NAIC Solvency (SMI)

Question 1

What are the focuses of the SMI?

Answer 1

CGGRS
-Capital requirements
-Group supervision
-Governance and RM
-Reinsurance
-Statutory Accounting Principles

Question 2

Background of the SMI

Answer 2

Solvency Modernization Initiative
Done in 2008 by regulators
self-evaluation of the insurance solvency framework with the intent to improve it
Review international developments for potential use

Question 3

What is the U.S Insurance Regulatory Mission?

Answer 3

-protect interests of the policyholder and those who rely on insurance provided to the PH
-facilitate financial stability and reliability of insurance companies for an effective marketplace

Question 4

What did regulators think was the best way to achieve this mission?

Answer 4

By combining market regulation and financial regulation

Question 5

Describe the 3 stages of financial regulation

Answer 5

-mitigate and eliminate risks via restrictions on activities

-use financial tools and oversight to implement corrective actions

-provide a backstop of financial protection in the event of a receivership

MITIGATE - CORRECT - BACKSTOP ====> MCB

Question 6

Describe the 3 possibilities of financial protection in a receivership

Answer 6

conservation - safeguard insurers asset while regulator decides
rehab - try to fix problems, protect assets, run off liabilities
liquidation
liquidiation - identify creditors and distribute the assets

Question 7

What are some key components of market regulation?

Answer 7

Analysis and oversight of insurers behavior in market including…
-treatment of PH in pricing
-competition
-statistical reporting
-licensing of insurance producers
-consumer assistance
-administration of residual markets

Question 8

How can we assess regulatory success?

Answer 8

RIICH
-were rehab efforts effective?
-the frequency and extent regulation IDd and corrected problems before they caused harm
-frequency of Insolvencies
-cost benefit analysis
-Market Health

Question 9

What does requisite authority consist of? (regulatory system needs this)

Answer 9

 Legal basis & protection
 Financial & human resources
 Independence & accountability
 Adequate powers
 Confidentiality

Question 10

U.S Insurance Financial Solvency Core Principles (7)

Answer 10

POORER - C
-Preventive and corrective measures (enforcement)
-on-site risk focused exams
-off-site monitoring and analysis
-regulatory control of significant risk related transactions
-exiting the market and receivership
-regulatory reporting, disclosure, and transparency
-capital adequacy, solvency, and reserves

Question 11

Describe the reporting principle

Answer 11

financial reports contain quan and qual
qual include: interrogatories, SAO, notes to fs, annual audit opinion, managements discussion
- used as input in exams
-provides market discipline

Question 12

Tools used in off-site exams

Answer 12

-CPA audit report
-sec filings
-corporate reports
-market conduct reports
-rate and form filings
-consumer complaints
-rating agencies
-result of most recent on-site exam

Question 13

Describe key aspects of on-site exams

Answer 13

-evaluate solvency, prospective view of RM practices and risks

also evaluate…
-corporate governance
-management oversight
-financial strength
-strengths and weaknesses

-documented publicly, can state required actions
usually once every 5 yrs

Question 14

List some preventative/corrective measures a regulator can require of an insurer

Answer 14

-updated business plan
-interim financial reports
-prohibit some investments
-restricting business
-order an increase in C&S
-order to correct governance deficiencies
-require replacement of senior management

Question 15

What are some alternatives to insolvency a regulator can consider?

Answer 15

-placing insurer into run-off mode
-reinsurance arrangements
-M&A
-non-renewal of part/all business

Question 16

2 approaches to investment regulation

Answer 16

defined limits - results in diversified portfolio
defined standards - “prudent person” - more flexibility

Question 17

3 components of risk focused superveillance

Answer 17

 Financial analysis
 Financial examination
 Supervisory plan development

Question 18

4 priorities of SMI

Answer 18

 Create a document that articulates the U.S. insurance regulatory system to communicate to domestic / international audiences
 Examine international developments for potential use in the U.S.
 Comply with International Association of Insurance Supervisors (IAIS) & Insurance Core Principles (ICP)
 Apply lessons from the global financial crisis

Question 19

Major reforms through SMI

Answer 19

-ORSA adoption (over certain premium threshold)
-Improved RBC calculation
-reviewed IFRS standards and improve uniformity
-participated in IMF FSAP (International Monetary Fund Financial Sector Assessment Program for G20)
-solvency maintenance: created a document laying out us insurance regulatory structure

Question 20

Reinsurance regulatory modernization framework proposal purpose

Answer 20

Indirect approach to regulating foreign reinsurers (licensed not in U.S)

-facilitate cross border reinsurance transactions
-enhance competition in the U.S market, while ensuring U.S PH and Insurers would be protected from insolvency

Question 21

Nonadmitted and Reinsurance Reform Act

Answer 21

included in the dodd-frank act of 2010
prohibits a state from denying credit for reinsurance if dom state
 Has recognized credit for reinsurance, and
 Is an NAIC accredited state

The NRRA also assigns the domiciliary state the sole responsibility for regulating the
reinsurer’s financial solvency

Question 22

Regulator concerns if internal modeling approaches take over RBC

Answer 22

-higher costs
-less comparability
-possible misuse
-potential competitive advantages

they believe costs > benefits.

Question 23

RBC system was created to provide…

Answer 23

capital adequacy standard related to risk
safety net for insurers
uniformity among the states
regulatory authority for timely action

Question 24

When may a regulator deem a company to be in hazardous financial condition?

Answer 24

Adverse findings in financial analysis / exam, market conduct, audits, SAOs.. etc
insolvencies of company reinsurers
incompetent or unfit management
failure to furnish info or provide accurate info
anything else commissioner deems hazardous to policyholders, creditors, or general public

Question 25

In Nov 2011, NAIC adopted what revisions to model laws for reinsurance

Answer 25

served to reduce collateral requirements for unauthorized
established certification process for foreign reinsurers
each state has authority to certify, or commissioner has authority to recognize the certification issued by another state
states must consider NAIC lists of good foreign jurisdictions “qualified” ones
states assign a rating, collateral %s (required to post) => 0,10,20,50,75,100 (for US insurer to be given full credit for ceded)

Question 26

Why are regulators resistant to a system that replaces RBC with an company’s internal model?

Answer 26

higher cost
less comparability
possible misuse / introduce competitive advabtages
costs outweigh benefits overall

Question 27

What is the AAA (or rather was) investigating in regard to an improved RBC formula with correlation matrices?

Answer 27

improve RBC square root formula with a more detailed correlation matrix to better represent diversification benefits
argued that significant judgement is required to populate such a matrix