Insurance Summit 2016 REGULATORY UPDATE

Panel Participants Ray Farmer (Director, South Carolina Department of Insurance) Tim Morris (Hanover Stone Solutions) Marty Wingate (RSM US) Bill Ferguson – Facilitator (Thomas Howell Ferguson P.A.)

“Create greater transparency in the arrangements for setting regulatory capital levels, while at the same time promoting a strong culture of risk management.” U.K. Financial Services Authority

Regulatory Update  Annual Financial Reporting Model Regulation (Model #205)  Corporate Governance Annual Disclosure (Model #305)  Insurance Holding Company Act (Model #440)  Risk Management and Own Risk and Solvency Assessment (Model #505)  Cybersecurity

Annual Financial Reporting Model Regulation  Purpose: “…to improve the [insert state] Insurance Department’s surveillance of the financial condition of insurers by requiring (1) an annual audit of financial statements reporting the financial position and the results of operations of insurers by independent certified public accountants, (2) Communication of Internal Control Related Matters Noted in an Audit, and (3) Management’s Report of Internal Control over Financial Reporting.”

Annual Financial Reporting Model Regulation

 Key Requirements  Designation of Qualified Independent Certified Public Accountant  Auditor’s Report  Required Communications with Regulator  Availability of Audit workpapers  Requirements of Audit Committee  Internal Audit Function Requirements  Management’s Report of Internal Control over Financial Reporting.

Corporate Governance Annual Disclosure Model Act (#305)  Since being adopted in 2014, six states (most recently including Florida) have adopted the Model Act.  Adoption of the Model Act as an accreditation standard has been recommended to the Financial Regulation Standards and Accreditation (F) Committee.

Corporate Governance

“An insurer, or insurer member of an insurance group, of which the office is the lead state regulator, as determined by the procedures in the most recent NAIC Financial Analysis Handbook, shall submit a corporate governance annual disclosure to the office by June 1 of each calendar year. The initial corporate governance annual disclosure must be submitted by December 31, 2018.”

“This section does not prescribe or impose corporate governance standards and internal procedures beyond those required under applicable state corporate law…”

Corporate Governance Annual Disclosure Model Act (#305)  Flexibility Regarding Reporting Level  The ultimate controlling parent level;  An intermediate holding company level;  The individual legal entity level.

Corporate Governance Annual Disclosure Model Act (#305)  Components of the Corporate Governance Annual Disclosure Filing  C.G. framework and structure of insurer or group;  Policies and practices of senior governance;  Significant committees;  Policies and practices for directing management;  Processes for considering critical risk areas.

Corporate Governance Best Practices  Corporate Governance One Size Does Not Fit All  Nature of the business;  Company size and stage of development;  Availability of resources;  Capital  Personnel  Other  Shareholder expectations;  Regulatory requirements.

Corporate Governance Best Practices  Board of Directors  Knowledgeable, qualified, competent, engaged;  Complementary contributions;  Independence;  Challenges management.

Corporate Governance Best Practices  Defined Roles  Written duties and expectations for the Board and Board Committees;  Delegation to sub-committees – audit, nominating, compensation, corporate governance;  Written position descriptions for Board and Committee Chairs, as well as CEO and Executive Management.

Corporate Governance Best Practices  Ethics  Conflict of interest policy;  Code of Conduct;  Regulatory compliance;  Internal audit.

Corporate Governance Best Practices  Performance Evaluation and Compensation  Assessment of Directors’ performance;  Measurable performance targets for executive officers with regular evaluation;  Link compensation and performance;  Independent compensation committee.

Corporate Governance Best Practices  Risk Management  Financial;  Operational;  Reputational;  Competitive;  Legal and regulatory.