1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. StateNet – Financial Analysis
© 2018 National Association of Insurance Commissioners

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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? 35
© 2018 National Association of Insurance Commissioners

36. 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 36
© 2018 National Association of Insurance Commissioners

37. Questions
© 2018 National Association of Insurance Commissioners