Casualty Actuarial Society
Casualty Loss Reserves Seminar
September 14, 2004
Financial Oversight Update
Kris DeFrain, FCAS, MAAA
NAIC Property & Casualty Actuary
National Association of Insurance Commissioners
Overview
State of the Industry
Financial Analysis
Examination White Paper
Risk-Focused Examinations
Other Solvency Issues
NAI C
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© 2004 National Association of Insurance Commissioners
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How many P/C insolvencies a
year?
Trend of P&C Insolvencies
As of April 2004
20
20
18
18
16
14
14
12
12
10
8
6
4
6
2
0
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1999
2000
2001
2002
2003
© 2004 National Association of Insurance Commissioners
2004
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Financial Analysis
Data/Information Sources
Annual & Quarterly Statements
Management’s Discussion & Analysis Letters
Independent Auditors Reports
Actuarial Reports
RBC Report
Holding Company Filings
Securities and Exchange Commission Filings
Rating Agency Reports/Actions
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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Ratio Analysis
P/C Insurers
Focus
Profitability
Leverage
Asset and Liquidity
Cashflow/Surplus
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© 2004 National Association of Insurance Commissioners
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Characteristics and Causes
P/C Insurers
Characteristics
Ownership
Writings
Age
Growth
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 Deficient Reserves
 Inadequate Pricing
 Rapid Growth
 Overstated Assets
 Fraud
 Change in Business
 Reinsurance Failure
 Catastrophic Losses
© 2004 National Association of Insurance Commissioners
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Ratio Analysis
P/C Insurers
Gross Prem. Written/
Surplus
Net Prem. Written/
Surplus
Chg. In Net Writings
Surplus Aid/Surplus
Change in Combined
Ratio
Investment Yield
Re Recoverables to
Surplus
NAI C
making progress . . . together
Change in Surplus
Liabilities to Liquid Assets
Gross Agents’
Balances/Surplus
Affiliated Assets to Surplus
2 Yr. Reserve
Development/Surplus
Reserves to Surplus
Cashflow from Operations
© 2004 National Association of Insurance Commissioners
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Examination Oversight
Task Force
Examination White Paper
White paper submitted to the NAIC from
seven trade associations requesting the
NAIC to address the following areas:
• Examination fees
• Enhanced coordination with CPAs
• Training for regulators
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© 2004 National Association of Insurance Commissioners
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Examination White Paper
“A Call for Change”
Recommendations Report adopted at the
Spring National Meeting
Referrals & proposals distributed to
numerous working groups and task forces
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Recommendations Report
Enhance the Zone Examination Process
• Referral to the FEHTG and ASWG
Develop Procedures for the Utilization and
Monitoring of Consultants and Contract
Examiners
• Referral to the FEHTG
Enhance examination process with technology
• Refer to the Audit Software Working Group
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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Recommendations Report
Increase level of cooperation provided by
company during a regulatory examination
• Refer to the EOTF and ASWG
Improve effectiveness of examination planning
• Refer to the FEHTG and IHCWG
Increase coordination of group-wide examinations
• Refer to the IHCWG
NAI C
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© 2004 National Association of Insurance Commissioners
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Recommendations Report
Improve the level of coordination between
external auditors and regulators
• Refer to the NAIC/AICPA WG
Develop and document the process for
accelerating statutory due date
• EOTF
Communicate with Audit Committees
• Refer to NAIC/AICPA WG and FEHTG
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© 2004 National Association of Insurance Commissioners
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Recommendations Report
Eliminate the 20% Retesting of CPA work
• FEHTG completed in March 2003
Increase Use of Interim External Auditor Workpapers
• Refer to NAIC/AICPA WG and FEHTG
Develop Enhanced Training Program for Examiners
• Refer to FEHTG and EOTF
Continue Development of Risk Assessment
Process
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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Coordination Among States
Enhance coordination among states
Promote the Insurance Regulatory
Modernization Action Plan
Implement Recommendations in response
to the industry’s Examination White Paper
Reduce travel time and cost to states
NAI C
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© 2004 National Association of Insurance Commissioners
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Financial Condition (E)
Committee
2004 Projects
Federal Tools
NAIC Framework for a National System of
State-Based Regulation
• Developed in partnership with the House
Financial Services Committee
• Focus upon modernization and uniformity
• NAIC Roadmap
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© 2004 National Association of Insurance Commissioners
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Federal Tools
Financial Focus
•
•
•
•
Surplus Lines
Reinsurance
Receivership
Enhancing Financial Surveillance
• Permitted Practices
• Institute National Practices
• Meetings with Insurers
• Corporate Governance
• Administrative Supervision
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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Federal Tools
Financial Focus
• Enhancing Financial Surveillance
• Standardize financial surveillance regarding
affiliated insurers
• Coordinate on-site examination scheduling
• Standardize the exchange of information on affiliated
insurers
• Lead state concept
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Risk Assessment
Working Group
Advantages to the proposed approach
Provides clearer methodology for assessing
residual risk
Allows the assessment of risk management
processes other than those that result in financial
statement line item verifications
Allows utilizing the examination findings to
establish, verify or revise the uniform company
priority rating system
NAI C
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© 2004 National Association of Insurance Commissioners
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Risk Assessment
Working Group
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© 2004 National Association of Insurance Commissioners
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Risk-Focused Examination
Seven-Phased Process Provides the
“Roadmap” for a Risk Assessment
• Understanding the Company and Identifying
Functional Activities of Insurer
• Identifying and Assessing an Inherent Risk
Rating in Activity
• Identify and Assess Risk Management Systems
in Place to Mitigate Inherent Risk
NAI C
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© 2004 National Association of Insurance Commissioners
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Risk-Focused Examination
(Continued)
Seven-Phased Process Provides the “Roadmap”
for a Risk Assessment
• Assign a Residual Risk Rating, which is a function of
the Inherent Risk Rating offset by the Control
Assessment Rating
• Establish/Conduct Examination Procedures based
upon the Residual Risk Rating
• Update CARRMEL Priority Rating and Supervisory
Plan Based upon Findings
• Draft Examination Report and Management Letter
Based upon Findings
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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Financial Analysis
Financial Analysis Includes
•
•
•
•
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Risk Assessment Results
Financial Analysis Handbook Process
Ratio Analysis (IRIS, FAST, Internal Ratios)
Actuarial Analysis
© 2004 National Association of Insurance Commissioners
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Internal/External Changes
Consider Changes to
•
•
•
•
•
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Rating Agency Ratings
Ownership/Management/Corporate Structure
Business Strategy/Plan
CPA Report or Auditor
Legal or Regulatory Status
© 2004 National Association of Insurance Commissioners
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Prioritization System
Standard prioritization system
• CARRMEL: Capital Adequacy, Asset Quality,
Reinsurance, Reserve Adequacy, Management
Assessment, Earnings, and Liquidity
• Objective and mathematical based
• Incorporates existing FAST Ratios
• Pilot Projects
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© 2004 National Association of Insurance Commissioners
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Supervisory Plan
Develop Plan for Ongoing Supervision
•
•
•
•
•
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Frequency of Exams
Scope of Exams
Meetings with Company Management
Follow-Up on Recommendations
Financial Analysis Monitoring
© 2004 National Association of Insurance Commissioners
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Risk Assessment
Working Group
Risk Focused Surveillance Framework
Risk Assessment Matrix
Revised CPA Checklist
Insurer Profile Summary
Prioritization Report
NAI C
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© 2004 National Association of Insurance Commissioners
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Risk Assessment
Working Group
Revisions to the NAIC Financial Condition
Examiners Handbook
Best Practices Supplement
• Interviewing states to compile best practices
Examiner Training Program
• Currently working to get approval to
engage a consultant
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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NAIC SVO Objectives
• Assist the Regulatory Community in the Conduct of
Financial Solvency Monitoring by Providing:
• Classifications (Debt/Preferred/Common)
• Designations (Credit Rating)
• Pricing (Value for Statutory Financials)
• Provide Technical Advice Relative to Investments & Identify
Investment Trends and Innovations
NAI C
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© 2004 National Association of Insurance Commissioners
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2003 NY Proposal To Enhance The SVO
Process - Goals
• More Effectively Produce, or Provide Ability to
Monitor/Verify, Accurate Credit Ratings and Valuations for
Bonds, Preferred Stock, and Common Stock
• Leverage off Rating Agencies and Market Facilitators
(Stock Exchanges, Broker/Dealers) for Ratings and
Valuations
• Consider Enhancing the SVO’s Role via the Research Unit
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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2003 New York Initiatives
Exempt All Rated Securities Equivalent to an
NAIC 1 or 2 Designation - DONE!
Have Regulators Guide Role of Research Unit DONE!
Exempt All Rated Securities and Mechanize
Valuation Process - DONE!
Consider Alternatives to the Filing of Securities
Not Rated by an NRSRO UNDER
CONSIDERATION
NAI C
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© 2004 National Association of Insurance Commissioners
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SVO And Solvency Regulation
• SVO Function is Critical
• Focus As Far As Credit Review Should Be
on the Universe of Non-Rated Securities
• Research Function Can Better Assist State
Insurance Departments
• A Potential Role in Risk Assessment
NAI C
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© 2004 National Association of Insurance Commissioners
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Questions?
If you have additional questions, please
contact me!
Kris DeFrain
816-783-8229
kdefrain@naic.org
NAI C
making progress . . . together
© 2004 National Association of Insurance Commissioners
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