The New World Order in Insurance Regulation: What Boards and Management Need to Know and Why

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The New World Order in Insurance Regulation
What Boards and Management Need to Know and Why
What the Regulator is Expecting Mid-Atlantic
Mutual Advantage ConventionBaltimore, Maryland
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• 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?

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• What are Regulators Looking at Now
• Corporate Governance Group level as well as
  Legal entity level
• Interviews with Chairman of the Board and Head of
  Audit Committee as part of Financial Examinations
• Importance of Audit Committee
• NAIC Corporate Governance Annual Disclosure Model
  Act
• Enterprise Risk Management
• How does the process work?
• Is it effective?
• Is it used by Management and Boards?
• Risk Management became Risk Justification

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• What are Regulators Looking at Now
• Own Risk and Solvency Assessment (ORSA)
• NAIC Guidance Manual
• The Proposed NAIC Model Law (first one due in
  2015)
• NAIC Pilot Program
• Control Environment
• Boards need to take on more responsibility
• Effective or not
• Boards need to make certain representations to
  Insurance Departments within Amended Holding
  Company Law

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• What are Regulators Looking at Now (Contd.)
• Capital Management
• How is this done by Management and Boards
• Effective or not
• Group Capital (ORSA)
• Strategic Management
• Does the Board have a plan?

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• Risk Management Initiatives
• Form B Annual registration statement new
  requirements
• Financial statements of holding company
• Statement that the insurers board of directors
  is responsible for and oversees corporate
  governance

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• Risk Management Initiatives
• New Form FEnterprise Risk Report
• Annual confidential supplement identifying
  material risks within the insurance holding
  company system that could pose financial and/or
  reputational contagion to the insurer (enterprise
  risk management)
• Form F shall provide information regarding the
  following areas that could produce enterprise
  risk
• Any material developments regarding strategy,
  internal audit findings, compliance or risk
  management affecting the insurance holding
  company system
• Acquisition or disposal of insurance entities and
  reallocating of existing financial or insurance
  entities within the insurance holding company
  system
• Any changes of shareholders of the insurance
  holding company system exceeding ten percent
  (10) or more of voting securities

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• Risk Management Initiatives
• New Form FEnterprise Risk Report
• Developments in various investigations,
  regulatory activities or litigation that may have
  a significant bearing or impact on the insurance
  holding company system
• Business plan of the insurance holding company
  system and summarized strategies for next 12
  months
• Identification of material concerns of the
  insurance holding company system raised by
  supervisory college, if any, in last year

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• Risk Management Initiatives
• New Form FEnterprise Risk Report
• Identification of any negative movement, or
  discussions with rating agencies which may have
  caused, or may cause, potential negative movement
  in the credit ratings and individual insurer
  financial strength ratings assessment of the
  insurance holding company system (including both
  the rating score and outlook)
• Information on corporate or parental guarantees
  throughout the holding company and the expected
  source of liquidity should such guarantees be
  called upon and
• Identification of any material activity or
  development of the insurance holding company
  system that, in the opinion of senior management,
  could adversely affect the insurance holding
  company system.

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Risk Management Initiatives

• Own Risk and Solvency Assessment (ORSA) proposal

• ERM Framework
• Description of the Risk Management Policy
• Quantitative Measurements of Risk Exposure in
  Normal and Stressed Environments
• Group Risk Capital Assessment
• Prospective Solvency Assessment

• Who is required to File (Exemptions)
• ORSA will be unique for each
• company
• Evergreen Approach to ORSA
• Group or Legal Entity Level

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• 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 (Will you be ready??)

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• 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 risksindividually or collectivelywould
  subject us to losses that exceed our tolerance
  levels?
• What risk scenarios would cause us to fail or
  stop operating as a going concern?

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• Risk Management Initiatives
• How will Regulators use the ORSA?
• Details to be worked out
• Reviewed Companys ORSA Summary Reports that were
  submitted voluntarily in 2012 and 2013
• Should fit like a glove with our Risk Focus Exam
  Process
• 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

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• Risk Management Initiatives
• What can smaller companies take away from all of
  this?
• It is scalable
• Has your management thought about this

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• Why are Regulators Doing This?
• It is a better regulatory process-looking out of
  the front of the car window (prospective risk)
  then looking out of the back window.
• AIG-Reputational Risk/Group Risk
• My International Friends (EU, IAIS, G-20)

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• What Boards Should Be Doing About All This Change
• Get educated
• Set up a Risk Committee of the Board
• Should we hire or designate a Chief Risk Officer
  (CRO Council of North America)
• Is the Board receiving proper Risk Summary
  Reports from Management

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• What Boards Should Be Doing About All This Change
  (Contd.)
• How does the Board know that the Companys ERM
  System is working
• AIG-Derivatives operation
• JPMorgan Chase 2B trading loss (Now 5.8B)
• UBS-Rogue Trader
• How do we learn from the ERM failure?

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• What Boards Should Be Doing About All This Change
  (Contd.)
• Boards need more individuals with an Insurance
  Regulatory Background-Where do we find them?
• Should the CEO and Chairman of the Board be split
  roles?
• Is your Board receiving updates on Regulatory
  Issues (Regulatory Risk)?
• Has your Board ever thought about inviting your
  Domestic Regulatory to one of your Board Meetings?

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• Concluding Thoughts from your Regulator
• Boards Can Never Fall Asleep

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• What Can Happen if a Board is Asleep at the
  Switch
• Information discussed today and the new
  regulatory model is to prevent Boards from
  falling asleep
• Boards should never stop getting educated and
  asking the right questions
• What questions were never asked by Boards in the
  past that should have been
• Why are we always reserving at the low end of the
  actuarys range?
• Why are our reserves always deficient?
• Why does our actuary not give the Board a
  presentation?

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• Questions (Contd.)
• Why do we take so much risk on our investments?
• How do we know we are pricing right?
• Why do we do business with reinsurers we never
  heard of?
• What are we doing about our RBC being below 300?
• How often do we waive our underwriting standards?
• Why are we using an accounting firm we never
  heard of?
• Why are we expanding so fast?

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• Questions (Contd.)
• Why did we get into a new line of business?
• Do we need to change management?
• What is our future?
• Insolvency

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• Solvency Update

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Solvency Update

• Low 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 7/28/2003
• Last Liquidation of a Life PA domestic 7/2/2004
• Companies 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

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• Insolvencies

2008 2009 2010 2011 2012 2013
P C 3 7 10 12 15 13
L H 5 (1 caused by economic crisis) 10 (1 caused by economic crisis) 3 3 2 3
Title 2 0 2 0 0 1
Fraternal 0 0 0 1 0 0
Total 10 17 15 16 17 17
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• Number of
• Bank Failures

Year Bank Failures
2008 25
2009 140
2010 157
2011 92
2012 51
2013 24
Source FDIC Failed Bank List www.fdic.gov
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The many things that keep me up at night

• Low interest rate environment
• CATS
• Reserve adequacy
• ComFrame
• Group supervision
• Regulatory Change
• Execution of Regulatory Change

• The Future of Reinsurance
• Affordable Health Care Act
• Feds getting more involved
• Run-off companies
• Long-term care insurance
• Regulatory talent
• Cyber Risk
• Can I make it to retirement

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Questions?