risk-focused surveillance (e) working group
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Date: 11/3/21 Virtual Meeting (in lieu of meeting at the 2021 Fall National Meeting) RISK-FOCUSED SURVEILLANCE (E) WORKING GROUP Tuesday, November 9, 2021 11:00 a.m. – 12:00 p.m. ET / 10:00 a.m. – 11:00 a.m. CT / 9:00 – 10:00 a.m. MT / 8:00 – 9:00 a.m. PT ROLL CALL
Justin Schrader, Chair Nebraska John Sirovetz New Jersey Amy Malm, Vice Chair Wisconsin Mark McLeod New York Blase Abreo/Sheila Travis Alabama Jackie Obusek/Monique Smith North Carolina Susan Bernard California Dwight Radel/Tracy Snow Ohio William Arfanis/Kathy Belfi Connecticut Eli Snowbarger Oklahoma Carolyn Morgan/Virginia Christy Florida Ryan Keeling Oregon Cindy Andersen/Eric Moser Illinois Melissa Greiner Pennsylvania Roy Eft Indiana Jack Broccoli/John Tudino Rhode Island Daniel Mathis Iowa Johanna Nickelson South Dakota Stewart Guerin Louisiana Amy Garcia Texas Vanessa Sullivan Maine Jake Garn Utah Dmitriy Valekha Maryland Dan Petterson Vermont Judy Weaver Michigan Greg Chew/David Smith Virginia Debbie Doggett/Shannon Schmoeger Missouri Steve Drutz/John Jacobson Washington Patricia Gosselin New Hampshire
NAIC Support Staff: Bruce Jenson/Jane Koenigsman
AGENDA 1. Discuss Comments Received on Exposure of Affiliated Services Guidance—Justin Schrader (NE)
• Exposure Document Attachment A • Hawaii Comment Letter Attachment A1 • IP Comment Letter Attachment A2 • MHPA Comment Letter Attachment A3 • Ohio Comment Letter Attachment A4
2. Consider Adoption of Analyst/Examiner Salary Recommendations—Justin Schrader (NE) Attachment B
3. Discuss Referral Received from the Chief Financial Regulator Forum—Justin Schrader (NE) Attachment C
4. Discuss Any Other Matters Brought Before the Working Group—Justin Schrader (NE) 5. Adjournment Https://naiconline.sharepoint.com/teams/FRSSolvencyMonitoring/RFSWG/2021 Calls/11-9-21 Call/RFSWG Call Agenda.docx
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MEMORANDUM
TO: Justin Schrader (NE), Chair of the Risk-Focused Surveillance (E) Working Group FROM: Judy Weaver (MI), Facilitator of the Chief Financial Regulator Forum DATE: November 10, 2020 RE: Affiliated Service Agreements with Market-Based Expense Allocation
On its Nov. 10, 2020 call, the Chief Financial Regulator Forum discussed the topic of affiliated service agreements. During this discussion, regulators noted an increase in the number of affiliated service agreements (Form D filings) being filed for regulator review with market-based expense allocations. While market-based expense allocations are not prohibited by the NAIC’s Insurance Holding Company Model Regulation With Reporting Forms and Instructions (#450), the insurer is required to provide a statement regarding the cost allocation methods that specifies whether proposed charges are based on “cost or market.” If market based, rationale for using market instead of cost, including justification for the company’s determination that amounts are fair and reasonable, is required to be provided with the filing. In addition to Model #450 filing requirements, the NAIC’s Financial Analysis Handbook provides other guidance for regulators to consider in reviewing Form D filings with market-based expense allocations. Such guidance states that “compensation bases other than actual cost should be closely evaluated” and that “insurers should not use related-party transactions as a method for transferring profits of the insurance company to an affiliate or related party.” In addition, the guidance references ways for regulators to evaluate the fairness and reasonability of market-based expense allocation, including: 1) Review of rates charged by the affiliated service provider to third-party clients for similar services; and 2) Review of rates charged (or quoted) by non-affiliated service providers to their clients for similar services. However, given the increasing prevalence and complexity of these agreements, the analysis handbook might benefit from additional guidance or supporting best practices tailored to specific types of services and contracts (e.g. pharmacy benefit management). In addition, the NAIC’s Financial Condition Examiners Handbook provides general guidance for reviewing and evaluating the appropriateness of affiliated service agreements but does not appear to directly discuss market-based allocations. As such, the Chief Financial Regulator Forum encourages the Risk-Focused Surveillance (E) Working Group to review this topic and to coordinate across analysis and exam processes to address any concerns identified. In addressing this issue, it might be appropriate to consider whether additional handbook guidance, sound practice considerations or educational/training materials should be developed to provide additional clarity. If there are any questions regarding the proposed recommendation, please contact either me or NAIC staff (Bruce Jenson at [email protected]) for clarification. Thank you for your consideration.
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Attachment A
Proposed Revisions to Financial Analysis Handbook
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Financial Analysis Handbook 2020 Annual / 2021 Quarterly
III.A.6. Template for Planning Meeting with Financial Examiner
Overview
This template is intended as an optional tool highlighting items that may be discussed during a planning meeting between the assigned financial analyst and the financial examiner in support of the financial exam process. This meeting should ensure that the examiner both understands the company that will be examined and also receives details on work that has already been performed in supervising the company’s operations. An effective exchange of information will promote efficiencies in the financial examination process by allowing the examiner to leverage the knowledge and work performed by the financial analyst. It may also prove useful to supplement this meeting with a discussion of the Exam Planning Questionnaire (Exhibit B) so that the analyst can review during the discussion to highlight or indicate if a document being requested has been obtained and/or reviewed by the insurance department. Although this template focuses on discussions between the assigned financial analyst and the financial examiner, the examiner may also consider incorporating this discussion into a broader planning meeting with members of department management and representatives from other areas of the department. However, if such an approach is taken, it should not reduce or diminish the level of discussion between the analyst and the examiner.
Given the importance of the Insurer Profile Summary (IPS) in communicating the results of the department’s financial analyst’s review of the company’s operations, the planning meeting with the analyst is intended to generally follow the format of the IPS template.
Depending on the significance of operations at the group level, the examiner should consider whether additional agenda items should be added to focus on risks posed and discussed on the Group Profile Summary that are relevant for consideration during the examination.
NOTE: The exhibit was prepared to assist examiners in obtaining a general knowledge of the company through the meeting with the analyst. The examiner leading the discussion should not rely exclusively on these topics and should tailor agenda items based on knowledge of the company and based on knowledge of work that has been performed by the department. Planning Meeting Between the Financial Analyst and Financial Examiner – Agenda Items
1. Business Summary – Discuss a summary of the business operations and lines of business of the insurer.
a. Discuss whether the department has received a recent business plan from the company and has identified any significant changes in strategy/operations.
b. Discuss any recent meetings with the company and their potential impact on the examination.
c. Discuss the corporate governance in place at the company and any recent changes or concerns identified.
2. Regulatory Actions – Discuss any significant recent steps taken in supervising the company, including, but
not limited to:
a. Granting of permitted practices;
b. Identification of issues of non‐compliance;
c. Follow‐up on items from the last financial examination;
d. Review of items filed with the department for approval and the need to verify or reevaluate approvals during the exam (e.g., Form A, Form D, Form E, etc.); and
e. Recent or pending regulatory actions (such as forfeitures, cease & desist orders, or restrictions on the company’s writings or operations).
3. Financial Snapshot/Overview of Financial Position – Discuss the company’s recent financial results,
including, but not limited to:
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III.A.6. Template for Planning Meeting with Financial Examiner
a. Changes in profitability trends;
b. Deterioration in asset quality, liquidity or capital adequacy;
c. Changes in investment holdings and strategy;
d. Changes in key annual statement balances;
e. Changes in reinsurance balances and program structure;
f. Significant results noted in financial analysis solvency tools; and
g. Deterioration in reserve development trend.
4. Branded Risk Assessments – Discuss individual branded risk assessments with a focus on moderate and
significant areas of concern. For example:
a. Discuss a summary of detailed analysis work performed to address key issues.
b. Discuss the status of any outstanding inquiries or requests for the company.
c. Discuss any management representations to the department that should be verified or corroborated during the exam.
d. Discuss any recommended exam procedures and/or follow‐up on key issues.
e. Discuss any risks assessed as “minor” which appear to be escalating.
5. Impact of Holding Company on Insurer – Discuss the impact of the holding company system on the domestic
insurer. For example:
a. Discuss and obtain the Group Profile Summary and non‐lead state holding company analysis work as necessary.
b. Discuss whether the analyst’s review of the Corporate Governance Annual Disclosure, Own Risk and Solvency Assessment (ORSA) Summary Report and/or Form F reporting indicate a need for additional follow‐up and review during the exam.
c. Discuss any developments or follow‐up items resulting from recent supervisory college sessions.
6. Overall Conclusion and Priority Rating – Discuss the analyst’s overall conclusion on the company’s financial
condition, strengths, weaknesses and priority rating assigned to the company. 7. Supervisory Plan – Discuss the analyst’s plans for the ongoing supervision of the company, including any
specific examination procedures identified. 8. Access to Work Papers and Company Documents – Discuss the best way that the analyst’s work can be
reviewed/obtained. As the number of files that examiners wish to review and obtain increases, they may consider obtaining access to the analyst’s workpapers and receiving specific locations (i.e., workpaper references) for all requested documents.
9. Input from Other Areas of the Department – Discuss whether the analyst has received recent
communications from other areas of the insurance department regarding issues that could affect the financial examination including, but not limited to, units in charge of:
a. Approving rates and forms filings
b. Legal and administrative matters
c. Market conduct examinations/filings
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Attachment A
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III.A.6. Template for Planning Meeting with Financial Examiner
10. General Observations – Depending on the information already provided, determine whether there are any
additional topics relevant for discussion, such as:
a. If you were going on‐site to examine this company, where would you focus your time?
b. What are your biggest concerns in terms of things that could go wrong at this company to result in a solvency concern?
c. Are you aware of any fraud allegations or concerns at the company? Are there any fraud risk factors that the exam team should be aware of?
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III.B.5.a. Operational Risk Repository – P/C Annual Operational Risk: The risk of financial loss resulting from inadequate or failed internal processes, personnel and systems, as well as unforeseen external events.
Note: The repository is not an all‐inclusive list of possible procedures. Therefore, risks identified for which no procedure is available should be analyzed by the state insurance department based on the nature and scope of the risk. Also, note that key insurance operations or lines of business, for example, may have related risks addressed in different repositories. Therefore, analysts may need to review other repositories in conjunction with operational risk. For example, many of the procedures also may be related to pricing/underwriting risks or strategic risks. Analysis Documentation: Results of operational risk analysis should be documented in Section III: Risk Assessment of the insurer. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐Detail Eliminated to Conserve Space‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
Exposure to Affiliated / Related Party Transactions
Note: The following procedures for the review of Corporate Structure and Affiliated Transactions should consider any analysis already completed or anticipated to be completed with regard to the Holding Company Analysis performed by the lead state, review of the Form B – Registration Statement and any review of Form D – Material Transactions to avoid duplication of analysis.
6. Determine whether any concerns exist regarding changes in the insurer’s corporate structure.
Other Risks
a. Review the Annual Financial Statement, Schedule Y – Part 1 and additional information provided in Form B, for the current and prior year:
i. Were there any significant changes to the corporate structure during the year (e.g., acquisitions, divestitures, mergers)?
ii. If 6.a.i is “yes,” and the change involved ownership of the insurer or a transaction with an affiliate, did the insurer fail to receive proper regulatory approval?
iii. Are there any indications the corporate structure may include a holding company whose primary asset is the stock of the insurance company?
iv. Does the insurer have an agency of brokerage subsidiary?
ST
7. Identify whether major transactions with affiliates are economic‐based and in compliance with regulatory
guidelines.
Other Risks
Benchmark Result Outside Benchmark
a. Management fees paid to affiliated to total expenses incurred [Annual Financial Statement, Underwriting and Investment Income Exhibit, Part 3]
>15% [Data] [Data]
Other Risks
b. Review the Annual Financial Statement, Schedule Y – Part 2, Notes to Financial Statement – Note #10 and Note #13, and additional information provided in Form B and Form D:
i. Are any unusual items noted, such as significant new affiliated transactions or
ST, LQ
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modified intercompany agreements from the prior year or significant increases in transaction amounts?
ii. Has the insurer forwarded to any affiliate funds greater than 15% of the insurer’s surplus?
iii. Do affiliated undertakings resulting in a contingent liability to the insurer involve financial exposure greater than 25% of surplus?
iv. Review the description of management agreements and service contracts. Is an allocation basis involved other than one designed to estimate actual cost?
c. After reviewing both the Annual Financial Statement, Schedule Y – Part 2 and Notes to Financial Statements – Note #10, identify any discrepancies in reporting between the two disclosures.
d. Verify that all regulatory approvals were received and that the transactions recorded in the Annual Financial Statement reflect the transactions as approved (e.g., Dividends – Note #13 and Structured Settlements – Note #27).
e. Risk Retention Groups: Summarize the insurer’s level of reliance on captive managers, TPAs, or MGAs to run its business operations (e.g., underwriting, claims, record and reporting).
i. If significant reliance exists, describe the services provides, any additional relationships, whether the expense ratio is in line with industry standards, and whether those parties service other insurers.
ST
8. Determine whether other affiliated transactions are legitimate and properly accounted for.
Other Risks
Benchmark Result Outside Benchmark
a. Affiliated receivable to surplus CR* >10% [Data] [Data]
b. Affiliated payable to surplus CR* >10% [Data] [Data]
c. Federal income tax recoverables to surplus >5% [Data] [Data]
d. Does any foreign entity control 10% or more of the insurer, either directly or indirectly, through a holding company system? [Annual Financial Statement, General Interrogatories, Part 1, #7.1 and #7.2.]
>10% [Data] [Data]
e. Review the Annual Financial Statement, General Interrogatories, Part 1, #20.1 and #20.2:
i. Total amount loaned to directors, other officers, or stockholders to net income.
>10% [Data] [Data]
ii. Total amount of loans outstanding at end of the year to directors, other officers, or stockholders to surplus.
>5% [Data] [Data]
f. Has the insurer failed to establish a conflict of interest disclosure policy? [Annual Financial Statement, General Interrogatories, Part 1, #18]
=YES [Data] [Data]
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Other Risks
g. Review Annual Financial Statement, Schedule E – Part 1 :
i. Were any open depositories a parent, subsidiary, or affiliate?
ii. Based upon a review of the holding company financial statements (as filed with the Annual Holding Company Registration Statement Form B), are there any holding company lenders reported that also appear as open depositories of the insurer?
h. Review the Annual Financial Statement, Notes to Financial Statements, Note #9 :
i. If the insurer is included in a consolidation federal income tax return, note any concerns relating to how taxes are allocated to the insurer.
ii. Review the tax‐sharing agreement and verify whether the terms are being followed.
iii. Obtain and review the financial statements of the parent of affiliate and evaluate any collectability to the insurer.
iv. Verify whether the amount recoverable from the prior year‐end has been collected/recovered.
v. If federal income tax recoverables are greater than 5% of surplus, are federal income tax recoverables due from an affiliate?
CR, LQ
i. Review the Annual Financial Statement, Notes to Financial Statements, Note #27:
i. Has the insurer acquired structured settlements from an affiliated life insurance company?
ii. If 8.i.i is “yes,” is the amount of loss reserved eliminated by annuities greater than 15% of surplus?
iii. Determine the current rating of the affiliates from the major rating agencies, if available.
iv. Review information about the affiliate from industry analysts and benchmark capital adequacy with top performers and peer groups.
v. Obtain and review the Statement of Actuarial Opinion of the affiliate, if available.
vi. Contact the domiciliary state to determine whether any regulatory actions are pending against the affiliate.
j. Review the Annual Financial Statement, General Interrogatories, Part 2, #5. In the case of reciprocal exchange:
i. Are any unusual items noted regarding compensation of the attorney‐in‐fact?
ii. If there an approval agreement on file with the insurance department, review the Articles of Agreement.
k. If 8.d is “yes,” did the insurer fail to properly disclose the investment on the Annual Financial Statement, Schedule Y – Part 2?
l. If 8.f is “yes,” is there any evidence that activities of directors, other officers, or shareholders were in violation of state statues?
m. Review the Financial Annual Statement, Schedule SIS, are any unusual items noted regarding transactions with, or compensation to directors and officers?
n. Assemble a list of all affiliated and other related parties and summarize the financial
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impact of each transaction. Identify any other unusual transactions and investigate for reasonableness.
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Additional Analysis and Follow‐Up Procedures
Examination Findings:
Review the most recent examination report and Summary Review Memorandum (SRM) for any findings regarding operational risks associated with:
Operating performance
Information Technology (IT) systems
Cybersecurity
Fraud
Internal controls
Disaster recovery
Affiliated transactions and services
If outstanding issues are identified, perform follow‐up procedures as necessary to address concerns.
Overall Operating Performance:
If there are any concerns regarding the insurer’s operating performance as it relates to expenses overall or by line of business:
Compare the entity’s actual results against projections. Determine any variances and request additional information for those areas where unfavorable variances exist. If material differences exist, request updated projections based on revised assumptions.
Review the Annual Financial Statement, Insurance Expense Exhibit (IEE):
o Investigate unusual items, especially situations where expenses were allocated to lines of business using methods not defined in the Annual Statement Instructions. The Annual Statement Instructions are included in the Supplements section and additional guidance in this regard is included in the Financial Condition Examiners Handbook.
Review the IEE, Part 1 :
o Investigate significant fluctuations in expenses by expense groups between years
o Compare expenses by expense group for the insurer with industry averages
Review the IEE, Part II and Part III:
o Investigate significant fluctuations in expenses by lines of business between years
o Compare expenses by line of business with industry averages
o Determine whether the totals agree with financial statement line items included in the Annual Financial Statement
Corporate Governance:
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III.B.5.a. Operational Risk Repository – P/C Annual If the CGAD is filed to your state as either the domestic state of a legal entity (not part of a group) or the lead state of a group and if concerns related to the corporate governance practices of the insurer or insurer group are identified:
Consider reviewing internal resources on file related to the following, and if not on file, request the following information from the insurer:
o For the board of directors and each committee established by the board of directors request a copy of the charter/policy, the business ethic policy, code of conduct policy, and conflict of interest policy
o The most recent conflict of interest statement, or its equivalent, for each member of the board of directors and committees established by the board of directors including an explanation of any conflicts reported
o Financial expertise or statutory accounting principles expertise of the audit committee
o Reporting structure of the internal audit function
o Copy of the company’s by‐laws currently in effect
o If part of a holding company system, discussion on the level of oversight the parent company maintains over the insurer
o Discussion of compliance with corporate governance statutes
o Discussion of compensation policies, bonus/incentive programs, and management performance and assessment programs
o Discussion of the board of directors’ and management’s responsibilities and authority
If your state is not the lead state and the CGAD is filed to the lead state, contact the lead state with any questions, concerns or follow‐ups.
Affiliated Transactions:
If concerns related to the economic substance of an affiliated/related party transaction are identified, obtain and review supporting documents.
If the concern relates to the fair value of an affiliated transaction:
o Obtain and review an appraisal of the asset transferred
o Consider consulting an independent appraiser
If the concern involves a management agreement or service contract:
o Obtain and review the supporting contract and compare against Form D filing previously submitted to the department (if applicable)
o Determine whether the amounts involved are reasonable approximations of actual costs
o Determine whether the actual amounts paid are in agreement with the supporting contact
o For any arrangement based on a cost plus formula or percent of premiums formula, request justification from the insurer for amounts in excess of the actual costs of providing the service
o For those services being performed by/for an affiliate and that are also provided by unrelated third‐party vendors (e.g., data processing, actuarial, investment management), contact such vendors or review vendor pricing schedules in order to determine the reasonableness of the intercompany transfer pricing level
o Evaluate whether any portion of such fees in substance dividends should be evaluated in the contact of dividend regulations
o Determine if agreements received appropriate regulatory approval in conformity with regulatory
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requirements
o Consider whether additional examination procedures should be recommended to verify/validate information reported on affiliated services or to further evaluate the fairness and reasonableness of expense allocations.
See additional guidance regarding criteria to be considered in determining whether an affiliated agreement merits review during an onsite examination at V.F. Domestic and/or Non‐Lead State Analysis – Analyst Reference Guide (Form D ‐ Prior Notice of a Transaction).
If the concern relates to federal tax recoverables from a parent or affiliate:
o Obtain and review the financial statements of the parent or affiliate, and evaluate any collectability risk to the insurer
o Review the tax‐sharing agreement, and verify that terms of the tax‐sharing agreement are being followed
o Verify that the amount recoverable from the prior year‐end has been paid
MGAs and TPAs:
For the more significant MGAs and TPAs, if further concerns exist request the following information from the insurer to evaluate:
The comparability of the incurred loss and LAE ratios on the business written by the MGA and TPA with that written directly by the insurer (for the lines of business in which significant, but not all, direct business is written through the MGA/TPA).
Whether the business produced by the MGA and TPA is ceded to a particular reinsurer and, if so, whether that reinsurance was arranged by the MGA or TPA. If the MGA or TPA arranged for the reinsurance, determine whether the MGA or TPA is affiliated with the reinsurer, and consider reviewing the reinsurance agreements to determine whether the terms are reasonable.
Commission rates and any other amounts paid to the MGA and TPA. Review the information for reasonableness and compare the commission rates to those paid by the insurer to other agents.
Whether the contracts between the insurer and MGA include minimum required provisions per Section 4 of the NAIC Managing General Agents Act (#225) and/or the applicable sections of the insurance code.
Whether the contracts between the insurer and TPA include minimum required provisions per Sections 2,4,6,7 and 8 of the NAIC Registration and Regulation of Third‐Party Administrators (#1090) and/or the applicable sections of the insurance code.
The most recent independent CPA audit or annual report of the MGA or TPA.
If the MGA establishes loss reserves, the opinion of an actuary attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced by the MGA.
Documentation supporting the insurer’s periodic (at least semi‐annual) on‐site review of the MGA’s underwriting and claims processing operations.
Documentation supporting the insurer’s periodic (at least semi‐annual) review of the operations of the TPA. (Model #225 requires at least one of the semi‐annual reviews to be an on‐site audit of the operations of the TPA.)
If there are concerns regarding the business placed with the insurer by an MGA or TPA, consider determining if other insurers are utilizing the same MGA or TPA and perform the following:
Compare the contract between the insurer and the MGA or TPA with the contracts between the other insurers and the MGA or TPA to determine whether the contracts are similar (e.g., contain the same
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commission rates).
Compare the insurer’s loss and LAE ratios on the business placed by the MGA or TPA with those of the other insurers utilizing the same MGA or TPA to determine whether the ratios are similar or whether it appears that the insurer may be receiving a disproportionate amount of “bad” business from the MGA or TPA.
Own Risk and Solvency Assessment (ORSA) Summary Report:
If the insurer is required to file an ORSA or is part of a group that is required to file an ORSA:
Did the ORSA Summary Report analysis conducted by the lead state indicate any operational risks that require further monitoring or follow‐up?
Did the ORSA Summary Report analysis conducted by the lead state indicate any mitigating strategies for existing or prospective operational risks?
Holding Company Analysis:
Did the Holding Company analysis conducted by the lead state indicate any operational risks impacting the insurer that require further monitoring or follow‐up?
Did the Holding Company analysis conducted by the lead state indicate any mitigating strategies for existing or prospective operational risks impacting the insurer?
Example Prospective Risk Considerations
Risk Components for IPS Explanation of Risk Components
1 Trend of poor operating performance [indicate overall or specific line of business]
Continued trends in expense ratio, combined ratio and overall profitability may indicate ongoing solvency risks.
2 High expense structure A high expense structure may make it difficult for the insurer to attract new business, compete with other insurers and fulfill its strategic plan.
3 Lack of effective governance/oversight of operations
The lack of an effective governance function to oversee operations may make it difficult for the insurer to fulfill its strategic plan and achieve desired outcomes.
4 Change in operations A significant change in operations resulting from turnover or change in key board and/or senior management positions may increase operational risk.
5 Lack of asset control Assets not under the full control of the insurer may not be available to fulfill policyholder obligations.
6 Questionable investment transactions
The insurer’s investment performance or risks in its investment portfolio may be masked due to questionable investment activities (e.g., wash sales, window dressing, etc.).
7 Concerns with investment advisors
Heavy reliance on unqualified investment advisors or lack of effective oversight may lead to excessive risk taking and increases in the fraud and investment reporting risks.
8 Significant and complex affiliated services and transactions
Significant affiliated services and transactions can mask true financial performance and increase risks related to cost sharing, contingent
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liabilities, unauthorized dividends, etc.
9 Significant reliance on MGAs/TPAs
Reliance on MGAs/TPAs to produce premiums, process claims and fulfill other operational functions can increase operational risk significantly if effective oversight practices are not in place.
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III.B.5.d. Operational Risk Repository – Analyst Reference Guide
Operational Risk Assessment
Operational Risk: The risk of financial loss resulting from inadequate or failed internal processes, personnel and systems, as well as unforeseen external events.
The objective of Operational Risk Assessment analysis is to focus on risks inherent in the company’s daily operations. As such, although operational risk encompasses overall profitability, other risks in this area may not be identified through traditional financial statement review. Therefore, analysts may require additional investigation and information requests to understand and assess the potential impact of these risks. For example, analysst may need additional information to assess the insurer’s exposure to cybersecurity risks. In addition, information presented in the Enterprise Risk Report (Form F) and Own Risk and Solvency Assessment (ORSA) Summary Report (if available) may assist analysts in identifying and assessing the insurer’s exposure to operational risks.
The following discussion of procedures provides suggested data, benchmarks and procedures analysts can consider in his/her review. Analysts’ risk‐focused assessment of operational risk should take into consideration the following areas (but not be limited to):
Statement of income and operating performance
Corporate governance practices
Changes in officers and directors
Investment operations (purchases and sales)
Use of investment advisors
Changes in corporate structure
Related party transactions
Use of managing general agents (MGAs) and third‐party administrators (TPAs)
Separate accounts (Life only)
Risk transfer arrangements other than reinsurance (Health only)
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Exposure to Affiliated/Transactions
Property/Casualty # Life/A&H/Fraternal # Health #
6, 7, 8 6, 7, 8 6, 7, 8
PROCEDURE #6 assists analysts in determining whether any concerns exist regarding changes in the insurer’s corporate structure. Significant changes in corporate structure may materially impact the entity’s future financial condition and generally require prior regulatory approval. Analysts should closely analyze changes in corporate structure in order to understand the motivation for the change. By understanding the corporate structure in which the health entity operates, analysts may be able to foresee future problems and take appropriate action. For example, a common corporate structure analysts may encounter involves a holding company whose only significant asset is the stock of the insurance entity. The holding company may have financed the acquisition of the insurer through bank financing or other debt where the debt service by the holding company is completely dependent upon dividends paid by the insurer. This type of corporate structure
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III.B.5.d. Operational Risk Repository – Analyst Reference Guide warrants close attention by analysts to ensure that dividends are valid and in compliance with your state’s applicable dividend restrictions, and that any other payments by the insurer to the holding company are legitimate, rather than dividends in disguise. Analysts should also be alert to a corporate structure that includes affiliated brokers or intermediaries that may be recording unusual or significant levels of commissions and fees. When a corporate structure is involved that includes multiple tiers of affiliates where significant levels of surplus are comprised of investments in affiliates, analysts should focus on the level of real surplus that exists on a consolidated basis.
Additional steps may be performed if the insurer’s corporate structure elevates concerns about affiliated transactions. The primary objective is to understand the financial position of the parent company. By understanding the financial commitments of the parent, analysts will be able to better understand the parent’s motivation for entering into transactions with the insurer or other affiliates. Financial statements of affiliates may reveal unauthorized transactions in progress.
PROCEDURE #7 assists analysst in determining whether major transactions with affiliates are economic‐based and in compliance with regulatory guidelines. Several types of affiliated transactions are reported in the Annual Financial Statement, Schedule Y – Part 2, and explanatory comments are provided in the Annual Financial Statement, Notes to Financial Statements, #10. In addition, information is made available in Note #13, as well as in holding company filings (Form B and Form D) that are received from insurance holding company systems throughout the year. Analysts should refer to all of these sources of information in order to develop an understanding and assessment of the underlying affiliated transactions.
The following briefly describes the key concerns to analysts for several of the major affiliated transactions. For shareholder dividends, the major concern relates to whether the level of dividends is within the regulatory guidelines and whether the dividends should be considered extraordinary, and therefore requires prior regulatory approval. For capital contributions from the insurer to another affiliate, analysts should determine that such contributions do not substantially impact the financial condition of the insurer. For non‐cash capital contributions into the insurer, analysts should determine that the infusion is recorded at fair value so as to not arbitrarily inflate surplus. In the case of purchases, sales or exchanges of loans, securities, real estate, mortgage loans, or other investments, the concern to analysts is primarily one of valuation. These types of transfers should be at arm’s length and recorded at fair value.
Analysts should also be alert to possible abuses regarding the transfer of assets between property/casualty and life/health affiliates merely to impact the RBC calculation of the affiliates. For management agreements and service contracts, the main concerns to analysts relate to the type of service being performed and the reasonableness of the cost. This is a common area for abuse when parent companies desire to withdraw funds from the insurer but do not want to or would not be permitted to classify it as a shareholder dividend. Analysts should understand why the parties were motivated to enter into such contracts and particularly, the benefit to the insurer. For those services provided by an affiliate where a market already exists (such as data processing, actuarial, or investment management), an effective way for analysts to determine whether an arm’s length transaction exists is to contact one of the vendors and request a proposal or fee estimate for a similar service.
In understanding and evaluating these transactions, analysts should identify any discrepancies in reporting across the various information sources. In addition, analysts should verify that all regulatory approvals were received and that the transactions recorded in the Annual Financial Statement reflect the transactions as approved.
PROCEDURE #8 assists analysts in determining whether other affiliated transactions are legitimate and properly accounted for. Analysts’ primary objective in this area is to understand the substance of the transactions and to determine whether the transactions are economic‐based. Analysts should review the extent of transactions with officers and directors to ensure that the transactions are at arm’s length and are not detrimental to the financial condition of the insurer. Analysts should closely monitor other affiliated transactions to ensure that the insurer is not exposed to significant collectability risk. For example, if the insurer is included in a consolidated federal income tax return and a significant asset for federal income tax recoverable is recorded on the financial
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
III.B.5.d. Operational Risk Repository – Analyst Reference Guide statements of the insurer, analysts should closely review the financial statements of the parent to determine the parent’s ability to repay the receivable. Structured settlements acquired from an affiliated life insurance company may also represent a collectability risk to the insurer. When the amounts of structured settlements are significant, analysts should review and understand the financial statements of the life insurance affiliate. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐Detail Eliminated to Conserve Space‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
Additional Analysis and Follow‐Up Procedures
EXAMINATION FINDINGS direct analysts to consider a review of the recent examination report, summary review memorandum and communication with the examination staff to identify if any operational risk issues were discovered during the examination.
OVERALL OPERATING PERFORMANCE directs analysts to perform additional steps, as necessary, to understand and evaluate issues related to the insurer’s operating performance. Such steps include comparing actual results to projections, reviewing details of expenses by comparing to prior years and industry averages, and requesting additional information from the insurer and/or third parties (i.e., federal Centers for Medicare & Medicaid Services—CMS) to evaluate performance.
MEDICARE PART D OPERATING PERFORMANCE (LIFE/HEALTH) directs analysts to obtain and review supporting documents if concerns are identified related to the operating performance of Medicare Part D business. Supporting documents may include information on contracted benefits, premium and cost sharing with the CMS, and support for reserve, utilization and benefit cost assumptions projected in the development of the contract.
CORPORATE GOVERNANCE directs analysts to use the CGAD and/or request additional information from the insurer to review and evaluate relevant policies and processes such as board/committee charters, code of conduct policy, conflict of interest policy, bylaws, compensation policies, etc.
AFFILIATED TRANSACTIONS direct analysts to take additional steps if concerns regarding the economic substance of an affliated transaction are identified. Such steps include independent appraisals, comparisons to third‐party services/bids, detailed review of contracts, review of the financial condition of the affiliate, reviewing collection, etc. In addition, the analyst should consider recommending procedures for the next examination (targeted or full‐scope) to verify information reported on affiliated transactions and to further evaluate the fairness and reasonableness of expense allocations. In so doing, the analyst should consider additional guidance regarding criteria to be considered in determining whether an affiliated agreement merits review during an onsite examination at V.F. Domestic and/or Non‐Lead State Analysis – Analyst Reference Guide (Form D ‐ Prior Notice of a Transaction).
MGAs AND TPAs direct analysts to take additional steps if concerns regarding significant MGAs, TPAs and IPAs are identified. Such steps include comparing the performance of MGA/TPA/IPA business to other business written by the insurer, reviewing the reasonableness of commissions and fees paid, performing detailed contract review, obtaining audited financial statements, etc.
RISK TRANSFER OTHER THAN REINSURANCE directs analysts to take additional steps if concerns are identified in this area, including requesting and reviewing provider contracts, requesting and reviewing liability amounts for the top five provider groups, and contacting the appointed actuary regarding the nature and scope of the review of provider contracts during the actuarial review.
OWN RISK AND SOLVENCY ASSESSMENT (ORSA) directs analysts to obtain and review the latest ORSA Summary Report for the insurer or insurance group (if available) to assist in identifying, assessing and addressing risks faced by the insurer.
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
III.B.5.d. Operational Risk Repository – Analyst Reference Guide HOLDING COMPANY ANALYSIS directs analysts to obtain and review the holding company analysis work completed by the lead state to assist in identifying, assessing and addressing operational risks that could impact the insurer.
ENTERPRISE RISK MANAGEMENT (HEALTH) directs analysts to conduct additional procedures if concerns exist regarding the insurer’s ability to respond to a pandemic outbreak event. A pandemic is defined as an epidemic of infectious disease that has spread through human populations across a large region. The effects a pandemic may have on an insurer include, but are not limited to, significant increases in claims volume, increased loss costs and liquidity demands. Therefore, it is important to understand the processes and strategies put in place by health insurers to limit the effect of a pandemic on an insurer’s operations and ongoing solvency, including the results of stress testing performed to assess and quantify the impact on an insurer. Such procedures may include gaining an understanding of the company’s plans and processes for dealing with such an event and evaluating whether they address increased utilization, liquidity needs and impact on workforce.
Example Prospective Risk Considerations
The table provides analysts with example risk components for use in the Risk Assessment and Insurer Profile Summary branded risk analysis section and a general discription of the risk component. Note that the risks listed are only examples and do not represent a complete list of all risks available for the operational risk category.
Discussion of Quarterly Procedures
The Quarterly Operational Risk Repository procedures are designed to identify the following:
1. Concerns with the insurer’s Statement of Income or operating performance
2. Whether all securities owned are under the control of the insurer and in the insurer’s possession
3. Whether the insurer is a member of a holding company group and whether the corporate structure elevates concerns about affiliated transactions
4. Whether major transactions with affiliates are economic‐based and in compliance with regulatory guidelines
5. Whether the insurer's use of bonus withhold arrangements are significant
6. Concerns with the insurer's separate accounts
For additional guidance on individual procedure steps, please see the corresponding annual procedures discussed above.
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.C. Domestic and/or Non‐Lead State Analysis – Form D Procedures
Special Notes:
The following procedures do not supersede state regulation but are merely additional guidance analysts may consider useful only if the state has adopted the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions, (#450).
Form D – Prior Notice of a Transaction
Form D is transaction specific and is not part of the regular annual/quarterly analysis process. The review of these transactions may vary as some states may have regulations that differ for Form D.
Compliance Assessment
1. If a material transaction has occurred, did the insurer file a Form D with its domestic state? (Section 5 of the NAIC Insurance Holding Company System Regulatory Act (#440) requires each insurer to give prior notice of certain proposed transactions).
2. Did Form D include the following information for each party to the transaction (Form D of Insurance Holding Company System Model Regulation with Reporting Forms and Instructions, (#450):
Name
Home office address
Principal executive office address
The organizational structure
A description of the nature of the parties’ business operations
The relationship, if any, of other parties to the transaction to the insurer filing the notice, including any ownership or debtor/creditor interest by any other parties to the transaction in the insurer seeking approval, or by the insurer filing the notice in the affiliated parties
The name(s) of the affiliate(s) that will receive, in whole or in substantial part, the proceeds of the transaction, when the transaction is with a non‐affiliate
3. Does Form D include the following information for each transaction for which notice is being given:
A statement as to the section of the holding company regulation Form D filing is being made
A statement as to the nature of the transaction
A statement of how the transaction meets the ‘fair and reasonable’ standard of the state’s insurance holding company law or regulation; and
The proposed effective date of the transaction
4. Does Form D provide a brief description of the following:
Amount and source of funds, securities, property or other consideration for the sale, purchase, exchange, loan, extension of credit, guarantee, or investment
Whether any provision exists for purchase by the insurer filing notice, by any party to the transaction, or by any affiliate of the insurer filing notice
A description of the terms of any securities being received, if any
A description of any other agreements relating to the transaction, such as contracts or agreements for services, consulting agreements and the like
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.C. Domestic and/or Non‐Lead State Analysis – Form D Procedures
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12. For management and service agreements, does Form D include the following:
A brief description of the managerial responsibilities or services to be performed
A brief description of the agreement, including a statement of its duration, together with brief descriptions of the basis for compensation and the terms under which payment or compensation is to be made (compensation bases other than actual cost should be closely evaluated)
13. For cost‐sharing arrangements, determine whether the Form D includes the following:
A brief description of the purpose of the agreement
A description of the period of time during which the agreement is to be in effect
A brief description of each party’s expenses or costs covered by the agreement
A brief description of the accounting basis to be used in calculating each party’s costs under the agreement
A brief statement as to the effect of the transaction upon the insurer’s surplus
A statement regarding the cost allocation methods that specifies whether proposed charges are based on ‘cost or market.’ If market based, include the rationale for using market instead of cost, including justification for the company’s determination that amounts are fair and reasonable
A statement regarding compliance with the NAIC Accounting Practices and Procedures Manual (AP&P Manual) regarding expense allocation
14. For management, service and cost‐sharing agreements, in accordance with the holding company act and regulation of the state, does the agreement1:
Identify the person providing services and the nature of such services
Set forth the methods to allocate costs
Require timely settlement, not less frequently than on a quarterly basis, and compliance with the requirements in the AP&P Manual
Prohibit advancement of funds by the insurer to the affiliate except to pay for services defined in the agreement
State that the insurer will maintain oversight for functions provided to the insurer by the affiliate and that the insurer will monitor services annually for quality assurance
Define books and records and data of the insurer to include all books and records and data developed or maintained under or related to the agreement that are otherwise the property of the insurer, in whatever form maintained, including, but not limited to, claims and claim files, policyholder lists, application files, litigation files, premium records, rate books, underwriting manuals, personnel records, financial records or similar records within the possession, custody or control of the affiliate
Specify that all books and records and data of the insurer are and remain the property of the insurer, and:
1 All underlined text in Procedure 14 represents amendments to Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (Model #450) Section 19 as adopted by the NAIC on Aug. 17, 2021. As state insurance departments are still in the process of adopting these amendments into state law, analysts should refer to their own state’s holding company law or regulation regarding compliance with Form D filings of management, service and cost‐sharing agreements.
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.C. Domestic and/or Non‐Lead State Analysis – Form D Procedures
o aAre subject to control of the insurer
o Are identifiable
o Are segregated from all other persons’ records and data or are readily capable of segregation at no additional cost to the insurer2
State that all funds and invested assets of the insurer are the exclusive property of the insurer, held for the benefit of the insurer and are subject to the control of the insurer
Include standards for termination of the agreement with and without cause
Include provisions for indemnification of the insurer in the event of gross negligence or willful misconduct on the part of the affiliate providing the services and for any actions by the affiliate that violate provisions of the agreement required in Subsections 19B(11), 19B(12), 19B(13), 19B(14) and 19B(15) of this regulation
Specify that, if the insurer is placed in supervision, seizure, conservatorship or receivership pursuant to [supervision and receivership acts]receivership or seized by the insurance commissioner under the State Receivership Act:
o All of the rights of the insurer under the agreement extend to the receiver or commissioner to the extent permitted by [law of the state]
o All records and data of the insurer shall be identifiable and segregated from all other persons’ records and data or readily capable of segregation at no additional cost to the receiver or the commissioner
o A complete set of All books and records and data will immediately be made available to the receiver or the insurance commissioner, shall be made available in a usable format and shall be turned over to the receiver or insurance commissioner immediately upon the receiver or the commissioner’s request and the cost to transfer data to the receiver or the commissioner shall be fair and reasonable3
o The affiliated person(s) will make available all employees essential to the operations of the insurer and the services associated therewith for the immediate continued performance of the essential services ordered or directed by the receiver or commissioner
Specify that the affiliate has no automatic right to terminate the agreement if the insurer is placed into supervision, seizure, conservatorship or receivership pursuant to [supervision and receivership acts]the State Receivership Act
Specify that the affiliate will provide the essential services for a minimum period of time [specified in the agreement] after termination of the agreement, if the insurer is placed into supervision, seizure, conservatorship or receivership pursuant to [supervision and receivership acts], as ordered or directed by the receiver or commissioner. Performance of the essential services will continue to be provided without regard to pre‐receivership unpaid fees, so long as the affiliate continues to receive timely payment for post‐receivership services rendered, and unless released by the receiver, commissioner or supervising court
Specify that the affiliate will continue to maintain any systems, programs, or other infrastructure notwithstanding supervision, seizure, conservatorship or receivership pursuant to [supervision and receivership acts]a seizure by the insurance commissioner under the State Receivership Act, and will make them available to the receiver, or commissioner as ordered or directed by the receiver or commissioner
2 In Model #450, the “at no additional cost to the insurer” language is not intended to prohibit recovery of the fair and reasonable cost associated with transferring records and data to the insurer, receiver or commissioner. Since records and data of the insurer are the property of the insurer, the insurer, receiver or commissioner should not pay a cost to segregate commingled records and data from other data of the affiliate. 3 In Model #450, the fair and reasonable cost to transfer data to the receiver or commissioner refers to the cost associated with physically or electronically transferring records and data files to the receiver or commissioner. This cost does not include costs to separate comingled data and records that should have been segregated or readily capable of segregation.
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.C. Domestic and/or Non‐Lead State Analysis – Form D Procedures
for so long as the affiliate continues to receive timely payment for post‐receivership services rendered, and unless released by the receiver, commissioner or supervising court
Specify that, in furtherance of the cooperation between the receiver and the affected guaranty association(s) and subject to the receiver’s authority over the insurer, if the insurer is placed into supervision, seizure, conservatorship or receivership pursuant to [supervision and receivership acts], and portions of the insurer’s policies or contracts are eligible for coverage by one or more guaranty associations, the affiliate's commitments under Subsections 19B(11), 19B(12), 19B(13) and 19B(14) of this regulation will extend to such guaranty association(s)
15. For any Form D affiliated agreement, in accordance with the holding company regulation, processes and procedures of the state, review and consider compliance with any state‐specific requirements.
Assessment of Form D – Prior Notice of a Transaction
156. Review Form D for any significant and/or unusual items or inconsistencies. Determine if the transaction appears is fair and reasonable as required under Section 5A(1)(a) of Model #440 by consideringin relation to the following:
a. a. For reinsurance agreements, are the general terms, settlement provision, and pricing consistent with those of non‐affiliated agreements?
b. b. For management, service or cost‐sharing agreement, are the charges or fees to be paid by/to the insurer reasonable in relation to the cost of such services?
c. c. Are fees paid for related party transactions consistent with the applicable section of the state’s Insurance Holding Company Act? (Note: Insurers should not use related‐party transactions as a method for transferring profits of the insurance company to an affiliate or related party.)
d. d. Will the insurer have adequate surplus upon completion of the transaction?
e. e. Does the transaction comply with the NAIC AP&P Manual? Are expenses incurred and payment received allocated to the insurer in conformity with customary insurance accounting practices consistently applied?
f. Are books, accounts and records of each party maintained clearly and accurately to disclose the nature and details of the transactions, including such information as is necessary to support the reasonableness of charges or fees to the respective parties?
e.g. Does the transaction comply with the state’s requirements regarding the insurer’s ownership of data and records that are held by an affiliate, and control of premium or other funds belonging to the insurer that are collected or held by an affiliate?4
h. f. Do unusual circumstances, risks or concerns exist?
f.i. Any other state‐specific requirements for determining and reviewing fair and reasonableness.
167. Determine whether the transaction was accounted for properly, based on statutory accounting principles, with the NAIC AP&P Manual.
4 Procedure 16.h represents amendments to Insurance Holding Company System Model Act (Model #440) Section 5A(1)(h) and 5A(1)(i) as adopted by the NAIC on Aug. 17, 2021. As state insurance departments are still in the process of adopting these amendments into state law, analysts should refer to their own state’s holding company law or regulation regarding compliance with Form D filings of management, service and cost‐sharing agreements.
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.C. Domestic and/or Non‐Lead State Analysis – Form D Procedures
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Summary and Conclusion
Develop and document an overall summary and conclusion regarding the review of the holding company Form D.
Recommendations for further action, if any, based on the overall conclusion above:
Contact the insurer seeking explanations or additional information
Obtain the insurer’s business plan
Require additional interim reporting from the insurer, particularly if the agreement is market‐based or if there are other ongoing concerns noted
Refer concerns to the examination section for targeted examination or follow‐up on the next full‐scope examination. Consider suggesting specific procedures to be performed by placing them in the supervisory plan section of the IPS.
Engage external resources to assist in the review of complex affiliated agreements (i.e., an independent actuary or other reinsurance expert to review specific reinsurance contracts, investment expert to review affiliated investment management agreements)
Meet with the insurer’s management
Other (explain)
Notice to Insurer
In the notice back to the insurer, state that approval of the agreement is based upon representations made in the filing, all of which are subject to verification on examination. In addition, state that the department reserves the right to review the charges and fees for fairness and reasonableness as part of future financial examinations or at any time validation is warranted. For any issues found on exam, a correction may be required on a going forward basis.
Consider whether any additional stipulations or orders should be imposed on the agreement as a result of the review and communicated in the notice to the insurer, such as the interim reporting outlined above.
Analyst: Date:
Supervisor Review: Date:
Supervisor Comments:
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.F. Domestic and/or Non‐Lead State Analysis – Analyst Reference Guide
Non‐Lead State Holding Company System Analysis Procedures
Refer to section VI.C. Group‐wide Supervision ‐ Insurance Holding Company System Analysis Guidance (Lead State) for additional guidance on holding company analysis procedures.
Forms A, B, D, E (or Other Required Information), and Extraordinary Dividend/ Distribution
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Form D – Prior Notice of a Transaction
PROCEDURES #1‐16 assist analysts in reviewing the Form D filing for completeness and help guide analysts through major items of information required by Form D.
Best Practices for Affiliated Management and Service Agreements
Charges for Fees for Services
SSAPs 25 and 70 and Appendix A‐440 discuss the Transactions Involving Services, Allocation of Costs, and Other Management Requirements
Transactions entered into at arm’s length by unaffiliated parties who willingly and freely (not under compulsion) enter into a transaction and arrive by negotiation at an agreed upon price (value) are by definition fair and reasonable. In the case of two or more affiliates, transactions can be deemed to be at arm’s length (and therefore fair and reasonable) if the transactions are entered into at rates equivalent to current market rates or on an allocation of actual costs. Some regulators consider transactions of an allocation of “costs plus a mark‐up or discount” as neither at market nor at cost because these transactions may not be deemed to be an arm’s length transaction and may require more analysis to determine if it is fair and reasonable.
Transactions at Market Rate – there are at least three ways to establish fairness and reasonability with substantiating documents:
The entity providing the service performs a substantial portion of its business with non‐affiliated entities and can establish a price for affiliates similar to charges to non‐affiliates, since the non‐affiliates are assumed to have negotiated at arm’s length.
The entity receiving the services analyzes and retains up‐to‐date documentation of localized market rates of services that could be provided to the entity by non‐affiliated parties. Since each transaction of service is unique, determining a fair and reasonable charge is very difficult and time consuming. This method is the least relevant and reliable, and not efficient in establishing the rate.
Transactions at cost plus mark‐up that is equal to market rate should be reviewed carefully and should be deemed fair and reasonable. Transactions at cost plus mark‐up that is less than market rate should be reviewed carefully to determine if it is fair and reasonable.
Transactions at Cost – this is the simplest method to determine fair and reasonable. The costs borne by the entity providing the agreed upon services are simply allocated to the entity receiving those services. As stated in the SSAPs, cost allocation must be done in ways that yield the most accurate results. Theoretically the service provider should not make a profit or incur a loss if the transaction is at cost.
Can be apportioned directly as if the entity incurring the expense had paid for it directly, or
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.F. Domestic and/or Non‐Lead State Analysis – Analyst Reference Guide
Allocated using pertinent factors or ratios such as studies of employee activities, salary ratios or similar
analysis.
Transactions at cost less a discount should be reviewed carefully to determine if it is fair and reasonable.
If cost is the method used (or required) to establish “reasonability,” identifying a “rate per unit” estimated on the amount of costs and number of units, does not in and of itself make the charge reasonable. This rate per unit is a close approximation of the actual costs. Using a rate per unit is merely a method for easily calculating interim payments that are due to the provider of the service. If a rate per unit is used to allocate costs, an expense “true‐up” needs to be prepared and settled at least annually to reconcile the estimated costs (payments) with the actual costs incurred. The expense “true up” essentially replaces the estimated amounts with the actual amounts and includes the subsequent settlement of any differences.
Note: Alien transactions will need additional deliberation due to potential conflicts between international tax laws and provision of services at cost vs. market.
Regulator Considerations
Items for initial filing review—the actual document(s) should be filed, not merely a summary:
Identify and document:
o The specific services that will be provided
The specific expenses and/or costs that are to be covered by each party
o The entity(ies) providing and receiving each of those services
Separate affiliate entities from non‐affiliates
o Allocation method (market or cost) of the agreement
The charges or fees for the services indicated
o The accounting basis used to apportion expenses
o Confirm that contract provisions will be accounted for in accordance with SSAPs
o Invoicing and settlement terms (should allow for admittance under SSAP 96)
o The effective date and termination date
o The records rights and policies of each entity that is a party in the contract
o The governing law
o Any unique and relevant clauses not covered above
o Financial statements of the entity providing the services
Other Considerations for Review of the Agreement:
o Determine the reasonableness of the allocation method and the charges or fees
o Determine the agreement does not divert funds that could be considered a dividend
o Determine the agreement does not result in the insurer’s fair share of expenses being retained by or allocated to a parent/affiliate, thereby masking the true performance of insurance operations
o Summarize the business rationale for purpose and need of the agreement
o Summarize the financial impact of the agreement on the company’s surplus or financial condition
o Summarize the impact the agreement would have on the priority status of the company
o Summarize the reasons to approve/disapprove the agreement
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Attachment A
Financial Analysis Handbook 2020 Annual / 2021 Quarterly
V.F. Domestic and/or Non‐Lead State Analysis – Analyst Reference Guide
Examination Verification and Validation
While the analyst is encouraged to take steps to assess and evaluate the information provided in the Form D filing as outlined above, it may be necessary to reevaluate the appropriateness of affiliated management and service agreements during an onsite examination. In determining which affiliated agreements merit consideration during an onsite examination, the analyst should assess agreements according to the following general criteria:
Is the agreement new or significantly modified since the prior examination?
What is the nature and extent of services provided under the agreement?
What is the basis for expense allocation under the agreement and what support is provided for that basis (i.e., market‐based allocations with limited support would be of highest concern)?
Does the ongoing performance of the agreement raise concerns (i.e., excessive profitability of affiliated service provider and/or high expense structure of insurer)?
If concerns are noted based on these criteria, the analyst should consider recommending specific follow‐up procedures to be performed during an onsite examination, as appropriate. For example, the examination team may be able to verify and validate assertions made by management in the Form D filing, as well as verify that the agreement has been implemented and is functioning as approved by the department. In addition, the examination team may be in a better position to assess the fairness and reasonableness of expense allocations after the agreement has been in place for a period of time. Suggested follow‐up procedures can be included in the Supervisory Plan section of the IPS and/or covered in the examination planning meeting between the assigned analyst and the examination team.
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Attachment A
Proposed Revisions to Financial Condition Examiners Handbook
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Attachment A
III. GENERAL EXAMINATION CONSIDERATIONS
This section covers procedures and considerations that are important when conducting financial condition examinations. The discussion here is divided as follows:
A. General Information Technology Review B. Materiality C. Examination Sampling D. Business Continuity E. Using the Work of a Specialist F. Outsourcing of Critical Functions G. Use of Independent Contractors on Multi-State Examinations H. Considerations for Insurers in Run-Off I. Considerations for Potentially Troubled Insurance Companies J. Comments and Grievance Procedures Regarding Compliance with Examination Standards
F. Outsourcing of Critical Functions
The examiner is faced with additional challenges when the insurer under examination outsources critical business functions to third-parties. It is the responsibility of management to determine whether processes which have been outsourced are being effectively and efficiently performed and controlled. This oversight may be performed through a number of methods including performing site visits to the third-party or through a review of SSAE 18 work that has been performed. In some cases, performance of site visits may even be mandated by state law. However, regardless of where the business process occurs or who performs it, the examination must conclude whether financial solvency risks to the insurer have been effectively mitigated. Therefore, if the insurer has failed to determine whether a significant outsourced business process is functioning appropriately, the examiner may have to perform testing of the outsourced functions to ensure that all material risks relating to the business process have been appropriately mitigated. The guidance below provides examiners additional information about the outsourcing of critical functions a typical insurance company may utilize. The guidance does not create additional requirements for insurers to comply with beyond what is included in state law, but may assist in outlining existing requirements that may be included in state law and should be used by examiners to assess the appropriateness of the company’s outsourced functions. Within the guidance, references to relevant NAIC Model Laws have been included to provide examiners with guidance as to whether compliance in certain areas is required by law. To assist in determining whether an individual state has adopted the provisions contained within the referenced NAIC models, examiners may want to review the state pages provided within the NAIC’s Model Laws, Regulations and Guidelines publication to understand related legislative or regulatory activity undertaken in their state.
Affiliated Service Providers
Specific requirements related to an insurance company’s utilization of cost sharing services and management services with affiliates are included in the NAIC’s Insurance Holding Company System Model Regulation (Model # 450). Prior to entering into one of these agreements, an insurer must first give notice to the State Insurance Department of the proposed transaction via the Form D filing. As the receipt and review of the Form D filing is typically the responsibility of the Department Analyst, the examiner should leverage that review to the extent possible. If the agreement has not been obtained and reviewed by the analyst, or if significant agreements have not been modified since 12/31/14 (date that new provisions were effective in Model #450), the examiner should obtain and evaluate whether the agreement includes the provisions listed below: Agreements for cost sharing services and management services shall at a minimum and as applicable:
1. Identify the person providing services and the nature of such services;
2. Set forth the methods to allocate costs;
© 2021 National Association of Insurance Commissioners 28
Attachment A
FINANCIAL CONDITION EXAMINERS HANDBOOK
3. Require timely settlement, not less frequently than on a quarterly basis, and compliance with the requirements in
the Accounting Practices and Procedures Manual;
4. Prohibit advancement of funds by the insurer to the affiliate except to pay for services defined in the agreement;
5. State that the insurer will maintain oversight for functions provided to the insurer by the affiliate and that the insurer will monitor services annually for quality assurance;
6. Define books and records of the insurer to include all books and records developed or maintained under or related to the agreement;
7. Specify that all books and records of the insurer are and remain the property of the insurer and are subject to control of the insurer;
8. State that all funds and invested assets of the insurer are the exclusive property of the insurer, held for the benefit of the insurer and are subject to the control of the insurer;
9. Include standards for termination of the agreement with and without cause;
10. Include provisions for indemnification of the insurer in the event of gross negligence or willful misconduct on the part of the affiliate providing the services;
11. Specify that, if the insurer is placed in receivership or seized by the commissioner under the State Receivership Act:
a. all of the rights of the insurer under the agreement extend to the receiver or commissioner; and,
b. all books and records will immediately be made available to the receiver or the commissioner, and shall
be turned over to the receiver or commissioner immediately upon the receiver or the commissioner’s request;
12. Specify that the affiliate has no automatic right to terminate the agreement if the insurer is placed in receivership
pursuant to the State Receivership Act; and
13. Specify that the affiliate will continue to maintain any systems, programs, or other infrastructure notwithstanding a seizure by the commissioner under the State Receivership Act, and will make them available to the receiver, for so long as the affiliate continues to receive timely payment for services rendered.
If certain provisions are missing from affiliate service agreements, the examination team should encourage/require revisions to include all appropriate provisions, depending upon the date of the agreement and provisions required by Model #450 at that date. In addition, in accordance with the risk-focused examination process and utilizing guidance from the Related Party Repository, the examiner should consider whether terms of significant affiliated agreements are fair and equitable. Examiners should also note that additional guidance for reviewing individual affiliated transactions is located in Section 1, Part IV D in this Handbook.
Affiliated Service Agreements
An affiliated service agreement should specify whether the charges are based on ‘cost or market’. Agreements with a cost-based structure utilize the actual cost to the service provider, requiring less judgment in setting the price charged by the affiliate. As such, there is no profit or loss to the service provider with the transaction. Within cost-based expense agreements, ensuring proper allocation of costs is essential so the insurance company is not being charged for additional or inappropriate costs. Agreements utilizing a market-based rate, however, require more judgment when setting the price charged by the affiliate. If a market-based structure is utilized, the rationale for using market instead of cost, as well as the
© 2021 National Association of Insurance Commissioners 29
Attachment A
justification for the company’s determination that amounts are fair and reasonable, should be thoroughly documented by management. It is vital to ensure the fairness and reasonability of market-based rates to ensure that the price charged by the affiliate does not enable the transfer of excessive profits from the insurance company to the affiliate.
Typically, the department analyst (or other assigned regulator) conducts the initial assessment of such agreements through its review and approval of Form D filings. However, due to the inherent complexity of a market-based agreement, it may be prudent for the exam team to verify the initial approval by performing additional procedures to evaluate the appropriateness of the rate used after the agreement has been placed in service. For example, if several years have elapsed since entering into the affiliated service agreement, the examiner can review whether and to what extent the service provider profited due to the terms of the agreement. Based upon recommendations from the department analyst during examination planning and/or the examination’s risk assessment procedures, it may be appropriate to review significant affiliated transactions that utilize market-based expense structures for in-depth review (see Related Party Repository for possible procedures). Any findings from this review should be reported back to the analyst via the Summary Review Memorandum (SRM), exit conference, etc.
© 2021 National Association of Insurance Commissioners 30
Attachment A
EXAMINATION REPOSITORY – RELATED PARTY
Identification of Risks: To ensure that the examiner appropriately identifies and addresses all relevant risks, it is important that examiners consider information contained within the Own Risk and Solvency Assessment (ORSA), Group Profile Summary (GPS), and insights shared from the Department’s Financial Analysts. An understanding of the group, including the Ultimate Controlling Party, will provide the examiner with a roadmap to help in effectively addressing the risks posted to the insurer by its related parties. Annual Statement Blank Line Items Listed below are the corresponding Annual Statement line items that are related to the identified risks contained in this exam repository: Receivables from Parent, Subsidiaries and Affiliates Payable to Parent, Subsidiaries and Affiliates Amount Provisionally Held for Deferred Dividend Policies (Life Companies) Dividends to Stockholders Declared and Unpaid (Life Companies) Please Note:
Transactions resulting from related party tax sharing and reinsurance agreements are typically reported on the appropriate tax and reinsurance financial statement line items, which are not listed above.
The examiner should consider the company’s compliance with the state statutory guidelines when reviewing affiliate and other related-party contracts.
For additional guidance on affiliated service agreements, see Section 1, Part III, F – Outsourcing of Critical Functions.
For additional guidance on related party and intercompany transactions, see Section 1, Part IV, D - Related Party/Holding Company Considerations.
Relevant Statements of Statutory Accounting Principles (SSAPs) All of the relevant SSAPs related to the related party process, regardless of whether or not the corresponding risks are included within this exam repository, are listed below: No. 15 Debt and Holding Company Obligations No. 25 Affiliates and Other Related Parties No. 64 Offsetting and Netting of Assets and Liabilities No. 67 Other Liabilities No. 70 Allocation of Expenses No. 97 Investments in Subsidiary, Controlled and Affiliated Entities
© 2021 National Association of Insurance Commissioners 31
Attachment A
Iden
tifi
ed R
isk
B
ran
ded
R
isk
E
xam
A
srt.
C
riti
cal
Ris
k
Pos
sib
le C
ontr
ols
P
ossi
ble
Tes
t of
C
ontr
ols
Pos
sib
le D
etai
l Tes
ts
Oth
er T
han
Fin
anci
al R
epor
tin
g R
isk
s A
rel
ated
par
ty (
incl
udin
g ho
ldin
g co
mpa
ny)
is o
verl
y re
lian
t on
the
insu
rer
for
ongo
ing
surp
lus
supp
ort.
LQ
O
ther
R
PH
CC
T
he in
sure
r ha
s po
lici
es in
pl
ace
to e
nsur
e th
at
divi
dend
s pa
id to
aff
ilia
tes
are
wit
hin
regu
lato
ry li
mit
s,
are
appr
oved
by
the
boar
d of
dir
ecto
rs (
or c
omm
itte
e th
ereo
f) a
nd h
ave
rece
ived
re
gula
tory
app
rova
l (if
re
quir
ed)
prio
r to
pay
men
t. T
he in
sure
r (o
r pa
rent
) m
anag
es it
s de
bt le
vels
and
le
vera
ge p
osit
ion
thro
ugh
capi
tal c
ontr
ibut
ions
and
ot
her
form
s of
fin
anci
ng, a
s w
ell a
s ca
sh f
low
ana
lysi
s to
ens
ure
that
deb
t bur
dens
do
not
cau
se a
so
lven
cy/l
iqui
dity
str
ain
at
the
pare
nt o
r it
s in
sura
nce
subs
idia
ries
.
Rev
iew
insu
rer
docu
men
tati
on s
how
ing
that
div
iden
ds a
re w
ithi
n re
gula
tory
lim
its,
are
ap
prov
ed b
y th
e bo
ard
of
dire
ctor
s (o
r co
mm
itte
e th
ereo
f) a
nd h
ave
rece
ived
reg
ulat
ory
appr
oval
(if
req
uire
d)
prio
r to
pay
men
t. R
evie
w d
ocum
enta
tion
on
inte
rnal
str
ateg
ies
and
prac
tice
s to
ens
ure
debt
le
vels
are
pro
perl
y m
anag
ed a
nd th
at
suff
icie
nt li
quid
ity
is
avai
labl
e to
mee
t ob
liga
tion
s.
Ass
ess
the
insu
ranc
e ho
ldin
g co
mpa
ny
orga
niza
tion
’s s
truc
ture
, ov
eral
l gro
up s
truc
ture
and
th
e ho
ldin
g co
mpa
ny’s
re
lian
ce o
n it
s su
bsid
iari
es
for
divi
dend
s. C
onsi
der
the
prof
itab
ilit
y an
d su
cces
s of
ot
her
com
pani
es w
ithi
n th
e ho
ldin
g co
mpa
ny, a
s w
ell
as c
apit
al r
esou
rces
and
de
bt m
atur
itie
s as
par
t of
the
asse
ssm
ent.
Rev
iew
his
tori
cal c
ash
flow
s fr
om th
e in
sure
r to
it
s af
fili
ated
com
pani
es
sinc
e th
e la
st e
xam
inat
ion,
an
d co
mpa
re to
sta
tuto
ry
divi
dend
cap
acit
y cu
rren
tly
avai
labl
e.
Tra
ce a
ll d
ivid
ends
re
quir
ing
regu
lato
ry
appr
oval
to in
sura
nce
depa
rtm
ent d
ocum
enta
tion
.
The
insu
rer
is o
verl
y re
lian
t on
an
affi
liat
e fo
r on
goin
g su
rplu
s su
ppor
t.
Ple
ase
Not
e: R
evie
w o
f th
is
risk
sho
uld
be p
erfo
rmed
in
conj
unct
ion
wit
h th
e C
apit
al a
nd S
urpl
us
Rep
osit
ory.
CR
L
Q
Oth
er
RP
HC
C
The
insu
rer
mon
itor
s th
e fi
nanc
ial p
osit
ion
of th
e af
fili
ate
prov
idin
g su
rplu
s su
ppor
t.
The
aff
ilia
te p
rovi
des
a gu
aran
tee
of it
s on
goin
g su
ppor
t for
the
insu
rer.
T
he in
sure
r m
onit
ors
all
guar
ante
e ag
reem
ents
and
an
alyz
es th
e gu
aran
tor’
s
Man
agem
ent r
evie
ws
fina
ncia
l res
ults
of
the
affi
liat
e on
a q
uart
erly
or
annu
al b
asis
. O
btai
n do
cum
enta
tion
su
ppor
ting
the
guar
ante
e pr
ovid
ed b
y th
e af
fili
ate.
V
erif
y th
at m
anag
emen
t pe
rfor
ms
an a
sses
smen
t of
the
guar
anto
r’s
abil
ity
Rev
iew
the
affi
liat
e’s
fina
ncia
l pos
itio
n to
de
term
ine
the
abil
ity
to
prov
ide
the
need
ed
supp
ort.
C
ompa
re th
e am
ount
gu
aran
teed
by
the
pare
nt/a
ffil
iate
wit
h th
e su
rplu
s of
the
insu
rer
rece
ivin
g th
e gu
aran
tee.
E
valu
ate
the
poss
ibil
ity
the
© 2021 National Association of Insurance Commissioners 32
Attachment A
Iden
tifi
ed R
isk
B
ran
ded
R
isk
E
xam
A
srt.
C
riti
cal
Ris
k
Pos
sib
le C
ontr
ols
P
ossi
ble
Tes
t of
C
ontr
ols
Pos
sib
le D
etai
l Tes
ts
abil
ity
to f
ulfi
ll th
e ag
reem
ent i
f ne
cess
ary.
to
ful
fill
the
agre
emen
t on
a p
erio
dic
basi
s.
guar
ante
e w
ill n
ot b
e fu
lfil
led
and
the
pote
ntia
l im
pact
to th
e in
sure
r.
Ver
ify
any
coll
ater
al
mai
ntai
ned
in a
ccor
danc
e w
ith
the
guar
ante
e.
Par
ent,
hold
ing
com
pani
es
or o
ther
aff
ilia
tes
mig
ht
beco
me
inso
lven
t or
have
li
quid
ity
issu
es.
Ple
ase
Not
e:
Thi
s ri
sk is
inte
nded
to
focu
s on
the
stra
tegi
c or
re
puta
tion
al im
pact
if
affi
liat
es e
xper
ienc
e so
lven
cy o
r li
quid
ity
issu
es.
ST
R
P
Oth
er
RP
HC
C
The
insu
rer
mon
itor
s pa
rent
or
hol
ding
com
pani
es f
or
fina
ncia
l sol
venc
y/li
quid
ity
issu
es.
The
boa
rd o
f di
rect
ors
(or
com
mit
tee
ther
eof)
rev
iew
s st
rate
gic
busi
ness
pla
ns a
nd
fina
ncia
l rep
orts
for
oth
er
mem
bers
of
the
hold
ing
com
pany
sys
tem
and
ev
alua
tes
any
risk
s an
d ne
w
init
iati
ves
that
cou
ld im
pact
th
e in
sure
r in
clud
ing
repu
tati
onal
ris
ks a
nd le
gal
risk
s. O
ther
ent
itie
s in
the
hold
ing
com
pany
sys
tem
m
ake
pres
enta
tion
s to
the
boar
d to
exp
lain
ope
rati
ons
and
risk
s.
Obt
ain
evid
ence
of
revi
ew o
f pa
rent
or
hold
ing
com
pany
fi
nanc
ial i
nfor
mat
ion
by
the
insu
rer.
Ens
ure
liqu
idity
is a
ppro
pria
tely
co
nsid
ered
. R
evie
w m
eeti
ng m
inut
es
of th
e bo
ard
of d
irec
tors
(o
r co
mm
itte
e th
ereo
f)
for
evid
ence
of
disc
ussi
ons
and
acti
ons
take
n to
mit
igat
e an
y co
ntag
ion
risk
s.
Obt
ain
and
revi
ew p
aren
t or
hol
ding
com
pany
fi
nanc
ial i
nfor
mat
ion
(inc
ludi
ng th
e E
nter
pris
e R
isk
Rep
ort/
OR
SA
if
avai
labl
e) f
or in
dica
tion
s of
fin
anci
al s
olve
ncy
or
liqu
idit
y is
sues
. If
sig
nifi
cant
issu
es a
re
iden
tifi
ed, p
erfo
rm
proc
edur
es to
eva
luat
e th
e po
tent
ial s
olve
ncy
impa
cts.
If
nec
essa
ry, n
otif
y th
e fi
nanc
ial a
naly
st o
f th
e co
ncer
n an
d re
ques
t ad
diti
onal
mon
itor
ing
of
the
insu
rer.
Fin
anci
al R
epor
tin
g R
isk
s T
he in
sure
r is
not
pro
perl
y id
enti
fyin
g re
late
d-pa
rty
acti
viti
es.
OP
S
T
AC
V
A
PD
C
M
CO
RP
HC
C
The
insu
rer
mai
ntai
ns a
list
of
all
rel
ated
par
ties
—
incl
udin
g pe
nsio
n fu
nds
and
othe
r tr
usts
est
abli
shed
for
em
ploy
ees,
maj
or b
orro
wer
s an
d le
nder
s, a
nd s
igni
fica
nt
agen
ts, b
roke
rs, p
rodu
cers
an
d pr
ovid
ers
— th
at is
ap
prov
ed b
y m
anag
emen
t
Obt
ain
the
rela
ted-
part
y li
stin
g an
d ve
rify
/ass
ess
the
met
hod
man
agem
ent
uses
to e
nsur
e co
mpl
eten
ess
and
util
izat
ion
of th
e li
st.
Rev
iew
upd
ates
to th
e re
late
d pa
rty
list
ing
to
Per
form
pro
cedu
res
to
iden
tify
rel
ated
par
ties
su
ch a
s:
Rev
iew
ing
min
utes
Rev
iew
ing
shar
ehol
der
list
ings
of
clos
ely
© 2021 National Association of Insurance Commissioners 33
Attachment A
Iden
tifi
ed R
isk
B
ran
ded
R
isk
E
xam
A
srt.
C
riti
cal
Ris
k
Pos
sib
le C
ontr
ols
P
ossi
ble
Tes
t of
C
ontr
ols
Pos
sib
le D
etai
l Tes
ts
and
prov
ided
to k
ey
empl
oyee
s.
As
sign
ific
ant t
rans
acti
ons
occu
r, m
anag
emen
t co
nsid
ers
whe
ther
new
re
late
d pa
rty
rela
tion
ship
s ha
ve b
een
esta
blis
hed
whi
ch
are
then
add
ed to
the
list
of
rela
ted
part
ies.
ensu
re th
e li
stin
g is
be
ing
prop
erly
m
aint
aine
d.
held
com
pani
es to
id
enti
fy p
rinc
ipal
sh
areh
olde
rs
R
evie
win
g m
ater
ial
inve
stm
ent
tran
sact
ions
dur
ing
the
peri
od u
nder
ex
amin
atio
n to
de
term
ine
whe
ther
th
ey c
ause
ano
ther
en
tity
to b
ecom
e a
rela
ted
part
y
Rev
iew
ing
conf
lict
-of-
inte
rest
st
atem
ents
ob
tain
ed b
y th
e en
tity
fro
m
man
agem
ent a
nd
dire
ctor
s.
Pre
pare
a li
st o
f en
titi
es
and/
or p
erso
ns th
at a
ppea
r to
be
rela
ted
part
ies
and
com
pare
to m
anag
emen
t’s
list
ing,
if o
ne e
xist
s. A
sk
man
agem
ent a
bout
the
insu
rer’
s re
lati
onsh
ips
wit
h th
ese
enti
ties
and
/or
pers
ons.
Det
erm
ine
whe
ther
the
enti
ties
and
/or
pers
ons
mee
t the
def
init
ion
of a
“re
late
d pa
rty”
und
er
the
dom
icil
iary
sta
te’s
in
sura
nce
code
. R
evie
w a
ccou
ntin
g re
cord
s fo
r la
rge,
unu
sual
or
non-
recu
rrin
g tr
ansa
ctio
ns o
r ba
lanc
es, p
ayin
g pa
rtic
ular
© 2021 National Association of Insurance Commissioners 34
Attachment A
Iden
tifi
ed R
isk
B
ran
ded
R
isk
E
xam
A
srt.
C
riti
cal
Ris
k
Pos
sib
le C
ontr
ols
P
ossi
ble
Tes
t of
C
ontr
ols
Pos
sib
le D
etai
l Tes
ts
atte
ntio
n to
tran
sact
ions
re
cogn
ized
at o
r ne
ar th
e en
d of
the
acco
unti
ng
peri
od, w
hich
may
indi
cate
tr
ansa
ctio
ns w
ith
rela
ted
part
ies
that
sho
uld
be
disc
lose
d.
The
insu
rer
is n
ot p
rope
rly
reco
rdin
g an
d di
sclo
sing
re
late
d-pa
rty
acti
viti
es.
OP
S
T
AC
V
A
PD
C
M
CO
RP
HC
C
For
iden
tifi
ed r
elat
ed
part
ies,
the
insu
rer
mai
ntai
ns r
ecor
ds (
e.g.
co
nsol
idat
ed s
ched
ule
of
inte
rcom
pany
all
ocat
ions
, ba
lanc
es, e
tc.)
so
that
in
divi
dual
allo
cati
ons
and
bala
nces
are
eas
ily
iden
tifi
able
and
am
ount
s th
at h
ave
been
off
set a
re
iden
tifi
able
. T
he in
sure
r ha
s pr
oced
ures
, in
clud
ing
supe
rvis
ory
revi
ew, i
n pl
ace
to e
nsur
e th
at a
ll r
elat
ed-p
arty
ac
tivi
ties
are
pro
perl
y di
sclo
sed
and
repo
rted
. M
anag
emen
t rev
iew
s co
ntra
ct te
rms
peri
odic
ally
to
ens
ure
that
they
are
re
ason
able
and
pro
perl
y re
flec
t cur
rent
ope
rati
ons.
. T
he in
sure
r ha
s a
proc
ess
Ver
ify
that
a r
evie
w o
f in
terc
ompa
ny b
alan
ces
is
perf
orm
ed.
Con
side
r w
heth
er s
ervi
ce
tran
sact
ions
are
oc
curr
ing
but a
re n
ot
bein
g gi
ven
acco
unti
ng
reco
gnit
ion,
suc
h as
re
ceiv
ing
or p
rovi
ding
ac
coun
ting
, man
agem
ent
or o
ther
ser
vice
s at
no
char
ge to
a r
elat
ed p
arty
. D
eter
min
e th
e m
ater
iali
ty o
f su
ch
tran
sact
ions
and
the
impa
ct o
n th
e in
sure
r.
Rev
iew
the
proc
edur
es
to e
nsur
e th
at r
elat
ed
part
y ac
tivi
ties
are
pr
oper
ly d
iscl
osed
, re
port
ed a
nd r
evie
wed
by
sup
ervi
sory
pe
rson
nel.
Ver
ify
that
con
trac
ts a
re
peri
odic
ally
rev
iew
ed
and
upda
ted
for
chan
ges
in o
pera
tion
s.
Rev
iew
a s
ampl
e of
pas
t
For
a s
ampl
e of
iden
tifi
ed
rela
ted
part
ies,
rev
iew
tr
ansa
ctio
ns to
ens
ure
they
ar
e be
ing
prop
erly
rep
orte
d an
d di
sclo
sed.
Rev
iew
all
ot
her
rela
ted-
part
y di
sclo
sure
s fo
r re
ason
able
ness
.*
Con
firm
whe
ther
the
rela
ted-
part
y re
lati
onsh
ip
is d
iscl
osed
in th
e in
sure
r’s
hold
ing
com
pany
re
gist
rati
on s
tate
men
t. R
evie
w th
e in
sure
r’s
tran
sact
ions
wit
h th
e su
spec
ted
rela
ted
part
y an
d de
term
ine
whe
ther
the
tran
sact
ions
are
sub
ject
to
any
prio
r ap
prov
al
requ
irem
ents
in th
e do
mic
ilia
ry s
tate
’s
insu
ranc
e co
de.
Rev
iew
the
cont
ract
ed
tran
sact
ions
wit
h af
fili
ates
an
d de
term
ine
whe
ther
th
ey a
re a
t arm
’s le
ngth
an
d pr
oper
ly r
epor
ted
as
econ
omic
or
non-
econ
omic
, in
acco
rdan
ce
wit
h S
SA
P N
o. 2
5.
© 2021 National Association of Insurance Commissioners 35
Attachment A
Iden
tifi
ed R
isk
B
ran
ded
R
isk
E
xam
A
srt.
C
riti
cal
Ris
k
Pos
sib
le C
ontr
ols
P
ossi
ble
Tes
t of
C
ontr
ols
Pos
sib
le D
etai
l Tes
ts
that
iden
tifi
es tr
ansa
ctio
ns
that
are
sub
ject
to r
egul
ator
ap
prov
al a
nd e
nsur
es th
at
tran
sact
ions
are
app
rove
d as
ap
prop
riat
e.
The
insu
rer
has
a po
licy
in
plac
e th
at r
equi
res
wri
tten
ap
prov
al f
rom
the
boar
d of
di
rect
ors
(or
com
mit
tee
ther
eof)
pri
or to
ent
erin
g in
to a
ny lo
an tr
ansa
ctio
n (l
endi
ng o
r bo
rrow
ing)
, or
guar
ante
es
(par
enta
l/af
fili
ated
sur
plus
su
ppor
t or
loan
re
paym
ent/
coll
ater
aliz
atio
n)
to e
nsur
e th
at tr
ansa
ctio
ns
mee
t “fa
ir a
nd r
easo
nabl
e”
and
“arm
’s-l
engt
h”
stan
dard
s.
tran
sact
ions
to c
onfi
rm
man
agem
ent’
s pr
oces
s w
as e
xecu
ted,
as
appr
opri
ate.
R
evie
w m
eeti
ng m
inut
es
of th
e bo
ard
of d
irec
tors
(o
r co
mm
itte
e th
ereo
f)
for
evid
ence
of
wri
tten
ap
prov
al o
f re
late
d-pa
rty
loan
s or
gua
rant
ees.
Obt
ain
the
loan
do
cum
ent(
s) o
r w
ritt
en
guar
ante
e an
d ve
rify
that
th
e te
rms
of th
e co
ntra
ct
are
equi
tabl
e an
d re
ason
able
. Ver
ify
the
guar
ante
e or
loan
was
pr
oper
ly d
iscl
osed
in th
e an
nual
fin
anci
al s
tate
men
t an
d fi
led
wit
h th
e do
mic
ilia
ry s
tate
insu
ranc
e de
part
men
t, if
app
lica
ble.
The
insu
rer
enga
ges
in
tran
sact
ions
and
ser
vice
ag
reem
ents
wit
h af
fili
ates
th
at h
ave
ineq
uita
ble
term
s.
OP
S
T
CM
A
C
VA
RP
HC
C
Man
agem
ent r
evie
ws
rela
ted-
part
y tr
ansa
ctio
ns
agre
emen
ts to
ens
ure
that
al
l agr
eem
ents
they
are
at
arm
’s le
ngth
and
pro
perl
y re
port
ed a
s ec
onom
ic o
r no
n-ec
onom
ic.
Man
agem
ent r
evie
ws
affi
liat
ed s
ervi
ce
agre
emen
ts to
ens
ure
the
term
s of
the
agre
emen
t are
fa
ir a
nd r
easo
nabl
e.
The
insu
rer
mai
ntai
ns
wri
tten
con
trac
ts f
or
sign
ific
ant t
rans
acti
ons
(exp
ense
all
ocat
ions
, tax
-sh
arin
g ag
reem
ents
, etc
.)
Obt
ain
evid
ence
of
man
agem
ent’
s re
view
of
rela
ted-
part
y tr
ansa
ctio
ns
and/
or a
ffil
iate
d se
rvic
e ag
reem
ents
, as
appl
icab
le.
Obt
ain
and
revi
ew th
e si
gnif
ican
t con
trac
ts
betw
een
the
insu
rer
and
its
affi
liat
es. V
erif
y th
at
the
insu
rer
revi
ews
the
Sel
ect a
sam
ple
of r
elat
ed
part
y ag
reem
ents
and
tr
ansa
ctio
ns f
or r
evie
w to
ve
rify
the
agre
emen
ts
tran
sact
ions
are
co
nsum
mat
ed a
t arm
’s
leng
th a
nd th
e tr
ansa
ctio
ns
are
in a
ccor
danc
e w
ith
the
agre
emen
ts. I
f th
e re
late
d pa
rty
tran
sact
ion
is n
ot a
t ar
m’s
leng
th, v
erif
y th
at
the
tran
sact
ion
is
appr
opri
atel
y ac
coun
ted
for
as n
on-e
cono
mic
. S
elec
t a s
ampl
e of
af
fili
ated
ser
vice
ag
reem
ents
and
per
form
pr
oced
ures
to e
nsur
e th
e
© 2021 National Association of Insurance Commissioners 36
Attachment A
Iden
tifi
ed R
isk
B
ran
ded
R
isk
E
xam
A
srt.
C
riti
cal
Ris
k
Pos
sib
le C
ontr
ols
P
ossi
ble
Tes
t of
C
ontr
ols
Pos
sib
le D
etai
l Tes
ts
wit
h re
late
d pa
rtie
s th
at a
re
revi
ewed
to e
nsur
e fa
ir a
nd
reas
onab
le te
rms
and
are
appr
oved
by
the
boar
d of
di
rect
ors
(or
com
mit
tee
ther
eof)
or
othe
r ap
prop
riat
e pe
rson
nel.
Man
agem
ent r
evie
ws
cont
ract
term
s an
d ac
tual
tr
ansa
ctio
ns p
erio
dica
lly
to
ensu
re th
at th
ey a
re
reas
onab
le a
nd p
rope
rly
refl
ect c
urre
nt o
pera
tion
s an
d ar
e in
com
plia
nce
wit
h re
late
d pa
rty
agre
emen
ts.
Man
agem
ent i
s su
bjec
t to
spec
ific
aut
hori
ty li
mit
s re
gard
ing
the
abil
ity
to
exec
ute
affi
liat
ed
agre
emen
ts
Man
agem
ent d
ocum
ents
its
rati
onal
e an
d m
aint
ains
su
ppor
ting
doc
umen
tati
on
(i.e
., a
thir
d-pa
rty
quot
e,
thir
d-pa
rty
opin
ion,
etc
.) f
or
the
rate
uti
lize
d in
the
affi
liat
ed a
gree
men
t.
agre
emen
ts to
ens
ure
fair
an
d re
ason
able
term
s an
d ap
prov
al b
y th
e bo
ard
of
dire
ctor
s (o
r co
mm
itte
e th
ereo
f) o
r ot
her
appr
opri
ate
pers
onne
l.
Ver
ify
that
con
trac
ts a
re
peri
odic
ally
rev
iew
ed
and
upda
ted
for
chan
ges
in o
pera
tion
s.
Tes
t the
con
trol
s in
pla
ce
to e
nsur
e th
at a
ffil
iate
d ag
reem
ents
are
ex
ecut
ed in
acc
orda
nce
wit
h do
cum
ente
d au
thor
ity
lim
its.
O
btai
n th
e co
mpa
ny’s
su
ppor
ting
do
cum
enta
tion
and
ev
alua
te th
e ap
prop
riat
enes
s of
the
rate
use
d.
term
s ar
e fa
ir a
nd
reas
onab
le, s
uch
as:
Obt
ain
supp
ort
from
the
affi
liat
ed
serv
ice
prov
ider
to
eval
uate
the
reas
onab
lene
ss o
f th
e se
rvic
e pr
ovid
er’s
pro
fit
mar
gin
on s
ervi
ces
rend
ered
.
O
btai
n a
sam
ple
of
rela
ted
part
y /a
ffil
iate
d co
ntra
cts
and
com
pare
the
term
s to
una
ffil
iate
d co
ntra
cts.
Inq
uire
of
any
mat
eria
l di
ffer
ence
s.
Obt
ain
a th
ird-
part
y qu
ote
or
acce
ss
benc
hmar
king
dat
a (i
f av
aila
ble)
for
si
mil
ar s
ervi
ces
and
com
pare
to th
e ra
te u
tili
zed
in th
e af
fili
ated
ser
vice
ag
reem
ent.
In
terc
ompa
ny a
lloc
atio
n of
ge
nera
l and
adm
inis
trat
ive
expe
nses
am
ong
affi
liat
es is
in
appr
opri
ate.
OP
V
A
PD
C
O
RP
HC
C
Man
agem
ent r
evie
ws
cost
-al
loca
tion
con
trac
ts w
ith
affi
liat
es t
o en
sure
that
the
basi
s fo
r ex
pens
e al
loca
tion
is
fai
r an
d re
ason
able
. E
xpen
ses
to b
e al
loca
ted
are
Rev
iew
the
insu
rer’
s ex
pens
e al
loca
tion
w
orks
heet
s an
d su
ppor
ting
do
cum
enta
tion
to
dete
rmin
e w
heth
er th
e
Tes
t the
insu
rer’
s ca
lcul
atio
n of
mat
eria
l ex
pens
e al
loca
tion
for
co
mpl
ianc
e w
ith
the
term
s of
the
cont
ract
. Rec
onci
le
amou
nts
to th
e ge
nera
l
© 2021 National Association of Insurance Commissioners 37
Attachment A
Iden
tifi
ed R
isk
B
ran
ded
R
isk
E
xam
A
srt.
C
riti
cal
Ris
k
Pos
sib
le C
ontr
ols
P
ossi
ble
Tes
t of
C
ontr
ols
Pos
sib
le D
etai
l Tes
ts
iden
tifi
ed a
nd r
easo
nabl
e m
etri
cs a
re d
efin
ed,
deve
lope
d an
d us
ed f
or e
ach
type
of
expe
nse.
M
anag
emen
t als
o re
view
s th
e ba
sis
of a
lloc
atio
n pe
riod
ical
ly to
ens
ure
that
it
is s
till
rea
sona
ble
and
prop
erly
ref
lect
s cu
rren
t op
erat
ions
.
met
hod
of a
lloc
atio
n fo
llow
s th
e co
ntra
ct a
nd
is r
easo
nabl
e.
Inqu
ire
wit
h m
anag
emen
t reg
ardi
ng
chan
ges
in o
pera
tion
s th
at m
ight
aff
ect e
xpen
se
allo
cati
on a
nd v
erif
y th
at
thos
e ch
ange
s ar
e pr
oper
ly r
efle
cted
.
ledg
er a
nd U
nder
wri
ting
&
Inve
stm
ent E
xhib
it, P
art 3
, an
d tr
ace
to r
ecei
pt o
r pa
ymen
t doc
umen
tati
on a
s ap
plic
able
.
Inte
rcom
pany
all
ocat
ion
of
tax
expe
nses
am
ong
affi
liat
es is
inap
prop
riat
e.
OP
A
C
CO
O
B/O
W
CM
RP
HC
C
The
insu
rer
has
a po
licy
in
plac
e to
dis
clos
e th
e na
mes
of
the
enti
ties
wit
h w
hom
th
e en
tity
’s ta
x re
turn
is
cons
olid
ated
, in
acco
rdan
ce
wit
h st
atut
ory
acco
unti
ng
prin
cipl
es (
SA
P)
and
appl
icab
le ta
x la
w.
The
insu
rer
mai
ntai
ns a
w
ritt
en a
gree
men
t, ap
prov
ed b
y its
boa
rd o
f di
rect
ors
(or
com
mit
tee
ther
eof)
that
set
s fo
rth
the
man
ner
in w
hich
the
tota
l co
mbi
ned
tax
is a
lloc
able
to
each
con
soli
date
d en
tity
.
Rev
iew
the
insu
rer’
s pr
oces
s to
acc
umul
ate
and
disc
lose
ent
itie
s w
ith
whi
ch a
con
soli
date
d ta
x re
turn
is f
iled
. R
evie
w th
e w
ritt
en
agre
emen
t and
ver
ify
appr
oval
by
the
boar
d of
di
rect
ors
(or
com
mit
tee
ther
eof)
and
the
dom
icil
iary
sta
te
insu
ranc
e de
part
men
t.
Rev
iew
the
insu
rer’
s al
loca
tion
met
hodo
logy
for
ap
prop
riat
enes
s an
d ve
rify
th
e ac
cura
cy o
f th
e al
loca
tion
. V
erif
y th
at ta
x-re
late
d in
terc
ompa
ny b
alan
ces
are
sett
led
in a
ccor
danc
e w
ith
wri
tten
agr
eem
ents
.
© 2021 National Association of Insurance Commissioners 38
Attachment A
This page intentionally left blank.
© 2021 National Association of Insurance Commissioners 39
Attachment A
SECTION 4 – EXAMINATION EXHIBITS Exhibit D
© 1976-2019 National Association of Insurance Commissioners
EXHIBIT D PLANNING MEETING WITH THE FINANCIAL ANALYST
Overview
This document is intended as an optional tool highlighting items that may be discussed during a planning meeting with the assigned financial analyst in support of the financial exam process. This meeting should ensure that the examiner both understands the company that will be examined and also receives details on work that has already been performed in supervising the company’s operations. An effective exchange of information will promote efficiencies in the financial examination process by allowing the examiner to leverage the knowledge and work performed by the financial analyst. It may also prove useful to supplement this meeting with a discussion of the Exam Planning Questionnaire (Exhibit B) so that the analyst can review during the discussion to highlight or indicate if a document being requested has been obtained and/or reviewed by the department. Although this exhibit focuses on discussions with the assigned analyst, it may be appropriate to incorporate this discussion into a broader planning meeting with members of department management and representatives from other areas of the department. However, if such an approach is taken, it should not reduce or diminish the level of discussion between the analyst and the examiner.
Given the importance of the Insurer Profile Summary (IPS) in communicating the results of the Department’s Financial Analyst’s review of the company’s operations, the planning meeting with the analyst is intended to generally follow the format of the IPS Template.
Depending on the significance of operations at the group level, the examiner should consider whether additional agenda items should be added to focus on risks posed and discussed on the Group Profile Summary that are relevant for consideration during the examination.
NOTE: The exhibit was prepared to assist examiners in obtaining a general knowledge of the company through the meeting with the analyst. The examiner leading the discussion should not rely exclusively on these topics and should tailor agenda items based on knowledge of the company and based on knowledge of work that has been performed by the department.
© 2021 National Association of Insurance Commissioners 40
Attachment A
Exhibit D FINANCIAL CONDITION EXAMINERS HANDBOOK
© 1976-2019 National Association of Insurance Commissioners
Planning Meeting with the Financial Analyst – Agenda Items
1. Business Summary – Discuss a summary of the business operations and lines of business of the insurer. a. Discuss whether the department has received a recent business plan from the company and has identified
any significant changes in strategy/operations. b. Discuss any recent meetings with the company and their potential impact on the examination. c. Discuss the corporate governance in place at the company and any recent changes or concerns identified.
2. Regulatory Actions – Discuss any significant recent steps taken in supervising the company, including, but not
limited to: a. Granting of permitted practices; b. Identification of issues of non-compliance; c. Follow-up on items from the last financial examination; d. Review of items filed with the department for approval and the need to verify or reevaluate approvals
during the exam (e.g. – Form A, Form D, Form E, etc.); and e. Recent or pending regulatory actions (such as forfeitures, cease & desist orders, or restrictions on the
company’s writings or operations).
3. Financial Snapshot/Overview of Financial Position – Discuss the company’s recent financial results, including, but not limited to:
a. Changes in profitability trends; b. Deterioration in asset quality, liquidity, or capital adequacy; c. Changes in investment holdings and strategy; d. Changes in key annual statement balances; e. Changes in reinsurance balances and program structure; f. Significant results noted in financial analysis solvency tools; and g. Deterioration in reserve development trend.
4. Branded Risk Assessments – Discuss individual branded risk assessments with a focus on moderate and
significant areas of concern. For example: a. Discuss a summary of detailed analysis work performed to address key issues. b. Discuss the status of any outstanding inquiries or requests for the company. c. Discuss any management representations to the department that should be verified or corroborated during
the exam. d. Discuss any recommended exam procedures and/or follow-up on key issues. e. Discuss any risks assessed as “minor” which appear to be escalating.
5. Impact of Holding Company on Insurer – Discuss the impact of the holding company system on the domestic
insurer. For example: a. Discuss and obtain the Group Profile Summary and non-lead state holding company analysis work as
necessary. b. Discuss whether the analyst’s review of the Corporate Governance Annual Disclosure, ORSA Summary
Report and/or Form F reporting indicate a need for additional follow-up and review during the exam. c. Discuss any developments or follow-up items resulting from recent supervisory college sessions.
6. Overall Conclusion and Priority Rating – Discuss the analyst’s overall conclusion on the company’s financial
condition, strengths, weaknesses and priority rating assigned to the company.
© 2021 National Association of Insurance Commissioners 41
Attachment A
SECTION 4 – EXAMINATION EXHIBITS Exhibit D
© 1976-2019 National Association of Insurance Commissioners
7. Supervisory Plan – Discuss the analyst’s plans for the ongoing supervision of the company, including anyspecific examination procedures identified.
8. Access to Workpapers and Company Documents – Discuss the best way that the analyst’s work can bereviewed/obtained. As the number of files that examiners wish to review and obtain increases, they may considerobtaining access the analyst’s workpapers and receiving specific locations (i.e. workpaper references) for allrequested documents.
9. Input from Other Areas of the Department – Discuss whether the analyst has received recent communicationsfrom other areas of the insurance department regarding issues that could impact the financial examinationincluding, but not limited to units in charge of:
a. Approving rates and forms filings;b. Legal and administrative matters; andc. Market conduct examinations/filings.
10. General Observations – Depending on the information already provided, determine whether there are anyadditional topics relevant for discussion, such as:
a. If you were going onsite to examine this company, where would you focus your time?b. What are your biggest concerns in terms of things that could go wrong at this company to result in a
solvency concern?c. Are you aware of any fraud allegations or concerns at the company? Are there any fraud risk factors that
the exam team should be aware of?
© 2021 National Association of Insurance Commissioners 42
Attachment A
FINANCIAL CONDITION EXAMINERS HANDBOOK
© 1976-2019 National Association of Insurance Commissioners
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© 2021 National Association of Insurance Commissioners 43
Attachment A
Hawaii Comment
Hawaii is supportive of the proposed revisions for affiliated service agreements. This NAIC guideline
enhancements would give our analysts the ability to determine fair and reasonable fee amounts
charged.
Patrick Lo, Insurance Examiner State of Hawaii Dept. of Commerce & Consumer Affairs Insurance Division
© 2021 National Association of Insurance Commissioners 44
Attachment A1
D. Keith Bell, CPA
Senior Vice President
Accounting Policy
Corporate Finance
The Travelers Companies, Inc.
Phone : 860-277-0537
Email: [email protected]
Rose Albrizio, CPA
Vice President
Accounting Practices
Equitable
Phone: 201-743-7221
Email: [email protected]
October 22, 2021
Mr. Justin Schrader, Chairman
Risk-Focused Surveillance (E) Working Group
National Association of Insurance Commissioners
1100 Walnut Street, Suite 1500
Kansas City, MO 64106-2197
RE: Affiliated Services Guidance Exposure - Comments Due October 29, 2021
Dear Mr. Schrader:
Industry Interested Parties (“Interested Parties”) appreciate the opportunity to provide comments
on the proposed handbook revisions for affiliated service agreements with market-based expense
allocations (the “Proposal”), which were exposed for an abbreviated public comment period by
the Risk-Focused Surveillance Working Group (the “Working Group”) on August 27, 2021.
Interested Parties thank the Working Group for providing an additional 30 days to provide their
comments.
The NAIC recognizes that affiliated transactions and related agreements are integral to how most
insurance groups and individual carriers transact business and has developed long-standing
statutory requirements for affiliated agreements in SSAP No. 25, Affiliates and Other Related
Parties and Insurance Model Regulation #450. These requirements include prior regulatory
approval for affiliated transactions meeting specified quantitative and qualitative thresholds.
The NAIC has long maintained through its statutory guidance that the approval of affiliated
service agreements should occur through the Form D review process. Insurance groups and
individual carriers rely on approvals granted under the Form D process and base business
projections, rate computations, and other crucial decisions on them. Consequently, Interested
Parties are concerned that the Proposal will create an unstable process for commissioners,
regulators, analysts, examiners, and insurers and potentially diminish the relevance of the Form
D filing and review process that the entire industry relies upon for conducting insurance
business. Insurance carriers need assurance that Form D approvals and non-disapprovals can be
relied upon and that there is coordination between the financial analyst and the financial
examiners to understand the agreements prior to financial examination. The Proposal introduces
inconsistencies among states as the financial examination procedures for evaluating the
transactions subject to the Form D approvals and non-disapprovals may not be consistently
applied among states if there is no communication between the analyst and the financial
© 2021 National Association of Insurance Commissioners 45
Attachment A2
Risk-Focused Surveillance Working Group
October 22, 2021
examiners. A lack of understanding of the Form D process leads to financial examiners
potentially duplicating or contradicting decisions made by the financial analyst, which, in turn,
creates uncertainty for carriers and could potentially expose the entire industry to a new form of
regulatory risk related to affiliated service agreements.
The financial examination process already serves an important role in verifying that affiliated
service agreements are performed in accordance with the approved terms of the agreement. This
Proposal is inconsistent with traditional financial examination procedures for verifying the
proper performance of affiliated service agreements and instead introduces subjective decisions
into the financial examination that would roll-back or unwind any affiliated service agreement
and thereby change the approval or non-disapproval status originally granted by the
Commissioner, Director or Supervisor of Insurance as part of the financial analysis process.
Financial examiners currently have the ability to question a Form D approval or non-disapproval
if the financial examination discovers adverse circumstances such as fraud or insolvency, or if
the examiner finds that services actually being provided are materially different than the
originally approved affiliated service agreement. No change is needed in the handbook to
address these circumstances.
Therefore, given the importance of affiliated agreements to the insurance industry and the
implications the proposed guidance will have on the vast majority of insurance carriers,
Interested Parties respectfully requests that before proceeding further at the Working Group
level, the Working Group refer this Proposal to the Financial Condition (E) Committee for a
broader, collaborative discussion and identification of all pending issues. The referral should
include a summary of the specific problem(s) or issue(s) identified by the Working Group and
Chief Financial Regulator Forum from November 2020 that should be addressed. Absent this
referral, Interested Parties cannot support the current Proposal that makes significant revisions to
long-standing statutory policy through the NAIC Financial Analysis Handbook and NAIC
Financial Condition Examiners Handbook (collectively, “Handbook”) guidance without a more
formal, open and transparent dialogue involving all parties.
Interested Parties are concerned about the perceived need for these changes and note that there
have been no public discussions of any regulatory concerns prior to the release of these
amendments. There is ample recent precedent when the NAIC has taken a broader approach on
matters that have significant implications for regulators and industry. Examples include the
NAIC’s deliberative and inclusive approach to addressing long-term care insurance, group
capital, ORSA and Corporate Governance Annual Disclosure. In these cases, and many others,
the NAIC has set a standard of collaboration and partnership for the insurance industry that
Interested Parties believe should operate within the context of affiliated service agreements.
As part of a broader policy discussion of affiliated service agreements by the Financial Condition
(E) Committee, Interested Parties look forward to exploring the following general observations
regarding reviews of affiliated service agreements during financial examinations:
• Review procedures should be solvency-focused and concerned with ensuring that any
profit in market-based agreements is arm’s length.
© 2021 National Association of Insurance Commissioners 46
Attachment A2
Risk-Focused Surveillance Working Group
October 22, 2021
• Additional guidance, if any, should be developed in an open and transparent process
allowing for fact and policy-based stakeholder input. This input should consider the
costs, risks and benefits of re-reviewing affiliated service agreements for all insurers
during financial examinations, or only those insurers demonstrating financial difficulty or
troubled insurer status. Any guidance should clearly indicate that expanded procedures
are to be considered as part of the risk-focused examination approach on a prospective
basis only. It should be clear that the scope of the review is to determine if the
agreements are being followed, and not to second-guess earlier decisions to approve
affiliate agreements.
• The proposed change to the Related Party Examination Matrix should distinguish
between a related party and an affiliate. As currently drafted, there may be applications
of the Form D process involving changes to the Related Parties Risk Matrix; therefore,
any additional tests or procedures should distinguish between affiliates and related
parties.
• The overall materiality of the affiliated service agreement to the insurer and holding
company should always be considered when determining the appropriate examination
procedures to perform during a financial examination.
• The application of any proposed new procedures for affiliated service agreements should
be risk-focused and supported by specific solvency concerns, as well as any concerns
with compliance involving the approved agreement identified by the financial analyst in
the Insurer or Group Profile Summaries. Circumstances and triggers where it may be
appropriate for a financial analyst to request the financial examiner to ask the carrier
more questions or perform additional procedures related to affiliated agreements should
include:
➢ Pursuant to existing prioritization framework, the carrier is already deemed a
troubled insurer or a high priority review insurer.
➢ Other factors resulting in the carrier trending towards troubled insurer, high
priority review insurer or that trigger standards under the Model #385 Regulation
to Define Standards and Commissioner’s Authority for Companies Deemed to be
in a Hazardous Financial Condition.
Thank you for considering Interested Parties’ comments, which are widely supported by the
insurance industry. If you have any questions, please do not hesitate to contact us.
Sincerely,
D. Keith Bell Rose Albrizio
cc: NAIC staff
Interested Parties
© 2021 National Association of Insurance Commissioners 47
Attachment A2
1575 Eye Street, NW Suite 300 Washington, D.C. 20005 TEL (202) 857-5720 FAX (202) 857-5731 www.medicaidplans.org
October 28, 2021
Mr. Justin Schrader, Chairman Risk-Focused Surveillance (E) Working Group National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197
RE: Affiliated Services Guidance Exposure
Dear Chairman Schrader:
Medicaid Health Plans of America (MHPA) appreciates the opportunity to provide comments on the proposed revisions to the NAIC’s Financial Analysis Handbook and Financial Condition Examiners Handbook for affiliated service agreements with market-based expense allocations (the “Proposal”) that was made available for public comment by the Risk-Focused Surveillance Working Group (the “Working Group”) on August 27, 2021. MHPA appreciates that the NAIC has extended the timeframe to submit comments to the Proposal which facilitates NAIC hearing from a broader range of stakeholders.
MHPA is the leading national trade organization representing the interests of the Medicaid managed care industry through advocacy and research to support innovative policy solutions that enhance the delivery of comprehensive, cost effective, and quality health care for Medicaid enrollees. MHPA works on behalf of 130+ commercial and nonprofit plans that serve more than 40 million Medicaid enrollees in 40 states, the District of Columbia and Puerto Rico. MHPA provides advocacy and research that support policy solutions to enhance the delivery of quality care for Medicaid enrollees through improved access and cost-effective services.
We write to express our concerns with potential downstream effects that may not have been considered under the Proposal as drafted. It is our understanding that under the Proposal, affiliated service agreements, which allow issuers -- including Medicaid Managed Care Organizations (MCOs) -- to obtain services from affiliated providers to serve their members, may be subject to later revisions or unwinding at the time of a financial examination. We would like to bring to the Working Group’s attention that Medicaid MCOs contract with affiliates to provide valuable services to Medicaid members, and Medicaid payment rates include a factor representing the cost that the Medicaid MCO pays to the affiliate for those services. We have concerns that the proposed policy could result in the potential unwinding of affiliated service agreements that would disrupt business arrangements that serve our members and lead to unanticipated or retroactive rate changes that, as a result, create a financial risk and could undermine Medicaid MCO-state contract agreements.
MHPA supports a robust discussion of the issues of the Proposal. We recommend that the NAIC’s Financial Condition (E) Committee hold more extensive policy discussions to ensure all stakeholder viewpoints are considered.
© 2021 National Association of Insurance Commissioners 48
Attachment A3
Risk-Focused Surveillance Working Group October 28, 2021
1575 Eye Street, NW Suite 300 Washington, D.C. 20005 TEL (202) 857-5720 FAX (202) 857-5731 www.medicaidplans.org
Thank you for considering MHPA’s comments. If you have any questions, please do not hesitate to contact us.
Sincerely,
/s/
Shannon Attanasio Vice President, Government Relations and Advocacy
cc: Bruce Jensen, NAIC
© 2021 National Association of Insurance Commissioners 49
Attachment A3
Comments from Ohio: Summarized comments: (Pages #s refer to the page in the PDF)
Page 3 #2d, Page 25, and Page 40, phrase “or reevaluate approvals during the exam” seems to imply that the “original” approval is not really approved. Suggest replacing with (page 3 and 40) “the terms and/or conditions of the filing are operating as approved” or (Page 25) “determine that the terms and/or conditions of the filing are operating as approved.” Of course, that is not to say that management couldn't hide some of the factors or terms that should have been included in the Form D in the first place.
Page 10, last bullet – consider moving to the second bullet in that section or making a sub-bullet of the first bullet in that section, in light of the added wording on the first bullet.
Page 11, first new bullet, and Page 16 newly added language, the phrase “and/or to further evaluate the fairness and reasonableness of expense allocations.” Delete phrase and add a new sentence – “For verification of market-value based transactions, review market-value methodology, rate used, and supporting documentation that follows the Form D filed, for continued appropriateness. For cost-based allocation, review that all allocable costs documented in the Form D were used (if an interim "rate" was used, review the true-up of costs to the rate).”
Page 20, third black bullet added language; Page 21 bullet added language- Replace “of this regulation” with “Model #450”
Page 22 “Notice to Insurer.” Doesn't a state already have exam authority within these comments, i.e., it's a given that we verify, reserve the right, and can make corrections. Why does the FAH need to determine what needs to be in a letter?
Page 29 use of the word “initial” again implies an approval is not really approved.
Also, the FAH and FCEH as a whole is generally considered an accreditation standard, and an email commenting that this is “optional” or “not intended to impact statutory authority” should be made within the FAH/FCEH itself if that is the intent.
© 2021 National Association of Insurance Commissioners 50
Attachment A4
MEMORANDUM
TO: Risk-Focused Surveillance (E) Working Group FROM: NAIC Staff DATE: November 9, 2021 RE: Recommended Increases to Financial Analyst and Examiner Salary Range Guidelines and Financial
Examiner Per Diem Rates
The Risk-Focused Surveillance (E) Working Group is charged with maintaining and updating salary range guidelines for financial analysts and financial examiners published in the Financial Analysis Handbook and Financial Condition Examiners Handbook, respectively. The Working Group expects to consider updates to the salary ranges every two years, with the next salary survey to be conducted during 2023 and resulting recommendations to be considered for inclusion in the 2024 Handbooks. Additionally, as several states currently base examiner compensation on the salary and per diem guidelines contained in Section 1 – II (D) of the Financial Condition Examiners Handbook the Working Group will continue to ensure those rates are updated. The Working Group expects to update per diem rates annually. This memo outlines the recommended increases to the salary ranges and per diem rates, along with the methodology utilized to reach these recommendations.
Salary Range Guidelines In 2019 the Working Group adopted salary range guidelines that were developed in recognition of the importance of compensation, particularly as it relates to the ability of an Insurance Department to attract and retain well-qualified employees. These guidelines, which were first published in the 2020 editions of the Financial Analysis Handbook and Financial Condition Examiners Handbook, were based on an in-depth salary survey that collected and analyzed salary data for state insurance regulators, banking regulators, and other related position in the financial services sector (e.g., internal and external auditors, etc.). The Working Group reviewed a high-level analysis of salary data prepared by NAIC staff which showed that increases to comparable salaries were not material. Therefore, the Working Group determined that a full salary survey is not necessary at this time, and instead recommended applying a flat rate adjustment to the existing salary ranges.
NAIC staff obtained and reviewed the Robert Half Salary guides for 2019-2021 which showed modest annual increases from 2019 to 2020 (2% - 4%), and minimal increases from 2020-2021 (1% or less). The total change for the period since the last salary survey ranges from 4% - 8% depending on position and seniority. To recognize this variation in salary increases, NAIC staff recommend adjusting the low end of the salary ranges by 3% and the high end of the salary ranges by 6%, as shown in the table below.
Positions (Analyst & Examiner)
Current Salary Range
Recommended Increase
Proposed Salary Ranges
Low End High End Low End
High End Low End High End
Financial Analyst/Examiner $46,000 $75,000
3% 6%
$47,380 $79,500
Senior Financial Analyst/Examiner $57,000 $90,000 $58,710 $95,400
Supervisor/Assistant Chief Analyst/Examiner $80,000 $130,000 $82,400 $137,800
Chief Analyst/Examiner $92,000 $150,000 $94,760 $159,000
© 2021 National Association of Insurance Commissioners 51
Attachment B
2 | P a g eNATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
Salary and Per Diem Guidelines The per diem guidelines are based off the Consumer Price Index (CPI). The Consumer Price Index, as defined by the U.S. Bureau of Labor Statistics (BLS), is a measure of the average change in prices of goods and services purchased by households over time. The CPI is based on prices of food, clothing, shelter, fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services purchased for day-to-day living. In 2008, regulators determined that because the CPI takes into consideration most costs incurred by the average household, it is reasonable that an increase in salary should be within the same parameters as the increase in the cost of living. In years in which the CPI does not accurately reflect market conditions, additional work—including surveys and salary studies—may be completed to ensure proper salary suggestions.
Based upon the current CPI data available (July 2020–July 2021), the estimated annual change in CPI is approximately 5.37%. Multiple economic experts continue to suggest that the current level of inflation, which is a key factor in the CPI, is primarily driven by temporary supply chain disruptions due to the ongoing impact of the COVID-19 pandemic and related economic conditions. As such, we recommend a slightly lower increase of 4.5% to base salary rates in all position classifications shown below.
The following data table shows the average annual salary increases adopted in the previous five years as compared to the CPI, as well as the proposed increase for the following year. The information “as published by BLS” compares the CPI as of July of each year, consistent with the analysis performed in past years. As shown below, the rates suggested by the NAIC have been consistently comparable to those published by the BLS, regardless of method used.
2016 2017 2018 2019 2020 2021 As Published in Financial Condition Examiners Handbook 2.75% 3.00% 3.00% 2.00% 1.00% *4.50%As Published by BLS 0.83% 1.73% 2.95% 1.53% 0.99% 5.37%
Difference 1.92% 1.27% 0.05% 0.47% 0.01% 0.87% *Suggested change
2020 2021
Classification Daily Rates
Suggested Increase
Daily Rates
Insurance Company Examiner, AFE* $ 339 4.50% $ 354
Automated Examination Specialist, AFE (no AES**) $ 415 4.50% $ 434
Senior Insurance Examiner, CFE*** $ 415 4.50% $ 434
Automated Examination Specialist, AES $ 467 4.50% $ 488
Automated Examination Specialist, CFE (no AES) $ 467 4.50% $ 488
Insurance Examiner In-Charge, CFE $ 500 4.50% $ 523
Supervising or Administrative Examiner $ 530 4.50% $ 554
* Accredited Financial Examiner** Automated Examination Specialist*** Certified Financial Examiner
© 2021 National Association of Insurance Commissioners 52
Attachment B
--
MEMORANDUM
TO: Justin Schrader (NE), Chair of the Risk-Focused Surveillance (E) Working Group
FROM: Judy Weaver (MI), Facilitator of the Chief Financial Regulator Forum
DATE: August 18, 2021
RE: Referral on NAIC Analyst/Examiner Job Descriptions
On its August 4, 2021 call, the Chief Financial Regulator Forum discussed challenges state insurance departments face in recruiting and retaining qualified staff to conduct financial analysis and examination work. During these discussions, regulators stressed the importance of expanding the traditional pool of candidates beyond those with accounting degrees/backgrounds to also include those with other relevant skills and educational backgrounds that can support a risk-focused approach to financial surveillance. Some of the other educational backgrounds discussed and identified as relevant included business, finance, actuarial science, insurance, and risk management.
Regulators also discussed the importance of maintaining up to date job duties and descriptions for use in recruiting and salary/wage determinations. It was noted that many states reference or utilize the NAIC job descriptions developed by the Working Group and made available on StateNet to assist with these determinations. As the job descriptions were initially created in 2015 and there have been some significant changes in financial surveillance practices since that time, the Chief Financial Regulator Forum encourages the Working Group to review and consider updates to its standardized job descriptions, as deemed appropriate. Such updates could incorporate additional information on relevant educational backgrounds as well as additional duties associated with new areas of financial regulation (i.e., ORSA/ERM review, group capital assessment, cybersecurity, etc.).
If there are any questions regarding the proposed recommendation, please contact either me or NAIC staff (Bruce Jenson at [email protected]) for clarification.
Thank you for your consideration of this referral.
© 2021 National Association of Insurance Commissioners 53
Attachment C