insurance regulatory update september 23, 2015 office of corporate and financial regulation - 1 -...

Insurance Regulatory UpdateSeptember 23, 2015

Office of Corporate and Financial Regulation - 1 -

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Insurance Regulatory Update

Pennsylvania Association of MutualInsurance Companies

Financial Seminar




Today’s Topics

FIO on the Global Reinsurance Market

Corporate Governance Annual Disclosure

NAIC Activity

Life Industry Issues

P & C Industry Issues

International Industry Issues

General Industry Issues

Solvency Update

The Many Things That Keep Me Up At Night




The FIO Report on the Global Reinsurance Market




So what did we get

A great primer on reinsurance to give to your new employees

“This report describes the important role of the global reinsurance market in supporting the insurance industry in the United States.” (and who in this room did not know that!!)

“Global reinsurance providers play a vital role supporting insurance in the United States, …”




“…, the global reinsurance market provides an essential backstop and various risk and capital management mechanisms for insurance in the United States.”

What is the worth of this report




Corporate Governance Annual Disclosure




What is Happening in the Regulatory World There have been seismic shifts in regulatory approach by the NAIC and Insurance Departments

Retrospective Prospective

Company Enterprise

Financial Statement Governance

Rules Principles

Regulators are expecting more Board involvement in this new regulatory approach

Is your management ready?




What are we trying to do differently:

Group vs. Legal Entity Supervision

Corporate Governance

Risk Management

Enterprise Level Legal Entity Level Inter-Connectivity Risks Control Environment

Capital Management

Strategic Management (Prospective Risk)

Verification of all of this-the Risk Focus Exam Process




Have you ever read the

NAIC’s White Paper on High Level Corporate Governance Principles

NAIC’s Comparative Analysis of Existing U.S. Corporate Governance Requirements

NAIC’s Model Corporate Governance Manual Disclosure Model Act and Model Regulation

Exhibits L & M on the NAIC’s Financial Examiners Handbook

Exhibit L – Branded Risk Classification

Exhibit M- Understanding the Corporate Governance Structure




Form F – Enterprise Risk Report

NAIC’s Own Risk and Solvency Assessment Guidance Manual

NAIC’s Own Risk and Solvency Assessment Feedback Pilot Projects Observations




Corporate Governance-What Boards already need to file with Regulators

Annual Holding Company Registration Form B

The insurer shall furnish a statement that the insurer’s board of directors oversees corporate governance and internal controls and that the insurer’s officers or senior management have approved, implemented and will continue to maintain and monitor corporate governance and internal control procedures.




Corporate Governance Annual Disclosure What it is – what it isn’t

Why – its purpose

Who it applies to

Whose governance is reported on (when insurer is part of a group of companies)

Where the filing is made (when insurer is part of an insurer group)

What must be filed

What regulators will/may do with the filing

WHAT YOU SHOULD BE DOING

NOW




Corporate Governance Annual DisclosureWhat It Is

Model Law & Regulation adopted by the NAIC at its Fall 2014 Meeting

Assuming adoption by state legislatures, the first CGAD filing (a confidential filing) would be due by June 1, 2016

Cited as one of the top insurance regulatory trends for 2015

Likelihood of adoption in PA – VERY HIGH:

A proposed NAIC accreditation standard

“It is the Department’s goal to adopt the NAIC Model Law as quickly as possible after the NAIC’s adoption.”

Deputy Commissioner Steve Johnson’s 12/10/2013 “State of the Union” Letter

(addressed again in 2014)




Corporate Governance Annual DisclosureWhat It Is

A filing that includes detailed narrative and documentation to respond to “inquiries” under 4 key areas:

Governance framework & structure

Policies & practices of the Board & Board committees

Policies & practices for directing senior management

Oversight of critical risk areas

No specified form/format:CGAD is not a “check the box” filing nor is it responding to a “questionnaire/survey,” and there

is no specific form/format like exists for, e.g., Forms B & D

Instead, you have “discretion regarding the appropriate format [and are] permitted to customize the CGAD to provide the most relevant information necessary” to permit the regulator to gain an understanding of your governance structure, policies & practices




Corporate Governance Annual DisclosureWhat It Isn’t

CGAD Act specifically indicates that it is not intended to be construed to prescribe or impose corporate governance standards and internal procedures beyond that which is already required under state law

With a Caveat: CGAD Act also states that it shall not be construed to limit the regulator’s authority under the state’s examination law




Corporate Governance Annual DisclosureWhy? “Lessons Learned”

Financial Crisis Inquiry Commission:

“An essential cause of the financial and economic crisis was appallingly bad risk management by the leaders of some of the largest financial institutions in the United

States and Europe. Each failed firm that the Commission examined failed in part because its leaders poorly managed risk.”

AIG: Testimony of Sarah Dahlgren (NY Fed. Reserve Bank official) in Starr International Co., Inc. v. U.S.) as reported by Law 360:

“This need [to monitor how AIG used its loan] was reinforced in the team’s initial meetings with the company, which left her with the impression that the company’s

management was “shell-shocked” and indicated to Fed staffers that the decentralized nature of AIG’s control over its various units meant it was unable to

answer even some basic questions about its operations . . . “




Corporate Governance Annual Disclosure Its Purpose

Stated Purpose: To provide to insurance regulators a summary of the corporate governance structure, policies and practices to permit the regulator to gain and maintain an understanding of the governance framework of an insurer / insurer group

Thus, the CGAD must go beyond the governance documents to provide information on actual practices and, in some cases, rationale for and suitability of those practices




Corporate Governance Annual DisclosureWho It Applies To

ALL INSURERS / INSURER GROUPS

There are no exemptions to this requirement (applies to all insurers / insurer groups -- regardless of size or organizational type / structure -- even small insurers, fraternals & standalone mutuals that may be exempt from other requirements like the ORSA & Insurance Holding Companies Act provisions)




CGAD for Groups of Companies (Whether an Insurer Group or Not)

Whose Governance Is Reported On

UCP, intermediate holding company, individual insurer -- you make the choice based upon the structure of your system of governance, but encouraged to make disclosures at:

Level at which risk appetite is determined; or

Level at which earnings, capital, liquidity, operations and reputation of insurer are overseen & at which supervision of these factors are coordinated and exercised; or

Level at which legal liability for failure of corporate governance duties would be placed

Must disclose choice in the CGAD




CGAD for Insurer Groups Where the Filing is Made

With the lead state regulator (as determined by the NAIC’s Financial Analysis Handbook), BUT . . .

As has occurred with other requirements, must verify the relevant state’s provisions (e.g. at least one state (New York) did not adopt the lead state approach for the Form F Enterprise Risk Report)




Corporate Governance Annual DisclosureWhat Must Be Included – A Few Examples

Governance Framework & Structure

Rationale for Board size & structure

Duties of the Board & each committee – and how each is governed (e.g. bylaws, charters, informal mandates, etc.)

How the Board’s leadership is structured (including a discussion of the roles of the CEO & Board chair)




Corporate Governance Annual DisclosureWhat Must Be Included – A Few ExamplesPolicies & Practices of Most Senior Governing Entity & Committees

How the qualifications, expertise & experience of each Board member meets the needs of the insurer / insurer group

Number of meetings of the Board & its committees and information on director attendance

How the insurer/insurer group identifies, nominates & elects members to the Board & its committees ( including a discussion on any term limits & how the election & re-election process works)

Processes for Board to evaluate the performance of the Board & its committees; measures taken to improve performance – including training programs





Policies & Practices for Directing Senior Management

Processes/practices (suitability standards) for determining whether officers & key persons in control functions have appropriate background, experience & integrity to fulfill roles

Plans for CEO and senior management succession

Processes for performance evaluation, compensation and corrective action (must include sufficient information for an understanding how the organization ensures that compensation programs do not encourage and/or reward excessive risk taking)





Oversight of Critical Risk Areas

Processes by which the Board, its committees and senior management ensure an appropriate amount of oversight of critical risk areas (i.e. risk management, actuarial, investments, reinsurance, business strategy/finance, compliance, financial reporting/internal auditing, and market conduct), including:

How oversight and responsibilities are delegated between the Board, its committees and management

How the Board is kept informed of strategic plans, associated risks, and monitoring and management of risks

Frequency at which information on each critical risk areas is reported to and reviewed by management and the Board




Corporate Governance Annual DisclosureWhat Regulators Will/May Do with the Filing

Will review to gain an understanding of the corporate governance framework

May request additional information




Corporate Governance Annual DisclosureWhat Regulators May Do with the Filing

Remember: the CGAD Act specifically states that it shall not be construed to limit the regulator’s authority under the state’s examination law

Regulators may retain, at the insurer’s expense, 3rd party consultants (including attorneys, actuaries, accountants & other experts) as necessary to assist in reviewing the CGAD & related information or an insurer’s compliance with the CGAD requirements

Important to note several relevant provisions in the “Standards to Define Insurers Deemed to Be in Hazardous Condition” regulation, including:

A standard on whether the management of an insurer (officers & directors) fails to possess and demonstrate competence, fitness and reputation deemed necessary to serve the insurer; and

Authority to issue an order to an insurer to correct deficiencies in corporate governance practices and adopt & utilize practices acceptable to the Commissioner




Corporate Governance Annual DisclosureWhat You Should Be Doing NOW

Learn about all that you must report on in the CGAD

Could you provide now rational, logical and meaningful information on all of the CGAD inquiries?

Is your governance structure appropriate for your needs and objectives?

Do your governance documents accurately say what you want them to say?

Are your actual practices/policies/procedures in accordance with your governance documents?

Are your governance structure, documents, policies and practices effective?




Corporate Governance Annual DisclosureWhat You Should Be Doing NOW

Change takes time . . .

If you have not recently analyzed the appropriateness & effectiveness of your corporate governance structure, documents, policies and practices for your operations, the time to do so is now and not when the filing is imminent.




NAIC Activities




General Overview of Group Supervision

US Approach-Communication & Coordination

Points of contact with state, federal, international regulators

Establishing lines of communication with group management

MMOU

Mechanism to distribute group solvency assessment (group analysis)

Coordinate request for group information back to the group




Group Supervision Initiatives

Increase Examination Authority of the Insurance Holding Company System

Concept of Supervisory Colleges

Companies have to pay

PA’s Group-Wide Supervision for International Insurance Groups

NAIC has adopted similar language to the Holding Company Model Law

Coordinate Financial Risk Focus Exams




General Overview of Group Supervision

International Approach-Comframe

Develop methods of operating group-wide supervision of Internationally Active Insurance Groups (IAIGs) in order to make group-wide supervision more effective and more reflective of actual business practices

Establish a comprehensive framework for supervisors to address group-wide activities and risks and also set grounds for better supervisory cooperation in order to allow for a more integrated and international approach

Establish a Group Capital Standard (very controversial)

Foster global convergence of regulatory and supervisory measures and approaches




Maintain effective internal audit functions capable of providing the Audit Committee independent assurance in respect of the insurer’s governance, risk management, and internal controls.•1.1 Independent assurance to the Audit Committee.•1.2 The internal audit function must be organizationally independent, and internal auditors must remain objective in performing their work.•1.3 The head of the internal audit function reports to the Audit Committee on a regular basis.

© 2013 National Association of Insurance Commissioners

Internal Audit




© 2013 National Association of Insurance Commissioners

Internal Audit• All large insurers (annual premiums >$500 million) to maintain an internal

audit function.

To implement this requirement, regulators plan to modify the existing Model Audit Rule (Adopted by NAIC at 2014 Summer NAIC Meeting)




Risk Management Initiatives

Risk Management and Own Risk and Solvency Assessment Model Act

Vehicle that will be used to require the ORSA Summary Report to be filed

Will provide for confidentiality provisions

Lead State Concept

Effective date - 1/1/2015 – Filings being made by companies




Risk Management Initiatives

ORSA Key Questions

What is our strategy?

What level of risk are we willing to assume in pursuit of this strategy?

What are the key risks that could hinder our ability to achieve our strategy?

How much capital do we need to cover those key risks?

What risks—individually or collectively—would subject us to losses that exceed our tolerance levels?

What risk scenarios would cause us to fail or stop operating as a going concern?




Risk Management InitiativesHow will regulators use the ORSA?

Details to be worked out (working on changes to the Financial Analysis and Financial Examiners Handbooks)

Reviewed Company’s ORSA Summary Reports that were submitted voluntarily in 2012 and 2013- Summary Memo of Observations

2014-Another ORSA Pilot Program

Should fit like a glove with our Risk Focus Exam Process

PA has 15 Groups/Companies that it is lead on for ORSA

Rating agencies want to know about your ERM process and I am sure your ORSA/regulators want to know what rating agencies are thinking

Quality ORSA and ERM starts with governance and ends with quality of your data

The role of the Chief Risk Officer today




Other NAIC Initiatives

RBC Operational Risk (This is for all types of insurance companies)

Will be for informational purposes in 2015

Will review results before making final decision

RBC P & C Catastrophe Risk

Will be for informational purposes in 2014 and 2015

Will review results before making final decision (2016, possible to be live)

Cybersecurity

– Task force

12 principles





Principles-Based Reserving for Life Insurers

Need 42 states and 75% of nationwide premium to pass changes to Standard Valuation Law before it becomes effective (phase-in period)

Where does PA stand/Exemption

AG 38 Reserving

Use of Captives and Special Purpose Vehicles

Private Equity and Hedge Funds into the business of insurance

Update Annuity Tables (Chapter 84)




Unclaimed Life Insurance Proceeds

The Issue

Data mining technology, meets,

A smart consultant, meets,

A not so smart life industry, meets,

The social security death master file, meets,

Unclaimed Property Laws, meets,

States hungry for revenue, meets,

Insurance Regulators Expectations of Companies

NAIC to develop a Model Law-selecting from 5 proposals





Group Capital Standards

ComFrame

EU Equivalence

IMF’s Financial Sector Program

Reinsurance

Supervisory Colleges

NAIC vs FIO vs Federal Reserves vs EU vs IAIS (through the FSOC and the FSB)

SIFIs/G-SIFIs

Why do we need all this new regulation





Lender Placed Insurance

Mortgage Guaranty Insurance

Reinsurance Collateral-Certified Reinsurer

Alternative Risk Financing




General Industry Issues




General Industry IssuesMerger and acquisition activity

Starr International case in US Court of Federal Claims

Driverless cars

Modeling risk

Industry investments

Numbers do not support any type of material deterioration of investment quality

Health industry

Fracking causes earthquakes

Big data




Solvency Update




Solvency UpdateLow insolvency level (low severity also)

7 straight calendar years (2005-2011) without an insolvency of a Pennsylvania domestic insurer

First Time in 64 Years!

Last Liquidation of a P/C PA domestic: 7/28/2003Last Liquidation of a Life PA domestic: 7/2/2004Companies saved in PA since 1997: 102

Streak ended on February 8, 2012-First Sealord (a surety only company) placed into liquidation

GAO Report (June 2013)-States did a great job during meltdown




Insolvencies (licensed companies placed in liquidation)

2008 2009 2010 2011 2012 2013 2014 2015(6 months)

P & C 3 7 10 12 15 13 12 0

L & H 5

(1 caused by

economic crisis)

10

(1 caused by

economic crisis)

3 3 2 3 2 4

Title 2 0 2 0 0 1 0 0

Fraternal 0 0 0 1 0 0 0 0

Total 10 17 15 16 17 17 14 4




Low interest rate environment

CATS

Reserve adequacy

ComFrame

Group supervision

Regulatory Change

Execution of Regulatory Change

The many things that keep me up at nightThe Future of Reinsurance

Affordable Health Care Act

Feds getting more involved

Run-off companies

Long-term care insurance

Regulatory talent

Talent for industry

Cyber Risk




No Longer on the List

Can I make it to retirement




Questions?

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