Transcript Slide 1

Ted Strickland, Governor
Mary Jo Hudson, Director
NAIC Potpourri
Mary Miller FCAS, MAAA
Assistant Director, Product Regulation & Actuarial Services
June 24, 2009
Kansas City Actuarial Club Seminar
Agenda
• NAIC Risk-Focused Examinations
• New Health Actuarial Opinion Instructions
• Actuarial Opinion Summary and Other
Initiatives
Risk Assessment and the NAIC
• Financial Analysts/Examiners have used
Risk Assessment for many years - SRA’s
• Focus was on the past – Balance Sheet
• Used to determine whether prior period
financials were fairly stated
Change Has Occurred
•
•
•
•
•
Risk – Focused Surveillance Process
Evolution or Revolution?
CARRMEL Rating Determines Priority
Coordinated Examinations
Emphasis on
– Corporate Governance
– Quality of the Board
– Risk Management
CARRMEL rating
• Prioritization system
• Improves decision-making and
communications
• Validated/Revised as part of the
examination effort
• Facilitates analysis to identify strengths and
weaknesses
• Scores management
• As time goes on, it becomes a better tool
CARRMEL
•
•
•
•
•
•
•
Capital Adequacy
Asset Quality
Reserves
Reinsurance
Management
Earnings
Liquidity
Corporate Governance
• Board of Directors
• Senior Management
• Control Functions
– Audit
– Compliance
– Risk management
Top-Down, Risk-Focused
Surveillance Process
1. Assess external and internal audit functions
- Maximize use where appropriate
2. Interview senior management
- Assessing corporate governance and ERM
3. Focus on high risk areas (examples include):
- Reserves
- Reinsurance
- Inter-company transactions
Objectives
•
•
•
•
Identification of risks
Assessment of governance structure
Allocation of Department resources
Assessment of risk management
framework & practices
• Meaningful communication of findings
with Board and/or Senior Management
• Update CARRMEL rating
Risk Management Principles
• Active Board and Senior Management
oversight
• Adequate policies, limits and procedures
• Adequate risk management, monitoring
and management information systems
• Comprehensive internal controls
• Compliance to law, regulations, and
internal policies
Assessment of Risk Management
Framework & Practices
• Tone at the top
– Audit/compliance relationships
• Adherence to Board policies and
procedures
• Internal control environment
Inherent Risks
•
•
•
•
•
•
•
•
•
Credit
Market
Pricing/Underwriting
Reserving
Liquidity
Operational
Legal
Strategic
Reputation
•
•
•
•
•
Application of these Risks to Key
Business Activities
Pricing/Underwriting
Reinsurance
Investments
Claims/Reserves
Support
– Accounting
– Actuarial
– IT
– Legal
– Human Resources
Risk Assessment Steps
Identification of Inherent Risk
Plus
Assessment of Risk Management Processes
Equates to
Residual Risk Determination
Residual Risk Grid
Inherent
Risk
Strong
Risk
Controls
Moderate
to High
Acceptable
Risk
Controls
Moderate to
High
Weak Risk
Controls
Moderate Moderate
Moderate to
High
Moderate to
High
Low
Low to
Moderate
High
Low
Low
High
7 Phases
•
•
•
•
•
•
•
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
Phase 6
Phase 7
Understand Company/Key Activities
Inherent Risk
Risk Mitigation Strategies/Controls
Residual Risk
Exam Procedures
Prioritization/Supervisory Plan
Exam Report/Management LetterRisky Business
16
Phase 1 – Understand Company/
Key Activities
1.
•
Understanding the Company
Steps to Phase 1, Part 1
1.
2.
3.
4.
5.
2.
3.
4.
5.
Gather Necessary Planning Information
Review the Gathered Information
Perform Analytical and Operational Reviews
Consider Information Technology Risk
Update the Insurer Profile Summary
Understanding Corporate Governance Structure
Assessing Adequacy of Audit Function
Identifying Key Functional Activities
Consider Business and Prospective Risks
17
Examination Interviews
Why
• Gather undocumented
information
• Clarify information
• Interpret information
• Identify key activities
• Identify strengths
• Identify risks
• Identify risk mitigating strategies
18
Examination Interviews
Who
•
•
•
•
•
•
•
J. Doe
President/CEO
CEO
CFO
Daryl Mony
Sam Sly
Babs Jones
CFO
VP Underwriting
VP Investments
COO
Tom Tyler
Fred Silver
Accounting Manager
IT Manager
CIO
Controller
Patty Melt
Cathy Franklin
Premiums
Payables
Chief Actuary
Board’s Audit Committee chairperson
Homer Smith
VP Claims
19
Example:Phase 1, Part 1, Step 3
Analytical and Operational Reviews
• Management and reserving processes
–
–
–
–
–
Who determines reserves booked
What analyses performed
Unique types of losses
Surplus and/or RBC level
Basis for variable compensation
20
Phase 1, Part 2
Corporate Governance & Management
• Management controls and reserving
– Management influence
– Independence of appointed actuary and their
assumptions
– Changes to appointed actuary
– Risk transfer due to ceded reinsurance
– Reserving actuary meets with Board/Audit
Committee
21
Phase 1, Part 2
Corporate Governance & Management
• ITEMS FOR REVIEW
– Actuary participates in pricing meetings
– Exposure growth is monitored regularly
– Well-diversified book of business-geographical
– Remedy bad situations promptly or drag on
– ERM implemented
– Carried reserves determined by actuary
– Segregation of actuarial duties
22
Phase 1, Part 3
Assess Audit Function
INDEPENDENCE:
• “In all matters relating to audit work, the
audit organization and the individual
auditor … should be free both in fact and
appearance from personal, external and
organizational impairments to
independence.”
GAO
23
Phase 1, Parts 4-5
Key Activities/Prospective Risk
• Key Activities will involve those lines of
business with the largest reserves or
premiums collected.
24
Phase 2
Inherent Risk
• Inherent Risks:
– Incorrect data
– Misapplying methodologies
– Invalid assumptions
– Incorrect calculations
– Improper reporting of reserves
25
• Liquidity
Phase 2
Inherent Risk
– Assess catastrophe management process to
identify likelihood of occurrence and
magnitude of impact relative to company’s
surplus and claims paying ability:
• as a result of an acceleration in claim payout
patterns
• in the event of an insolvency of a significant
reinsurer
• an increase in the duration of assets
26
Phase 2
Inherent Risk
• Pricing/Underwriting – P/C
– Consider inherent risks related to:
• An insurance product priced with little margin can
lead to significant losses.
• Are separate analyses conducted for certain unique
types of losses (e.g., construction defects, class
actions, catastrophes, environmental)?
27
Phase 3
Risk Mitigation Strategies/Controls
• Controls related to specific identified risk
• Look at controls over:
– Reserving process
– Staffing issues
©2008 National
Association of
Insurance
28
Phase 3
Risk Mitigation Strategies/Controls
Best Practice Controls
• Pricing/Underwriting
– Appropriate rate-setting methodologies
– Quality assurance of underwriting guidelines
– Experience level of underwriting staff (i.e.,
more complex issues handled by senior staff
members)
©2008 National
Association of
Insurance
29
Phase 3
Risk Mitigation Strategies/Controls
Best Practice Controls
• Liquidity comprised of:
–
–
–
–
Risk management
Investments
Premiums
Claims
• Proper controls in each area ensure
liquidity
30
Phase 4
Residual Risk
• Risk remaining after consideration of
controls
Inherent Risk
– Internal Controls
Calculated Residual Risk
+/- Examiner’s Judgment
Overall Residual Risk Assessment
31
Phase 5
Exam Procedures
• Procedures based on residual risk assessment
– P/C
•
•
•
•
Larger, more volatile lines
New lines of business/segments
New geographic areas
Persistent adverse development
32
Phase 6
Prioritization & Supervisory Plan
Phase 7
Exam Report & Management Letter
33
Health Actuarial Opinion Changes
• Define an appointed actuary
• Require appointed actuary report findings
to the Board or Audit Committee
• Require the reliance statement
Why were changes needed?
• Appointment and memorandum
requirements were not specified
• Desire for consistency across blanks
• Make instructions more relevant to health
blank – not a modified Life opinion
• Define process for changing actuaries
• Define what Qualified, Adverse and
Inconclusive opinions are
Consistency
• Joint CASTF/LHATF subgroup charged with
developing the process for the
appointment and change of the actuary
• Definitions
• Reliance statements
Appointed Actuary
• If you were appointed according to the
new instructions in the past, you don’t
need to be re-appointed
• If you were not appointed according to the
new instructions, you need to be
appointed in order to sign the opinion for
2009
Prescribed Wording
• Prescribed wording is preferable if it fits
the situation
• Not using prescribed wording does NOT
imply that something is wrong
• Makes it easier for non-actuaries to review
the opinions
Table of Key Indicators
This Opinion is:
 Unqualified
 Qualified
 Adverse
 Inconclusive
IDENTIFICATION SECTION
 Prescribed Wording Only
 Prescribed Wording with Additional Wording
 Revised Wording
SCOPE SECTION
 Prescribed Wording Only
 Prescribed Wording with Additional Wording
 Revised Wording
RELIANCE SECTION
 Prescribed Wording Only
 Prescribed Wording with Additional Wording
 Revised Wording
OPINION SECTION
 Prescribed Wording Only
 Prescribed Wording with Additional Wording
 Revised Wording
RELEVANT COMMENTS
 Revised Wording
 The Actuarial Memorandum includes “Deviation from Standard” wording regarding conformity with
an Actuarial Standard of Practice
Other New Stuff
• Relevant Comments Section
• Actuarial Memorandum
– Narrative and technical components
– Tie to financial statements
Definitions – Adverse Opinion
• An actuarial opinion in which the
appointed actuary determines that the
reserves and liabilities are not good and
sufficient.
Definitions – Qualified Opinion
• When in the actuary’s opinion the reserves for a certain
item or items are in question because they cannot be
reasonably estimated or the actuary is unable to render
an opinion on those items, the actuary should issue a
qualified opinion.
• A qualified opinion should state whether the reserves
would be good and sufficient without the items in
question.
• There’s also a provision that the actuary doesn’t have to
issue a qualified opinion if the actuary determines the
item in question is immaterial.
Definitions – Inconclusive Opinion
• If for some reason the actuary can’t reach
a conclusion due to deficiencies or
limitations in the data, analysis,
assumptions or related information, then
the actuary should issue an inconclusive
opinion.
• The opinion should then include the
reasons why a conclusion could not be
reached.
FYI
• Ohio in process of changing Life AOMR
• Health blank users must use Health
Opinion instructions
ACTUARIAL OPINION SUMMARY
•
•
•
•
Confidential
Filed only with domiciliary state or as requested
Due March 15
Minimum Requirements:
– Point estimate and/or range of reasonable estimates for loss and loss
adjustment expenses, net and gross of reinsurance
– Company’s recorded loss and loss adjustment expense reserves, net and gross
of reinsurance
– Difference between carried reserves and point estimate/range of reasonable
estimates, net and gross of reinsurance
– Explicit discussion of persistent adverse reserve development (1 year
development of 5% of surplus in 3 of the last 5 years)
• Uses:
– Tool for deciding when to request Report
– Use in conjunction with Opinion and Report when planning exam
45
AOS Statistics
 Combined Net
Data from 825
Companies
domiciled in
seven states
 Reflects 2007
AOS data
 Includes some
companies
that carry net
zero
30%
Point
Range
Both
52%
18%
AOS Statistics –
Carried to Actuary Estimate
• Combined Net
data from 732
companies in
7 states
• Excludes
companies
that carry
zero-net
reserves
50%
40%
30%
20%
10%
to
5%
M
or
e
th
an
10
%
ab
ov
Le
10
e
ss
%
th
ab
an
o
5% ve
ab
ov
Le
e
ss
th
an Eq
5% ual
5%
be
to
M
lo
or
10
w
e
%
th
an
be
lo
10
% w
be
lo
w
0%
Implications
• P&C Companies coming off a hard market
with generally strong reserves
• Tracking AOS data going forward will add
an additional tool for monitoring the
industry
Other Regulatory Initiatives
• Regulator Guidance in COPLFR Practice
Note
• Frequent interaction and collaboration
with Accounting Groups at NAIC
• RBC trend test
• LOB survey
• Continued Discussing Premium Deficiency
Reserves at June NAIC Meeting