Statutory Financial Regulation
Overview & Updates
Jennifer R. Danz, CPA, CFE
Examiner-in-Charge, Missouri DIFP
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Overview
Basics of Financial Regulation
Missouri’s system and team
Analysis and examination processes
Recent and Future Changes
Recent shifts to qualitative considerations
Focus on Critical Risk Factors
Insurance Holding Company System Regulatory Act
Enterprise Risk Management (ERM) / Form F
Own Risk and Solvency Assessment (ORSA)
Corporate Governance Model Act & Regulation
Principle-Based Reserving
Coordination with federal regulators
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Key Terms
Domicile: state under the laws of which an insurer is
formed and regulated
Domestic Insurer: company that is domiciled in the
regulator’s state
Foreign Insurer: company that is domiciled in a
different state
Alien Insurer: company that is domiciled in a
different country
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Key Terms
NAIC:
National Association of Insurance Commissioners
U.S. standard-setting and regulatory support
organization
Establishes standards and best practices for state
insurance regulators
Coordinates regulatory oversight among the states
Conducts peer reviews
Sets accreditation standards
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Key Terms
Qualitative Analysis: consideration of data that can
be observed but not measured with numbers:
Risk appetite
Professional background of BOD
“Tone at the top”
Quantitative Analysis: consideration of data that
can be measured with numbers:
Premium income
Interest rates
Financial ratios
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Basics of Exam & Analysis
Missouri regulates about 100 commercial life, P&C, health
companies and 125 other special insurance entities
Financial Analysts perform ongoing analysis of all companies
Examiners perform on-site exams every 3 to 5 years
Exam and Analysis Team:
• Chief Financial Examiner
• Chief Financial Analyst
• Assistant Chief Examiners, EICs, field examiners
• Examiners/analysts
• IT system examiners
• Reinsurance examiners
• Life, P&C actuaries & other support
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Financial Analysis Process
Goal: Early identification of risks, negative trends,
etc., performed through review of:
Form A, B, C and D filings
Quarterly and annual financial reports
Dividend approvals
Actuarial reports
Audited financial statements
MDAs
IRIS reports
Jumpstart reports
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Financial Analysis Process
Insurer Profile
• Internal conclusions regarding the company
• Strengths and weaknesses
• Priority level
• Summary of recent filings
Risk Matrix: central location for documenting risk
assessment conclusions
Supervisory Plan: junction between results of exam
and follow-up from analyst
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Shift in Solvency Monitoring
More emphasis on qualitative considerations:
Corporate governance
Suitability of persons (fit and proper)
Risk Management and Internal Controls
Strategic risks
Legal risks
Reputational risks
Prospective solvency risks
Holding company system risks
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Exam Objectives: Recent Expansions
Former Objectives:
Added Objectives:
• Detect potential financial trouble
• Identify financial misstatements
• Identify noncompliance with
statutes/regulations
• Compile information for
regulatory action
• Update company’s priority rating
• Assess risk management and
corporate governance
• Assess and monitor
current and prospective
solvency
• Emphasize review of
business processes and
controls
• Identify and evaluate
critical risks that could
cause an insurer’s surplus
to be materially misstated
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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10 Critical Risk Categories
Valuation/impairment of complex or subjectively
valued invested assets
Liquidity considerations
Appropriateness of investment portfolio and strategy
Appropriateness/ adequacy of reinsurance program
Reinsurance reporting and collectability
Underwriting and pricing strategy/quality
Reserve data
Reserve adequacy
Related party/ holding company considerations
Capital management
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Impact of Critical Risk Focus
Eliminate requirement to address all line items above
tolerable error
Reduce unnecessary financial statement verification
Free up exam resources to identify and address high
inherent risks
Allow for greater reliance on existing work (CPA, IA,
etc.)
Enhanced flexibility, which requires examiner judgment
More frequent contact with Company
Perhaps more frequent, short-term, on-site Company visits
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Insurance Holding Company
System Regulatory Act
Recent global financial crisis – emphasized the need
for regulators of holding companies to better address
“contagion effects”
NAIC Solvency Modernization Initiative
• Increased communication between regulators
• Supervisory colleges
• Access to and collection of information from groups
• Group capital assessments
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Insurance Holding Company
System Regulatory Act
NAIC adopted Model #440 and Model #450 in 2010:
Expands ability to evaluate any entity within an insurance
holding company system
Enhances regulators’ rights to access books and records
Establishes expectation of funding with regard to regulator
participation in supervisory colleges
Enhances corporate governance focus
Expands Form B to broaden requirements to include financial
statements of all affiliates
Introduces Form F, which requires firms to identify and report
their enterprise risk
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Form F – Enterprise Risk Report
Requires registrant (holding company) to provide information about:
Material developments
Acquisitions/disposals/reallocations
Changes of shareholders exceeding 10% or more of voting securities
Developments in investigations, regulatory activities or litigation
Business plan and summarized strategies for next 12 months
Material concerns raised by supervisory college
Capital resources and material distribution patterns
Negative movement with rating agencies
Corporate/parental guarantees
Any material activity that could adversely affect insurance holding
system
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Current Status of HCA & Form F
38 states have passed legislation
Missouri has not yet passed legislation
Accreditation requirement as of January 1, 2016
If Missouri does not pass legislation, domestic
insurers will be subject to increased legislation
from other states
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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ORSA Model Act
ORSA Guidance Manual - Adopted by NAIC in 2012
Individual companies with over $500 million in premium
and/or groups with over $1 billion in premium
Insurers subject to ORSA must maintain a risk
management function
Summary Report, at a minimum, should discuss:
• Section 1 – Description of Insurer’s Risk Management
Framework
• Section 2 – Insurer’s Assessment of Risk Exposure
• Section 3 – Group Risk Capital and Prospective Solvency
Assessment
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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ORSA Model Act (continued)
There is no “mechanical” way to conduct ORSA
How to conduct ORSA is left to each insurer to
decide
Actual results and contents of ORSA will vary
from Company to Company
Output will be a set of documents that demonstrate
the results of management’s self-assessment
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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ORSA Model Act
Section 1: Description of Insurer’s ERM Framework
An effective ERM framework should incorporate five
key principles:
1. Risk Culture and Governance
2. Risk Identification and Prioritization
3. Risk Appetite, Tolerances and Limits
4. Risk Management and Controls
5. Risk Reporting and Communication
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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ORSA Model Act (continued)
Section 2: Insurer Assessment of Risk Exposures
High-level summary of the quantitative and/or
qualitative assessments of risk exposure
Consideration of normal and stressed environments
Identify material risks, including (but not limited to):
•
•
•
•
•
Credit
Legal
Liquidity
Market
Operational
• Pricing/Underwriting
• Reputational
• Reserving
• Strategic
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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ORSA Model Act (continued)
Section 3: Group Assessment of Risk Capital and
Prospective Solvency Assessment
How does the insurer determine the level of
financial resources needed to manage its business?
• Current needs
• Longer-term business cycle needs
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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ORSA Model Act
Examiners and analysts can leverage more from Companyprovided info
Lead States will prepare summary of its review of ORSA
filings
Non-Lead States place significant reliance on Lead State’s
review
Current status
• Available for states to adopt as law
• 18 states have passed legislation
• Missouri has legislation pending
• Will be an accreditation requirement as of January 1, 2017
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Corporate Governance Model Act
and Regulation
Key disclosures:
Corporate governance framework
Policies and practices of BOD and committees
Policies and practices directing Senior
Management
Processes by which critical risk areas are
addressed by BOD, committees and Senior
Management
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Future Changes – PrincipleBased Reserving
Introduced in 2009 with the NAIC’s adoption of the
Standard Valuation Law
Replaces formulaic approach to reserving
Establishes principles upon which reserves are
based (rather than specific formulas)
Allows reserves to adjust as economic conditions
change and as insurers accumulate experience with
new products
Requires adoption by enough states to represent
75% of total U.S. premium for implementation
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Future Changes – Coordination
with Federal Regulators
Dodd-Frank Wall Street Protection and Consumer
Protection Act:
Created the FIO – provides expertise and advice
regarding insurance matters to the Treasury
Department and other federal agencies
Created the FSOC – monitors safety and stability of
the nation’s financial system
Director of FIO is non-voting member of FSOC
FSOC identifies “SIFIs” – which will have oversight
by the Federal Reserve
Name of session (1 line)
DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Questions?
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DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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Thank you!
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DIFP
Department of Insurance,
Financial Institutions &
Professional Registration
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