1. 1 How To Minimize the Risk of Another Frankel Situation Risk-Focused Regulatory Approach Mike Moriarty - NY Insurance Dept. CAS Spring Seminar 5/8/01

2. 2 Frankel n A Breakdown in Then-Existing Processes n Situation Highlighted Certain Areas in the State Regulatory System that Warranted Enhancement n Event that Forces Evaluation of the Regulatory Paradigm n Proposed Initiatives in the NY Environment Are Not Driven by Frankel

3. 3 Mid/Late 90’s n Financial Markets Changing n Blurring of Lines Between Financial Service Industries n Financial Services Becoming Global Enterprises n In US, the Integration of Financial Services Codified by GLBA n Internally, NYID Stepped Back - Is Our Regulatory Approach Still Valid?

4. 4 New York Initiatives n Risk-Focused Examinations n Establishment of Capital Markets Bureau n Liquidity Analysis (Circular Letter #35 - 1999 & #33 -2000) n Derivative Use Plans n 4th Quarter Meetings n Operational Reviews of Insurers

5. 5 New York Initiatives (cont’d) n Increased NAIC Involvement n Heightened Department-Wide Reaction to Risk Events n Training and Off-Site Seminars n Internet/Intranet to Enhance Examinations and Examiner Knowledge

6. 6 CAPITAL MARKETS BUREAU n Assist in the regulation of capital markets & risk management activities of New York licensed insurers n Capital Markets Risk - the potential for loss on investment instruments or portfolios. n Risk Management - an insurer that manages its risk poorly will be a greater financial solvency threat than an insurer that manages its risk better.

7. 7 Capital Markets Bureau - Services n Examination Support n Transaction Review n Derivatives n ALM n Training

8. 8 Capital Markets Bureau - Services n Financial Analytics n Third Party Investment Management n Securitization n Information Dissemination n Research

9. 9 Risk-Focused Examinations n NY Is Moving Away From Triennial Full Scope Exams n Using Risk-Focused (Limited Scope) Exams in Growing #’s n Obvious Reason - Dedicate Limited Resources in the Most Effective Manner n Other Reasons u GLBA u Federal Regulation u Recent BIS Proposal

10. 10 Gradual Movement n No Radical Change in Process n Looking at Areas that we did not focus on before (ALM, Independent Risk Management Units, Internal Audits) n Committees at NY Dept. Meet Frequently and Changes are Continually Made to Procedures

11. 11 Gradual Movement n Report is Still Balance-Sheet Oriented But is Being Supplemented n More “Movement” Under Consideration u Moving Further Away from Balance Sheet Verification and More Toward Risk Assessment u Generation of an Internal Report from Exam Process

12. 12 EFFECT ON A FRANKEL-LIKE SCENARIO n Capital Markets Bureau Would Have Participated in Financial Analysis and in Exam Pre-Planning n “Turnover” Ratios Would Have Spit Out Frankel Insurers as Extreme Outliers n Investment Strategy Would Have Been Questioned on a Prospective Basis n Risk Management Systems Would Have Been Reviewed n “Audit Risk” Would Have Been Evaluated

13. 13 NAIC Financial Reporting WG n “Branding” Risk Classifications n Review How Existing Processes Provide for the Assessment of these Risks n Make Recommendations to Enhance the Examination/Analysis Process Along These Lines

14. 14 CONCLUSIONS n Basic Evaluation of Investment Management Practices Would Have Uncovered Fraud n Assessment of Risk Management Should Be Institutionalized in Regulatory Practices n Financial Services Industries Will Continue to Drive the Development of Risk Management n Regulatory Focus will Follow that Development, as it has in Banking Regulation