risk-focused surveillance framework3 key benefits of risk focused surveillance respond to increased...

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RiskRisk--Focused Surveillance Focused Surveillance FrameworkFramework

Enterprise Risk Management SymposiumEnterprise Risk Management SymposiumChicago, IllinoisChicago, Illinois

April 26, 2004April 26, 2004

Terri Vaughan, Iowa Insurance CommissionerTerri Vaughan, Iowa Insurance Commissioner

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Today’s Agenda Today’s Agenda

Motivation for RiskMotivation for Risk--Focused Surveillance Focused Surveillance Description of Framework and Supporting Description of Framework and Supporting ToolsToolsImplementation ChallengesImplementation ChallengesProject Timeline Project Timeline

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Key Benefits of Risk Focused Surveillance Key Benefits of Risk Focused Surveillance Respond to increased complexity of products, Respond to increased complexity of products, investment strategies, etc.investment strategies, etc.Greater emphasis on early identification of Greater emphasis on early identification of emerging risks at individual insurers and on a emerging risks at individual insurers and on a sector wide basissector wide basisIncreased regulatory understanding of insurer’s Increased regulatory understanding of insurer’s quality of management, characteristics of the quality of management, characteristics of the insurer’s business and risk it assumes insurer’s business and risk it assumes More effective use of regulatory resources through More effective use of regulatory resources through a sharper focus on higher risk areas a sharper focus on higher risk areas

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Key Benefits Risk Focused SurveillanceKey Benefits Risk Focused Surveillance

Leverage trends in insurer risk management and Leverage trends in insurer risk management and corporate governancecorporate governanceEnhanced utilization of management informationEnhanced utilization of management informationBetter evaluation of risks through assessment of Better evaluation of risks through assessment of inherent risks and risk management processinherent risks and risk management process–– Accuracy of financial statementsAccuracy of financial statements–– Ability of management to identify, control, and Ability of management to identify, control, and

evaluate risk evaluate risk Consistency with other financial regulators and Consistency with other financial regulators and global trendsglobal trends

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Risk Classifications Risk Classifications •• Credit Credit •• Market Market •• Pricing/UnderwritingPricing/Underwriting•• ReservingReserving•• LiquidityLiquidity•• Operational Operational •• LegalLegal•• StrategicStrategic•• ReputationalReputational

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What Financial Solvency Oversight Functions are What Financial Solvency Oversight Functions are Impacted in the Proposed Framework?Impacted in the Proposed Framework?

•• RiskRisk--Focused Examinations Focused Examinations •• OffOff--Site RiskSite Risk--Focused Financial AnalysisFocused Financial Analysis•• Review of Internal/External ChangesReview of Internal/External Changes•• Priority System (CARRMEL)Priority System (CARRMEL)•• Supervisory PlanSupervisory Plan

Results are summarized in the Insurer Profile, which Results are summarized in the Insurer Profile, which includes key information, regulatory findings and the includes key information, regulatory findings and the regulatory plan.regulatory plan.

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Proposed Regulatory CycleProposed Regulatory Cycle

INSURER PROFILE

Internal/External Changes

Examination

Priority System

Supervision

Consider Changes to:•NRSRO Ratings •Ownership/Management/ Corporate Structure

•Business Strategy/Plan•CPA Report or Auditor•Legal or Regulatory Status

Risk-Focused Examination

•Identify Functional Activities•Identify/Assess Inherent Risk•Identify & Evaluate Controls•Determine Residual Risk•Establish Procedures and Conduct Exam

•Revise CARRMEL Rating and Supervisory Plan

• Exam Report/Mgmt Letter

Develop Ongoing Supervision That

Includes:•Frequency of Exams•Scope of Exams•Meetings with Company Management

•Follow-Up on Recommendations

•Financial Analysis Monitoring

Priority System Based on Ratios and Analysis to Measure:•Capital Adequacy•Asset Quality•Reinsurance•Reserves•Management•Earnings•Liquidity

Financial Analysis includes:•Risk Assessment Results •Financial Analysis Handbook Process

•Ratio Analysis (IRIS, FAST, Internal Ratios)

•Actuarial Analysis

Financial Analysis

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RiskRisk--Focused Examination Focused Examination Seven Phased Process Provides the Seven Phased Process Provides the “Roadmap” for a Risk Assessment “Roadmap” for a Risk Assessment –– Understanding the Company and Identifying Understanding the Company and Identifying

Functional ActivitiesFunctional Activities of Insurerof Insurer–– Identifying and Assessing an Identifying and Assessing an Inherent Risk Inherent Risk

RatingRating in Activityin Activity–– Identify and Assess Identify and Assess Risk Management Risk Management

Systems Systems in Place to Mitigate Inherent Risk in Place to Mitigate Inherent Risk (Policies & Procedures, Internal Audit, (Policies & Procedures, Internal Audit, Reporting, Corporate Governance, etc.)Reporting, Corporate Governance, etc.)

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RiskRisk--Focused Examination (continued)Focused Examination (continued)–– Assign a Assign a Residual Risk RatingResidual Risk Rating, which is a , which is a

Function of the Inherent Risk Rating offset by Function of the Inherent Risk Rating offset by the Control Assessment Ratingthe Control Assessment Rating

–– Establish/Conduct Establish/Conduct Examination ProceduresExamination ProceduresBased Upon the Residual Risk RatingBased Upon the Residual Risk Rating

–– Update CARRMEL rating and Supervisory Update CARRMEL rating and Supervisory PlanPlan

–– Draft Draft Examination Report and Management Examination Report and Management LetterLetter Based Upon FindingsBased Upon Findings

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Enhanced Regulatory Risk Assessment Framework (DRAFT)Examinations Flow Chart

NAIC Financial Condition Examiners HandbookExamination Planning

Are Risks Assessable?Are Controls Identifiable?

Is financial solvency risk limited?

Can reliance be placed on CPA work?

Is external source information favorable?

“Less Balance Sheet Oriented,

More Prospective Risk-Focused Approach”

Risk focused proceduresWork in Progress Substantive

Procedures

Report of ExaminationIncludes F/S

Confidential Managemen

t Letter

Products of Examination

More Balance Sheet Oriented Approach

CreditRisk

MarketRisk

Pricing/Underwriting

Risk

Risk Assessment

LiquidityRisk

ReservingRisk

LegalRisk

OperationalRisk

StrategicRisk

ReputationalRisk

YES NO

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INSURER PROFILE


Examination

Priority System

Supervision





•Update CARRMEL Rating and Supervisory Plan










Financial Analysis

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OffOff--Site RiskSite Risk--Focused Focused Financial AnalysisFinancial Analysis

Financial Analysis includes:Financial Analysis includes:Risk Assessment Results Risk Assessment Results Financial Analysis Handbook Financial Analysis Handbook ProcessProcessRatio Analysis (IRIS, FAST, Ratio Analysis (IRIS, FAST, Internal Ratios)Internal Ratios)Actuarial AnalysisActuarial Analysis

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Review of Internal/External Review of Internal/External ChangesChanges

Consider Changes to:Consider Changes to:NRSRO Ratings NRSRO Ratings Ownership/Management/ Ownership/Management/ Corporate StructureCorporate StructureBusiness Strategy/PlanBusiness Strategy/PlanCPA Report or AuditorCPA Report or AuditorLegal or Regulatory StatusLegal or Regulatory Status

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Prioritization SystemPrioritization SystemDevelop standard prioritization system Develop standard prioritization system

(CARRMEL)(CARRMEL)Capital Adequacy, Asset Quality, Capital Adequacy, Asset Quality, Reinsurance, Reserve Adequacy, Reinsurance, Reserve Adequacy, Management Assessment, Earnings, and Management Assessment, Earnings, and LiquidityLiquidityObjective and mathematical basedObjective and mathematical basedIncorporates existing FAST Ratios in Incorporates existing FAST Ratios in systemsystemPilot ProjectPilot Project

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Supervisory PlanSupervisory PlanDevelop Plan for Ongoing Supervision Develop Plan for Ongoing Supervision

That Includes:That Includes:Frequency of ExamsFrequency of ExamsScope of ExamsScope of ExamsMeetings with Company ManagementMeetings with Company ManagementFollowFollow--Up on RecommendationsUp on RecommendationsFinancial Analysis MonitoringFinancial Analysis Monitoring

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INSURER PROFILE


Examination

Priority System

Supervision





•Update CARRMEL Rating and Supervisory Plan










Financial Analysis

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Insurer ProfileInsurer ProfileComponents Components –– Descriptive Information, Overview of Descriptive Information, Overview of

BusinessBusiness–– Risk Profile. Priority RatingRisk Profile. Priority Rating–– External InformationExternal Information–– Key Financial DataKey Financial Data–– Regulatory Findings, Regulatory PlanRegulatory Findings, Regulatory Plan–– Other State’s Action Other State’s Action

Confidential, but available to other Confidential, but available to other states upon requeststates upon request

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What is the role of the CPA in this What is the role of the CPA in this Framework?Framework?–– Leverage Off of CPAs Work Leverage Off of CPAs Work -- WHERE WHERE

APPROPRIATEAPPROPRIATE–– Recent Accounting FailuresRecent Accounting Failures

»» EnronEnron»» Global CrossingGlobal Crossing»» WorldComWorldCom

–– SarbanesSarbanes--OxleyOxley»» NAIC/AICPA Working GroupNAIC/AICPA Working Group

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What other tools/processes will be What other tools/processes will be utilized to enhance current solvency utilized to enhance current solvency processes?processes?–– Enterprise Risk Assessment Form Enterprise Risk Assessment Form –– Revised CPA ChecklistRevised CPA Checklist–– Increased Coordination Between Auditors Increased Coordination Between Auditors

and Examinersand Examiners–– Enhanced Information Resources for Enhanced Information Resources for

RegulatorsRegulators–– Guidance on Best Practices for Managing Guidance on Best Practices for Managing

RiskRisk

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Challenges of Risk AssessmentChallenges of Risk AssessmentThe Three “Cs”The Three “Cs”

ConfidentialityConfidentiality–– Risk Assessment Confidentiality ApproachesRisk Assessment Confidentiality Approaches

»» Laws and State StatuteLaws and State Statute»» Accreditation ProgramAccreditation Program»» Annual Confidentiality Agreement Annual Confidentiality Agreement -- Similar to FASTSimilar to FAST

CompetencyCompetency–– Regulatory resources and expertiseRegulatory resources and expertise

Consolidated Approach: Regulating on a Consolidated Approach: Regulating on a Groupwide PerspectiveGroupwide Perspective

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RiskRisk--Focused Surveillance FrameworkFocused Surveillance FrameworkProject TimelineProject TimelineDeliverablesDeliverables–– Revisions to FrameworkRevisions to Framework–– Prioritization Report, Insurer ProfilePrioritization Report, Insurer Profile–– Risk Matrix, CPA ChecklistRisk Matrix, CPA Checklist–– Updated Examiner Handbook GuidanceUpdated Examiner Handbook Guidance–– Revisions to Analysis HandbookRevisions to Analysis Handbook–– Best Practices Compilation, Best Practices Compilation, –– Implementation plan, Training ProgramImplementation plan, Training Program–– Confidentiality AgreementConfidentiality Agreement

Retaining Consultant to assist with Retaining Consultant to assist with Examiner Handbook, Best PracticesExaminer Handbook, Best Practices

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QUESTIONS…????QUESTIONS…????

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