Examination Best Practices and Hawaii Domicile Update Honolulu, Hawaii October 22, 2014 1
Welcome and Introductions Aloha 2
The Panel Robert Panah, CPA, CFE, CISA, Managing Director, Noble Consulting Services, Inc. Investment, Information Technology and Troubled Company Specialist KPMG 10 Years, Officer in SEC Reporting Group with Conseco Insurance 7 Years, Hedge Fund CFO 3 Years, involved in regulatory consulting and examination services since 1998 3
The Panel-continued Holly Osumi, Chief Captive Insurance Examiner, Captive Insurance Branch Certified Financial Examiner and Certified Public Accountant Captive Insurance Examiner with the Insurance Division since 2004 4
The Panel-continued Tommy Tso, Director of Risk Management, J.F. Shea Company Since 2003 - Responsible for creation, control and management of risk management function for commercial and residential construction company Account Executive with Willis Wrap-up Manager with AIG 5
The Panel-continued Sanford Saito, Deputy Commissioner and Captive Insurance Administrator, Captive Insurance Branch Certified Financial Examiner and Captive Insurance Examiner with the Insurance Division since 2004 Public Utilities Auditor with the Division of Consumer Advocacy 6
Agenda Examination Update & Best Practices Regulator Expectations from Captive Owners and Captive Managers and Common Exam Findings The Captive Owner s Perspective and Keys to Successful Captive Program Hawaii Domicile Update and Trends Regulatory Landscape 7
Does this look familiar? 8
Recognition of the Need for Better ERM Hartford Financial 9
Aftermath of the Financial Crisis: Selected Lessons Learned Corporate governance Identification of emerging risks Measurement/quantification of risks Economic Capital models Stress tests Reporting and monitoring activities Capital Efficient Products Others 10
Aftermath of the Financial Crisis Selected Buzz Words Systemic Risk Equivalence Common Supervision Framework Supervisory Collaboration Solvency Modernization Initiatives Windows and Walls 11
Question? Can a small derivatives operation in London take down the 30 th largest company in the world? 12
Windows and Walls Holding Company Activities Risk Profile of the Group Group-wide Corporate Governance Non-insurance Subsidiaries Including Captives and SPV s Affiliated Activities 13
Working Through the Acronyms a partial list NAIC SMI ORSA IAIS Solvency II ComFrame FSOC SIFI FIO 14
Solvency Modernization Initiatives Getting to Know the DNA of a Company Steve Johnson-Deputy Insurance Commissioner, PA Principles Based Company View to Group View Retrospective to Prospective Financial Statement to Governance and Risk Management 15
Importance of Corporate Governance Even in a Small Captive or RRG Best Practices Independent Board Financial expert Other experts (investment) Internal Audit Comply with SOX or MAR Enterprise Risk Management Succession Plan Formal strategic plan Small Company Largely management team Typically rely on the CFO Limited experts on Board None or limited No documented controls Informal ERM Limited /no succession plan Limited or formal plan 16
Challenges with Captives and RRGs? No Documented Internal Controls-(no SOX or MAR) No formalized governance/erm policies and procedures None or limited internal audit activities May have good controls that are not documented or formalized Limited IT resources (staffing as well as budget) Limited capital, limited growth potential 17
Negative Thinking The Power of NEGATIVE Thinking by Bobby Knight and how it impacts risk and solvency considerations..
ORSA in a Nutshell* Answer the following: What is our strategy? What level of risk are we willing to assume in pursuit of the strategy? What are the key risks that could hinder our ability to achieve our strategy? How much capital do we need to cover those key risks? What risks, individually and collectively, would subject us to losses that would exceed our tolerance levels? What risk scenarios would cause us to fail or stop operating as a going concern? * Steve Johnson, Deputy Insurance Commissioner, PA 19
Selected Sources of Trouble Management and Controls Inadequate Experience Poor Oversight Weak Internal Controls Underwriting and Marketing Inappropriate Pricing Inappropriate Underwriting Expansion into new lines of business or geographic areas Claims and Reserving Poor Claims Practices Inadequate Reserving 20
Sources of Trouble for Captives? Reinsurance challenges Adequacy of reinsurance, accounting Reserve adequacy Operational DR/BCP, Security Strategic plan Reasonable? Stressed? Well managed? Understanding risks undertaken Letter of credit Irrevocable? Secured? 21
Sources of Trouble for Captives? MGA/TPA functions Financially stable Replaceable? Service levels-claims processing, other Compliance Arms length transactions Weak captive managers 22
Surveillance and Prioritization Process Insurance department analysts are the first line of defense Importance of training and experience Understanding industry and company specific history and risks Participation in key meetings and examination interviews Communication with management Consideration of financial and non-financial information. 23
New NAIC Guidance Increase reliance on External Audits Spend more time on higher risk areas Must address the 10 Critical Risk Categories Emphasize other than financial reporting risks Emphasize prospective risks 24
Critical Risk Categories New Bright Line discussion topics Valuation/Impairment of Complex or Subjectively Valued Invested Assets Liquidity Considerations Appropriateness of Investment Portfolio and Strategy Appropriateness/Adequacy of Reinsurance Program Reinsurance Reporting and Collectability Underwriting and Pricing-Strategy/Quality Reserve Data/Reserve Adequacy Related Party/Holding Company Transactions Capital Management 25
Agenda Examination Update & Best Practices Regulator Expectations from Captive Owners and Captive Managers and Common Exam Findings The Captive Owner s Perspective and Keys to Successful Captive Program Hawaii Domicile Update and Trends Regulatory Landscape 26
Examination Expectations from Owners and Captive Managers Provide comprehensive responses to eliminate numerous correspondence Timely responses to inquiries or delivery of documents Review of documents for completeness and execution prior to delivery of documents Timely and thorough review of Draft Report 27
Common Examination Findings & Comments Missing or unexecuted documents in accordance with Hawaii Administrative Rules Changes to Captive Business Plan without regulatory approval Exceeding $250,000 FDIC limits Lack of investment custodial indemnification clause in investment-custodial agreements Lack of formalized agreement for services to and/or from affiliated entities 28
Agenda Examination Update & Best Practices Exam Expectations from Captive Owners and Captive Managers and Common Exam Findings The Captive Owner s Perspective and Keys to Successful Captive Program Hawaii Domicile Update and Trends Regulatory Landscape 29
Captive Owner s Perspective on Examinations The Hawaii DOI recently completed 5-year examinations on several of our owned pure captive entities: Initial response to request for data Relied on auditor for audit workpapers, and captive manager for rest of documentation request. Afforded a copy of the examination for review Discussed with the examination team one finding within the report (investment agreement language) Final Directors signed an affidavit indicating that they had received a copy of the examination and a copy of the order Considered a fairly straight forward process, supported by our ongoing efforts to ensure that all books and records are continually on island and current. 30
Captive Owner s Perspective on Regulatory Relationships Why Hawaii Open door policy to discuss new concepts and potential captive expansion Robust regulatory environment In person meetings (or simply meet and greets) during conferences (RIMS & HCIC), while in Hawaii for captive board annual meetings, and by phone during the year if material transactions or changes in the captive programs warrant. Value regulation as support for our business goals and objectives Regulation supports our own internal control requirements 31
Keys to Successful Captive Insurance Program Long-term commitment and support from owners and senior management Qualified and experienced administration, management resources and service providers Concerted focus and efforts to control losses Reasonable predictability of losses Appropriate reinsurance or excess insurance Stable and supportive political and regulatory environment 32
Agenda Examination Update & Best Practices Regulator Expectations from Captive Owners and Captive Managers and Common Exam Findings The Captive Owner s Perspective and Keys to Successful Captive Program Hawaii Domicile Update and Trends Regulatory Landscape 33
Recent Growth in U.S. Domiciles U.S. Captive Domiciles 1990 Colorado Tennessee Virginia Vermont Hawaii 34
U.S. Captive Domiciles - 2014 Alabama Kentucky Oregon Arizona Louisiana South Carolina Arkansas Maine South Dakota Colorado Michigan Tennessee Connecticut Missouri Texas Delaware Montana Utah District of Columbia Nevada Vermont Florida New Jersey Virginia Georgia New York West Virginia Hawaii North Carolina Guam Illinois Ohio Puerto Rico Kansas Oklahoma U.S. Virgin Islands 35
World s Largest Captive Domiciles Estimated Number of Active Licenses at 12.31.2013 Source: Business Insurance Magazine 3.17.2014 Bermuda 831 Hawaii (US) 184 Cayman Islands 759 District of Columbia (US) 172 Vermont (US) 588 Montana (US) 150 Guernsey 344 Nevada (US) 148 Utah (US) 342 British Virgin Islands 147 Delaware (US) 298 South Carolina (US) 145 Anguilla 295 Dublin/Ireland 142 Nevis 276 Kentucky (US) 128 Barbados 264 Isle of Man 125 Luxembourg 225 Arizona (US) 106 36
Hawaii Captive Statistics As of December 31, 2013 Number of Captives 184 Combined Total Assets Total Assets Invested in Hawaii $ 15.661 Billion $ 910 Million Combined Premiums Combined Capital & Surplus $ 2.857 Billion $3.566 Billion 37
Eastern U.S. 27 14% Hawaii Captive Owners by Location As of 9/30/14 Central U.S. 11 6% Asia/Pacific 11 6% Western U.S. Eastern U.S. Central U.S. Asia/Pacific Western U.S. 137 74% 38
Hawaii Captive Owners by Industry As of 9/30/14 26 14% 17 9% 22 12% 34 18% 54 29% 33 18% Construction / Real Estate Healthcare Telecom & Manufacturing Retail & Other Services Financial Services Transportation / Energy 39
Captive Trends Medium and smaller sized companies exploring captive solutions 831(b) Cell Captives Growth from Asia/Pacific Region 40
Captive Trends Enterprise Risk Management Cyber, Employee Benefits, Medical Stop-Loss, Errors & Omissions, TRIA, Earthquake, Flood 41
Regulatory Landscape Federal Government FIO IRS LRRA State of Hawaii HRS/HAR changes NAIC Model RRG Law update Multi-State Insurer Captive Insurance Regulatory Arbitrage 42
Captive Insurance Branch Insurance Division - DCCA Contact Information Sanford Saito, Deputy Commissioner and Captive Insurance Administrator Holly Osumi, Chief Captive Insurance Examiner Mailing Address: Insurance Division State of Hawaii Department of Commerce and Consumer Affairs P.O Box 3614 Honolulu, Hawaii, USA 96811 Telephone: (808)586-0981 Fax: (808)586-0987 http://www.captiveinsurance.hawaii.gov e-mail: captiveins@dcca.hawaii.gov 43
Mahalo 44