Post on 18-Dec-2015
© 2012 The National Association of Insurance Commissioners
Risk Management and Governance
Lou Felice
Health and Solvency Policy Advisor
NAIC
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© 2012 The National Association of Insurance Commissioners
Recap and Going Forward• Touching on ERM and Governance in
Existing U.S. Solvency Regulation– RBC – Reserves– Analysis – Exams
• ORSA Coming On Line
• Corporate Governance Standards / Best Practices Being Developed
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© 2012 The National Association of Insurance Commissioners
Risk Management Framework - RBCUse of the Capital Requirement
RBC has some influence on insurers’ risk management (e.g. Reserves reduced for reinsurance, but not for collateral); addressed mainly through other supervisory tools
SII is designed to provide incentives for risk management
Capital add on may be required by regulator, but it is not part of the RBC capital amount
SII capital add on increases SCR
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© 2012 The National Association of Insurance Commissioners
Risk Management Framework – PBR Reserves• Governance Guidance in Valuation Manual
(VM-G) – All Applicable to the PBR function– Guidance for the Board of Directors
Best practices for oversight, review and interaction with senior management v
– Guidance for Senior ManagementOversight of actuarial valuation function:risk tolerance ;
assumptions; to mitigation strategies; adequate expertise and resources
– Guidance for Actuary Adequate review, testing of assumptions, cooperation
with internal / external auditors and regulators4
© 2012 The National Association of Insurance Commissioners
Risk Management Framework - Analysis
• Continuous monitoring/qualitative assessments using regulator only data – assess:• Changes in business plan• Material transactions, including group transactions • Implications for reputation/contagion risks • Impacts of major economic and insurance events, and • Stress testing
• In depth assessments of (potentially) troubled insurers • More frequent/extensive:
• Insurer reporting• Regulator analyses/exams
• Authorities for regulatory actions include• Conservation/rehabilitation/liquidation in the domiciliary state• Suspending or revoking license to write in the state 5
© 2012 The National Association of Insurance Commissioners
Risk Management Framework – Analysis (ORSA)• ORSA process is one element of insurer’s broader ERM
frameworko Links the insurer’s risk identification, measurement and prioritization
processes with capital management and strategic planningo Each insurer’s ORSA process will be unique, reflecting its business, strategy and
approach to ERM
• Regulators will use the ORSA Summary Report to gain a high-level understanding of the process
o Summary Report may be provided in any combination as long as all insurance legal entities within the group are represented
o Summary Report will be supplemented by the insurer’s internal risk management materials
o 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
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© 2012 The National Association of Insurance Commissioners
Risk Management Framework – Financial Exams
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
Phase 6
Understand the Company and Identify Key
Functional Activities to be Reviewed
Identify and Assess Inherent Risks in Activities
Identify and Evaluate Risk Mitigation
Strategies/Controls
Determine Residual Risk
Establish/Conduct Exam Procedures
Update Prioritization and Supervisory Plan
Draft Exam Report and Management Letter
Based on FindingsPhase 7
Planning
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© 2012 The National Association of Insurance Commissioners
Risk Management Framework - Financial Exams
To provide a clear methodology for assessing residual risk and how it translates into
examination procedures;
To allow the assessment of risk-management processes in addition to those which relate to
financial statement line items; and
To utilize examination findings to establish, verify or revise company’s priority score.
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© 2012 The National Association of Insurance Commissioners
Risk Management Framework - Exams
1. Identify and understand internal controls that the insurer has in place for each risk
2. Consider whether the controls appear to be designed appropriately to mitigate each risko If not, no need to test controls
3. If so, test the controls for operating effectivenesso Not required if testing will be inefficient
4. Conclude whether the internal controls effectively mitigate each inherent risko Strong, Moderate or Weak
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© 2012 The National Association of Insurance Commissioners
Risk Management Framework – Financial Exams
• Review Existing Control Documentationo SOX Workpaperso Internal Audit Workpaperso External Audit Workpapers
o Model Audit Rule Requirements
• Utilize where relevant to exam
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© 2012 The National Association of Insurance Commissioners
Solvency Modernization Initiative (SMI):
ORSA
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© 2012 The National Association of Insurance Commissioners
US Solvency Framework• US Own Risk & Solvency Assessment (ORSA)
o ORSA Manual developed with industry comments o Two primary goals:
• Foster effective level of ERM, thru which each insurer identifies and quantifies material and relevant risks using techniques appropriate to the nature, scale and complexity of the insurer’s risks, in a manner adequate to support risk and capital decisions
• Provide a group-level perspective on risk and capital as a supplement to the existing legal entity view
• ORSA Exemptiono Individual insurer’s annual direct written and unaffiliated assumed premium,
including international direct and assumed premium but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, is less than $500,000,000; and
o Insurance group’s (all insurance legal entities within the group) same annual premium is less than $1,000,000,000
o Insurer specific waiver granted by Commissioner based upon unique circumstances including, but not limited to, type and/or volume of business written
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© 2012 The National Association of Insurance Commissioners
• Model adopted effective 1/1/15
• ORSA Guidance Manual• Section 1-Description of insurers ERM• Section 2-Insurer assessment of risk exposure• Section 3-Group risk capital and prospective
solvency assessment
ORSA
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© 2012 The National Association of Insurance Commissioners
• Current Status• ORSA Pilot Project
• Summer 2012• Feedback to industry• ORSA Subgroup report to E Committee
• Make a few modifications to the guidance manual• Post observations to NAIC website• Referrals to FAH and FEH-Subgroup to continue to
provide guidance to these groups• No Part B Accreditation Standards at this time• 2013 ORSA Pilot
ORSA
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© 2012 The National Association of Insurance Commissioners
• No two ORSAs will be the same, nor should they• Regulatory guidance will be high level• Regulators need to learn by reviewing
• Staffing?• ERM expert?• ERM or actuarial consultant?• As you learn, you will begin to see what you believe are
best practices, and begin to set expectations• Will result in interaction, but hopefully not mandates
with some exceptions
• Internationally active insurers ORSAs (or result) may be treated differently
ORSA-What to Expect
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© 2012 The National Association of Insurance Commissioners
• Section 1-Description of insurers ERM• Risk Culture and Governance• Risk Identification and Prioritization• Risk Appetite, Tolerances and Limits• Risk Management and Controls• Risk Reporting and Communications
ORSA-What is Included in Manual
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© 2012 The National Association of Insurance Commissioners
• Section 2-Insurer assessment of risk exposure• This section typically identifies where the insurer believes its major risks lie (e.g. interest rate
risk, equity risk, catastrophe risk, terrorism risk, certain lines of business, certain investment risks, etc.)
• May also identify financing risk (debt covenants, rating agency requirements, unused debt or unused liquidity)
• Typically contains some amount of discussion on how each of the risks are mitigated. In some cases the information may be very quantitative (e.g. limits), in other cases more qualitative (e.g. reinsurance limits, hedging program discussion and limits, and other more specific mitigators for more specific risks.
• Less of a sales opportunity and less need to be examined that section 1 since it will likely tend to be more specific and factual.
• Maybe the single most important part of the ORSA to the extent company can articulate how well the mitigators and stresses are used and relate to the major risks of the company.
• Particularly helpful where there is a particular area of concern that the regulator may have (e.g. low interest rate environment, concentration risk, etc.)
• Helpful because it demonstrates the rigor and thoughtfulness of the company. • Likely would need to be explained by the company to make sure there is a good
understanding. • Role of the examiner vs. analyst to avoid duplication
ORSA-What to Expect
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© 2012 The National Association of Insurance Commissioners
• Section 3-Group risk capital and prospective solvency assessment• Combines outcomes of sections 1 and 2
• Testing available capital• Description of methods and assumptions used
• Basis of accounting (e.g. GAAP, economic)• Time Horizon (e.g. for economic)• Value at risk (Var), Tail-value at risk (TVAR), Probability of
Ruin• AA solvency, 99.X%, 1-year VAR, TVAR or CTE, X% of
RBC, etc• Aggregation or diversification
ORSA-What is Included in Manual
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© 2012 The National Association of Insurance Commissioners
• Section 3-Group risk capital and prospective solvency assessment• Perhaps the most useful section, particularly to the analysis process• Provides a new window (to rating agency capital) that was always desired but rarely
provided to regulators. Typically some comparison to SAP RBC. • Provides even more useful data for the more sophisticated companies in the form of
an economic capital. Some of the largest companies will likely submit an assessment that may share Solvency II type of methods (1 year 99.5% Var approach) or methods looked for by rating agencies (e.g. AA rating from S&P)
• May identify the capital by areas of risk. • May discuss liquidity in addition to capital in similar fashion.• Should include how the capital changes under different stresses.• Particularly helpful where there is concern regarding sensitivity of the business plan
to ratings. • Similar to section 2, demonstrates the rigor and thoughtfulness of the company. • May need to be explained by the company to make sure there is a good
understanding. • Role of the examiner vs. analyst to avoid duplication
ORSA-What to Expect
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© 2012 The National Association of Insurance Commissioners
Solvency Modernization Initiative (SMI):
Corporate Governance
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© 2012 The National Association of Insurance Commissioners
• What is Corporate Governance?
– CG address insurer insolvencies
• Rules and practices ensuring:
– Accountability
– fairness and
– Transparency
What is Corporate Governance?
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© 2012 The National Association of Insurance Commissioners
Rules and practices ensuring:• Accountability
• fairness and
• Transparency
Between insurers and stakeholders.
What is Corporate Governance?
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© 2012 The National Association of Insurance Commissioners
Topic Recommendation
Suitability of Persons Specific requirements in relation to individuals’ fitness and propriety should be adopted.
Corporate Governance
Consider issuing more guidance on good and bad practices in corporate governance for insurers
Internal Controls Consider the scope for issuing guidance on good and bad practices in internal control. Make a formal requirement for insurers to have an internal audit function.
Enforcement or Sanctions
The insurance laws should be changed to provide the supervisory authority with powers to fine individual directors and senior managers of insurers
Risk Assessment and Management
The relevant laws, regulations or standards should be changed to include a requirement that an insurer have in place comprehensive risk management policies and systems capable of promptly identifying, measuring, assessing, reporting and controlling their risks.
Insurance Activity: Board Approval Requirement
The relevant laws or regulation should explicitly provide that an insurer must have in place strategic underwriting and pricing policies approved and reviewed regularly by the Board.
FSAP- 2009 CG Recommendations
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© 2012 The National Association of Insurance Commissioners
• Part of a broader Solvency Modernization Initiative
• Considering changes to improve Corporate Governance practices and regulator assessment
Corporate Governance Working Group- Formed
http://www.naic.org/committees_e_isftf_corp_governance.htm
Formed at the 2009 Winter NM
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© 2012 The National Association of Insurance Commissioners
CGWG ChargesCharges
Outline high-level corporate governance principles. Determine the appropriate methodology to evaluate adherence with such principles, giving due consideration to development of a model law.
• Analyze the requirements, regulatory initiatives and best practices of the states, other countries and regulators, and the insurance industry, to assist in principle development.
Develop additional regulatory guidance including detailed best practices for the corporate governance of insurers
Review the current IAIS principles and standards related to corporate governance. Critically review and provide input and drafting to the IAIS Governance and Compliance Subcommittee, and on other IAIS papers as assigned by the parent Task Force. From this work, identify future initiatives to improve our regulatory solvency system.
Consider the development of insurance regulatory education for members of insurers’ Boards of Directors.
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© 2012 The National Association of Insurance Commissioners
Study of existing requirements related to corporate governance
Corporate Governance Working Group
US- Non-Insurance
US- Insurance
IAIS- ICPs
Comparative Analysis
• ICP 5: Suitability of Persons
• ICP 7: Corporate Governance
• ICP 8: Risk Management and Internal Controls
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© 2012 The National Association of Insurance Commissioners
• September 28, 2012 - Exposure Proposed Responses to a Comparative Analysis of Existing U.S. Corporate Governance Requirements Summary available at:http://www.naic.org/documents/committees_e_isftf_corp_governance_exposures_proposed_responses_comparative_analysis.pdf
Corporate Governance Working Group
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© 2012 The National Association of Insurance Commissioners
Example of Proposed Enhancement to CG• Annual reporting of
CG practicesEXAMPLE TOPIC
Describe your
organization’s
governance structure,
including a
description of the
Board and various
committees ultimately
responsible for
governing the
organization.
a. Discuss the
rationale for the
current Board size
and structure,
explaining why the
organization believes
it to be appropriate;
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© 2012 The National Association of Insurance Commissioners
Example of Proposed Enhancement to CG• Develop a more Common
Methodology for both analyst and examiners to use in the assessment of Corporate Governance.
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