Lessons Learned from the Financial Crisis: Recent Developments in Insurance Regulation

Transcription

1 Lessons Learned from the Financial Crisis: Recent Developments in Insurance Regulation NOVEMBER 16, 2017 MYSTIC, CT 1

2 Agenda Learning Objectives NAIC and State Based Regulation 2008 Solvency Modernization Initiative Regulatory Perspective: Current NAIC Initiatives 2

3 Learning Objectives Understand the background and developments leading to the NAIC Solvency Modernization Initiative Understand how the developments of the NAIC Solvency Modernization Initiative build and expand on the developments resulting from the NAIC Solvency Agenda Discuss the impact of these items on Current NAIC Initiatives 3

4 U.S. Regulatory Environment NAIC and State Based Regulation A critical responsibility of a state insurance department is to monitor the financial solvency of insurers domiciled or licensed in its state. The current developments continue to evolve from a solvency agenda adopted by the NAIC in 1989 to enhance solvency regulation in response to a number of insurer insolvencies that occurred during the 1980s. The Solvency Agenda was updated in 1991 and is considered to be an on-going process. The following items were included in the original initiatives provide the regulatory framework for the current developments: Codification of Statutory Accounting Principles (SAP); Revision of the NAIC Financial Condition Examiners Handbook; Develop Risk-Based Capital; Develop a model investment law; Create a centralized financial analysis unit; Develop computerized financial analysis routines; and Create an NAIC education fund. 4

5 U.S. Regulatory Environment: NAIC and State Based Regulation Accreditation Program The NAIC began discussing and shaping the Financial Regulation Standards and Accreditation Program in September The concept of the NAIC s Accreditation Process began in the late 1980 s in response to a Congressional inquiry. In June 1990, a formal accreditation program began to certify that insurance departments have the following: Adequate solvency laws and regulations; Effective and efficient financial analysis and examination process; Appropriate organizational and personnel practices; and Effective and efficient processes regarding the review of the organization, licensing and change of control of domestic insurers. Accreditation program allows for inter-state cooperation and intended to reduce regulatory redundancies. Program evolves with the regulatory framework (i.e., state must adopt certain model laws as required). 5

6 U.S. Regulatory Environment: NAIC and State Based Regulation Codification of Statutory Accounting Principles (SAP) Primary purpose for codification of SAP was to provide a comprehensive basis of reporting for use by insurance departments, insurers and auditors. Codified SAP promotes consistent and comprehensive reporting and does not preempt state legislative and regulatory authority. Preserves the ability for states to allow prescribed or permitted practices, subject to disclosure. Consistent and comprehensive financial reporting provides consistency and comparability among insurers and is the foundation for solvency regulation, which includes both financial analysis and financial examination of insurers. 6

7 U.S. Regulatory Environment: NAIC and State Based Regulation Revision of NAIC Financial Examinations The financial examination and financial analysis process have evolved over time to better assess the underlying risk of the insurance entity and the group. The risk-focused examination has evolved to incorporate prospective risks, and focus on the areas of higher risk. The current process includes interviews of C-level officers, as well as an evaluation of information technology controls and enterprise risk management (ERM). 7

8 U.S. Regulatory Environment: NAIC and State Based Regulation Annual Financial Reporting Model Audit Regulation (MAR) In 1991, the NAIC s MAR required CPA audits, following extensive deliberation in the preceding years: Greater reliance on independent CPA audits intended to be a valuable supplement to the examination system. Annual Statement instructions were modified, effective for the 1991 blank, requiring a CPA audit. Required to be adopted by all states. MAR was amended to include additional requirements for governance, including independence requirements for audit committees and Managements Report on Internal Controls over Financial Reporting for insurers meeting certain requirements effective for 2010 annual reporting. MAR was again amended with a January 1, 2016 effective date requiring insurers meeting certain requirements to establish an internal audit function to provide independent objective and reasonable assurance to the Audit Committee and management regarding the insurer s governance, risk management, and internal controls. 8

9 U.S. Regulatory Environment: NAIC and State Based Regulation Continues to Evolve Continues to evolve as evidenced by additional requirements (e.g., Model Holding Company, ERM, ORSA, Corporate Governance Annual Disclosure). The previous legal entity approach has evolved into a group-wide approach, while also retaining the legal entity oversight. Each significant change has followed as a result of either significant insolvencies, changes to the regulatory environment, or a financial crisis. 9

10 2008 Solvency Modernization Initiative The 2008 global financial crisis resulted in various regulatory agencies developing new guidelines and requirements. These guidelines and requirements are intended to strengthen the regulatory oversight of financial institutions with an emphasis on preventing future financial crisis and to improve regulatory oversight of all financial institutions (with an emphasis on large, or too big to fail institutions). Dodd-Frank Act was enacted in 2010 as a response to the financial crisis of 2008 and resulted in a number of new government agenciesl The Financial Stability Oversight Council (FSOC) monitors the financial stability of large entities who could pose systemic risk to the economy (i.e., too big to fail ). The Federal Insurance Office was established to monitor all aspects of the insurance industry and to serve as an advisory member to FSOC. 10

11 2008 Solvency Modernization Initiative To accomplish this, the NAIC formed the Group Solvency Issues Working Group (GSIWG) to consider possible enhancements to U.S. Group Supervision through coordination with the International Association of Insurance Supervisors (IAIS), and the Solvency Modernization Initiative. Some key changes from these initiatives include revisions to the Model Insurance Holding Company System Regulatory Act and the Insurance Holding Company System Model Regulation as well as new Model Laws with a focus on group-wide supervision: Requirements for Enterprise Risk Management Report within the Annual Holding Company Registration (i.e., Form F ). Establishes a Supervisory College, intended to intended to facilitate over-sight of internationally active insurance companies at the group level for international and U.S. domiciled regulators. Risk Management and Own Risk and Solvency Assessment ( ORSA ) Model (effective 2015). Corporate Governance Annual Disclosure Model (effective 2016). Revisions to Annual Financial Reporting Model Regulation to expand the corporate audit function to provide reasonable assurance of the effectiveness of ERM, internal control, and corporate governance (effective 2016). 11

12 Timeline of U.S Regulatory Changes NAIC Accreditation Process Risk-Based Capital Sarbanes-Oxley Act Update to Model Holding Company Law/Regulation Supervisory College Corporate Governance Annual Disclosure Model MAR Update Solvency Agenda Update from 1989 Version Graham-Leach Bliley Act Amendments to MAR Dodd-Frank FSOC/FIO NAIC GSIWG ORSA Amendment to MAR 12

13 The Next Chapter CURRENT AND EMERGING REGULATORY TRENDS 13

14 The Next Chapter As the regulators incorporate the new requirements into the solvency oversight, new additional changes and expectations can be expected, such as a group-wide capital requirement and an enhanced financial examination and financial analysis process. The recent post financial crisis regulatory developments expanded many of the developments made in response to a insurer insolvencies occurring in the 1980s, and the resulting NAIC Solvency Agenda. 14