Rhode Island Insurance Division Financial Surveillance System€¦ · 1 Rhode Island Insurance...

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Rhode Island Insurance Division

Financial Surveillance System

Joseph Torti III, CPA Superintendent of Banking and Insurance

Jack Broccoli, CPA, CFE

Associate Director – Financial Regulation

Elizabeth Kelleher Dwyer, Esq. Associate Director – General Counsel

Presentation Prepared for

Insurance Accounting & Systems Association (IASA)

November 21, 2014 1511 Pontiac Avenue – Bldg 69-2 Cranston, RI 02920 [email protected], [email protected], [email protected] Ph: (401) 462-9620 Fax: (401) 462-9602

mailto:[email protected]



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RI Financial Surveillance System

Outline/Agenda

1. Items before the Financial Condition (E) Committee 2. Evolution of the Financial Surveillance Process 3. Financial Analysis 4. Financial Examinations 5. Corporate Governance 6. ERM and ORSA 7. Holding Company Analysis 8. Confidentiality

Rhode Island Division of Insurance

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NAIC Financial Condition (E) Committee Update

NAIC Structure

9 top tier Committees – 7 Lettered Committees

Financial Condition (E) Committee Approximately 60 Task Forces, Working Groups

and Sub-groups (20 Direct Reports) Handles all Financial Solvency Issues Reports up through Executive Committee and

NAIC Plenary


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Group Supervision

Issue Solvency Modernization Initiative – identified Group

Supervision as an area where improvements could be made Holding company Analysis, RMORSA, Supervisory Colleges,

Holding Company Act enhancements

The U.S. approach to group supervision is generally conducted on an indirect basis – primarily at the insurance entity level

International Supervisors utilize consolidated supervision


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Group Supervision

Current Work Group Solvency Issues (E) Working Group (GSI)

charged to review the insurance holding company model act and regulation and to specifically address: (1) Clear legal authority and delineated powers to act as

the group-wide supervisor for an IAIG; (2) Direct legal authority over the insurance holding

company, including the authority to set group capital requirements; and

(3) Group-wide financial reporting for large insurance groups.

(4) Resolution Plans


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Group Supervision

Status GSI very close to final version of Model

IAIG vs. IIG Authority granted to Supervisor too broad

The Working Group will not move forward on a new group reporting supplement to the Annual Statement. Concentrating on analysis procedures instead

Receivership & Insolvency Task Force – rejected creation of resolution plans Checklist approach suggested

Group capital still being debated


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Corporate Governance Issue

2009 FSAP made recommendations to consider governance enhancements in several areas SMI initiative – charge given to the Corporate Governance Working

Group

Current Work Annual Financial Reporting Model Regulation (Model

#205) adopted in August Internal Audit Function required for large insurers

Corporate Governance Annual Filing Model Act and Regulation (Model #305 and #306) CGAD - Confidentiality

Status – Work Completed


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Other Significant Issues Credit for Reinsurance

Qualified Jurisdictions being considered and approved Bermuda, Germany, France, Ireland, UK Switzerland and Japan also under consideration

Covered Agreements – FIO Report State Implementation – 23 states representing more than

60% of premium

Regulatory Redundancy High Priority – Risk Focused Surveillance Working Group

Corporate Governance Working Group also considered the issues

New E Committee Charge Being Considered Reinsurance Contracts with Risk Limiting features


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Evolution of the Financial Surveillance System

Past:

Examinations were Balance Sheet oriented

Little C-Level executive involvement

Heavy reliance on substantive testing for all balance sheet accounts

No real analysis process

No early warning system to detect troubled companies


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Results:

Inefficient use of examiner time – many hours spent on small balance sheet accounts

Reoccurring findings and recommendations made from previous 5 year examinations

Lack of a true understanding of the company and its risks

Did provide reasonable assurance that the financial statements were presented fairly


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Present:

Risk-Focused Examination AND Analysis Process

Focus is on gaining an understanding of the company and its risks

Communication and coordination between examiners and analysts

Requires new skillsets for examiners and analysts – Ongoing training is very important

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Results: Better understanding of the company and its

risks Better assessment of the company’s ability to

compete in the market place Better understanding of how prospective risks

may impact the company Better assessment of management Better assessment of Corporate Governance

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Financial Surveillance System


ANALYSIS EXAMINATION

CAA/CQA

Corporate Governance Actuarial Opinion

Holding Company Analysis

Audit Report

Business Plan

CPA Report

ERM

ORSA

C- Level Interviews

IPS

Internal Controls

Internal Audit Work

External Audit Work

Mgt. Level Interviews

Actuarial Review

Risk Matrices

Examination Report

Management Letter

Annual/Quarterly Financial Statements

Supervisory Plan

Exam Report Follow-up Executive Summary

Risk Assessment Branded Risks

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Financial Analysis Process


Comprehensive Annual Analysis (“CAA”) A self-assessment prepared by the company and signed by the

CEO, CFO and Preparer

1. Material changes in balance sheet accounts between years.

2. Material changes in Surplus

3. Results of Operations

4. Cash Flow & Liquidity

5. Underwriting

6. Reinsurance Program

7. Investments

8. Intercompany agreements and transactions

9. Legal Issues

10. IT Considerations

11. Enterprise Risk Management

12. Fraud Considerations

13. Strengths and Weaknesses

14. Prior Year Business Plan Analysis

15. Current Year Bus. Plan Analysis

16. Corporate Governance w/BOD attachments

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Branded Risk Categories

Credit Risk Market Risk Pricing/Underwriting Risk Reserving Risk Liquidity Risk Operational Risk Legal Risk Strategic Risk Reputational Risk Other


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Branded Risk Categories

Analysts will assign a score of 1-5 to each branded risk based on the company’s exposure to that risk

The company’s controls/strategies to mitigate their exposure to a risk are also considered by the analyst.

A score of 1 indicates sound risk management policies and practices to mitigate and/or manage that risk

A score of 5 indicates critically deficient risk management policies and practices to mitigate and/or manage that risk

Average of overall score is used for prioritization purposes and can determine the level of oversight required for that company.


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Financial Examination Process


Goals of a Risk-Focused Examination

Other Than Financial Reporting Risk:

Assess quality and reliability of an Insurer’s Corporate Governance and Risk Management Processes to identify, assess and manage its risk environment

Financial Reporting Risk:

Assess the risk that the insurer’s surplus is materially misstated

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Risk-Focused Approach

Phase 1 – Understand the Company – Key Activities Phase 2 – Risk Identification/Inherent Risks Phase 3 – Risk Mitigation & Controls Phase 4 – Residual Risk Assessments Phase 5 – Exam Procedures & Findings Phase 6 – Prioritizing Results & Supervisory Plan Phase 7 – Report Findings & Management Letter

Findings Subsequent Updating/Follow-up by Analyst


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Exam Planning

Understanding the Company Information Technology Planning Questionnaire (“ITPQ”) Kickoff meeting with Analysts and other Department staff Interviews with management Review internal audit work papers Review CPA work papers Review ERM program Review ORSA documentation

Exam Planning is a significant portion of the exam budget.

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Increased use of specialists in the following areas:

Preparing Risk Matrices for Reserves, Reinsurance, Pricing/underwriting

Review of ERM program Review of ORSA documentation It is encouraged to have specialists involved very early in the exam process.

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Examiner and Analyst Communication


Analysts and examiners work together to create a continuous financial surveillance process Kickoff Meeting – Discussion of analysts concerns and assessment

of the company. Interviews – Analysts participate in all C-Level interviews and

some management interviews Examination findings are reported to the Analyst monthly Analysis findings and concerns are communicated to the

examiners throughout the examination Analysts participate at the exit meeting with the company to

discuss comments and recommendations made in the exam report or management letter

Analysts coordinate and/or follow-up on exam and management letter comments and recommendations

Analysts and Examiners update the Insurer Profile Summary and Supervisory Plan

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Insurer Profile Summary (“IPS”)

The IPS is a summary of the insurer’s risk assessment as determined by the analysts and examiners

It details each of the 9 Branded Risk Categories and the Analyst’s concerns level for each of those risks

It documents the Department’s concern level regarding the financial condition of the insurer

It is shared with other regulator’s upon request and signed confidentiality agreement.

It is often requested by other regulators when insurer is requesting to expand into their state.


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Supervisory Plan

The Supervisory Plan is prepared by Analysts and Examiners at the end of every exam and at the conclusion of each annual and quarterly analysis

Documents the following: Issues/Risks to be monitory by the Financial Analysts Examination report recommendations follow-up procedures Planned meetings with management Material Adverse Findings Action on Material Adverse Findings Schedule of next examination Resources needed Communication / Coordination with other States if necessary


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Corporate Governance


Assess the qualifications and backgrounds of the Board of Directors

Review the attendance records of the Directors at Board and committee meetings

Understand the Charter/Policy of the Board and committees

Review Code of Conduct and Conflict of Interest Policy Review the BOD self-evaluation policy

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Corporate Governance


Assess the level of oversight the Board has over the ERM/ORSA program

Assess the level of oversight the Board has over management

Review Board minutes and assess the quality of the minutes

Determine that the Board is provided with appropriate documentation (Board package) to enable them to make informed decisions

Assess the tone at the top

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Enterprise Risk Management Program

Assess the maturity of the company’s ERM program How often is it updated What is the level of involvement of the BOD Are “risk appetites” and “risk tolerances” clearly defined

and understood by management and risk owners How are emerging or prospective risks identified,

tracked, assessed and mitigated How are risks communicated and monitored throughout

the organization


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Own Risk and Solvency Assessment

How does the organization use risk information to determine capital needs?

Are internal models used and regularly updated to ensure appropriate risk management decisions?

Does the organization’s capital adequacy assessment provide an overall determination of the risk capital needs based on the nature, scale and complexity of risk within the organization?

Does the organization perform a prospective solvency assessment that demonstrates it has the financial resources necessary to execute its multi-year business plan?


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Holding Company Analysis

Are there any risks within the holding company

structure that could pose a significant risk to the solvency and/or operations of the insurer?

What is the nature of the insurer’s interdependence on the holding company or affiliated entities for business operations or financial stability?

How does the organization assess and monitor the risk within the holding company structure?


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New Initiatives Being Considered


Review existing requirements for examination reports and consider revisions to align with examination objectives. (Current format has not been updated in over 20 years)

Review existing examination and analysis procedures to identify and eliminate redundant efforts in collecting and reviewing insurer information for solvency monitoring purposes

Review the risk-focused examination process to determine the best way to increase the review of prospective risks and reduce unnecessary financial statement verification during an examination

Identify and document the regulatory skillsets necessary to effectively monitor the solvency of insurers under an evolving risk-focused surveillance framework

Consideration is being given to allow NAIC accreditation review team members to perform a more qualitative review.

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Confidentiality


38-2-2(4)

"Public record" or "public records" shall mean all documents, papers, letters, maps, books, tapes, photographs, films, sound recordings, magnetic or other tapes, electronic data processing records, computer stored data (including electronic mail messages, except specifically for any electronic mail messages of or to elected officials with or relating to those they represent and correspondence of or to elected officials in their official capacities) or other material regardless of physical form or characteristics made or received pursuant to law or ordinance or in connection with the transaction of official business by any agency. For the purposes of this chapter, the following records shall not be deemed public: (S) Records, reports, opinions, information, and statements

required to be kept confidential by federal law or regulation or state law, or rule of court.

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Confidentiality


27-13.1-5(f)

(f) Privilege for, and confidentiality of ancillary information. (1)(i) Except as provided in section 5(e) above and in this subsection, documents, materials, or other information, including, but not limited to, all working papers, and copies thereof, created, produced by, obtained by, or disclosed to the director or any other person in the course of an examination made under this chapter, or in the course of analysis by the director of the financial condition or market conduct of a company shall be confidential by law and privileged, shall not be subject to the Access to Public Records Act, chapter 38-2, shall not be subject to subpoena, and shall not be subject to discovery or be admissible in evidence in any private civil action. The director is authorized to use the documents, materials, or other information in the furtherance of any regulatory or legal action brought as part of the director's official duties.

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Confidentiality


Heritage Healthcare v. Beacon Mutual Providence County Superior Court decided April 17, 2007

27-13.1-5(f) recognizes that the examiners “…will

receive and generate documents, other than the examination reports, which contain information sensitive to the examined company.” The statute therefore “…provides specific procedures for releasing the examination report, as distinguished from the documents and working papers underlying that report.”

Rhode Island Insurance Division Financial Surveillance System€¦ · 1 Rhode Island Insurance...

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