on the back end through an insurance product.

Commissioner Redmer moved the conversation to the proposal made by U.S. Fire and asked Ms.Alvarado to present it. She said U.S. Fire’s proposal is simply a clarification that a cancellation fee waiver is a contractual agreement between the travel supplier and the consumer and that it could be cancelled for any reason or any reason the supplier chooses. She said it is not insurance but a product designed by a travel supplier who owns the inventory and is selling it to the consumer if they choose to make it refundable. She said if they do, the consumer pays a fee, the supplier can waive those penalties and it becomes a refundable ticket and remains a two-party contract between the supplier and the consumer. She said whether the travel supplier decides to put a CLIP on it does not change the fact that they can provide this waiver to the consumer and it is not insurance.

Mr.Birnbaum said what Ms.Alvarado described is the consumer has the option of buying a refundable ticket or buying a cancellation fee waiver for the ticket and potentially the travel supplier buying a CLIP to cover the loss in the event the cancellation fee waiver is invoked. He said if that happens, then a third party is involved and it is an insurance product. He also questioned how adding the word “with or without” to the definition adds anything, as it provides no guidance or clarification but just says the same thing over again. Ms.Alvarado said it is simply to provide clarification, as there have been questions raised as to how the cancellation fee waiver would work. Mr.Birnbaum asked for an example. Ms.Alvarado said it has been raised recently by regulators, noting that this language is intended to clarify and avoid any further confusion.

Commissioner Redmer asked industry participants who the refund actually comes from, the travel supplier or the third-party insurance carrier, if the supplier offers the cancellation fee waiver as a two party agreement and then insures it through a CLIP on the back end, and the waiver kicks in. Ms.Alvarado said it is paid by the travel supplier. Commissioner Redmer asked if that was always the case and Ms.Alvarado said yes, to her knowledge and it is how it works at U.S. Fire.

Sean Brady (Arch Insurance Company) said the vast majority of travel suppliers have the wherewithal to manage their own risks. He said there may be instances in the marketplace where they may look for stop-loss prevention under extreme situations to cover unlimited risk, but the vast majority of them look at it as managing their cancellation and refund policy, and the payment does come from the supplier.

Commissioner Redmer asked if the CLIPs specifically reinsure on an individual basis or if they are based on aggregate claims. Ms.Alvarado clarified that there is not always a CLIP involved and sometimes a waiver is provided without a CLIP. She said, when there is one, it would be done on a group basis, where the supplier would be the insured and it would not be on an individual traveler basis.

Mr.Birnbaum said a stop-loss policy would be different from a CLIP, as it would be a company offering a cancellation fee waiver product and assuming the risk but using a stop-loss policy to handle a catastrophic event. He said that would be different from a CLIP designed to replicate the cancellation fee waiver, as the way that would operate would be a policy is issued to a supplier and every time a cancellation fee waiver is sold it becomes enrolled into the CLIP benefit and there are, therefore, three parties involved. He reiterated the CEJ is not trying to say cancellation fee waivers cannot or should not be offered, but is saying it should not be an insurance product being sold as a cancellation fee waiver.

Commissioner Redmer asked Oklahoma to present its recommendation for the definition of “cancellation fee waiver.” Mr.Amini said the proposal was designed to say this should be with or without grounds for triggering the claim. Ms.Alvarado asked if Oklahoma is saying the same as the U.S. Fire proposal, but missing the “with or without” in the definition. Mr.Amini agreed and said it is the same.

Commissioner Redmer said the Working Group has three recommendations in front of it: from the CEJ, U.S. Fire and Oklahoma. He asked if any regulator wanted to offer the CEJ language or the U.S. Fire proposal. Mr.Combs recommended the Oklahoma language. Mr.Barratt said Utah agrees with Oklahoma’s proposal. Ms.Alvarado asked if the words “with or without” would be included. Oklahoma agreed with that change.

Hearing no further questions or comments, Commissioner Redmer asked if the Working Group members on the phone agreed with this language and all did, with no opposition.