Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 1 -...

Update on Regulatory Topics

April 27, 2015

Office of Corporate and Financial Regulation - 1 -

Annette B. Szady, CPA, Director, Bureau of Financial Examinations


IASA Mid-Atlantic Chapter

Spring 2015 Conference April 27, 2015

Philadelphia, PA


April 27, 2015



Today’s Discussion

1. PA Insurance Department and Office of Corporate and Financial Regulation (OCFR)

2. Regulatory Framework for Monitoring Financial Solvency

• Risk-Focused Examination Process—Exam Best Practices

• Corporate Governance Initiatives

3. Update on Life Industry Issues


April 27, 2015



PA Insurance Department and Office of Corporate and Financial Regulation (OCFR)


April 27, 2015



Insurance Commissioner

Office of General Counsel Office of Chief Counsel

Policy Office

Communications Office

Deputy Insurance Commissioner for Market Regulation

Deputy Insurance Commissioner for

Liquidations, Rehabilitations and Special Funds

Deputy Insurance Commissioner for Corporate and Financial Regulation

Deputy Insurance Commissioner for Insurance Product Regulation

and Administration

Administrative Hearings Office

Bureau of Liquidations and Rehabilitations Administration

Divisions: Financial Management Claims Administration

Bureau of Special Funds Divisions: Auto CAT and Workers Compensation Security Funds Underground Storage Tank Indemnification Fund

Bureau of Medical Care Availability & Reduction of Error (MCARE)

Divisions: Claims Administration Administration and Coverage Compliance

Bureau of Consumer Services

Divisions: Health Care Property, Casualty & Life

Bureau of Market Actions

Divisions: Life and Health Market Actions Property and Casualty Market Actions Market Analysis

Bureau of Licensing and Enforcement

Divisions: Licensing Services Enforcement Fraud

Bureau of Financial Examinations

Bureau of Company Licensing and Financial Analysis

Divisions: Financial Analysis Company Licensing

Bureau of Administration Divisions: Human Resources and Equal Employment Opportunity Budget Office Management

Bureau of Property and Casualty Insurance

Divisions: Actuarial Review Policy Review

Bureau of Life, Accident and

Health Insurance

Divisions: Actuarial Review Policy Review

Bureau of Children’s Health Insurance Program (CHIP)

Divisions: Policy and Planning Quality Assurance Operations Support Marketing and Outreach

Office of the BudgetComptroller’s Office

INSURANCE DEPARTMENT

Legislative Office

Executive Deputy Insurance Commissioner

Special Projects Office


April 27, 2015



Acting Insurance Commissioner

Teresa D. Miller

Deputy Insurance Commissioner

Stephen J. Johnson, CPA

Executive SecretaryDanna Lutes

2 Support Staff

Program AnalystChristine Diep

Bureau of Company Licensing & Financial Analysis, Kimberly Rankin, Director

Bureau of Financial ExaminationsAnnette Szady, CPA, Director

Management TechnicianChristine Wooddell

Office of Insurance Product Regulation

and Administration2 Life Actuaries

5 Exam Managers

29 Financial Examiners(4 vacant)

Financial AnalysisDivision

Kaushik Patel, Chief

Company Licensing Division

(Vacant, Chief)

3 Financial Analysis Supervisors(2 vacant)

13 Financial Analysts(5 vacant)

1 Sr. Company Licensing Specialist

2 Company Licensing Specialists

1 P & C ActuaryMelissa Greiner

Actuarial Associate 1Kevin Clark


April 27, 2015



Position Name

Director, Bureau of Company Kim Rankin

Licensing and Financial Analysis

Director, Bureau of Financial Examinations Annette Szady

Examination Manager, Northeastern Region Shannon Hopkins

Examination Manager, Western Region Philip Judge

Examination Manager, Southeastern Region 1 Kelly Monaghan

Examination Manager, Southeastern Region 2 James Minder

Examination Manager, Central Region David Evans

Property & Casualty Actuary, All Regions Missy Greiner


April 27, 2015



PA Domestic Insurance Companies• As of 12/31/2014:

Line of Business # of Companies

P & C 182

Fraternal 20

Health 42

Life 26

Title 1

Total Domestic Insurance Companies

271


April 27, 2015



Statutory Requirement for Frequency of Examinations

Under Pennsylvania’s Examinations Law (40 P.S. §323.3(b)) the Department may conduct an examination of any insurer as often as the Commissioner, in the Commissioner’s sole discretion, deems appropriate, but at a minimum the Department is to conduct an examination of each insurer not less frequently than once every five years.

The Department typically conducts financial examinations on a 5-year cycle, with the following exceptions:

1. Financially troubled insurers, which are examined on an as needed basis and may involve the use of examiners for an extended period of time to monitor or supervise corrective actions or restrictions imposed on the company’s operations.

2. Target and limited scope examinations in high-risk or problematic areas, such as reinsurance exposure and reserves.

3. New start-up domestic insurers, which may be examined on an annual basis for the first 5 years of their operations.

4. Short-period examinations are done to coordinate examinations of groups with other states.


April 27, 2015



Exams Completed

Type CY 2014 CY 2013 CY 2012

Full risk-focused financial exams 37 (1) 75(2) 52(3)

Limited scope (target) exams 0 1 2

Organizational exams 5 4 5

Continuing Care Retirement Community (CCRC) exams

4 35 15

Total 46 115 74

Notes:(1) This includes 27 multi-state and 10 single state company exams(2) This includes 38 multi-state and 37 single state company exams(3) This includes 35 multi-state and 17 single state company exams


April 27, 2015



Use of Contract Vendors• 29 in-house field examiners (2 vacant)

5 examiner trainees hired since Fall 2014

• Increased use of contract financial examiners

Expect need for examiner-in-charge (EIC) on more engagements

• Continued use of outside specialists

Actuarial (P & C and Life) IT

• List of 52 qualified vendors that can be used

RFQ for Examination Support Services effective 11/1/2013 through 8/31/2016


April 27, 2015



Regulatory Framework for Monitoring Financial

Solvency


April 27, 2015



Framework for solvency has changed significantly• There have been seismic shifts in regulatory approach by the

NAIC and Insurance Department to monitor financial solvency

• Retrospective Prospective

• Company Enterprise

• Financial Statement Governance

• Rules Principles

• Getting to Know the DNA of a Company

• Regulators are expecting more Board involvements in this new regulatory approach

• Is your management ready?


April 27, 2015



History and Background

• Key components of SMI

Capital requirements

Governance and risk management

Group supervision

Statutory accounting

Reinsurance


April 27, 2015



What are we trying to do:

• Group vs. Legal Entity Supervision

• Corporate Governance

• Risk Management

Enterprise Level Legal Entity Level Inter-Connectivity Risks

• Capital Management

• Verification of all of this-the Risk Focused Exam Process


April 27, 2015



Risk-Focused Examination Process• Implemented entirely new examination process effective 1/1/2010

• New risk-focused exam (RFE) process takes holistic approach to examining a company

Old process verified balance sheet

• Review all aspects of how management and board govern and operate the company

• New approach is more comprehensive and takes longer to perform (higher exam costs)


April 27, 2015



What can you do to make an exam more efficient

• Review our website on exams-get educated on new risk-focused exam approaches

• Obtain NAIC Financial Condition Examiners Handbook

• Meet often with examiners-status checks

• Understand informational request

• Deliver information to examiner ASAP

• Be pro-active where you can be


April 27, 2015



Exam Best Practices • How has risk-focused exam(RFE) process changed in past 5 years?

Critical risk categories Focus on other than financial reporting (OTFR) risks/prospective risks Increased reliance on CPA Audit work papers to reduce work on financial

reporting risks

• Expectations for 2nd five year risk focused examination

Focus on changes made by Company since last exam Leverage off foundation built in 1st RFE Identify 80-90% significant risks before starting fieldwork (ERM work,

Form F, ORSA, Corporate Governance Annual Disclosures)

• Examiners to leverage work done by Financial Analysis on quarterly, annual basis between exams


April 27, 2015



Exam Best Practices • Company single point of contact for exam requests

Depends on size company Facilitator Financial person (not attorneys) Examiners need direct access to others/process owners

• Consistent findings/management comments from RFEs

Shift from financial statement items/compliance issues to corporate governance, processes and controls

IT Deficiencies Disaster Recovery/Business Continuity Planning Succession Planning Implementation/formalization of ERM process


April 27, 2015



Exam Best Practices • Continuous improvement to RFE process

Various NAIC Committees for specific purpose Reviewing redundancies/duplication of information requested from

company Increased interaction between examiners and financial analysts Better align handbooks—similar risk-focused approach and terminology Critical risk categories to RFE process--reduce work on financial reporting

risks Group coordinated examinations

• What can a smaller company (not subject to SOX/MAR) do to increase efficiency of RFE? Comprehensive response to pre-exam planning survey SSAE 16 reports for outsourced functions Experience and quality of CPA work Maintain and update risk matrices from 1st RFE


April 27, 2015



Exam Best Practices • Group Coordinated Examinations

Lead state responsible for developing group coordinated exam plan Subgroup exams may be established

Work as one regulatory exam team Heavy reliance on work done by lead state -- exam and financial analysis

work Legal entity exam schedules moved to get all on same exam cycle Lead state responsible for Group functions

Corporate governance, ERM/ORSA/Form F, Internal Audit

• Coordination Efforts NAIC Financial Exam Coordination Working Group (FEWCG) formed Recent updates to Coordination Framework Clear definition of roles and responsibilities of lead state and participating

states Experience and quality of CPA work Maintain and update risk matrices from 1st RFE


April 27, 2015



Corporate Governance Initiatives

• NAIC Formed Corporate Governance Working Group

• White Paper on High-Level Corporate Governance Principles (see next slide)

• Never adopted by NAIC but a great reference source to understand where the Regulators are coming from


April 27, 2015



White Paper on High-Level Corporation Governance Principles

Corporate Governance

Board of Directors (Education of Boards)

Senior Management

Suitability of Individuals

Reporting and Transparency

Risk Management and Internal Controls

Central Functions

Regulatory Oversight


April 27, 2015




• White Paper on Existing U.S. Corporate Governance Requirements

Used the 7 principles from our Framework Paper

Compared with Insurance Core Principles from IAIS

Where do we need to beef-up our Corporate Governance Oversight? Disclosure!!

Scoring Corporate Governance?


April 27, 2015



Major Changes relating to Corporate Governance

• Annual Corporate Governance Disclosure and Reporting Requirements

• Internal Audit Function Requirement (revised Model Audit Rule)

• Accreditation Requirement


April 27, 2015



Annual ReportingObjective: To receive more regular and timely information on corporate governance practices of insurers through filing a confidential discussion of insurer governance practices with the domestic state of each insurance legal entity.

Proposed Sections of Exhibit ASection 1 Discussion of Significant Changes from Prior

YearSection 2 General Description of the Organization’s

Corporate Governance Framework

Section 3 Description of Board of Directors and Committee Policies and Practices

Section 4 Description of Management Policies and Practices

Section 5 Management and Oversight of Critical Risk Areas


April 27, 2015



Annual ReportingTo collect this information, regulators developed a new stand-alone model law that would authorize and protect the collection of confidential corporate governance information on an annual basis. (Adopted by NAIC on November 18, 2014)


April 27, 2015



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


April 27, 2015



© 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 modified the existing Model Audit Rule (Adopted by NAIC on August 19, 2014)


April 27, 2015




• NAIC Model Corporate Governance Disclosure Law adopted November 18, 2014

• NAIC Model Corporate Governance Disclosure Regulation adopted November 18, 2014

PA plans to submit Corporate Governance Disclosure Law to PA legislature in fall 2015 with an effective date in 2016

No exemptions in law

• Changes to NAIC Model CPA Audit Regulation adopted August 19, 2014

Require internal audit function Exempt if individual insurer writing < $500 million premium or insurance Group writing <

$1 billion in annual premium PA plans to submit changes to PA MAR regulation in 2015 to be effective in 2016

Draft of PA regulation already submitted to industry and no comments were received


April 27, 2015



Corporate Governance Annual Disclosure

• “Disclosure” Requirement – No Exemptions in Law• File with Lead State for the Insurance Group• May provide information at UCP level, intermediate holding

company level or individual legal entity level Level at which the insurer’s or group’s risk appetite is determined or Level at which the earnings, capital, liquidity, operations and

reputation of the insurer are overseen collectively or Level at which legal liability for failure of corporate governance duties

would be placed

• Review of filing and request for additional information done by lead state


April 27, 2015




• Contents of Corporate Governance Annual Disclosure See Corporate Governance Annual Disclosure Model Regulation

• Describe corporate governance framework and structure Board and significant—size, structure, level at which oversight

occurs Duties of Board and committees

• Policies and Practices of the most senior governing entity and significant committees Qualifications, expertise, experience of each Board member Amount of independence on Board and committees Number of meetings and attendance at meetings Process to identify, nominate and elects Board members Process to evaluate Board/committee performance


April 27, 2015




• Policies and Practices for Directing Senior Management Process to determine whether officers and key persons in control

have appropriate background, experience and integrity Group’s code of business conduct and ethics

Compliance with laws, rules, regulations Proactive reporting of any illegal or unethical behavior

Process for performance evaluation, compensation and corrective action to ensure effective senior management Compensation programs and programs designed to reward Board’s role How related to company and individual performance

• Process by Board/Committees/Senior Management to ensure appropriate amount of oversight to critical risk areas impacting insurer’s business activities


April 27, 2015



Link to NAIC Corporate Governance Law and Regulations

• Corporate Governance Annual Disclosure Model Act and Corporate Governance Annual Filing Model Regulation:

http://www.naic.org/committees_e_isftf_corp_governance.htm

http://www.naic.org/committees_e_isftf_corp_governance.htm


April 27, 2015



Update on Life Industry Issues


April 27, 2015



Life Industry Issues

• 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)

Industry proposal for NAIC to consider small company exemption

• AG 38 Reserving

• Use of Captives and Special Purpose Vehicles

• Private Equity and Hedge Funds into the business of insurance


April 27, 2015



Principles Based Reserving (PBR) for Life Insurers• 20 states have already adopted PBR legislation

• NAIC is considering a “small company” exemption

• ACLI (American Council of Life Insurers) small company exemption proposal

Individual insurer with <$300 million of Ordinary Life Premium and a company that is member of a Group with < $600 million of Ordinary Life Premium

Does not include annuity premium

• Company RBC of at least 450%

• Appointed Actuary provides an unqualified opinion on reserves

• Company must request annual exemption (not automatic)


April 27, 2015



PBR Legislation in PA• PA is supportive of PBR and a small company exemption

• Draft of PA PBR legislation was sent out to interested parties including PAMIC, PA and American Fraternal Alliances

Comments received back for PA consideration

• PA is considering small company exemption

Individual insurer and Group writing < $100 million Ordinary Life Premium

No RBC requirement


April 27, 2015



Unclaimed Life Insurance Proceeds

• The NAIC has formed an Unclaimed Life Insurance Benefits Working Group to develop a new NAIC Model Law

Not a financial solvency issue so not under OCFR responsibility

Pennsylvania would likely want to adopt this new NAIC Model Law


April 27, 2015



Questions?

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