Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Insurance Regulatory Update Pennsylvania Association of Mutual Insurance Companies Financial Seminar

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Today’s Topics FIO on the Global Reinsurance Market Corporate Governance Annual Disclosure NAIC Activity Life Industry Issues P & C Industry Issues International Industry Issues General Industry Issues Solvency Update The Many Things That Keep Me Up At Night

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner The FIO Report on the Global Reinsurance Market

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner So what did we get A great primer on reinsurance to give to your new employees “This report describes the important role of the global reinsurance market in supporting the insurance industry in the United States.” (and who in this room did not know that!!) “Global reinsurance providers play a vital role supporting insurance in the United States, …”

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner “…, the global reinsurance market provides an essential backstop and various risk and capital management mechanisms for insurance in the United States.” What is the worth of this report

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner What is Happening in the Regulatory World There have been seismic shifts in regulatory approach by the NAIC and Insurance Departments RetrospectiveProspective CompanyEnterprise Financial StatementGovernance RulesPrinciples Regulators are expecting more Board involvement in this new regulatory approach Is your management ready?

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner What are we trying to do differently: Group vs. Legal Entity Supervision Corporate Governance Risk Management  Enterprise Level  Legal Entity Level  Inter-Connectivity Risks  Control Environment Capital Management Strategic Management (Prospective Risk) Verification of all of this-the Risk Focus Exam Process

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Have you ever read the NAIC’s White Paper on High Level Corporate Governance Principles NAIC’s Comparative Analysis of Existing U.S. Corporate Governance Requirements NAIC’s Model Corporate Governance Manual Disclosure Model Act and Model Regulation Exhibits L & M on the NAIC’s Financial Examiners Handbook Exhibit L – Branded Risk Classification Exhibit M- Understanding the Corporate Governance Structure

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Form F – Enterprise Risk Report NAIC’s Own Risk and Solvency Assessment Guidance Manual NAIC’s Own Risk and Solvency Assessment Feedback Pilot Projects Observations

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance-What Boards already need to file with Regulators Annual Holding Company Registration Form B The insurer shall furnish a statement that the insurer’s board of directors oversees corporate governance and internal controls and that the insurer’s officers or senior management have approved, implemented and will continue to maintain and monitor corporate governance and internal control procedures.

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What it is – what it isn’t Why – its purpose Who it applies to Whose governance is reported on (when insurer is part of a group of companies) Where the filing is made (when insurer is part of an insurer group) What must be filed What regulators will/may do with the filing WHAT YOU SHOULD BE DOING NOW

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What It Is Model Law & Regulation adopted by the NAIC at its Fall 2014 Meeting Assuming adoption by state legislatures, the first CGAD filing (a confidential filing) would be due by June 1, 2016 Cited as one of the top insurance regulatory trends for 2015 Likelihood of adoption in PA – VERY HIGH: A proposed NAIC accreditation standard “It is the Department’s goal to adopt the NAIC Model Law as quickly as possible after the NAIC’s adoption.” Deputy Commissioner Steve Johnson’s 12/10/2013 “State of the Union” Letter (addressed again in 2014)

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What It Is A filing that includes detailed narrative and documentation to respond to “inquiries” under 4 key areas: Governance framework & structure Policies & practices of the Board & Board committees Policies & practices for directing senior management Oversight of critical risk areas No specified form/format: CGAD is not a “check the box” filing nor is it responding to a “questionnaire/survey,” and there is no specific form/format like exists for, e.g., Forms B & D Instead, you have “discretion regarding the appropriate format [and are] permitted to customize the CGAD to provide the most relevant information necessary” to permit the regulator to gain an understanding of your governance structure, policies & practices

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What It Isn’t CGAD Act specifically indicates that it is not intended to be construed to prescribe or impose corporate governance standards and internal procedures beyond that which is already required under state law With a Caveat: CGAD Act also states that it shall not be construed to limit the regulator’s authority under the state’s examination law

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure Why? “Lessons Learned” Financial Crisis Inquiry Commission: “An essential cause of the financial and economic crisis was appallingly bad risk management by the leaders of some of the largest financial institutions in the United States and Europe. Each failed firm that the Commission examined failed in part because its leaders poorly managed risk.” AIG: Testimony of Sarah Dahlgren (NY Fed. Reserve Bank official) in Starr International Co., Inc. v. U.S.) as reported by Law 360: “This need [to monitor how AIG used its loan] was reinforced in the team’s initial meetings with the company, which left her with the impression that the company’s management was “shell-shocked” and indicated to Fed staffers that the decentralized nature of AIG’s control over its various units meant it was unable to answer even some basic questions about its operations... “

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure Its Purpose Stated Purpose: To provide to insurance regulators a summary of the corporate governance structure, policies and practices to permit the regulator to gain and maintain an understanding of the governance framework of an insurer / insurer group Thus, the CGAD must go beyond the governance documents to provide information on actual practices and, in some cases, rationale for and suitability of those practices

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure Who It Applies To ALL INSURERS / INSURER GROUPS There are no exemptions to this requirement (applies to all insurers / insurer groups -- regardless of size or organizational type / structure -- even small insurers, fraternals & standalone mutuals that may be exempt from other requirements like the ORSA & Insurance Holding Companies Act provisions)

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner CGAD for Groups of Companies (Whether an Insurer Group or Not) Whose Governance Is Reported On UCP, intermediate holding company, individual insurer -- you make the choice based upon the structure of your system of governance, but encouraged to make disclosures at: Level at which risk appetite is determined; or Level at which earnings, capital, liquidity, operations and reputation of insurer are overseen & at which supervision of these factors are coordinated and exercised; or Level at which legal liability for failure of corporate governance duties would be placed Must disclose choice in the CGAD

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner CGAD for Insurer Groups Where the Filing is Made With the lead state regulator (as determined by the NAIC’s Financial Analysis Handbook), BUT... As has occurred with other requirements, must verify the relevant state’s provisions (e.g. at least one state (New York) did not adopt the lead state approach for the Form F Enterprise Risk Report)

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Governance Framework & Structure Rationale for Board size & structure Duties of the Board & each committee – and how each is governed (e.g. bylaws, charters, informal mandates, etc.) How the Board’s leadership is structured (including a discussion of the roles of the CEO & Board chair)

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Policies & Practices of Most Senior Governing Entity & Committees How the qualifications, expertise & experience of each Board member meets the needs of the insurer / insurer group Number of meetings of the Board & its committees and information on director attendance How the insurer/insurer group identifies, nominates & elects members to the Board & its committees (including a discussion on any term limits & how the election & re-election process works) Processes for Board to evaluate the performance of the Board & its committees; measures taken to improve performance – including training programs

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Policies & Practices for Directing Senior Management Processes/practices (suitability standards) for determining whether officers & key persons in control functions have appropriate background, experience & integrity to fulfill roles Plans for CEO and senior management succession Processes for performance evaluation, compensation and corrective action (must include sufficient information for an understanding how the organization ensures that compensation programs do not encourage and/or reward excessive risk taking)

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Oversight of Critical Risk Areas Processes by which the Board, its committees and senior management ensure an appropriate amount of oversight of critical risk areas (i.e. risk management, actuarial, investments, reinsurance, business strategy/finance, compliance, financial reporting/internal auditing, and market conduct), including: How oversight and responsibilities are delegated between the Board, its committees and management How the Board is kept informed of strategic plans, associated risks, and monitoring and management of risks Frequency at which information on each critical risk areas is reported to and reviewed by management and the Board

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What Regulators Will/May Do with the Filing Will review to gain an understanding of the corporate governance framework May request additional information

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What Regulators May Do with the Filing Remember: the CGAD Act specifically states that it shall not be construed to limit the regulator’s authority under the state’s examination law Regulators may retain, at the insurer’s expense, 3 rd party consultants (including attorneys, actuaries, accountants & other experts) as necessary to assist in reviewing the CGAD & related information or an insurer’s compliance with the CGAD requirements Important to note several relevant provisions in the “Standards to Define Insurers Deemed to Be in Hazardous Condition” regulation, including: A standard on whether the management of an insurer (officers & directors) fails to possess and demonstrate competence, fitness and reputation deemed necessary to serve the insurer; and Authority to issue an order to an insurer to correct deficiencies in corporate governance practices and adopt & utilize practices acceptable to the Commissioner

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What You Should Be Doing NOW Learn about all that you must report on in the CGAD Could you provide now rational, logical and meaningful information on all of the CGAD inquiries? Is your governance structure appropriate for your needs and objectives? Do your governance documents accurately say what you want them to say? Are your actual practices/policies/procedures in accordance with your governance documents? Are your governance structure, documents, policies and practices effective?

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Corporate Governance Annual Disclosure What You Should Be Doing NOW Change takes time... If you have not recently analyzed the appropriateness & effectiveness of your corporate governance structure, documents, policies and practices for your operations, the time to do so is now and not when the filing is imminent.

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner NAIC Activities

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner General Overview of Group Supervision US Approach-Communication & Coordination Points of contact with state, federal, international regulators Establishing lines of communication with group management MMOU Mechanism to distribute group solvency assessment (group analysis) Coordinate request for group information back to the group

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Group Supervision Initiatives Increase Examination Authority of the Insurance Holding Company System Concept of Supervisory Colleges Companies have to pay PA’s Group-Wide Supervision for International Insurance Groups NAIC has adopted similar language to the Holding Company Model Law Coordinate Financial Risk Focus Exams

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner General Overview of Group Supervision International Approach-Comframe Develop methods of operating group-wide supervision of Internationally Active Insurance Groups (IAIGs) in order to make group-wide supervision more effective and more reflective of actual business practices Establish a comprehensive framework for supervisors to address group-wide activities and risks and also set grounds for better supervisory cooperation in order to allow for a more integrated and international approach Establish a Group Capital Standard (very controversial) Foster global convergence of regulatory and supervisory measures and approaches

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Maintain effective internal audit functions capable of providing the Audit Committee independent assurance in respect of the insurer’s governance, risk management, and internal controls. 1.1 Independent assurance to the Audit Committee. 1.2 The internal audit function must be organizationally independent, and internal auditors must remain objective in performing their work. 1.3 The head of the internal audit function reports to the Audit Committee on a regular basis. © 2013 National Association of Insurance Commissioners Internal Audit

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner © 2013 National Association of Insurance Commissioners Internal Audit All large insurers (annual premiums > $500 million) to maintain an internal audit function. To implement this requirement, regulators plan to modify the existing Model Audit Rule (Adopted by NAIC at 2014 Summer NAIC Meeting)

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Risk Management Initiatives Risk Management and Own Risk and Solvency Assessment Model Act Vehicle that will be used to require the ORSA Summary Report to be filed Will provide for confidentiality provisions Lead State Concept Effective date - 1/1/2015 – Filings being made by companies

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Risk Management Initiatives ORSA Key Questions What is our strategy? What level of risk are we willing to assume in pursuit of this 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 or collectively—would subject us to losses that exceed our tolerance levels? What risk scenarios would cause us to fail or stop operating as a going concern?

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Risk Management Initiatives How will regulators use the ORSA? Details to be worked out (working on changes to the Financial Analysis and Financial Examiners Handbooks) Reviewed Company’s ORSA Summary Reports that were submitted voluntarily in 2012 and Summary Memo of Observations 2014-Another ORSA Pilot Program Should fit like a glove with our Risk Focus Exam Process PA has 15 Groups/Companies that it is lead on for ORSA Rating agencies want to know about your ERM process and I am sure your ORSA/regulators want to know what rating agencies are thinking Quality ORSA and ERM starts with governance and ends with quality of your data The role of the Chief Risk Officer today

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Other NAIC Initiatives RBC Operational Risk (This is for all types of insurance companies) Will be for informational purposes in 2015 Will review results before making final decision RBC P & C Catastrophe Risk Will be for informational purposes in 2014 and 2015 Will review results before making final decision (2016, possible to be live) Cybersecurity Task force 12 principles

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Life Industry Issues

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Life Industry Issues Principles-Based Reserving for Life Insurers Need 42 states and 75% of nationwide premium to pass changes to Standard Valuation Law before it becomes effective (phase-in period) Where does PA stand/Exemption AG 38 Reserving Use of Captives and Special Purpose Vehicles Private Equity and Hedge Funds into the business of insurance Update Annuity Tables (Chapter 84)

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Unclaimed Life Insurance Proceeds The Issue Data mining technology, meets, A smart consultant, meets, A not so smart life industry, meets, The social security death master file, meets, Unclaimed Property Laws, meets, States hungry for revenue, meets, Insurance Regulators Expectations of Companies NAIC to develop a Model Law-selecting from 5 proposals

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner International Industry Issues

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner International Industry Issues Group Capital Standards ComFrame EU Equivalence IMF’s Financial Sector Program Reinsurance Supervisory Colleges NAIC vs FIO vs Federal Reserves vs EU vs IAIS (through the FSOC and the FSB) SIFIs/G-SIFIs Why do we need all this new regulation

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner P & C Industry Issues

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner P & C Industry Issues Lender Placed Insurance Mortgage Guaranty Insurance Reinsurance Collateral-Certified Reinsurer Alternative Risk Financing

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner General Industry Issues

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner General Industry Issues Merger and acquisition activity Starr International case in US Court of Federal Claims Driverless cars Modeling risk Industry investments Numbers do not support any type of material deterioration of investment quality Health industry Fracking causes earthquakes Big data

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Solvency Update

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Solvency Update Low insolvency level (low severity also) 7 straight calendar years ( ) without an insolvency of a Pennsylvania domestic insurer First Time in 64 Years! Last Liquidation of a P/C PA domestic: 7/28/2003 Last Liquidation of a Life PA domestic: 7/2/2004 Companies saved in PA since 1997: 102 Streak ended on February 8, 2012-First Sealord (a surety only company) placed into liquidation GAO Report (June 2013)-States did a great job during meltdown

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Insolvencies (licensed companies placed in liquidation) (6 months) P & C L & H5 (1 caused by economic crisis) 10 (1 caused by economic crisis) Title Fraternal Total

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Low interest rate environment CATS Reserve adequacy ComFrame Group supervision Regulatory Change Execution of Regulatory Change The many things that keep me up at night The Future of Reinsurance Affordable Health Care Act Feds getting more involved Run-off companies Long-term care insurance Regulatory talent Talent for industry Cyber Risk

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner No Longer on the List Can I make it to retirement

Insurance Regulatory Update September 23, 2015 Office of Corporate and Financial Regulation Stephen J. Johnson, CPA, Deputy Insurance Commissioner Questions?