What Boards & Management Need to Know and Why August 4, 2014 Stephen J. Johnson, CPA, Deputy...
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Transcript of What Boards & Management Need to Know and Why August 4, 2014 Stephen J. Johnson, CPA, Deputy...
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 1 -
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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 2 -
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?
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 3 -
What are Regulators Looking at NowCorporate 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”
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 4 -
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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 5 -
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?
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 6 -
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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 7 -
Risk Management InitiativesNew 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;
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 8 -
Risk Management InitiativesNew 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;
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 9 -
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.
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 10 -
Risk Management Initiatives
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
Own Risk and Solvency Assessment (ORSA) proposal
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 11 -
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??)
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 12 -
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?
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 13 -
Risk Management InitiativesHow 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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 14 -
Risk Management Initiatives
What can smaller companies take away from all of this?
It is scalable
Has your management thought about this
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 15 -
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)
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 16 -
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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 17 -
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?
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 18 -
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?
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 19 -
Concluding Thoughts from your Regulator:
Boards Can Never Fall Asleep
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 20 -
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?
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 21 -
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?
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 22 -
Questions (Cont’d.)
Why did we get into a new line of business?
Do we need to change management?
What is our future?
Insolvency
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 23 -
Solvency Update
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 24 -
Solvency UpdateLow 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: 7/28/2003Last Liquidation of a Life PA domestic: 7/2/2004Companies 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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 25 -
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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 26 -
Number of
Bank Failures Year Bank Failures
2008 25
2009 140
2010 157
2011 92
2012 51
2013 24Source: FDIC Failed Bank List www.fdic.gov
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 27 -
Low interest rate environment
CATS
Reserve adequacy
ComFrame
Group supervision
Regulatory Change
Execution of Regulatory Change
The many things that keep me up at nightThe 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
What Boards & Management Need to Know and Why
August 4, 2014Stephen J. Johnson, CPA, Deputy Insurance Commissioner
Office of Corporate and Financial Regulation - 28 -
Questions?