Examinat ion Best Pract ices and Hawaii Domicile Updat e - PowerPoint PPT Presentation

Examinat ion Best Pract ices and Hawaii Domicile Updat e Honolulu, Hawaii Oct ober 22, 2014 1

Welcome and Introductions Aloha 2

The Panel  Robert Panah, CP A, CFE, CIS A, Managing Director, Noble Consult ing S ervices, Inc.  Invest ment , Informat ion Technology and Troubled Company S pecialist  KPMG 10 Y ears, Officer in S EC Report ing Group wit h Conseco Insurance 7 Y ears, Hedge Fund CFO 3 Y ears, involved in regulat ory consult ing and examinat ion services since 1998 3

The Panel-continued  Holly Osumi, Chief Captive Insurance Examiner, Capt ive Insurance Branch  Cert ified Financial Examiner and Cert ified Public Account ant  Capt ive Insurance Examiner wit h t he Insurance Division since 2004 4

The Panel-continued  Tommy Tso, Director of Risk Management, J.F . S hea Company  S ince 2003 - Responsible for creat ion, cont rol and management of risk management funct ion for commercial and resident ial const ruct ion company  Account Execut ive wit h Willis Wrap-up Manager wit h AIG 5

The Panel-continued  S anford S aito, Deputy Commissioner and Captive Insurance Administrator, Capt ive Insurance Branch  Cert ified Financial Examiner and Capt ive Insurance Examiner wit h t he Insurance Division since 2004  Public Ut ilit ies Audit or wit h t he 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 S uccessful Captive Program  Hawaii Domicile Update and Trends  Regulatory Landscape 7

Does t his look familiar? 8

Recognit ion of t he Need for Bet t er ERM Hartford Financial 9

Aft ermat h of t he Financial Crisis: S elect ed Lessons Learned • Corporate governance • Identification of emerging risks • Measurement/ quantification of risks • Economic Capital models • S tress tests • Reporting and monitoring activities • Capital Efficient Products • Others… 10

Aftermath of the Financial Crisis – S elected Buzz Words • S yst emic Risk • Equivalence • Common S upervision Framework • S upervisory Collaborat ion • S olvency Modernizat ion Init iat ives • “ 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 Act ivit ies • Risk Profile of t he Group • Group-wide Corporat e Governance • Non-insurance S ubsidiaries – Including Captives and S PV’s • Affiliat ed Act ivit ies 13

Working Through the Acronyms a partial list… • SMI NAIC • ORSA • Solvency II IAIS • ComFrame • SIFI FSOC • FIO 14

S olvency Modernizat ion Init iat ives “ Get t ing t o Know t he DNA of a Company” Steve Johnson-Deputy Insurance Commissioner, P A Principles Based Retrospective to Prospective Company View to Group View Financial S tatement to Governance and Risk Management 15

Importance of Corporate Governance mall Capt ive or RRG Even in a S Small Company Best Practices • • Independent Board Largely management team • • Financial expert Typically rely on the CFO • • Other experts (investment) Limited experts on Board • • Internal Audit None or limited • • Comply with S OX or MAR No documented controls • • Enterprise Risk Informal ERM Management • Limited / no succession • S uccession Plan plan • • Formal strategic plan Limited or formal plan 16

Challenges wit h Capt ives and RRGs? • No “ Documented” Internal Controls-(no S OX 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

Negat ive Thinking The Power of NEGATIVE Thinking by Bobby Knight and how it impacts risk and solvency considerations…..

ORS A in a Nut shell*… Answer t he 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 subj ect us to losses that would exceed our tolerance levels? – What risk scenarios would cause us to fail or stop operating as a going concern? * S teve Johnson, Deputy Insurance Commissioner, PA 19

S elect ed S ources of Trouble • Management and Cont rols – Inadequate Experience – Poor Oversight – Weak Internal Controls • Underwrit ing and Market ing – Inappropriate Pricing – Inappropriate Underwriting – Expansion into new lines of business or geographic areas • Claims and Reserving – Poor Claims Practices – Inadequate Reserving 20

S ources of Trouble for Capt ives? • Reinsurance challenges – Adequacy of reinsurance, account ing • Reserve adequacy • Operat ional… DR/ BCP , S ecurit y • S t rat egic plan – Reasonable? S t ressed? Well managed? • Underst anding risks undert aken • Let t er of credit – Irrevocable? S ecured? 21

S ources of Trouble for Capt ives? • MGA/ TP A functions – Financially stable – Replaceable? – S ervice levels-claims processing, other – Compliance – Arms length transactions • Weak captive managers 22

S urveillance and Priorit izat ion 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  S pend more time on higher risk areas  Must address the 10 Critical Risk Categories  Emphasize other than financial reporting risks  Emphasize prospective risks 24

Crit ical Risk Cat egories – New Bright Line… discussion topics • Valuation/ Impairment of Complex or S ubj ectively Valued Invested Assets • Liquidity Considerations • Appropriateness of Investment Portfolio and S trategy • Appropriateness/Adequacy of Reinsurance Program • Reinsurance Reporting and Collectability • Underwriting and Pricing-S trategy/ 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 S uccessful 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 S uccessful Captive Program  Hawaii Domicile Update and Trends  Regulatory Landscape 29

Captive Owner’s Perspective on Examinations The Hawaii DOI recent ly complet ed 5-year examinat ions on several of our owned pure capt ive ent it ies: • Init ial response t o request for dat a • Relied on audit or for audit workpapers, and capt ive manager for rest of document at ion request . • Afforded a copy of t he examinat ion for review • Discussed wit h t he examinat ion t eam one finding wit hin t he report (invest ment agreement language) • Final • Direct ors signed an affidavit indicat ing t hat t hey had received a copy of t he examinat ion and a copy of t he order Considered a fairly st raight forward process, support ed by our on- going effort s t o ensure t hat all books and records are cont inually 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 obj ectives • Regulation supports our own internal control requirements 31