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FINANCIAL EXAMINERS HANDBOOK (E) TECHNICAL GROUP Conference Call
Wednesday, September 27, 2017 2:00 p.m. ET/ 1:00 p.m. CT
ROLL CALL
Susan Bernard, Chair California Omar Akel/Renee Hanshaw Nevada Richard Ford Alabama Colin Wilkins New Hampshire William Arfanis Connecticut Steve Kerner New Jersey N. Kevin Brown District of Columbia Tracy Snow Ohio Cindy Andersen Illinois Joel Sander Oklahoma Grace Kelly Minnesota Missy Greiner Pennsylvania Leslie Nehring/Levi Nwasoria Missouri Patrick McNaughton Washington Justin Schrader Nebraska John Litweiler Wisconsin NAIC Support Staff: Bailey Henning
AGENDA
1. Receive Comments on Exposure Draft and Consider Adoption—Susan Bernard (CA)• Exposure Drafts Attachment One
o Guidance Related to Communication Between Analyst and Examiner Pages 5 - 12 o Handbook Technical Group Amendment Procedures Page 13 o Guidance Related to Examination Repository Updates Pages 15 - 59 o Guidance Related to Referral from PBR Review (E) Working Group Pages 61 - 103 o Guidance Related to Referral from Receivership Model Law (E) Working Group Pages 105 - 108
• Comment Letters Attachment Two o American Academy of Actuaries Pages 111 - 113 o Fontaine Consulting, LLC Page 114 o Joint Interested Parties Pages 115 - 116
2. Consider Exposure of Handbook Guidance Related to Referral from Financial Analysis (E)Working Group—Susan Bernard (CA)
Attachment Three
• Financial Analysis (E) Working Group Referral Page 119 • Section 1-3: Run-off Examinations Pages 120 – 121 • Section 2-1: Redomestication Pages 122 - 123
3. Consider Exposure of Handbook Guidance Related to Clean-Up—Susan Bernard (CA) Attachment Four • Section 1-1: Review & Reliance on Another State’s Workpapers (Coordination Plan) Pages 127 - 128 • Exhibit E Pages 129 - 131
4. Review 2017 Project Listing—Susan Bernard (CA) Attachment Five Pages 135 - 136
5. Any Other Matters Brought Before the Technical Group—Susan Bernard (CA)
6. Adjournment
© 2017 National Association of Insurance Commissioners 1 of 136
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© 2017 National Association of Insurance Commissioners 2 of 136
Attachment OneExposure Drafts:
• Communication Between Examiner and Analyst• Handbook Technical Group Amendment
Procedures• Examination Repository Updates• Revisions related to referral from PBR Review
(E) Working Group• Revisions related to referral from Receivership
& Insolvency (E) Task Force
© 2017 National Association of Insurance Commissioners 3 of 136
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© 2017 National Association of Insurance Commissioners 4 of 136
--
To: Commissioner Todd E. Kiser, Chair, Financial Regulation Standards and Accreditation (F) Committee From: Judy Weaver, Chair, Financial Analysis Handbook (E) Working Group Date: July 10, 2017 Re: Revisions to Accreditation Review Team Guidelines for Risk-Focused Analysis
On the Financial Analysis Handbook (E) Working Group’s July 10, 2017 conference call, the Working Group finalized proposed revisions to Accreditation Review Team Guidelines to incorporate enhancements to the financial analysis process, including the Financial Analysis Handbook (Handbook), for the risk-focused assessment of insurers during annual and quarterly analysis. The Working Group adopted the risk-focused framework on its January 23, 2017 conference call. The changes to the Handbook for risk-focused analysis will be applicable beginning with the annual 2017 analysis. The revisions to the Accreditation Review Team Guidelines, included in Attachment A, are intended to align the standards and guidelines with the new analysis process.
Within the revisions is included a change to the process-oriented guidelines for communication of relevant information to/from financial analysis staff (b.3.). The Financial Examiners Handbook (E) Technical Group reviewed the revisions on their June 29 conference call and drafted coordinating revisions to examination guidelines necessary for consistency, which will be referred separately.
Please contact Financial Analysis Handbook (E) Working Group staff Jane Koenigsman ([email protected]) if you have any questions or would like additional information.
© 2017 National Association of Insurance Commissioners 5 of 136
Part B1: Financial Analysis
--------------------------------------------DETAIL ELIMINATED TO CONSERVE SPACE----------------------------
b. Communication of Relevant Information to/from Financial Analysis Staff
Standard: The department should ensure that all relevant information and data obtained that may assist in the financial analysis process is provided to the financial analysis staff. The department should ensure that findings of the financial analysis staff are communicated to the appropriate person(s) within the department.
Results-Oriented Guidelines: 1. Analysts should effectively communicate and coordinate with various areas within the department,
including management, the financial examination staff and other non-financial areas, as applicable.Evidence of this communication should be clearly documented in the analysis files. When assessingcompliance with this guideline, consideration should be given to the following: The analyst’s utilization of pertinent information that is obtained from management and/or other
areas of the department Sharing by the analyst of any pertinent information obtained as a result of the financial analysis
with management and/or other areas of the department The analyst’s communication and collaboration with the financial examination staff before,
during and at the conclusion of a financial examination The analyst’s utilization and incorporation of pertinent information from the financial
examination in conducting ongoing analysis procedures.
Process-Oriented Guidelines: 1. The analysis process should include a formal periodic method that allows for pertinent information
from other areas (e.g. legal, rates and forms, actuarial, etc.) that could impact the financial analysisprocess to be shared with the financial analysis staff Although no one method is required, thefollowing are examples that may demonstrate compliance: quarterly department heads meetings,department managers’ meetings, information requests to other areas, etc.
2. Financial solvency information identified as a result of the financial analysis, particularly adversefindings or significant unresolved issues, should be communicated to, management and otherdepartment staff, as necessary.
3. Results of ongoing analysis procedures should be shared with the financial examiners to assist inexamination planning. At the beginning of each examination, the analyst should communicate areasof concern and specific issues to address during the examination. To assist in communication, theanalyst should provide a current copy of the Insurer Profile Summary as well as any other supportingdocumentation necessary to communicate concerns and suggested procedures.
1. Results of ongoing analysis procedures should be shared with the financial examiners to assist inexamination planning through a coordination meeting. An email exchange alone, between analyst and examiner is not considered sufficient communication in planning an examination. During the planning process of each examination, the analyst should meet (in person or via conference call) with the examiner to communicate areas of concern and specific issues to address during the examination. To assist in communication, the analyst should provide a current copy of the Insurer
© 2017 National Association of Insurance Commissioners 6 of 136
Profile Summary as well as other supporting analyst work papers and other documentation already on file at the department to communicate current or prospective concerns or observations and suggested procedures.
1.2.The financial analyst should participate in a collaborative follow-up meeting or conference call at the end of the examination to discuss the following: Examination results and/or findings Insurer’s prioritization level Ongoing supervisory plan and the completed Summary Review Memorandum Re-aAssessment of branded risks as contained in the Insurer Profile Summary
5. The analyst should follow-up with the insurer to address concerns/issues identified as a result ofexamination activities, which may include examination report findings, management lettercomments or prospective risks.
--------------------------------------------DETAIL ELIMINATED TO CONSERVE SPACE----------------------------
© 2017 National Association of Insurance Commissioners 7 of 136
Part B2: Financial Examinations
------------------------------------------------DETAIL ELIMINATED TO CONSERVE SPACE---------------------------------------------
b. Communication of Relevant Information to/from Examination Staff
Standard: The department should ensure that all relevant information and data obtained that may assist in the financial examination process is provided to the financial examination staff. The department should ensure that findings of the financial examination staff are communicated to the appropriate person(s).
Results-Oriented Guidelines: 1. Examiners should effectively communicate and coordinate with various areas within the department.
Such communication should consist of both: 1) communication of information held by other areas ofthe department to the examiners as appropriate to enhance the quality of the examination; and 2)communication of key examination findings to other areas of the department as appropriate toenhance the work performed by those other areas. Evidence of this communication should be clearlydocumented in the examination files. When assessing compliance with this guideline, considerationshould be given to the following: The examiner’s utilization of pertinent information that is obtained from management and/or
other areas of the department. Sharing by the examiner of any pertinent information obtained as a result of the financial
examination with management and/or other areas of the department. The examiner’s communication and collaboration with the financial analysis staff before, during
and at the conclusion of a financial examination. The examiner’s utilization and incorporation of pertinent information from the financial analysis
in planning and conducting examination procedures.
Process-Oriented Guidelines: 1. The examination process should include a formal method that allows for pertinent information from
other areas (e.g., legal, rates and forms, actuarial, etc.) within the department that could impact thefinancial examination to be shared with the examination staff. Although no one method is required,the following are examples that may demonstrate compliance: regularly scheduled department headmeetings, department managers’ meetings, information requests to other areas of the department,etc.).
2. The examiner-in-charge (EIC) should provide a status report to the chief examiner (or designee) atleast monthly and include information as required by the NAIC Financial Condition ExaminersHandbook (Examiners Handbook).
3. Financial solvency information identified as a result of the financial examination, particularlyadverse findings or significant unresolved issues, should be communicated by the examination teamto the chief examiner, financial analyst, management and other department staff, as necessary
4. At the beginningDuring the planning process of each examination, the examiner should meet (inperson or via conference call) with the assigned financial analyst (and/or analyst supervisor) toobtain input from the financial analyst regarding areas of concern and specific issues to addressduring the examination. An email exchange alone is not considered sufficient communication in
© 2017 National Association of Insurance Commissioners 8 of 136
planning an examination. To assist in gathering this information, the examiner should obtain a current IPS from the financial analyst, as well as any other supporting analyst workpapers and other documentation already on file at the department to communicate current or prospective necessary to understand the financial analyst’s concerns or observations and suggested procedures.
5. Results of examination activities should be shared with the financial analyst to assist in conductingongoing analysis procedures. At the conclusion of an examination, the examiner should hold acollaborative follow-up meeting or conference call with the financial analyst to discuss thefollowing: Examination results and/or findings. Insurer’s prioritization level. Ongoing supervisory plan and the completed SRM. Assessment of branded risks contained in the IPS.
6. The examiner should recommend follow-up for the financial analyst to perform in addressingconcerns/issues identified as a result of examination activities. In so doing, the examiner shouldcommunicate examination report recommendations, management letter comments and/orprospective risks. Information to be provided as a result of each full-scope examination shouldinclude the report of examination, management letter (if used) and SRM (or substantially similardocument).
© 2017 National Association of Insurance Commissioners 9 of 136
EXHIBIT A EXAMINATION PLANNING PROCEDURES CHECKLIST
COMPANY NAME __________________________________________________________________________
PERIOD OF EXAMINATION _________________________________________________________________
The following checklist details the components of Phase 1 and Phase 2, as well as other information that should be considered during the planning process. Narrative guidance is provided within Section 2 of this Handbook to aid examiners in understanding the risk-focused surveillance process.
Pre-planning Procedures Examiner Date
1. At least six months prior to the as-of date, notify the company and itsexternal auditors, with company personnel’s assistance, that anexamination will take place and that the auditor workpapers will berequested when the exam begins.
2. If the examination is to be performed on a company that is part of aholding company group, send an informal notification at least sixmonths prior to the as-of date to other states that have domestics in thegroup.
3. Call the examination in the Financial Exam Electronic TrackingSystem (FEETS) at least 90 days prior to the exam start date.
a. If the examination is to be performed on a company that is partof a holding company group, document your attempts tocoordinate the exam with the Lead State and other domesticstate(s) within your group. Utilize Exhibit Z – ExaminationCoordination to assist with this process.
4. Send preliminary information requests to the company with sufficientlead-time to allow information to be provided prior to the start ofexamination fieldwork. Exhibit B – Examination PlanningQuestionnaire and Exhibit C, Part One – Information TechnologyPlanning Questionnaire can be utilized to assist in developing pre-planning requests. Note: The examiner is encouraged, with input fromthe financial analyst when possible, to customize Exhibit B to theinsurer being examined prior to submitting the information request.
Phase 1 – Understand the Company and Identify Key Functional Activities to be Reviewed
Part 1: Understanding the Company
Step 1. Gather Necessary Planning Information
Meet with the Financial Analyst
1. Meet (in person or via conference call) with the assigned financialanalyst (and/or analyst supervisor) to gain an understanding of
© 2017 National Association of Insurance Commissioners 10 of 136
company information available to the department. In addition, discuss risks and concerns highlighted in the Insurer Profile Summary as well as the company’s financial condition and operating results since the last examination. Ascertain the reasons for unusual trends, abnormal ratios and transactions that are not easily discernible. Document a summary of significant risks identified by the analyst for further review on the examination. Note: An email exchange, in and of itself, is not deemed sufficient to achieve the expectation of a planning meeting with the assigned analyst.
a. If deemed necessary, obtain supporting documentationfrom the most recent annual financial statement analysis toaid in the identification of significant risks and facilitateongoing discussion with the analyst.
--------------------------------------------DETAIL ELIMINATED TO CONSERVE SPACE--------------------------------------
© 2017 National Association of Insurance Commissioners 11 of 136
EXHIBIT B EXAMINATION PLANNING QUESTIONNAIRE
The Examination Planning Questionnaire contains procedures and questions that are designed to assist the examiner in gathering necessary planning information and obtaining an understanding of the insurer’s organization. The examiner or company personnel should complete this questionnaire as early in exam planning as practical. If company personnel complete this exhibit, identification of who completed each request, as well as supporting documentation, should be provided to the examination team and the responses to this questionnaire should be critically evaluated by the examiner. If information requested through the questionnaire has already been provided to the department, the company’s response should so state and reference when and how the information was provided. The substance of the information collected during the completion of this questionnaire should be incorporated into the Examination Planning Memorandum. The questionnaire responses should be considered when identifying the inherent risks of the insurer. They should also impact the planned examination approach, and the nature, timing and extent of examination procedures performed.
Examiners may consider requesting the completion of Section K: Liquidity during intervals outside of the full-scope examination period (e.g., annually). The majority of questions in this section are intended for all insurers; however, questions 9, 10 and 11 in this section apply to life insurers only. Therefore, the questionnaire should be customized before it is provided to the insurer. If the examiner has prior knowledge or reason to believe the company may be facing significant liquidity risks, the additional liquidity tables included at Attachment 1 may also be requested to prompt the company to provide greater detail regarding potential liquidity risks (typically most applicable to life insurers). Alternatively, if the examiner is not already aware of significant liquidity risks, it may be appropriate to first review the company’s responses to the liquidity questions before determining whether the additional detail provided by the tables should be gathered.
Customization of Questionnaire Prior to Distribution This questionnaire should be customized to the insurer being examined to allow the examiner or company personnel completing the questionnaire to focus only on the applicable questions. The questions that remain should be completely addressed, providing additional support if necessary. It is possible that the financial analyst has performed work in these areas as part of the analysis procedures; therefore, prior to completion of the questionnaire, the exam team should communicate with the analyst to determine whether the information has already been obtained in order to reduce duplication of work and duplicative information requests to the insurer.
To assist the exam team in identifying information that may already be provided to the department, requests that may be collected through the financial analysis process have been denoted with an asterisk (*) for ease in identification and potential removal from the questionnaire.
Instructions for Completing Exhibit Please provide the most current version of the following items to the examination team within the specified timeline. If a requested item has already been provided to the department, please note the date and to whom it was provided.
COMPLETED BY
SUPPORTING DOCUMENTATION
I. OWNERSHIP AND MANAGEMENT INFLUENCES
A. Concentration of Ownership
1. Provide documentation explaining:
a. The concentration of ownership.*
--------------------------------------------DETAIL ELIMINATED TO CONSERVE SPACE--------------------------------------
© 2017 National Association of Insurance Commissioners 12 of 136
PROCEDURES OF THE FINANCIAL EXAMINERS HANDBOOK (E) TECHNICAL GROUP IN CONNECTION WITH PROPOSED AMENDMENTS
TO THE FINANCIAL CONDITION EXAMINERS HANDBOOK
The following establishes procedures of the Financial Examiners Handbook (E) Technical Group (Technical Group) for proposed changes, amendments and/or modifications to the Financial Condition Examiners Handbook.
1. The Technical Group may consider relevant proposals to change the NAIC Financial ConditionExaminers Handbook (Handbook) at any conference call, interim or national meeting (“themeeting”) throughout the year as scheduled by the Technical Group.
2. If a proposal for suggested changes, amendments and/or modifications is submitted to, or filedwith, NAIC staff support it may be considered at the next regularly scheduled meeting of theTechnical Group.
3. The Technical Group publishes a formal submission form and instructions that can be used tosubmit proposals and is available on the Group’s webpage. However, proposals may also besubmitted in an alternate format provided that they are stated in a concise and complete format. Inaddition, if another NAIC committee, task force or Technical group is known to have consideredthis proposal, that committee, task force or Technical group should provide any relevantinformation.
4. Any proposal that would change the Handbook will be effective following the NAIC Fall/WinterNational Meeting (i.e. of the preceding year) in which it was adopted (e.g., a change proposed tobe effective January 1, 2018 must be adopted no later than the 2017 Fall/Winer National Meeting).
5. Upon receipt of a proposal, the Technical Group will review the proposal at the next scheduledmeeting and determine whether to consider the proposal for public comment. The publiccomment period shall be thirty days unless extended by the Technical Group. The Technical Groupwill consider comments received on each proposal at its next meeting and take action. Proposalsunder consideration may be deferred by the Technical Group until the following scheduledmeeting. The Technical Group may form an ad hoc group to study the proposal, if needed. TheTechnical Group may also refer proposals to other NAIC committees for technical expertise orreview. If a proposal has been referred to another NAIC committee, the proposal will come off theTechnical Group’s agenda until a response has been received.
6. NAIC staff support will prepare an agenda inclusive of all proposed changes. The agenda andrelevant materials shall be sent via e-mail to each member of the Technical Group, interestedregulators and interested parties and posted to the Technical Group’s webpage approximately 5-10business days prior to the next regularly scheduled meeting during which the proposal would beconsidered.
7. In rare instances, or where emergency action may be required, suggested changes and amendmentscan be considered as an exception to the above stated process and timeline based on a two-thirdsmajority consent of the Technical Group members present.
8. NAIC staff support will publish the Handbook on or about February 28, each year. NAIC staffwill post to the NAIC Publications Web site any material subsequent corrections to thesepublications.
© 2017 National Association of Insurance Commissioners 13 of 136
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© 2017 National Association of Insurance Commissioners 14 of 136
EXAMINATION REPOSITORY – REINSURANCE (CEDING INSURER)
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:
Amounts Recoverable from Reinsurers Funds Held by or Deposited with Reinsured Companies Other Amounts Receivable Under Reinsurance Contracts Ceded Reinsurance Premiums Payable (Net of Ceding Commissions) Funds Held by Company Under Reinsurance Treaties (P&C Companies) Funds Held Under Reinsurance Treaties with Unauthorized Reinsurers (Life Companies) Provision for Reinsurance Contract Liabilities Not Included Elsewhere – Other Amounts Payable on Reinsurance Miscellaneous Liabilities – Reinsurance in Unauthorized Companies (Life Companies) Funds Held Under Coinsurance (Life Companies)
Relevant Statements of Statutory Accounting Principles (SSAPs)
All of the relevant SSAPs related to the reinsurance process, regardless of whether or not the corresponding risks are included within this exam repository, are listed below:
No. 5R Liabilities, Contingencies and Impairments of Assets – Revised No. 25 Affiliates and Other Related Parties No. 61R Life, Deposit-Type and Accident and Health Reinsurance – Revised (Health/Life Companies) No. 62R Property and Casualty Reinsurance – Revised (P&C Companies) No. 63 Underwriting Pools (Health/Life Companies) No. 64 Offsetting and Netting of Assets and Liabilities No. 65 Property and Casualty Contracts (P&C Companies)
© 2017 National Association of Insurance Commissioners 15 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
Oth
er T
han
Fina
ncia
l Rep
ortin
g R
isks
Th
e in
sure
r doe
s not
ac
cura
tely
iden
tify,
ac
cum
ulat
e an
d tra
ck
its a
ggre
gate
loss
ex
posu
res t
hat m
ay
requ
ire re
insu
ranc
e co
vera
ge.
ST
Oth
er
AA
RP
The
insu
rer h
as a
risk
m
anag
emen
t fun
ctio
n in
pl
ace
to id
entif
y, tr
ack
and
mon
itor v
ario
us lo
ss
expo
sure
s (e.
g., c
atas
troph
ic
risk,
mor
talit
y, m
orbi
dity
, ep
idem
ic, e
tc.).
The
insu
rer h
as p
roce
sses
in
plac
e to
ens
ure
that
pol
icy
info
rmat
ion
is c
orre
ctly
ca
ptur
ed in
the
syst
em (S
ee
also
Exa
min
atio
n R
epos
itory
– U
nder
writ
ing)
. (N
ote:
Thi
s fun
ctio
n m
ay b
e ou
tsou
rced
to a
TPA
/MG
A).
The
(re)
insu
rer h
as a
pr
oces
s in
plac
e to
revi
ew
and
accu
mul
ate
loss
ex
posu
re d
ata
repo
rted
by
its c
edin
g in
sure
r/bro
kers
fo
r inc
lusi
on in
trac
king
ag
greg
ate
loss
exp
osur
e (S
ee a
lso
Exam
inat
ion
Rep
osito
ry –
Rei
nsur
ance
A
ssum
ed).
If th
is p
roce
ss is
out
sour
ced
to a
third
-par
ty
adm
inis
trato
r (TP
A) o
r m
anag
ing
gene
ral a
gent
(M
GA
), th
e in
sure
r has
a
proc
ess i
n pl
ace
to e
nsur
e th
at th
e TP
A/M
GA
co
rrec
tly in
puts
dat
a in
to th
e sy
stem
.
Rev
iew
and
test
the
oper
atin
g ef
fect
iven
ess o
f th
e in
sure
r’s p
roce
sses
to
iden
tify,
trac
k an
d m
onito
r re
leva
nt lo
ss e
xpos
ures
.
Test
con
trols
rela
ting
to th
e ac
cura
cy o
f pol
icy
data
up
load
ed (b
y th
e in
sure
r or
a TP
A/M
GA
) to
the
syst
em
(See
als
o Ex
amin
atio
n R
epos
itory
– U
nder
writ
ing)
.
Rev
iew
and
test
the
oper
atin
g ef
fect
iven
ess o
f th
e (r
e)in
sure
r’s p
roce
sses
to
revi
ew a
nd a
ccum
ulat
e lo
ss e
xpos
ure
data
repo
rted
by c
edin
g in
sure
rs/b
roke
rs
(See
als
o Ex
amin
atio
n R
epos
itory
– R
eins
uran
ce
Ass
umed
).
Sele
ct a
sam
ple
of d
irect
ly
unde
rwrit
ten
polic
ies t
o ve
rify
that
the
insu
rer h
as
corr
ectly
reco
rded
loss
ex
posu
re d
ata
asso
ciat
ed
with
rele
vant
pol
icie
s (Se
e al
so E
xam
inat
ion
Rep
osito
ry –
Und
erw
ritin
g).
Ana
lytic
ally
revi
ew th
e lo
ss
expo
sure
dat
a re
porte
d to
th
e co
mpa
ny b
y ce
ding
in
sure
rs/b
roke
rs o
n as
sum
ed
busi
ness
to id
entif
y po
tent
ial i
ncon
sist
enci
es
(See
als
o Ex
amin
atio
n R
epos
itory
– R
eins
uran
ce
Ass
umed
).
If de
emed
nec
essa
ry,
perf
orm
add
ition
al
proc
edur
es to
get
com
fort
with
the
loss
exp
osur
e da
ta
repo
rted
to th
e (r
e)in
sure
r fr
om c
edin
g in
sure
rs/b
roke
rs o
n as
sum
ed
busi
ness
(See
als
o Ex
amin
atio
n R
epos
itory
–
Rei
nsur
ance
Ass
umed
).
The
insu
rer h
as n
ot
esta
blis
hed
and
ST
OP
Oth
er
AA
RP
The
insu
rer h
as a
wel
l-de
fined
rein
sura
nce
stra
tegy
R
evie
w m
eetin
g m
inut
es o
f th
e bo
ard
of d
irect
ors (
or a
R
evie
w th
e in
sure
r’s
rein
sura
nce
leve
ls fo
r
© 2017 National Association of Insurance Commissioners 16 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
mai
ntai
ned
appr
opria
te
rein
sura
nce
leve
ls in
ac
cord
ance
with
the
com
pany
’s c
apita
l le
vel,
loss
exp
osur
es
and
unde
rwrit
ing
risk
prof
ile.
that
is b
ased
on
the
aggr
egat
e lo
ss e
xpos
ures
it
face
s. Th
e st
rate
gy in
dica
tes
the
type
of r
eins
uran
ce (e
.g.,
aggr
egat
e ex
cess
of l
oss,
per
occu
rren
ce, e
tc.)
to b
e m
aint
aine
d by
the
orga
niza
tion
and
is
appr
oved
by
the
boar
d of
di
rect
ors (
or a
com
mitt
ee
ther
eof)
.
The
insu
rer h
as e
stab
lishe
d an
d do
cum
ente
d ex
posu
re
limits
and
a ri
sk a
ppet
ite
that
hav
e be
en re
view
ed a
nd
appr
oved
by
seni
or
man
agem
ent.
The
insu
rer r
eins
ures
all
expo
sure
s tha
t exc
eed
the
expo
sure
lim
its a
nd
mai
ntai
ns c
over
age
in
acco
rdan
ce w
ith it
s ris
k ap
petit
e.
The
insu
rer h
as d
evel
oped
fo
rmal
doc
umen
tatio
n of
its
rein
sura
nce
stru
ctur
e an
d ha
s est
ablis
hed
an e
ffec
tive,
on
goin
g di
alog
ue a
mon
g th
e un
derw
ritin
g, c
laim
s and
re
insu
ranc
e ar
eas.
The
insu
rer h
as a
pro
cess
in
plac
e to
eva
luat
e th
e ef
fect
iven
ess o
f its
re
insu
ranc
e co
vera
ge.
com
mitt
ee th
ereo
f) o
r oth
er
evid
ence
of b
oard
in
volv
emen
t in
the
appr
oval
of
the
insu
rer’
s rei
nsur
ance
po
licy.
Rev
iew
how
ag
greg
ated
/mod
eled
loss
ex
posu
re d
ata
is u
tiliz
ed b
y th
e co
mpa
ny to
reac
h re
insu
ranc
e de
cisi
ons.
Rev
iew
doc
umen
tatio
n of
re
insu
ranc
e co
vera
ge li
mits
an
d ev
iden
ce o
f sen
ior
man
agem
ent
revi
ew/a
ppro
val.
Rev
iew
a su
mm
ary
of a
ll re
insu
ranc
e co
ntra
cts t
o en
sure
that
the
cove
rage
s m
atch
the
insu
rer’
s ex
posu
re li
mits
.
Rev
iew
ev i
denc
e of
in
tera
ctio
n be
twee
n th
e un
derw
ritin
g, c
laim
s and
re
insu
ranc
e ar
eas.
Rev
iew
the
insu
rer’
s an
alys
is o
f res
ults
gro
ss a
nd
net o
f rei
nsur
ance
.
appr
opria
tene
ss. C
onsi
der
the
resu
lts o
f dat
a ag
greg
atio
n/ m
odel
s to
assi
st in
this
ass
essm
ent.
Rev
iew
t he
insu
rer’
s re
insu
ranc
e co
vera
ge a
s co
mpa
red
to th
e ris
k be
ing
reta
ined
by
the
insu
rer t
o en
sure
ade
quat
e, b
ut n
ot
exce
ssiv
e, re
insu
ranc
e le
vels
.
Cal
cula
te th
e hi
stor
ical
ag
greg
ate
prof
itabi
lity
of
rein
sura
nce.
Con
side
r app
lyin
g a
rang
e of
scen
ario
s to
a se
lect
ion
of si
gnifi
cant
re
insu
ranc
e co
ntra
cts t
o te
st
the
over
all
perf
orm
ance
/pro
spec
tive
prof
itabi
lity
of th
e co
ntra
ct
and
to a
sses
s whe
ther
the
cedi
ng c
omm
issi
on is
gr
eate
r tha
n th
e co
st to
writ
e th
e bu
sine
ss.
Rev
iew
rein
sura
nce
cont
ract
s to
dete
rmin
e if
risk-
limiti
ng p
rovi
sion
s (e
.g.,
slid
ing
com
mis
sion
s, lo
ss c
orrid
ors,
etc.
) im
pact
th
e ef
fect
iven
ess o
f the
in
sure
r’s r
eins
uran
ce
stra
tegy
.
© 2017 National Association of Insurance Commissioners 17 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
The
insu
rer p
erfo
rms a
co
st/b
enef
it an
alys
is p
rior t
o en
terin
g in
to re
insu
ranc
e ag
reem
ents
.
Rev
iew
the
insu
rer’
s co
st/b
enef
it an
alys
is.
The
insu
rer’
s ca
tast
roph
ic
rein
sura
nce
prot
ectio
ns a
re
inad
equa
te.
ST
OP
Oth
er
AA
RP
The
insu
rer u
ses o
ne o
f the
in
dust
ry’s
cat
astro
phic
m
odel
ing
softw
are
tool
s (R
MS,
AIR
, EQ
ECA
T, e
tc.)
to d
eter
min
e th
e pr
obab
le
max
imum
loss
(PM
L) b
y zo
ne.
The
proc
ess i
nclu
des
actu
aria
l inv
olve
men
t with
th
e ce
ded
rein
sura
nce
depa
rtmen
t to
insu
re th
e ce
ded
depa
rtmen
t pur
chas
es
the
prop
er a
mou
nt o
f re
insu
ranc
e.
The
insu
rer a
djus
ts it
s re
tent
ions
or u
ses
rein
sura
nce
alte
rnat
ives
, su
ch a
s cat
bon
ds, t
o en
sure
fu
ll pl
acem
ent a
t eac
h ca
tast
roph
ic la
yer.
The
insu
rer h
as p
rote
cted
its
elf a
gain
st m
ultip
le
occu
rren
ces i
n th
e sa
me
perio
d w
ith c
ontra
ctua
l re
inst
atem
ent o
f cov
erag
e.
Rev
iew
the
adeq
uacy
of t
he
proc
ess a
nd to
ols u
tiliz
ed to
de
term
ine
the
insu
rer’
s PM
L am
ount
(s).
Det
erm
ine
whe
ther
the
insu
red’
s rei
nsur
ance
st
rate
gy in
clud
es th
e in
volv
emen
t of t
he a
ctua
rial
and
cede
d re
insu
ranc
e de
partm
ents
in th
e pu
rcha
sing
of c
atas
troph
ic
rein
sura
nce.
Rev
iew
the
cove
rage
s in
plac
e fo
r eac
h la
yer o
f re
insu
ranc
e fo
r app
ropr
iate
su
perv
isor
y re
view
.
Det
erm
ine
whe
ther
the
insu
rer’
s rei
nsur
ance
st
rate
gy re
quire
s pre
miu
m
rein
stat
emen
t for
the
cat
prog
ram
.
Rev
iew
the
reas
onab
lene
ss
of th
e ca
tast
roph
ic
rein
sura
nce
cove
rage
in
plac
e at
the
insu
rer b
y be
nchm
arki
ng a
gain
st
com
petit
ors a
nd/o
r co
mpa
ring
agai
nst i
ndus
try
stan
dard
s. C
onsi
der i
nvol
ving
an
exam
ac
tuar
y or
rein
sura
nce
spec
ialis
t in
asse
ssin
g th
e ad
equa
cy o
f the
insu
rer’
s ca
tast
roph
ic re
insu
ranc
e co
vera
ge.
The
insu
rer i
s ove
r-ex
pose
d to
cre
dit a
nd
liqui
dity
risk
s in
its
use
of re
insu
ranc
e co
unte
rpar
ties.
OP
ST
CR
LQ
Oth
er
AA
RP
The
insu
rer h
as p
olic
ies i
n pl
ace
requ
iring
util
izat
ion
of
mul
tiple
rein
sure
rs to
re
duce
con
cent
ratio
n w
ith
any
one
entit
y.
Test
the
oper
atin
g ef
fect
iven
ess o
f the
in
sure
r’s c
ontro
ls to
trac
k co
mpl
ianc
e w
ith th
e co
ncen
tratio
n po
licy.
Bas
ed o
n a
revi
ew o
f si
gnifi
cant
con
tract
s, de
term
ine
whe
ther
the
insu
rer i
s pro
perly
di
vers
ified
.
© 2017 National Association of Insurance Commissioners 18 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
The
insu
rer h
as d
evel
oped
a
form
al p
roce
ss to
app
rove
re
insu
ranc
e co
unte
rpar
ties.
The
insu
rer h
as a
pro
cess
in
plac
e to
pre
appr
ove
and
set
max
imum
lim
its to
be
cede
d to
rein
sure
rs th
at a
re
mon
itore
d an
d re
vise
d, a
s ne
cess
ary.
The
insu
rer c
ontin
ually
m
onito
rs th
e fin
anci
al
solv
ency
of i
ts re
insu
rers
th
roug
hout
the
dura
tion
of
the
rein
sura
nce
cont
ract
s.
Col
late
ral i
s hel
d in
as
soci
atio
n w
ith si
gnifi
cant
tre
atie
s to
enco
urag
e pr
ompt
se
ttlem
ent a
nd fu
lfillm
ent o
f ob
ligat
ions
.
Obt
ain
evid
ence
of t
he
com
pany
’s p
roce
ss to
ap
prov
e re
insu
ranc
e co
unte
rpar
ties.
Obt
ain
evid
ence
of t
he
prea
ppro
val p
roce
ss a
nd
docu
men
tatio
n of
max
imum
re
insu
ranc
e lim
its.
Obt
ain
evid
ence
of t
he
insu
rer’
s ong
oing
revi
ew o
f its
rein
sure
rs.
Obt
ain
evid
ence
of t
he
insu
rer’
s pro
cess
to
cons
ider
/requ
ire c
olla
tera
l to
be
held
for s
igni
fican
t tre
atie
s.
Perf
orm
pro
cedu
res t
o ev
alua
te th
e qu
ality
of
sign
ifica
nt re
insu
rers
ut
ilize
d by
the
insu
rer;
for
exam
ple:
•
Rev
iew
age
ncy
ratin
gs•
Rev
iew
fina
ncia
l res
ults
Con
tact
dom
estic
regu
lato
r re
gard
ing
any
conc
erns
For s
elec
t rei
nsur
ers,
verif
y th
at th
e ba
lanc
e cu
rren
tly
cede
d is
with
in th
e m
axim
um li
mits
set b
y th
e in
sure
r.
Rei
nsur
ance
co
unte
rpar
ties a
re n
ot
likel
y to
fulfi
ll th
eir
oblig
atio
ns.
CR
LQ
O
ther
A
AR
P R
RC
Th
e in
sure
r has
dev
elop
ed a
fo
rmal
pro
cess
to a
ppro
ve
rein
sura
nce
coun
terp
artie
s.
New
cou
nter
parti
es a
re
subj
ect t
o re
view
and
ap
prov
al in
acc
orda
nce
with
st
anda
rds.
The
insu
rer c
ontin
ually
m
onito
rs th
e fin
anci
al
solv
ency
of i
ts re
insu
rers
th
roug
hout
the
dura
tion
of
the
rein
sura
nce
cont
ract
s.
Obt
ain
evid
ence
of t
he
com
pany
’s p
roce
ss to
ap
prov
e re
insu
ranc
e co
unte
rpar
ties.
Sele
ct a
sam
ple
of n
ew
coun
terp
artie
s to
dete
rmin
e w
heth
er c
ontro
ls a
re
oper
atin
g ef
fect
ivel
y.
Obt
ain
evid
ence
of t
he
insu
rer’
s ong
oing
revi
ew o
f its
rein
sure
rs.
Perf
orm
pro
cedu
res t
o ev
alua
te th
e qu
ality
of
sign
ifica
nt re
insu
rers
ut
ilize
d by
the
insu
rer;
for
exam
ple:
•
Rev
iew
age
ncy
ratin
gs•
Rev
iew
fina
ncia
l res
ults
•C
onta
ct d
omes
ticre
gula
tor r
egar
ding
any
conc
erns
© 2017 National Association of Insurance Commissioners 19 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
Col
late
ral i
s hel
d in
as
soci
atio
n w
ith si
gnifi
cant
tre
atie
s to
enco
urag
e pr
ompt
se
ttlem
ent a
nd fu
lfillm
ent o
f ob
ligat
ions
.
Obt
ain
evid
ence
of t
he
insu
rer’
s pro
cess
to
cons
ider
/requ
ire c
olla
tera
l to
be
held
for s
igni
fican
t tre
atie
s. Sm
alle
r, le
ss c
ompl
ex
or n
ew in
sure
rs a
re
unab
le to
neg
otia
te
equi
tabl
e re
insu
ranc
e co
ntra
ct te
rms f
rom
la
rger
or m
ore
expe
rienc
ed
rein
sure
rs.
OP
ST
LQ
Oth
er
AA
RP
The
insu
rer e
ngag
es
licen
sed
rein
sura
nce
inte
rmed
iarie
s to
nego
tiate
fa
ir an
d ac
cura
te
rein
sura
nce
cont
ract
s on
its
beha
lf.
Rev
iew
the
wor
k pe
rfor
med
by
the
insu
rer t
o de
term
ine
whe
ther
the
inte
rmed
iary
is
licen
sed.
Rev
iew
the
cred
entia
ls,
back
grou
nd a
nd e
xper
ienc
e of
thos
e ne
gotia
ting
the
cont
ract
s to
ensu
re th
at th
ey
are
licen
sed
to re
pres
ent t
he
insu
rer i
n co
ntra
ct
nego
tiatio
ns.
Fina
ncia
l Rep
ortin
g R
isks
R
eins
uran
ce c
ontra
cts
with
aff
iliat
es h
ave
not b
een
filed
in
acco
rdan
ce w
ith
appl
icab
le st
ate
stat
utes
and
do
not
incl
ude
equi
tabl
e co
ntra
ct p
rovi
sion
s.
OP
ST
CM
A
C
AA
RP
RPH
CC
Th
e in
sure
r has
pol
icie
s and
pr
oced
ures
in p
lace
to
ensu
re a
ll co
ntra
cts w
ith
affil
iate
s are
file
d w
ith th
e in
sura
nce
depa
rtmen
t as
requ
ired
by a
pplic
able
stat
e st
atut
es (F
orm
D fi
ling)
.
The
insu
rer h
as p
olic
ies i
n pl
ace
to e
nsur
e th
at a
ll co
ntra
cts w
ith a
ffili
ates
are
ne
gotia
ted
at a
rm’s
leng
th
and
are
in a
ccor
danc
e w
ith
stat
utor
y ac
coun
ting
prin
cipl
es (S
AP)
. The
se
polic
ies e
nsur
e th
at:
•C
ontra
cts a
re su
bjec
t to
revi
ew a
nd a
ppro
val b
yse
nior
man
agem
ent;
•C
edin
g co
mm
issi
ons
are
suff
icie
nt to
cov
erth
e in
sure
r’s
unde
rwrit
ing
expe
nses
.•
Con
tract
term
s com
ply
with
SSA
P N
o.25
;
Rev
iew
the
insu
rer’
s po
licie
s and
pro
cedu
res i
n pl
ace
to e
nsur
e su
ch p
olic
ies
adhe
re to
app
licab
le st
atut
es
and
wou
ld a
dequ
atel
y id
entif
y tra
nsac
tions
re
quiri
ng a
filin
g.
Test
the
insu
rer’
s pro
cess
to
ensu
re th
at tr
ansa
ctio
ns w
ith
rela
ted
parti
es a
re
nego
tiate
d at
arm
’s le
ngth
by
obt
aini
ng e
vide
nce
of
seni
or m
anag
emen
t rev
iew
an
d ap
prov
al a
nd su
ppor
t fo
r the
suff
icie
ncy
of c
edin
g co
mm
issi
ons,
risk
trans
fer
and
adeq
uate
pric
ing.
Obt
ain
and
revi
ew th
e si
gnifi
cant
con
tract
s be
twee
n th
e in
sure
r and
its
affil
iate
s and
ens
ure
that
ag
reem
ents
are
file
d w
ith
the
insu
ranc
e de
partm
ent i
n ac
cord
ance
with
app
licab
le
stat
e re
quire
men
ts. V
erify
th
at th
e in
sure
r is o
pera
ting
in a
ccor
danc
e w
ith
appr
oved
con
tract
term
s.
Rev
iew
co n
tract
pro
visi
ons
for r
easo
nabl
enes
s thr
ough
co
nduc
ting
anal
ytic
al
proc
edur
es su
ch a
s co
mpa
ring
cedi
ng
com
mis
sion
s to
the
insu
rer’
s exp
ense
ratio
or
com
parin
g ac
tual
to
expe
cted
resu
lts.
Con
side
r inv
olvi
ng a
re
insu
ranc
e ex
pert
or
actu
aria
l exa
min
er to
revi
ew
com
plex
con
tract
s and
/or
© 2017 National Association of Insurance Commissioners 20 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
•R
eins
uran
ce is
not
bein
g us
ed to
tran
sfer
capi
tal t
o af
filia
tes;
and
•A
ctua
rial r
evie
w is
perf
orm
ed p
rior t
oco
ntra
ct e
xecu
tion
toen
sure
that
pol
icie
s are
enfo
rced
.
The
insu
rer h
as p
olic
ies i
n pl
ace
to e
nsur
e m
ultip
le
cede
nt c
ontra
cts h
ave
fair
and
equi
tabl
e al
loca
tion
term
s and
are
subj
ect t
o re
view
and
app
rova
l by
all
impa
cted
div
isio
ns (e
.g.,
acco
untin
g, a
ctua
rial,
etc.
).
Eval
uate
pro
cedu
res i
n pl
ace
to e
nsur
e m
ultip
le
cede
nt a
rran
gem
ents
hav
e al
loca
tion
term
s in
plac
e (in
clud
ing
cost
allo
catio
n ag
reem
ents
whe
n ap
prop
riate
), an
d th
at su
ch
term
s are
fair
and
equi
tabl
e an
d ap
plic
able
to u
nder
lyin
g re
insu
ranc
e ag
reem
ent.
thos
e w
ith q
uest
iona
ble
prov
isio
ns.
Con
side
r per
form
ing
inde
pend
ent t
estin
g to
ev
alua
te th
e re
ason
able
ness
of
con
tract
pric
ing
and
term
s.
Rev
iew
sign
ifica
nt m
ultip
le
cede
nt a
gree
men
ts to
ens
ure
allo
catio
n te
rms a
nd
agre
emen
ts a
re c
lear
ly
docu
men
ted
and
equi
tabl
e.
Rei
nsur
ance
con
tract
s ar
e no
t com
plet
ed a
nd
acco
unte
d fo
r in
com
plia
nce
with
SA
P an
d ap
plic
able
stat
e re
quire
men
ts.
OP
PD
EX
OB
/OW
V
A
RR
C
The
insu
rer e
valu
ates
all
rein
sura
nce
cont
ract
s to
ensu
re th
at th
ere
is a
dequ
ate
trans
fer o
f ris
k, in
co
mpl
ianc
e w
ith S
AP.
Con
tract
s are
revi
ewed
to
ensu
re in
clus
ion
of a
dequ
ate
colla
tera
l and
con
tract
pr
ovis
ions
as r
equi
red
by
SAP.
All
rein
sura
nce
cont
ract
s ar
e re
view
ed b
y th
e in
sure
r’s l
egal
dep
artm
ent
to e
nsur
e th
at th
ere
are
no
prov
isio
ns th
at m
ight
ad
vers
ely
affe
ct th
e in
sure
r.
The
insu
rer h
as p
olic
ies i
n pl
ace
to e
nsur
e th
at
rein
sura
nce
cont
ract
s are
Exam
ine
cont
ract
s for
ev
iden
ce o
f ins
urer
ev
alua
tion
and
revi
ew fo
r al
l req
uire
d re
gula
tory
el
emen
ts.
•Fo
r P&
C in
sure
rs,
revi
ew th
e in
sure
r’s
polic
ies a
nd p
roce
dure
sin
pla
ce to
1) d
eter
min
eho
w th
e re
insu
ranc
eag
reem
ent i
s acc
ount
edfo
r (pr
ospe
ctiv
e,re
troac
tivel
y or
depo
site
d in
acc
orda
nce
with
SSA
P N
o. 6
2R);
and
2) e
nsur
e th
eag
reem
ent i
nclu
des
requ
ired
agre
emen
tte
rms.
•Fo
r life
insu
rers
, rev
iew
the
insu
rer's
pol
icie
san
d pr
oced
ures
in p
lace
Obt
ain
copi
es o
f all
sign
ifica
nt re
insu
ranc
e co
ntra
cts i
n-fo
rce
and
com
plet
e Ex
hibi
t N, P
art
Thre
e, to
ens
ure
trans
fer o
f ris
k.
If a
cont
ract
doe
s not
tra
nsfe
r ris
k, v
erify
whe
ther
it
has r
ecei
ved
depo
sit
acco
untin
g tre
atm
ent i
n ac
cord
ance
with
SA
P.
Obt
ain
copi
es o
f all
sign
ifica
nt re
insu
ranc
e co
ntra
cts i
n-fo
rce
for t
he
perio
d un
der e
xam
inat
ion.
D
eter
min
e w
heth
er th
e co
ntra
ct in
clud
es e
ffec
tive
date
and
exe
cutio
n da
te,
paym
ent t
erm
s, te
rmin
atio
n cl
ause
, ins
olve
ncy
clau
se,
© 2017 National Association of Insurance Commissioners 21 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
final
ized
, red
uced
to w
ritte
n fo
rm a
nd si
gned
in
acco
rdan
ce w
ith a
pplic
able
SS
APs
. •
For P
&C
insu
rers
,co
ntra
cts m
ust b
eex
ecut
ed w
ithin
nin
em
onth
s of e
ffec
tive
date
or a
ccou
nted
for a
sre
troac
tive
agre
emen
tsin
acc
orda
nce
with
SSA
P N
o. 6
2R.
•Fo
r life
insu
rers
, cre
dit
for r
eins
uran
ce is
not
auth
oriz
ed if
the
agre
emen
t, am
endm
ent
or b
indi
ng le
tter o
fin
tent
is n
ot e
xecu
ted
by b
oth
parti
es b
y th
e“a
s-of
” da
te o
f the
finan
cial
stat
emen
t in
acco
rdan
ce w
ithA
ppen
dix
A-7
91.
to e
nsur
e co
mpl
ianc
e w
ith A
ppen
dix
A-7
91.
polic
ies/
lines
of b
usin
ess
rein
sure
d, in
sure
r ret
entio
n,
etc.
For a
sam
ple
of P
&C
re
insu
ranc
e co
ntra
cts,
dete
rmin
e w
heth
er th
e ef
fect
ive
date
and
the
exec
utio
n da
te fa
ll w
ithin
ni
ne m
onth
s of e
ach
othe
r or
that
the
cont
ract
is
acco
unte
d fo
r ret
roac
tivel
y in
acc
orda
nce
with
SS
AP
No.
62R
.*
For a
sam
p le
of li
fe
rein
sura
nce
cont
ract
s, de
term
ine
whe
ther
the
effe
ctiv
e da
te a
nd e
xecu
tion
date
mee
t App
endi
x A
-791
re
quire
men
ts.*
The
insu
rer i
s not
ac
cura
tely
bill
ing
and
reco
rdin
g lo
ss a
nd lo
ss
adju
stm
ent e
xpen
se
(LA
E) p
aym
ents
for
polic
ies l
inke
d to
re
insu
ranc
e co
ntra
cts.
OP
LQ
EX
CO
A
C
RR
C
The
insu
rer h
as p
roce
dure
s in
pla
ce w
here
by p
olic
ies
mee
ting
rein
sura
nce
cont
ract
crit
eria
are
au
tom
atic
ally
atta
ched
to
the
appl
icab
le re
insu
ranc
e co
ntra
ct. W
hen
a cl
aim
is
filed
on
a ta
gged
pol
icy,
the
syst
em n
otifi
es th
e us
er so
th
at th
e cl
aim
can
be
subj
ecte
d to
the
rein
sura
nce
proc
ess.
Whe
n cl
aim
s are
pai
d th
at
are
cove
red
unde
r a
rein
sura
nce
polic
y, a
bill
ing
is a
utom
atic
ally
gen
erat
ed
Test
the
oper
atin
g ef
fect
iven
ess o
f the
id
entif
icat
ion
and
billi
ng o
f re
insu
ranc
e re
cove
rabl
e ba
lanc
es th
roug
h re
perf
orm
ance
and
ob
serv
atio
n.
Perf
orm
pro
cedu
res r
elat
ed
to th
e N
AIC
Exa
min
atio
n Ju
mps
tart
appr
oach
to te
st
whe
ther
the
leve
l of c
eded
re
cove
rabl
es a
re re
ason
ably
eq
uiva
lent
to th
e le
vel o
f as
sum
ed li
abili
ties r
epor
ted
by th
e as
sum
ing
rein
sure
rs.
For a
sam
ple
of re
insu
ranc
e re
cove
rabl
e ba
lanc
es, a
gree
th
e ba
lanc
e to
a v
alid
re
insu
ranc
e co
ntra
ct, n
otin
g w
heth
er re
insu
ranc
e pr
emiu
ms h
ave
been
pai
d;
the
clai
ms a
re c
over
ed
unde
r the
rein
sura
nce
© 2017 National Association of Insurance Commissioners 22 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
with
all
of th
e re
leva
nt
clai
m in
form
atio
n re
quire
d by
the
rein
sure
r and
a
corr
espo
ndin
g re
cove
rabl
e am
ount
is re
cord
ed.
The
insu
rer h
as p
roce
dure
s in
pla
ce w
here
by ti
mel
y no
tice
is p
rovi
ded
to th
e re
insu
rer i
n ac
cord
ance
with
re
porti
ng re
quire
men
ts (e
.g.,
repo
rted
clai
ms i
n ex
cess
of
50%
of r
eten
tion,
dea
th o
r di
smem
berm
ent).
Rec
ords
ass
ocia
ted
with
re
insu
ranc
e re
cove
rabl
e ba
lanc
es a
re a
ppro
pria
tely
re
stric
ted,
con
form
to
stan
dard
s out
lined
in th
e re
insu
ranc
e tre
aty
and
prov
ide
adeq
uate
supp
ortin
g ev
iden
ce fo
r the
net
re
cove
rabl
e ba
lanc
es.
If th
is p
roce
ss is
out
sour
ced
to a
third
-par
ty
adm
inis
trato
r (TP
A) o
r m
anag
ing
gene
ral a
gent
(M
GA
), th
e in
sure
r has
a
proc
ess i
n pl
ace
to m
onito
r th
e ac
tiviti
es o
f the
TP
A/M
GA
(e.g
., ob
tain
s or
perf
orm
s reg
ular
aud
its,
obta
ins S
OC
1 re
port,
re
quire
s per
iodi
c re
porti
ng,
etc.
).
Test
the
oper
atin
g ef
fect
iven
ess o
f con
trols
ov
er th
e re
insu
ranc
e re
cord
keep
ing
proc
ess b
y ob
serv
ing
acce
ss re
stric
tions
an
d in
spec
ting
docu
men
ts
dem
onst
ratin
g su
perv
isor
y re
view
of r
eins
uran
ce
reco
rdke
epin
g.
Rev
iew
aud
it re
ports
and
ot
her d
ocum
enta
tion
to
dete
rmin
e w
heth
er th
e in
sure
r pro
vide
s suf
ficie
nt
over
sigh
t of i
ts
TPA
s/M
GA
s.
cont
ract
; the
ded
uctib
le
paym
ents
by
the
cedi
ng
insu
rer h
ave
been
met
; and
th
e ba
lanc
e ha
s bee
n ne
tted
agai
nst i
ndem
nity
and
pai
d LA
E am
ount
s pre
viou
sly
reco
vere
d fr
om th
e re
insu
rer.
Ver
ify w
heth
er th
e ce
ding
in
sure
r has
pai
d th
e cl
aim
s as
soci
ated
with
the
reco
vera
ble
bala
nce
by
vouc
hing
to c
opie
s of t
he
clai
m p
aym
ents
.
In c
onju
nctio
n w
ith te
stin
g pe
rfor
med
in th
e Ex
amin
atio
n R
epos
itory
–
Res
erve
s/C
laim
s Han
dlin
g te
st a
sam
ple
clai
ms
(incl
udin
g th
ose
hand
led
by
a TP
A/M
GA
) to
dete
rmin
e w
heth
er c
laim
s sub
ject
to
rein
sura
nce
wer
e ap
prop
riate
ly id
entif
ied.
Sign
ifica
nt
rein
sura
nce
reco
vera
bles
are
CR
EX
V
A
PD
RR
C
The
insu
rer c
ontin
ually
m
onito
rs th
e fin
anci
al
solv
ency
of i
ts re
insu
rers
Rev
iew
ass
essm
ents
of t
he
rein
sura
nce
revi
ew
perf
orm
ed b
y
Perf
orm
pro
cedu
res r
elat
ed
to th
e N
AIC
Exa
min
atio
n Ju
mps
tart
appr
oach
to te
st
© 2017 National Association of Insurance Commissioners 23 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
over
stat
ed o
r not
co
llect
ible
. th
roug
hout
the
dura
tion
of
the
rein
sura
nce
cont
ract
s.
The
insu
rer m
aint
ains
re
cord
s of i
ts re
insu
ranc
e re
cove
rabl
es, p
repa
res a
ging
re
ports
and
follo
ws u
p on
an
y pa
st-d
ue a
mou
nts i
n a
timel
y m
anne
r.
inte
rnal
/ext
erna
l aud
itors
, re
insu
rers
and
/or o
ther
s for
si
gnifi
cant
issu
es.
Obt
ain
docu
men
ted
revi
ew
of a
ging
repo
rts a
nd su
ppor
t fo
r the
col
lect
abili
ty o
f any
de
linqu
ent u
ncol
lect
ed
amou
nts.
whe
ther
the
leve
l of c
eded
re
cove
rabl
es a
re re
ason
ably
eq
uiva
lent
to th
e le
vel o
f as
sum
ed li
abili
ties r
epor
ted
by th
e as
sum
ing
rein
sure
rs.
Obt
ain
and
anal
yze
rece
nt
finan
cial
info
rmat
ion
of th
e as
sum
ing
(re)
insu
rer (
e.g.
, an
nual
fina
ncia
l sta
tem
ent,
SEC
filin
gs, e
tc.)
or re
sults
of
insu
ranc
e in
dust
ry
repo
rting
and
ratin
g se
rvic
es
(e.g
., A
.M. B
est,
S&P,
FA
ST to
ols,
etc.
) to
dete
rmin
e th
e cr
edit
wor
thin
ess o
f sig
nific
ant
rein
sure
rs.
Perf
orm
pro
cedu
res t
o de
term
ine
the
colle
ctab
ility
/exi
sten
ce o
f re
insu
ranc
e re
cove
rabl
e ba
lanc
es:
•Se
lect
a sa
mpl
e of
rein
sura
nce
reco
vera
ble
bala
nces
and
trace
tosu
bseq
uent
col
lect
ion
in o
rder
to a
scer
tain
colle
ctib
ility
colle
ctab
ilit
y; o
r,.
•Fo
r a sa
mpl
e of
rein
sura
nce
reco
vera
ble
bala
nces
,ag
ree
the
bala
nce
to a
valid
rein
sura
nce
© 2017 National Association of Insurance Commissioners 24 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
cont
ract
, not
ing
whe
ther
rein
sura
nce
prem
ium
s hav
e be
en
paid
; the
cla
ims a
re
cove
red
unde
r the
re
insu
ranc
e co
ntra
ct;
the
dedu
ctib
le
paym
ents
by
the
cedi
ng in
sure
r hav
e be
en m
et; a
nd th
e ba
lanc
e ha
s bee
n ne
tted
agai
nst
inde
mni
ty a
nd p
aid
LAE
amou
nts
prev
ious
ly re
cove
red
from
the
rein
sure
r. Fu
nds h
eld
as se
curit
y fo
r XX
X/A
XX
X
trans
actio
ns a
re n
ot
adeq
uate
to su
ppor
t th
e re
serv
e.
CR
V
A
CM
A
AR
P R
A
The
insu
rer p
erio
dica
lly
revi
ews t
he u
nder
lyin
g se
curit
y fo
r XX
X/A
XX
X
trans
actio
ns fo
r com
plia
nce
with
app
licab
le st
ate
inve
stm
ent l
aws f
or th
e ce
ding
insu
rer a
nd S
SAPs
.
For t
ran s
actio
ns su
bjec
t to
AG
48,
the
insu
rer’
s ap
poin
ted
actu
ary
cond
ucts
an
ana
lysi
s of X
XX
/AX
XX
re
insu
ranc
e ar
rang
emen
ts
on a
trea
ty-b
y-tre
aty
basi
s to
dete
rmin
e th
at fu
nds
cons
istin
g of
Prim
ary
Secu
rity
and
Oth
er S
ecur
ity
are
appr
opria
tely
hel
d by
or
on b
ehal
f of t
he c
edin
g in
sure
r or t
hat t
he in
sure
r ha
s est
ablis
hed
a lia
bilit
y in
ac
cord
ance
with
AG
48.
Ver
ify th
at a
revi
ew o
f the
un
derly
ing
secu
rity
for
XX
X/A
XX
X tr
ansa
ctio
ns is
co
nduc
ted
on a
per
iodi
c ba
sis a
nd su
bjec
t to
man
agem
ent r
evie
w a
nd
appr
oval
.
Obt
ain
the
anal
ysis
pre
pare
d by
the
insu
rer’
s app
oint
ed
actu
ary
and
verif
y m
anag
emen
t rev
iew
and
ap
prov
al.
Rev
iew
the
inve
stm
ent
portf
olio
of t
he c
edin
g in
sure
r to
dete
rmin
e co
mpl
ianc
e w
ith a
pplic
able
st
ate
inve
stm
ent l
aws f
or th
e ce
ding
insu
rer a
nd S
SAPs
.
For a
sam
ple
of re
insu
ranc
e po
licie
s not
subj
ect t
o
AG
48,
revi
ew th
e fu
nds
held
by
or o
n be
half
of th
e ce
ding
insu
rer a
s sec
urity
fo
r the
rein
sura
nce
trans
actio
n to
det
erm
ine
com
plia
nce
with
app
licab
le
stat
e in
vest
men
t law
s for
the
cedi
ng in
sure
r and
SSA
Ps.
Con
side
r req
uest
ing
an
asse
t/lia
bilit
y m
atch
ing
run
on a
stan
dalo
ne b
asis
for a
ll bu
sine
ss is
sued
thro
ugh
a re
insu
ranc
e fin
anci
ng
agre
emen
t.
© 2017 National Association of Insurance Commissioners 25 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
For a
sam
ple
of re
insu
ranc
e tra
nsac
tions
subj
ect t
o
AG
48,
revi
ew th
e as
sets
he
ld b
y or
on
beha
lf of
the
cedi
ng in
sure
r tha
t co
nstit
ute
the
Req
uire
d Le
vel o
f Prim
ary
Secu
rity
to
dete
rmin
e w
heth
er th
e re
quire
men
ts fo
r cl
assi
ficat
ion
of “
Prim
ary
Secu
rity”
per
AG
48
have
be
en m
et.
The
insu
rer i
s not
pr
oper
ly c
alcu
latin
g th
e pr
ovis
ion
for
rein
sura
nce.
(P
&C
Com
pani
es)
OP
AC
V
A
EX
CM
PD
RR
C
The
insu
rer h
as p
olic
ies i
n pl
ace
to d
eter
min
e w
heth
er
rein
sure
rs a
re a
utho
rized
, un
auth
oriz
ed o
r cer
tifie
d. A
pr
ovis
ion
for r
eins
uran
ce is
co
mpl
eted
for u
naut
horiz
ed
and
certi
fied
rein
sure
rs in
ac
cord
ance
with
SA
P.
The
insu
rer m
aint
ains
and
ve
rifie
s ade
quac
y of
fund
s he
ld, l
ette
rs o
f cre
dit,
trust
ac
coun
t bal
ance
s or a
ny
othe
r for
ms o
f col
late
ral.
The
insu
rer h
as c
ontro
ls in
pl
ace
to re
conc
ile th
e re
cove
rabl
e ba
lanc
es,
agin
gs, a
mou
nts i
n di
sput
e an
d of
fset
pay
able
bal
ance
s us
ed in
the
prov
isio
n ca
lcul
atio
n to
thos
e am
ount
s re
porte
d in
the
gene
ral
ledg
er a
nd a
ccou
ntin
g sy
stem
.
The
prov
isio
n fo
r re
insu
ranc
e ca
lcul
atio
n is
Obt
ain
docu
men
tatio
n re
latin
g to
aut
horiz
ed,
unau
thor
ized
and
cer
tifie
d re
insu
rers
. Rev
iew
com
pany
su
ppor
t for
rein
sure
r sta
tus
and
evid
ence
of p
rovi
sion
ca
lcul
atio
n an
d re
view
.
Obt
ain
evid
ence
of i
nsur
er
verif
icat
ion
of fu
nds h
eld,
le
tters
of c
redi
t, tru
st
acco
unt b
alan
ces o
r any
ot
her f
orm
s of c
olla
tera
l.
Obt
ain
and
revi
ew th
e co
mpl
eted
reco
ncili
atio
ns.
Test
any
sign
ifica
nt
reco
ncili
ng it
ems f
or
appr
opria
tene
ss.
Obt
ain
evid
ence
of
man
agem
ent r
evie
w.
Ver
ify a
utho
rizat
ion
and
certi
fied
rein
sure
r sta
tus f
or
rein
sure
rs in
clud
ed in
the
prov
isio
n fo
r rei
nsur
ance
ca
lcul
atio
ns.
Rev
iew
the
lette
rs o
f cre
dit
to v
erify
whe
ther
they
are
cl
ean,
irre
voca
ble
and
issu
ed b
y a
qual
ified
U.S
. fin
anci
al in
stitu
tion,
as
defin
ed in
App
endi
x A
-785
of
the
Acco
untin
g Pr
actic
es
and
Proc
edur
es M
anua
l.
Ver
ify th
e ex
iste
nce
and
adeq
uacy
of f
unds
hel
d,
trust
acc
ount
bal
ance
s or
any
othe
r for
ms o
f co
llate
ral.
Ver
ify w
heth
er
the
trust
ee is
a q
ualif
ied
U.S
. fin
anci
al in
stitu
tion
and
that
the
form
of t
he tr
ust
and
amou
nts c
ompl
y w
ith
the
law
s and
regu
latio
ns o
f th
e st
ate
of th
e ce
ding
in
sure
r’s c
omm
issi
oner
.
© 2017 National Association of Insurance Commissioners 26 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
revi
ewed
by
man
agem
ent t
o en
sure
acc
urac
y.
Iden
tify
any
sign
ifica
nt
amou
nts i
nclu
ded
in th
e ca
lcul
atio
n no
t pre
viou
sly
exam
ined
. Per
form
pr
oced
ures
to a
scer
tain
the
valid
ity o
f the
am
ount
s and
th
eir u
tiliz
atio
n in
the
calc
ulat
ion.
Rec
alcu
late
the
prov
isio
n fo
r rei
nsur
ance
. In
sure
r is t
akin
g cr
edit
for r
eins
uran
ce
cont
ract
s with
un
auth
oriz
ed
rein
sure
rs.
(Non
-P&
C
Com
pani
es)
The
insu
rer h
as p
roce
sses
in
plac
e to
segr
egat
e au
thor
ized
, una
utho
rized
an
d ce
rtifie
d re
insu
rer
cont
ract
s in
acco
rdan
ce w
ith
the
requ
irem
ents
set f
orth
in
App
endi
x A
-785
– C
redi
t fo
r Rei
nsur
ance
.
The
insu
rer i
nclu
des
appr
opria
te c
olla
tera
l re
quire
men
t pro
visi
ons i
n al
l con
tract
s with
un
auth
oriz
ed a
nd c
ertif
ied
rein
sure
rs.
The
insu
rer h
as p
roce
dure
s in
pla
ce to
mon
itor a
nd
obta
in a
dditi
onal
col
late
ral
as it
bec
omes
nec
essa
ry to
do
so.
Perf
orm
a w
alkt
hrou
gh to
ga
in a
n un
ders
tand
ing
of th
e in
sure
r’s p
roce
ss to
se
greg
ate
auth
oriz
ed,
unau
thor
ized
and
cer
tifie
d re
insu
rer c
ontra
cts.
Obt
ain
cont
ract
s to
dete
rmin
e w
heth
er
prov
isio
n fo
r col
late
ral
requ
irem
ent i
s inc
lude
d an
d ad
equa
te.
Test
the
com
pany
’s
proc
esse
s to
revi
ew a
nd
adju
st c
olla
tera
l bal
ance
s as
nece
ssar
y.
Perf
orm
pro
cedu
res t
o ve
rify
that
rese
rve
cred
its
are
take
n ap
prop
riate
ly
unde
r the
requ
irem
ents
of
App
endi
x A
-785
of t
he
Acco
untin
g Pr
actic
es a
nd
Proc
edur
es M
anua
l or
appl
icab
le st
ate
law
s and
re
gula
tions
. For
exa
mpl
e,
verif
y th
e am
ount
and
va
lidity
of c
olla
tera
l hel
d in
su
ppor
t of c
redi
ts ta
ken.
The
insu
rer i
s ov
eres
timat
ing
the
rein
sura
nce
reco
vera
ble
cred
it on
in
curr
ed b
ut n
ot
repo
rted
(IBN
R) l
oss
and
IBN
R L
AE
rese
rves
.
OP
VA
A
C
RR
C
The
insu
rer e
stim
ates
re
insu
ranc
e re
cove
rabl
e cr
edit
on IB
NR
loss
and
IB
NR
LA
E re
serv
es b
y re
view
ing
rein
sura
nce
treat
ies i
n pl
ace
at th
e in
sure
r, as
wel
l as h
isto
rical
re
sults
.
Test
the
oper
atin
g ef
fect
iven
ess o
f the
in
sure
r’s p
roce
ss to
ca
lcul
ate
rein
sura
nce
reco
vera
bles
cre
dits
on
IBN
R lo
ss a
nd IB
NR
LA
E re
serv
es, i
nclu
ding
in
volv
emen
t of t
he
Con
side
r the
reas
onab
lene
ss
of re
insu
ranc
e cr
edits
take
n,
reco
vera
bles
for I
BN
R lo
ss
and
IBN
R L
AE
rese
rves
, ba
sed
on a
revi
ew o
f the
in
sure
r’s r
eins
uran
ce
prog
ram
and
trea
ties i
n pl
ace.
© 2017 National Association of Insurance Commissioners 27 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
(See
als
o Ex
amin
atio
n R
epos
itory
–
Res
erve
s/C
laim
s H
andl
ing)
The
insu
rer’
s app
oint
ed
actu
ary
is in
volv
ed in
ca
lcul
atin
g an
d/or
es
timat
ing/
revi
ewin
g th
e re
cove
rabl
e cr
edit
amou
nt.
appo
inte
d ac
tuar
y,
man
agem
ent a
ppro
val a
nd
sign
-off
.
Util
ize
the
insu
ranc
e de
partm
ent a
ctua
ry o
r an
inde
pend
ent a
ctua
ry to
re
view
the
reas
onab
lene
ss
of c
eded
rein
sura
nce
estim
ates
incl
uded
in th
e op
inin
g ac
tuar
y’s r
epor
t.
Com
pare
the
cred
it re
cove
rabl
e am
ount
s re
cord
ed b
y th
e in
sure
r to
rein
sure
rs’ e
stim
ated
lia
bilit
y, if
ava
ilabl
e.
Rec
alcu
late
or t
est a
ctua
l cr
edits
take
n on
a sa
mpl
e of
co
ntra
cts a
nd v
erify
whe
ther
th
e ce
ding
insu
rer i
s co
rrec
tly a
pply
ing
the
term
s.
© 2017 National Association of Insurance Commissioners 28 of 136
EXAMINATION REPOSITORY – REINSURANCE (ASSUMING INSURER)
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:
Reinsurance Payable on Paid Loss and Loss Adjustment Expenses Funds Held by the Company Under Reinsurance Treaties Contract Liabilities Not Included Elsewhere – Other Amounts Payable on Reinsurance Commissions and Expense Allowances Payable on Reinsurance Assumed
Relevant Statements of Statutory Accounting Principles (SSAPs)
All of the relevant SSAPs related to the reinsurance process, regardless of whether or not the corresponding risks are included within this exam repository, are listed below:
No. 5R Liabilities, Contingencies and Impairments of Assets – Revised No. 6 Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due from Agents and Brokers No. 25 Affiliates and Other Related Parties No. 61R Life, Deposit-Type and Accident and Health Reinsurance – Revised No. 62R Property and Casualty Reinsurance – Revised No. 63 Underwriting Pools No. 64 Offsetting and Netting of Assets and Liabilities No. 65 Property and Casualty Contracts
© 2017 National Association of Insurance Commissioners 29 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
Oth
er T
han
Fina
ncia
l Rep
ortin
g R
isks
Th
e (r
e)in
sure
r doe
s no
t hav
e or
is n
ot
com
plyi
ng w
ith it
s re
insu
ranc
e st
rate
gy.
OP
ST
Oth
er
UPS
Q
The
(re)
insu
rer h
as a
do
cum
ente
d st
rate
gy th
at
indi
cate
s the
type
of
rein
sura
nce
to b
e of
fere
d an
d th
e gu
idel
ines
for
cedi
ng c
ompa
nies
to m
eet,
whi
ch is
app
rove
d by
the
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
.
The
(re)
insu
rer h
as a
form
al
proc
ess i
n pl
ace
to re
view
an
d ap
prov
e re
insu
ranc
e ag
reem
ents
for c
ompl
ianc
e w
ith th
e co
mpa
ny’s
do
cum
ente
d st
rate
gy.
Rev
iew
mee
ting
min
utes
of
the
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
or o
ther
ev
iden
ce o
f boa
rd
invo
lvem
ent i
n th
e ap
prov
al
of th
e (r
e)in
sure
r’s
rein
sura
nce
stra
tegy
.
Obt
ain
and
revi
ew
docu
men
ted
rein
sura
nce
stra
tegy
.
Sele
ct a
sam
ple
of n
ew
rein
sura
nce
cont
ract
s for
ev
iden
ce o
f rev
iew
and
ap
prov
al in
acc
orda
nce
with
th
e in
sure
r’s p
roce
ss.
Rev
iew
ass
umin
g ag
reem
ents
to d
eter
min
e w
heth
er th
e lin
es, t
ypes
and
lim
its o
f bus
ines
s ass
umed
co
nfor
m to
the
(re)
insu
rer’
s re
insu
ranc
e st
rate
gy.
The
(re)
insu
rer i
s not
pr
oper
ly e
valu
atin
g an
d m
onito
ring
the
cedi
ng in
sure
r for
co
mpl
ianc
e w
ith
guid
elin
es o
utlin
ed in
th
e re
insu
ranc
e st
rate
gy.
OP
Oth
er
UPS
Q
Prio
r to
ente
ring
into
co
ntra
cts,
the
(re)
insu
rer
perf
orm
s due
dili
genc
e on
th
e po
tent
ial c
edin
g in
sure
rs
to e
nsur
e co
mpl
ianc
e w
ith
the
rein
sure
r’s u
nder
writ
ing
and
clai
ms p
ract
ices
.
Thro
ugho
ut th
e te
rm o
f the
co
ntra
ct, t
he (r
e)in
sure
r pe
riodi
cally
revi
ews t
he
unde
rwrit
ing
prac
tices
and
ev
alua
tes t
he u
nder
writ
ing
and
clai
ms r
esul
ts o
f ced
ing
insu
rers
thro
ugh
anal
ytic
al
revi
ews a
nd/o
r qua
lity
assu
ranc
e (Q
A) r
evie
ws.
Obt
ain
docu
men
tatio
n of
th
e (r
e)in
sure
r’s d
ue
dilig
ence
and
con
side
r w
heth
er th
e w
ork
com
plet
ed
is a
ppro
pria
te.
Obt
ain
docu
men
tatio
n of
th
e (r
e)in
sure
r’s p
erio
dic
revi
ews o
f ced
ing
insu
rers
.
Rev
iew
ana
lytic
ally
the
resu
lts o
f ced
ing
insu
rers
to
eval
uate
thei
r und
erw
ritin
g an
d cl
aim
s pra
ctic
es.
The
(re)
insu
rer d
oes
not c
olle
ct a
ccur
ate
and
com
plet
e lo
ss
expo
sure
dat
a fr
om
OP
ST
Oth
er
UPS
Q
AA
RP
RD
The
(re)
insu
rer h
as a
pr
oces
s in
plac
e to
revi
ew
and
accu
mul
ate
loss
ex
posu
re d
ata
repo
rted
by
Rev
iew
and
test
the
oper
atin
g ef
fect
iven
ess o
f th
e (r
e)in
sure
r’s p
roce
sses
to
revi
ew a
nd a
ccum
ulat
e
Ana
lytic
ally
revi
ew th
e lo
ss
expo
sure
dat
a re
porte
d by
ce
ding
insu
rers
/bro
kers
to
iden
tify
pote
ntia
l
© 2017 National Association of Insurance Commissioners 30 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
cedi
ng
insu
rers
/bro
kers
. (Se
e al
so E
xam
inat
ion
Rep
osito
ry –
R
eser
ves/
Cla
ims
Han
dlin
g.)
its c
edin
g in
sure
r/bro
kers
. •
The
proc
ess i
nclu
des
cons
iste
ncy
chec
ks/v
aria
nce
anal
ysis
in re
view
ing
repo
rted
data
; and
•Th
e (r
e)in
sure
rco
nduc
ts p
erio
dic
audi
tsof
ced
ing
com
pani
es to
revi
ew re
porte
d lo
ssex
posu
re d
ata
and
othe
rsi
gnifi
cant
repo
rting
elem
ents
.
loss
exp
osur
e da
ta re
porte
d by
ced
ing
insu
rers
/bro
kers
. in
cons
iste
ncie
s.
If de
emed
nec
essa
ry,
perf
orm
add
ition
al
proc
edur
es to
get
com
fort
with
the
loss
exp
osur
e da
ta
repo
rted
to th
e (r
e)in
sure
r fr
om c
edin
g in
sure
rs/b
roke
rs.
The
(re)
insu
rer h
as n
ot
esta
blis
hed
and
mai
ntai
ned
appr
opria
te ri
sk
expo
sure
lim
its fo
r as
sum
ing
rein
sura
nce.
OP
ST
Oth
er
UPS
Q
The
(re)
insu
rer h
as
esta
blis
hed
and
docu
men
ted
risk
expo
sure
lim
its b
y ge
ogra
phy
and/
or li
ne o
f bu
sine
ss th
at h
ave
been
re
view
ed a
nd a
ppro
ved
by
seni
or m
anag
emen
t.
The
(re)
insu
rer u
tiliz
es a
fu
lly st
affe
d, w
ell-q
ualif
ied
rein
sura
nce
depa
rtmen
t tha
t ha
s exp
erie
nce
in a
ll lin
es o
f bu
sine
ss a
nd g
eogr
aphi
c lo
catio
ns se
rved
by
the
(re)
insu
rer.
The
(re)
insu
rer a
ccum
ulat
es
assu
med
loss
exp
osur
e da
ta
and
utili
zes d
ata
mod
els t
o tra
ck c
ompl
ianc
e w
ith
expo
sure
lim
its e
stab
lishe
d by
the
(re)
insu
rer.
Rev
iew
doc
umen
tatio
n of
ris
k ex
posu
re li
mits
and
ev
iden
ce o
f sen
ior
man
agem
ent
revi
ew/a
ppro
val.
Rev
iew
the
cred
entia
ls,
back
grou
nd a
nd
resp
onsi
bilit
ies o
f the
seni
or
pers
onne
l man
agin
g th
e in
sure
r’s r
eins
uran
ce
func
tion.
Test
the
oper
atin
g ef
fect
iven
ess o
f the
(r
e)in
sure
r’s c
ontro
ls to
ac
cum
ulat
e lo
ss e
xpos
ure
data
and
trac
k co
mpl
ianc
e w
ith th
e ex
posu
re li
mits
by
revi
ewin
g th
e m
odel
ing
proc
ess.
If ne
cess
ary,
reca
lcul
ate
the
aggr
egat
e lo
ss e
xpos
ures
by
revi
ewin
g da
ta re
porte
d by
ce
ding
insu
rers
/bro
kers
.
Util
ize
a udi
t sof
twar
e to
re
view
the
(re)
insu
rer’
s ris
k ex
posu
res (
e.g.
, sum
mar
ize
polic
ies b
y ZI
P co
de,
indu
stry
cod
e, p
olic
y si
ze,
etc.
) for
com
plia
nce
with
in
sure
r lim
its. I
f the
(r
e)in
sure
r has
not
iden
tifie
d ris
k ex
posu
re li
mits
, tes
t the
ris
k ex
posu
res f
or
appr
opria
tene
ss b
y co
nsid
erin
g in
dust
ry
stan
dard
s.
The
(re)
insu
rer i
s not
m
onito
ring
finan
cial
re
sults
for f
inan
cial
ly
OP
ST
Oth
er
UPS
Q
The
(re)
insu
rer h
as
proc
edur
es in
pla
ce
gove
rnin
g co
mpa
rison
of
Obt
ain
docu
men
tatio
n of
on
goin
g m
onito
ring
of
rein
sura
nce
resu
lts.
Rev
iew
trea
ty fi
les f
or
evid
ence
of o
ngoi
ng re
view
pr
oces
s.
© 2017 National Association of Insurance Commissioners 31 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
sign
ifica
nt a
ssum
ed
cont
ract
s. ac
tual
vs.
expe
cted
for
finan
cial
ly si
gnifi
cant
co
ntra
cts.
Perf
orm
ana
lytic
al
proc
edur
es to
ens
ure
that
si
gnifi
cant
con
tract
s do
not
repr
esen
t a fu
ture
solv
ency
ris
k.
The
(re)
insu
rer d
oes
not e
ffec
tivel
y ov
erse
e its
rein
sura
nce
inte
rmed
iarie
s to
ensu
re th
at th
ey a
re
com
plyi
ng w
ith th
e in
term
edia
ry
agre
emen
t.
OP
CR
O
ther
U
PSQ
Th
e re
insu
rer h
as a
writ
ten
agre
emen
t with
the
inte
rmed
iary
to d
ocum
ent
the
resp
onsi
bilit
ies o
f eac
h pa
rty.
The
(re)
insu
rer p
erio
dica
lly
revi
ews t
he p
roce
sses
, pr
oced
ures
and
tran
sact
ions
pe
rfor
med
by
the
inte
rmed
iary
to e
nsur
e th
at
they
are
pro
perly
ne
gotia
ting
cont
ract
s and
fu
lfilli
ng o
ther
con
tract
ual
dutie
s as o
utlin
ed in
the
agre
emen
t.
Rev
iew
the
docu
men
tatio
n th
at p
rovi
des e
vide
nce
that
a
writ
ten
cont
ract
is re
ceiv
ed
and
appr
oved
.
Rev
iew
doc
umen
tatio
n th
at
prov
ides
evi
denc
e of
pe
riodi
c re
view
of t
he
inte
rmed
iary
func
tion.
Rev
iew
the
resu
lts o
f aud
its
perf
orm
ed b
y th
e in
term
edia
ries (
audi
ts o
f ce
ding
insu
rers
).
If de
emed
nec
essa
ry,
perf
orm
a si
te v
isit
to a
udit
the
inte
rmed
iary
’s p
roce
sses
an
d tra
nsac
tions
.
Fina
ncia
l Rep
ortin
g R
isks
R
eins
uran
ce c
ontra
cts
are
not c
ompl
eted
and
ac
coun
ted
for i
n co
mpl
ianc
e w
ith
stat
utor
y ac
coun
ting
prin
cipl
es (S
AP)
and
ap
plic
able
stat
e re
quire
men
ts.
LG
PD
EX
OB
/OW
RR
C
The
rein
sure
r eva
luat
es a
ll re
insu
ranc
e co
ntra
cts t
o en
sure
that
ther
e is
ade
quat
e tra
nsfe
r of r
isk
in
com
plia
nce
with
SA
P.
Con
tract
s are
revi
ewed
to
ensu
re in
clus
ion
of a
dequ
ate
colla
tera
l and
con
tract
pr
ovis
ions
as r
equi
red
by
SAP.
All
rein
sura
nce
cont
ract
s ar
e re
view
ed b
y th
e re
insu
rer’
s leg
al d
epar
tmen
t to
ens
ure
that
ther
e ar
e no
pr
ovis
ions
that
mig
ht
adve
rsel
y af
fect
the
Gai
n an
und
erst
andi
ng o
f th
e (r
e)in
sure
r’s p
roce
sses
fo
r the
revi
ew o
f re
insu
ranc
e co
ntra
cts a
nd
exam
ine
cont
ract
s for
ev
iden
ce o
f eva
luat
ion.
•
For P
&C
insu
rers
,re
view
the
insu
rer’
spo
licie
s and
pro
cedu
res
in p
lace
to 1
) det
erm
ine
how
the
rein
sura
nce
agre
emen
t is a
ccou
nted
for (
pros
pect
ive,
retro
activ
ely
orde
posi
ted
in a
ccor
danc
ew
ith S
SAP
No.
62R
);an
d 2)
ens
ure
the
For a
ll si
gnifi
cant
con
tract
s, de
term
ine
whe
ther
the
cont
ract
s inc
lude
ap
prop
riate
cla
uses
and
tra
nsfe
r ris
k in
acc
orda
nce
with
SA
P. U
se E
xhib
it N
, Pa
rt Th
ree
to a
ssis
t in
this
pr
oces
s.
If a
cont
r act
doe
s not
tra
nsfe
r ris
k, v
erify
that
it
has r
ecei
ved
depo
sit
acco
untin
g tre
atm
ent i
n ac
cord
ance
with
SA
P.*
For a
sam
ple
of P
&C
re
insu
ranc
e co
ntra
cts,
dete
rmin
e w
heth
er th
e
© 2017 National Association of Insurance Commissioners 32 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
assu
min
g in
sure
r.
The
assu
min
g in
sure
r has
pr
oced
ures
in p
lace
to
ensu
re th
at re
insu
ranc
e co
ntra
cts a
re fi
naliz
ed,
redu
ced
to w
ritte
n fo
rm a
nd
sign
ed in
acc
orda
nce
with
ap
plic
able
SSA
Ps.
•Fo
r P&
C in
sure
rs,
cont
ract
s mus
t be
exec
uted
with
in n
ine
mon
ths o
f eff
ectiv
e da
teor
acc
ount
ed fo
r as
retro
activ
e ag
reem
ents
in a
ccor
danc
e w
ithSS
AP
No.
62R
.•
For l
ife in
sure
rs, c
redi
tfo
r rei
nsur
ance
is n
otau
thor
ized
if th
eag
reem
ent,
amen
dmen
tor
bin
ding
lette
r of
inte
nt is
not
exe
cute
d by
both
par
ties b
y th
e “a
s-of
” da
te o
f the
fina
ncia
lst
atem
ent i
n ac
cord
ance
with
App
endi
x A
-791
.
agre
emen
t inc
lude
s re
quire
d ag
reem
ent
term
s. •
For l
ife in
sure
rs, r
evie
wth
e in
sure
r’s p
olic
ies
and
proc
edur
es in
pla
ceto
ens
ure
com
plia
nce
with
App
endi
x A
-791
.
exec
utio
n da
te fa
lls w
ithin
ni
ne m
onth
s of t
he e
ffec
tive
date
or t
hat t
he c
ontra
ct is
ac
coun
ted
for r
etro
activ
ely
in a
ccor
danc
e w
ith S
SAP
No.
62R
.
For a
sam
ple
of li
fe
rein
sura
nce
cont
ract
s, de
term
ine
whe
ther
the
effe
ctiv
e da
te a
nd th
e ex
ecut
ion
date
fall
with
in
App
endi
x A
-791
re
quire
men
ts.
The
(re)
insu
rer i
s not
in
clud
ing
all a
ssum
ed
cont
ract
s in
its
finan
cial
stat
emen
ts.
OP
RV
A
C
CO
PD
RD
R
RC
Th
e (r
e)in
sure
r has
pr
oced
ures
in p
lace
that
de
fine
the
spec
ific
auth
ority
le
vels
of d
esig
nate
d pe
rson
nel w
ho a
re
auth
oriz
ed to
com
mit
the
corp
orat
ion
to n
ew
rein
sura
nce
cont
ract
s.
The
(re)
insu
rer h
as w
ritte
n gu
idel
ines
/pro
cedu
res
spec
ifyin
g ac
cept
able
do
cum
enta
tion,
revi
ew a
nd
Rev
iew
a se
lect
ion
of
cont
ract
s to:
•
Ensu
re th
at o
nly
auth
oriz
ed p
erso
nnel
are
com
mitt
ing
the
insu
rer
to re
insu
ranc
e co
ntra
cts.
•En
sure
that
the
appr
opria
tedo
cum
enta
tion
and
appr
oval
s are
in p
lace
.•
Det
erm
ine
whe
ther
they
have
bee
n re
view
ed b
y
Util
ize
NA
IC E
xam
inat
ion
Jum
psta
rt re
ports
to id
entif
y in
stan
ces w
here
mat
eria
l as
sum
ed re
insu
ranc
e lia
bilit
ies h
ave
not b
een
incl
uded
in th
e as
sum
ing
insu
rer’
s fin
anci
al
stat
emen
ts.
© 2017 National Association of Insurance Commissioners 33 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
appr
oval
requ
ired
befo
re a
co
ntra
ct m
ay b
e ac
cept
ed.
The
(re)
insu
rer h
as
proc
edur
es in
pla
ce to
en
sure
revi
ew o
f all
cont
ract
s by
the
acco
untin
g de
partm
ent t
o en
sure
pro
per
repo
rting
.
the
acco
untin
g de
partm
ent f
or p
urpo
ses
of d
eter
min
ing
the
prop
er a
ccou
ntin
g tre
atm
ent.
Rei
nsur
ance
con
tract
s w
ith a
ffili
ates
hav
e no
t bee
n fil
ed in
ac
cord
ance
with
ap
plic
able
stat
e st
atut
es a
nd d
o no
t ha
ve e
quita
ble
cont
ract
pro
visi
ons.
OP
ST
CM
A
C
AA
RP
RPH
CC
Th
e (r
e)in
sure
r has
pol
icie
s an
d pr
oced
ures
in p
lace
to
ensu
re a
ll co
ntra
cts w
ith
affil
iate
s are
file
d w
ith th
e de
partm
ent a
s req
uire
d by
ap
plic
able
stat
utes
(For
m D
fil
ing)
.
The
(re)
insu
rer h
as p
olic
ies
in p
lace
to e
nsur
e th
at a
ll co
ntra
cts w
ith a
ffili
ates
are
ne
gotia
ted
at a
rm’s
leng
th
and
are
in a
ccor
danc
e w
ith
SAP.
The
se p
olic
ies e
nsur
e th
at:
•C
ontra
cts a
re su
bjec
t to
revi
ew a
nd a
ppro
val b
yse
nior
man
agem
ent;
•C
edin
g co
mm
issi
ons
are
com
men
sura
te w
ithth
e na
ture
/qua
lity
of th
ebu
sine
ss a
ssum
ed;
•C
ontra
ct te
rms c
ompl
yw
ith S
SAP
No.
25;
•R
eins
uran
ce is
not
bein
g us
ed to
tran
sfer
capi
tal t
o af
filia
tes;
and
•A
ctua
rial r
evie
w is
perf
orm
ed p
rior t
o
Rev
iew
the
insu
rer’
s po
licie
s and
pro
cedu
res i
n pl
ace
to e
nsur
e su
ch p
olic
ies
adhe
re to
app
licab
le st
atut
es
and
wou
ld a
dequ
atel
y id
entif
y tra
nsac
tions
re
quiri
ng a
filin
g.
Test
the
(re)
insu
rer’
s pr
oces
ses t
o en
sure
that
tra
nsac
tions
with
rela
ted
parti
es a
re n
egot
iate
d at
ar
m’s
leng
th b
y ob
tain
ing
evid
ence
of s
enio
r m
anag
emen
t rev
iew
and
ap
prov
al a
nd su
ppor
t for
the
appr
opria
tene
ss o
f ced
ing
com
mis
sion
s, ris
k tra
nsfe
r an
d ad
equa
te p
ricin
g.
Obt
ain
and
revi
ew th
e si
gnifi
cant
con
tract
s be
twee
n th
e (r
e)in
sure
r and
its
aff
iliat
es a
nd e
nsur
e th
at
agre
emen
ts a
re fi
led
with
th
e in
sura
nce
depa
rtmen
t in
acco
rdan
ce w
ith a
pplic
able
st
ate
requ
irem
ents
. Ver
ify
that
the
(re)
insu
rer i
s op
erat
ing
in a
ccor
danc
e w
ith a
ppro
ved
cont
ract
te
rms.
Rev
iew
con
tract
pro
visi
ons
for r
easo
nabl
enes
s thr
ough
co
nduc
ting
anal
ytic
al
proc
edur
es su
ch a
s re
view
ing
the
prof
itabi
lity
of b
usin
ess a
ssum
ed fr
om
affil
iate
s and
/or c
ompa
ring
com
mis
sion
s pai
d to
the
cedi
ng in
sure
r’s e
xpen
se
ratio
or c
ompa
ring
actu
al to
ex
pect
ed re
sults
.
Con
side
r inv
olvi
ng a
re
insu
ranc
e ex
pert
or
actu
aria
l exa
min
er to
revi
ew
com
plex
con
tract
s and
/or
thos
e w
ith q
uest
iona
ble
© 2017 National Association of Insurance Commissioners 34 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
cont
ract
exe
cutio
n to
en
sure
that
pol
icie
s are
en
forc
ed.
prov
isio
ns.
Con
side
r per
form
ing
inde
pend
ent t
estin
g to
ev
alua
te th
e re
ason
able
ness
of
con
tract
pric
ing
and
term
s.
© 2017 National Association of Insurance Commissioners 35 of 136
EXAMINATION REPOSITORY – CAPITAL AND SURPLUS
Own Risk and Solvency Assessment (ORSA)
During the review of the ORSA filing (if applicable), the examiner may identify risks and controls that are relevant to be considered when creating the Capital and Surplus Key Activity Matrix. Additionally, examiners may perform test procedures related to the information contained within the ORSA filing that provides evidence regarding the sufficiency of an insurer’s capital and surplus. Examiners are encouraged to leverage the information contained within the ORSA, and associated test procedures, when populating the Key Activity Matrix.
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:
Capital Notes and Interest Thereon Aggregate Write-ins for Special Surplus Funds Common Capital Stock Preferred Capital Stock Aggregate Write-ins for Other than Special Surplus Funds Surplus Notes Gross Paid-in and Contributed Surplus Unassigned Funds (Surplus) Treasury Stock
Relevant Statements of Statutory Accounting Principles (SSAPs)
All of the relevant SSAPs related to other liabilities and surplus, regardless of whether or not the corresponding risks are included within this exam repository, are listed below:
No. 41 Surplus Notes No. 72 Surplus and Quasi-reorganizations
© 2017 National Association of Insurance Commissioners 36 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
Oth
er T
han
Fina
ncia
l Rep
ortin
g R
isks
Th
e in
sure
r is n
ot
mon
itorin
g its
cap
ital
and
surp
lus n
eeds
, in
clud
ing
how
ch
ange
s may
impa
ct
RB
C a
nd fi
nanc
ial
stre
ngth
ratin
gs fr
om
ratin
g ag
enci
es.
Plea
se N
o te:
Ex
amin
ers s
houl
d
utili
ze in
form
atio
n co
ntai
ned
in th
e O
wn
Ris
k an
d So
lven
cy
Ass
essm
ent (
OR
SA)
prov
ided
by
insu
rers
th
at a
re su
bjec
t to
this
fil
ing
requ
irem
ent.
LQ
Oth
er
CM
T M
anag
emen
t per
form
s ca
pita
l mod
elin
g ca
lcul
atio
ns, i
nclu
ding
as
sess
ing
capi
tal a
nd
liqui
dity
nee
ds in
nor
mal
an
d st
ress
ed e
nviro
nmen
ts,
to u
nder
stan
d th
e in
sure
r’s
curr
ent a
nd p
rosp
ectiv
e ca
pita
l nee
ds.
The
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
revi
ews
and
appr
oves
the
capi
tal
mod
elin
g re
sults
per
form
ed
by m
anag
emen
t on
an
annu
al b
asis
.
Man
agem
ent p
repa
res
finan
cial
pro
ject
ions
that
in
clud
e in
vest
men
t, un
derw
ritin
g an
d ex
pens
es,
and
thei
r pro
ject
ed im
pact
on
surp
lus.
Fina
nci a
l pro
ject
ions
are
re
view
ed b
y th
e bo
ard
of
dire
ctor
s.
Obt
ain
evid
ence
of t
he
capi
tal m
odel
ing
calc
ulat
ions
per
form
ed b
y m
anag
emen
t, in
clud
ing
self-
valid
atio
n ef
forts
.
Rev
iew
the
boar
d of
di
rect
ors’
(or c
omm
ittee
th
ereo
f) m
eetin
g m
inut
es
for e
vide
nce
of th
e bo
ard’
s ap
prov
al o
f the
cap
ital
mod
elin
g re
sults
.
Obt
ain
evid
ence
of f
inan
cial
pr
ojec
tions
and
pla
nnin
g by
m
anag
emen
t.
Rev
iew
the
boar
d of
di
rect
or m
eetin
g m
inut
es fo
r ev
iden
ce o
f boa
rd re
view
an
d ap
prov
al.
Con
side
r util
izin
g an
ac
tuar
ial s
peci
alis
t to
assi
st
with
det
ail t
est p
roce
dure
s.
Con
side
r app
lyin
g a
wid
e ra
nge
of sc
enar
ios,
incl
udin
g se
vere
ly st
ress
ed
scen
ario
s, to
ver
ify th
e in
sure
r’s a
vaila
ble
capi
tal i
s ad
equa
te to
mee
t its
cur
rent
an
d pr
ospe
ctiv
e ca
pita
l ne
eds.
Con
side
r the
impa
ct
of d
iffer
ent s
cena
rios o
n R
BC
and
/or r
atin
g ag
ency
as
sess
men
ts.
Rev
iew
t he
insu
rer’
s cap
ital
mod
elin
g an
d ev
alua
te th
e ap
prop
riate
ness
of i
nput
as
sum
ptio
ns, m
etho
dolo
gies
an
d co
nsid
erat
ions
use
d in
qu
antif
ying
ava
ilabl
e ca
pita
l an
d ris
k ca
pita
l. In
the
case
of
stoc
hast
ic o
r de
term
inis
tic m
odel
ing,
do
cum
ent c
onsi
dera
tion
of
appr
opria
tene
ss o
f di
vers
ifica
tion
of ri
sks.
Rev
iew
the
unde
rlyin
g as
sum
ptio
ns fo
und
in th
e fin
anci
al p
roje
ctio
ns fo
r re
ason
able
ness
. Rev
iew
pr
ior y
ear p
roje
ctio
ns fo
r a
com
paris
on o
f ass
umpt
ions
an
d w
heth
er m
anag
emen
t is
hist
oric
ally
on
targ
et.
The
insu
rer d
oes n
ot
have
acc
ess t
o ST
O
ther
C
MT
Man
agem
ent p
erfo
rms
ongo
ing
anal
ysis
of v
ario
us
Rev
iew
doc
umen
tatio
n de
scrib
ing
the
insu
rer’
s Pe
rfor
m a
revi
ew o
f m
anag
emen
t’s a
vaila
ble
© 2017 National Association of Insurance Commissioners 37 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
suff
icie
nt c
apita
l to
supp
ort i
ts o
ngoi
ng
and
futu
re b
usin
ess
need
s.
Plea
se N
o te:
Ex
amin
ers s
houl
d ut
ilize
info
rmat
ion
cont
aine
d in
the
Ow
n R
isk
and
Solv
ency
A
sses
smen
t (O
RSA
) pr
ovid
ed b
y in
sure
rs
that
are
subj
ect t
o th
is
filin
g re
quire
men
t.
sour
ces o
f cap
ital (
e.g.
, is
suin
g bo
nds,
selli
ng
com
mon
stoc
k, p
aren
t co
ntrib
utio
ns, b
orro
win
g,
etc.
) to
ensu
re th
e in
sure
r m
aint
ains
a c
urre
nt
unde
rsta
ndin
g of
the
optio
ns
avai
labl
e.
The
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
revi
ews
and
appr
oves
the
stra
tegi
c ca
pita
l man
agem
ent p
lan,
in
clud
ing
sour
ces o
f cap
ital,
on a
n an
nual
bas
is.
over
all c
apita
l man
agem
ent
stra
tegy
and
the
optio
ns
avai
labl
e to
rais
e ca
pita
l.
Plea
se N
o te:
Whe
n th
e so
urce
of c
apita
l is f
rom
an
affil
iate
, con
side
r tes
ting
in
conj
unct
ion
with
the
Rel
ated
Par
ty R
epos
itory
. R
evie
w th
e bo
ard
of
dire
ctor
s’ (o
r com
mitt
ee
ther
eof)
mee
ting
min
utes
fo
r evi
denc
e of
the
Boa
rd’s
ap
prov
al o
f the
ove
rall
capi
tal s
trate
gy p
lan
and
the
vario
us o
ptio
ns a
vaila
ble
to
rais
e ca
pita
l, sh
ould
the
need
aris
e.
sour
ces o
f cap
ital a
nd a
sses
s th
e fe
asib
ility
of e
ach
optio
n to
con
firm
the
insu
rer h
as
acce
ss to
suff
icie
nt c
apita
l, sh
ould
the
need
aris
e.
Plea
se N
ote:
Whe
n th
e so
urce
of c
apita
l is f
rom
an
affil
iate
, con
side
r tes
ting
in
conj
unct
ion
with
the
Rel
ated
Par
ty R
epos
itory
.
The
insu
rer i
s not
ef
fect
ivel
y m
anag
ing
its g
ross
leve
rage
.
ST
CR
O
ther
A
AR
P Th
e in
sure
r has
est
ablis
hed
and
docu
men
ted
gros
s le
vera
ge li
mits
that
are
re
view
ed a
nd a
ppro
ved
by
seni
or m
anag
emen
t.
The
insu
rer p
erio
dica
lly
eval
uate
s its
gro
ss le
vera
ge
and
adju
sts,
as n
eede
d.
Revi
ew d
ocum
enta
tion
of
gros
s lev
erag
e lim
its a
nd
evid
ence
of s
enio
r m
anag
emen
t re
view
/app
rova
l.
Rev
iew
the
reas
onab
lene
ss
of th
e in
sure
rs g
ross
le
vera
ge li
mit
by
benc
hmar
king
aga
inst
in
dust
ry st
anda
rds.
Fina
ncia
l Rep
ortin
g R
isks
Th
e un
derly
ing
qual
ity o
f the
co
mpa
ny’s
cap
ital i
s no
t suf
ficie
nt to
su
ppor
t its
ong
oing
an
d fu
ture
bus
ines
s op
erat
ions
.
LQ
CR
O
P
AC
EX
V
A
PD
CM
T Th
e in
sure
r mon
itors
ass
ets
to e
nsur
e th
e qu
ality
of
capi
tal w
ill su
ppor
t its
on
goin
g bu
sine
ss n
eeds
. U
nder
lyin
g as
sets
to b
e co
nsid
ered
may
incl
ude:
•
Def
erre
d ta
x as
sets
•Si
gnifi
cant
rece
ivab
les
•G
oodw
ill•
Inve
stm
ent i
n su
bsid
iary
•En
cum
bere
d as
sets
Ver
ify th
e in
sure
r’s p
roce
ss
to m
onito
r the
qua
lity
of
unde
rlyin
g as
sets
in re
latio
n to
requ
ired
capi
tal n
eeds
.
Ver
ify th
e ac
cura
cy o
f re
porte
d am
ount
s for
se
lect
ed a
sset
s to
dete
rmin
e th
e qu
ality
as t
hey
supp
ort
the
insu
rer’
s sur
plus
. In
clud
e co
nsid
erat
ion
of th
e liq
uidi
ty o
f the
ass
ets u
nder
re
view
.
Rev
iew
the
mak
e-up
of t
he
insu
rer’
s cap
ital a
nd a
sses
s
© 2017 National Association of Insurance Commissioners 38 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
•D
efin
ed b
enef
it pe
nsio
nas
set
The
insu
r er m
aint
ains
do
cum
enta
tion
rega
rdin
g pe
rmitt
ed p
ract
ices
that
co
uld
impa
ct th
e qu
ality
of
avai
labl
e ca
pita
l and
re
view
s all
asso
ciat
ed
calc
ulat
ions
to e
nsur
e co
mpl
ianc
e.
Obt
ain
docu
men
tatio
n of
th
e in
sure
r’s r
evie
w o
f its
co
mpl
ianc
e w
ith p
erm
itted
pr
actic
es.
how
the
cate
gorie
s (e.
g.,
com
mon
stoc
k, p
refe
rred
st
ock,
surp
lus n
otes
, pai
d-in
-cap
ital,
etc.
) sup
port
the
ongo
ing
and
futu
re b
usin
ess
oper
atio
ns.
Rev
iew
the
insu
rer’
s ca
lcul
atio
ns to
ens
ure
they
co
mpl
y w
ith th
e pe
rmitt
ed
prac
tices
gra
nted
by
the
dom
icili
ary
insu
ranc
e co
mm
issi
oner
. Rev
iew
the
effe
cts o
f the
per
mitt
ed
prac
tice
on R
BC
ca
lcul
atio
ns, i
nclu
ding
su
bseq
uent
exa
min
atio
n ad
just
men
ts.
The
insu
rer i
s not
ac
cura
tely
cal
cula
ting,
re
porti
ng a
nd
mon
itorin
g R
BC
.
OP
CM
C
MT
RB
C c
alcu
latio
ns a
re
perf
orm
ed in
acc
orda
nce
with
inst
ruct
ions
and
su
bjec
t to
supe
rvis
ory
revi
ew.
The
com
p any
has
a p
roce
ss
to e
nsur
e th
at R
BC
repo
rts
and
supp
ortin
g da
ta a
re fi
led
with
the
NA
IC in
a ti
mel
y an
d co
mpl
ete
man
ner.
The
com
pany
reco
ncile
s da
ta fi
led
in su
ppor
t of t
he
RB
C c
alcu
latio
n ba
ck to
Test
con
trols
rela
ting
to th
e in
sure
r’s s
uper
viso
ry re
view
pr
oces
s for
RB
C.
Rev
iew
the
NA
IC R
BC
cr
ossc
heck
lette
r fro
m th
e in
sure
r or t
he N
AIC
, if
appl
icab
le, a
nd re
spon
se
lette
r fro
m th
e in
sure
r to
dete
rmin
e th
e co
mpl
eten
ess
and
accu
racy
of t
he
insu
rer’
s RB
C re
port.
C
onta
ct th
e N
AIC
qua
lity
assu
ranc
e de
partm
ent i
f su
ch c
orre
spon
denc
e is
un
avai
labl
e.
Test
the
insu
rer’
s re
conc
iliat
ion
of su
ppor
ting
data
bac
k to
the
syst
em
Obt
ain
and
revi
ew th
e in
sure
r’s s
uppo
rting
w
orkp
aper
s to
test
whe
ther
m
ater
ial v
alue
s in
the
RB
C
repo
rt w
ere
prop
erly
cl
assi
fied,
val
ued
and
incl
uded
(e.g
., ca
tast
roph
e ris
k ex
posu
re d
ata,
C-3
Ph
ase
II). (
This
pro
cedu
re
may
onl
y be
nec
essa
ry fo
r va
lues
not
obt
aine
d di
rect
ly
from
the
annu
al fi
nanc
ial
stat
emen
t and
not
subj
ect t
o th
e N
AIC
RB
C c
ross
chec
k pr
oced
ures
.)
Det
erm
ine
the
impa
ct o
f ex
amin
atio
n ch
ange
s on
the
RB
C c
alcu
latio
n.
Com
pare
the
mod
elin
g ap
proa
ches
, ass
umpt
ions
© 2017 National Association of Insurance Commissioners 39 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
syst
em d
ata
and/
or so
urce
do
cum
enta
tion.
The
com
pany
util
izes
the
sam
e m
odel
ing
appr
oach
, as
sum
ptio
ns a
nd d
ata
to
dete
rmin
e si
gnifi
cant
co
mpo
nent
s of i
ts R
BC
ch
arge
(e.g
., ca
tast
roph
e ris
k ex
posu
re, C
-3 P
hase
II)
as it
use
s for
its o
wn
inte
rnal
risk
man
agem
ent
and
regu
lato
ry
acco
untin
g/re
serv
ing
purp
oses
.
and/
or so
urce
do
cum
enta
tion.
Test
the
oper
atin
g ef
fect
iven
ess o
f com
pany
co
ntro
ls to
ver
ify th
at
mod
elin
g ap
proa
ches
, as
sum
ptio
ns a
nd d
ata
used
to
det
erm
ine
sign
ifica
nt
com
pone
nts o
f RB
C
char
ges a
re
reco
ncile
d/ag
reed
to th
ose
used
in in
tern
al ri
sk
man
agem
ent a
nd
acco
untin
g/re
serv
ing
proc
esse
s.
and
data
file
d in
supp
ort o
f R
BC
cal
cula
tions
with
thos
e us
ed b
y th
e co
mpa
ny fo
r in
tern
al ri
sk m
anag
emen
t an
d re
gula
tory
ac
coun
ting/
rese
rvin
g pu
rpos
es. I
nves
tigat
e an
y si
gnifi
cant
var
ianc
es fo
r ap
prop
riate
ness
.
© 2017 National Association of Insurance Commissioners 40 of 136
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 theappropriate 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 reviewingaffiliate and other related-party contracts.
• For additional guidance on related party and intercompany transactions, see Section 1, Part IV, D - Review ofAffiliated Transactions.
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
© 2017 National Association of Insurance Commissioners 41 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
Oth
er T
han
Fina
ncia
l Rep
ortin
g R
isks
A
rela
ted
party
(inc
ludi
ng
hold
ing
com
pany
) is
over
ly re
liant
on
the
insu
rer f
or o
ngoi
ng
surp
lus s
uppo
rt.A
ffili
ated
co
mpa
nies
are
ove
r-re
liant
on
divi
dend
s pai
d by
the
insu
rer.
ST
LQ
Oth
er
RPH
CC
Th
e in
sure
r has
pol
icie
s in
plac
e to
ens
ure
that
di
vide
nds p
aid
to a
ffili
ates
ar
e w
ithin
regu
lato
ry li
mits
do
not
cau
se a
liqu
idity
st
rain
on
the
insu
rer,
are
appr
oved
by
the
boar
d of
di
rect
ors (
or c
omm
ittee
th
ereo
f) a
nd h
ave
rece
ived
re
gula
tory
app
rova
l (if
requ
ired)
prio
r to
paym
ent.
The
insu
rer (
or p
aren
t) m
anag
es it
s deb
t lev
els a
nd
leve
rage
pos
ition
thro
ugh
capi
tal c
ontri
butio
ns a
nd
othe
r for
ms o
f fin
anci
ng, a
s w
ell a
s cas
h flo
w a
naly
sis
to e
nsur
e th
at d
ebt b
urde
ns
do n
ot c
ause
a
solv
ency
/liqu
idity
stra
in a
t th
e pa
rent
or i
ts in
sura
nce
subs
idia
ries.
Rev
iew
insu
rer
docu
men
tatio
n sh
owin
g th
at d
ivid
ends
are
w
ithin
regu
lato
ry
limits
, do
not c
ause
a
liqui
dity
stra
in o
n th
e in
sure
r, ar
e ap
prov
ed
by th
e bo
ard
of
dire
ctor
s (or
com
mitt
ee
ther
eof)
and
hav
e re
ceiv
ed re
gula
tory
ap
prov
al (i
f req
uire
d)
prio
r to
paym
ent.
Rev
iew
doc
umen
tatio
n on
inte
rnal
stra
tegi
es
and
prac
tices
to e
nsur
e de
bt le
vels
are
pro
perly
m
anag
ed a
nd th
at
suff
icie
nt li
quid
ity is
av
aila
ble
to m
eet
oblig
atio
ns.
Ass
ess t
he in
sura
nce
hold
ing
com
pany
or
gani
zatio
n’s s
truct
ure,
ov
eral
l gro
up st
ruct
ure
and
the
hold
ing
com
pany
’s re
lianc
e on
its
subs
idia
ries f
or d
ivid
ends
. C
onsi
der t
he p
rofit
abili
ty
and
succ
ess o
f oth
er
com
pani
es w
ithin
the
hold
ing
com
pany
, as w
ell
as c
apita
l res
ourc
es a
nd
debt
mat
uriti
es a
s par
t of
the
asse
ssm
ent.
Rev
iew
his
toric
al c
ash
flow
s fro
m th
e in
sure
r to
its a
ffili
ated
com
pani
es
sinc
e th
e la
st e
xam
inat
ion,
an
d co
mpa
re to
stat
utor
y di
vide
nd c
apac
ity
curre
ntly
ava
ilabl
e.
Trac
e al
l div
iden
ds
requ
iring
regu
lato
ry
appr
oval
to in
sura
nce
depa
rtmen
t do
cum
enta
tion.
Th
e in
sure
r is o
verly
re
liant
on
an a
ffili
ate
for
ongo
ing
surp
lus s
uppo
rt.
Plea
se N
ote:
Rev
iew
of
this
risk
shou
ld b
e pe
rfor
med
in c
onju
nctio
n w
ith th
e C
apita
l and
Su
rplu
s Rep
osito
ry.
OP
ST
CR
LQ
Oth
erO
B/O
W
VA
R
PHC
C
The
insu
rer m
onito
rs th
e fin
anci
al p
ositi
on o
f the
af
filia
te p
rovi
ding
surp
lus
supp
ort.
The
affil
iate
pro
vide
s a
guar
ante
e of
its o
ngoi
ng
supp
ort f
or th
e in
sure
r.
The
insu
rer m
onito
rs a
ll gu
aran
tee
agre
emen
ts a
nd
Man
agem
ent r
evie
ws
finan
cial
resu
lts o
f the
af
filia
te o
n a
quar
terly
or
ann
ual b
asis
.
Obt
ain
docu
men
tatio
n su
ppor
ting
the
guar
ante
e pr
ovid
ed b
y th
e af
filia
te.
Ver
ify th
at
Rev
iew
the
affil
iate
’s
finan
cial
pos
ition
to
dete
rmin
e th
e ab
ility
to
prov
ide
the
need
ed
supp
ort.
Com
pare
the
amou
nt
guar
ante
ed b
y th
e pa
rent
/aff
iliat
e w
ith th
e su
rplu
s of t
he in
sure
r re
ceiv
ing
the
guar
ante
e.
Com
men
t [N
AIC
1]:
Mov
ed fr
om F
R se
ctio
n of
re
posi
tory
.
© 2017 National Association of Insurance Commissioners 42 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
anal
yzes
the
guar
anto
r’s
abili
ty to
fulfi
ll th
e ag
reem
ent i
f nec
essa
ry.
man
agem
ent p
erfo
rms
an a
sses
smen
t of t
he
guar
anto
r’s a
bilit
y to
fu
lfill
the
agre
emen
t on
a pe
riodi
c ba
sis.
Eval
uate
the
poss
ibili
ty
the
guar
ante
e w
ill n
ot b
e fu
lfille
d an
d th
e po
tent
ial
impa
ct to
the
insu
rer.
Ver
ify a
ny c
olla
tera
l m
aint
aine
d in
acc
orda
nce
with
the
guar
ante
e.
Pare
nt, h
oldi
ng
com
pani
es o
r oth
er
affil
iate
s mig
ht b
ecom
e in
solv
ent o
r hav
e liq
uidi
ty is
sues
.
Plea
se N
ote:
Th
is ri
sk is
inte
nded
to
focu
s on
the
stra
tegi
c or
re
puta
tiona
l im
pact
if
affil
iate
s exp
erie
nce
solv
ency
or l
iqui
dity
is
sues
.
ST
LQ
RP
Oth
er
RPH
CC
Th
e in
sure
r mon
itors
par
ent
or h
oldi
ng c
ompa
nies
for
finan
cial
solv
ency
/liqu
idity
is
sues
.
The
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
revi
ews
stra
tegi
c bu
sine
ss p
lans
and
fin
anci
al re
ports
for o
ther
m
embe
rs o
f the
hol
ding
co
mpa
ny sy
stem
and
ev
alua
tes a
ny ri
sks a
nd n
ew
initi
ativ
es th
at c
ould
impa
ct
the
insu
rer i
nclu
ding
re
puta
tiona
l ris
ks a
nd le
gal
risks
. Oth
er e
ntiti
es in
the
hold
ing
com
pany
sys
tem
m
ake
pres
enta
tions
to th
e bo
ard
to e
xpla
in o
pera
tions
an
d ris
ks.
Obt
ain
evid
ence
of
revi
ew o
f par
ent o
r ho
ldin
g co
mpa
ny
finan
cial
info
rmat
ion
by th
e in
sure
r. En
sure
liq
uidi
ty is
ap
prop
riate
ly
cons
ider
ed.
Rev
iew
mee
ting
min
utes
of t
he b
oard
of
dire
ctor
s (or
com
mitt
ee
ther
eof)
for e
vide
nce
of
disc
ussi
ons a
nd a
ctio
ns
take
n to
miti
gate
any
co
ntag
ion
risks
.
Obt
ain
and
revi
ew p
aren
t or
hol
ding
com
pany
fin
anci
al in
form
atio
n (in
clud
ing
the
Ente
rpris
e R
isk
Rep
ort/O
RSA
if
avai
labl
e) fo
r ind
icat
ions
of
fina
ncia
l sol
venc
y or
liq
uidi
ty is
sues
.
If si
gnifi
cant
issu
es a
re
iden
tifie
d, p
erfo
rm
proc
edur
es to
eva
luat
e th
e po
tent
ial s
olve
ncy
impa
cts.
If n
eces
sary
, no
tify
the
finan
cial
an
alys
t of t
he c
once
rn a
nd
requ
est a
dditi
onal
m
onito
ring
of th
e in
sure
r.
The
insu
rer e
ngag
es in
tra
nsac
tions
with
af
filia
tes t
hat h
ave
ineq
uita
ble
term
s.
OP
ST
CM
A
C
VA
RPH
CC
M
anag
emen
t rev
iew
s re
late
d-pa
rty a
gree
men
ts to
en
sure
that
all
agre
emen
ts
are
at a
rm’s
leng
th a
nd
prop
erly
repo
rted
as
econ
omic
or n
on-e
cono
mic
.
The
insu
rer m
aint
ains
w
ritte
n co
ntra
cts f
or
sign
ifica
nt tr
ansa
ctio
ns
(exp
ense
allo
catio
ns, t
ax-
shar
ing
agre
emen
ts, e
tc.)
Obt
ain
evid
ence
of
man
agem
ent’s
revi
ew
of re
late
d-pa
rty
agre
emen
ts.
Obt
ain
and
revi
ew th
e si
gnifi
cant
con
tract
s be
twee
n th
e in
sure
r and
its
aff
iliat
es. V
erify
that
Sele
ct a
sam
ple
of
agre
emen
ts a
nd
trans
actio
ns fo
r rev
iew
to
verif
y th
e ag
reem
ents
are
co
nsum
mat
ed a
t arm
’s
leng
th a
nd th
e tra
nsac
tions
are
in
acco
rdan
ce w
ith th
e ag
reem
ents
.
Com
men
t [N
AIC
2]:
Mov
ed d
own
to b
e cl
oser
to
sim
ilar r
isks
on
allo
catio
n of
exp
ense
s.
© 2017 National Association of Insurance Commissioners 43 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
with
rela
ted
parti
es th
at a
re
revi
ewed
to e
nsur
e fa
ir an
d re
ason
able
term
s and
are
ap
prov
ed b
y th
e bo
ard
of
dire
ctor
s (or
com
mitt
ee
ther
eof)
or o
ther
app
ropr
iate
pe
rson
nel.
Man
agem
ent r
evie
ws
cont
ract
term
s per
iodi
cally
to
ens
ure
that
they
are
re
ason
able
and
pro
perly
re
flect
cur
rent
ope
ratio
ns.
the
insu
rer r
evie
ws t
he
agre
emen
ts to
ens
ure
fair
and
reas
onab
le
term
s and
app
rova
l by
the
boar
d of
dire
ctor
s (o
r com
mitt
ee th
ereo
f)
or o
ther
app
ropr
iate
pe
rson
nel.
Ver
ify th
at c
ontra
cts
are
perio
dica
lly
revi
ewed
and
upd
ated
fo
r cha
nges
in
oper
atio
ns.
Fina
ncia
l Rep
ortin
g R
isks
Th
e in
sure
r is n
ot
prop
erly
iden
tifyi
ng
rela
ted-
party
act
iviti
es.
OP
ST
AC
V
A
PD
CM
C
O
RPH
CC
Th
e in
sure
r mai
ntai
ns a
list
of
all
rela
ted
parti
es —
in
clud
ing
pens
ion
fund
s and
ot
her t
rust
s est
ablis
hed
for
empl
oyee
s, m
ajor
bo
rrow
ers a
nd le
nder
s, an
d si
gnifi
cant
age
nts,
brok
ers,
prod
ucer
s and
pro
vide
rs —
th
at is
app
rove
d by
m
anag
emen
t and
pro
vide
d to
key
em
ploy
ees.
As s
igni
fican
t tra
nsac
tions
oc
cur,
man
agem
ent
cons
ider
s whe
ther
new
re
late
d pa
rty re
latio
nshi
ps
have
bee
n es
tabl
ishe
d w
hich
are
then
add
ed to
the
list o
f rel
ated
par
ties.
Obt
ain
the
rela
ted-
party
lis
ting
and
verif
y/as
sess
th
e m
etho
d m
anag
emen
t use
s to
ensu
re c
ompl
eten
ess
and
utili
zatio
n of
the
list.
Rev
iew
upd
ates
to th
e re
late
d pa
rty li
stin
g to
en
sure
the
listin
g is
be
ing
prop
erly
m
aint
aine
d.
Perf
orm
pro
cedu
res t
o id
entif
y re
late
d pa
rties
su
ch a
s:
•R
evie
win
gm
inut
es
•R
evie
win
gsh
areh
olde
r lis
tings
of c
lose
ly
held
com
pani
es to
id
entif
y pr
inci
pal
shar
ehol
ders
•
Rev
iew
ing
mat
eria
l in
vest
men
t tra
nsac
tions
du
ring
the
perio
d un
der
exam
inat
ion
to
dete
rmin
e w
heth
er th
ey
caus
e an
othe
r en
tity
to b
ecom
e a
rela
ted
party
Com
men
t [N
AIC
3]:
Pro
cedu
res m
oved
from
risk
be
low
.
Com
men
t [N
AIC
4]:
Add
ed n
ew c
ontro
l and
test
of
con
trol t
o ad
dres
s gap
.
© 2017 National Association of Insurance Commissioners 44 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
•R
evie
win
gco
nflic
t-of-
inte
rest
st
atem
ents
ob
tain
ed b
y th
e en
tity
from
m
anag
emen
t and
di
rect
ors.
Prep
are
a lis
t of e
ntiti
es
and/
or p
erso
ns th
at a
ppea
r to
be
rela
ted
parti
es a
nd
com
pare
to m
anag
emen
t’s
listin
g, if
one
exi
sts.
Ask
m
anag
emen
t abo
ut th
e in
sure
r’s re
latio
nshi
ps
with
thes
e en
titie
s and
/or
pers
ons.
Det
erm
ine
whe
ther
the
entit
ies
and/
or p
erso
ns m
eet t
he
defin
ition
of a
“re
late
d pa
rty”
unde
r the
do
mic
iliar
y st
ate’
s in
sura
nce
code
.
Rev
iew
acc
ount
ing
reco
rds f
or la
rge,
unu
sual
or
non
-rec
urrin
g tra
nsac
tions
or b
alan
ces,
payi
ng p
artic
ular
atte
ntio
n to
tran
sact
ions
reco
gniz
ed
at o
r nea
r the
end
of t
he
acco
untin
g pe
riod,
whi
ch
may
indi
cate
tran
sact
ions
w
ith re
late
d pa
rties
that
sh
ould
be
disc
lose
d.
The
insu
rer i
s not
pr
oper
ly id
entif
ying
, re
cord
ing
and
disc
losi
ng
rela
ted-
party
act
iviti
es.
OP
ST
AC
V
A
PD
CM
RPH
CC
Th
e in
sure
r mai
ntai
ns a
list
of
all
rela
ted
parti
es —
in
clud
ing
pens
ion
fund
s and
ot
her t
rust
s est
ablis
hed
for
Obt
ain
the
rela
ted-
party
lis
ting
and
verif
y th
e m
etho
d m
anag
emen
t us
es to
ens
ure
Prep
are
a lis
t of e
ntiti
es
and/
or p
erso
ns th
at a
ppea
r to
be
rela
ted
parti
es. A
sk
man
agem
ent a
bout
the
Com
men
t [N
AIC
5]:
Mov
ed fr
om b
elow
with
m
inor
wor
ding
revi
sion
.
© 2017 National Association of Insurance Commissioners 45 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
CO
em
ploy
ees,
maj
or
borr
ower
s and
lend
ers,
and
sign
ifica
nt a
gent
s, br
oker
s, pr
oduc
ers a
nd p
rovi
ders
—
that
is a
ppro
ved
by
man
agem
ent a
nd p
rovi
ded
to k
ey e
mpl
oyee
s.
For i
dent
ified
rela
ted
parti
es, t
he in
sure
r m
aint
ains
reco
rds (
e.g.
co
nsol
idat
ed sc
hedu
le o
f in
terc
ompa
ny a
lloca
tions
, ba
lanc
es, e
tc.)
so th
at
indi
vidu
al a
lloca
tions
and
ba
lanc
es a
re e
asily
id
entif
iabl
e in
the
aggr
egat
e in
terc
ompa
ny b
alan
ces a
nd
amou
nts t
hat h
ave
been
of
fset
are
iden
tifia
ble.
The
insu
rer h
as p
roce
dure
s, in
clud
ing
supe
rvis
ory
revi
ew, i
n pl
ace
to e
nsur
e th
at a
ll re
late
d-pa
rty
activ
ities
are
pro
perly
di
sclo
sed
and
repo
rted.
Man
agem
ent r
evie
ws
cont
ract
term
s per
iodi
cally
to
ens
ure
that
they
are
com
plet
enes
s and
ut
iliza
tion
of th
e lis
t.
Ver
ify th
at a
revi
ew o
f in
terc
ompa
ny b
alan
ces
is p
erfo
rmed
.
Con
side
r whe
ther
se
rvic
e tra
nsac
tions
are
oc
curr
ing
but a
re n
ot
bein
g gi
ven
acco
untin
g re
cogn
ition
, suc
h as
re
ceiv
ing
or p
rovi
ding
ac
coun
ting,
m
anag
emen
t or o
ther
se
rvic
es a
t no
char
ge to
a
rela
ted
party
. D
eter
min
e th
e m
ater
ialit
y of
such
tra
nsac
tions
and
the
impa
ct o
n th
e in
sure
r.
Rev
iew
the
proc
edur
es
to e
nsur
e th
at re
late
d pa
rty a
ctiv
ities
are
pr
oper
ly d
iscl
osed
, re
porte
d an
d re
view
ed
by su
perv
isor
y pe
rson
nel.
Ver
ify th
at c
ontra
cts
are
perio
dica
lly
revi
ewed
and
upd
ated
fo
r cha
nges
in
oper
atio
ns.
insu
rer’s
rela
tions
hips
w
ith th
ese
entit
ies a
nd/o
r pe
rson
s. D
eter
min
e w
heth
er th
e en
titie
s an
d/or
per
sons
mee
t the
de
finiti
on o
f a “
rela
ted
party
” un
der t
he
dom
icili
ary
stat
e’s
insu
ranc
e co
de.
For a
sam
ple
of id
entif
ied
rela
ted
parti
es, r
evie
w
trans
actio
ns to
ens
ure
they
are
bei
ng p
rope
rly
repo
rted
and
disc
lose
d.
Rev
iew
all
othe
r rel
ated
-pa
rty d
iscl
osur
es fo
r re
ason
able
ness
.*
Rev
iew
acc
ount
ing
reco
rds f
or la
rge,
unu
sual
or
non
-rec
urrin
g tra
nsac
tions
or b
alan
ces,
payi
ng p
artic
ular
atte
ntio
n to
tran
sact
ions
reco
gniz
ed
at o
r nea
r the
end
of t
he
acco
untin
g pe
riod,
whi
ch
may
indi
cate
tran
sact
ions
w
ith re
late
d pa
rties
that
sh
ould
be
disc
lose
d.
Con
firm
whe
ther
the
rela
ted-
party
rela
tions
hip
is d
iscl
osed
in th
e in
sure
r’s h
oldi
ng
com
pany
regi
stra
tion
stat
emen
t. R
evie
w th
e in
sure
r’s tr
ansa
ctio
ns w
ith
the
susp
ecte
d re
late
d pa
rty a
nd d
eter
min
e
© 2017 National Association of Insurance Commissioners 46 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
reas
onab
le a
nd p
rope
rly
refle
ct c
urre
nt o
pera
tions
..
The
insu
rer h
as a
pro
cess
th
at id
entif
ies t
rans
actio
ns
that
are
subj
ect t
o re
gula
tor
appr
oval
and
ens
ures
that
tra
nsac
tions
are
app
rove
d as
ap
prop
riate
.
The
insu
rer h
as a
pol
icy
in
plac
e th
at re
quire
s writ
ten
appr
oval
from
the
boar
d of
di
rect
ors (
or c
omm
ittee
th
ereo
f) p
rior t
o en
terin
g in
to a
ny lo
an tr
ansa
ctio
n (le
ndin
g or
bor
row
ing)
, or
guar
ante
es
(par
enta
l/aff
iliat
ed su
rplu
s su
ppor
t or l
oan
repa
ymen
t/col
late
raliz
atio
n)
to e
nsur
e th
at tr
ansa
ctio
ns
mee
t “fa
ir an
d re
ason
able
” an
d “a
rm’s
-leng
th”
stan
dard
s.
Rev
iew
a sa
mpl
e of
pa
st tr
ansa
ctio
ns to
co
nfirm
man
agem
ent’s
pr
oces
s was
exe
cute
d,
as a
ppro
pria
te.
Rev
iew
mee
ting
min
utes
of t
he b
oard
of
dire
ctor
s (or
com
mitt
ee
ther
eof)
for e
vide
nce
of
writ
ten
appr
oval
of
rela
ted-
party
loan
s or
guar
ante
es.
whe
ther
the
trans
actio
ns
are
subj
ect t
o an
y pr
ior
appr
oval
requ
irem
ents
in
the
dom
icili
ary
stat
e’s
insu
ranc
e co
de.
Rev
iew
the
cont
ract
ed
trans
actio
ns w
ith a
ffili
ates
an
d de
term
ine
whe
ther
th
ey a
re a
t arm
’s le
ngth
an
d pr
oper
ly re
porte
d as
ec
onom
ic o
r non
-ec
onom
ic, i
n ac
cord
ance
w
ith S
SAP
No.
25.
Obt
ain
the
loan
do
cum
ent(s
) or w
ritte
n gu
aran
tee
and
verif
y th
at
the
term
s of t
he c
ontra
ct
are
equi
tabl
e an
d re
ason
able
. Ver
ify th
e gu
aran
tee
or lo
an w
as
prop
erly
dis
clos
ed in
the
annu
al fi
nanc
ial s
tate
men
t an
d fil
ed w
ith th
e do
mic
iliar
y st
ate
insu
ranc
e de
partm
ent,
if ap
plic
able
.
The
insu
rer i
s ove
rly
relia
nt o
n an
aff
iliat
e fo
r on
goin
g su
rplu
s sup
port.
Plea
se N
ote:
Rev
iew
of
this
risk
shou
ld b
e pe
rfor
med
in c
onju
nctio
n w
ith th
e C
apita
l and
Su
rplu
s Rep
osito
ry.
OP
ST
CR
OB
/OW
V
A
RPH
CC
Th
e in
sure
r mon
itors
the
finan
cial
pos
ition
of t
he
affil
iate
pro
vidi
ng su
rplu
s su
ppor
t.
The
affil
iate
pro
vide
s a
guar
ante
e of
its o
ngoi
ng
supp
ort f
or th
e in
sure
r.
The
insu
rer m
onito
rs a
ll gu
aran
tee
agre
emen
ts a
nd
Man
agem
ent r
evie
ws
finan
cial
resu
lts o
f the
af
filia
te o
n a
quar
terly
or
ann
ual b
asis
.
Obt
ain
docu
men
tatio
n su
ppor
ting
the
guar
ante
e pr
ovid
ed b
y th
e af
filia
te.
Ver
ify th
at
Rev
iew
the
affil
iate
’s
finan
cial
pos
ition
to
dete
rmin
e th
e ab
ility
to
prov
ide
the
need
ed
supp
ort.
Com
pare
the
amou
nt
guar
ante
ed b
y th
e pa
rent
/aff
iliat
e w
ith th
e su
rplu
s of t
he in
sure
r re
ceiv
ing
the
guar
ante
e.
Com
men
t [N
AIC
6]:
Mov
ed u
p to
be
clos
er to
si
mila
r ris
ks.
© 2017 National Association of Insurance Commissioners 47 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
anal
yzes
the
guar
anto
r’s
abili
ty to
fulfi
ll th
e ag
reem
ent i
f nec
essa
ry.
man
agem
ent p
erfo
rms
an a
sses
smen
t of t
he
guar
anto
r’s a
bilit
y to
fu
lfill
the
agre
emen
t on
a pe
riodi
c ba
sis.
Eval
uate
the
poss
ibili
ty
the
guar
ante
e w
ill n
ot b
e fu
lfille
d an
d th
e po
tent
ial
impa
ct to
the
insu
rer.
Ver
ify a
ny c
olla
tera
l m
aint
aine
d in
acc
orda
nce
with
the
guar
ante
e.
The
insu
rer i
s not
pr
oper
ly d
iscl
osin
g lo
ans
and/
or g
uara
ntee
s with
af
filia
tes.
OP
ST
OB
/OW
PD
R
PHC
C
The
insu
rer h
as a
pol
icy
in
plac
e th
at re
quire
s writ
ten
appr
oval
from
the
boar
d of
di
rect
ors (
or c
omm
ittee
th
ereo
f) p
rior t
o en
terin
g in
to a
ny lo
an tr
ansa
ctio
n (le
ndin
g or
bor
row
ing)
, or
guar
ante
es
(par
enta
l/aff
iliat
ed su
rplu
s su
ppor
t or l
oan
repa
ymen
t/col
late
raliz
atio
n)
to e
nsur
e th
at tr
ansa
ctio
ns
mee
t “fa
ir an
d re
ason
able
” an
d “a
rm’s
-leng
th”
stan
dard
s.
Rev
iew
mee
ting
min
utes
of t
he b
oard
of
dire
ctor
s (or
com
mitt
ee
ther
eof)
for e
vide
nce
of
writ
ten
appr
oval
of
rela
ted-
party
loan
s or
guar
ante
es.
Obt
ain
the
loan
do
cum
ent(s
) or w
ritte
n gu
aran
tee
and
verif
y th
at
the
term
s of t
he c
ontra
ct
are
equi
tabl
e an
d re
ason
able
. Ver
ify th
e gu
aran
tee
or lo
an w
as
prop
erly
dis
clos
ed in
the
annu
al fi
nanc
ial s
tate
men
t an
d fil
ed w
ith th
e do
mic
iliar
y st
ate
insu
ranc
e de
partm
ent,
if ap
plic
able
.
The
insu
rer e
ngag
es in
tra
nsac
tions
with
af
filia
tes t
hat h
ave
ineq
uita
ble
term
s.
OP
ST
CM
A
C
VA
RPH
CC
M
anag
emen
t rev
iew
s re
late
d-pa
rty a
gree
men
ts to
en
sure
that
all
agre
emen
ts
are
at a
rm’s
leng
th a
nd
prop
erly
repo
rted
as
econ
omic
or n
on-e
cono
mic
.
The
insu
rer m
aint
ains
w
ritte
n co
ntra
cts f
or
sign
ifica
nt tr
ansa
ctio
ns
(exp
ense
allo
catio
ns, t
ax-
shar
ing
agre
emen
ts, e
tc.)
with
rela
ted
parti
es th
at a
re
revi
ewed
to e
nsur
e fa
ir an
d re
ason
able
term
s and
are
ap
prov
ed b
y th
e bo
ard
of
dire
ctor
s (or
com
mitt
ee
Obt
ain
evid
ence
of
man
agem
ent’s
revi
ew
of re
late
d-pa
rty
agre
emen
ts.
Obt
ain
and
revi
ew th
e si
gnifi
cant
con
tract
s be
twee
n th
e in
sure
r and
its
aff
iliat
es. V
erify
that
th
e in
sure
r rev
iew
s the
ag
reem
ents
to e
nsur
e fa
ir an
d re
ason
able
te
rms a
nd a
ppro
val b
y th
e bo
ard
of d
irect
ors
Sele
ct a
sam
ple
of
agre
emen
ts a
nd
trans
actio
ns fo
r rev
iew
to
verif
y th
e ag
reem
ents
are
co
nsum
mat
ed a
t arm
’s
leng
th a
nd th
e tra
nsac
tions
are
in
acco
rdan
ce w
ith th
e ag
reem
ents
.
Com
men
t [N
AIC
7]:
Mov
ed a
bove
.
Com
men
t [N
AIC
8]:
Ris
k w
as m
oved
from
ab
ove
to b
e pa
ired
with
sim
ilar r
isks
.
© 2017 National Association of Insurance Commissioners 48 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
ther
eof)
or o
ther
app
ropr
iate
pe
rson
nel.
Man
agem
ent r
evie
ws
cont
ract
term
s and
act
ual
trans
actio
ns p
erio
dica
lly to
en
sure
that
they
are
re
ason
able
and
pro
perly
re
flect
cur
rent
ope
ratio
ns
and
are
in c
ompl
ianc
e w
ith
rela
ted
party
agr
eem
ents
.
(or c
omm
ittee
ther
eof)
or
oth
er a
ppro
pria
te
pers
onne
l.
Ver
ify th
at c
ontra
cts
are
perio
dica
lly
revi
ewed
and
upd
ated
fo
r cha
nges
in
oper
atio
ns.
Inte
rcom
pany
allo
catio
n of
gen
eral
and
ad
min
istra
tive
expe
nses
am
ong
affil
iate
s is
inap
prop
riate
.
OP
VA
PD
C
O
RPH
CC
M
anag
emen
t rev
iew
s cos
t-al
loca
tion
cont
ract
s to
ensu
re th
at th
e ba
sis f
or
expe
nse
allo
catio
n is
fair
and
reas
onab
le. E
xpen
ses t
o be
allo
cate
d ar
e id
entif
ied
and
reas
onab
le m
etric
s are
de
fined
, dev
elop
ed a
nd u
sed
for e
ach
type
of e
xpen
se.
Man
agem
ent a
lso
revi
ews
the
basi
s of a
lloca
tion
perio
dica
lly to
ens
ure
that
it
is st
ill re
ason
able
and
pr
oper
ly re
flect
s cur
rent
op
erat
ions
.
Rev
iew
the
insu
rer’
s ex
pens
e al
loca
tion
wor
kshe
ets a
nd
dete
rmin
e w
heth
er th
e m
etho
d of
allo
catio
n fo
llow
s the
con
tract
an
d is
reas
onab
le.
Inqu
ire w
ith
man
agem
ent r
egar
ding
ch
ange
s in
oper
atio
ns
that
mig
ht a
ffec
t ex
pens
e al
loca
tion
and
verif
y th
at th
ose
chan
ges a
re p
rope
rly
refle
cted
.
Test
the
insu
rer’s
ca
lcul
atio
n of
mat
eria
l ex
pens
e al
loca
tion
for
com
plia
nce
with
the
term
s of
the
cont
ract
. Rec
onci
le
amou
nts t
o th
e ge
nera
l le
dger
and
Und
erw
ritin
g &
Inve
stm
ent E
xhib
it,
Part
3, a
nd tr
ace
to re
ceip
t or
pay
men
t do
cum
enta
tion
as
appl
icab
le.
Inte
rcom
pany
allo
catio
n of
tax
expe
nses
am
ong
affil
iate
s is i
napp
ropr
iate
.
OP
AC
C
O
OB
/OW
C
M
RPH
CC
Th
e in
sure
r has
a p
olic
y in
pl
ace
to d
iscl
ose
the
nam
es
of th
e en
titie
s with
who
m
the
entit
y’s t
ax re
turn
is
cons
olid
ated
, in
acco
rdan
ce
with
stat
utor
y ac
coun
ting
prin
cipl
es (S
AP)
and
ap
plic
able
tax
law
.
The
insu
rer m
aint
ains
a
Rev
iew
the
insu
rer’
s pr
oces
s to
accu
mul
ate
and
disc
lose
ent
ities
w
ith w
hich
a
cons
olid
ated
tax
retu
rn
is fi
led.
Rev
iew
the
insu
rer’
s al
loca
tion
met
hodo
logy
fo
r app
ropr
iate
ness
and
ve
rify
the
accu
racy
of t
he
allo
catio
n.
Ver
ify th
at ta
x-re
late
d in
terc
ompa
ny b
alan
ces
are
settl
ed in
acc
orda
nce
with
writ
ten
agre
emen
ts.
© 2017 National Association of Insurance Commissioners 49 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m A
srt.
Cri
tical
R
isk
Poss
ible
Con
trol
s Po
ssib
le T
est o
f C
ontr
ols
Poss
ible
Det
ail T
ests
writ
ten
agre
emen
t, ap
prov
ed b
y its
boa
rd o
f di
rect
ors (
or c
omm
ittee
th
ereo
f) th
at se
ts fo
rth th
e m
anne
r in
whi
ch th
e to
tal
com
bine
d ta
x is
allo
cabl
e to
ea
ch c
onso
lidat
ed e
ntity
.
Rev
iew
the
writ
ten
agre
emen
t and
ver
ify
appr
oval
by
the
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
and
th
e do
mic
iliar
y st
ate
insu
ranc
e de
partm
ent.
© 2017 National Association of Insurance Commissioners 50 of 136
EXAMINATION REPOSITORY - INVESTMENTS
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:
Bonds Stocks (Preferred and Common) Mortgage Loans on Real Estate Cash, Cash Equivalents and Short-Term Investments Derivatives Other Invested Assets Securities Lending – Reinvested Collateral Assets
Other Annual Statement line items related to investments, whose risks are less common, have not been included in this examination repository. They include the following:
Real Estate Aggregate Write-Ins for Invested Assets Contract Loans Receivables for Securities Payable for Securities Investment Income Due and Accrued (P&C Companies) Drafts Outstanding Unearned Investment Income (Life Companies) Liability for Deposit-Type Contracts (Life Companies) Miscellaneous Liabilities – Asset Valuation Reserve Contract Liabilities Not Included Elsewhere – Interest Maintenance Reserve Contract Liabilities Not Included Elsewhere – Surrender Values on Cancelled Contracts (Life Companies)
Relevant Statements of Statutory Accounting Principles (SSAPs)
All of the relevant SSAPs related to the investment process, regardless of whether or not the corresponding risks are included within this exam repository, are listed below:
No. 2R Cash, Cash Equivalents, Drafts, and Short-Term Investments No. 7 Asset Valuation Reserve and Interest Maintenance Reserve No. 21 Other Admitted Assets No. 23 Foreign Currency Transactions and Translations No. 26 Bonds No. 30 Unaffiliated Common Stock No. 32 Preferred Stock No. 34 Investment Income Due and Accrued No. 37 Mortgage Loans No. 38 Acquisition, Development and Construction Arrangements No. 39 Reverse Mortgages No. 40R Real Estate Investments No. 41R Surplus Notes No. 43R Loan-Backed and Structured Securities – Revised No. 44 Capitalization of Interest No. 48 Joint Ventures, Partnerships and Limited Liability Companies No. 49 Policy Loans
© 2017 National Association of Insurance Commissioners 51 of 136
No. 56 Separate Accounts No. 74 Insurance-Linked Securities Issued Through a Protected Cell No. 83 Mezzanine Real Estate Loans No. 86 Derivatives No. 90 Impairment or Disposal of Real Estate Investments No. 93 Low Income Housing Tax Credit Property Investments No. 97 Investments in Subsidiary, Controlled and Affiliated Entities No. 103R Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
NOTE: Due to the length of the Investments Repository, only pages with
proposed revisions are shown.
© 2017 National Association of Insurance Commissioners 52 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
The
insu
rer m
ay n
ot
effe
ctiv
ely
man
age
its
asse
t dur
atio
n to
m
atch
its f
utur
e lia
bilit
ies.
LQ
ST
Oth
er
AIP
S Th
e in
sure
r has
a p
roce
ss in
pl
ace
in w
hich
ass
ets a
nd
liabi
litie
s are
revi
ewed
to
ensu
re th
e in
sure
r has
en
ough
ass
ets t
o co
nver
t to
cash
to p
ay o
blig
atio
ns.
This
shou
ld in
clud
e co
nsid
erat
ion
of c
all,
exte
nsio
n an
d de
ferra
l (i.e
., du
ratio
n) o
f the
ass
ets,
liqui
dity
and
mar
ket v
alue
vo
latil
ity.
Act
uarie
s doc
umen
t for
in
vest
men
t sta
ff th
e du
ratio
n of
the
liabi
litie
s th
roug
h ec
onom
ic sc
enar
io
test
ing.
The
com
pany
has
a
proc
ess i
n pl
ace
to a
djus
t its
in
vest
men
t stra
tegy
to
mat
ch th
e do
cum
ente
d du
ratio
n.
The
insu
rer h
as a
go
vern
ance
stru
ctur
e th
at
rout
inel
y ch
alle
nges
, ap
prov
es a
nd re
view
s the
as
set/l
iabi
lity
mat
chin
g ac
tiviti
es o
f the
insu
rer.
The
actu
arie
s and
in
vest
men
t sta
ff m
eet
regu
larly
(e.g
., m
onth
ly) t
o re
view
ass
et a
nd li
abili
ty
Obt
ain
docu
men
tatio
n to
ev
iden
ce th
e in
sure
r is
revi
ewin
g th
e m
atch
ing
of
asse
ts a
nd li
abili
ties a
nd te
st fo
r eff
ectiv
enes
s as f
ollo
ws:
•
Ver
ify th
e in
sure
r has
apr
oces
s in
plac
e to
dete
rmin
e th
e ex
pect
edlia
bilit
y du
ratio
ns a
nd to
chec
k th
e im
pact
of a
nyas
set/l
iabi
lity
mis
mat
ch.
•R
evie
w m
axim
umas
set/l
iabi
lity
mis
mat
chdu
ratio
n al
low
ed fo
rre
ason
able
ness
.•
Ver
ify a
sset
dat
a us
edfo
r com
plia
nce
ofpo
licy.
•V
erify
that
the
dura
tion
mis
mat
ches
are
not
allo
wed
to g
o ou
tsid
e of
set p
aram
eter
s.
Ensu
re th
at th
e co
mpa
ny
cons
ider
s cal
l, ex
tens
ion
and
defe
rral r
isk
in it
s du
ratio
n pl
anni
ng.
Obt
ain
docu
men
tatio
n of
th
e go
vern
ance
and
ver
ify
adeq
uacy
of r
evie
ws
perf
orm
ed b
y m
anag
emen
t.
Obt
ain
docu
men
tatio
n of
th
e in
tera
ctio
n be
twee
n th
e in
vest
men
t sta
ff a
nd
actu
arie
s to
ensu
re it
s
Test
ass
umpt
ions
use
d in
th
e as
set a
nd li
abili
ty
mat
chin
g an
alys
is.
Det
erm
ine
whe
ther
the
assu
mpt
ions
are
reas
onab
le
base
d on
ove
rall
econ
omic
an
d co
mpa
ny h
isto
rical
and
tre
nd d
ata
and
valid
ate
that
th
e co
mpa
ny’s
illiq
uid
asse
ts (i
nclu
ding
priv
ate
plac
emen
t, he
dge
fund
, rea
l es
tate
, spe
cial
de
posi
ts/re
stric
ted
asse
ts
and
affil
iate
inve
stm
ents
) w
ere
all c
onsi
dere
d in
its
anal
ysis
..
Ver
ify u
nder
lyin
g da
ta u
sed
to a
naly
ze th
e m
atch
ing
of
asse
ts a
nd li
abili
ties u
sing
th
e pr
icin
g do
cum
ents
sh
owin
g lia
bilit
y du
ratio
ns,
and
the
Act
uaria
l Opi
nion
M
emor
andu
m sh
owin
g as
set a
nd li
abili
ty c
ash
flow
s.
If n
eces
sary
, util
ize
an
inve
stm
ent s
peci
alis
t and
/or
actu
ary
to a
naly
ze th
e in
sure
r’s a
sset
/liab
ility
m
atch
ing.
Rev
iew
ass
et a
nd li
abili
ty
cash
flow
s to
dete
rmin
e ho
w h
edgi
ng im
pact
ed a
sset
lia
bilit
y m
atch
ing.
Tra
ce
mat
eria
l mis
mat
ches
to
appr
opria
te c
omm
unic
atio
n.
© 2017 National Association of Insurance Commissioners 53 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
cash
flow
s. M
eetin
gs
disc
uss a
ny la
rge
asse
t or
liabi
lity
cash
flow
s ex
pect
ed, t
he d
urat
ions
of
the
in-f
orce
ass
ets a
nd
liabi
litie
s, an
d th
e ex
pect
ed
dura
tion
of n
ew li
abili
ties
and
asse
t pur
chas
es.
Mat
eria
l hed
ge m
ism
atch
es
are
inve
stig
ated
and
re
med
iate
d.
thor
ough
and
tim
ely
cons
ider
ing
the
size
and
co
mpl
exity
of t
he
com
pany
’s p
ortfo
lio. I
n ad
ditio
n, v
erify
that
id
entif
ied
mis
mat
ches
are
ap
prop
riate
ly re
med
iate
d by
th
e co
mpa
ny.
The
insu
rer d
oes n
ot
revi
ew it
s liq
uidi
ty
posi
tion
to d
eter
min
e if
adju
stm
ents
are
ne
cess
ary
to m
eet i
ts
pote
ntia
l nea
r-ter
m
cash
flow
nee
ds.
Plea
se N
ote:
Ex
amin
ers m
ay w
ish
to re
fer t
o th
e Ex
am
Plan
ning
Q
uest
ionn
aire
sect
ion
on li
quid
ity (E
xhib
it B
, Sec
tion
K) t
o as
sist
in
iden
tifyi
ng a
nd
asse
ssin
g po
tent
ial
risk
in th
is a
rea.
OP
ST
LQ
Oth
er
LC
The
insu
rer h
as li
quid
ity
mea
sure
men
t, m
onito
ring
and
man
agem
ent
fram
ewor
k w
hich
incl
udes
a
writ
ten
liqui
dity
pla
n w
ith
cont
inge
ncy
and
stre
ss-
test
ing
feat
ures
.
Det
erm
ine
whe
ther
m
anag
emen
t’s re
view
of t
he
liqui
dity
pla
n an
d st
ress
te
stin
g pr
oced
ures
and
as
sum
ptio
ns is
reas
onab
le
cons
ider
ing
its e
xper
ienc
e an
d m
arke
t his
tory
.
Val
idat
e th
at th
e co
mpa
ny’s
ill
iqui
d as
sets
(inc
ludi
ng
priv
ate
plac
emen
t, he
dge
fund
, rea
l est
ate,
spec
ial
depo
sits
/rest
ricte
d as
sets
an
d af
filia
te in
vest
men
ts)
wer
e al
l inc
lude
d co
nsid
ered
and
det
erm
ine
whe
ther
it re
lies h
eavi
ly
upon
non
-trad
ition
al o
r non
-in
sura
nce
activ
ities
(e.g
., co
mm
erci
al p
aper
and
se
curit
ies l
endi
ng) f
or
liqui
dity
.
Val
idat
e co
mpa
ny li
quid
ity
test
ing
to c
onfir
m re
sults
un
der s
tress
ed sc
enar
ios.
If n
eces
sary
, util
ize
an
inve
stm
ent s
peci
alis
t and
/or
actu
ary
to a
naly
ze th
e in
sure
r’s li
quid
ity p
ositi
on.
Fina
ncia
l Rep
ortin
g R
isks
Th
e in
sure
r’s b
onds
, st
ocks
and
shor
t-ter
m
inve
stm
ents
that
are
co
nsid
ered
har
d-to
-va
lue,
hig
h-ris
k an
d/or
MK
V
A
VIIA
Th
e in
sure
r rec
onci
les i
ts
inve
stm
ents
to th
e st
atem
ents
rece
ived
from
its
inve
stm
ent
man
ager
s/cu
stod
ians
on
a
Insp
ect r
econ
cilia
tions
of
the
insu
rer’s
reco
rded
in
vest
men
ts to
the
inve
stm
ent s
tate
men
ts
rece
ived
from
inve
stm
ent
Rev
iew
Jum
psta
rt in
vest
men
t exc
eptio
n re
ports
to d
eter
min
e w
heth
er th
e co
mpa
ny’s
qu
ality
ass
uran
ce c
ontro
ls
© 2017 National Association of Insurance Commissioners 54 of 136
D. Related Party/Holding Company Considerations Review of Affiliated Transactions
As insurance holding companies grow in complexity, related parties often represent a significant area of risk for insurance companies under exam. Risks may arise from transactions and agreements arising from relationships with affiliates that affect the insurer’s ongoing solvency position. Risks may also originate from inequitable contract provisions, the impact of guarantees, contagion risks extending from holding company operations, intercompany tax issues, etc. Consistent with other complex areas of an exam, it is important that the examiner leverage analyst insights when deciding upon group risks that have a potential solvency impact on the legal entity under exam. As the examination process is generally legal-entity focused, the exam team should limit its review of group issues to those with the potential to significantly impact the solvency position of the insurer(s) under examination. The narrative that follows will help examiners understand the risks that related parties may pose insurance companies both in relation risks that originate from transactions as well as risks that stem from the relationship between the related party entities.
General Related Party Considerations
The following list provides an approach for detecting abuses that sometimes result from holding company or affiliated relationships:
Potential abuses:
(1) Misuse of insurance company assets through:
• Shifting assets (particularly securities) from one affiliate to another for “window-dressing”purposes during examinations or at the financial statement date.
• Making unsecured loans or advances to affiliates.• Maintaining compensating bank balances for the benefit of an affiliate.• Making inappropriate loans to affiliates or purchases of affiliate securities.• Pledging assets to secure loans for affiliates.
(2) Siphoning of insurance company funds through:
• Dividends.• Management or service fees.• Payment of exorbitant reinsurance premiums to affiliates.• Inappropriate payment of the expense of affiliates.• Misdirection of premiums or commissions to affiliate insurance companies or agencies.
(3) Other forms of misrepresentation:
• Creating nonexistent receivables due from affiliates for “window-dressing” purposes duringexamination or at the financial statement date.
• Assuming the liabilities by/for an affiliate.
Moreover, related parties may present risks to the legal entities beyond matters of control and or influencemisuse of assets, siphoning of funds or misrepresentation. Related parties (especially those with common ownership) often devise strategy as a joint effort. Therefore, one related party experiences financial or operational difficulty, it may impact the reputation or even the strategy of other companies in
Comment [NAIC1]: Heading added and section moved from below.
Excerpt from Section 1, Part 4
© 2017 National Association of Insurance Commissioners 55 of 136
the group. Given the complexity of these sorts of risks, examiners typically identify relevant areas of risk in this are through discussion with the department’s financial analyst.
Work performed related to affiliated transaction related party transactions should be dependent on the insurer’s exposure to risk in this area. If, after understanding the various relationships and transactions during the planning process, the examiner deems related parties to be an area of risk exposure, additional testing in subsequent phases of the examination should be considered. The examiner may utilize the sample risks provided in the Related Party Examination Repository to address risks in this area and to ensure an appropriate review of the Related Party/Holding Company Considerations critical risk category is conducted. Additionally, upon completion of examination planning, the examiner should document any significant agreements, transactions and/or findings in the examination planning memo. Inclusion of an item in the company’s letter of representation may also be warranted to confirm management’s identification and disclosure of related party transactions to the examination team.
Related Party Transactions
This section provides guidance for identifying and examining affiliated transactionrelated party transactions. There are two broad categories of affiliated related party transactions:
• Transactions having implications as to potentially misleading the presentation of the AnnualStatement. Such transactions frequently have involved questionable dealings, includingmanagement fraud. This type of affiliated transactionrelated party transaction occurs infrequently,but constitutes a difficult area.
• Transactions occurring in the ordinary course of business are considered affiliatedtransactionrelated party transactions only because of an existing relationship between thetransacting parties.
Generally, examiners are more concerned with detecting and disclosing the affiliated transactionrelated party transactions in the first category than with the affiliated transactionrelated party transactions that are transacted in the ordinary course of business. Even though the greatest exposure is focused on only a relatively few affiliated transactionrelated party transactions, procedures are performed to encompass the broad definitions of affiliates related party and affiliated transactionrelated party transactions. Additional considerations for affiliated transactionrelated party transactions can be found in the Examination Repository – Related Party located in Section 3 of this Handbook. Regulators should also be sure that risks identified address the associated Critical Risk Category (Related Party/Holding Company Considerations) as reflected in Exhibit DD.
An affiliated transactionrelated party transaction is any direct or indirect transaction between the reporting entity and an affiliate. Affiliates exist when there is a relationship that offers the potential for self-dealing, transactions at less than arm’s length, favorable treatment, or the ability to direct the outcome of events differently from what might result in the absence of that relationship. Affiliated transactionRelated party transactions include transactions between:
(1) A parent company and its subsidiaries.
(2) Subsidiaries of a common parent.
(3) The reporting entity and:
• Other affiliated businesses.• Management (including directors).
© 2017 National Association of Insurance Commissioners 56 of 136
• Principal owners.• Pension and profit-sharing trusts managed by or under the trusteeship of management.• Entities for which investments are accounted for by the equity method.
An affiliate also includes any other person with which the reporting entity might deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. SSAP 97 – Investments in Subsidiary, Controlled, and Affiliated Entities states that “control presumed to exist if a reporting entity and its affiliates directly or indirectly, own, control, hold with the power to vote, or hold proxies representing 10% or more of the voting interests of the entity.” A third person also is affiliated if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Affiliated transactionRelated party transactions also could include other transactions in which the reporting entity may not appear to be involved. Identifying these affiliated transactionrelated party transactions is frequently difficult, if not impossible, because (1) examiners ordinarily must rely on oral representations to obtain an awareness that a relationship exists and a transaction has occurred; and (2) the parties to the transaction may be averse to disclosing the motives, facts and circumstances surrounding the transaction.
Transactions that, after study, cannot be understood as to their apparent motivation or appear to be commercially unreasonable raise the presumption that an affiliated transactionrelated party transaction exists. Where subtle affiliated relationships are known or believed to exist, examiners should perform procedures to determine whether an affiliated transactionrelated party transaction classification is appropriate. Although oral representations of management or others often are required to understand the business purpose of the transaction, such representations should be evaluated in light of apparent motives and the weight of other evidence. Important oral representations should be confirmed in writing, either in the letter of representations or in a separate letter.
There are a number of conditions that might create motivation for affiliated transactionrelated party transactions that are designed to alleviate or forestall circumstances management perceived would adversely affect the company. Some examples are:
• Lack of sufficient surplus to continue the business.• An urgent desire for a continued favorable earnings record in the hope of supporting the price of
the company’s stock.• An overly optimistic earnings forecast.• Dependence on a single, or relatively few, products for the ongoing success of the company.• Significant litigation, especially between shareholders and management.
Absent contrary circumstances, transactions with affiliates should not be assumed to be outside the ordinary course of business. However, affiliated transactionrelated party transactions are occasionally deliberately obscured by using devices such as business structure or management operating style.
Circumstances such as these should increase the examiner’s skepticism of management. These circumstances might illustrate a management team determined to attain its objectives, regardless of the means required to do so.
© 2017 National Association of Insurance Commissioners 57 of 136
If the transaction is recurring, there should be a contract/agreement in place and it is required to be filed with the department under the NAIC’s Insurance Holding Company System Model Regulation (#450). Additional insight, including provisions the regulator can consider are included in Section I-III (F) Outsourcing of Critical Functions, under the “Affiliated Service Providers” heading.
Affiliated TransactionRelated party Transactions with Partial or No Accounting Recognition
Transactions by or among affiliates are considered to be related party transactions affiliated transactions, even though they might be given partial or no accounting recognition. For example, an entity that provides significant services to an affiliate without charge, or at charges that do not appear normal, might be involved in an affiliated transactionrelated party transaction.
Affiliates Related Parties without Transactions
Sometimes two or more entities are under common ownership or management control, but do not transact business between or among themselves. The mere existence of common control may result in operating results or a financial position significantly different from what would have occurred if the entities were autonomous. For example, two or more entities in the same line of business may be commonly controlled by a party with the ability to increase or decrease the volume of business done by each (i.e., the ability to exercise significant influence over the operations of each entity).
One means used by many entities to preclude significant affiliate influence is to prohibit a director or other member of management from voting, or otherwise participating, in any business decisions in which that individual is an affiliate. In some cases, an affiliate might have participated in a business decision and it might not be practical for the board to reconsider a previously approved transaction solely so that person can abstain from voting. In these instances, it usually is acceptable to obtain written representation from appropriate management and the affiliate that significant influence was not exercised, provided that by reference to the entity’s minutes or otherwise, the examiners are able to satisfy themselves that the affiliate’s vote did not influence the outcome of the board’s decision (e.g., the resolution was unanimously approved). If examiners are unable to satisfy themselves as to the absence of significant influence, or if they otherwise conclude that a relationship or transaction merits the attention of the board of directors, they may recommend subsequent reconsideration of an issue by the board of directors, with any affiliates required to abstain from voting.
Certain procedures that usually are performed to achieve other examination objectives also are used in identifying affiliates and affiliated transactions. These procedures include, but are not limited to:
(1) Considering guarantees indicated by confirmations of cash, investments, or loans receivable andpayable.
(2) Examining invoices from law firms.
(3) Reviewing minutes.
(4) Reviewing year-end trial balance.
(5) Reviewing selected operations accounts.
(6) Reviewing shareholder listings of closely held companies to identify principal shareholders.
Comment [NAIC2]: Moved into the repository, as appropriate.
© 2017 National Association of Insurance Commissioners 58 of 136
(7) Reviewing material investment transactions during the period under examination to determinewhether they cause another entity to become a related party.
(8) Reviewing conflict-of-interest statements obtained by the entity from management and directors(covered in Exhibit B – Examination Planning Questionnaire). Conflict-of-interest statements provide the board of directors with information about the existence of relationships between persons completing the statement and parties with whom the entity transacts business.
Work performed related to affiliated transactionrelated party transactions should be dependent on the insurer’s exposure to risk in this area. If, after understanding the various relationships and transactions during the planning process, the examiner deems related parties to be an area of risk exposure, additional testing in subsequent phases of the examination should be considered. The examiner may utilize the sample risks provided in the Related Party Examination Repository to address risks in this area and to ensure an appropriate review of the Related Party/Holding Company Considerations critical risk category is conducted. Additionally, upon completion of examination planning, the examiner should document any significant agreements, transactions and/or findings in the examination planning memo. Inclusion of an item in the company’s letter of representation may also be warranted to confirm management’s identification and disclosure of related party transactions to the examination team.
© 2017 National Association of Insurance Commissioners 59 of 136
This page was intentionally kept blank.
© 2017 National Association of Insurance Commissioners 60 of 136
June 13, 2017 To: Susan Bernard, Chair, Financial Examiners Handbook (E) Technical Group
From: Mike Boerner, Chair, PBR Review (EX) Working Group
Re: Financial Condition Examiners Handbook – Principle-Based Reserving Guidance
In 2016, the PBR Review Procedures (EX) Subgroup received the following charge:
The subgroup will provide recommendations to the working group for changes to the examiners handbook and the financial analysis handbook and provide recommendations to carry out other subgroup charges.
In response to this charge, the Subgroup has worked with NAIC Exam and Actuarial staff to identify revisions to the Financial Condition Examiners Handbook (Handbook) to help regulators address Principle-Based Reserving (PBR) related risks during the course of a risk-focused examination. The Subgroup has developed the following recommended updates to the Handbook guidance:
Section 1 – 3: Revisions proposed would highlight situations in which regulators should consider the use of an actuarial specialist to assist in addressing PBR related risks.
Section 1 – 6: The Subgroup proposes adding a new section to the Handbook guidance to provide regulators with background on Life Insurance Reserves.
Reserves/Claims Handling (Life) Repository: The Subgroup drafted new risks and updated existing risks to assist examiners in identifying the most common risks associated with PBR. The subgroup also developed suggested updates to the controls, tests of controls, and tests of details, as appropriate.
Exhibit M: The Subgroup drafted updates to the Exhibit M guidance to assist regulators in assessing if the insurer’s corporate governance structure provides appropriate oversight for PBR related activities.
Exhibit Y: The Subgroup drafted several additional questions that regulators may consider as they perform interviews during the planning phase of the exam.
As part of the Subgroup’s work, the Subgroup discussed the Handbook’s use of the term “credentialed” when referring to the involvement of an actuarial specialist. The Subgroup felt that in the context in which the term is used, the term “qualified” might be a better expectation for regulators to consider in specialist selection. The use of the term qualified would help to ensure regulators use appropriate staffing for review of an inherently complicated are of an exam, as not all credentialed actuaries are expected to possess the requisite knowledge and experience in this area. However, as this term is widely used beyond the Examiners Handbook (see Analysis & Accreditation Handbooks), the Subgroup asks that the Handbook Technical Group study the issue further and determine if a wording change is needed.
Please contact Larry Brunning ([email protected]) or Jim Stinson ([email protected]), NAIC Staff for the PBR Review Procedures (EX) Subgroup, with any questions you may have.
cc: Bruce Jenson, Bailey Henning, Miguel Romero
Attachment (Exam Handbook Draft Revisions)
© 2017 National Association of Insurance Commissioners 61 of 136
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 ReviewB. MaterialityC. Examination SamplingD. Business ContinuityE. Using the Work of a SpecialistF. Outsourcing of Critical FunctionsG. Use of Independent Contractors on Multi-State ExaminationsH. Comments and Grievance Procedures Regarding Compliance with Examination Standards
--------------------------------------------Detail Eliminated to Conserve Space--------------------------------------------
E. Using the Work of a Specialist
1. Decision to Use the Work of a Specialist
Education and experience enable the examiner to be knowledgeable about insurance matters in general, but theexaminer is not expected to have the expertise of a person trained for or qualified to engage in the practice ofanother profession or occupation. During the examination, an examiner may encounter matters potentiallymaterial to the current or prospective solvency of the insurer that require special knowledge and, in the examiner’sjudgment, require using the work of a specialist. The department should have on staff or be able to contract therequisite expertise to effectively examine any insurer. The requisite expertise should be determined by thecharacter and nature of the domestic industry.
Examples of matters that may necessitate the work of a specialist include, but are not limited to, the following:
a. IT Review and assessment of applications (e.g., EDP environment and controls, computer audittechniques and expert systems).
b. Valuation of invested assets and portfolio analysis (e.g., real estate, restricted securities and othercomplex investment holdings).
c. Determination of amounts derived and risks associated with specialized techniques or methods (e.g.,certain actuarial determinations, pricing and liquidity).
d. Interpretation of technical requirements, regulations, or agreements (e.g., the potential significance ofreinsurance and other contracts or other legal documents, or legal title to property).
In certain situations, an examination requires the use of a specialist to effectively examine an insurer. These situations include the following:
© 2017 National Association of Insurance Commissioners 62 of 136
a. Life and Health company examinations where the company has a substantial amount of interest-sensitivebusiness or with a substantial amount of business subject to principle-based reserve (PBR) calculations orexclusion business requiretests require the involvement of a credentialed actuary to perform anevaluation of reserves.
b. Property & Casualty company examinations where the company has a substantial amount of long-taillines of business require the involvement of a credentialed actuary to perform an evaluation of lossreserves.
In all other situations, the decision to use a specialist is at the discretion of the examination team in consultation with the chief examiner or designee.
2. Selecting a Specialist
The department should obtain satisfaction concerning the professional qualifications and reputation of an outsidespecialist by inquiry or other procedures, as appropriate. The department should consider the following:
a. The professional certification, license, or other recognition of the competence of the specialist in his/herfield, as appropriate.
b. The reputation and standing of the specialist in the views of his/her peers and others familiar with his/hercapability or performance.
c. The relationship, if any, of the specialist to the company.
d. Prior experience of the specialist in working on examinations.
3. Determining the Involvement of and the Work to be Performed by the Specialist
Typically, the use of a specialist should be determined during examination planning, preferably well in advance offieldwork. An understanding should exist among the department, including the examiner-in-charge, the companyand the specialist about the nature of the work to be performed by the specialist. This understanding should bedocumented in the Exam Planning Memorandum by covering the following:
a. The specialists’ role in the risk assessment process, including interviews, selection of key activities andthe development of risk statements.
b. The planned objectives and scope of the specialists’ work.
c. The specialists’ representations as to their relationship, if any, to the company.
In certain situations, it may be difficult to determine that a specialist is needed prior to performing risk assessment procedures. In these cases, the exam team may still elect to involve a specialist by adequately documenting the rationale for this decision in the examination workpapers without amending the Exam Planning Memorandum.
4. Documentation of Work Performed by the Specialist
The examiner-in-charge should communicate with the specialist as to the appropriate documentation of the workperformed by the specialist. It should be determined upfront with the specialist who is responsible for thecompletion of the risk matrix and supporting documentation. Regardless of who is responsible for completing therisk matrix in a particular area, the work performed is required to clearly document a consideration of all sevenphases of the risk-focused examination process. The work should also be completed in accordance with theguidance outlined in the standard examination procedures regarding examination documentation, includingsufficient documentation on all conclusions.
5. Review and Use of the Findings of the Specialist
Although the appropriateness and reasonableness of the work performed is the responsibility of the specialist, theexaminer-in-charge should obtain an understanding of the worked performed by the specialist to determinewhether the findings are suitable to meet the needs of the examination. This requires the examiner-in-charge toreview the work completed by the specialist and to understand the nature and impact of any findings or exceptionsidentified by the specialist. This review should be demonstrated via sign-off on all significant workpapers and
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procedure steps completed by the specialist. In addition, the examiner-in-charge is responsible for incorporating these findings into the examination report, management letter or ongoing supervisory plan of the insurer, but may request the assistance of the specialist in developing these items.
6. Additional Considerations for Commonly Used Specialists
IT Specialist
The use of an IT specialist in performing an IT Review should be considered for all multi-state examinations.However, examinations of less-complex IT systems or systems where extensive test documentation is alreadyavailable (e.g., external audit work, SSAE 16 reports, etc.) may minimize the need to involve an IT specialist.When selecting IT specialists, the examination team should keep in mind designations indicating that specialistshave met specific training and educational requirements, such as CISA, AES, CITP, CRISC, etc. For moreguidance on the use of an IT specialist during an examination, see Section 1 Part III A on General InformationTechnology Review.
Reinsurance Specialist
The use of a reinsurance specialist should be considered for examinations of insurers with complex andsophisticated reinsurance programs. Scenarios under which it may be appropriate to utilize a reinsurance specialistinclude but are not limited to the following:
• The reinsurance program includes restrictions on levels and concentrations of reinsurance that do not appearnormal;
• Excessive bonus or other unusual remuneration or incentives for management are tied to the performance ofreinsurance contracts;
• The insurer utilizes off-balance-sheet vehicles including structured investment vehicles and special purposevehicles for reinsurance purposes;
• The entity holds a significant amount of reinsurance-related reserves in comparison to its overall reserves andpolicyholder surplus;
• The insurer carries a significant amount of reinsurance balances that demonstrate questionable characteristics(e.g., overdue, disputed, concentrations, etc.); and
• For property and casualty insurers, the entity responded affirmatively to General Interrogatories – Part 2: 7.1,8.1, 9.1, 9.2 or 9.4.
When selecting reinsurance specialists, the examination team should keep in mind designations indicating that specialists have met specific training and educational requirements, such as ARe, ARA, etc. For more guidance on specific reinsurance review procedures during an examination, see Section 1 Part V.
Actuarial Specialist
As previously noted, the involvement of a credentialed actuary is required on all examinations of life and health insurers with a substantial amount of interest-sensitive business, with a substantial amount of business subject to principle-based reserve (PBR) calculations or subject to PBR exclusion tests property/casualty insurers with a substantial amount of long-tail lines of business. Actuarial credentials include Fellow (or Associate) of the Casualty Actuarial Society (FCAS/ACAS) for property and casualty lines as well as Fellow (or Associate) of the Society of Actuaries (FSA/ASA) or Member of the American Academy of Actuaries (MAAA) for life and health lines. In addition to situations where the use of a credentialed actuary is required, there are many other situations in which the use of an actuarial specialist would be appropriate, such as pricing, liquidity, and reinsurance risk. Therefore, it is recommended that considerations regarding the use of an actuarial specialist be documented on all multi-state examinations. In addition to the use of credentialed actuaries, other individuals may be considered for use as actuarial specialists if they have training, experience and education providing them with an appropriate background for this role. This may include individuals in the process of obtaining actuarial credentials (e.g.,
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completed portions some of the actuarial exams) and those with degrees in actuarial science, mathematics and statistics. The NAIC’s support staff will be available to provide actuarial expertise and/or be consulted as to whether the use of an actuarial specialist would be appropriate to the circumstances.
Investment Specialist
The use of an investment specialist should be considered for examinations of insurers with complex investment portfolios. Scenarios under which it may be appropriate to utilize an investment specialist include but are not limited to the following:
• The insurer maintains a significant position greater than its competitors’ averages in any of the followinginvestment categories:
o Bonds with call options and varied payment timingo Foreign investmentso Hybrid capital securitieso Mezzanine loanso Affiliated investmentso RMBS, CMBS, ABS CO/CLO or similar bond collateral typeso Structured securities on negative watch
• The insurer participates in derivative trading;• The insurer participates in securities lending, repurchase and reverse repurchase transactions; and• The insurer has significant exposure to liquidity and asset/liability matching risks.
Investment specialists generally have one or more designations indicating they have completed the specific training and educational requirements, including IPIR, FRM, CIMA, CFA, etc.
7. Controlling Exam Costs When Utilizing the Work of an Outside Specialist
When the examiner utilizes the work of outside specialists, exam costs may rise. The examiner should havesufficient oversight of the specialist’s work to minimize the examination costs. As the procedures for utilizingspecialists and independent contractors are similar, refer to Part 3 of this Handbook section, “Use of IndependentContractors on Multi-State Examinations,” for more details on how to control costs when utilizing the work of aspecialist.
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VI. LIFE INSURANCE RESERVE REVIEW
This section covers procedures and considerations that are important when conducting financial condition examinations of life insurance reserves. The discussion here is divided as follows:
A. Life Insurance Reserve Overview B. Formula Based Valuation MethodologyC. Principle-Based Valuation MethodologyD. Actuarial Opinion and Asset Adequacy AnalysisE. Actuarial Oversight and Internal Controls
A. Life Insurance Reserve Overview
Life insurance reserves represent the liability established by the insurance company to pay future policy benefits such as death benefits upon the death of the insured, endowment benefits upon the maturity of a life insurance policy and cash surrender benefits upon the surrender of the life insurance policy. Historically, the company liability to pay future policy benefits has been determined by calculating a reserve based on a formula valuation methodology as described below. Life insurance products have evolved over time and today, such products may be quite complex offering multiple benefits and/or options to the policyowner or the insured or both the policyowner and the insured within a single contract such as death benefits, accelerated death benefits, secondary guarantees such as no lapse guarantees, policy loans, retirement income benefits such as guaranteed lifetime income benefits and long term care benefits. The value of some of these complex benefits depends upon the current and future market value of the underlying assets. Regulators have found it increasingly difficult to define or modify a formula based valuation methodology to value all the options and/or benefits in a single contract. This complexity of current insurance products along with the fact that the value of certain benefits depends upon the current and future market value of underlying assets has led to the development of a principle-based valuation methodology which incorporates the value of both asset and liability cash flows. The principle-based valuation methodology is described below.
In order to implement the principle-based valuation methodology, amendments to the Standard Valuation Law were adopted in 2009 and a Valuation Manual was developed. The Valuation Manual which is referred to in the amended Standard Valuation Law provides reserve requirements for life, health, and annuity products issued on and after the manual’s operative date. Requirements include all of the details of the methodology for determining a principle-based reserve as well as any changes to the formula based valuation methodology that occurs on and after the operative date of the Valuation Manual. The operative date of the Valuation Manual is January 1, 2017. Unless a change in the Valuation Manual specifies a later effective date, changes to the Valuation Manual shall be effective January 1 following the date when the change to the Valuation Manual has been adopted by the NAIC by an affirmative vote of at least three-fourths (3/4) of the members of the NAIC voting but not less than a majority of the total membership and such members voting in the affirmative represent jurisdictions totaling greater than 75% of the direct premiums written as reported in the most recent life, accident and health annual statements, health annual statements, or fraternal annual statements. No state legislative adoption is needed to effect changes to the Valuation Manual.
The Valuation Manual defines the insurance contracts that are subject to a principle-based valuation (Section II). Unless otherwise specified in Section II of the Valuation Manual, the principle-based valuation methodology will apply to life insurance contracts issued on or after the operative date of the Valuation Manual, however a company may elect to defer the implementation of the principle-based valuation methodology to life insurance contracts issued during the first 3 years following the operative date of the Valuation Manual. Since elements of the Actuarial Method in AG 48 are based on VM-20, a company may “partially implement” the Valuation Manual during the deferral period even though for new business the company otherwise defers implementation.
Actuarial Guideline 48 (AG 48) was adopted December 16, 2014 with an effective date of January 1, 2015 and refers to the Actuarial Method which is also a principle based methodology that companies may use in evaluating level of primary assets held by captive insurers in support of reserves. If regulators determine that the insurer under examination has business subject to AG 48, they may also consider the involvement of a credentialed actuary and may apply the concepts discussed in evaluating PBR.
Comment [BH1]: Tracked changes to Sec. I-VI reflect suggestions from AAA comment letter
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A Valuation Analysis Working Group (VAWG) consisting of regulators with expertise in actuarial, financial analysis and examination experience reports to the Financial Condition (E) Committee and supports the states in the review of Principle-Based Reserves (PBR) to ensure consistent implementation and application of the methodology. VAWG will also suggest necessary changes to the Valuation Manual to enhance clarification and interpretation of application of the principle-based valuation methodology.
In addition, NAIC actuarial staff is available to provide expertise in modeling insurance cash flows to assist individual states and VAWG in conducting analyses and examinations to verify the PBR and exclusion test calculations performed by the company.
Due to the complexities of life insurance products, the involvement of a credentialed actuary is required on all examinations of life and health insurers with a substantial amount of interest-sensitive business or with a substantial amount of PBR calculations or subject to PBR exclusion tests See Section 1, Part III, E. Using the Work of a Specialist for further reference.
B. Formula Based Valuation Methodology
Theoretically, the formula based reserves represent the present value of future guaranteed benefits reduced by the present value of expected future net premiums. The insurance policy is a unilateral contract whereby the insured can cancel the agreement to pay premiums at any time. However, the insurer is “locked in” regardless of future experience and cannot forfeit on its guarantees as long as the premiums are paid. Life reserves are required in order to ensure that commitments made to policyholders and their beneficiaries will be met, even though the obligations may not be due for many years. Since the primary purpose of life reserves is to pay claims when they become due, life reserves must be adequate and the funds must be safely invested.
The Valuation Manual prescribes the minimum standards to be used in determining the formula based reserves as applicable in addition to principle-based reserves as discussed elsewhere in this document. Currently for most formula based reserves, the manual refers to requirements in the NAIC Accounting Practices and Procedures Manual (AP&P Manual). Insurers may establish life reserves, which equal or exceed these minimum standards. These minimum life reserve standards specify a: 1) valuation mortality table; 2) maximum valuation rate of interest; and 3) valuation method. The valuation method used to define minimum life reserves for statutory accounting purposes is referred to as the Commissioners Reserve Valuation Method (CRVM). The mortality rate assumptions are substantially higher than what the insurer can expect to realize from medically underwritten insurance policies. The interest rate assumptions are intended to be significantly lower than current money and capital market yields. Thus, the life reserves developed are generally conservative.
There are three general valuation methods under a formula based valuation methodology used to value life reserves. The net level premium method does not provide for a first-year acquisition cost allowance in determining life reserves. Therefore, this method results in the most conservative, or highest, life reserve valuation of the three methods. The full preliminary term method does provide a first-year expense allowance and then assumes that the remaining premium stream is used to cover policy benefits. The Commissioners Reserve Valuation Method (CRVM) is a form of the full preliminary method. This method allows for a lower life reserve valuation than the net level premium method in the earlier years of the policy term. The modified preliminary term method is a variation of the two methods described above and results in a reserve valuation between the net level premium and preliminary term methods.
As described below, the type of life insurance policy dictates the amount of the life reserve that must be established and the duration for maintaining the reserve. In addition, special situations arise which require unique reserving techniques. The following summarizes the major types of life insurance policies, and the related reserving implications under a formula based valuation methodology:
1. Ordinary Life ReservesUnder a whole life plan of insurance, the insurer is obligated to maintain a reserve until the death of the insured.Term life insurance provides coverage only for the period that is specified in the policy. Under a term insuranceplan, the insurer must maintain a reserve, which reduces to zero upon expiration of the term period. Similar to
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term insurance, endowment life insurance provides coverage for a period specified in the policies. Unlike term insurance, the proceeds of endowment insurance are payable if the insured lives to the end of the period. Policies, which permit flexible premium payments, are referred to as “universal life” policies and those with fixed premiums are referred to as “interest sensitive” policies. Universal life policies are accumulation type policies where the current account value is determined based upon the accumulation of premiums less mortality charges and expense charges, plus a current interest rate credit. The account value less surrender charges is the cash value. Because of the unique features of universal life and interest sensitive types of policies, unique reserving requirements are specified for them in Appendix A-585, Universal Life Insurance, of the AP&P Manual. The minimum standard for universal life reserves consider guarantees within the policy at the time of issue, present value of future guaranteed benefits, account value and cash value.
2. Group Life ReservesMost group life insurance is monthly renewable term insurance. For these policies, gross premiums are typicallyrecalculated periodically, most often annually, using the age and sex census of the group along with experienceadjustments. Therefore, the reserve is usually calculated as the unearned premiums or a percentage thereof toestimate the claim exposure. However, some group life insurance policies provide permanent or longer termbenefits analogous to individual coverages. In these cases, the reserving methods are similar to those employedfor individual insurance, using appropriate mortality tables. Appendix A-820 does not specify a mortality table forgroup life insurance but leaves that to the discretion and approval of the domiciliary state.
3. Industrial Life ReservesIndustrial life insurance is unique in that it involves higher unit premiums, smaller face amount policies andhigher mortality expectations. The minimum standards for reserves are the same as the traditional life insuranceexcept that a unique mortality table is used.
4. Credit Life ReservesCredit life insurance policies are designed to discharge a debt upon the debtor’s death. They are usually funded as a single premium. Reserve requirements vary among the states. Key considerations include claims reserves and policy reserves based on a state-specified combination of mortality reserves, unearned premium reserves, and potential refunds. Credit Life and Disability Reserves are addressed in Valuation Manual (VM)-26
4.5. Life Reserves Relating to Riders Life insurance policies frequently include riders for additional benefits such as accidental death and disability and waiver of premium upon disability. The minimum valuation standards for reserves are the same as for the base life insurance except that specialized mortality and disability tables are used and the net level premium valuation method is required.
5.6. Miscellaneous Life Reserves There are various other special situations involving life reserves. First, a deficiency reserve may be required in situations where the actual policy gross premium is less than the valuation net level premium. This situation occurs when pricing assumptions are used that are different from the minimum reserve valuation standards. This does not necessarily indicate that the policy is being sold at a loss by the insurer, but rather is a reflection of the highly conservative nature of the minimum reserve valuation standards. Second, there may be unusual situations where the cash surrender value of a life insurance policy is greater than the minimum reserve standard. In these situations, life reserves must be increased by the amount of this excess.
6.7. Minimum Aggregate Reserves
In the aggregate, policy reserves for all life insurance policies valued under a formula based valuation methodology that are reported in the statutory financial statements must equal or exceed reserves calculated by using the assumption and methods that produce the minimum formula standard valuation.
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C. Principle-Based Valuation Methodology
In general, under a principle-based valuation methodology, all of the liability cash flows emanating from the contract benefits provided in the product are determined for each period and compared with all of the asset cash flows for each period determined from the assets the insurance company has purchased or plans to purchase or sell to fund the liability cash flows. The resulting differences between the asset and liability cash flows for each period are valued under a range of likely or plausible economic scenarios. Economic scenarios may consist of interest rates or market returns or both depending on the nature of the asset and liability cash flows. A single economic scenario represents multiple consecutive periods (such as 30 or 40 years) of movements in the underlying interest rate or market rate returns. The length of the scenario period is determined by the length of the liabilities being valued. The economic scenarios are stochastically (randomly) generated using a prescribed Economic Scenario Generator (ESG). The prescribed ESG can be found on the Society of Actuaries website.
The principle-based valuation methodology developed for life insurance contracts defines 3 components of a principle-based reserve: 1) a net premium reserve (NPR); 2) a deterministic reserve (DR); and 3) a stochastic reserve (SR). The level of risk embedded in a life insurance contract will determine whether the principle-based reserve will consist of all 3 reserve components (NPR, DR, SR), or only 2 reserve components (NPR, DR); or only 1 reserve component (NPR). The principle-based valuation methodology defines a stochastic exclusion test and a deterministic exclusion test each of which are designed to measure the level of risk embedded in a life insurance contract. Life insurance contracts that pass an exclusion test are then exempt from the calculation of the associated principle-based reserve component. For example, all life insurance contracts that pass the stochastic exclusion test but fail the deterministic exclusion test, must calculate the NPR and DR components. Life insurance contracts that pass both the stochastic and deterministic exclusion tests need only calculate the NPR component. For groups of policies other than variable life or universal life with a secondary guarantee, a company may provide a certification by a qualified actuary that the group of policies is not subject to material interest rate risk or asset return volatility risk in lieu of performing the stochastic exclusion ratio test or stochastic exclusion demonstration test. In addition, a company is not required to compute stochastic reserves and deterministic reserves on any of its ordinary life policies if it meets the conditions of Section 2 of VM-20 referred to as the “companywide exemption”. If the domestic commissioner does not reject a company’s application for the companywide exemption pursuant to Section 6 of VM-20, then the company will compute reserves for its ordinary life policies per the requirements provided in VM-A and VM-C of the Valuation Manual.
The reserve stochastic reserveliability under a principle-based valuation methodology is determined as a function of the discounted value of the differences between the asset and liability cash flows for each period over the range of economic scenarios. Economic scenarios may consist of interest rates or market returns or both depending on the nature of the asset and liability cash flows. A single economic scenario represents multiple consecutive periods (such as 30 or 40 years) of movements in the underlying interest rate or market rate returns. The length of the scenario period is determined by the length of the liabilities being valued. The economic scenarios are stochastically (randomly) generated using a prescribed Economic Scenario Generator (ESG). The prescribed ESG can be found on the Society of Actuaries website. The objective is to determine if there is a reasonable likelihood that assets are insufficient to cover the obligations of the company, and by what amount they may be insufficient. Under economic scenarios where assets are insufficient, the principle-based methodology determines all the amounts of the insufficiencies and discounts them back to the valuation date. The largest discounted value is known as the Greatest Present Value of Accumulated Deficiencies, or “GPVAD”, for that scenario. The stochastic reserves may be set at a CTE(70) level (conditional tail expectation at the 70% level). The function CTE(70) means the average of the 30% (100%-70%) worst (largest) GPVADs. So for example if a company randomly generates 1,000 economic scenarios, it would then determine the largest accumulated amount of deficiency for each of the 1,000 scenarios. The CTE(70) stochastic reserve level would be determined by taking the average of the 300 [1,000 x (100% - 70%)] worst GPVADs out of the 1,000 scenarios.
The principle-based valuation methodology developed for life insurance contracts defines 3 components of a principle-based reserve: 1) a net premium reserve (NPR); 2) a deterministic reserve (DR); and 3) a stochastic reserve (SR). The level of risk embedded in a life insurance contract will determine whether the principle-based reserve will consist of all 3 reserve components (NPR, DR, SR), or only 2 reserve components (NPR, DR); or only 1 reserve component (NPR). The principle-based valuation methodology defines a stochastic exclusion test and a deterministic exclusion test each of which are designed to measure the level of risk embedded in a life insurance contract. Life insurance contracts that pass an
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exclusion test are then exempt from the calculation of the associated principle-based reserve component. For example, all life insurance contracts that pass the stochastic exclusion test but fail the deterministic exclusion test, must calculate the NPR and DR components. Life insurance contracts that pass both the stochastic and deterministic exclusion tests need only calculate the NPR component. For groups of policies other than variable life or universal life with a secondary guarantee, a company may provide a certification by a qualified actuary that the group of policies is not subject to material interest rate risk or asset return volatility risk in lieu of performing the stochastic exclusion ratio test or stochastic exlusion demonstration test. In addition, a company is not required to compute stochastic reserves and deterministic reserves on any of its ordinary life policies if it meets the conditions of Section 2 of VM-20 referred to as the “companywide exemption”. If the domestic commissioner does not reject a company’s application for the companywide exemption pursuant to Section 6 of VM-20, then the company will compute reserves for its ordinary life policies per the requirements provided in VM-A and VM-C of the Valuation Manual.
Note that some states incorporated a “companywide exemption” in the Standard Valuation Law that may override Section 2 of VM-20. In such cases the state’s Standard Valuation Law will determine whether a company is not subject to computing the stochastic and deterministic reserves. Note also, the commissioner may exempt specific product forms or product lines of a domestic company that is licensed and doing business only in a single state as defined in Section 15 of the amended NAIC Model Standard Valuation Law.
As part of the calculation process, the principle-based valuation methodology allows companies to aggregate or group policies with similar risk characteristics. For example, all term policies that provide only a death benefit and do not provide any cash surrender values may be grouped together by underwriting class. The exclusion tests are then applied on a group or aggregated basis and not a contract by contract basis. Also, the DR and the SR are calculated on the aggregated or group basis. However, the SR must be performed using aggregation subgroups that do not intermingle multiple product groups (Term, ULSG, Other). The NPR component is a fully prescribed formula based reserve and must be applied on a contract by contract basis.
The annual statement blank contains a VM-20 Supplement. This supplement breaks out the principle-based reserve into its various components of NPR, DR and SR. Regulators may request the assistance of NAIC modeling staff and or VAWG in verifying exclusion testing as well as various components of the principle-based reserve on a smaller sample set of company contracts.
D. Actuarial Opinion and Asset Adequacy Analysis
Due to the complexity in determining life reserves, insurers must rely on actuaries to assist with valuation of these reserves. Insurers are required to annually obtain an opinion regarding the reasonableness of the reserves by a qualified actuary who is appointed by the company. The actuarial opinion requirements are provided in VM-30 of the Valuation Manual. These requirements also include requirements for asset adequacy analysis. As a result of the asset adequacy analysis conducted by the appointed actuary, the actuary may conclude that the insurer’s assets are not adequate to cover future liabilities as valued by the calculated reserves. When this occurs, reserves must be increased by the estimated deficiency resulting from asset adequacy testing.
E. Actuarial Oversight and Internal Controls
Appendix G of the Valuation Manual provides guidance that while not expanding the existing legal duties of a company’s board of directors, senior management, and appointed actuary and/or qualified actuaries, provides guidance that focuses on their roles in the context of principle-based reserves. A summarySome of the duties and expectations for the board of directors and senior management is are provided as follows:below. If an actuarial specialist is involved in an examination, Appendix G includes additional requirements that should be considered during the review of the company’s actuarial oversight and associated internal controls.
1. The Board of Directors should:
a. Receive and reviews reports, including the certification of the effectiveness of internal controls withrespect to the principle-based calculation, as provided in Section 12.B.(2) of the Standard Valuation Law.
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b. Understand the process undertaken by senior management to correct any material weaknesses in theinternal controls with respect to a principle-based reserve valuation, if any is identified.
c. Understand the infrastructure (consisting of policies, procedures, controls and resources) in place toimplement and oversee principle-based reserve processes.
d. Ensure the proper documentation of review and action undertaken by the board relating to the principle-based reserving function in the minutes of all of the board meetings where such function is discussed.
2. Senior Management should:
a. Ensure that an adequate infrastructure (consisting of the risk tolerances, policies, procedures, controls,risk management strategies and resources) has been established to implement the principle-basedreserving function.
b. Review for reasonableness the principle-based reserving elements (consisting of the assumptions,methods and models used to determine principle-based reserves of the insurer company or group ofinsurance companies) that have been put in place.
c. Review the principle-based reserving results for consistency with established risk tolerances of theinsurance company or group of insurance companies in relation to the risks of the products of theinsurance company or group of insurance companies offers, the various strategies used to mitigate suchrisks, and its emerging experience, in order to understand the general level of conservatism incorporatedinto principle-based reserves.
d. Review and address any significant and/or unusual findings in light of the results of the principle-basedreserve valuation processes and applicable sensitivity tests of the insurance company or group ofinsurance-companies.
As examiners perform both the Corporate Governance assessment and the examination interviews, the topics above should be considered to ensure that the companies with transactions goverened by PBR are adequately implementing the relevant portions of the Valuation Manual.
Additional procedures regarding the examiners’ assessment of the insurer’s PBR related risks, controls, and possible test procedures can be located in Section 3 Reserves/Claims Handling (Life) repository.
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EXAMINATION REPOSITORY – RESERVES/CLAIMS HANDLING (LIFE)
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:
Aggregate Reserve for Life Contracts Aggregate Reserve for Accident and Health Contracts Liability for Deposit-Type Contracts Contract Claims
Relevant Statements of Statutory Accounting Principles (SSAPs)
All of the relevant SSAPs related to the life insurance reserving process, regardless of whether or not the corresponding risks are included within this exam repository, are listed below:
No. 5R Liabilities, Contingencies and Impairments of Assets – Revised No. 50 Classifications of Insurance or Managed Care Contracts No. 51 Life Contracts No. 54 Individual and Group Accident and Health Contracts No. 55 Unpaid Claims, Losses and Loss Adjustment Expenses No. 61R Life, Deposit-Type and Accident and Health Reinsurance – Revised No. 63 Underwriting Pools No. 70 Allocation of Expenses
Comment [BH1]: Revisions to refer to “Independent” Actuary instead of “Consulting” Actuary made per Fontaine Consulting Comment Letter
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sues
incl
udin
g re
ports
(at
leas
t ann
ually
) fro
m th
e ap
poin
ted
actu
ary.
Obt
ain
info
rmat
ion
on
revi
sion
s mad
e by
the
insu
rer t
o its
rese
rvin
g pr
actic
es a
nd v
erify
the
revi
sion
s wer
e ap
prop
riate
ly
revi
ewed
and
/or a
ppro
ved
by th
e bo
ard
of d
irect
ors (
or
com
mitt
ee th
ereo
f).
Obt
ain
info
rmat
ion
on th
e in
sure
r’s o
vera
ll re
serv
ing
prac
tices
and
forw
ard
it to
th
e in
sura
nce
depa
rtmen
t ac
tuar
y or
an
inde
pend
ent
actu
ary
for r
evie
w.
Dis
cuss
wi th
mem
bers
of
the
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
thei
r le
vel o
f inv
olve
men
t in
mon
itorin
g th
e im
plem
enta
tion
of re
serv
ing
prac
tices
.
The
insu
rer h
as n
ot
take
n ap
prop
riate
st
eps t
o pr
epar
e fo
r the
im
plem
enta
tion
of
prin
cipl
ePrin
cipl
e-ba
sed
Base
d re
serv
ing
Res
ervi
ng (P
BR
).
Not
e: U
nder
the
requ
irem
ents
of t
he
Val
uatio
n M
anua
l, co
mpa
nies
hav
e un
til
RV
ST
O
ther
R
A
RD
Th
e in
sure
r has
a P
BR
im
plem
enta
tion
plan
that
in
clud
es c
onsi
dera
tion
of
staf
fing
need
s and
ap
prop
riate
exp
ertis
e in
cu
rrent
and
/or f
utur
e bu
dget
s and
stra
tegi
c pl
ans.
Ver
ify th
at b
udge
ts a
nd/o
r st
rate
gic
plan
s con
tain
co
nsid
erat
ion
of P
BR
im
plem
enta
tion
need
s in
clud
ing
qual
ified
staf
f.
Det
erm
ine
if th
e co
mpa
ny
has a
dequ
ate
suita
bilit
y re
quire
men
ts in
pla
ce fo
r th
e ac
tuar
ial d
epar
tmen
t tha
t re
quire
s the
act
uaria
l sta
ff to
be
qua
lifie
d to
impl
emen
t
Rev
iew
the
insu
rer’
s PB
R
impl
emen
tatio
n pl
an fo
r re
ason
able
ness
.
Rev
iew
act
uaria
l de
partm
ent s
taff
qu
alifi
catio
ns to
det
erm
ine
if su
itabi
lity
requ
irem
ents
ar
e m
et a
nd/o
r det
erm
ine
if ac
tuar
ial s
taff
has
ade
quat
e tra
inin
g av
aila
ble
for
impl
emen
tatio
n of
PB
R.
© 2017 National Association of Insurance Commissioners 73 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
1/1/
2020
to im
plem
ent
PBR
requ
irem
ents
. Se
e Se
ctio
n 1-
6 fo
r fu
rther
info
rmat
ion
on
the
impl
emen
tatio
n of
PB
R.
The
insu
rer h
as a
pro
cess
to
mon
itor t
he p
rogr
ess a
nd
ongo
ing
need
s of P
BR
im
plem
enta
tion.
Dat
a re
porti
ng a
nd sy
stem
ne
eds a
re re
view
ed b
y m
anag
emen
t on
a pe
riodi
c ba
sis i
n pr
epar
atio
n fo
r PB
R
impl
emen
tatio
n.
and
prac
tice
a PB
R
met
hodo
logy
.
Rev
iew
the
insu
rer’
s pr
oced
ures
to d
eter
min
e if
pend
ing
PBR
im
plem
enta
tion
need
s are
co
ntin
uous
ly m
onito
red
by
com
pany
per
sonn
el.
Ver
ify th
at m
anag
emen
t re
view
s dat
a re
porti
ng a
nd
syst
em n
eeds
.
Con
side
r inv
olvi
ng a
n IT
sp
ecia
list i
n a
revi
ew o
f sy
stem
cap
abili
ties
nece
ssar
y fo
r PB
R
impl
emen
tatio
n.
Fina
ncia
l Rep
ortin
g R
isks
In
-for
ce d
ata
utili
zed
by th
e ac
tuar
y to
ca
lcul
ate
rese
rves
for
life,
A&
H a
nd
depo
sit-t
ype
cont
ract
s is
not
com
plet
e or
ac
cura
te n
or c
onsi
sten
t w
ith a
ccou
ntin
g re
cord
s.
OP
RV
C
O
AC
R
D
The
insu
rer h
as e
stab
lishe
d ap
prop
riate
inte
rnal
con
trols
ov
er th
e in
put a
nd
mai
nten
ance
of i
n-fo
rce
data
as o
utlin
ed in
the
Exam
inat
ion
Rep
osito
ry –
U
nder
writ
ing.
The
in-f
orce
dat
a is
test
ed
perio
dica
lly b
y th
e in
sure
r’s
qual
ity a
ssur
ance
(QA
) fu
nctio
n fo
r com
plet
enes
s an
d ac
cura
cy.
The
insu
rer’s
syst
em is
pr
ogra
mm
ed to
issu
e in
sura
nce
cont
ract
s util
izin
g se
quen
tial p
olic
y nu
mbe
rs.
In-f
orce
dat
abas
e is
re
conc
iled
to a
ccou
ntin
g
Perf
orm
test
s to
verif
y th
e op
erat
ing
effe
ctiv
enes
s of
polic
y in
-for
ce c
ontro
ls a
s ou
tline
d in
the
Exam
inat
ion
Rep
osito
ry –
Und
erw
ritin
g.
Rev
iew
the
QA
repo
rts
rela
ting
to th
e te
stin
g of
in-
forc
e da
ta to
ver
ify th
e op
erat
ing
effe
ctiv
enes
s of
the
cont
rols
.
Ver
ify th
roug
h ob
serv
atio
n an
d/or
repe
rfor
man
ce th
at
syst
em p
aram
eter
s pro
hibi
t th
e is
suan
ce o
f non
-se
quen
tial p
olic
y nu
mbe
rs.
Ensu
re m
anag
emen
t rev
iew
of
exc
eptio
ns.
Test
reco
ncili
atio
n pr
oces
s fo
r sup
ervi
sory
revi
ew,
Obt
ain
a co
py o
f the
list
ing
deta
iling
in-f
orce
insu
ranc
e co
ntra
cts p
rovi
ded
to th
e in
sure
r’s a
ctua
ry. P
erfo
rm
proc
edur
es to
ver
ify th
e co
mpl
eten
ess o
f thi
s lis
ting
by tr
acin
g to
the
data
base
a
sam
ple
of c
ontra
cts s
elec
ted
from
sour
ces o
utsi
de th
e re
serv
e sy
stem
(e.g
., pr
emiu
m c
ash
colle
ctio
ns).
Use
con
trol t
otal
s for
face
am
ount
, ben
efits
, and
pol
icy
coun
t in
orde
r to
dete
ct u
se
of in
corre
ct fi
les.
*
In c
onju
nctio
n w
ith th
e te
stin
g pe
rfor
med
in th
e Ex
amin
atio
n U
nder
writ
ing
Rep
osito
ry, S
elec
t sel
ect a
sa
mpl
e of
in-f
orce
insu
ranc
e co
ntra
cts t
o ve
rify
that
the
syst
em d
ata
refle
cts t
he
accu
racy
of t
he li
stin
g
© 2017 National Association of Insurance Commissioners 74 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
reco
rds o
n a
perio
dic
basi
s. ap
prop
riate
ness
and
op
erat
ing
effe
ctiv
enes
s. ut
ilize
d by
the
actu
arie
s by
agre
eing
rese
rve
data
to th
e ac
tual
insu
ranc
e co
ntra
ct
prov
isio
ns.*
Rev
iew
com
plai
nt lo
gs fo
r m
isap
plie
d pa
ymen
ts,
mis
sing
pol
icy
docu
men
tatio
n an
d in
vest
igat
e th
e st
atus
of t
he
com
plai
nt.
Rec
onci
le d
ata
elem
ents
to
AS
repo
rting
.
The
data
util
ized
in
the
com
pany
’s P
BR
m
odel
is n
ot
repr
esen
tativ
e an
d co
nsis
tent
with
the
com
pany
’s in
-for
ce
data
.
OP
RV
A
C
CO
R
D
The
insu
rer m
aint
ains
a
mod
el v
alid
atio
n pr
oces
s to
conf
irm th
at m
odel
cel
ls
repr
esen
t act
ual i
nfor
ce
data
.
Rev
iew
doc
umen
tatio
n as
soci
ated
with
the
mod
el
valid
atio
n pr
oces
s pe
rfor
med
by
the
com
pany
to
ens
ure
agre
emen
t be
twee
n th
e in
sure
r’s m
odel
an
d ag
greg
ated
in-f
orce
dat
a fo
r attr
ibut
es su
ch a
s:
*Iss
ue a
ge*G
ende
r*P
olic
y co
unts
*Fac
e am
ount
s*F
und
valu
es*A
nnua
lized
pre
miu
m
Com
pare
in-f
orce
ag
greg
atio
n an
d st
atis
tics
for p
rodu
cts u
nder
scop
e of
PB
R to
mod
el o
utpu
t re
ports
at p
erio
d ze
ro fo
r at
tribu
tes s
uch
as:
*Ave
rage
issu
e ag
e*G
ende
r dis
tribu
tion
*Tot
al p
olic
y co
unts
*Tot
al fa
ce a
mou
nts
*Tot
al fu
nd v
alue
s*T
otal
ann
ualiz
ed p
rem
ium
In-f
orce
dat
a is
not
ap
prop
riate
ly
rest
ricte
d an
d pr
otec
ted
to m
aint
ain
accu
rate
and
com
plet
e da
ta.
OP
AC
C
O
RA
Th
e in
sure
r mai
ntai
ns
logi
cal a
cces
s con
trols
, in
clud
ing
pass
wor
d pr
otec
tion
and
activ
e di
rect
orie
s, to
pro
perly
re
stric
t acc
ess t
o in
-for
ce
data
.
Test
the
oper
atin
g ef
fect
iven
ess o
f log
ical
ac
cess
con
trols
by
revi
ewin
g do
cum
enta
tion
rela
ting
to re
ques
ts fo
r ac
cess
and
by
atte
mpt
ing
to
have
una
utho
rized
in
divi
dual
s acc
ess t
he in
Sele
ct a
sam
ple
of in
-for
ce
polic
y da
ta a
t the
ex
amin
atio
n as
of d
ate
for
accu
racy
and
com
plet
enes
s te
stin
g. *
Test
a sa
mpl
e of
cha
nges
m
ade
to in
-for
ce p
olic
ies
© 2017 National Association of Insurance Commissioners 75 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
The
insu
rer h
as
appr
opria
tely
segr
egat
ed it
s du
ties t
o en
sure
that
in
divi
dual
s with
the
abili
ty
to u
pdat
e in
-for
ce d
ata
do
not h
ave
conf
lictin
g re
spon
sibi
litie
s.
The
insu
rer h
as e
stab
lishe
d po
licie
s and
pro
cedu
res f
or
mak
ing
accu
rate
, tim
ely
chan
ges t
o po
licie
s.
The
insu
rer h
as e
stab
lishe
d a
QA
pro
cess
to re
view
ch
ange
s to
polic
ies t
o en
sure
com
plia
nce
with
the
insu
rer’s
pol
icie
s and
pr
oced
ures
on
a sa
mpl
e ba
sis.
forc
e da
ta.
Test
the
oper
atin
g ef
fect
iven
ess o
f seg
rega
tion
cont
rols
by
atte
mpt
ing
to
have
indi
vidu
als a
utho
rized
to
acc
ess i
n-fo
rce
data
ac
cess
cla
ims p
roce
ssin
g or
ot
her s
yste
ms.
Perf
orm
a w
alkt
hrou
gh to
ga
in a
n un
ders
tand
ing
of th
e in
sure
r’s p
roce
ss to
mak
e ch
ange
s to
in-f
orce
pol
icie
s.
Test
a sa
mpl
e of
cha
nges
to
polic
ies r
evie
wed
by
the
QA
fu
nctio
n fo
r pro
per
impl
emen
tatio
n of
the
insu
rer’s
pol
icie
s and
pr
oced
ures
.
durin
g th
e ye
ar b
y re
view
ing
supp
ortin
g do
cum
enta
tion.
*
Rei
nsur
ance
is n
ot
prop
erly
take
n in
to
acco
unt i
n ac
cum
ulat
ing
in-f
orce
da
ta. (
See
also
Ex
amin
atio
n R
epos
itory
–
Rei
nsur
ance
A
ssum
ing
Insu
rer.)
RV
A
C
CO
R
D
The
insu
rer h
as e
stab
lishe
d pr
oced
ures
to p
repa
re th
e in
-for
ce d
ata
for a
ctua
rial
revi
ew in
acc
orda
nce
with
th
e in
sure
r’s re
insu
ranc
e tre
atie
s.
Rev
iew
the
insu
rer’
s re
conc
iliat
ion
repo
rts o
f ac
tuar
ial d
ata
to th
e in
sure
r’s in
-for
ce sy
stem
, re
insu
ranc
e re
ports
, and
ac
coun
ting
reco
rds.
Test
the
oper
atin
g ef
fect
iven
ess o
f the
in
sure
r’s e
stab
lishe
d pr
oced
ures
to in
clud
e in
-fo
rce
data
from
ass
umed
re
insu
ranc
e tre
atie
s with
in
the
data
for a
ctua
rial
revi
ew.
Test
reco
ncili
ng it
ems
rela
ting
to re
insu
ranc
e in
-fo
rce
data
for
appr
opria
tene
ss.
Ver
ify th
e as
sum
ed
rein
sura
nce
in-f
orce
dat
a ac
cum
ulat
ed fo
r act
uaria
l re
view
by
com
parin
g to
the
data
pro
vide
d by
the
cedi
ng
insu
rer f
or c
ompl
eten
ess.
Util
ize
the
NA
IC
Exam
inat
ion
Jum
psta
rt re
port
to c
ompa
re in
-for
ce
amou
nts r
epor
ted
by th
e as
sum
ing
insu
rer t
o th
ose
amou
nts r
epor
ted
by th
e ce
ding
insu
rer.
© 2017 National Association of Insurance Commissioners 76 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
The
insu
rer d
oes n
ot
prop
erly
mon
itor
XX
X/A
XX
X re
serv
e de
velo
pmen
t rel
ated
to
its c
eded
rein
sura
nce
trans
actio
ns.
RV
A
C
VA
R
A
The
insu
rer m
onito
rs a
ctua
l ex
perie
nce
on c
eded
re
insu
ranc
e re
lativ
e to
the
initi
al o
r mos
t rec
ent
proj
ectio
ns a
nd m
onito
rs
unde
rlyin
g as
sum
ptio
ns to
ev
alua
te a
sset
ade
quac
y an
d re
port
any
mat
eria
l adv
erse
de
viat
ions
to m
anag
emen
t.
Rev
iew
the
insu
rer’
s pr
oces
s to
mon
itor
expe
rienc
e on
ced
ed
rein
sura
nce
trans
actio
ns a
nd
verif
y th
at m
ater
ial a
dver
se
devi
atio
ns a
re re
view
ed b
y m
anag
emen
t.
Det
erm
ine
whe
ther
the
insu
rer’s
ced
ed re
insu
ranc
e tra
nsac
tions
are
trac
king
ap
prop
riate
ly re
lativ
e to
the
initi
al o
r mos
t rec
ent
proj
ectio
ns a
nd u
nder
lyin
g as
sum
ptio
ns. F
or e
xam
ple,
co
mpa
re a
ctua
l dea
ths u
nder
th
e re
insu
ranc
e tra
nsac
tion
with
exp
ecte
d de
aths
as
sum
ed in
the
rese
rve
unde
r the
rein
sura
nce
trans
actio
n. C
onsi
der
utili
zing
an
actu
aria
l sp
ecia
list t
o as
sist
in th
is
dete
rmin
atio
n.
The
assu
mpt
ions
and
m
etho
dolo
gies
use
d by
the
insu
rer f
or li
fe,
A&
H a
nd d
epos
it-ty
pe
cont
ract
s are
not
ac
cura
te o
r ap
prop
riate
.
RV
V
A
AC
PD
RA
Th
e in
sure
r use
s con
sist
ent
assu
mpt
ions
and
m
etho
dolo
gies
that
hav
e be
en b
ased
on
guid
elin
es
outli
ned
in th
e Va
luat
ion
Man
ual (
VM) a
nd A
ppen
dix
A a
nd A
ppen
dix
C o
f the
N
AIC
Acc
ount
ing
Prac
tices
an
d Pr
oced
ures
Man
ual (
to
the
exte
nt a
ppro
pria
te),
adeq
uate
ly d
ocum
ente
d,
appr
oved
by
seni
or
man
agem
ent,
and
in
acco
rdan
ce w
ith st
atut
ory
acco
untin
g pr
inci
ples
(SA
P)
and
appl
icab
le st
ate
stat
utes
an
d/or
regu
latio
ns.
Seni
or m
anag
emen
t use
s in
tern
al o
r ind
epen
dent
ac
tuar
ies t
o co
nduc
t res
erve
an
alys
es o
f all
maj
or li
nes
of b
usin
ess o
n an
ann
ual
basi
s.
Gai
n an
und
erst
andi
ng o
f th
e in
sure
r’s a
ssum
ptio
ns
and
met
hodo
logi
es a
nd
com
pare
with
prio
r per
iods
.
Ver
ify th
at se
nior
m
anag
emen
t sig
ns o
ff o
n as
sum
ptio
ns a
nd
met
hodo
logi
es u
sed
by th
e in
sure
r, in
clud
ing
any
chan
ges.
Ver
ify se
nior
man
agem
ent
revi
ew o
f rep
orts
from
ac
tuar
ies a
nd th
at re
ports
in
clud
e re
serv
e an
alys
es o
f al
l maj
or li
nes o
f bus
ines
s.
Rev
iew
the
cred
entia
ls,
back
grou
nd a
nd
resp
onsi
bilit
ies o
f the
in
sure
r’s a
ctua
rial
depa
rtmen
t sta
ff .f
or
com
plia
nce
with
App
endi
x
Rev
iew
ass
umpt
ions
and
m
etho
dolo
gies
for
reas
onab
lene
ss,
appr
opria
tene
ss, a
ccur
acy,
an
d co
mpl
ianc
e w
ith th
e Va
luat
ion
Man
ual a
nd
App
endi
x A
and
App
endi
x C
of t
he N
AIC
Acc
ount
ing
Prac
tices
and
Pro
cedu
res
Man
ual,
with
ass
ista
nce
from
the
insu
ranc
e de
partm
ent a
ctua
ry o
r an
inde
pend
ent a
ctua
ry.
Com
pare
act
ual i
nves
tmen
t, m
orta
lity,
mor
bidi
ty, l
apse
, in
tere
st c
redi
ting
stra
tegy
an
d ex
pens
e ex
perie
nce
to
assu
mpt
ions
, by
line
of
busi
ness
and
to p
rior-
perio
d as
sum
ptio
ns.
Ver
ify w
heth
er th
e as
sum
ptio
ns su
rrou
ndin
g co
ntra
ct c
laim
liab
ilitie
s are
© 2017 National Association of Insurance Commissioners 77 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
The
insu
rer m
aint
ains
a
fully
staf
fed,
wel
l-qua
lifie
d ac
tuar
ial d
epar
tmen
t tha
t m
eets
the
requ
irem
ents
of
App
endi
x A
-820
of t
he
NA
IC A
ccou
ntin
g Pr
actic
es
and
Proc
edur
es M
anua
l .
Act
uaria
l ana
lysi
s is s
ubje
ct
to a
pee
r rev
iew
pro
cess
.
Man
agem
ent r
ecei
ves
regu
lar r
epor
ts o
n cl
aim
lia
bilit
ies (
incl
udin
g IB
NR
) by
line
or c
lass
of b
usin
ess,
as w
ell a
s oth
er k
ey ra
tios,
and
revi
ews u
nusu
al
fluct
uatio
ns o
n a
timel
y ba
sis t
o re
view
cla
im
liabi
litie
s for
ade
quac
y.
A-8
20 o
f the
NA
ICAc
coun
ting
Prac
tices
and
Pr
oced
ures
Man
uall.
If p
erfo
rmed
in-h
ouse
, re
view
and
test
the
actu
aria
l pe
er re
view
pro
cess
and
re
late
d si
gn-o
ffs.
Ver
ify m
anag
emen
t rev
iew
of
con
tract
cla
im li
abili
ties
repo
rting
and
test
the
oper
atin
g ef
fect
iven
ess o
f pr
oced
ures
in p
lace
.
in a
ccor
danc
e w
ith th
e re
leva
nt S
SAPs
, as w
ell a
s ap
plic
able
stat
utes
, re
gula
tions
, pr
onou
ncem
ents
and
/or
bulle
tins.
Util
ize
the
insu
ranc
e de
partm
ent a
ctua
ry o
r an
inde
pend
ent a
ctua
ry to
pe
rfor
m a
n in
depe
nden
t ca
lcul
atio
n/es
timat
e of
the
life
rese
rves
and
incu
rred
but n
ot re
porte
d (I
BN
R)
cont
ract
cla
ims l
iabi
lity.
Det
erm
ine
whe
ther
the
appr
opria
te d
iscl
osur
es h
ave
been
mad
e in
the
Not
es to
th
e Fi
nanc
ial S
tate
men
ts fo
r an
y ch
ange
s in
rese
rve
met
hodo
logi
es.
Rev
iew
act
uaria
l rep
orts
an
d co
mpa
re re
ports
to p
rior
perio
ds. I
nves
tigat
e si
gnifi
cant
var
iatio
ns.
Rev
iew
cor
resp
onde
nce
rela
ted
to a
ny p
eer r
evie
ws
perf
orm
ed fo
r app
ropr
iate
de
pth
of re
view
. Th
e as
sum
ptio
ns u
sed
by th
e in
sure
r to
calc
ulat
e re
serv
es fo
r po
licie
s sub
ject
to
Prin
cipl
e-B
ased
R
eser
ving
are
not
ac
cura
te o
r ap
prop
riate
.
RV
V
A
AC
PD
RA
Th
e co
mpa
ny u
tiliz
es th
e pr
escr
ibed
val
uatio
n as
sum
ptio
ns o
f the
V
alua
tion
Man
ual t
o ca
lcul
ate
PBR
rese
rves
.
The
com
pany
mai
ntai
ns
Util
ize
a D
epar
tmen
t ac
tuar
y,
cons
ultin
gind
epen
dent
ac
tuar
y or
NA
IC A
ctua
rial
Mod
elin
g su
ppor
t sta
ff to
re
view
com
pany
do
cum
enta
tion
that
pro
vide
s su
ppor
t for
ass
umpt
ions
and
Util
ize
a D
epar
tmen
t ac
tuar
y,
cons
ultin
gind
epen
dent
ac
tuar
y o
r NA
IC A
ctua
rial
Mod
elin
g su
ppor
t sta
ff to
ve
rify
and
valid
ate
that
the
com
pany
has
follo
wed
the
requ
irem
ents
of P
BR
as
© 2017 National Association of Insurance Commissioners 78 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
cred
ible
exp
erie
nce
data
to
supp
ort a
ll as
sum
ptio
ns
utili
zed
in P
BR
rese
rvin
g,
incl
udin
g:
•La
pse
•M
orta
lity
•M
orbi
dity
•In
tere
st ra
te•
Etc.
evid
ence
that
they
are
de
velo
ped
in a
ccor
danc
e w
ith th
e re
quire
men
ts o
f PB
R a
s pub
lishe
d in
the
Val
uatio
n M
anua
l.
pres
crib
ed in
the
Val
uatio
n M
anua
l in
deve
lopi
ng
assu
mpt
ions
.
Polic
ies w
ith
supp
lem
enta
l or
acce
lera
ted
bene
fits
have
not
bee
n pr
oper
ly se
para
ted
and
rese
rved
for i
n ac
cord
ance
with
SA
P.
OP
RV
A
C
RA
R
D
The
insu
rer h
as a
pro
cess
in
whi
ch su
pple
men
tal a
nd
acce
lera
ted
bene
fits a
re
prop
erly
iden
tifie
d an
d re
serv
ed.
Test
the
proc
ess
surro
undi
ng th
e id
entif
icat
ion
and
rese
rvin
g of
supp
lem
enta
l and
ac
cele
rate
d be
nefit
s.
Util
ize
the
insu
ranc
e de
partm
ent a
ctua
ry o
r an
inde
pend
ent a
ctua
ry to
pe
rfor
m a
n in
depe
nden
t ca
lcul
atio
n of
the
rese
rves
of
supp
lem
enta
l and
ac
cele
rate
d be
nefit
s.
Ver
ify th
at re
serv
es a
re in
ac
cord
ance
with
SA
P.
Polic
ies s
ubje
ct to
Pr
inci
ple-
Bas
ed
Res
ervi
ng a
re n
ot
prop
erly
iden
tifie
d or
ex
clus
ion
test
ing
is
not a
ppro
pria
tely
co
nduc
ted.
RV
V
A
AC
PD
RA
C
ompa
ny c
ondu
cts a
nd
revi
ews e
xclu
sion
test
ing
in
acco
rdan
ce w
ith V
alua
tion
Man
ual i
nstru
ctio
ns.
Rev
iew
com
pany
supp
ort
and
supe
rvis
ory
sign
-off
for
excl
usio
n te
stin
g.
Util
ize
a D
epar
tmen
t ac
tuar
y,
cons
ultin
gind
epen
dent
ac
tuar
y o
r NA
IC A
ctua
rial
Mod
elin
g su
ppor
t sta
ff to
co
nduc
t or r
eper
form
ex
clus
ion
test
ing.
Th
e lif
e, A
&H
and
de
posi
t-typ
e re
serv
e an
d IB
NR
con
tract
cl
aim
liab
ility
co
mpu
tatio
ns a
re n
ot
perf
orm
ed c
orre
ctly
or
the
sele
cted
est
imat
es
are
unre
ason
able
.
OP
RV
A
C
VA
R
A
The
insu
rer h
as a
n es
tabl
ishe
d pr
oces
s tha
t is
cons
iste
nt w
ith th
e m
etho
d ad
opte
d by
the
NA
IC to
ca
lcul
ate
the
life
rese
rves
on
an a
nnua
l bas
is.
The
insu
rer m
aint
ains
a
fully
staf
fed,
wel
l-qua
lifie
d ac
tuar
ial d
epar
tmen
t. th
at
mee
ts th
e re
quire
men
ts o
f A
ppen
dix
A-8
20 o
f the
Rev
iew
the
proc
ess i
n pl
ace
(whi
ch m
ay in
clud
e pe
rfor
man
ce o
f a
wal
kthr
ough
) to
estim
ate
the
life
rese
rves
.
Rev
iew
the
cred
entia
ls,
back
grou
nd a
nd
resp
onsi
bilit
ies o
f the
in
sure
r’s a
ctua
rial
depa
rtmen
t sta
ff. f
or
Util
ize
the
insu
ranc
e de
partm
ent a
ctua
ry o
r an
inde
pend
ent a
ctua
ry to
pe
rfor
m a
n in
depe
nden
t es
timat
e of
the
life
rese
rves
an
d IB
NR
con
tract
cla
ims
liabi
lity.
Perf
orm
ana
lytic
al
proc
edur
es to
revi
ew th
e re
ason
able
ness
of r
eser
ve
calc
ulat
ions
.
© 2017 National Association of Insurance Commissioners 79 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
NA
IC A
ccou
ntin
g Pr
actic
es
and
Proc
edur
es M
anua
l .
Seni
or m
anag
emen
t use
s in
tern
al o
r ind
epen
dent
ac
tuar
ies t
o co
nduc
t res
erve
an
alys
es o
f all
maj
or li
nes
on a
n an
nual
bas
is.
The
actu
aria
l cal
cula
tions
ar
e su
bjec
t to
a pe
er re
view
pr
oces
s.
The
insu
rer’s
boa
rd o
f di
rect
ors (
or c
omm
ittee
th
ereo
f) re
ceiv
es a
n an
nual
pr
esen
tatio
n on
the
actu
aria
l an
alys
is p
roce
ss.
Man
agem
ent r
ecei
ves
regu
lar r
epor
ts o
n ke
y ra
tios
and
revi
ews u
nusu
al
fluct
uatio
ns o
n a
timel
y ba
sis t
o re
view
rese
rves
for
adeq
uacy
.
com
plia
nce
with
App
endi
x A
-820
of t
he N
AIC
Acco
untin
g Pr
actic
es a
nd
Proc
edur
es M
anua
l .
Obt
ain
actu
aria
l rep
orts
to
verif
y w
heth
er th
e in
sure
r is
usin
g in
depe
nden
t or i
n-ho
use
actu
arie
s to
perf
orm
th
e re
serv
e ca
lcul
atio
ns o
n al
l maj
or li
nes o
f bus
ines
s an
nual
ly a
nd v
erify
seni
or
man
agem
ent r
evie
w o
f re
ports
from
act
uarie
s.
If p
erfo
rmed
in-h
ouse
, re
view
and
test
the
actu
aria
l pe
er re
view
pro
cess
and
re
late
d si
gn-o
ffs.
Rev
iew
the
mee
ting
min
utes
of
the
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
to v
erify
w
heth
er a
pre
sent
atio
n w
as
give
n on
the
actu
aria
l ca
lcul
atio
n pr
oces
s.
Ver
ify m
anag
emen
t rev
iew
of
rese
rve
repo
rting
and
test
th
e op
erat
ing
effe
ctiv
enes
s of
pro
cedu
res i
n pl
ace.
The
met
hodo
logi
es
utili
zed
in P
BR
are
no
t app
ropr
iate
or t
he
rese
rve
com
puta
tions
ar
e no
t per
form
ed
corr
ectly
.
OP
RV
A
C
VA
R
A
The
com
pany
has
a fo
rmal
pr
oces
s in
plac
e to
dev
elop
an
d va
lidat
e a
mod
el fo
r use
in
PB
R. G
over
nanc
e of
the
actu
aria
l mod
el in
clud
es
cons
ider
atio
n of
: •
Secu
rity
Proc
ess
Rev
iew
evi
denc
e th
at th
e co
mpa
ny fo
llow
ed it
s pr
oces
s in
deve
lopi
ng a
nd
valid
atin
g its
mod
el fo
r use
in
PB
R.
Rev
iew
the
cred
entia
ls,
Util
ize
a D
epar
tmen
t ac
tuar
y,
cons
ultin
gind
epen
dent
ac
tuar
y o
r NA
IC A
ctua
rial
Mod
elin
g su
ppor
t sta
ff to
re
view
and
eva
luat
e re
sults
(e
.g. c
ompa
re re
sults
of t
he
© 2017 National Association of Insurance Commissioners 80 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
•So
ftwar
e C
hang
ePr
oces
s •
Para
met
er S
ettin
gPr
oces
s •
Val
idat
ion
Proc
ess
•O
vers
ight
of
Ove
rall
Mod
el
Proc
esse
s
Mod
el re
sults
hav
e un
derg
one
peer
revi
ew a
nd
are
subj
ect t
o re
ason
able
ness
test
s, su
ch
as:
•Th
e in
sure
rm
anua
lly c
alcu
late
s N
et P
rem
ium
R
eser
ve (N
PR) o
n se
lect
ed p
olic
ies.
•Th
e in
sure
rco
mpa
res r
eser
ves
per 1
000
of fa
ce
amou
nt w
ith p
rior
perio
ds.
•Th
e in
sure
rpe
rfor
ms s
ensi
tivity
te
stin
g on
key
non
-pr
escr
ibed
as
sum
ptio
ns.
back
grou
nd a
nd
resp
onsi
bilit
ies o
f the
in
sure
r’s a
ctua
rial
depa
rtmen
t sta
ff in
de
velo
ping
and
val
idat
ing
the
mod
el u
sed
in P
BR
.
Ensu
re th
at c
ompa
ny p
eer
revi
ew p
roce
ss is
in p
lace
an
d op
erat
ing
effe
ctiv
ely.
stan
dard
por
tfolio
, re
ason
able
ness
in
com
paris
on w
ith p
rior
perio
ds, e
tc.)
of th
e in
sure
r’s m
odel
ing
com
puta
tions
.
Util
ize
a D
epar
tmen
t ac
tuar
y,
cons
ultin
gind
epen
dent
ac
tuar
y o
r NA
IC A
ctua
rial
Mod
elin
g su
ppor
t sta
ff to
re
calc
ulat
e re
serv
es o
n se
lect
ed p
olic
ies.
The
com
puta
tion
of
rein
sura
nce
cred
its
with
in li
fe, A
&H
and
de
posi
t-typ
e re
serv
es
are
not p
erfo
rmed
CR
R
V
AC
V
A
CO
RA
Th
e re
serv
ing
actu
ary
calc
ulat
es th
e re
serv
e on
a
gros
s bas
is a
nd d
eter
min
es
the
net b
asis
by
estim
atin
g th
e re
insu
ranc
e cr
edits
and
Test
the
oper
atin
g ef
fect
iven
ess o
f the
in
sure
r’s p
roce
ss fo
r re
view
ing
the
rese
rve
anal
ysis
to d
eter
min
e
Com
pare
the
annu
al
finan
cial
stat
emen
t net
and
gr
oss i
ncur
red
for
cons
iste
ncy
with
re
insu
ranc
e tre
atie
s in
plac
e
© 2017 National Association of Insurance Commissioners 81 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
corr
ectly
. (Se
e al
so
Exam
inat
ion
Rep
osito
ry –
R
eins
uran
ce C
edin
g In
sure
r.)
appl
ying
them
to th
e gr
oss
rese
rve.
The
insu
rer a
pplie
s re
insu
ranc
e cr
edits
to li
fe
rese
rves
by
revi
ewin
g re
insu
ranc
e tre
atie
s in
plac
e at
the
insu
rer,
as w
ell a
s hi
stor
ical
resu
lts.
whe
ther
life
rese
rves
hav
e be
en e
stim
ated
on
a gr
oss
basi
s, in
clud
ing
man
agem
ent a
ppro
val a
nd
sign
-off
.
Test
the
oper
atin
g ef
fect
iven
ess o
f the
in
sure
r’s p
roce
ss to
est
imat
e re
insu
ranc
e cr
edits
for l
ife
rese
rves
, inc
ludi
ng
man
agem
ent a
ppro
val a
nd
sign
-off
.
at th
e in
sure
r.
Con
side
r the
reas
onab
lene
ss
of re
insu
ranc
e cr
edits
take
n,
base
d on
a re
view
of t
he
insu
rer’s
rein
sura
nce
prog
ram
and
trea
ties i
n pl
ace.
Com
pare
the
corre
spon
ding
re
serv
e he
ld b
y th
e re
insu
rer
with
the
cred
it ta
ken
by th
e in
sure
r and
iden
tify
all
reas
ons f
or d
iffer
ence
s. Th
e in
sure
r doe
s not
pr
oper
ly a
djus
t the
te
rmin
al re
serv
e co
mpu
tatio
n ba
ck to
th
e re
porti
ng d
ate.
OP
RV
A
C
RA
Th
e in
sure
r has
a p
roce
ss in
pl
ace
whe
reby
rese
rve
com
puta
tions
are
adj
uste
d ba
ck to
the
repo
rting
dat
e.
Test
the
key
cont
rols
su
rroun
ding
the
proc
ess b
y w
hich
rese
rve
com
puta
tions
ar
e ad
just
ed b
ack
to th
e re
porti
ng d
ate.
Util
ize
the
insu
ranc
e de
partm
ent a
ctua
ry o
r an
inde
pend
ent a
ctua
ry to
pe
rfor
m a
n in
depe
nden
t es
timat
e of
the
rese
rve
adju
stm
ent b
ack
to th
e re
porti
ng d
ate.
Th
e in
itial
rese
rves
ca
lcul
ated
by
the
actu
ary
do n
ot
adeq
uate
ly re
flect
re
serv
e lia
bilit
ies.
OP
RV
V
A
RA
Th
e in
sure
r has
a p
roce
ss in
pl
ace
by w
hich
it c
ompu
tes
an a
sset
ade
quac
y te
st o
n th
e ca
lcul
ated
life
rese
rves
.
The
insu
rer h
as a
pro
cess
in
plac
e to
ens
ure
that
the
corr
ect a
ssum
ptio
ns a
nd
met
hodo
logi
es a
re u
sed
to
estim
ate
the
adeq
uacy
of t
he
life
rese
rves
.
Man
agem
ent r
evie
ws t
he
asse
t ade
quac
y te
st fo
r re
ason
able
ness
of t
he
Test
the
key
cont
rols
su
rroun
ding
the
proc
ess b
y w
hich
the
rese
rve
adeq
uacy
te
st is
cal
cula
ted.
Test
the
key
cont
rols
su
rroun
ding
the
assu
mpt
ions
and
m
etho
dolo
gies
use
d to
es
timat
e re
serv
e ad
equa
cy.
Ver
ify m
anag
emen
t rev
iew
of
ass
et a
dequ
acy
test
.
Util
ize
the
insu
ranc
e de
partm
ent a
ctua
ry o
r an
inde
pend
ent a
ctua
ry to
pe
rfor
m a
n in
depe
nden
t es
timat
ion
of th
e re
serv
e ad
equa
cy te
st to
det
erm
ine
whe
ther
the
over
all r
eser
ve
liabi
lity
is a
dequ
ate.
© 2017 National Association of Insurance Commissioners 82 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
rese
rve
amou
nt.
Man
agem
ent b
ooks
re
serv
es th
at a
re
mat
eria
lly d
iffer
ent
than
the
actu
ary’
s bes
t es
timat
e.
OP
ST
LG
VA
PD
R
A
The
insu
rer h
as a
pro
cess
in
plac
e to
ens
ure
that
rese
rves
ar
e re
cord
ed b
ased
on
the
actu
ary’
s bes
t est
imat
e, o
r do
cum
ents
an
appr
opria
te
reas
on fo
r any
dev
iatio
ns.
The
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
co
mpa
res t
he b
ooke
d re
serv
es to
the
amou
nts
incl
uded
in th
e ac
tuar
ial
repo
rt by
rece
ivin
g a
repo
rt fr
om th
e ap
poin
ted
actu
ary.
The
insu
rer’s
org
aniz
atio
nal
stru
ctur
e lim
its th
e in
fluen
ce th
at m
anag
emen
t ca
n ha
ve o
n th
e ap
poin
ted
actu
ary.
Rev
iew
man
agem
ent’s
gu
idel
ines
rega
rdin
g th
e re
cord
ing
of a
ctua
rially
de
term
ined
rese
rves
. Ver
ify
that
dev
iatio
ns fr
om th
e ac
tuar
y’s b
est e
stim
ate
are
prop
erly
doc
umen
ted,
if
appl
icab
le.
Rev
iew
mee
ting
min
utes
of
the
boar
d of
dire
ctor
s (or
co
mm
ittee
ther
eof)
for
evid
ence
of a
pre
sent
atio
n an
d re
view
of t
he a
ctua
rial
repo
rt.
Inte
rvie
w th
e ap
poin
ted
actu
ary
durin
g th
e pl
anni
ng
phas
e of
the
exam
inat
ion
to
dete
rmin
e w
heth
er th
e in
sure
r’s o
rgan
izat
iona
l st
ruct
ure
is a
ppro
pria
te in
th
is a
rea.
Rev
iew
the
actu
aria
l rep
ort,
as w
ell a
s the
ann
ual
finan
cial
stat
emen
t and
ot
her a
ppro
pria
te
docu
men
tatio
n, to
de
term
ine
whe
ther
the
insu
rer h
as b
ooke
d th
e ac
tuar
y’s b
est e
stim
ate.
Rev
iew
the
docu
men
tatio
n su
ppor
ting
a de
viat
ion
from
th
e ac
tuar
y’s b
est e
stim
ate
for r
easo
nabl
enes
s, if
appl
icab
le.
The
insu
rer i
s not
pr
oper
ly a
ccou
ntin
g fo
r cas
h su
rrend
er
valu
e (C
SV) o
n lif
e (in
clud
ing
annu
ities
) co
ntra
cts.
OP
LG
OB
/OW
PD
R
A
The
insu
rer h
as p
olic
ies i
n pl
ace
to e
nsur
e th
e re
porti
ng
of C
SV o
n lif
e (in
clud
ing
annu
ities
) con
tract
s in
acco
rdan
ce w
ith S
SAP
No.
51
.
Ensu
re th
e po
licie
s for
the
proc
ess u
sed
to re
port
CSV
s on
life
(inc
ludi
ng a
nnui
ties)
co
ntra
cts i
s per
iodi
cally
re
view
ed a
nd a
ppro
ved
by
man
agem
ent.
For a
sam
ple
of li
fe
(incl
udin
g an
nuiti
es)
cont
ract
s with
cas
h su
rrend
ers,
dete
rmin
e w
heth
er th
e C
SV is
bei
ng
prop
erly
repo
rted.
C
ontra
ct c
laim
lia
bilit
ies a
re n
ot
esta
blis
hed
or
revi
ewed
in
acco
rdan
ce w
ith th
e in
sure
r’s st
anda
rds
and
appl
icab
le
stat
utor
y gu
idel
ines
.
RV
C
R
AC
V
A
CO
RA
Th
e in
sure
r has
a p
olic
y fo
r re
cord
ing
cont
ract
cla
im
liabi
litie
s and
act
uarie
s are
in
volv
ed in
est
ablis
hing
and
re
view
ing
the
polic
y.
Con
tract
cla
im li
abili
ties a
re
reco
rded
in a
ccor
danc
e w
ith
the
insu
rer’s
pol
icy,
Obt
ain
docu
men
tatio
n su
ppor
ting
the
insu
rer’s
co
ntra
ct c
laim
liab
ility
po
licy
to e
nsur
e ac
tuar
y re
view
and
pol
icy
adeq
uacy
.
For a
sam
ple
of c
ontra
ct
clai
m li
abili
ties,
dete
rmin
e w
heth
er c
ontra
ct c
laim
For a
sam
ple
of c
ontra
ct
clai
m li
abili
ties,
verif
y th
at
the
calc
ulat
ion
is in
ac
cord
ance
with
the
insu
rer’s
pol
icy,
app
licab
le
stat
utor
y gu
idel
ines
, and
are
ca
lcul
ated
on
a tim
ely
basi
s.
From
the
sam
ple
sele
cted
© 2017 National Association of Insurance Commissioners 83 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
appl
icab
le st
atut
ory
guid
elin
es a
nd w
ithin
a
spec
ified
tim
e fr
ame.
Com
mit t
ees e
valu
ate
and
stra
tegi
ze c
laim
liab
ilitie
s in
volv
ing
larg
e or
unu
sual
lo
ss c
ontra
ct c
laim
de
term
inat
ions
and
/or
settl
emen
ts.
revi
ews w
ere
perf
orm
ed a
nd
docu
men
ted
in a
ccor
danc
e w
ith th
e in
sure
r’s p
olic
y an
d ap
plic
able
stat
utor
y gu
idel
ines
.
Obt
ain
min
utes
and
oth
er
mee
ting
mat
eria
ls fr
om th
e m
eetin
gs o
f the
com
mitt
ee
to d
eter
min
e w
heth
er th
e co
mm
ittee
pro
vide
d ap
prop
riate
ove
rsig
ht.
abov
e, id
entif
y an
y cl
aim
s in
clud
ed o
n th
e de
tail
for
whi
ch th
e lia
bilit
y re
cord
ed
is n
ot c
onsi
sten
t with
the
cont
ract
term
s. Id
entif
y cl
aim
s tha
t app
ear t
o ha
ve
not b
een
paid
in a
re
ason
able
or f
air t
ime
fram
e. In
vest
igat
e th
e st
atus
of
thes
e cl
aim
s/be
nefit
s w
ith th
e in
sure
r’s
man
agem
ent.*
Ver
ify th
at th
e cl
aim
s/be
nefit
s lia
bilit
y is
co
mpl
ete
and
prop
erly
re
cord
ed a
t yea
r-en
d.
Obt
ain
a de
tail
of re
sist
ed
clai
ms a
nd c
laim
s clo
sed
with
out p
aym
ent.
Perf
orm
pr
oced
ures
to v
erify
the
grou
nds f
or th
e re
sist
ed
clai
ms.
For a
sam
ple
of c
ontra
ct
clai
m li
abili
ties m
eetin
g th
e cr
iteria
to g
o to
a
loss
/ben
efits
com
mitt
ee,
dete
rmin
e w
heth
er th
e lia
bilit
ies w
ere
refe
rred
to
this
com
mitt
ee.*
Th
e in
sure
r doe
s not
m
aint
ain
an a
dequ
ate
prem
ium
def
icie
ncy
rese
rve.
RV
R
Q
OP
VA
C
O
CM
RA
Th
e in
sure
r has
a p
roce
ss in
pl
ace
to re
view
for p
rem
ium
de
ficie
ncie
s on
an a
nnua
l ba
sis i
n ac
cord
ance
with
SS
AP
No.
54.
Inde
pend
ent a
ctua
ries
revi
ew a
nd si
gn o
ff o
n de
ficie
ncy
rese
rve
Rev
iew
the
proc
ess i
n pl
ace
and
verif
y ke
y co
ntro
ls
surro
undi
ng th
e ca
lcul
atio
n of
pre
miu
m d
efic
ienc
y re
serv
es.
Obt
ain
the
actu
aria
l opi
nion
an
d ve
rify
appr
oval
of
defic
ienc
y re
serv
e
Perf
orm
an
anal
ytic
al
revi
ew o
f los
s rat
ios.
If n
eces
sary
, util
ize
the
insu
ranc
e de
partm
ent
actu
ary
or a
n in
depe
nden
t ac
tuar
y to
per
form
a
deta
iled
revi
ew o
r an
inde
pend
ent
© 2017 National Association of Insurance Commissioners 84 of 136
Iden
tifie
d R
isk
Bra
nded
R
isk
Exa
m
Asr
t. C
ritic
al
Ris
k Po
ssib
le C
ontr
ols
Poss
ible
Tes
t of C
ontr
ols
Poss
ible
Det
ail T
ests
calc
ulat
ions
. ca
lcul
atio
ns.
calc
ulat
ion/
estim
ate
of th
e pr
emiu
m d
efic
ienc
y re
serv
es.
© 2017 National Association of Insurance Commissioners 85 of 136
EXHIBIT M UNDERSTANDING THE CORPORATE GOVERNANCE STRUCTURE
The purpose of this exhibit is to assist the examiner in documenting the understanding and assessment of an insurer’s corporate governance policies and practices. As insurers are expected to demonstrate different corporate governance practices in accordance with the nature and extent of their operations, examiners should not expect the practices of each individual insurer to specifically match the guidance provided in this exhibit. Therefore, the focus of an examination team’s considerations in this area should be to determine whether the practices implemented by the insurer are reasonable and effective.
The examination team should first attempt to utilize information obtained through Exhibit B – Examination Planning Questionnaire, Exhibit Y – Examination Interviews and other planning sources (including information provided to the financial analyst and any other information available to the examiner) before requesting any additional information that may be necessary to gain an understanding and perform an assessment of corporate governance. A favorable overall assessment of governance does not, by itself, serve to reduce the scope or extent of examination procedures; rather, specific governance controls need to be assessed for their adequacy of the management of specific risks, in conjunction with other controls designed to manage the same.
In conducting examinations of insurers that are part of a holding company group, the work to gain an understanding and assess corporate governance should focus on the level at which insurance operations are directly overseen (e.g., ultimate parent company level, insurance holding company level, legal entity level, etc.). However, in certain areas, it may be necessary to review governance activities occurring at a level above or below the primary level of focus. Many critical aspects of governance usually occur at the holding company level. The exam team should seek to coordinate the review and assessment of group corporate governance in accordance with the exam coordination framework and lead state approach outlined in Section 1 of this Handbook. Where possible, in a coordinated examination, the lead state’s work on the corporate governance assessment should be utilized to prevent duplication of effort and to leverage examination efficiencies. Additionally, the examiner should utilize the Corporate Governance Annual Disclosure (CGAD), which is required to be filed with the Department of Insurance (DOI) annually in accordance with the Corporate Governance Annual Disclosure Model Act (#305) and Corporate Governance Annual Disclosure Model Regulation (#306). The CGAD provides a narrative description of the insurer’s or insurance group’s corporate governance framework and structure and may enhance examination efficiencies when leveraged.
A. ASSESSING THE BOARD OF DIRECTORS
An assessment of the board of directors may be determined through discussions with the board of directors and through gaining an understanding of the board’s oversight role. The overall assessment should cover the suitability of board members, as well as the suitability, policies and practices of the board as a whole. As a general guideline, the following areas should be considered in the assessment of the board of directors:
1. Are membership criteria and terms for the board of directors sufficient to enable the effective monitoring andoversight of management?
2. Are board members suitable for their respective roles in supporting the overall objectives of the insurer? Anassessment of suitability may include consideration of knowledge, experience, competence and integrity ofmembers.
3. Does the board of directors effectively monitor and oversee management activities?
4. Is the board of directors sufficiently independent from management such that, when necessary, difficult andprobing questions are raised? If not independent, what compensating factors, if any, exist to ensure that, whennecessary, difficult and probing questions will be raised with or considered by management?
© 2017 National Association of Insurance Commissioners 86 of 136
5. What is the frequency and timeliness with which meetings are held with chief financial and/or accountingofficers, internal auditors and external auditors?
6. Is the information provided to the board of directors or committee members sufficient and timely enough to allowmonitoring of management’s objectives and strategies, the entity’s financial position and operating results, andterms of significant agreements?
7. Is there a formal process through which the board of directors or audit committee is apprised of sensitiveinformation, investigations and improper acts (e.g., travel expenses of senior officers, significant litigation,investigations of regulatory agencies, defalcations, embezzlement or misuse of corporate assets, violations ofinsider trading rules, political payments, illegal payments) sufficiently and in a timely manner?
An active and effective board of directors, or underlying committee, provides an important oversight function. In addition, because of management’s ability to override system controls, the board of directors plays an important role in ensuring effective internal control, setting the “tone at the top” and setting other management standards that may affect the risk analysis for the company’s activities. Key components include:
1. Independence from management such that, when necessary, difficult and probing questions are raised. Forexample, consider:
a. Whether the board of directors constructively challenges management’s planned decisions (e.g., strategicinitiatives and major transactions) and probes for explanations of past results (e.g., budget variances).
b. Whether a board of directors that consists solely of an entity’s officers and employees (e.g., a smallcorporation) questions and scrutinizes activities, presents alternative views and takes appropriate action ifnecessary.
c. The leadership structure of the board. Have there been changes during the exam period? Has the companychosen to combine or separate the principal executive officer from the Chairman of the Board? Why orwhy not?
d. If there is a lead independent director. What role does that person play in the leadership of the company?e. If there are any other arrangements intended to ensure that, when necessary, difficult and probing
questions are raised with or considered by management. If so, what are they?
2. The use of board committees, where warranted, by the need for more in-depth or directed attention to particularmatters. For example, consider whether:
a. Board committees exist.b. They are sufficient, in subject matter and membership, to deal with important issues adequately.
3. The knowledge, integrity and experience of directors. For example, consider:a. Whether directors have sufficient knowledge, applicable industry experience and time to serve effectively.b. Whether directors have demonstrated integrity through their business conduct.
i. A review of biographical data and background checks performed on directors may provideevidence of appropriate background, integrity and experience from the company licensingprocess, Insurance Holding Company System Regulatory Act (#440) filings, SEC filings, examplanning questionnaires, additional information gathered as a result of the risk-focusedsurveillance framework, etc.
c. Changes in board composition during the examination period, including those that have broadened theexperience of the directors as a whole.
d. The criteria for identifying board of director candidates.
4. The frequency and timeliness with which meetings are held with chief financial and/or accounting officers,internal auditors and external auditors. For example, consider whether:
a. The audit committee meets privately with the chief accounting officer and internal and external auditorsto discuss the reasonableness of the financial reporting process, system of internal control, significantcomments and recommendations, and management’s performance.
b. The audit committee reviews the scope of activities of the internal and external auditors annually.
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5. The sufficiency and timeliness with which information is provided to the board of directors or committeemembers, to allow monitoring of management’s objectives and strategies, the entity’s financial position andoperating results, and terms of significant agreements. For example, consider whether:
a. The board of directors regularly receives key financial information, such as company financial statementsand related analysis, the financial results of significant affiliates and business partners and changes tosignificant contracts.
b. The board of directors regularly receives key information on strategic risk areas, such as investmentstrategies and results, reinsurance strategies and results, major marketing initiatives, results ofnegotiations and information on reasonably foreseeable prospective risks.
c. The board of directors regularly receives key information on the actuarial function of the organization,such as reports and presentations on the adequacy of reserve provisions, the effectiveness of internalcontrols, and the prospective solvency position of the insurer.
d. Directors believe they receive the proper information in a timely and effective manner.
6. The oversight in determining the compensation of executive officers and head of internal audit, and theappointment and termination of those individuals. Smaller or non-public companies are less likely to have thetypes of compensation policies and practices of larger, publicly traded companies, so the examination should takethat fact into consideration. Some examples to consider may include:
a. Whether the compensation committee, or board, approves executives’ incentive compensation plans.b. The general design philosophy of compensation and incentive programs.c. Whether the board or compensation committee considers how to eliminate, reduce, or manage material
adverse risks to the company that may arise from compensation practices.d. Whether there have been any changes in executive compensation plans during the exam period. Review
applicable SEC filings and the NAIC Supplemental Compensation Exhibit.e. The nature and extent of services provided by compensation consultants during the exam period. Are all
services approved by the board of directors or compensation committee? How are independentcompensation consultants selected and to whom do they report?
f. How are management compensation programs reviewed for effectiveness?g. What is the process by which changes in compensation programs are approved?h. Does the compensation policy induce excessive or inappropriate risk-taking?i. Is the compensation policy in line with the identified risk appetite and long-term interests of the insurer
with proper regard to the interests of the stakeholders?
7. The board’s role in establishing the appropriate “tone at the top.” For example, consider whether:a. The board and audit committee are involved sufficiently in evaluating the effectiveness of the “tone at the
top.”b. The board of directors takes steps to ensure an appropriate tone.c. The board of directors specifically addresses management’s adherence to the code of conduct.d. The board of directors has developed an adequate conflict of interest policy for officers, management and
key personnel.
8. The actions that the board of directors or committee takes as a result of its findings, including specialinvestigations, as needed. For example, consider whether:
a. The board of directors has issued directives to management detailing specific actions to be taken.b. The board of directors oversees and follows up as needed.
B. UNDERSTANDING THE ORGANIZATIONAL STRUCTURE
The organizational structure should not be so simple that it cannot adequately monitor the enterprise’s activities, nor so complex that it inhibits the necessary flow of information. Executives should fully understand their control responsibilities and possess the requisite experience and levels of knowledge commensurate with their positions. Key components include:
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1. The appropriateness of the entity’s organizational structure, and its ability to provide the necessary informationflow to manage its activities. For example, consider whether:
a. The organizational structure is appropriately centralized or decentralized, given the nature of the entity’soperations.
b. The structure facilitates the flow of information upstream, downstream and across all business activities.c. Checks and balances exist and are working as intended, allowing for flexibility and responsiveness in the
timeliness of decision-making, transparency and concentration of power within the organization.d. For insurance groups, consider if group-wide governance policies address risks and objectives at the legal
entity level and at the group level.
2. The adequacy of the definition of key managers’ responsibilities, and their understanding of these responsibilities.For example, consider whether:
a. Responsibilities and expectations for the entity’s business activities are communicated clearly to theexecutives in charge of those activities.
3. The adequacy of knowledge and experience of key managers in light of responsibilities. For example, considerwhether:
a. The executives in charge have the required knowledge, experience and training to perform their duties.b. Key managers understand their responsibilities regarding the insurer’s risk policies/appetites and internal
controls.
4. The appropriateness of reporting relationships. For example, consider whether:a. Established reporting relationships—formal or informal, direct or indirect—are effective and provide
managers with information appropriate to their responsibilities and authority.b. The management of the business activities has access to senior operating executives through clear
communication channels. The internal audit function reports directly to the board of directors or to theaudit committee.
5. The extent to which modifications to the organizational structure and business strategy are made or planned inlight of changing conditions. For example, consider whether:
a. Management periodically evaluates the entity’s organizational structure in light of changes in the businessor industry.
b. For large insurance groups with significant affiliate relationships and interconnectivity (includingsystemically important financial institutions as designated by the Financial Stability Oversight Council) ,the board and management is involved in developing and reviewing resolution/contingency plans to beimplemented in the event of company failure.
6. Sufficiency in the number of employees, particularly in management and supervisory capacities. For example,consider whether:
a. Managers and supervisors have sufficient time to carry out their responsibilities effectively.b. Managers and supervisors work excessive overtime and/or are fulfilling the responsibilities of more than
one employee.c. The insurer has succession plans established to replace/retain key employees.
7. The extent of accountability maintained for material activities or functions outsourced to an external party. Forexample, consider whether:
a. Outsourced activities and functions are subject to periodic reviews by the insurer or an independent thirdparty.
b. Outsourced activities and functions are subject to the same degree of accountability as non-outsourcedactivities and functions.
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C. UNDERSTANDING THE ASSIGNMENT OF AUTHORITY AND RESPONSIBILITY
The assignment of responsibility, delegation of authority and establishment of related policies provide a basis for accountability and control, and set forth individuals’ respective roles. Key components include:
1. The assignment of responsibility and delegation of authority to deal with organizational goals and objectives,operating functions and regulatory requirements, including responsibility for information systems andauthorizations for changes. For example, consider whether:
a. Authority and responsibility are assigned to employees throughout the entity.b. Responsibility for decisions is related to assignment of authority and responsibility.c. Proper information is considered in determining the level of authority and scope of responsibility
assigned to an individual.
2. The appropriateness of control-related standards and procedures, including employee job descriptions. Forexample, consider whether:
a. Job descriptions, for at least management and supervisory personnel, exist.b. The job descriptions, or other standards and procedures, contain specific references to control-related
responsibilities.
3. The appropriateness of staff size, particularly with respect to information systems, actuarial and accountingfunctions, with the requisite skill levels relative to the size of the entity and nature and complexity of activitiesand systems. For example, consider whether:
a. The entity has an adequate workforce—in numbers and experience—to carry out its mission.
4. The appropriateness of delegated authority in relation to assigned responsibilities. For example, consider whether:a. There is an appropriate balance between authority needed to “get the job done” and the involvement of
senior personnel where needed.b. Employees at the appropriate level are empowered to correct problems or implement improvements, and
empowerment is accompanied by appropriate levels of competence and clear boundaries of authority.
D. ASSESSING MANAGEMENT
A quality assessment of management may be determined through discussions and observations of the governance processes. This assessment should cover both the suitability of individual members of management as well as the suitability, policies and practices of management as a whole. As a general guideline, the following areas should be included in the assessment of management suitability.
1. Do key members of management appear to be suitable for their respective roles? Do they appear to possess thenecessary competence and integrity for their positions?
2. How long has key management been with the company in their current positions, and what specific industryexperience do they have?
3. Has there been significant turnover in management?
4. Have members of management ever been officers, directors, trustees, key employees or controlling stockholdersof an insurance company that, while they occupied any such position or served in any such capacity with respectto it:
a. Became insolvent or was placed in conservation?b. Was placed into supervision or rehabilitation?c. Was enjoined from, or ordered to cease and desist from, violating any securities or insurance law or
regulation?d. Suffered the suspension or revocation of its certificate of authority or license to do business in any state?
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In addition to the assessment of management suitability, examiners should make an assessment of management’s performance. The following areas should be considered when assessing management performance.
1. Does management periodically review information to adequately assess the impact of changes in competition,technology, regulation, environment and general economic trends that may impact the company’s business?
2. Does management have adequate financial and operating information to identify trends or variations from budgetsthat may impact the statutory financial statements?
3. Does management effectively analyze and investigate financial and operating information and trends such thatsignificant adverse trends or misstatements in the annual financial statement could reasonably be expected to beidentified and rectified on a timely basis?
4. Do management, supervisors and agents have appropriate knowledge and experience to capably and effectivelyadminister management’s policies and procedures?
5. Does the company maintain effective controls to ensure that potential short-term liquidity problems, long-term capital needs and other significant fund management variations/needs are identified and rectified on a timelybasis?
6. Do adequate physical safeguards exist over company assets, and are all officers and their employees appropriatelybonded? (See Exhibit R – Suggested Minimum Amounts of Fidelity Insurance for assistance.)
7. Does management have a positive attitude toward internal controls (including controls over the informationsystems)?
8. Does management have adequate financial and operating information to identify, on a timely basis, potentialliabilities, commitments and/or contingencies that may require recording and/or disclosure in the annual financialstatement?
9. Does management regularly obtain and review key information on strategic risks, including investment strategiesand results, reserving methodologies and results, reinsurance strategies and results, and information on reasonablyforeseeable prospective risks?
As an expansion of the sample evaluative guidance above, the philosophy and operating style of management will normally have a pervasive effect on an entity. These are intangibles, but one can look for positive and negative signs. Key components include:
1. The nature of business risks accepted (e.g., whether management often enters into particularly high-risk venturesor is extremely conservative in accepting risks). For example, consider whether:
a. Management moves carefully, proceeding only after carefully analyzing the risks and potential benefits ofa venture.
2. Personnel turnover in key functions (e.g., operating, actuarial, accounting, information systems, internal audit).For example, consider whether:
a. There has been excessive turnover of management and supervisory personnel.b. Key personnel have quit unexpectedly or on short notice.c. There is a pattern to turnover (e.g., inability to retain key financial or internal audit executives) that may
be an indicator of the emphasis that management places on control.
3. Management’s attitude toward the information systems and accounting functions, and concerns about thereliability of financial reporting and safeguarding of assets. For example, consider whether:
a. The accounting function is viewed as a necessary group of checks and balances, or as a vehicle forexercising control over the entity’s various activities.
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b. The selection of accounting principles used in financial statements always results in the highest reportedincome.
c. Operating unit accounting personnel also have the responsibility to report to or communicate with centralfinancial officers.
d. Valuable assets, including intellectual assets and information, are protected from unauthorized access oruse.
4. Frequency of interaction between senior management and operating management, particularly when operatingfrom geographically removed locations. For example, consider whether:
a. Senior managers frequently visit subsidiary or divisional operations.b. Group or divisional management meetings are held frequently.
5. Attitudes and actions toward financial reporting, including disputes over the application of accounting treatments(e.g., selection of conservative vs. liberal accounting policies; whether accounting principles have beenmisapplied, important financial information not disclosed, or records manipulated or falsified). For example,consider whether:
a. Management avoids obsessive focus on short-term reported results.b. Personnel do not submit inappropriate reports to meet targets.c. Managers do not ignore signs of inappropriate practices.d. Estimates do not stretch facts to the edge of reasonableness and beyond.
Management should provide effective oversight of the insurer’s actuarial function in evaluating and providing advice to the insurer in respect to technical provisions, premium, and pricing, and reserving activities, and compliance with related statutory and regulatory requirements. While various components of an actuarial function can be provided internally or outsourced to an external third party, the following elements should be considered in understanding and assessing the insurer’s governance practices in this area:
1. Are individuals within the insurer’s actuarial function suitable for their respective roles? Do they possess thenecessary competence and integrity for their positions?
a. Does the insurer’s appointed actuary maintain current actuarial credentials with an appropriate professional organization (e.g., FCAS, MAAA, etc.)?
b. Does the appointed actuary have experience in the lines of the business written by the company?c. Do others within the company’s actuarial function have the appropriate knowledge, experience and
background to function in the roles assigned to them?
2. Does the insurer’s actuarial function provide advice on actuarial matters to management as appropriate based onthe size and complexity of the entity? Key components include:
a. The insurer’s actuarial and financial risks.b. The insurer’s current and prospective solvency position.c. Risk-assessment and risk-management policies and controls relevant to actuarial matters or the financial
condition of the insurer.d. Distribution of policy dividend or other benefits.e. Underwriting policies.f. Reinsurance arrangements.g. Product development and design, including the terms and conditions of insurance contracts.h. The sufficiency and quality of data used in the calculation of technical provisions.i. Risk modeling and use of internal models in risk management.
3. Does the insurer have appropriate segregation of duties between its actuarial function and executive managementto ensure that: that recorded reserves reflect an appropriate actuarial estimate?
a. Recorded reserves reflect an appropriate actuarial estimate (P&C and Health)?a.b. The Does the company books the actuary’s best estimate each year (P&C and Health)?c. If the company’s recorded reserves differ from the actuary’s best estimate, is the rationale for such
deviation is appropriately documented and presented to the board of directors (P&C and Health)?
Comment [BH1]: Per Joint IP Comment Letter, revised b. and c. to reference only P&C.
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d. The company’s appointed actuary has submitted a report to the Board of Directors on reserve adequacy(All Lines)?
E. REVIEWING THE RISK MANAGEMENT FUNCTION
A review of the entity’s risk management function should be conducted through discussions with senior management and the board of directors and through gaining an understanding of the risk management function including inspection of relevant risk management documentation. For companies subject to the Own Risk and Solvency Assessment (ORSA), a review of the ORSA summary report—including completion of the ORSA Documentation Template in Section 1, Part X of this Handbook—may be used in place of completing this section. For companies that do not submit an ORSA summary report, the ORSA guidance contained in this Handbook may still be a helpful tool for the examiner to consider in assessing the maturity of an insurer’s risk-management framework, which should include an assessment of each of five key principles. While each of the key principles can be applicable to all insurers, it is important to consider variations in size and complexity and alter expectations appropriately. As a general guideline, the following areas should be considered in conducting a review of the risk-management function:
1. Risk Culture and Governancea. What kind of risk-management culture is demonstrated throughout the organization? What does the
culture indicate regarding the importance of risk management to the organization?
2. Risk Identification and Prioritizationa. How are existing risks identified, monitored, evaluated and responded to? Does risk assessment take
probability, potential impact and time duration into account?b. How are emerging and/or prospective risks identified, monitored, evaluated and responded to?
3. Risk Appetite, Tolerances and Limitsa. How are risk tolerances, appetites and limits defined and communicated throughout the organization?
Does the insurer maintain appropriate policies outlining specific obligations of employees in dealing withrisk?
b. How does the organization use the risk information it gathers to determine its capital needs?
4. Risk Management and Controlsa. How are responsibilities for risk-management functions delegated and monitored within the organization?
5. Risk Reporting and Communicationa. What is the involvement of the board of directors in the risk-management function of the organization?
An effective risk-management function is essential in providing effective corporate governance over financial solvency. During the latter phases of the risk-focused examination, the examiner will document a review of the entity’s individual risk-management functions within the system. However, during a review of the entity’s corporate governance, the examiner should document the review of the entity’s risk-management function as a whole, as well as its place and importance in the entity’s corporate governance structure. For ORSA companies, the knowledge gained in performing a review and assessment of enterprise risk management (ERM) may also be utilized to gain efficiencies, if appropriate, in accordance with the insurer’s assessed maturity level, in the latter phases of the risk-focused examination as described in Section 1, Part X of this Handbook.
F. DOCUMENTATION
The examination team should document its understanding and assessment of the entity’s governance, as well as its assessment on the related impact on the examination. This summary should include a description of any unique examination procedures, including special inquiries that are considered necessary to any significant risks identified as a result of the assessment.
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The Risk Assessment Matrix, as the central documentation tool, should be utilized for the identification and assessment of individual solvency risks requiring review through the risk assessment process. However, documentation on the understanding and assessment of corporate governance is at the discretion of the examiner and would not typically be presented in a Risk Assessment Matrix. For most companies, a memorandum and/or corresponding documentation in the electronic workpapers addressing the items presented in this exhibit should provide sufficient documentation. For example, the documentation could summarize the attributes and techniques supporting the examiner’s overall evaluation, any resulting examination scope implications, and the approach used to validate the more significant attributes and techniques. For smaller companies, documentation of the examination’s consideration of corporate governance may be provided in the appropriate section of Exhibit I – Examination Planning Memorandum.
Specific findings or concerns related to an insurer’s corporate governance practices should be accumulated for inclusion in a management letter (or similar document) to provide feedback and recommendations to the insurer. In addition, it may be necessary for the examination to document information on the corporate governance assessment for communication back to the financial analyst through the use of Exhibit AA – Summary Review Memorandum (or similar document).
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EXHIBIT Y EXAMINATION INTERVIEWS
--------------------------------------------Detail Eliminated to Conserve Space-------------------------------------------- Sample Interview Questions for Board or Committee Members
Experience and Background • How has your professional experience and background prepared you to serve on the board of directors for this
company?
Duties and Responsibilities • How often does the board/committee meet? Why is that sufficient?• Briefly describe your duties and responsibilities, including what types of company information you monitor on a
continuous basis.• How does management establish objectives and how does the board of directors monitor achievement of those
objectives?• What role does the board of directors play in determining executive compensation?• What areas are discussed and what type of decisions are made by the board/committee?
- How does the board ensure that sufficient information is received to make informed decisions on behalf of thecompany?
• Does the board/committee review related-party transactions?• What role does the board/committee play in overseeing the actuarial function as well as associated internal
controls?
Reporting Structure • Describe the reporting structure of the company, including who reports to the board/committee.• Describe the interaction the board of directors has with the internal/external auditors, shareholders and senior
management.
Ethics • Does the company have a code of conduct/ethics in place? Is it enforced? Approved?• Explain the commitment to ethics by the board/committee and explain how the board/committee conveys that
commitment to employees.- How does the board obtain an understanding of the “tone” throughout the organization?
• How does the company compare to others, in terms of its position on ethics?• Do you have any knowledge or suspicion of fraud within the company?
Risk Areas • How does the board identify and monitor key risks faced by the company?
- What are the key risks the board has identified?- What are the key prospective risks the company faces?
• Does the board review any type of stress testing?
Risk Mitigation Strategies (Internal Controls) • How often does the board receive reports from management on the internal controls of the company?
- What information is reported?
Corporate Strategy • How is the board involved in significant corporate strategy decisions?• Does the board approve an annual business plan?
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• How does the board gain comfort with total exposures and the risk/return trade-offs?• Where is the company headed strategically? What type of plan is in place to implement this strategy? Has it been
approved? How is it being monitored?• Is the corporate strategy effectively communicated between senior management and the rest of the company?• Explain any strengths or weaknesses of the company, as well as opportunities or threats, the company is facing
and how the company is responding to each.• If part of a holding company:
- How does the holding company contribute to the company’s strategy?• How might the holding company be impacted by the company’s strategy?
Other Topics • Explain any significant turnover in senior management or on the board/committee.• What type of succession planning does the company have in place?• Based on the current economic climate, are there any other competencies/skills that would be useful to the board?• Is the current size of the board sufficient to fulfill necessary oversight responsibilities?• How does the company monitor and assess financing needs, as well as access to capital?• How does the company monitor, assess and respond to information security risks (including those related to
cybersecurity threats)?
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Sample Interview Questions for the Chief Executive Officer
Experience and Background • How has your professional experience and background prepared you to serve as the Chief Executive Officer for
this company?
Duties and Responsibilities • Briefly describe your duties and responsibilities.• How does management establish objectives and how is the achievement of those objectives monitored?• What role do you play in the hiring of senior management and determining executive compensation?
- How is your compensation determined?• How do you support the operations and administration of the board?• Briefly describe your oversight responsibilities regarding the company’s actuarial function?
Reporting Structure • Describe the reporting structure of the company, including to whom you report, as well as those reporting to you.• Explain the function and reporting structure of your senior management team.
- How often are you in contact with them?• Describe your interaction with the board of directors.
Ethics • Does the company have a code of conduct/ethics in place? Is it enforced? Approved?• Explain management’s commitment to ethics and explain how management conveys that commitment to
employees.- How does management obtain an understanding of the “tone” throughout the organization?
• When establishing ethics, does the company evaluate what other companies have implemented? If yes, how doesthe company compare?
• Do you have any knowledge or suspicion of fraud within the company?
Risk Areas • How are key risks faced by the company identified and monitored?
- What are the key prospective risks the company faces?- How are these risks communicated to senior management and throughout the company?
• Describe any stress testing performed by the company.
Risk Mitigation Strategies (Internal Controls) • What is the formal procedure for reporting on risk management to senior management and the board?• Explain your commitment to the internal control structure.• What is your company’s plan for operating in crisis/disaster – business continuity?• From a strategic perspective, how are risks addressed across all business units and entities?
Corporate Strategy • Where is the company headed strategically? What type of plan is in place to implement this strategy? Has it been
approved? How is it being monitored?• What are your plans for retaining and growing business?• Explain what types of tools and/or reports you utilize to make key business decisions.• Explain any strengths or weaknesses of the company, as well as opportunities or threats, the company is facing
and how the company is responding to each.• What key measures do you assess to evaluate the company’s performance and competitive position?• If part of a holding company:
- How does the holding company contribute to the company’s strategy?
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- How might the holding company be impacted by the company’s strategy?• How often do you discuss corporate strategy with your direct reports?
Other Topics • Explain any significant turnover in senior management and/or on the board/committee.• What type of succession planning does the company have in place?• How does the company monitor and assess financing needs, as well as access to capital?• How does the company monitor, assess and respond to information security risks (including those related to
cybersecurity threats)?
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Sample Interview Questions for Chief Risk Officer
Experience and Background • How has your professional experience and background prepared you to serve as the Chief Risk Officer for this
company?
Duties and Responsibilities • Briefly describe your duties and responsibilities.• How does your role/function relate to, or how is it integrated with Sarbanes-Oxley Act and/or NAIC Annual
Financial Reporting Model Regulation (Model Audit Rule) processes, internal audit and/or other departments?• Describe the major projects taking place and how you divide your departments time (i.e., what are the areas of
focus)?• Do you publish reports/findings?
- To whom are they distributed and how often are they distributed?
Reporting Structure • Describe the reporting structure of the company, including to whom you report, as well as who reports to you.• Is there a board-level committee or other group that you report to?
- Is that group independent from your area of management?- What is their role and how do you interact with them?
• Describe those who have been involved (e.g., your team, internal audit, operational areas, consultants, externalauditors, etc.) and their roles in the Model Audit Rule compliance process.
• Are there any financial ties to company profits within your compensation package?
Ethics • Does the company have a code of conduct/ethics in place? Is it enforced? Approved?• Explain management’s commitment to ethics and explain how management conveys that commitment to
employees.• When establishing ethics, does the company evaluate what other companies have implemented? If yes, how does
the company compare?• Do you have any knowledge or suspicion of fraud within the company?
Risk Areas • How are key risks faced by the company identified and monitored?
- What are the key prospective risks the company faces?- How are these risks communicated to senior management and throughout the company?
• Do you monitor risks relevant to specific components or divisions within the entity?• What key risks do you monitor in your position?
- What reports or other means do you utilize to evaluate the risks?• Does your company consider the impact of climate change risks as part of its overall risk management practices?
- If so, what risks have you identified related to the impact of climate change risks?- If so, what is done to analyze and mitigate each of those risks? Is this done independently or as part of
weather-related risks in general?• Are you involved in the company’s process for establishing and monitoring reserving risks?
- If so, please describe the company’s process to establish and monitor reserving risks.
Risk Mitigation Strategies (Internal Controls) • What is the formal procedure for reporting on risk management to senior management and the board?• What is the company’s plan for operating in crisis/disaster – business continuity?• From a strategic perspective, how are risks addressed across all business units and entities?• How has the Model Audit Rule affected the company, if at all? How has it affected the holding company and/or
the internal audit department?
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• Does the organization structure allow for proper segregation of duties?• What internal controls exist to ensure adherence to company policies and procedures, as well as regulatory
procedures?• What procedures are in place to diversify risks?• What strategies are used for managing the most significant risks facing the company?• Are executive officers and management team members required to disclose personal business or family
relationships with organizations in which your company invests?• Describe any compliance-related training conducted by the organization.
- Is the training required?• Are quality reviews performed by internal auditors or other means within the company?• How are goals set and performance evaluated?
- How is that linked to responsibility and accountability?- How does all of that impact the divisional level?
• What is the nature and extent of incentive compensation throughout the company?- How are risks related to compensation identified, monitored and mitigated?
Corporate Strategy • Explain strengths or weaknesses of the company, as well as opportunities and threats the company is facing, and
how the company is responding to each.
Other Topics • Do you have an organization-wide integrated risk management framework?• Explain the company’s involvement in transactions that include derivative risks.• Is the company subject to any derivative risks that are not disclosed within Schedule DB of the Annual
Statement? If so, please explain.
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Sample Interview Questions for the Chief Actuary
Experience and Background • How has your professional experience and background prepared you to be the Chief Actuary for this company?
Duties and Responsibilities • Briefly describe your duties and responsibilities.• How does management establish objectives, and how is the achievement of those objectives monitored?• How is your performance evaluated? Is it based on the performance of the company?
Reporting Structure • Describe the reporting structure of the actuarial function, including to whom you report, as well as those reporting
to you.• Is there a reserving committee?
- How is it organized and who are its members?- How are differences resolved?
• Describe your interaction with the CFO/CEO/BOD.- Do you provide them with any specific reports?
• Do the board/audit committee members demonstrate an understanding of the variability inherent in the reserves?• How does the board/committee oversee the application of Principle Based Reserving (if applicable)?
Ethics • Does the company have a code of conduct/ethics in place? Is it enforced? Approved?• Explain management’s commitment to ethics and explain how that commitment is conveyed to employees.• Do you have any knowledge or suspicion of fraud within the company?
Risk Areas • How are key legal and regulatory risks faced by the company identified and monitored?
- What are the key prospective risks the company faces?- How are these risks communicated to senior management and throughout the company?
• Have there been changes in the appointed actuary in recent years and, if so, how often have such changesoccurred and why?
• What is the current reinsurance program? Describe any changes over the past five years.• Describe the company’s process to establish Principle Based Reserves.
o Does the company have credible experience or experience studies to substantiate the model assumptions?o Does the company use a vendor supplied or internally developed Cash Flow Model?
Risk Mitigation Strategies (Internal Controls) • What is the formal procedure for reporting on risk management to senior management and the board.• What controls are in place to ensure reserving guidelines are followed?• Who determines which reserves will be booked in the financial statements quarterly and/or annually?
- Does the company book to the actuary’s point estimate, or is there a monitored gap?• How often are full reserve analyses performed?• Does the company book to the actuary’s point estimate, or is there a monitored gap?• Is the actuarial opinion signed by a company actuary or a consultant?• Does the company use commercial software or “homegrown” spreadsheets? What controls are in place to check
for errors?• How are pricing and underwriting monitoring integrated into the reserving process?• Is there a peer review of the reserving actuary’s work? If so, who performs it?• How much reliance does the appointed actuary place on the work of others?• Describe the controls in place over the PBR processes.
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• Has the company instituted any new controls as a result of the implementation of Principle Based Reserving(if applicable)?
• Describe the modeling controls in place supporting the Principle Based Reserving processes (e.g. modelvalidation, changes in modeling assumptions, etc.).
•
Corporate Strategy • Give a general description of the company’s reserving philosophy.• Explain what types of tools or reports you utilize to evaluate actuarial decisions.
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Other Topics • What is the quality of the actuarial report, with respect to completeness and clarity of documentation?• What actions have been taken to apply PBR methodologiessteps have been, or will be, taken to prepare for the
implementation of principle-based reserving (PBR)? (Life Insurers Only)- How are system capabilities considered in preparation for PBR implementation?- What system changes were made to apply PBR?- How are staffing needs, appropriate expertise and availability of effective training evaluated in preparation for
PBR implementation?- What changes to staffing and training were made to apply PBR?- Discuss management’s commitment to successful implementation of PBR.-
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To: Judy Weaver, Chair of the Financial Analysis Handbook (E) Working Group and
Susan Bernard, Chair of the Financial Examiners Handbook (E) Technical Group
From: James Kennedy, Chair of the Receivership Model Law (E) Working Group
Date: May 16, 2017
Re: Receivership Provisions in Management, Service and Cost-sharing Agreements
The Receivership Model Law (E) Working Group (RMLWG) has identified that because of the increasing occurrence of holding company relationships, non-regulated entities that are operationally related to insurers frequently present a challenge when the insurer is in receivership. In many cases the issues may be resolved if certain language addressing receivership of the insurer is included in the affiliated agreements. Additionally, how the U.S. receivership regime handles nonregulated entities in receivership was an issue identified by the International Monetary Fund (IMF) during the Financial Sector Assessment Program (FSAP) review.
The NAIC adopted revisions to the Insurance Holding Company Model Regulation and Reporting Forms (Model #450) in 2010 to require specific language in management, service and cost-sharing agreements specific to when an insurer is placed into receivership, as follows. At this time, most states have adopted the following revision to their regulation, with few exceptions.
Section 19. Transactions Subject to Prior Notice - Notice Filing B. Agreements for cost sharing services and management services shall at a minimum and as applicable:
(11) Specify that, if the insurer is placed in receivership or seized by the commissioner under the StateReceivership 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, andshall be turned over to the receiver or commissioner immediately upon the receiver or thecommissioner’s request;
(12) Specify that the affiliate has no automatic right to terminate the agreement if the insurer is placed inreceivership pursuant to the State Receivership Act; and
(13) Specify that the affiliate will continue to maintain any systems, programs, or other infrastructurenotwithstanding a seizure by the commissioner under the State Receivership Act, and will make themavailable to the receiver, for so long as the affiliate continues to receive timely payment for servicesrendered?
The RMLWG requests that the Financial Analysis Handbook (E) Working Group and the Financial Examiners Handbook (E) Technical Group include in the Financial Analysis Handbook and the Financial Condition
Examiners Handbook instructions for analysts and examiners to ensure that agreements under review include the above language in accordance with state law. Suggested revisions are enclosed as Attachments A and B.
If there are any questions regarding this referral, please feel free to contact the Chair or NAIC staff support (Jane Koenigsman) to discuss.
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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 ReviewB. MaterialityC. Examination SamplingD. Business ContinuityE. Using the Work of a SpecialistF. Outsourcing of Critical FunctionsG. Use of Independent Contractors on Multi-State ExaminationsH. Comments and Grievance Procedures Regarding Compliance with Examination Standards
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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 16 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.
Types of Third-Party AdministratorsService Providers
Insurance companies have been known to outsource a wide range of business activities including sales & marketing, underwriting & policy service, premium billing & collections, claims handling, investment management, reinsurance and information technology functions. There are a number of different types of entities that accept outsourced business from insurers including the following:
• Managing General Agent – Person who acts as an agent for such insurer whether known as a managing generalagent, manager or other similar term, who, with or without the authority, either separately or together withaffiliates, produces, directly or indirectly, and underwrites an amount of gross direct written premium equal to ormore than five percent (5%) of the policyholder surplus as reported in the last annual statement of the insurer inany one quarter or year together with the following activity related to the business produced adjusts or paysclaims in excess of $10,000 per claim or negotiates reinsurance on behalf of the insurer.
• Producer – An insurance broker or brokers or any other person, firm, association or corporation, when, for anycompensation, commission or other thing of value, the person, firm, association or corporation acts or aids in any
Comment [BH1]: Per Joint IP Comment Letter
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manner in soliciting, negotiating or procuring the making of an insurance contract on behalf of an insured other than the person, firm, association or corporation.
• Controlling Producer – A producer who, directly or indirectly, controls an insurer.
• Custodian – A national bank, state bank, trust company or broker/dealer which participates in a clearingcorporation.
• Investment Adviser – A person or firm that, for compensation, is engaged in the act of providing advice, makingrecommendations, issuing reports or furnishing analyses on securities. In addition to providing investment advice,some investment advisers also manage investment portfolios or segments of portfolios. Other common names forinvestment advisers include asset managers, investment managers and portfolio managers.
• Affiliated Service Provider – An affiliated person or firm to which the insurer outsources ongoing businessservices, including cost sharing services and management services.
• Other Third-Party Administrators – Other third-party entities that perform business functions of the insurer.
Additional information on each of the above types of entities has been provided below to assist examiners in reviewing business activities outsourced.
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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;
3. Require timely settlement, not less frequently than on a quarterly basis, and compliance with the requirements inthe 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 theinsurer 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 relatedto the agreement;
7. Specify that all books and records of the insurer are and remain the property of the insurer and are subject tocontrol of the insurer;
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8. State that all funds and invested assets of the insurer are the exclusive property of the insurer, held for the benefitof 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 thepart of the affiliate providing the services;
11. Specify that, if the insurer is placed in receivership or seized by the commissioner under the State ReceivershipAct:
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 shallbe 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 receivershippursuant to the State Receivership Act; and
13. Specify that the affiliate will continue to maintain any systems, programs, or other infrastructure notwithstandinga 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.
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Attachment TwoComment Letters:
• American Academy of Actuaries• Fontaine Consulting, LLC• Joint Interested Parties
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August 15, 2017
Ms. Susan Bernard Chair, Financial Examiners Handbook (E) Technical Group National Association of Insurance Commissioners
Dear Ms. Bernard,
The Principle-Based Reserving Review Procedures Work Group of the American Academy of Actuaries1 appreciates the opportunity to provide comments on the June 29, 2017, exposure of proposed changes to the Financial Condition Examiners Handbook.
In general, the work group believes the exposure draft represents a significant improvement over the current framework by including a new section for Life Insurance Reserves Review and additional considerations in the Corporate Governance and Life Exam Repository for Principle-Based Reserve (PBR) Revisions. The work group does, however, recommend some substantive changes detailed below.
Recommended Changes to the Exposure
1.) Section III.E.1.6 and III.E.6
The work group suggests the following edits to clarify the description of which business requires actuarial involvement because “significant uncertainty in the appropriateness and/or amount of actuarial reserves” may apply to health insurers, credit insurers and, in some cases, term life insurers not subject to PBR.
Section III.E.1 Decision to Use the Work of a Specialist
In certain situations, an examination requires the use of a specialist to effectively examine an insurer. These situations include the following:
a. Life and Health company examinations where the company has a substantial amountof interest-sensitive business, has a substantial amount of the actuarial reserves thatentail significant judgment, or the company has a substantial amount of businesssubject to PBR calculations or PBR exclusion tests require the involvement of acredentialed actuary to perform an evaluation of reserves. (emphasis added)
1 The American Academy of Actuaries is a 19,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.
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b. Property & Casualty company examinations where the company has a substantialamount of long-tail lines of business require the involvement of a credentialedactuary to perform an evaluation of loss reserves.
Section III.E.6: Actuarial Specialist
As previously noted, the involvement of a credentialed actuary is required on all examinations of property/casualty insurers with a substantial amount of long-tail lines of business and life and health insurers with a substantial amount of interest-sensitive business, a substantial amount of actuarial reserves that entail significant judgment, or when the company has a substantial amount of business subject to principle-based reserve (PBR) calculations or subject to PBR exclusion tests… (emphasis added)
2.) Section VI.B. Second paragraph
We suggest changing “The mortality rate assumptions are substantially higher…” to “The mortality assumptions are higher…” because when X-factors are applied or super-preferred underwriting classes are used as permitted, the mortality assumptions may be minimally higher than underwriting experience.
3.) Section VI.B. Third paragraph
We suggest significant changes to the third paragraph to more accurately describe the commonly used formulaic reserving methods for statutory life insurance reserves. Our recommended wording for the revision of paragraph is provided below for your consideration:
There are three general valuation methods under a formula based valuation methodology commonly used to value statutory life reserves. Each of these methods assigns reserves equal to the present value of future benefits less the present value of future premiums. The methods differ in how expenses are recognized. The net level premium method (NLP) uses net premiums and does not recognize any expenses. Therefore, this method often results in the most conservative, or highest, life reserve valuation of the three methods. The full preliminary term method (FPT) recognizes for an expense allowance in the first year. Under FPT the reserves in the first year are computed as if the policy were a one-year term insurance policy. After the first year, reserves are computed using the NLP method with the policy assumed to be issued at the beginning of its second year. The net premiums after the first year under the FPT are higher than the NLP premiums. The Commissioners Reserve Valuation Method (CRVM) is a modified blend of the full preliminary term and net level premium methods. It allows the first year’s net premium as an expense allowance and then spreads that expense allowance over the policy’s coverage period or 19 years, whichever is less. This method allows for a lower life reserve valuation than the net level premium method in the earlier years of the policy term. The CRVM results in a reserve valuation which grades from $0 in the first year to the NLP over a period of up to 20 years.
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4.) Section VI.B. (New Section) Credit Life Reserves
We suggest adding a section on “Credit Life Reserves” between sections 3 (Industrial Life Reserves) and 4 (Life Reserves Related to Riders) on page 12. Credit insurance is a distinct line of business in the annual statement and has a separate section in the Valuation Manual. Its inclusion is recommended for completeness.
The following language is offered for your consideration:
Credit life insurance policies are designed to discharge a debt upon the debtor’s death. They are usually funded as a single premium. Reserves requirements vary among the states. Key considerations include claims reserves and policy reserves based on some state-specified combination of mortality reserves, unearned premium reserves, and potential refunds. Credit Life and Disability Reserves are addressed in Valuation Manual (VM)-26.
5.) Section VI-C
We suggest the second paragraph be moved to follow the third paragraph for clarity. The reserve liability is described in the paragraph that starts with “The principle-based valuation methodology…” The stochastic reserve (SR) is one of the components used to determine the reserve liability under PBR. We recommend changing the first sentence of the paragraph that describes the SR from “The reserve liability…” to “The stochastic reserve…”
6.) Section VI-E. Actuarial Oversight and Internal Controls
We suggest the technical group consider including the responsibilities of the qualified actuaries as described in VM-G. The Valuation Manual has recommendations for the board and management, and includes governance requirements for the qualified actuaries. The qualified actuaries’ adherence to these requirements should be included in the governance portion of any examination.
*****
Should you have questions regarding these suggestions, please contact Ian Trepanier, the Academy’s life policy analyst, at [email protected].
Sincerely,
Randall Stevenson, MAAA, ASA, MSc Chairperson, Principle-Based Reserving Review Procedures Work Group American Academy of Actuaries
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Henning, Bailey
From:Sent:To:Subject:
Alice Fontaine Tuesday, August 15, 2017 12:25 PMHenning, BaileyFinancial Examiners Handbook (E) Technical Group - Exposure Draft comment
Baily,
I would like to offer the following suggested language changes for consideration to some of the exposed items in the Repository ‐ Reserves/Claims Handling changes:
Several examples (starting on p.21) use the language: “Utilize a Department actuary, consulting actuary or NAIC Actuarial Modeling support staff to”…
The language contained in other parts of the repository (older language and language added to Reinsurance repository – see p.63) is as follows: “utilize the insurance department actuary or an independent actuary to”
The highlighted current language in the handbook uses the term “independent actuary” while the newer language, in some instances, uses the term “consulting actuary”. While I do not express a preference for either term, I believe there are fewer new references to “consulting actuary, therefore I recommend using the consistent language of “insurance department actuary or an independent actuary” in the additional examples.
Alice Fontaine, FSA, FCIA, MAAA President & Consulting Actuary Fontaine Consulting, LLC 100E. Whitestone Blvd., Suite 148‐288 Cedar Park, TX 78613
Unless indicated to the contrary this message does not constitute professional advice or opinions upon which reliance may be made by the addressee or any other party, and it should be considered to be a work in progress. Unless otherwise noted in this email or its attachments, this communication does not form a Statement of Actuarial Opinion under American Academy of Actuaries guidelines.
The information in this Internet e-mail and any attachment is confidential and may be legally privileged. It is for the intended addressee(s) only. Access by any other person is not authorized. The unauthorized use, disclosure or copying of this email, any attachment or any information contained therein, is prohibited. If you are not the intended recipient, please delete this Internet e-mail and its attachment(s) from your computer system and notify the sender immediately.
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August 15, 2017
Ms. Susan Bernard Deputy Commissioner, California Department of Insurance Chair, NAIC Financial Examiners Handbook (E) Technical Group
Re: Comments on Financial Examiners Handbook Revisions
Dear Deputy Commissioner Bernard:
The undersigned submit the following comments regarding the current exposure for proposed revisions to the Financial Examiners Handbook.
• On Page 3, Exhibit A - We believe the following additional guidance should be added to emphasize thatthe initial planning meeting with the analyst should occur prior to any requests being sent to thecompany. “Whenever possible, the in-person or teleconference planning meeting with the departmentanalyst should occur prior to sending the company the initial records request.”
We suggest further enhancing the examination guidance to indicate that prior to States sending out theExhibit B to the company, regardless of when the planning meeting occurs, that the Exhibit B is alsosent to and thoroughly reviewed by the analyst for information that is already available at the stateinsurance department. For consistency, we recommend adding the following guidance to the FinancialExaminers Handbook currently on page 27 in the Financial Analysis Handbook:
“Communicate and provide access to relevant information that has already been obtained by the analystfunction and is available to the state insurance department. It may be helpful for the analyst to reviewthe Examiner’s Exhibit B questionnaire and note specific items that have already been accumulated andavailable to the examiner.”
• On Page 35, regarding segregation of duties between the actuarial function and executive management,Items 3.b and 3.c should only be for P&C. Any reference to Health should be eliminated since healthreserves are not based on best estimates.
• On Page 47 and 48, the “Affiliated Service Provider” is listed under the Third Party Administratorsection. It should be removed from that listing. We appreciate your consideration of our comments andlook forward to the next technical group discussion and in the interim please let us know if you have anyquestions.
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The interested parties, as noted below, agree with the comments contained in this letter.
Organization Name Phone Number E-mail AddressAmerican Council of Life Insurers
Wayne Mehlman 202-624-2135 [email protected]
American Insurance Association
Phillip Carson [email protected]
America's Health Insurance Plans
Max McGee 201-213-2376 [email protected]
Blue Cross Blue Shield Association
Joseph Zolecki 312-297-5766 [email protected]
National Association of Mutual Insurance Companies
Jonathan Rodgers 317-875-5250 x1106 [email protected]
Property Casualty Insurers Association of America (PCI)
Stephen W. Broadie 847-553-3606 [email protected]
Reinsurance Association of America
Karalee C. Morell 202-783-8380 [email protected]
UnitedHealthcare Jeff Martin 813-890-4569 [email protected]
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Attachment ThreeProposed Revisions Related to
Referral from Financial Analysis (E) Working Group
• FAWG Referral• Section 1-3: Run-off Examinations• Section 2-1: Redomestication
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--
MEMORANDUM
TO: Susan Bernard, Chair, Financial Examiners Handbook (E) Technical Group
FROM: Doug Slape, Chair, Financial Analysis (E) Working Group
DATE: April 26, 2017
RE: Enhanced Regulatory Guidance
As you may be aware, the Financial Analysis (E) Working Group (FAWG) meets annually in Kansas City to discuss among other things, potentially troubled insurers and insurance groups. During this same meeting, the FAWG discusses industry trends, including identifying any that are potentially adverse or might warrant communication and coordination with other NAIC groups. As a result of the issues and trends discussed, the FAWG would like to refer four items to the attention of your group.
1. Runoff Exams – The first item relates to how the exam process would be performed in situations where an insureris in run-off. In this situation the risks of the organization may change, making it appropriate to narrow the focus ofan exam to those issues most relevant to run-off insurers and reducing the potential strain on resources. Inconducting these exams, we recommend that liquidity and staffing be specifically considered to address commonissues identified by FAWG. Therefore, we encourage the development of additional guidance and training in thisarea as necessary, to address the issues identified.
2. Corporate Governance – The second item relates to how examiners consider a company’s corporate governanceduring the course of an exam. FAWG continues to identify troubled company situations that are due in part to poorcorporate governance practices. In some cases, corporate governance was assessed as strong or adequate on aprevious exam based on its form, but the actual substance of corporate governance turned out to be deficient.Therefore, we recommend that handbook guidance be reviewed and training be developed to look beyond writtenpolicies, procedures and structure to challenge the operating effectiveness of the processes in place.
3. Re-domestication – The third item relates to communication between states in situations where a company has re-domesticated since the last full-scope examination. FAWG has identified situations where regulators have notincorporated insights from the former domestic state’s supervisory plan into future examinations. In these situations,it is imperative that regulator concerns be appropriately transitioned to avoid losing regulatory insights accumulatedover years of oversight. Therefore, we encourage the development of additional guidance and training in this area asnecessary, to address the issues identified.
4. Expansion of Business – The forth item relates to risks associated with the expansion of business. Such risks mayemerge as companies consider expansion (either by geographical area of operation or products offered), wherewithout the right expertise and/or plan, a company can experience significant losses that threaten their solvency.Therefore, we encourage the development of additional guidance and training in this area as necessary, to addressthe issues identified.
In considering these issues, FAWG recommends considering existing guidance in the Examiners Handbook to ensure it sufficiently addresses the concerns above. Moreover, we recommend considering whether additional training would be beneficial to assist regulators in addressing the concerns during the course of financial exams.
If there are any questions regarding the proposed recommendation, please contact me or NAIC staff (Bruce Jenson at [email protected]) for clarification.
Thank you for your consideration.
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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 ReviewB. MaterialityC. Examination SamplingD. Business ContinuityE. Using the Work of a SpecialistF. Outsourcing of Critical FunctionsG. Use of Independent Contractors on Multi-State ExaminationsH. Considerations for Insurers in Run-OffHI. Comments and Grievance Procedures Regarding Compliance with Examination Standards
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H. Considerations for Insurers in Run-Off
Run-off may be either a voluntary or state mandated course of action where the insurer ceases writing new policies on a portion of business or all business written. During run-off, the insurer typically continues collecting premiums on mandatory policies for a statutorily mandated period and to policy expiration dates. The degree and timing of the reduction in premiums should be closely monitored through projections, which are often provided within a run-off plan. The run off of claims becomes the focus of attention until the last dollar of exposure is paid. The risk exposures for insurers in run-off are likely to be different than that of an insurer writing new business; therefore it may be necessary for an examiner to narrow the focus of the financial condition examination and ongoing solvency oversight of the insurer. For example, when examining a company in run-off, the examiner may be able to reduce testing performed in traditional areas, such as underwriting. The focus of the examination of a run-off insurer may include, but not be limited to, the following:
Run-off Plan A company in run-off will typically prepare a run-off plan outlining how it will manage its resources in this stage of its operations. The specific content of the run-off plan may vary depending upon the line and nature of business in run-off and the financial condition of the insurer. If the company has prepared a run-off plan, the examiner should obtain the plan and gain an understanding of the process the company has chosen for winding down its business and the primary risks that remain. In addition, the examiner should track the company’s progress against its plan to assist in evaluating the effectiveness of the run-off. If the company has entered into run-off since the prior exam, the department analyst may have already obtained the run-off plan. Therefore, the examiner should consult with the analyst prior to requesting the run-off plan from the company.
Corporate Governance Insurers in run-off are faced with unique challenges in maintaining effective oversight and staffing in circumstances of decreasing resources. Some areas of corporate governance that may be more critical for an insurer in run-off include employee compensation and retention, succession planning, and adequate oversight of critical functions by the Board of Directors and senior management. Evaluating the suitability of key management becomes of increased importance in an environment of high turnover and changing responsibilities. The examiner may also consider whether the company’s decreasing resources create segregation of duties issues that limit the effectiveness of the company’s internal control structure.
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Capital and Liquidity Management An objective of an insurer in run-off is to manage its assets and liabilities and maintain sufficient cash flow to ensure claim payments are met. Ideally, the insurer will reduce liabilities over time while ensuring its balance sheet maintains liquid assets to pay claims. When assessing liquidity and surplus adequacy, the examiner should evaluate the appropriateness of the insurer’s investment portfolio, including proper asset/liability matching. An insurer in run-off would generally be expected to maintain a conservative strategy in order to preserve the ability of invested assets to meet run-off obligations. An aggressive strategy may warrant additional scrutiny by the examiner. The examiner may also evaluate whether the insurer has performed analyses to determine further cash flow needs and stress testing to assess its capital needs. In some circumstances, the examiner may consider involving an actuarial specialist to assist in evaluating the adequacy of the insurer’s capital. Loss and LAE Reserves Loss reserves are the largest liability reported by an insurer and one of the most critical pieces of data in assessing an insurer that has entered run-off. Many run-off insurers are thinly capitalized. Given the materiality of this liability, a slight variance in reserves can have a significant impact on the insurer’s ability to continue as a going concern. As a result, there is increased importance placed on highly accurate reserve estimations as well as close monitoring of loss reserves. When examining an insurer in run-off, the examiner should consider focusing procedures on the company’s processes for determining loss reserves, reviewing loss reserve development trends, and involving an actuarial specialist in evaluating the overall adequacy of the reserves held.
I. Comments and Grievance Procedures Regarding Compliance with Examination Standards
This section covers procedures to be followed by industry and regulators relating to comments and grievances involving compliance with examination standards.
Each comment or grievance must be put in writing and presented in the following format. The matter is to be addressed to the Examination Oversight (E) Task Force.
The resolution of each submission either will be made or administered by the Task Force with ratification by the parent committee of the NAIC. Subsequent to ratification of action taken, the person making the submission will be notified.
The above procedure should suffice to receive and properly respond to any and all matters involving compliance with examination standards.
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PHASE 1 – UNDERSTAND THE COMPANY AND IDENTIFY KEY FUNCTIONAL ACTIVITIES TO BE REVIEWED
In Phase 1 of a risk-focused examination, key activities will be confirmed or identified using background information gathered on the company from various sources. Some of this information will already have been available in the department prior to the initial planning meeting, or can be obtained from the company’s internal audit department or external auditors. A Phase 1 goal is to gather any additional or current information necessary to begin a risk-focused examination. Sources of information may include organizational charts, filings required by sections 302 and 404 of the Sarbanes-Oxley Act of 2002 (where applicable), interviews with senior management, or other publicly available information.
To ensure the appropriate risk-focused examination scope, it is important to identify the key functional activities (i.e., business activities) of the company. Information gathered by understanding the company, the company’s corporate governance structure, and assessing the company’s audit function will form the basis for determining key activities.
Essential to executing the risk-focused surveillance process is interviewing executive management and possibly board members of the company to identify key activities and risks. Risks identified through these interviews and each part of Phase 1 should be documented on Exhibit CC – Issue/Risk Tracking Template or a similar document to ensure they are carried through the remaining phases of the examination. Examiners and company officials should attempt to maintain an ongoing dialogue to assist the examiners in understanding the company and identifying key functional activities. It is also critical for the examination team to understand and leverage the company’s risk management program; that is, how the company identifies, controls, monitors, evaluates and responds to its risks. For companies required to submit an Own Risk and Solvency Assessment (ORSA) summary report, the report provided by the company may be a useful tool in this evaluation. The discipline and structure of risk management programs vary dramatically from company to company. “Best practices” are emerging for risk management programs and more companies are appointing chief risk managers whose responsibilities go well beyond the traditional risk management function (the buying of insurance). The Committee of Sponsoring Organizations (COSO) has published internal control standards that are widely-held, although not required, in many industries and has released an Enterprise Risk Management Integrated Framework, which is anticipated to be incorporated by several entities, as well as guidance to apply the integrated framework and internal control standards to small public companies. The examination team should evaluate the strength of the company’s risk management process, which can include a “hind-sight” evaluation of why a particular negative surprise or event occurred (i.e., why was it not identified in the current risk management program of the company).
There are five parts to Phase 1 that are key components of performing a risk assessment, the results of which drive the direction of the risk-focused examination: (1) Understanding the Company; (2) Understanding the Corporate Governance Structure; (3) Assessing the Adequacy of the Audit Function; (4) Identifying Key Functional Activities; and (5) Consideration of Prospective Risks for Indications of Solvency Concerns. The Risk Assessment Matrix (Exhibit K), the tool developed to serve as the central location for the documentation of risk assessment and testing conclusions, should be updated with the identified key activities of the company after the examiner is able to obtain an understanding of the company and corporate governance structure. The five parts of Phase 1 are discussed in detail below.
A. Part 1: Understanding the Company
Step 1: Gather Necessary Planning Information
Meet with the Assigned Analyst Gathering information becomes the first step in gaining an understanding of the company. While general information may have been requested from the company during examination pre-planning through use of Exhibits B and C, the examination team should determine what other information is already available to the department before making additional information requests. To do so, the examination team should meet (in-person or via conference call) with the assigned financial analyst (and/or analyst supervisor) prior to requesting additional information for use in examination planning. An email exchange, in and of itself, is not deemed sufficient to achieve the expectation of a planning meeting with the assigned analyst.
© 2017 National Association of Insurance Commissioners 122 of 136
In addition to gaining an understanding of the information already available to the department, the meeting with the analyst should focus on the company’s financial condition, prospective risks and operating results since the last examination. The analyst should be asked to discuss risks and concerns highlighted in the Insurer Profile Summary and to describe the reasons for unusual trends, abnormal ratios and transactions that are not easily discernible. The analyst may also request specific matters or concerns for verification and review during the financial examination. To summarize the input received from financial analysis, the examination team should document risks identified by the analyst for further review on the examination and post significant items to Exhibit CC – Issue/Risk Tracking Template for incorporation into the examination process.
If the company under examination has redomesticated since the prior exam, the department analyst will typically take a primary role in communicating with the prior domestic regulator in order to adequately transfer regulatory insights accumulated over years of oversight. The department analyst would then share these insights with the examiner in charge during the examiner/analyst meeting during the planning phase of the examination. This communication may include a discussion of the Insurer Profile Summary and key risks, the supervisory plan, the former regulator’s assessment of Senior Management, the Board of Directors and corporate governance, and other relevant solvency monitoring information. If after meeting with the analyst the examiner requires additional information or further clarification, the examiner may consider contacting the former regulator.
The avoidance of redundancy between analysis and examination processes is of critical importance for an enhanced and more efficient overall regulatory process that will benefit both regulators and industry. An efficient regulatory process fosters clarity and consistency, which results in a better understanding of how individual insurers operate across the different aspects of the regulatory spectrum, including the areas of financial examination, financial analysis and other solvency-related regulation.
By utilizing information and input provided by the analysts, the examination team can request updates to existing information available to the department rather than duplicating requests for information already provided to the analyst. This process eliminates the need for examiners to redevelop the financial analysis information in the examination workpapers so that examination resources may instead be used to update the information while on-site at the insurer. Similar to the benefits of reviewing and using external or internal auditor workpapers, examiners use of detailed financial analysis workpapers in the examination files should result in examinations being more efficient and streamlined.
--------------------------------------------Detail Eliminated to Conserve Space--------------------------------------------
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Attachment FourProposed Revisions Related to
Handbook Clean Up
• Section 1-1: Review and Reliance on AnotherState’s Workpapers (Coordination Plan)
• Exhibit E
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I. EXAMINATION OVERVIEW
This section of the Handbook addresses the following subjects:
A. Exam Classifications DefinedB. General Procedures for Scheduling an ExaminationC. Coordinating Examinations of Multi-State InsurersD. Coordination of Holding Company Group ExamsE. Review and Reliance on Another State’s WorkpapersF. Examinations of Underwriting Pools, Syndicates and AssociationsG. Special E Committee ExaminationsH. Limited-Scope ExaminationsI. Interim Work
E. Review and Reliance on Another State’s Workpapers
For a number of reasons, state insurance regulators have recognized a growing need to more fully coordinate their regulatory efforts. One such reason is the realization that the analysis of an individual company may not be complete without understanding the context of the insurance holding company group of which the individual company is a part. Insurers within an insurance holding company group may have common management and similar information systems and/or control processes. Therefore, if the insurer under examination is part of an insurance holding company group, the domestic state could benefit from the work of another state if that other state’s examination procedures address the domestic insurer’s financial statements or internal control procedures.
Depending on how the examination is coordinated, the extent of documentation required to explain the reliance of a domestic state on the work of another state varies. There are three general scenarios that may affect the extent of documentation.
1) Lead State/Exam Facilitator conducting a fully coordinated group examination – When the group examination isconducted in this manner, the Lead State/Exam Facilitator is responsible for the overall quality of the workperformed in support of the coordinated exam conclusions. Any work performed that is solely related to anindividual domestic is excluded from the Lead State/Exam Facilitator’s responsibility. For a discussion of specificresponsibilities of the Lead State/Exam Facilitator, refer to the “Responsibilities of the Lead State” and the“Responsibilities of the Exam Facilitator” sections above. Additionally, Exhibit Z, Part Two – Section A and/orExhibit Z, Part Two – Section B should be completed in this scenario.
2) Participating State in a fully coordinated group examination – To demonstrate adequate participation, theparticipating state should complete Exhibit Z, Part Two – Section C to assist in documenting compliance with theresponsibilities outlined in the “Responsibilities of States Participating in a Fully Coordinated Exam” sectionabove. Such documentation may be supplemented by a separate memo, if deemed necessary, to demonstratecompliance. In addition, the participating state assumes ownership of any state-specific procedures that areperformed and is responsible for the quality of such work.
3) States not participating in utilizing existing work outside of a fully coordinated group examination – States in thiscategory conducted a standalone examination separate from the fully coordinated group examination. States inthis category are responsible for all work contained in the examination file. In this scenario, If the a state isutilizing existing work but wasis not directly involved in the planning, oversight and review of the examinationwork. Therefore, this state takes ownership of the project and is responsible for the overall quality of workperformed in support of examination conclusions. This state should perform a review of the testing state’s workprogram and conclusions to ensure the work being relied upon is sufficient to meet the needs of its examination.When determining the extent of review, the state utilizing the work of another state should consider its comfortand experience with the quality of work performed by that state. In addition, the accreditation status of other
© 2017 National Association of Insurance Commissioners 127 of 136
states may also be considered in determining the level of review to be performed by the relying state. Exhibit Z, Part Two – Section D should be completed in this scenario.
© 2017 National Association of Insurance Commissioners 128 of 136
EXHIBIT E AUDIT REVIEW PROCEDURES
COMPANY NAME __________________________________________________________________________ PERIOD OF EXAMINATION _________________________________________________________________ EXAMINATION FIELD DATE ________________________________________________________________ PREPARED BY _____________________________________________________________________________ DATE _____________________________________________________________________________________
Examiner Date
External Auditor Workpaper and Report Review
1. Obtain the external auditor’s engagement letter to ensure that there are noindemnification clauses or other unusual items included in the engagement letter.
Guidance Point: An indemnification clause between an insurer and an external auditor automatically breaches the independence of that auditor. If an indemnification clause exists, whether directly or indirectly, the examiner must evaluate whether it is reasonable to place reliance on the work of the external auditor. Additionally, the inclusion of an indemnification clause in a statutory auditing engagement letter is a breach of independence as outlined in the AICPA Ethics Interpretation 501-8.
2. If not already performed by the financial analyst, obtain the following correspondence asrequired by the NAIC Annual Financial Reporting Model Regulation. Evaluate thecontent of the correspondence for consideration in the planning phases of theexamination.
a. An “Awareness Letter” noting the external auditor’s understanding of the insurancecodes and regulations applicable to the insurer and affirming that the opinionexpressed on the financial statements is in terms of their conformity to the statutoryaccounting principles.
b. If there was a change in auditor since the last examination, obtain the followingdocuments:
i. A “Notification Letter” from the insurer to the commissioner stating whether, inthe 24 months preceding the change in auditor, there were any disagreementswith the former auditor.
ii. A “Confirmation Letter” from the former auditor stating whether they agreewith the statements contained in the insurer’s “Notification Letter” and, if not,stating the reasons for which he or she does not agree.
c. A “Qualification Letter” from the external auditor which includes the followingrepresentations:
i. The auditor is independent.
ii. The audit staff assigned to the engagement have sufficient background,designations and experience, in general, and the experience in audits of insurers.
© 2017 National Association of Insurance Commissioners 129 of 136
Examiner Date
iii. The auditor’s opinion will be filed in compliance with regulation.
iv. The auditor consents to make available for review all workpapers andcommunications obtained as part of the audit to the examiner.
v. The auditor is properly licensed by an appropriate state licensing authority and isa member in good standing with the AICPA.
vi. The auditor meets the qualifications of an Independent Certified PublicAccountant as defined in Section 7 of the NAIC Annual Financial ReportingModel Regulation.
d. “Notification of Adverse Financial Condition,” if applicable, outlining the reasons forthe classification of Adverse Financial Condition.
e. “Communication of Internal Control Related Matters Noted in an Audit,” whichoutlines any unremediated material weaknesses noted during the audit.
3. If not already performed by the financial analyst, obtain a copy of all recorded andunrecorded audit adjustments for the most recent year of the examination period (ormultiple years of the examination period, if deemed necessary)each year since the lastexamination, along with supporting documentation regarding the adjustments orexplanations from the external auditor. Evaluate the adjustments for consideration in theplanning phases of the examination.
Guidance Point: The examiner should use information regarding audit adjustments identified by the external auditor in identifying risks or internal control weaknesses. This consideration should be documented within the examiner’s workpapers.
4. If not already performed by the financial analyst, obtain a copy of the signedmanagement representation letter for the most recent year of the examination period (ormultiple years of the examination period, if deemed necessary)each year since the lastexamination, which acknowledges that management is responsible for the presentation ofthe financial statements and has considered all uncorrected misstatements and concludedthat any uncorrected misstatements are immaterial, both individually and in theaggregate. (Practice Alert 94-1: Dealing with Audit Differences; SAS 89: AuditAdjustments)
a. Review the entire management representation letter to determine if there are any non-standard representations or representations that would have an impact on theexamination.
5. If not already performed by the financial analyst, obtain a copy of the internal control-related matters presentation materials for the most recent year of the examination period(or multiple years of the examination period, if deemed necessary)each year since the lastexamination, including the Management Letter, prepared by the external auditor for theaudit committee’s review. Verify that the presentation took place through review of auditcommittee meeting minutes.
Guidance Point: The external auditor is required to provide written communication to the audit committee of all significant deficiencies or material weaknesses known by the external auditor. These comments from the external auditors should be a good guide as
© 2017 National Association of Insurance Commissioners 130 of 136
Examiner Date
to what areas will need additional testwork.
6. If not already performed by the financial analyst, obtain from the external auditor a copyof the independent statutory audit report and opinion for the most recent year of theexamination period (or multiple years of the examination period, if deemednecessary)each year since the last examination.
a. Verify that the audit report has an unmodified audit opinion, except with regard to theuse of prescribed or permitted practices related to statutory accounting in the insurer’sstate of domicile. If an unmodified opinion was not issued, document the rationale forthe modified opinion (e.g. qualified, adverse) and how this was considered during theexaminer’s risk assessment process.
b. Identify any issues (material findings, contingencies, subsequent events, etc.) thatshould be considered during the examination. Document any issues noted and howthey were considered during the examiner’s risk assessment process.
c. Ensure that the audited financial statements reconcile to the annual statement. If not,the examiner should ask the external auditor to provide an explanation for anydifferences.
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© 2017 National Association of Insurance Commissioners 132 of 136
Attachment Five2017 Project Listing
© 2017 National Association of Insurance Commissioners 133 of 136
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© 2017 National Association of Insurance Commissioners 134 of 136
Topi
cR
efer
ral (
If A
pplic
able
) R
eque
st/Is
sue
to b
e ad
dres
sed
Prog
ress
1P
BR
PB
R R
evie
w (E
X) W
orki
ng
Gro
upJu
ne 1
3, 2
017
Con
side
r the
nee
d to
add
gui
danc
e on
Prin
cipl
es-B
ased
Res
ervi
ng
for l
ife in
sure
rs.
Min
or u
pdat
es w
ere
adop
ted
in 2
013
to h
elp
exam
iner
s di
scus
s pl
anni
ng fo
r im
plem
enta
tion
of P
BR
.
Mor
e su
bsta
ntia
l rev
isio
ns w
ere
expo
sed
on 6
/29/
17
conf
eren
ce c
all.
Con
side
r for
ado
ptio
n on
9/2
7/17
con
fere
nce
call.
2B
rand
ed R
isk
Cla
ssifi
catio
n D
efin
ition
sR
isk-
Focu
sed
Sur
veilla
nce
(E)W
orki
ng G
roup
Dec
embe
r 21,
201
6
Rev
ise
defin
ition
of t
he c
redi
t ris
k an
d op
erat
iona
l ris
k br
ande
d ris
k cl
assi
ficat
ions
Ado
pted
on
3/22
/17
conf
eren
ce c
all.
3O
RS
A In
form
atio
n S
harin
g B
est P
ract
ices
gu
ide
OR
SA
Impl
emen
tatio
n (E
) S
ubgr
oup
Dec
embe
r 1, 2
016
Con
side
r ref
eren
cing
the
OR
SA
Info
rmat
ion
Sha
ring
Bes
t Pra
ctic
es
Gui
de in
the
Han
dboo
k in
ord
er to
pro
mot
e ef
fect
ive
shar
ing
and
prot
ect t
he c
onfid
entia
lity
of th
e O
RS
A re
ports
in c
oord
inat
ed
exam
s.
Ado
pted
on
6/29
/17
conf
eren
ce c
all.
4C
onsi
sten
cy a
nd
Uni
form
ity A
mon
g S
tate
s in
Ass
essi
ng C
orpo
rate
G
over
nanc
e
Cor
pora
te G
over
nanc
e (E
) W
orki
ng G
roup
A
pril
7, 2
013
Fina
ncia
l Con
ditio
n (E
) C
omm
ittee
- A
pril
5, 2
016
Dev
elop
a re
gula
tor t
ool t
o en
cour
age
unifo
rmity
and
con
sist
ency
in
revi
ewin
g co
rpor
ate
gove
rnan
ce p
ract
ices
acr
oss
regu
lato
ry
func
tions
. Thi
s is
a lo
ng-te
rm p
roje
ct th
at w
ill be
con
side
red
at a
la
ter d
ate,
onc
e m
ore
stat
es h
ave
adop
ted
the
CG
AD
N/A
at t
his
time.
5C
onsi
sten
cy w
ith
Fina
ncia
l Ana
lysi
s Fu
nctio
n
Fina
ncia
l Ana
lysi
s (E
) W
orki
ng G
roup
Apr
il 4,
201
6
Mon
itor t
he w
ork
of th
e Fi
nanc
ial A
naly
sis
Han
dboo
k (E
) Wor
king
G
roup
to e
nsur
e co
nsis
tenc
y be
twee
n th
e tw
o fu
nctio
ns a
nd to
re
duce
redu
ndan
cy
Ong
oing
6E
nhan
ced
Reg
ulat
ory
Gui
danc
eFi
nanc
ial A
naly
sis
(E)
Wor
king
Gro
up
Apr
il 26
, 201
7
Con
side
r whe
ther
gui
danc
e sh
ould
be
revi
sed
to a
ddre
ss is
sues
re
late
d to
runo
ff ex
ams,
cor
pora
te g
over
nanc
e, re
-dom
estic
atio
n an
d ex
pans
ion
of b
usin
ess.
On
its 6
/29/
17 c
onfe
renc
e ca
ll, F
EH
TG re
ques
ted
that
sta
ff re
view
an
d pr
opos
e re
visi
ons
as n
eede
d.
Con
side
r exp
osur
e of
pro
pose
d re
visi
ons
on 9
/27/
17 c
onfe
renc
e ca
ll. R
evis
ions
pro
pose
d to
add
ress
redo
mes
ticat
ion
and
exam
inat
ions
of c
ompa
nies
in ru
n-of
f. C
orpo
rate
gov
erna
nce
and
risks
rela
ted
to e
xpan
sion
of b
usin
ess
are
brie
fly a
ddre
ssed
in th
e H
andb
ook
and
will
be c
over
ed in
futu
re tr
aini
ng.
7A
ffilia
ted
Agr
eem
ents
Rec
eive
rshi
p M
odel
Law
(E)
Wor
king
Gro
up
May
16,
201
7
Inco
rpor
ate
a re
view
of n
eces
sary
pro
visi
ons
(per
Hol
ding
Com
pany
M
odel
) int
o H
andb
ook.
E
xpos
ed o
n 6/
29/1
7 co
nfer
ence
cal
l.
Con
side
r for
ado
ptio
n on
9/2
7/17
con
fere
nce
call.
8/10
/201
7
2017
Pro
ject
s fo
r FEH
TGLa
st U
pdat
ed :
© 2017 National Association of Insurance Commissioners 135 of 136
Topi
cR
efer
ral (
If A
pplic
able
) R
eque
st/Is
sue
to b
e ad
dres
sed
Prog
ress
8C
omm
unic
atio
n w
ith
Ana
lyst
N/A
Pro
pose
d re
visi
ons
to E
xhib
it A
to c
larif
y th
at th
e m
eetin
g be
twee
n th
e ex
amin
er in
ana
lyst
dur
ing
plan
ning
sho
uld
occu
r in
pers
on o
r vi
a co
nfer
ence
cal
l. E
mai
l is
not s
uffic
ient
.
Pro
pose
d re
visi
ons
to E
xhib
it B
to p
rovi
de in
stru
ctio
ns fo
r the
co
mpa
ny c
ompl
etin
g th
e qu
estio
nnai
re -
allo
ws
for t
he c
ompa
ny to
no
te th
at a
requ
este
d ite
m h
as a
lread
y be
en p
rovi
ded,
incl
udin
g w
hen
and
to w
hom
.
As
part
of th
is, a
reco
mm
enda
tion
was
pro
vide
d to
F C
omm
ittee
to
ensu
re th
at th
e re
late
d ac
cred
itatio
n re
view
team
gui
delin
es m
atch
H
andb
ook
guid
ance
in th
is a
rea
Exp
osed
revi
sion
s to
Exh
ibit
A a
nd E
xhib
it B
on
6/29
/17
conf
eren
ce c
all.
Con
side
r for
ado
ptio
n on
9/2
7/17
con
fere
nce
call.
9H
andb
ook
Tech
nica
l G
roup
Am
endm
ent
Pro
cedu
res
N/A
Pro
pose
d do
cum
ent f
orm
ally
out
lines
the
proc
ess
to id
entif
y,
disc
uss,
exp
ose
and
adop
t rev
isio
ns to
Han
dboo
k gu
idan
ce.
Exp
osed
on
6/29
/17
conf
eren
ce c
all.
Con
side
r for
ado
ptio
n on
9/2
7/17
con
fere
nce
call.
10 11 1R
epos
itory
Mai
nten
ance
Ann
ual r
epos
itory
revi
ew to
ens
ure
repo
sito
ries
cont
ain
appr
opria
te
and
rele
vant
risk
s an
d re
late
d te
st p
roce
dure
s.
Tent
ativ
e P
lan
2017
: Rei
nsur
ance
, Rel
ated
Par
ty20
18: T
BD
Exp
osed
revi
sion
s to
Rei
nsur
ance
- A
ssum
ing,
Rei
nsur
ance
- C
edin
g, C
apita
l & S
urpl
us, R
elat
ed P
arty
and
Inve
stm
ents
on
6/29
/17
conf
eren
ce c
all.
Con
side
r for
ado
ptio
n on
9/2
7/17
con
fere
nce
call.
2H
andb
ook
Cle
anup
On
an a
nnua
l bas
is, c
onsi
der r
evis
ions
to th
e H
andb
ook
to e
nsur
e co
nsis
tenc
y of
gui
danc
e. A
llow
for f
eedb
ack
thro
ugh
the
use
of a
"P
ropo
sal S
ubm
issi
on F
orm
".
Sec
tion
1-1-
E: R
evie
w a
nd R
elia
nce
on A
noth
er S
tate
’s
Wor
kpap
ers
Exh
ibit
E
Cla
rify
that
Exh
ibit
Z, P
art 2
D s
houl
d be
com
plet
ed b
y an
y st
ate
part
of a
hol
ding
com
pany
gro
up th
at d
id n
ot p
artic
ipat
e in
a
coor
dina
ted
exam
.
Cla
rify
that
sup
port
shou
ld b
e ob
tain
ed fo
r mos
t cur
rent
yea
r of
exam
per
iod,
with
con
side
ratio
n of
obt
aini
ng h
isto
rical
yea
rs if
w
arra
nted
.
Con
side
r exp
osur
e of
pro
pose
d re
visi
ons
on 9
/27/
17 c
onfe
renc
e ca
ll
Ann
ual M
aint
enan
ce
© 2017 National Association of Insurance Commissioners 136 of 136
