Society of Financial Examiners (SOFE) Career Development Seminar Monday, July 16, 2018 Sound Practices for Risk-Focused Financial Analysis Jane Koenigsman, FLMI Sr. Manager I – Life/Health Financial Analysis National Association of Insurance Commissioners (NAIC) © 2018 National Association of Insurance Commissioners

Learning Objectives At the end of this presentation, you will be able to: Identify sound practices in risk-focused analysis implementation Describe best practices for gaining efficiencies in risk-focused analysis process Identify good documentation practices for risk assessment Describe the importance of supervisory review of the risk-focused analysis Describe challenges of the risk-focused analysis process and methods to overcome them © 2018 National Association of Insurance Commissioners

Risk-Focused Surveillance The intent of risk-focused surveillance is to identify and assess risks in insurers’ operations and utilize those assessments to formulate ongoing surveillance plans Assists supervisors in concentrating their efforts on high risk insurers Also assists supervisors in focusing their efforts on the riskiest areas of an insurer’s operations Designed to provide continuous regulatory oversight Depth of review depends on the complexity, financial strengths and weaknesses, and known risks of the insurer and the priority designation. © 2018 National Association of Insurance Commissioners

Financial Analyst Responsibilities Identifying and assessing risks impacting the insurer Ongoing Monitoring risks and company results Provide input into the state insurance department’s priority of each insurer Updating the Insurer Profile Summary to reflect risks Providing the primary input to the ongoing prioritization and supervisory plan of the insurer Providing department management with timely knowledge of significant events © 2018 National Association of Insurance Commissioners

Risk-Focused Financial Analysis Risk Assessment worksheet is the primary documentation of analysis & underlying support for IPS Analysis organized into four main sections: Background Analysis Current Period Analysis Risk Assessment Update IPS Utilizes the Branded Risk Classification system to assess and communicate solvency risks Documentation should reflect the assessment of the financial condition of the insurer © 2018 National Association of Insurance Commissioners

Risk-Focused Financial Analysis Goal: Improves the Quality of Financial Analysis Encourages customization through use of Risk Assessment Repositories House data, benchmarks, and optional procedures Repositories to be used as reference tools in completing risk assessment Repositories are not all inclusive Worksheet and repositories are not a checklist Leads to efficiencies in updating Insurer Profile Summary and communicating risks across states and functions © 2018 National Association of Insurance Commissioners

Analysis Sound Practices Sound Practices result from regulator feedback during peer review Sound Practices highlight practices for each of the sections of the Risk-Assessment, IPS and GPS Located on StateNet on the Financial Analysis webpage © 2018 National Association of Insurance Commissioners

StateNet – Financial Analysis © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation I. Background & II. Current Period Challenge: Documentation that is efficient and effective Sound Practices: Concise comments & notes on key issues to scope analysis work Links to other source documents Concise comments on unresolved exam issues that require further analysis “Analysts Notes”, if used, should be concise and should not be used instead of Section III to document risks © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation I. Background & II. Current Period Challenge: Documentation that is efficient and effective Avoid: Carrying forward outdated/minimal info no longer relevant Repeating resolved issues Copying full narratives from PY IPS or RA © 2018 National Association of Insurance Commissioners

Use of Analyst Notes - Feedback How are you using the “analyst notes”? Including notes in the Worksheet? Making notes elsewhere that scope your analysis? Immediately updating Section III – Risk Assessment? © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation II. Signoffs of the Review of Source Document Challenge: Efficient documentation specific to this standard Sound Practices: Options: On the source document Within TeamMate procedure step On a simplified checklist of documents Within Section II. Of the RA worksheet © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation II. Signoffs of the Review of Source Document Challenge: Efficient documentation specific to this standard Avoid: Overall signoff of the RA worksheet would not represent signoff of source documents © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation III. Risk Assessment Challenge: Documentation that is efficient and effective Sound Practices : Focus on “risks” Include links or reference to other work papers to avoid duplication For risks that do not vary materially YoY, refer to or carry forward a summary of prior work and note “no material change…” © 2018 National Association of Insurance Commissioners

Financial Analysis – Depth of Analysis III. Risk Assessment Challenge: Analysis and documentation that is commensurate to the level of assessment – minimal, moderate or significant Sound Practices: Provide both quantitative and qualitative analysis within the risk assessment. Moderate and significant risks should reflect more analysis/explanation Section III should document or reference all of the work performed to analyze significant risks © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation III. Risk Assessment Challenge: Documentation that is efficient and effective Avoid: Over documentation of minimal/no risks However, mitigating factors may warrant explanation if they are the justification for reducing a risk assessment © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation No/Minimal Risks Challenge: Documentation of risks that is meaningful for the risk profiles of the company Sound Practices: Include risks that have improved from a moderate assessment but not yet diminished enough to exclude Challenge the relevance – Let minor issues go Some no/minimal risks may not be material enough for IPS To the extent this reduces the overall category assessment on the IPS recommend a comment such as “Minimal risks that did not warrant inclusion in the IPS and/or other mitigating factors were considered when lowering the overall assessment.” © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation No/Minimal Risks Challenge: Documentation of risks that is meaningful for the risk profiles of the company Avoid: Generic risks (e.g. “assets”, “reserves”) Standardized lists of risks used on every company Carry-over risks from prior years that have not been assessed or determined to still be warranted/relevant © 2018 National Association of Insurance Commissioners

No/Minimal Risks Would You Include in the RA? Invested Assets are 100% NAIC 1 Bonds and Cash Foreclosed Mortgages in PY were sold, (100% decline), now $0 Company Paid Ordinary Dividends, consistent with PYs Management Changes Emerging Industry Risks: Drones, Self-driving Cars © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation Large YoY Variances Challenge: Documentation that is efficient and effective for large variances that pose no financial risk Sound Practices: Document large variances in the current period analysis for which an assessment determined no financial risk exists No documentation needed in Section III or the IPS © 2018 National Association of Insurance Commissioners

Financial Analysis - Documentation Large YoY Variances Challenge: Documentation that is efficient and effective for large variances that pose no financial risk Avoid: Discussion of small or immaterial variances Duplication of documentation with lengthy narrative discussions that are repeated in Section III. © 2018 National Association of Insurance Commissioners

Financial Analysis – Documentation Follow-Ups, Monitoring, Actions Challenge: Monitoring actions that are efficient and necessary to the solvency monitoring of the insurer based on its risk profile Sound Practices: Distinguish between actions included on the IPS vs. not: Materiality Compliance Issues that do not pose a financial solvency risk Issues that do not warrant notification to IPS recipients Include in risk assessment a summary, suitable to the Department, of actions not carried forward to the IPS © 2018 National Association of Insurance Commissioners

Financial Analysis – Documentation Follow-Ups, Monitoring, Actions Challenge: Documentation that is efficient and effective Avoid: Carrying forward YoY all follow-ups/ monitoring / actions, if no longer warranted Non-specific actions such as simply “monitor” © 2018 National Association of Insurance Commissioners

Financial Analysis – Documentation Overlapping Risks Challenge: For risks that fall into overlapping categories, documentation that is relevant to the risk category and that is not duplicative Sound Practices: Focus analysis work on category that is “best fit” E.g. Market risk related to the valuation of the asset vs. liquidity risk related to the ease/speed to sell the asset to meet liquidity needs Differentiate the documentation specific to that category Cross reference where appropriate Include general comments or financial data in only one category © 2018 National Association of Insurance Commissioners

Financial Analysis – Documentation Overlapping Risks Challenge: For risks that fall into overlapping categories, documentation that is relevant to the risk category and that is not duplicative Avoid: Duplicating same comments, or financial amounts in multiple categories © 2018 National Association of Insurance Commissioners

Risk-Focused Analysis Repositories Data, benchmarks and procedures by branded risk category Another tool in the analysis toolbox. Analyst can select from repositories to build and customize risk assessment Repositories are not checklists No expectation that all repository results or procedures will be used or responded to by the analyst Repositories include suggestions for inquiries to the company, possible risk sub-components © 2018 National Association of Insurance Commissioners

Financial Analysis - Repositories Use of Risk Repositories & iSite+ Tools Challenge: Effective use of repositories and tools to identify and analyze risks Sound Practices: Utilize the repository summary reports to identify categories to consider in the scope of the analysis Utilize the data/benchmarks/procedures in the repositories to build the analysis Since the repositories are not an all-inclusive list, consider other unique risks Utilize other data and tools on iSite+ © 2018 National Association of Insurance Commissioners

Financial Analysis - Repositories Use of Risk Repositories & iSite+ Tools Challenge: Effective use of repositories and tools to identify and analyze risks Avoid: Analyzing every “yes” quantitative response in repositories Including repositories not relevant to the analysis Over documentation of explanations in repository rather than Section III. © 2018 National Association of Insurance Commissioners

Use of Risk Repositories – Feedback How are you deciding which repository procedures to complete? Utilizing the Handbook Company Summary Report? Utilizing your knowledge of the Company & Prior Analysis? Are you customizing? © 2018 National Association of Insurance Commissioners

Financial Analysis – RA vs. IPS Challenge: Documentation that reflects the differing purposes of RA & IPS Purpose & Sound Practices: Risk Assessment (RA) Insurer Profile Summary (IPS) Detailed documentation of the risk-focused analysis work performed, commensurate to the nature of the risk Communication tool to other regulators Summary of the background & risks, conclusion on financial condition and supervisory plan Supports all risks included in the IPS Sufficient to explain to other regulators the nature and materiality of the risk Contains more detail than the IPS © 2018 National Association of Insurance Commissioners

Financial Analysis – RA vs. IPS Challenge: Documentation that reflects the differing purposes of the RA and IPS Avoid: Copy/paste from RA to IPS RA & IPS that are identical Conflicting information Risks in the IPS not covered or supported in the RA Risks in the IPS should typically not have more detail than the RA © 2018 National Association of Insurance Commissioners

Financial Analysis – RA vs. IPS Prioritization Rationale Challenge: Documentation that provides sufficient detail for the end user Sound Practice: RA: include a detailed explanation of any prioritization change, suitable to the Department Explain how solvency condition changed IPS: include only a high level summary of the change appropriate to explain to other regulators Avoid: Excessive documentation (Copy/Paste) in the IPS © 2018 National Association of Insurance Commissioners

Insurer Profile Summary (IPS) “Living” Document Primary Communication Tool to Other Regulators Summary of Analysis High Level Overview Key Sections Include Business Summary Regulatory Actions Financial Snapshot (Optional) Branded Risk Assessments Heat Map, Individual Risk Assessments, Prospective Exposure Impact of Holding Company on Insurer Overall Conclusion and Priority Rating Supervisory Plan © 2018 National Association of Insurance Commissioners

IPS - Feedback With the use of the new risk-focused approach, have you seen improvement in the IPS (i.e. quality, efficiency in updating)? © 2018 National Association of Insurance Commissioners

Risk-Focused Analysis Send Your Feedback What best practices has your state used? TeamMate TeamStore Use of Repositories Work Flow or Other? What edits are needed in the Handbook or to the analysis process? jkoenigsman@naic.org adaleo@naic.org bjenson@naic.org bwilson@naic.org 35 © 2018 National Association of Insurance Commissioners

Financial Analysis Handbook Future Training Opportunities Online Intermediate Financial Analysis Fall 2018 Updated for Risk-focused Approach Risk-Focused Financial Analysis Webinar December 4, 2018 Updated Sound Practices & Handbook Guidance based on Regulator and Peer Review Program Feedback http://www.naic.org/education_home.htm 36 © 2018 National Association of Insurance Commissioners

Questions © 2018 National Association of Insurance Commissioners