1. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 1 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Update on Regulatory Topics IASA Mid-Atlantic Chapter Spring 2015 Conference April 27, 2015 Philadelphia, PA

2. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 2 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Today’s Discussion 1.PA Insurance Department and Office of Corporate and Financial Regulation (OCFR) 2.Regulatory Framework for Monitoring Financial Solvency Risk-Focused Examination Process—Exam Best Practices Corporate Governance Initiatives 3.Update on Life Industry Issues

3. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 3 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations PA Insurance Department and Office of Corporate and Financial Regulation (OCFR)

4. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 4 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations

5. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 5 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations

6. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 6 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Position Name Director, Bureau of Company Kim Rankin Licensing and Financial Analysis Director, Bureau of Financial ExaminationsAnnette Szady Examination Manager, Northeastern RegionShannon Hopkins Examination Manager, Western RegionPhilip Judge Examination Manager, Southeastern Region 1Kelly Monaghan Examination Manager, Southeastern Region 2James Minder Examination Manager, Central RegionDavid Evans Property & Casualty Actuary, All RegionsMissy Greiner

7. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 7 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations PA Domestic Insurance Companies As of 12/31/2014: Line of Business# of Companies P & C182 Fraternal20 Health42 Life26 Title1 Total Domestic Insurance Companies 271

8. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 8 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Statutory Requirement for Frequency of Examinations Under Pennsylvania’s Examinations Law (40 P.S. §323.3(b)) the Department may conduct an examination of any insurer as often as the Commissioner, in the Commissioner’s sole discretion, deems appropriate, but at a minimum the Department is to conduct an examination of each insurer not less frequently than once every five years. The Department typically conducts financial examinations on a 5-year cycle, with the following exceptions: 1. Financially troubled insurers, which are examined on an as needed basis and may involve the use of examiners for an extended period of time to monitor or supervise corrective actions or restrictions imposed on the company’s operations. 2. Target and limited scope examinations in high-risk or problematic areas, such as reinsurance exposure and reserves. 3. New start-up domestic insurers, which may be examined on an annual basis for the first 5 years of their operations. 4. Short-period examinations are done to coordinate examinations of groups with other states.

9. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 9 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Exams Completed TypeCY 2014CY 2013CY 2012 Full risk-focused financial exams37 (1) 75 (2) 52 (3) Limited scope (target) exams012 Organizational exams545 Continuing Care Retirement Community (CCRC) exams 43515 Total4611574 Notes: (1) This includes 27 multi-state and 10 single state company exams (2) This includes 38 multi-state and 37 single state company exams (3) This includes 35 multi-state and 17 single state company exams

10. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 10 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Use of Contract Vendors 29 in-house field examiners (2 vacant)  5 examiner trainees hired since Fall 2014 Increased use of contract financial examiners  Expect need for examiner-in-charge (EIC) on more engagements Continued use of outside specialists  Actuarial (P & C and Life)  IT List of 52 qualified vendors that can be used  RFQ for Examination Support Services effective 11/1/2013 through 8/31/2016

11. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 11 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Regulatory Framework for Monitoring Financial Solvency

12. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 12 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Framework for solvency has changed significantly There have been seismic shifts in regulatory approach by the NAIC and Insurance Department to monitor financial solvency Retrospective Prospective Company Enterprise Financial Statement Governance Rules Principles Getting to Know the DNA of a Company Regulators are expecting more Board involvements in this new regulatory approach Is your management ready?

13. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 13 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations History and Background Key components of SMI  Capital requirements  Governance and risk management  Group supervision  Statutory accounting  Reinsurance

14. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 14 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations What are we trying to do: Group vs. Legal Entity Supervision Corporate Governance Risk Management  Enterprise Level  Legal Entity Level  Inter-Connectivity Risks Capital Management Verification of all of this-the Risk Focused Exam Process

15. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 15 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Risk-Focused Examination Process Implemented entirely new examination process effective 1/1/2010 New risk-focused exam (RFE) process takes holistic approach to examining a company  Old process verified balance sheet Review all aspects of how management and board govern and operate the company New approach is more comprehensive and takes longer to perform (higher exam costs)

16. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 16 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations What can you do to make an exam more efficient Review our website on exams-get educated on new risk- focused exam approaches Obtain NAIC Financial Condition Examiners Handbook Meet often with examiners-status checks Understand informational request Deliver information to examiner ASAP Be pro-active where you can be

17. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 17 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Exam Best Practices How has risk-focused exam(RFE) process changed in past 5 years?  Critical risk categories  Focus on other than financial reporting (OTFR) risks/prospective risks  Increased reliance on CPA Audit work papers to reduce work on financial reporting risks Expectations for 2 nd five year risk focused examination  Focus on changes made by Company since last exam  Leverage off foundation built in 1 st RFE  Identify 80-90% significant risks before starting fieldwork (ERM work, Form F, ORSA, Corporate Governance Annual Disclosures) Examiners to leverage work done by Financial Analysis on quarterly, annual basis between exams

18. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 18 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Exam Best Practices Company single point of contact for exam requests  Depends on size company  Facilitator  Financial person (not attorneys)  Examiners need direct access to others/process owners Consistent findings/management comments from RFEs  Shift from financial statement items/compliance issues to corporate governance, processes and controls  IT Deficiencies  Disaster Recovery/Business Continuity Planning  Succession Planning  Implementation/formalization of ERM process

19. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 19 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Exam Best Practices Continuous improvement to RFE process  Various NAIC Committees for specific purpose  Reviewing redundancies/duplication of information requested from company  Increased interaction between examiners and financial analysts  Better align handbooks—similar risk-focused approach and terminology  Critical risk categories to RFE process--reduce work on financial reporting risks  Group coordinated examinations What can a smaller company (not subject to SOX/MAR) do to increase efficiency of RFE?  Comprehensive response to pre-exam planning survey  SSAE 16 reports for outsourced functions  Experience and quality of CPA work  Maintain and update risk matrices from 1 st RFE

20. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 20 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Exam Best Practices Group Coordinated Examinations  Lead state responsible for developing group coordinated exam plan  Subgroup exams may be established  Work as one regulatory exam team  Heavy reliance on work done by lead state -- exam and financial analysis work  Legal entity exam schedules moved to get all on same exam cycle  Lead state responsible for Group functions  Corporate governance, ERM/ORSA/Form F, Internal Audit Coordination Efforts  NAIC Financial Exam Coordination Working Group (FEWCG) formed  Recent updates to Coordination Framework  Clear definition of roles and responsibilities of lead state and participating states  Experience and quality of CPA work  Maintain and update risk matrices from 1 st RFE

21. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 21 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Corporate Governance Initiatives NAIC Formed Corporate Governance Working Group White Paper on High-Level Corporate Governance Principles (see next slide) Never adopted by NAIC but a great reference source to understand where the Regulators are coming from

22. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 22 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations White Paper on High-Level Corporation Governance Principles Corporate Governance Board of Directors (Education of Boards) Senior Management Suitability of Individuals Reporting and Transparency Risk Management and Internal Controls Central Functions Regulatory Oversight

23. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 23 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Corporate Governance Initiatives White Paper on Existing U.S. Corporate Governance Requirements  Used the 7 principles from our Framework Paper  Compared with Insurance Core Principles from IAIS  Where do we need to beef-up our Corporate Governance Oversight? Disclosure!!  Scoring Corporate Governance?

24. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 24 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Major Changes relating to Corporate Governance Annual Corporate Governance Disclosure and Reporting Requirements Internal Audit Function Requirement (revised Model Audit Rule) Accreditation Requirement

25. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 25 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Annual Reporting Objective: To receive more regular and timely information on corporate governance practices of insurers through filing a confidential discussion of insurer governance practices with the domestic state of each insurance legal entity. Proposed Sections of Exhibit A Section 1Discussion of Significant Changes from Prior Year Section 2General Description of the Organization’s Corporate Governance Framework Section 3Description of Board of Directors and Committee Policies and Practices Section 4Description of Management Policies and Practices Section 5Management and Oversight of Critical Risk Areas

26. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 26 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Annual Reporting To collect this information, regulators developed a new stand- alone model law that would authorize and protect the collection of confidential corporate governance information on an annual basis. (Adopted by NAIC on November 18, 2014)

27. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 27 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations 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

28. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 28 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations © 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 modified the existing Model Audit Rule (Adopted by NAIC on August 19, 2014)

29. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 29 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Corporate Governance Initiatives NAIC Model Corporate Governance Disclosure Law adopted November 18, 2014 NAIC Model Corporate Governance Disclosure Regulation adopted November 18, 2014  PA plans to submit Corporate Governance Disclosure Law to PA legislature in fall 2015 with an effective date in 2016  No exemptions in law Changes to NAIC Model CPA Audit Regulation adopted August 19, 2014  Require internal audit function  Exempt if individual insurer writing < $500 million premium or insurance Group writing < $1 billion in annual premium  PA plans to submit changes to PA MAR regulation in 2015 to be effective in 2016  Draft of PA regulation already submitted to industry and no comments were received

30. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 30 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Corporate Governance Annual Disclosure “Disclosure” Requirement – No Exemptions in Law File with Lead State for the Insurance Group May provide information at UCP level, intermediate holding company level or individual legal entity level  Level at which the insurer’s or group’s risk appetite is determined or  Level at which the earnings, capital, liquidity, operations and reputation of the insurer are overseen collectively or  Level at which legal liability for failure of corporate governance duties would be placed Review of filing and request for additional information done by lead state

31. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 31 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Corporate Governance Annual Disclosure Contents of Corporate Governance Annual Disclosure  See Corporate Governance Annual Disclosure Model Regulation Describe corporate governance framework and structure  Board and significant—size, structure, level at which oversight occurs  Duties of Board and committees Policies and Practices of the most senior governing entity and significant committees  Qualifications, expertise, experience of each Board member  Amount of independence on Board and committees  Number of meetings and attendance at meetings  Process to identify, nominate and elects Board members  Process to evaluate Board/committee performance

32. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 32 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Corporate Governance Annual Disclosure Policies and Practices for Directing Senior Management  Process to determine whether officers and key persons in control have appropriate background, experience and integrity  Group’s code of business conduct and ethics  Compliance with laws, rules, regulations  Proactive reporting of any illegal or unethical behavior  Process for performance evaluation, compensation and corrective action to ensure effective senior management  Compensation programs and programs designed to reward  Board’s role  How related to company and individual performance Process by Board/Committees/Senior Management to ensure appropriate amount of oversight to critical risk areas impacting insurer’s business activities

33. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 33 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Link to NAIC Corporate Governance Law and Regulations Corporate Governance Annual Disclosure Model Act and Corporate Governance Annual Filing Model Regulation: http://www.naic.org/committees_e_isftf_corp_governance.htm http://www.naic.org/committees_e_isftf_corp_governance.htm

34. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 34 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Update on Life Industry Issues

35. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 35 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations 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)  Industry proposal for NAIC to consider small company exemption AG 38 Reserving Use of Captives and Special Purpose Vehicles Private Equity and Hedge Funds into the business of insurance

36. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 36 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Principles Based Reserving (PBR) for Life Insurers 20 states have already adopted PBR legislation NAIC is considering a “small company” exemption ACLI (American Council of Life Insurers) small company exemption proposal  Individual insurer with <$300 million of Ordinary Life Premium and a company that is member of a Group with < $600 million of Ordinary Life Premium  Does not include annuity premium Company RBC of at least 450% Appointed Actuary provides an unqualified opinion on reserves Company must request annual exemption (not automatic)

37. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 37 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations PBR Legislation in PA PA is supportive of PBR and a small company exemption Draft of PA PBR legislation was sent out to interested parties including PAMIC, PA and American Fraternal Alliances  Comments received back for PA consideration PA is considering small company exemption  Individual insurer and Group writing < $100 million Ordinary Life Premium  No RBC requirement

38. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 38 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Unclaimed Life Insurance Proceeds The NAIC has formed an Unclaimed Life Insurance Benefits Working Group to develop a new NAIC Model Law  Not a financial solvency issue so not under OCFR responsibility  Pennsylvania would likely want to adopt this new NAIC Model Law

39. Update on Regulatory Topics April 27, 2015 Office of Corporate and Financial Regulation - 39 - Annette B. Szady, CPA, Director, Bureau of Financial Examinations Questions?