NAIC Solvency (SMI) Flashcards
What are the focuses of the SMI?
CGGRS
-Capital requirements
-Group supervision
-Governance and RM
-Reinsurance
-Statutory Accounting Principles
Background of the SMI
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
What is the U.S Insurance Regulatory Mission?
-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
What did regulators think was the best way to achieve this mission?
By combining market regulation and financial regulation
Describe the 3 stages of financial regulation
-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
Describe the 3 possibilities of financial protection in a receivership
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
What are some key components of market regulation?
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
How can we assess regulatory success?
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
What does requisite authority consist of? (regulatory system needs this)
Legal basis & protection
Financial & human resources
Independence & accountability
Adequate powers
Confidentiality
U.S Insurance Financial Solvency Core Principles (7)
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
Describe the reporting principle
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
Tools used in off-site exams
-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
Describe key aspects of on-site exams
-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
List some preventative/corrective measures a regulator can require of an insurer
-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
What are some alternatives to insolvency a regulator can consider?
-placing insurer into run-off mode
-reinsurance arrangements
-M&A
-non-renewal of part/all business
2 approaches to investment regulation
defined limits - results in diversified portfolio
defined standards - “prudent person” - more flexibility
3 components of risk focused superveillance
Financial analysis
Financial examination
Supervisory plan development
4 priorities of SMI
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
Major reforms through SMI
-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
Reinsurance regulatory modernization framework proposal purpose
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
Nonadmitted and Reinsurance Reform Act
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
Regulator concerns if internal modeling approaches take over RBC
-higher costs
-less comparability
-possible misuse
-potential competitive advantages
they believe costs > benefits.
RBC system was created to provide…
capital adequacy standard related to risk
safety net for insurers
uniformity among the states
regulatory authority for timely action
When may a regulator deem a company to be in hazardous financial condition?
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
In Nov 2011, NAIC adopted what revisions to model laws for reinsurance
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)
Why are regulators resistant to a system that replaces RBC with an company’s internal model?
higher cost
less comparability
possible misuse / introduce competitive advabtages
costs outweigh benefits overall
What is the AAA (or rather was) investigating in regard to an improved RBC formula with correlation matrices?
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
