NAICNational Association of Insurance Commissioners

AD HOC TASK FORCE ON SOLVENCY AND ANTI-FRAUD

Casualty Actuarial Society2001 Spring Meeting

The FontainebleauMay 8, 2001

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Ad Hoc Task Force on Solvency and Anti-FraudOverview

Purpose and Process

Completed Improvements

Task Force Recommendations

NAIC

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Purpose and Process

NAIC filings Informal discussions with states Media reports

NAIC

What happened?

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Purpose and Process

NAIC

Question was:

How could it have been prevented or detected sooner?

Goal was to:

Propose improvements in NAIC programs, processes and procedures

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Completed Improvements

Procedure which questions turnover activity of company’s portfolio

Reference guidance for considering the results of the procedure

Additional detailed procedures if concerns are raised including securities brokers’ standing with the SEC

NAIC

NAIC Financial Analysis Handbook

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Completed Improvements

Added turnover ratios for stocks, long-term bonds and total portfolio

NAIC

NAIC 5-Year Company Profile

Examinations

Investment section of NAIC Financial Condition Examiners Handbook has been rewritten and includes new guidance on evaluating investment management and controls

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Task Force Recommendations

Accreditation Standards and Guidelines Financial Analysis and Examinations Communication and Coordination Anti-Fraud Programs and Resources Disclosure and Notification Improvements to Model Laws and Regulations

NAIC

Report and Recommendations of Ad Hoc TF (dated 4/13/01) was adopted by Executive (EX) Committee on 4/25/00 (see Handout #1).

Three Levels of Recommendations General Areas

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Level One

NAIC

“These items are generally the highest priority items that can be accomplished relatively quickly and that should not involve significant NAIC or state resources.”

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Level One

NAIC

Accreditation Standards Model law regarding custodial arrangements Use of investment specialists Expanded requirements for “communications with

states” proactive define applicable criteria review teams to evaluate sufficiency and timeliness

Use of new Form A database Task force recommended expedited adoption of

these new standards

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Level One

NAIC

Financial Analysis and Examinations Add an evaluation of investment management

practices to the Level One checklist of the NAIC Financial Analysis Handbook

Develop examination procedures to evaluate investment management practices of insurers

Annual Statement Blanks and Instructions Add disclosure affirming that investments are held

pursuant to a qualified custody agreement Add disclosure regarding changes in custodian or

custody agreement

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Level One

NAIC

Form A Database Create a Form A database containing the following

elements: State submitting data Date of Form A application Contact person and contact information for state submitting

data Application status (i.e., pending, approved, denied or

withdrawn) Names and addresses of applicants, directors, officers, and

significant (10%) shareholders Names and addresses of affiliated persons or companies or

key parties to the transaction

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Level One

NAIC

Anti-Fraud Continue negotiations with NASD for shared

database access

Compile detailed information on anti-fraud databases maintained by anti-fraud organizations, financial regulators, and law enforcement agencies, and identify criteria for access

Where members can meet criteria for access to such databases, negotiate access agreements for NAIC and member states

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Level One

NAIC

Anti-Fraud (continued) Establish guidelines for investigative and

prosecutorial resources based on objective measures

Consider modifications to the Insurance Fraud Prevention Model Act such as:

authority to investigate insider fraud

law enforcement status

prosecution authority

alternative structures for dedicated prosecution resources

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Level One

NAIC

Model Laws and Regulations Modify the model law regarding custodial

arrangements to require custodian to notify regulators upon significant withdrawal of assets or termination of the agreement

Amend the model audit rule to require modification upon change in auditors

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Level Two

NAIC

“These are initiatives that overlap current projects of other NAIC groups, primarily the GLBA National Regulatory Priorities Working Groups. Although many of these items are considered priorities of the task force, they also appear high on the membership’s overall agenda so no further action is considered necessary at this time. However, the task force would like to endorse these initiatives for additional urgency.”

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Level Two

NAIC

Coordinated Financial Examinations

Develop a process for coordinating financial exams of insurer groups

Develop requirements for consolidated accounting and reporting by insurer groups

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Level Two

NAIC

Consolidated Financial Analysis

NAIC Financial Analysis & Reporting Division to coordinate analysis of GAAP information, SEC filings, and Federal Reserve information on Financial Holding Companies

States to coordinate consolidated statutory analysis of insurance only groups

Develop a process for consolidated financial analysis of insurer groups

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Level Two

NAIC

Holding Company Filings Develop standard review processes and

procedures for holding company filings

Develop standard procedures for Form A data input

Model Laws and Regulations Consider modifying the model audit rule to require

consolidated GAAP and statutory audit reports

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Level Three

NAIC

“These are initiatives that may require lengthy discussions and development or that involve significant additional NAIC or state resources. They are no less important to the task force but are likely to require careful planning, organization and funding to complete. The task force has identified potential committees and charges to oversee these projects.”

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Level Three

NAIC

Accreditation Standards and Guidelines

Consider adopting a review team guideline requiring that significant elements of Part A standards are reviewed during the financial analysis and financial examination processes

Consider revisions to accreditation scoring including both the weighting of scores and the review team guidelines for scoring

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Level Three

NAIC

Accreditation Standards and Guidelines (continued) Consider adding review team guidelines that

would require examination of troubled or first priority insurers more often that once every five years

Consider adding review team guidelines requiring better communications with other state insurance regulators and state and federal banking and securities regulators

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Level Three

NAIC

Financial Analysis and Examinations Consider adding guidance to the NAIC Financial

Analysis Handbook and Financial Condition Examiners Handbook requiring compliance with Part A Accreditation Standards be reviewed and tested

Consider revising the NAIC Financial Condition Examiners Handbook to require scheduling of exams and targeted exams based on risks of insurers

Consider amending the NAIC Financial Condition Examiners Handbook to require a risk management assessment approach

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Level Three

NAIC

Anti-Fraud Develop alternatives for providing resources

and expertise to state insurance departments for fraud investigation

Obtain insurance regulators’ access to NCIC for licensing and investigation purposes

Develop a structure for sharing information between insurance fraud investigations and prosecution authorities

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Level Three

NAIC

Model Laws and Regulations Consider amendments to the Assumptions

Model Act and the Disclosure of Material Transactions Model Act to increase prior approval of significant reinsurance transactions

NAIC Troubled Companies Handbook Consider improvements to the NAIC Troubled

Companies Handbook regarding potential causes of solvency problems

For status of the Task Force’s recommendations, see Handout #2.