MEMORANDUM TO: FROM: DATE: REminimum baseline standards. Now that state insurance departments have a...

--

MEMORANDUM

TO: Financial Regulation Standards and Accreditation (F) Committee FROM: Becky Meyer, Senior Accreditation Manager

DATE: March 14, 2016 RE: Accreditation Program Changes – Proposed Guidance and Pilot Review Results

Background Information When the Accreditation Program was first developed, reviews focused on compliance to ensure states were meeting minimum baseline standards. Now that state insurance departments have a solid comprehension of those baseline standards, the focus can shift more toward substance and quality of work performed. The following recommendation provides revisions to the accreditation process and standards for consideration by the Committee. Summary of Proposed Guidance

Changes are proposed to the Review Team Guidelines (Parts B, C and D) and the Accreditation Review Process and Procedures. In addition, updates to the self-evaluation guide may also be proposed following consideration of the current recommendations to the guidance. Review Team Guidelines In working toward the goal of increasing the focus of an accreditation review on substance and quality of work, the accreditation guidelines were categorized into Results-Oriented Guidelines and Process-Oriented Guidelines. In performing this process, care was taken to maintain the integrity of the concepts within each guideline so that the changes reflect a shift toward underlying quality without additional requirements for the states. This shift in focus is captured primarily in the Results-Oriented Guidelines, which may require a more in-depth review and discussion with department staff to determine the quality of the work performed in accordance with the standard. The Process-Oriented Guidelines typically have a clear “yes” or “no” answer in regard to a state’s compliance. As noted above, the underlying content remains consistent without adding additional requirements, with a few notable exceptions: • Department Oversight Guidelines – One area previously lacking in the accreditation standards was the role of senior

department management in overseeing their staff and the solvency of their insurers. A new standard was, therefore, developed stating that “Department management should be involved in solvency monitoring activities for its domestic industry to ensure appropriate oversight of staffing, company interactions and key solvency issues with the ability and willingness to take action, as deemed appropriate.” Individual guidelines were developed for financial solvency senior management as well as for the commissioner, and focus on awareness of issues, constraints, potential actions, and proficiency of working within the department’s structure and set procedures.

• Part C: Organizational and Personnel Practices – This section was previously defined only by accreditation standards without supporting guidelines to provide additional detail on areas that demonstrate compliance with the standard. Supporting guidelines were, therefore, developed to provide the necessary depth for this important area. One new standard was added to align expectations of contractors with state personal and states “A department that utilizes contract personnel to assist in financial surveillance and regulation should ensure that those hired in the capacity of a contractor are subject to standards that are comparable to or exceed those standards applicable to employees of the state.”

• Holding Company Considerations – In 2015, the Financial Analysis Handbook (E) Working Group adopted guidance for a Group Profile Summary. 2010 revisions to the Holding Company Act (#440), which included Form F – Enterprise Risk Report, also became effective for accreditation purposes 1/1/16. Both new requirements related to holding company considerations were incorporated into the existing analysis guidelines.

1

Accreditation Review Process and Procedures This section provides an overview of the accreditation processes and procedures. One key revision discussed in this document is to replace the concept of scoring with a recommendation regarding whether it is clear the state should retain its accreditation with no additional consideration or follow-up by the Committee or whether the review team is requesting the Committee’s review and discussion of certain findings to allow the Committee to determine the most appropriate action (if any) related to the state’s accreditation. Another key revision is the content of the review team’s report to the Committee. The reports now will include an executive summary identifying the review team’s recommendation, supporting rationale for the recommendation, positive attributes and key areas for improvement. The report also will include a section for the review team’s discussion which allows the team flexibility to include additional context and any information that would be valuable or meaningful to the Committee. Recommendation The proposed revisions to the Review Team Guidelines and the Accreditation Review Process and Procedures, as outlined above, are recommended for consideration and potential exposure by the Committee. W:\National Meetings\2016\Spring\Cmte\F\Open\2016 Accreditation Changes Progress Memo - Open.docx

2

--

MEMORANDUM

TO: Financial Regulation Standards and Accreditation (F) Committee FROM: Becky Meyer, Senior Accreditation Manager DATE: August 8, 2016 RE: Modernization of Accreditation Program – Suggested Revision to B1(f)

In conjunction with drafting revisions to the Self-Evaluation Guide/Interim Annual Review, which occurred after the comment deadline for the accreditation program changes, a need to clarify standard B1(f) was identified. Standard B1(f) currently discusses the depth and quality of the analysis review and recognizes that these factors may vary based on certain considerations of the company. However, it was recognized that while the depth of a review may vary based on factors such as financial strength, the quality of the review should always be held to high standards. To clarify this point, suggested language for both the standard and the results-oriented guideline for consideration by the Committee are as follows: B1(f): Standard: The department’s financial analysis should ensure that domestic insurers receive an high quality review at an appropriate depth and quality of review commensurate with their financial strength and position. Results-Oriented Guidelines:

1. The department’s financial analysis should include an in-depth and thorough review of relevant risks to the insurer, both current and prospective, on all multi-state domestic insurers, including holding company considerations. The review should be high quality and the substance of the review should be commensurate with the insurers’ priority rating, complexity and financial strength. When assessing compliance with this guideline, consideration should be given to the following: Assessments of significant unusual items, fluctuations or other issues found Documentation of Level 2 procedures, where warranted Assessments and conclusions (including branded risk assessments) within the Insurer Profile Summary Overall conclusion regarding the insurer, including whether any additional action should be considered Analysis and documentation of any necessary follow-up, including communications with the company Appropriate use of automated quarterly procedures for non-troubled insurers Assessment of the holding company group (Lead State) Impact of the holding company on the domestic insurer(s) Analysis procedures specific to RRGs

W:\National Meetings\2016\Summer\Cmte\F\Open\5a - Revision to B1f.docx

3

DRAFT DATE: 3/7/16 NAIC FINANCIAL REGULATION STANDARDS

AND ACCREDITATION PROGRAM

REVIEW TEAM GUIDELINES

Introduction The following standards have been developed by the Financial Regulation Standards and Accreditation (F) Committee (the Committee) to provide detailed guidance to the review teams regarding how compliance with the Part B: Regulatory Practices and Procedures standards, Part C: Organizational standards and Personnel Practices standards and Part D: Organization, Licensing and Change of Control of Domestic Insurers standards should be assessed. These guidelines within each of the standards can also assist state departments in preparing for an accreditation review. Understanding the Standards Every standard contains a general, high level description of what is being assessed. Accompanying each of the standards are guidelines that provide more detailed information that review teams should consider when assessing a state’s compliance. This additional guidance has been bifurcated into two sets of guidelines: Results-Oriented and Process-Oriented. Results-Oriented Guidelines The results-oriented guidelines are designed to direct the review team’s focus to the substance and quality of the work performed by the state. As a result, the Part B guidelines provide a framework for assessing the ability of other states to rely on that state’s work for solvency monitoring purposes. For Parts C and D, the results-oriented guidelines provide information related to personnel practices and to a department’s policies related to new companies and mergers/acquisitions that help to support the financial monitoring process. Because each guideline targets the substance and quality of a state’s work, there is an inherent amount of subjectivity in this assessment. In making these assessments, the review team is expected to be prudent and unbiased. If an issue or area of concern arises within a guideline, the review team should first ensure all applicable information on the issue is obtained. The review team should also ensure there was clear and explicit dialogue on the issue with the state to gain a full understanding of the circumstances. Once all aspects of the issue have been reviewed, the review team shall determine if the issue is likely to impact the accredited status of the state, or if a response or further action from the state will be required. In either instance, an explanation of the issue will be discussed in the review team’s report to the Committee. In areas where the review team believes the department has excelled, this too will be discussed in the review team’s report. Process-Oriented Guidelines The process-oriented guidelines are objective in nature and play an important role in the accreditation assessment. However, due to the relative ease of assessing the process-oriented guidelines, the review team will perform their assessment and identify any issues that should be brought to the attention of the Committee, but their primary focus will be on the results-oriented guidelines. In instances where significant issues are identified in the process-oriented guidelines that could impact the accreditation status of a state under review or that may require a response or action from the state, such issues will be discussed in the review team’s report to the Committee.

5

Review Team Considerations The review team shall consider each of the factors listed within the guidelines prior to reaching a conclusion regarding the state’s compliance with the standards. In reporting to the Committee, the review team shall discuss positive attributes, key areas for improvement and a general, overall discussion of how the department is performing with regard to the standards. The review team’s report to the Committee should be succinct and to the point, ensuring inclusion of only relevant information that adds value to the Committee to make an informed decision on the status of the state’s accreditation. In its assessment of most standards, the review team is to focus the accreditation review on the most recent 12-month period for financial analysis and on the financial examinations in process or most recently completed. In addition to this primary review, the review team is instructed to perform a limited review of analyses and examinations from other 12-month periods not previously reviewed during an on-site accreditation review. This limited review is to provide assurance to the Committee that the state is competently performing throughout the review period. If the review team determines that a state’s performance has been uneven during the period under review, the team may reflect its concerns in the review team’s report and make recommendations for improvements. Although, as indicated above, the review team is to focus on the most recent analyses and examinations in the assessment of most standards, in assessing compliance with the Reporting and Action on Material Adverse Findings standard, the review team should consider material adverse findings from the most recent 12-month period and, if necessary, in all other periods not previously reviewed during an on-site accreditation review. The review team is also instructed to evaluate whether a state has generally implemented the provisions included in the laws and regulations listed in Part A. The factors enumerated below are in no particular order and are presented as such for ease of identification. The numbering does not indicate that one factor is necessarily more important than another.

6

Part B1: Financial Analysis

a. Sufficient Qualified Staff and Resources Standard: The department should have the appropriate staff and resources to effectively and timely review the financial condition of all domestic insurers. Results-Oriented Guidelines:

1. The department should have qualified analysts or contractual resources with appropriate skill sets, abilities, knowledge and experience levels to satisfactorily and effectively perform analysis tasks and procedures. Such experience should match the sophistication and complexity of the domestic industry. When assessing whether a department has qualified staff and resources, consideration should be given to the following: The quality of the work performed by the financial analysis staff as documented in the financial

analysis files The financial analysis staff’s knowledge and comprehension of the insurance industry and its

domestic insurers, as demonstrated during interviews with the staff 2. The analysis of various financial filings should be completed timely, as discussed in the Compliance

Guidelines. If the analysis tasks and procedures were not completed timely, consideration should be given to the size and complexity of the department’s multi-state insurers. If the analysis tasks and procedures were not completed timely, the department should document the reasons for such and the review team may take extenuating circumstances into consideration.

Process-Oriented Guidelines:

1. The financial analysts and supervisors should have an accounting, insurance, financial analysis and/or actuarial background, and insurance backgrounds should be financial in nature. College degrees should focus on accounting, insurance, finance or actuarial science Professional designations and credentials may also demonstrate expertise in insurance and/or financial analysis.

2. The analysis of priority insurers’ financial statements actuarial-related filings (Actuarial Opinion,

Actuarial Opinion Summary, and Regulatory Asset Adequacy Issues Summary, as applicable) should be completed by the analyst and reviewed by the supervisor by: Annual Statements and actuarial-related filings: End of April Quarterly Statements: Within 60 days from receipt of filing

3. The analysis of non-priority insurers’ financial statements and actuarial-related filings should be

completed by the analyst and reviewed by the supervisor by: Annual Statements and actuarial-related filings: End of June Quarterly Statements: Within 90 days from receipt of filing

4. The analysis of priority insurers’ supplemental filings (MD&A, Annual Audited Financial Report,

applicable Holding Company Filings, etc.) should be completed by the analyst and reviewed by the supervisor within 60 days from receipt of the filing.

5. The analysis of non-priority insurers’ supplemental filings (MD&A, Annual Audited Financial

Report, applicable Holding Company Filings, etc.) should be completed by the analyst and reviewed by the supervisor within 120 days from receipt of the filing.

7

b. Communication of Relevant Information to/from Financial Analysis Staff Standard: The department should ensure that all relevant information and data obtained that may assist in the financial analysis process is provided to the financial analysis staff. The department should ensure that findings of the financial analysis staff are communicated to the appropriate person(s) within the department. Results-Oriented Guidelines:

1. Analysts should effectively communicate and coordinate with various areas within the department, including management, the financial examination staff and other non-financial areas, as applicable. Evidence of this communication should be clearly documented in the analysis files. When assessing compliance with this guideline, consideration should be given to the following: The analyst’s utilization of pertinent information that is obtained from management and/or other

areas of the department Sharing by the analyst of any pertinent information obtained as a result of the financial analysis

with management and/or other areas of the department The analyst’s communication and collaboration with the financial examination staff before,

during and at the conclusion of a financial examination The analyst’s utilization and incorporation of pertinent information from the financial

examination in conducting ongoing analysis procedures. Process-Oriented Guidelines:

1. The analysis process should include a formal periodic method that allows for pertinent information from other areas (e.g. legal, rates and forms, actuarial, etc.) that could impact the financial analysis process to be shared with the financial analysis staff Although no one method is required, the following are examples that may demonstrate compliance: quarterly department heads meetings, department managers’ meetings, information requests to other areas, etc.

2. Financial solvency information identified as a result of the financial analysis, particularly adverse

findings or significant unresolved issues, should be communicated to, management and other department staff, as necessary.

3. Results of ongoing analysis procedures should be shared with the financial examiners to assist in

examination planning. At the beginning of each examination, the analyst should communicate areas of concern and specific issues to address during the examination. To assist in communication, the analyst should provide a current copy of the Insurer Profile Summary as well as any other supporting documentation necessary to communicate concerns and suggested procedures.

4. The financial analyst should participate in a collaborative follow-up meeting or conference call at the

end of the examination to discuss the following: Examination results and/or findings Insurer’s prioritization level Ongoing supervisory plan and the completed Summary Review Memorandum Assessment of branded risks as contained in the Insurer Profile Summary

5. The analyst should follow-up with the insurer to address concerns/issues identified as a result of

examination activities, which may include examination report findings, management letter comments or prospective risks.

8

c. Appropriate Supervisory Review Standard: The department’s financial analysis process should provide for appropriate supervisory review and comment. Supervisory review may be conducted by the analyst’s supervisor or a senior level analyst whose job functions include such review duties. Results-Oriented Guidelines:

1. The supervisory review should be an in-depth and challenging review of the analyst’s findings. An in-depth and challenging review should ensure the financial analyses performed are thorough and substantive. When assessing whether the supervisory review was in-depth and challenging, consideration should be given to the following: Substantive review notes provided by the supervisor. Although supervisory review notes may

assist the accreditation review team in assessing the supervisory review, they are not required to be created or maintained

The overall quality of the analysis work as documented in the analysis file, including whether all material matters have been identified and adequately discussed

Why issues with the quality of the analysis were not identified and resolved by the supervisor


1. There should be evidence of at least one level of supervisory review on the financial analysis, although this does not include scenarios when the company “passed” an automated review such as the Level 1 for Non-Troubled Insurers. The supervisory review should be evidenced by sign-off and dating.

2. If the department utilizes an automated process such as the Level 1 for Non-Troubled Insurers, and the company did not “pass” the automated review, but the analyst documented the rationale that no further documented analysis was necessary, a supervisor should approve the conclusion.

3. The supervisory review should include a review of all significant worksheets and documents, and

include at least some review of the source documents, the level of which should be based on the experience of the analyst.

4. The supervisory review should be performed within two to three weeks of completion of the original

analysis. 5. The supervisory review should include any written responses from the company received by the

primary analyst that contain significant information. 6. The supervisory review should include any change in an insurer’s priority rating. d. Priority-Based Analysis Standard: The department’s financial analysis procedures should be priority-based to ensure that potential problem companies are reviewed promptly. Such a prioritization scheme should utilize appropriate factors as guidelines to assist in the consistent determination of priority designations.

9

Results-Oriented Guidelines:

1. The complexity of the department’s prioritization designation system should be appropriate given the size of the department’s domestic industry and should include general factors (both quantitative and qualitative) to be used by the analyst when assigning priority ratings.

2. The insurer’s priority rating and the analyst’s rationale for the rating should be reasonable based on

the department’s priority designation framework. When assessing compliance with this guideline, consideration should be given to the following: Discussion of the insurer’s financial condition in relation to quantitative factors included in the

department’s priority designation framework Discussion regarding any qualitative information and reasonable judgment that was factored into

the priority rating Whether the general factors included in the department’s priority designation framework were

consistently applied. Process-Oriented Guidelines:

1. The department should have a prioritization scheme that is used by the analyst in assigning company priorities.

2. The companies with the highest priority should be reviewed first by the assigned analyst. 3. Justification for priority ranking and any change to the priority ranking should be included in the

analysis file. e. Documented Analysis Procedures

Standard: The department should have documented financial analysis procedures and/or guidelines to provide for consistency and continuity in the process and to ensure that appropriate analysis procedures are being performed on each domestic insurer. Results-Oriented Guidelines:

1. The analysis process should be designed to adequately assess the insurer’s exposure to the branded risk categories and to effectively allow the analyst to reach appropriate conclusions regarding the company’s financial condition and risks impacting the insurer both currently and prospectively. The use of the NAIC Financial Analysis Handbook or sections thereof is considered acceptable.


1. The analyst should review and document their analysis of each of the following documents: Annual Statement Actuarial Opinion Actuarial Opinion Summary (P/C) or Regulatory Asset Adequacy Issues Summary (L/H and

Fraternal) Management’s Discussion and Analysis Annual Audited Financial Statements Holding company filings (i.e., Forms A,B,C,D,E,F and external filings: SEC, IFRS) Quarterly statements or automated quarterly review process such as the Level 1 for Non-

Troubled Insurers

10

Financial ratios and NAIC financial analysis solvency tools (i.e. scoring system, IRIS ratios) 2. The analyses performed by the analyst should include initials of the preparer and the dates of

completion. (This is not required for companies that pass an automated quarterly review process, such as the Level 1 for Non-Troubled Insurers).

3. If the company is part of a holding company group, and the state is the lead in the group, a group

profile summary (GPS) should be completed and shared with applicable states by October 31. 4. If the company is part of a holding company group, and the state is the only state in the group, a GPS

should be completed by December 31. 5. If the company is part of a holding company group, and the state is not the lead state in the group,

the non-lead state checklist (or something similar) should be completed by December 31. 6. If the company is a captive RRG, the following procedures should be performed and documented

within the analysis file: Annual review of the business plan to ensure that it is unchanged from the prior year Ensure that all changes in the plan of operations have been approved Review of the Note 1 reconciliation to ensure that it appears accurate and can be relied upon by

others Review of the General Interrogatory, Part 2 question 13.1 and ensure that the amount agrees with

the approved plan of operations Ensure that the financial projections on file accurately reflect the operations as presently

conducted Ensure that the “Notes” relating to the operation of the company agree with the approved plan of

operation 7. If the company cedes XXX/AXXX business to affiliated or unaffiliated captives or special purposes

vehicles, the analyst should complete the process contained within the NAIC Financial Analysis Handbook that pertain to XXX/AXXX transactions, specifically Supplemental Procedures-Form D and Level 2-Reinsurance.

f. Appropriate Depth and Quality of Review

Standard: The department’s financial analysis should ensure that domestic insurers receive an appropriate depth and quality of review commensurate with their financial strength and position. Results-Oriented Guidelines:

1. The department’s financial analysis should include an in-depth and thorough review of relevant risks to the insurer, both current and prospective, on all multi-state domestic insurers, including holding company considerations. The quality and substance of the review should be commensurate with the insurers’ priority rating, complexity and financial strength. When assessing compliance with this guideline, consideration should be given to the following: Assessments of significant unusual items, fluctuations or other issues found Documentation of Level 2 procedures, where warranted Assessments and conclusions (including branded risk assessments) within the Insurer Profile

Summary

11

Overall conclusion regarding the insurer, including whether any additional action should be considered

Analysis and documentation of any necessary follow-up, including communications with the company

Appropriate use of automated quarterly procedures for non-troubled insurers Assessment of the holding company group (Lead State) Impact of the holding company on the domestic insurer(s) Analysis procedures specific to RRGs


1. Any significant unusual items, fluctuations from established norms or other issues raised during the analysis of a company should be addressed and documented in the analysis file.

2. When utilized, the non-troubled automated review should be based on a calculation similar to that found in the NAIC Financial Analysis Handbook. If a company does not pass the automated quarterly review process such as that included in the Level 1 for Non-Troubled Insurers, but the analyst concludes that no further analysis is necessary, the analyst’s written justification for such should be included in the analysis workpapers.

3. Significant correspondence from the company should show evidence of analysis by the department, including sign-off, and concluding that the response is adequate.

4. The Insurer Profile Summary should include discussion/information on: The company’s prospective exposure to each of the nine branded risk classifications, with

adequate supporting detail Financial analysis Financial examination Internal/external changes Priority ranking Supervisory plan

5. The company’s Insurer Profile Summary should be updated after each of the following: Annual financial statement analysis The conclusion of an on-site examination Any significant information impacting the insurer was identified

6. The completed financial analysis should include a conclusion that discusses: The company’s strengths and weaknesses The company’s exposure to prospective risks Whether any action should be considered as a result of the analysis

g. Reporting of and Action on Material Adverse Findings

Standard: The department’s procedures should require that all material adverse findings be promptly presented to the commissioner or an appropriate designee for determination and implementation of appropriate regulatory action. Upon reporting of any material adverse findings from the financial analysis staff, the department should take timely action in response to such findings or adequately demonstrate the determination that no action was required.

12

A material adverse finding is defined as a finding made by a department with respect to an event, trend, transaction or series of transactions, fluctuation, agreement, arrangement, operating results or violation of law, which either has, or reasonably could have, a significant negative impact on a company’s financial position. Results-Oriented Guidelines:

1. Financial analysis files should contain clear evidence that material adverse findings were promptly presented to the commissioner or appropriate designee and that timely and appropriate action was taken or adequately demonstrate and document that no action was required. The review team will accept the ultimate action of the regulator as appropriate as long as the logic of the decision is clearly documented and the decision is reasonable based upon what other regulators would commonly understand to be appropriate in that scenario and given the information available at that time.


1. The department should have a policy or procedure for handling material adverse findings that is formally communicated to the financial analysis staff.

2. The department’s material adverse finding policy or procedure should define a material adverse finding, to whom the finding should be communicated and require the finding(s) to be promptly reported to the commissioner or an appropriate designee.

3. The department’s material adverse finding policy or procedure should require timely action be taken

or adequately demonstrate and document that no action was required.

4. If there was a material adverse finding, the finding should promptly be reported to individuals who were capable of taking appropriate regulatory action and documentation of such should be included in the analysis file.

13

Part B2: Financial Examinations a. Sufficient Qualified Staff and Resources Standard: The department should have the resources to effectively examine all domestic insurers on a periodic basis, which is commensurate with the financial strength and position of each insurer. Results-Oriented Guidelines:

1. The department should have qualified examiners or contractual resources with appropriate skill sets, abilities, knowledge and experience levels to satisfactorily and effectively perform examination tasks and procedures. Such experience should match the sophistication and complexity of the domestic industry. When assessing whether a department has qualified staff and resources, consideration should be given to the following: The quality of the work performed by the financial examination staff and/or contractors as

documented in the financial examination files The financial examination staff’s and/or contractor’s knowledge and comprehension of the

insurance industry and the company under examination, as demonstrated during interviews with the staff

2. The department should have sufficient examination staff and/or contractual resources to

appropriately perform necessary target and limited scope examinations. Process-Oriented Guidelines:

1. The financial examiners and supervisors should have an accounting, insurance, financial analysis, financial examination, information technology and/or actuarial background, and insurance backgrounds should be financial in nature. College degrees should focus on accounting, insurance, finance or actuarial science. Professional designations and credentials may also demonstrate expertise in insurance and/or financial examinations.

2. The department should perform a full-scope examination on each domestic company in accordance with the respective state law or at least once every five years, whichever is less.

b. Communication of Relevant Information to/from Examination Staff

Standard: The department should ensure that all relevant information and data obtained that may assist in the financial examination process is provided to the financial examination staff. The department should ensure that findings of the financial examination staff are communicated to the appropriate person(s). Results-Oriented Guidelines:

1. Examiners should effectively communicate and coordinate with various areas within the department. Such communication should consist of both (1) communication of information held by other areas of the department to the examiners as appropriate to enhance the quality of the examination, and (2) communication of key examination findings to other areas of the department as appropriate to enhance the work performed by those other areas. Evidence of this communication should be clearly documented in the examination files. When assessing compliance with this guideline, consideration should be given to the following:

14

The examiner’s utilization of pertinent information that is obtained from management and/or other areas of the department

Sharing by the examiner of any pertinent information obtained as a result of the financial examination with management and/or other areas of the department

The examiner’s communication and collaboration with the financial analysis staff before, during and at the conclusion of a financial examination

The examiner’s utilization and incorporation of pertinent information from the financial analysis in planning and conducting examination procedures


1. The examination process should include a formal method that allows for pertinent information from other areas (e.g. legal, rates and forms, actuarial, etc.) within the department that could impact the financial examination to be shared with the examination staff Although no one method is required, the following are examples that may demonstrate compliance: regularly scheduled department head meetings, department managers’ meetings, information requests to other areas of the department, etc.).

2. The examiner-in-charge (EIC) should provide a status report to the chief examiner (or designee) at least monthly and include information as required by the NAIC Financial Condition Examiners Handbook (Examiners Handbook).

3. Financial solvency information identified as a result of the financial examination, particularly

adverse findings or significant unresolved issues, should be communicated by the examination team to the chief examiner, financial analyst, management and other department staff, as necessary

4. At the beginning of each examination, the examiner should obtain input from the financial analyst

regarding areas of concern and specific issues to address during the examination. To assist in gathering this information, the examiner should obtain a current Insurer Profile Summary from the financial analyst as well as any other supporting documentation necessary to understand the financial analyst’s concerns and suggested procedures.

5. Results of examination activities should be shared with the financial analyst to assist in conducting

ongoing analysis procedures. At the conclusion of an examination, the examiner should hold a collaborative follow-up meeting or conference call with the financial analyst to discuss the following: Examination results and/or findings Insurer’s prioritization level Ongoing supervisory plan and the completed Summary Review Memorandum Assessment of branded risks contained in the Insurer Profile Summary.

6. The examiner should recommend follow-up for the financial analyst to perform in addressing

concerns/issues identified as a result of examination activities. In so doing, the examiner should communicate examination report recommendations, management letter comments and/or prospective risks. Information to be provided as a result of each full-scope examination should include the report of examination, management letter (if used) and Summary Review Memorandum (or substantially similar document).

15

c. Use of Specialists Standard: The department’s examination staff should include specialists with appropriate training and/or experience or otherwise have available qualified specialists, which will permit the department to effectively examine any insurer. These specialists should be utilized where appropriate given the complexity of the examination or identified financial concerns. Results-Oriented Guidelines:

1. The department should demonstrate appropriate usage of specialists in examining its domestic insurers. The requisite expertise should be determined by the character and nature of the insurer being examined in areas such as computer audit, reinsurance, actuarial and investment expertise. This expertise may be provided by persons on staff, under contract, or as otherwise available to the department. When assessing compliance with this guideline, consideration should be given to the following: Whether persons with appropriate experience are involved on all examinations Whether the knowledge and experience of the individual performing the work is commensurate

with the complexity and sophistication of the area being examined Completeness and appropriateness of documentation supporting the work and conclusions of the

specialist Process-Oriented Guidelines:

1. (IT): An Information Technology (IT) review, as outlined in the Examiners Handbook, should be completed and should address each of the following six steps: Gather necessary IT planning information Review information gathered Request insurer control information and complete IT review planning Conduct IT review fieldwork Document results of the IT review Assist on the financial examination

2. (IT): The IT review should be finished prior to the completion of planning the financial condition

exam.

3. (IT): The IT review should be supported by proper documentation, including, at a minimum, a completed Information Technology Planning Questionnaire (Exhibit C – Part One), an IT Review Work Program (Exhibit C – Part Two), and a summary of findings or something similar. As discussed in the Examiners Handbook, there are certain situations in which the use of Exhibit C – Part Two may be limited or the Exhibit may not be completed. When the examiner limits or eliminates the use of Exhibit C – Part Two, the examiner should document the rationale for such in the IT planning memo and/or summary memo. In all cases, the six-step process should be adhered to.

4. (Actuarial): Credentialed actuaries should be involved on all life/health company examinations

where the company has a substantial amount of interest-sensitive business and on all property/casualty examinations where the company has a substantial amount of long-tail lines of business.

16

5. (Actuarial): Coordination between examiners and actuaries should be clearly evidenced in the examination files. At a minimum, such coordination should consist of communication related to risk identification, control mitigation and residual risk assessment.

6. (Reinsurance): Significant reinsurance contracts should be reviewed to determine transfer of risk. d. Appropriate Supervisory Review Standard: The department’s procedures for examinations should provide for supervisory review of examination workpapers and reports to ensure that the examination procedures and findings are appropriate and complete and that the examination was conducted in an efficient and timely manner. Results-Oriented Guidelines:

1. The supervisory review should be an in-depth and challenging review of the examiner’s findings and the concepts applied in performing the work. When assessing compliance with this guideline, consideration should be given to the following: Depth and challenging nature of supervisory review notes, although maintenance of review notes

is not required The overall quality of the work performed, including whether the examination procedures appear

to be complete and appropriate and no material matter remains unaddressed Discussions with department staff that verify occurrence and sufficiency of supervisory review,

including but not limited to, the EICs Why issues with the quality of the examination were not identified and resolved by the

supervisor Process-Oriented Guidelines:

1. All workpapers, including work performed by the EIC, should receive at least one level of supervisory review evidenced by sign off and dating by the reviewer.

2. The work of specialists should be reviewed by the EIC for familiarity and understanding. 3. The supervisory review of planning (Phases 1 and 2), including the Examination Planning

Memorandum and risk matrices, should be done before work has begun in Phase 3. The review of planning should include each of the following: Identification of key activities Identification and assessment of inherent risks

4. The supervisory review of Phases 3, 4 and the first part of Phase 5 should be documented by a

review of the risk matrices and any associated coaching notes or correspondence before any applicable substantive test work has begun. The review of Phases 3, 4 and the beginning of Phase 5 should include each of the following: Identification and evaluation of risk mitigation strategies/controls Determination of residual risk Established detail examination procedures

5. The supervisory review of workpapers should occur within a reasonable period after completion of

the item being examined (generally two to four weeks).

17

6. The examination report should be reviewed by at least one person other than the preparer. 7. The examination report should be approved by the commissioner or the commissioner’s designee

prior to final issuance. e. General Examination Procedures Standard: The department’s policies and procedures for the conduct of examinations should generally follow those set forth in the Examiners Handbook. Appropriate variations in methods and scope should be commensurate with the financial strength and position of the insurer. Results-Oriented Guidelines

1. The examiner should utilize a risk-focused approach and prepare examination documentation in sufficient detail to provide a clear understanding of the work performed. The content and organization of the documentation should support conclusions reached and effective execution of the risk-focused approach. When assessing compliance with this guideline, consideration should be given to the following: Utilization of a risk-focused approach in establishing priority of accounts or operational areas The clarity and accuracy of the documentation used to support examination conclusions Extent of involvement with contract examiners if utilized Utilization of audit work when relied upon to support an identified risk Fulfillment of coordination efforts as determined by the state in Exhibit Z, and consistent with

their role as described in the Examiners Handbook, for companies that are part of a holding company group that includes more than one insurer


1. The examiner should prepare a Risk Assessment Matrix, or substantially similar document, that addresses each of the seven phases.

2. The examiner should prepare a planning memorandum that includes a discussion of each of the

following: Scope and objective of the examination Materiality assessment Results of the analytical review Results of the IT review Corporate governance assessment Results of the audit function assessment (internal and external), including review of external

auditor’s workpapers and reports Summary of the key activities selected Scope of the prospective risk assessment procedures to be performed Intended reliance on work completed by auditors and accredited states (if applicable) Exam staffing and time budgets

3. If the company being examined is part of a holding company group with multiple insurers, the state

should complete the appropriate section of Exhibit Z, Part Two (or similar document) as follows: If the state is the exam facilitator conducting a fully coordinated group examination, Exhibit Z,

Part Two, Section B (or similar document) should be completed.

18

If the state is a participating state in a fully coordinated group examination, the state should complete Exhibit Z, Part Two, Section C (or similar document).

If the state did not participate in a coordinated group examination or utilized existing work outside of a fully coordinated group examination, the state should complete Exhibit Z, Part Two, Section D (or similar document).

4. The data supplied by the company or an outside source and utilized (relied upon) by the examiners,

should be tested for both accuracy and completeness in accordance with the respective residual risk assessment.

5. The sampling techniques used should conform to guidance set forth in the Examiners Handbook or

other appropriate authoritative guidance. 6. If a department elects to utilize contract examiners, the department should demonstrate significant

involvement of appropriate department personnel during the course of the examination to assure that the examination is generally conducted in accordance with the Examiners Handbook and the department’s policies and procedures.

7. The department should utilize qualified EICs. The Examiners Handbook provides guidance on the

authority, responsibilities and credentials for a qualified EIC. If the department utilizes an EIC who does not hold the CFE designation or is not directly supervised by someone holding the CFE designation, the department should document in the Financial Exam Electronic Tracking System (FEETS) when calling the exam how this individual is qualified to act in the capacity of an EIC on a multi-state insurer examination. Factors that may be considered include other professional designations, prior insurance experience, familiarity with the NAIC risk-focused surveillance process, etc.

f. Risk Assessment and Testing Standard: The department’s performance and documentation of risk-focused examinations should generally follow the guidance set forth in the Examiners Handbook. Appropriate variations in methods and scope should be commensurate with the financial strength and position of the insurer. Results-Oriented Guidelines:

1. The department’s financial examinations should include identification and review of relevant risks to the insurer, both current and prospective, using a risk-focused approach consistent with the Examiners Handbook. The quality and substance of the review should reflect the nature and complexity of the insurer. When assessing compliance with this guideline, consideration should be given to the following: Identification and testing of risks throughout the examination process Evidence that each critical risk category as defined in Exhibit DD – Critical Risk Categories is

appropriately addressed on a key activity matrix, Exhibit V – Overarching Prospective Risk Assessment or in the planning memo

Whether Phase 3 controls appropriately address the identified risk in Phase 2 Whether the Phase 3 control assessments are adequately supported Whether Phase 5 detail procedures are commensurate with the residual risk assessment and

appropriately address the risk in Phase 2 when these procedures are warranted based on the residual risk

19

Documentation of appropriate rationale when the examiner judgmentally adjusts the calculated residual risk assessment

Appropriate identification and assessment of prospective risks included on Exhibit V – Overarching Prospective Risk Assessment (or substantially similar document)


1. For examinations with an as of date prior to December 31, 2013: there should be a key activity, developed risk statement(s) or documented rationale for no risk statement for every annual statement account balance greater than tolerable error.

2. For examinations as of December 31, 2013 and later: Each critical risk category should be addressed by at least one risk in the risk matrices or Exhibit

V – Overarching Prospective Risk Assessment or include rationale in the planning memo describing why the category is not addressed

The examiners should utilize Exhibit DD – Critical Risk Categories, or substantially similar document, to demonstrate that all critical risk categories have been addressed

3. Procedures that were performed “outside of the matrix” should be limited to state-specific

compliance items, consideration of prospective risks and other general examination procedures. 4. All risks that were deemed significant enough to be included on a risk matrix, or substantially

similar document, should be addressed by at least a minimum amount of control testing in Phase 3 and/or detail testing in Phase 5.

5. Exhibit V – Overarching Prospective Risk Assessment, or substantially similar document, should be

utilized to document significant prospective risks identified that did not related to a specific key activity, or related to more than one key activity.

6. Significant risks and issues that were identified in Phase 1 should be documented and tracked

throughout the risk-focused examination process utilizing Exhibit CC – Issue/Risk Tracking Template, or substantially similar document.

g. Scheduling of Examinations Standard: In scheduling financial examinations, the department should follow procedures such as those set forth in the Examiners Handbook that provide for the periodic examination of all domestic companies on a timely and coordinated basis. This system should accord priority to companies that exhibit adverse financial trends or otherwise demonstrate a need for examination. Results-Oriented Guidelines:

1. The department should schedule examinations so that companies are examined with a frequency that is consistent with their financial condition. In scheduling examinations, the department should consider not only its statutory requirements, but also any financial solvency-related concerns. If a higher priority company or a company that otherwise displays financial solvency concerns was not examined sooner than once every five years, the review team shall inquire of the department’s senior solvency management justification for this.

20


1. The department should prepare a flexible yearly examination schedule that identifies the company being examined, priority ranking, examination period and the EIC.

2. The department should call the examinations using FEETS, as directed by the Examiners Handbook. 3. The department should document the attempt to coordinate examination efforts with departments of

other states consistent with the coordinated exam approach prescribed in the Examiners Handbook. Each company that is part of a holding company group that includes more than one insurer should include a copy of the coordination plan, documented in Section A of Exhibit Z, Part Two (or similar document), in its examination file.

h. Communication of Examination Results Standard: The department’s reports of examination should be prepared in accordance with the format adopted by the NAIC and should be sent to other states in which the insurer transacts business in a timely fashion. Results-Oriented Guidelines:

1. Findings of fact, as well as significant results, observations and recommendations to the company identified as part of an examination should be appropriately conveyed to the company and followed up on by the examiner or other department personnel as agreed upon by the department. Communication of this information to the company may be contained within the examination report, management letter or, for states not utilizing a management letter, during the exit conference or other means deemed appropriate. When assessing compliance with this guideline, consideration should be given to the following: Clarity of descriptions and discussion of findings of facts as identified during the examination Completeness of examination report and management letter comments resulting from

examination procedures Whether any significant items identified within the examination were not appropriately

communicated to the company Fulfillment of follow-up action or identification of plan for action as a result of items

communicated to the company Process-Oriented Guidelines:

1. The examination report should be prepared in accordance with a format outlined in the Examiners Handbook.

2. The examination report should be adopted, as follows: Within 18 months after the “as of” date of the examination Within four months after the completion of fieldwork

3. The examination report should be shared with other states by uploading the examination report and

formally closing the examination in FEETS no more than 30 days after the date the examination report is adopted.

21

4. If the examination report has not been issued within 22 months of the “as of” date of the examination, the department should notify the Examination Oversight (E) Task Force within 10 days of the end of the 22nd month.

i. Reporting of and Action on Material Adverse Findings

Standard: The department’s procedures should require that all material adverse findings be promptly presented to the commissioner or an appropriate designee for determination and implementation of appropriate regulatory action. Upon reporting of any material adverse findings from the financial examination staff, the department should take timely action in response to such findings or adequately demonstrate the determination that no action was required.

A material adverse finding is defined as a finding made by a department with respect to an event, trend, transaction or series of transactions, fluctuation, agreement, arrangement, operating results or violation of law, which either has, or reasonably could have, a significant negative impact on a company’s financial position. Results-Oriented Guidelines:

1. Financial examination files should contain clear evidence that material adverse findings were promptly presented to the commissioner or appropriate designee and that timely and appropriate action was taken or adequately demonstrate and document that no action was required. The review team will accept the ultimate action of the regulator as appropriate as long as the logic of the decision is clearly documented and the decision is reasonable based upon what other regulators would commonly understand to be appropriate in that scenario and given the information available at that time.


1. The department should have a policy or procedure for handling material adverse findings that is formally communicated to the financial examination staff.

2. The department’s material adverse finding policy or procedure should define a material adverse finding, to whom the finding should be communicated and require the finding(s) to be promptly reported to the commissioner or an appropriate designee.

3. The department’s material adverse finding policy or procedure should require timely action be taken or adequately demonstrate and document that no action was required.

4. If there was a material adverse finding, the finding should promptly be reported to individuals who were capable of taking appropriate regulatory action and documentation of such should be included in the examination file.

22

Part B3: Department Procedures and Oversight a. Information Sharing Standard: States should have the authority to share confidential information with other state, federal, and international regulatory agencies and law enforcement authorities, and the NAIC. States should also have the authority to maintain the confidentiality of information received from these parties. Further, the states should demonstrate the willingness to act on this authority to share confidential information. Results-Oriented Guidelines:

1. The department should demonstrate that it has responded appropriately to inquiries from other regulatory agencies and shared confidential information pertaining to domestic companies, provided that the recipients were able to demonstrate that the confidentiality of the information would be maintained.

2. The department should demonstrate that it has responded appropriately to inquiries regarding

domestic companies from the NAIC Analyst Team, the Financial Analysis (E) Working Group, and any other appropriate NAIC body.


1. The department should demonstrate that it is authorized to share confidential documents, materials, information, administrative or judicial orders, or other actions with the regulatory officials of any state, federal and international regulatory agencies and law enforcement authorities, and the NAIC provided that the recipients are required to maintain its confidentiality.

2. The department should demonstrate that it is authorized to keep confidential documents, materials,

and information provided by the regulatory officials of any state, federal and international regulatory agencies and law enforcement authorities, and the NAIC, which is considered confidential in their jurisdiction.

3. The department should have a documented policy to cooperate and share documents, materials, and

information on domestic companies with the regulatory officials of any state, federal agency or foreign countries and the NAIC, as authorized by state law, directly and also indirectly through committees established by the NAIC that may be reviewing and coordinating regulatory oversight and activities. This policy should also include cooperation and sharing information with respect to domestic companies subject to delinquency proceedings.

4. The department should require those RRGs that have filed a disclaimer of affiliation under the

Insurance Holding Company System Regulatory Act to file a copy of the disclaimer as a change in business plan with all other states in which it is registered.

b. Procedures for Troubled Companies Standard: The department should generally follow and observe procedures set forth in the NAIC Troubled Insurance Company Handbook. Appropriate variations in application of procedures and regulatory requirements should be commensurate with the identified financial concerns and operational problems of the insurer.

23


1. The department should demonstrate that application of procedures and regulatory requirements are commensurate with the identified financial concerns and operational problems of the insurer. When assessing compliance with this guideline, consideration should be given to the following: Whether identified concerns are adequately addressed Appropriate consideration and execution of more frequent examinations, including

appropriateness of the scope of the examination Timing, quality and reasonableness of communication with other states where the insurance

company has a significant amount of written, assumed or ceded insurance business or an impacted affiliate


1. Once the department has identified an insurance company as troubled or potentially troubled, the department should take steps, such as those set forth in the NAIC Troubled Insurance Company Handbook, to address the identified concerns. This shall apply from the point the department identifies the insurance company as troubled, or potentially troubled, to the point the company has been placed into receivership.

2. The department should examine those insurance companies that the department has identified as

troubled or potentially troubled more frequently than once every five years as outlined in the NAIC Model Law on Examinations or provide rationale for not conducting more frequent examinations. Limited scope examinations are acceptable in meeting this guideline; however; the department is still required to complete a full-scope examination in compliance with statutory requirements.

3. Once the department has identified an insurance company as troubled or potentially troubled, the

department should make efforts to communicate proactively with other state insurance regulators where the insurance company has a significant amount of written, assumed or ceded insurance business and with states in which affiliates of the troubled company are domiciled or those states where the troubled company has significant market share. Department files should contain written evidence of such communication(s). To a lesser extent, oral verification may provide such evidence.

c. Department Oversight Standard: Department management should be involved in solvency monitoring activities for its domestic industry to ensure appropriate oversight of staffing, company interactions and key solvency issues with the ability and willingness to take action, as deemed appropriate. The term department management includes both (1) the financial solvency senior management and (2) the commissioner. The term “financial solvency senior management” is intended to mean the head financial regulator(s) responsible for financial solvency regulation and typically includes those at the level of chief analyst, chief examiner, deputy commissioner or other similar positions. The term “commissioner” is intended to mean the chief insurance regulatory official such as the commissioner, director or superintendent. Determination of compliance with the guidelines for financial solvency senior management should focus on the knowledge, abilities and involvement of the person or persons at the upper levels of financial solvency regulation within the department.

24


1. Financial solvency senior management should be involved in solvency monitoring activities including demonstrating awareness and understanding of the domestic industry, staffing needs, company interactions, key solvency issues and the ability and willingness to take appropriate action. In addition, the commissioner should have adequate interaction with financial solvency senior management and demonstrate appropriate involvement in significant or high-profile issues. When assessing compliance with this guideline, consideration should be given to the following: Demonstration of awareness of key solvency issues through inquiry and corroborated by internal

meetings, review of company files or significant transactions, review of macro reports, etc. Appropriateness of action taken to address significant company-specific issues Content and quality of interactions between department personnel and company personnel given

the size, complexity and financial health of the domestic industry Content and quality of interactions between financial solvency senior management and analysis

and/or examination staff Depth of knowledge by financial solvency senior management of current skills and abilities of

staff, options and capacity for improving quality of staff and an understanding of the options available for improvement (including training, pay options, hiring options, etc.) with willingness to take action as necessary to ensure adequate oversight is maintained

Depth of understanding by financial solvency senior management of the department’s need for succession or contingency planning for key individuals and areas of expertise within the department and how future leaders can be developed or brought in as appropriate


1. Financial solvency senior management should obtain information on key solvency issues related to its domestic industry.

2. Financial solvency senior management should demonstrate that action is taken to address significant company-specific issues identified through solvency monitoring activities and applicable NAIC groups (e.g. Financial Analysis (E) Working Group, Examination Oversight (E) Task Force, etc.).

3. Financial solvency senior management should demonstrate that there is interaction between

department personnel and company personnel. Company interaction may be demonstrated through emails or phone calls with company management, in-person meetings with the company, obtaining business plans and financial projections, etc. If interaction takes place at the financial solvency senior management level, information obtained should then be communicated to the appropriate analysis and/or examination staff to incorporate into the ongoing solvency monitoring of the company.

4. The commissioner should have periodic interaction with financial solvency senior management,

which may take place in the form of department-wide meetings with department senior management, one-on-one meetings, review of written status updates and reports, etc.

5. The commissioner should demonstrate an awareness of companies with significant transactions, solvency issues or other high profile concerns and an understanding of various options that may be taken to address the issue.

25

Part C: Organizational and Personnel Practices a. Professional Development

Standard: The department should recognize and provide necessary training needs for staff involved with financial surveillance and regulation. The department should also have a policy that encourages professional development through job-related college courses, professional programs, and/or other training programs.


1. The department should have the ability to provide adequate training for staff involved in financial surveillance and regulation commensurate with the needs of the department. When assessing compliance with this guideline, consideration should be given to the following: Department’s recognition of when financial surveillance personnel may require additional

training Whether appropriate training is provided Effectiveness of training programs including how the department assesses effectiveness Use of on-the-job training Sufficiency of budgeted hours and finances to support training needs of the department


1. The department should have a policy that focuses on training and developing staff involved with financial surveillance and regulation, in particular, staff that is new to financial surveillance and regulation.

2. The department should have a continuing education policy that encourages professional development in place for staff involved with financial surveillance and regulation.

b. Minimum Educational and Experience Requirements

Standard: The department should establish minimum educational and experience requirements for all professional employees and contractual staff positions in the financial regulation and surveillance area, which are commensurate with the duties and responsibilities of the position. Results-Oriented Guidelines:

1. Financial surveillance staff should have the ability to perform the necessary duties and responsibilities, as well as meet the minimum educational and experience requirements commensurate with each position’s role in financial surveillance.


1. The department should establish minimum educational and experience requirements for staff positions in the financial surveillance and regulation area.

2. The department should maintain current and relevant job descriptions for staff positions in the financial surveillance and regulation area.

26

c. Retention of Personnel

Standard: The department should have the ability to attract and retain qualified personnel for those positions involved with financial surveillance and regulation. Results-Oriented Guidelines:

1. The department should demonstrate the ability to attract and retain qualified personnel for those positions involved with financial surveillance and regulation. When assessing compliance with this guideline, consideration should be given to the following: Department’s hiring policy Overall retention of personnel in key financial surveillance regulation areas Performance appraisal, review process and/or coaching programs The ability to provide promotional opportunities and/or career paths The ability to provide a competitive pay structure commensurate with the job duties and

responsibilities Process-Oriented Guidelines:

1. The department should have a hiring policy that allows for personnel needs to be addressed. 2. The department should identify how it determines that pay structures are or are not competitive for

positions involved with financial surveillance and regulation.

3. The department should have a performance appraisal and/or coaching program for staff. d. Use of Contract Personnel

Standard: A department that utilizes contract personnel to assist in financial surveillance and regulation should ensure that those hired in the capacity of a contractor are subject to standards that are comparable to or exceed those standards applicable to employees of the state. Results-Oriented Guidelines:

1. The department should assess contractors used in performing financial surveillance and regulation activities to ensure the work being performed is commensurate with the department’s processes and procedures.


1. The department should have a process in place to consider qualifications, training and professional development of contractors performing financial surveillance and regulation activities.

2. The department should have the authority to terminate a contract for services related to financial surveillance and regulation on the basis of poor performance.

27

Part D: Organization, Licensing and Change of Control of Domestic Insurers a. Sufficient Qualified Staff and Resources

Standard: The department should have the appropriate staff and resources to effectively and timely review applications for primary licensure and Form A filings for all domestic insurers.


1. The department should have qualified staff with appropriate skill sets, abilities, knowledge and experience levels to satisfactorily and effectively perform a thorough review of applications for primary licensure and Form A filings. When assessing whether a department has qualified staff and resources, consideration should be given to the quality of work performed by department staff as documented in the files.

2. The review of applications for primary licensure and Form A filings should be completed timely, as discussed in the Compliance Guidelines. If the review was not completed timely, the department should document the reasons for such and the review team may take extenuating circumstances into consideration.


1. The department staff responsible for reviewing the applications for primary licensure and Form A filings should have an accounting, insurance, financial analysis and/or actuarial backgrounds. College degrees should focus on accounting, insurance, finance or actuarial science. Professional designations and credentials may also demonstrate expertise in insurance and/or financial analysis.

2. The department should review applications for new companies within 30 days of receipt. If additional or supplementary information is needed from the insurer based on the initial review for completeness, the insurer should be notified of such within 45 days of receipt of the application.

3. For primary applications, if the state’s statutes or regulations do not specify timing requirements, the review should be completed within 90 calendar days of receipt. A review of an application is complete once the insurer is notified of approval or denial. If additional information not originally requested in the application is needed to finalize the review of the application, the review may take longer to complete. Once a request for information is made, the timing requirement is suspended until the information is received from the applicant.

4. The review of the primary application or Form A should be completed in accordance with timing

requirements mandated by the state’s statute or regulation. b. Scope and Performance of Procedures for Primary Applications

Standard: The department should have documented licensing procedures to provide for consistency in the review process and to ensure that appropriate procedures are being performed on all primary applications. Results-Oriented Guidelines:

1. The review process should adequately assess primary applications and allow the department to reach appropriate conclusions regarding whether the primary applications are approved or denied.

28


1. The department should review and document their assessment of each of the following: Business and strategic plans Pro forma financial projections Adequacy of proposed reinsurance program Adequacy of investment policy Adequacy of short-term and long-term financing arrangements: Initial financing of proposed operations or transactions Maintenance of adequate capital and surplus levels

Biographical affidavits of the following: Ultimate controlling person Proposed officers and directors Appointed actuary Appointed accountant

Related party agreements’ compliance with SSAP No. 25 2. The department should review the NAIC Form A and SAD databases for related information.

c. Scope and Performance of Procedures for Form A Filings

Standard: The department should have documented procedures for the review of Form A filings to provide for consistency in the review process and to ensure that appropriate procedures are being performed on all Form A filing reviews. Results-Oriented Guidelines:

1. The review process should be designed to adequately assess the Form A filings and accompanying information and to effectively allow the department to reach appropriate conclusions regarding whether the Form A filings are approved or denied.


1. The department’s review of Form A filings should include the following: The source, nature and amount of the consideration used or to be used in effecting the merger or

other acquisition of control Fully audited financial information regarding the earnings and financial condition of the

acquiring parties for the preceding five years. If fully audited financial information is not available, substantially similar information such as compiled financial statements or tax returns, as deemed acceptable to the commissioner, may be reviewed in lieu of fully audited financial information

Unaudited financial information regarding the earnings and financial condition of the acquiring parties as of a date not earlier than 90 days prior to the filing of each statement

2. The department should utilize and update the Form A Database for prior filings made by the Form A

applicant and the ultimate outcome of such filing(s).

3. Pertinent and relevant information from the Form A filing should be manually entered into the Form A Database within 10 business days of receipt of the Form A.

29

4. Any changes to the status of the filing or other data elements should be entered into the Form A Database within 10 business days.

30

Draft Date: March 7, 2016

ACCREDITATION REVIEW PROCESS AND PROCEDURES

PREPARATION FOR AN ACCREDITATION REVIEW 1) A state requests an accreditation review by contacting the applicable NAIC staff. 2) The NAIC requests that the state submit a self-evaluation guide. This guide provides the state

with the detailed requirements of the accreditation standards, including laws and regulations that must be adopted, financial analysis and examination procedures that must be in place, organizational and personnel practices that must be established, and organization, licensing and change of control of domestic insurers’ practices that must be established.

3) The NAIC assembles proposed review teams consisting of qualified candidates that are

considered experts in the insurance industry, to participate on a state’s accreditation review. These proposed review teams are reviewed and approved by the chief operating officer.

34) The NAIC notifies the chair and vice-chair of the Financial Regulation Standards and

Accreditation (F) Committee (FRSACthe Committee) that the state has requested an accreditation review and provides the chair and vice-chair with the proposed review team, as approved by the chief operating officera list of qualified review team candidates, comprised of experts in insurance regulation.

4) The chair and vice-chair of FRSAC the Committee approves the review team and the review

team leader and appoints at least one NAIC observer. Review teams generally consist of three to six eight individuals depending upon the size of the state as noted in the “Workplan for the Full On-Site Accreditation Review;” however, the chair of FRSAC the Committee may determine that a lesser number is sufficient when the size of the state’s insurance industry and scope of the department’s responsibilities are notably limited. The review team should include at least one disinterested former executive level regulator.

5) The NAIC notifies the state of the selection of the review team. The state is given the

opportunity to object to any of the review team members. 6) The NAIC notifies the review team members. The review team members are paid by the

NAIC at a set hourly rate for time spent on the accreditation review plus reasonable actual expenses incurred.

7) The NAIC works with the state to schedule the site visit and notifies the review team of the

dates. Generally, a site visit requires three to five days depending upon the size of the state. 8) The NAIC sends copies of the state’s completed self-evaluation guide with any applicable

supporting documentation to the review team.

31

9) The NAIC notifies the state of the data, documentation, staff interviews, and other needs of the review team for its on-site review.

10) The NAIC Legal Division reviews the Part A responses and other pertinent information

received from the state, and to the extent necessary, may analyze the state’s laws, to determine whether the state is in compliance with the Part A standards and to confirm whether the citations provided by the state accurately identify the extent to which the state’s laws and regulation evidence compliance with the Part A standards. Questions or concerns are forwarded to the NAIC accreditation staff and, if not resolved, are discussed with the state and, in addition, may be brought to the attention of an accreditation review team leader.

11) The report of the NAIC Legal Division on the Part A standards (Part A Report) reports the

findings of the NAIC Legal Division and includes the NAIC Legal Division’s conclusion on the state’s compliance with the Part A: Laws and Regulations Standards. An exceptions management comments portion of the report will may highlight concerns, if any are noted during the review, together with recommendations for the state to consider enhancements to its laws and regulations providing for sound insurance regulation. The department is required to provide a formal response to any exceptions noted theManagement Comment Letter by the date indicated by NAIC staff. This response will be included in the accreditation report package provided to FRSAC the Committee for discussion during the National Meeting.

12) The Part A Report is made part of the documentation for the accreditation review. It is

delivered to the department and the review team no later thantypically by the commencement of the on-site review, and is included in the materials submitted to each member of FRSAC the Committee at the conclusion of the on-site review.

ON-SITE ACCREDITATION REVIEWS

1) The review team conducts the on-site review following a general outline of procedures to be performed to allow for uniformity in the evaluation process among the states. In addition, an NAIC staff representative is an observer on each site visit to help ensure uniformity and consistency in the on-site reviews. Before the on-site review, there is an initial meeting of the team members to discuss comments and concerns from review of the Financial Regulation Standards self-evaluation guide and supporting documentation.

2) The on-site review consists of the following: Discussion with financial solvency senior management and the commissioner regarding its

role in financial solvency oversight. Review of examination reports and supporting work papers and analytical reviews. Inspection of financial analysis and examination files for selected companies. Interviews with department personnel. Review of organizational and personnel practices. Inspection of documentation regarding primarily licensure applications and Form A filings

for selected companies. Walk-through of the department to gain an understating of document and communication

flows.

32

Meetings of the review team to discuss comments and findings from the review. Team members convene into a private meeting to develop the review team’s

recommendation regarding the state’s accreditation and to draft the review team’s report vote using a scoring system to determine whether a state is in compliance with the accreditation standards.

Closing conference with the state to discuss findings. Draft copies of the Part A Compliance Report and the review team’s Parts B, C and D

Compliance Report report discussing Parts B, C and D and noting any key areas for improvement and Management Comment Letter are provided to the state.

3) The review team’s report includes an executive summary identifying the review team’s recommendation, supporting rationale for the recommendation, positive attributes and key areas for improvement. The report template also includes a section for the review team’s discussion which allows the team flexibility to include additional context and any information that would be valuable or meaningful to the Committee. The review team’s report may include items that require a response from the department. As a result of the site visit, a review team report, Parts B, C and D Compliance Report and Management Comment Letter are prepared by the review team and submitted to the Committee by the team leader. The reports summarize the scope of the procedures performed during the site visit, document the findings on an exception basis, highlight major recommendations as a result of the review, and conclude with the review team’s recommendation as to whether the state should be accredited by FRSAC. In those instances, Tthe department is required to provide a formal response to the Management Comment Letter by the date indicated by NAIC staff. This response will be included in the accreditation report package provided to FRSAC the Committee for discussion during the next National Meeting. In addition, a Part A Report is prepared by NAIC Legal and submitted to the Committee as well. COMMITTEE EVALUATION 1) FRSAC The Committee normally typically meets at the NAIC National Meetings to discuss

the review team’s report. The Committee also has copies of the state’s self-evaluation guide and supporting documentation available. In addition, the team leader and the NAIC observer are present at the meeting as needed. Representatives of the state are in attendance to respond to questions from the Committee or to comment upon the review team’s report and recommendation.

2) FRSAC The Committee has the option to convene into a “private” session during its

Regulator-to-Regulator session meeting at the discretion of the chair of FRSACthe Committee. The individuals in the private session would typically include only members of FRSAC the Committee and their representatives, applicable NAIC staff, and the team leader. This should only occur in rare and infrequent situations when the Committee must discuss or inquire regarding sensitive issues. Examples of this could include the following:

Concern regarding the quality or competence of personnel employed by a state insurance

department; or

33

To confer with NAIC staff on the process and results of a contentious issue that the Committee has deliberated previously.

3) Representatives of the state are excused once the Committee has no further questions for

these individuals. Based on the recommendation of the review team and as a result of this meeting, the Committee makes a decision as to whether or not the state should be accredited. If the state is already accredited, the Committee makes a decision whether the state should retain its accreditation, or whether its accreditation should be placed on probation, suspended or revoked.

4) FRSAC The Committee informs the state of its decision:

a) If the decision is to retain the state’s accreditation (which includes those states granted

continued accreditation although they were also placed on probation), the state receives recognition at the National Meeting via inclusion in the daily newsletter.

b) For those states not currently accredited: If the decision is unfavorable, the state has three

options: withdraw its request for accreditation; ask the Committee to hold its decision in abeyance pending legislative or other corrective action to bring the state into compliance with the standards; or appeal the decision of the Committee. If the state received a failing score in Part B, the state may request a copy of its Part B Scoring Sheet upon being informed of the unfavorable decision.

c) For those states currently accredited:

If the decision is to place a state’s accredited status on probation, a letter setting forth the conditions of the probation should be sent to the state as soon as possible after the FRSAC Committee meeting. The state does not have the option to appeal the decision of the Committee.

If the decision is to suspend a state’s accreditation, a letter setting forth the conditions

of the suspension should be sent to the state as soon as possible after the FRSAC Committee meeting. The state may either accept the decision or choose to appeal the decision of the Committee. If the state received a failing score in Part B, the state may request a copy of its Part B Scoring Sheet upon being informed of the suspension decision. In the case of an appeal, the state retains its full accredited status during the appeals process. Public acknowledgement that a state’s accreditation has been suspended should only occur after the opportunity to appeal has lapsed and the state has not chosen to do so, or if the decision by the Committee to suspend accreditation is upheld by the appeal hearing panel.

If the decision is to revoke the state’s accreditation, the state may either accept the

decision or choose to appeal the decision of the Committee. If the state received a failing score in Part B, the state may request a copy of its Part B Scoring Sheet upon being informed of the unfavorable decision. In the case of an appeal, the state retains its full accredited status during the appeals process. Public acknowledgement that a

34

state’s accreditation has been revoked should only occur after the opportunity to appeal has lapsed and the state has not chosen to do so, or if the decision by the Committee to revoke accreditation is upheld by the appeal hearing panel.

5) Accreditation is for a five-year period, subject to annual reviews of the state’s self-evaluation

guide. Once accredited, a state is subject to a full accreditation review every five years. If information comes to the attention of the Committee that suggests that a state may no longer meet the Standards, a special review may be conducted. If the Committee concludes that the state’s accreditation should be placed on probation, suspended or revoked, the specific reasons would be documented in a report to the state. The state would have the right to appeal a suspension or revocation decision of FRSAC the Committee utilizing the procedures outlined in the section entitled, “Appeal Procedure for the NAIC Financial Regulation Standards and Accreditation Program.”

INTERIM ANNUAL REVIEWS 1) Annually, on the anniversary of the state’s accreditation, the state shall submit an updated

Financial Regulation Standards self-evaluation guide (interim annual reviews) to the NAIC Central Office.

2) The state’s report in the first year after an on-site accreditation review shall also provide an

updated response to all recommendations made in the review team’s report and/or management letter, including its progress on addressing each of the recommendations. Additional updates may also be required in subsequent years to address any outstanding concerns.

3) NAIC staff will review the interim annual review report and supporting documentation

submitted by the state and summarize the information for presentation to the Committee.

4) After hearing the report from the NAIC staff, the Committee will determine whether the state remains in compliance with the accreditation standards. (The Committee may request that a representative of the state be present to answer questions, if desired.)

5) If the Committee finds the state to be out of compliance with the accreditation standards, the

specific reasons will be documented in a letter to the state and the state’s accreditation will be placed on probation, suspended or revoked. The state would have the right to appeal a suspension or revocation decision of the Committee utilizing the procedures outlined in the following section entitled, “Appeal Procedure for the NAIC Financial Regulation Standards and Accreditation Program.” A state cannot appeal a decision by the Committee to place its accreditation on probation.

35

MEMORANDUM TO: FROM: DATE: REminimum baseline standards. Now that state insurance departments have a...

Documents

Transcript of MEMORANDUM TO: FROM: DATE: REminimum baseline standards. Now that state insurance departments have a...