What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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 Convention
Baltimore, Maryland
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
What is Happening in the Regulatory World
There have been seismic shifts in regulatory approach by the
NAIC and Insurance Departments
Retrospective
Company
Financial Statement
Rules
Prospective
Enterprise
Governance
Principles
Regulators are expecting more Board involvement in this new
regulatory approach
Is your management ready?
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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”
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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
Board’s need to take on more responsibility
Effective or not
Boards need to make certain representations to Insurance Departments
within Amended Holding Company Law
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
What are Regulators Looking at Now (Cont’d.)
Capital Management
How is this done by Management and Boards
Effective or not
Group Capital (ORSA)
Strategic Management
Does the Board have a plan?
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Risk Management Initiatives
Form B –Annual registration statement new
requirements:
Financial statements of holding company
Statement that the insurer’s board of directors is
responsible for and oversees corporate
governance
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Risk Management Initiatives
New Form F—Enterprise 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;
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Risk Management Initiatives
New Form F—Enterprise 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;
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Risk Management Initiatives
New Form F—Enterprise 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.
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Risk Management Initiatives
Own Risk and Solvency Assessment (ORSA) proposal
ERM Framework
Description of the Risk
Management Policy
Who is required to File (Exemptions)
ORSA will be unique for each
company
Quantitative Measurements of
Risk Exposure in Normal and
Stressed Environments
Evergreen Approach to ORSA
Group Risk Capital Assessment
Group or Legal Entity Level
Prospective Solvency
Assessment
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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??)
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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 risks—individually or collectively—would subject us
to losses that exceed our tolerance levels?
What risk scenarios would cause us to fail or stop
operating as a going concern?
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Risk Management Initiatives
How will Regulators use the ORSA?
Details to be worked out
Reviewed Company’s 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
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Risk Management Initiatives
What can smaller companies take away from all of this?
It is scalable
Has your management thought about this
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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)
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
What Boards Should Be Doing About All This
Change (Cont’d.)
How does the Board know that the Company’s 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?
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
What Boards Should Be Doing About All This
Change (Cont’d.)
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?
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Concluding Thoughts from your
Regulator:
Boards Can Never Fall Asleep
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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 actuary’s
range?
Why are our reserves always deficient?
Why does our actuary not give the Board a presentation?
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Questions (Cont’d.)
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?
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Questions (Cont’d.)
Why did we get into a new line of business?
Do we need to change management?
What is our future?
Insolvency
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Solvency Update
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
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
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Insolvencies
2008
2009
2010
2011
2012
2013
P&C
3
7
10
12
15
13
L&H
5
10
3
3
2
3
(1 caused
by
economic
crisis)
(1 caused
by
economic
crisis)
Title
2
0
2
0
0
1
Fraternal
0
0
0
1
0
0
Total
10
17
15
16
17
17
Office of Corporate and Financial Regulation
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Number of
Bank Failures
Year
2008
2009
2010
2011
2012
2013
Source: FDIC Failed Bank List www.fdic.gov
Office of Corporate and Financial Regulation
August 4, 2014
Bank
Failures
25
140
157
92
51
24
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
The many things that keep me up at night
Low interest rate
environment
The Future of Reinsurance
CATS
Feds getting more involved
Affordable Health Care Act
Run-off companies
Reserve
adequacy
Long-term care insurance
Regulatory talent
ComFrame
Group supervision
Cyber Risk
Can I make it to retirement
Office of Corporate and Financial Regulation
Regulatory Change
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What Boards & Management Need to Know and Why
Stephen J. Johnson, CPA, Deputy Insurance Commissioner
August 4, 2014
Questions?
Office of Corporate and Financial Regulation
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