Examinat ion Best Pract ices and Hawaii Domicile Updat e - - PowerPoint PPT Presentation

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Examinat ion Best Pract ices and Hawaii Domicile Updat e

Honolulu, Hawaii Oct ober 22, 2014

Welcome and Introductions

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Aloha

The Panel

• Robert Panah, CP

A, CFE, CIS A, Managing Director, Noble Consult ing S ervices, Inc.

• Invest ment , Informat ion Technology and

Troubled Company S pecialist

• KPMG 10 Y

ears, Officer in S EC Report ing Group wit h Conseco Insurance 7 Y ears, Hedge Fund CFO 3 Y ears, involved in regulat ory consult ing and examinat ion services since 1998

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The Panel-continued

• Holly Osumi, Chief Captive Insurance

Examiner, Capt ive Insurance Branch

• Cert ified Financial Examiner and Cert ified

Public Account ant

• Capt ive Insurance Examiner wit h t he

Insurance Division since 2004

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The Panel-continued

• Tommy Tso, Director of Risk Management,

J.F . S hea Company

• S

ince 2003 - Responsible for creat ion, cont rol and management of risk management funct ion for commercial and resident ial const ruct ion company

• Account Execut ive wit h Willis Wrap-up

Manager wit h AIG

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The Panel-continued

• S

anford S aito, Deputy Commissioner and Captive Insurance Administrator, Capt ive Insurance Branch

• Cert ified Financial Examiner and Capt ive

Insurance Examiner wit h t he Insurance Division since 2004

• Public Ut ilit ies Audit or wit h t he Division of

Consumer Advocacy

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Agenda

• Examination Update & Best Practices
• Regulator Expectations from Captive

Owners and Captive Managers and Common Exam Findings

• The Captive Owner’s Perspective and

Keys to S uccessful Captive Program

• Hawaii Domicile Update and Trends
• Regulatory Landscape

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Does t his look familiar?

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Recognit ion of t he Need for Bet t er ERM

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Hartford Financial

Aft ermat h of t he Financial Crisis: S elect ed Lessons Learned

• Corporate governance
• Identification of emerging risks
• Measurement/ quantification of risks
• Economic Capital models
• S

tress tests

• Reporting and monitoring activities
• Capital Efficient Products
• Others…

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Aftermath of the Financial Crisis – S elected Buzz Words

• S

yst emic Risk

• Equivalence
• Common S

upervision Framework

• S

upervisory Collaborat ion

• S
• lvency Modernizat ion Init iat ives
• “ Windows and Walls”

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Question?

• Can a small derivatives operation in

London take down the 30th largest company in the world?

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Windows and Walls

• Holding Company Act ivit ies
• Risk Profile of t he Group
• Group-wide Corporat e Governance
• Non-insurance S

ubsidiaries – Including Captives and S

PV’s

• Affiliat ed Act ivit ies

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Working Through the Acronyms a partial list…

NAIC

• SMI
• ORSA

IAIS

• Solvency II
• ComFrame

FSOC

• SIFI
• FIO

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S

• lvency Modernizat ion Init iat ives

Financial S tatement to Governance and Risk Management Company View to Group View Retrospective to Prospective

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“ Get t ing t o Know t he DNA of a Company”

Steve Johnson-Deputy Insurance Commissioner, P A

Principles Based

Importance of Corporate Governance Even in a S mall Capt ive or RRG

Best Practices

• Independent Board
• Financial expert
• Other experts (investment)
• Internal Audit
• Comply with S

OX or MAR

• Enterprise Risk

Management

• S

uccession Plan

• Formal strategic plan

Small Company

• Largely management team
• Typically rely on the CFO
• Limited experts on Board
• None or limited
• No documented controls
• Informal ERM
• Limited / no succession

plan

• Limited or formal plan

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Challenges wit h Capt ives and RRGs?

• No “ Documented” Internal Controls-(no S

OX or MAR)

• No formalized governance/ ERM policies and

procedures

• None or limited internal audit activities
• May have good controls that are not documented or

formalized

• Limited IT resources (staffing as well as budget)
• Limited capital, limited growth potential

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Negat ive Thinking

The Power of NEGATIVE Thinking by Bobby Knight and how it impacts risk and solvency considerations…..

ORS A in a Nut shell*… Answer t he following:

– What is our strategy? – What level of risk are we willing to assume in

pursuit of the strategy?

– What are the key risks that could hinder our

ability to achieve our strategy?

– How much capital do we need to cover those key

risks?

– What risks, individually and collectively, would

subj ect us to losses that would exceed our tolerance levels?

– What risk scenarios would cause us to fail or stop

• perating as a going concern?

* S teve Johnson, Deputy Insurance Commissioner, PA

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S elect ed S

• urces of Trouble
• Management and Cont rols

– Inadequate Experience – Poor Oversight – Weak Internal Controls

• Underwrit ing and Market ing

– Inappropriate Pricing – Inappropriate Underwriting – Expansion into new lines of business or geographic areas

• Claims and Reserving

– Poor Claims Practices – Inadequate Reserving

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S

• urces of Trouble for Capt ives?
• Reinsurance challenges

– Adequacy of reinsurance, account ing

• Reserve adequacy
• Operat ional…

DR/ BCP , S ecurit y

• S

t rat egic plan

– Reasonable?

S t ressed? Well managed?

• Underst anding risks undert aken
• Let t er of credit

– Irrevocable?

S ecured?

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S

• urces of Trouble for Capt ives?
• MGA/ TP

A functions

– Financially stable – Replaceable? – S

ervice levels-claims processing,

• ther

– Compliance – Arms length transactions

• Weak captive managers

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S urveillance and Priorit izat ion Process

• Insurance department analysts are the first line of

defense

• Importance of training and experience
• Understanding industry and company specific

history and risks

• Participation in key meetings and examination

interviews

• Communication with management
• Consideration of financial and non-financial

information.

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New NAIC Guidance

• Increase reliance on External Audits
• S

pend more time on higher risk areas

• Must address the 10 Critical Risk

Categories

• Emphasize other than financial

reporting risks

• Emphasize prospective risks

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Crit ical Risk Cat egories

– New Bright Line…

discussion topics

• Valuation/ Impairment of Complex or

S ubj ectively Valued Invested Assets

• Liquidity Considerations
• Appropriateness of Investment Portfolio and

S trategy

• Appropriateness/Adequacy of Reinsurance

Program

• Reinsurance Reporting and Collectability
• Underwriting and Pricing-S

trategy/ Quality

• Reserve Data/ Reserve Adequacy
• Related Party/ Holding Company Transactions
• Capital Management

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Agenda

• Examination Update & Best Practices
• Regulator Expectations from Captive

Owners and Captive Managers and Common Exam Findings

• The Captive Owner’s Perspective and

Keys to S uccessful Captive Program

• Hawaii Domicile Update and Trends
• Regulatory Landscape

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Examination Expectations from Owners and Captive Managers

• Provide comprehensive responses to

eliminate numerous correspondence

• Timely responses to inquiries or delivery of

documents

• Review of documents for completeness and

execution prior to delivery of documents

• Timely and thorough review of Draft Report

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Common Examination Findings & Comments

• Missing or unexecuted documents in

accordance with Hawaii Administrative Rules

• Changes to Captive Business Plan without

regulatory approval

• Exceeding $250,000 FDIC limits
• Lack of investment custodial indemnification

clause in investment -custodial agreements

• Lack of formalized agreement for services to

and/ or from affiliated entities

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Agenda

• Examination Update & Best Practices
• Exam Expectations from Captive

Owners and Captive Managers and Common Exam Findings

• The Captive Owner’s Perspective and

Keys to S uccessful Captive Program

• Hawaii Domicile Update and Trends
• Regulatory Landscape

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Captive Owner’s Perspective on Examinations

The Hawaii DOI recent ly complet ed 5-year examinat ions on several

• f our owned pure capt ive ent it ies:
• Init ial response t o request for dat a
• Relied on audit or for audit workpapers, and capt ive

manager for rest of document at ion request .

• Afforded a copy of t he examinat ion for review
• Discussed wit h t he examinat ion t eam one finding

wit hin t he report (invest ment agreement language)

• Final
• Direct ors signed an affidavit indicat ing t hat t hey had

received a copy of t he examinat ion and a copy of t he

• rder

Considered a fairly st raight forward process, support ed by our on- going effort s t o ensure t hat all books and records are cont inually

• n island and current .

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Captive Owner’s Perspective on Regulatory Relationships

• Why Hawaii
• Open door policy to discuss new concepts and

potential captive expansion

• Robust regulatory environment
• In person meetings (or simply meet and greets) during

conferences (RIMS & HCIC), while in Hawaii for captive board annual meetings, and by phone during the year if material transactions or changes in the captive programs warrant.

• Value regulation as support for our business goals and
• bj ectives
• Regulation supports our own internal control

requirements

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Keys to S uccessful Captive Insurance Program

• Long-term commitment and support from
• wners and senior management
• Qualified and experienced administration,

management resources and service providers

• Concerted focus and efforts to control

losses

• Reasonable predictability of losses
• Appropriate reinsurance or excess insurance
• S

table and supportive political and regulatory environment

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Agenda

• Examination Update & Best Practices
• Regulator Expectations from Captive

Owners and Captive Managers and Common Exam Findings

• The Captive Owner’s Perspective and

Keys to S uccessful Captive Program

• Hawaii Domicile Update and Trends
• Regulatory Landscape

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Recent Growth in U.S . Domiciles

U.S . Captive Domiciles – 1990

• Colorado
• Tennessee
• Virginia
• Vermont
• Hawaii

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U.S . Captive Domiciles - 2014

Alabama Kentucky Oregon Arizona Louisiana South Carolina Arkansas Maine South Dakota Colorado Michigan Tennessee Connecticut Missouri Texas Delaware Montana Utah District of Columbia Nevada Vermont Florida New Jersey Virginia Georgia New Y

• rk

West Virginia Hawaii North Carolina Guam Illinois Ohio Puerto Rico Kansas Oklahoma U.S. Virgin Islands

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World’s Largest Captive Domiciles

Est imat ed Number of Act ive Licenses at 12.31.2013

S

• urce: Business Insurance Magazine 3.17.2014

Bermuda 831 Hawaii (US) 184 Cayman Islands 759 District of Columbia (US) 172 Vermont (US) 588 Montana (US) 150 Guernsey 344 Nevada (US) 148 Utah (US) 342 British Virgin Islands 147 Delaware (US) 298 South Carolina (US) 145 Anguilla 295 Dublin/ Ireland 142 Nevis 276 Kentucky (US) 128 Barbados 264 Isle of Man 125 Luxembourg 225 Arizona (US) 106

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Hawaii Captive Statistics

As of December 31, 2013

Number of Captives 184 Combined Total Assets $ 15.661 Billion Total Assets Invested in Hawaii $ 910 Million Combined Premiums $ 2.857 Billion Combined Capital & S urplus $3.566 Billion

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Western U.S. 137 74% Eastern U.S. 27 14% Central U.S. 11 6% Asia/Pacific 11 6%

Hawaii Captive Owners by Location As of 9/30/14

Western U.S. Eastern U.S. Central U.S. Asia/Pacific

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54 29% 33 18% 34 18% 26 14% 17 9% 22 12%

Hawaii Captive Owners by Industry As of 9/30/14

Construction / Real Estate Healthcare Telecom & Manufacturing Retail & Other Services Financial Services Transportation / Energy

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Capt ive Trends

• Medium and smaller sized

companies exploring captive solutions

• 831(b)
• Cell Captives
• Growth from Asia/ Pacific Region

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Capt ive Trends

• Enterprise Risk Management
• Cyber, Employee Benefits, Medical

S top-Loss, Errors & Omissions, TRIA, Earthquake, Flood

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Regulat ory Landscape

• Federal Government

– FIO – IRS – LRRA

• S

tate of Hawaii

– HRS

/ HAR changes

• NAIC

– Model RRG Law update – Multi-S

tate Insurer

• Captive Insurance Regulatory Arbitrage

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Captive Insurance Branch Insurance Division - DCCA Cont act Informat ion

• Sanford Saito, Deputy Commissioner and Captive

Insurance Administrator

• Holly Osumi, Chief Captive Insurance Examiner
• Mailing Address:

Insurance Division State of Hawaii Department of Commerce and Consumer Affairs P .O Box 3614 Honolulu, Hawaii, USA 96811

• Telephone: (808)586-0981

Fax: (808)586-0987

• http:/ / www.captiveinsurance.hawaii.gov
• e-mail: captiveins@

dcca.hawaii.gov

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Mahalo

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