The NAIC's Own Risk and Solvency Assessment

As part of its Solvency Modernization Initiative, the National Association of Insurance Commissioners ("NAIC") promulgated the U.S. Own Risk and Solvency Assessment ("ORSA") regulatory framework in 2011. According to the NAIC, the ORSA concept is "an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios."[1]
An ORSA will require insurers to analyze all reasonably foreseeable and relevant material risks (i.e., underwriting, credit, market, operational, liquidity risks, etc.) that could have an impact on an insurer’s ability to meet its policyholder obligations.[2]
Essentially, ORSA is a self-assessment function that requires certain large and mid-sized insurers and insurance groups, starting in 2015, to internally assess the various risks associated with their businesses and operations, as well as the adequacy of their asset resources in light of such risks. It includes not only identification and measurement of risks, but also development of risk controls and strategies for risk management.
The “O” in ORSA represents the insurer’s “own” assessment of their current and future risks. Insurers and/or insurance groups will be required to articulate their own judgment about risk management and the adequacy of their capital position. This is meant to encourage management to anticipate potential capital needs and to take action before it’s too late. ORSA is not a one-off exercise—it is a continuous evolving process and should be a component of an insurer’s enterprise risk-management (ERM) framework. Moreover, there is no mechanical way of conducting an ORSA; how to conduct the ORSA is left to each insurer to decide, and actual results and contents of an ORSA report will vary from company to company. The output will be a set of documents that demonstrate the results of management’s self-assessment."[3]
Insurance Regulatory Law has chronicled the creeping encroachment of federal regulatory law into the traditionally state-based insurance regulatory system (see, for example: here, here and here). However, ORSA is a signal of another increasing trend in U.S. insurance regulation: globalization.

ORSA is one of the Insurance Core Principles set by the International Association of Insurance Supervisors ("IAIS") and it forms part of the insurance regulatory framework in Europe and a number of other countries around the world. Bringing one of IAIS's Insurance Core Principles, in the form of ORSA, into the state-based regulatory regime can be seen as a proactive step by the NAIC to strengthen the state-based system, but it is also indicative of the ongoing globalization of insurance regulatory standards.

U.S. Bancorp Sued by Insurance Company for Failure to Protect Assets in Trust

The Wall Street Journal is reporting that U.S. Bancorp has been sued by South Carolina insurer Companion Property & Casualty Insurance Company for "allegedly failing to prevent $176 million of the insurer's funds from being replaced with illiquid or worthless assets." The article notes that this is "the latest fallout from a scandal involving 28-year-old financier Alexander Chatfield Burns."[1]
In the lawsuit, filed Friday in a federal court in Columbia, S.C., Companion Property & Casualty Insurance Co. claimed that the bank’s US Bank unit, which served as trustee for trust accounts being managed by Mr. Burns’s companies, negligently or recklessly allowed them to be 'depleted' in favor of securities that are 'illiquid and appear to have little or no value.'
According to the Wall Street Journal article, insurance regulators in Delaware and Louisiana seized two insurers controlled by Mr. Burns last year "because of concerns about the quality of their assets." Allegedly, the private-equity firm run by Mr. Burns had "siphoned off hundreds of millions from several insurers that he controlled or whose accounts he managed, replacing them with unusual holdings including rights to a purported Caravaggio painting, according to filings in the Delaware liquidation matter."[2]

Mr. Burns, who resigned from his firm last year, hasn’t been accused of any wrongdoing in any criminal or civil proceeding. He is also the subject of another prominent expose by the Wall Street Journal: Young Financier's Insurance Empire Collapses.

The Wall Street Journal details the allegations in the case against U.S. Bancorp made by Companion.
Companion had a so-called fronting arrangement with two insurers controlled by Mr. Burns, under which those insurers assumed risk from policies issued by Companion, for a fee. To ensure that they would make good on their obligations, the insurers established collateral trust accounts for the benefit of Companion.

As trustee, the lawsuit claims, US Bank was responsible for ensuring that any substituted assets in the accounts were of “comparable value” to those they replaced, and for providing monthly statements certifying that the fair-market value of the assets in the accounts was “true and correct.”

By early 2014, the complaint says, investments in “reputable bond companies such as PIMCO” had been sold and replaced by investments in obscure entities with little or no value.[3]
According to the article, many of these new holdings were allegedly "identical to those found on the books of Freestone Insurance Co., a Delaware insurer now in liquidation that was controlled by Mr. Burns."[4]

Approximately $86 million of Companion's trust assets were invested "in entities whose main assets are rights to the purported Caravaggio painting," as detailed in the article.[5]

Before being sold and renamed Sussex Insurance earlier this year, Companion posted a loss of $113 million, according to its regulatory filings.[6]

The Wall Street Journal quotes Talcott J. Franklin, "an expert on trust law who has litigated a number of cases involving the duties of trustees," as suggesting that, although the lawsuit is in the early stages, the "trustee appears to have the duties outlined in the complaint." Further, Franklin suggests that, if Companion's allegations are proven true, U.S. Bank "could be liable for the plaintiff's lost profits" and potentially exposed to treble damages under South Carolina state law.[7].

1Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
2Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
3Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
4Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
5Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
6Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
7Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.

Report Predicts Ongoing Regulatory Uncertainty For The Insurance Industry

Global audit and consulting firm Deloitte LLP is warning life and annuity insurers in its 2015 Life Insurance and Annuity Industry Outlook report that regulatory uncertainty will be "an ongoing way of life rather than a passing conundrum" as the multiple jurisdictional layers of state, federal and international regulators "compete for supremacy." Moving forward, the new and enhanced standards that have been placed on some of the more significant insurers may trickle down through those layers of jurisdiction to effect smaller companies.

The Deloitte report describes 2015 as "an active year on the compliance front" with insurers trying to "adapt to a host of regulatory changes."

As primary evidence of this, the report sites Own Risk and Solvency Assessment ("ORSA") Summary Report, the first filing of which is due by U.S. domestic insurers this year. The ORSA Summary Report is part of ongoing efforts by the National Association of Insurance Commissioners ("NAIC") to strengthen the state-based regulatory framework, and it focuses on looking forward, as opposed to the historical perspective traditionally taken by most state-based solvency analysis.

The report describes this change as replacing "static examinations conducted every five years" with "an ongoing dialogue between regulators and the regulated, engineered on a framework of real-time, in-depth, customized, relevant information." While that sounds like a progressive and advanced system, the reality may mean more reporting of more information more often.

The NAIC is also moving certain corporate governance and holding company supervision model laws through its internal approval process, according to the report, which may mean these regulatory models will soon be introduced to state legislatures for incorporation into state regulatory laws.

While the capital standards adopted by associations like the International Association of Insurance Supervisors in 2014 will only directly affect those few insurers designated as systematically important, the Deloitte report suggests that ongoing work by the NAIC, the Federal Insurance Office and the Federal Reserve could sweep other insurers into the increased capital standard fold.

As group capital standards become the norm internationally, the report suggests that – despite opposition by both U.S. regulators and industry officials – domestic insurers with international operations will have to comply with such standards.

The Deloitte report lists a "host of tax issues" that may impact life and annuity insurers in 2015, including:
…the regulation of affiliated captives, the potential elimination of the interest deduction related to the purchase of company-owned life insurance, a modification of the deferred acquisition costs rule (which should mean essentially more capitalization), and a new method of computing the separate account dividend-received deduction that would reduce the benefit.[1]
However, the report notes a beneficial ruling from the IRS may allow companies to take significant losses earlier, referring to a directive on variable annuity contracts and the timing of certain deductions.

Another positive noted by the Deloitte report is the adoption of an amendment to the Dodd-Frank act which prohibits the Federal Reserve from requiring insurers that use only statutory accounting principles to use generally accepted accounting principles.

Read the full report:

Cavalcade of Risk No. 222

Insurance Regulatory Law is quite grateful to welcome the Thanksgiving edition of the Cavalcade of Risk, bringing a bounty of information on a variety of insurance-related topics from a number of different experts. The Cavalcade is a biweekly, rotating collection of articles and links (also known as a "blog carnival") from insurance and other risk-related resources that provides some great information and insight about risks and risk management.

Without further ado, Insurance Regulatory Law presents the 222nd Edition of the Cavalcade of Risk:
  • Henry Stern at InsureBlog digs into a bowlful of Unintentional Medical Tourism with a side of coverage controversy. When a 6-months pregnant Canadian woman took a personal trip to Hawaii, she brings home a bouncing baby souvenir and $1 million in medical bills. InsureBlog fisks the MSM's coverage. Read the full article for more information.

  • The Health Business Blog eschews the turkey and tries to decide between the chicken and the egg. In Chicken or egg: Do family dinners lead to health or vice versa?, the Health Business Blog sets the table with what seems like a clear case of cause and effect: having dinner together leads to better health. But maybe family dinner is just a proxy for high-income families with leisure time. The risk is that we underestimate the social determinants of health and are too smug about our own virtue. Read the full article for more information.

  • On his Governance, Risk Management & Audit blog, Norman Marks serves up an extra helping of Technology, Strategy, Cyber, and Risk cooked over a slow boil of disruptive technology. Disruptive technology - think 3d printing - poses risks that many (most?) businesses haven't considered, and Norman Marks makes the case for why they should. Read the full article for more information.

  • Hilary Tuttle at the Risk Management Monitor hones in on the retail side of the Thanksgiving tradition. Yes, Thanksgiving means Black Friday is closing in, so How Retailers Can Better Mitigate Black Friday Risks offers up some handy tips for retailers interested in mitigating risks associated with the annual sales behemoth. Read the full article for more information.

  • The Risk Management Association blog is already looking forward to the next annual sales behemoth, Christmas, with its post CFPB Proposes New Protections for the Prepaid Market about pre-paid products (i.e., gift cards and the like), explaining how proposed new rules for these pre-paid products may help mitigate consumers' risks. Read the full article for more information.

  • And last, but certainly not least, Jeff Waters at the RMS Blog brings us all back down to earth with Canada earthquake risk 85 years after the Grand Banks earthquake and tsunami. When you think of Thanksgiving, you probably don't think about earthquakes and tsunamis. Well, when you think of earthquakes and tsunamis, Canada's probably not the first locale that comes to mind. But the RMS Blog notes that November 18th marked the 85th anniversary of a 7.2 magnitude quake "up North," and discusses the risks of another one in the near future. Read the full article for more information.

The next edition of the Cavalcade of Risk will be hosting by Bob Wilson at Thanks for reading, and have a great holiday!

Patient advocacy groups allege discrimination by health insurers against those with chronic diseases

Several patient advocacy groups focused on AIDs, leukemia, epilepsy and other diseases have alleged that health insurers are violating the Affordable Care Act by discriminating against those with chronic diseases, and the groups are pressing the Department of Health and Human Services to respond, according to an article from The Hill.
Groups such as the National Health Law Program and the AIDS Institute have filed complaints with the administration claiming insurers are in violation of the Affordable Care Act’s provisions that prevent them from discriminating against people with pre-existing conditions and chronic diseases.

They argue certain drugs are put on higher tiers, requiring patients with chronic diseases to pay bigger out-of-pocket costs. In some cases, they say, the co-pay for such drugs can be 30 percent or higher.[1]
The pharmaceutical industry is apparently siding with the patient advocacy groups, as lobbying groups like the Pharmaceutical Research and Manufacturers of America have also questioned insurers' co-pay practices.[2]

One of the largest health insurance lobbying groups, America's Health Plans, has responded "by arguing that patients have the option to select a range of health plans that may suit their budgets better," according to The Hill.

Read the full article:
1HHS pressed on insurance discrimination claims, Ferdous Al-Faruque; The Hill; August 18, 2014.
2HHS pressed on insurance discrimination claims; Ferdous Al-Faruque; The Hill; August 18, 2014.

NAIC to Tout State Regulation to U.S. and Foreign Policymakers

As reported by Insurance Journal, the National Association of Insurance Commissioners (NAIC) is "Protecting the Future" with its new educational initiative in U.S. capital, the European Union capital, and the seat of the Financial Stability Board (FSB) for the G-20. The NAIC initiative will extol "the virtues of the 150-year old state-based insurance regulatory system" in Washington, D.C.; Brussels; and Basel, Switzerland.[1]
“The U.S.’s state-based insurance regulation system has an unmatched track record and can best adapt to meet our future economic and financial challenges,” said Ben Nelson, NAIC chief executive officer. “By ensuring soundness, solvency, stability and competition, state-based insurance regulation does more than make insurance markets work — it protects the future for American consumers, employers and the economy as a whole.[2]
The pro-state insurance regulation is motivated in part by the NAIC's view that "some federal officials and global regulators are seeking unprecedented authority over American insurance markets, including the imposition of bank-centric regulation on insurance companies." [3]
The NAIC, Nelson and its other leaders have been critical of recommendations for an expanded role for the federal government in U.S. insurance regulation, attempts to apply capital requirements suitable for banks to insurance companies, and moves to introduce global capital requirements on insurers.

State regulation advocates are also concerned that the international Financial Stability Board in Basel, Switzerland, could be gaining too much influence in the U.S. when it comes to financial regulation.[4]
Adam Hamm, current NAIC President who is also North Dakota insurance commissioner, explains that "[s]tate insurance regulation works because it's specific to the industry's unique risks and able to reflect state-specific considerations."[5]

Read the full article:

Mergers and Acquisitions in the Insurance Industry Expected to Rise

A recently released survey of insurance executives predicts a rise in M&A, and identifies the impact of new regulations and legislation as the biggest threat to insurance industry.
According to the 2014 Insurance Industry Outlook Survey from KPMG, the insurance industry may see a rise in strategic acquisitions moving forward, as the majority of insurers are "investing in customer programs, talent, and technology to grow their businesses and gain a competitive advantage" according to a KPMG press release accompanying the survey.

The survey's key findings include that a majority of the insurance industry executives surveyed (54%) indicated that their company was likely to be involved in M&A as a buyer over the next 12 months. That result is up from one-third (34%) last year.

The survey also listed the top three "drivers of transformation" over the next three to five years as customer demand, coping with change in technology and domestic competition.

Significantly, more than one-third (34%) of the insurance executives surveyed identified the biggest threat to their business models as the impact of new regulations and legislation. The second largest threat identified in the survey was losing share to lower-cost producers.

Read the full survey:

Expert Identifies "Worrisome Trends" in Solvency Regulation of Insurance Groups

Robert E. Litan, a nonresident senior fellow in the Economic Studies Program at the Brookings Institution, suggests that global trends of insurance solvency regulation focused on a "creditor-centric" approach, as opposed to the traditional "customer-centric" approach used in the United States, may ultimately have negative impacts on individual policyholders.

In Source of Weakness: Worrisome Trends in Solvency Regulation of Insurance Groups in a Post-Crisis World, Litan discusses some key differences, as well as some similarities, between the banking industry and the insurance industry that insurance regulators should recognize when drafting and implementing insurance regulatory policy. The essay also discusses the Dodd-Frank Act and "post-crisis" regulation of banks and insurance in the U.S.

From the abstract to Litan's essay:
The regulation of insurer financial strength in the United States historically has focused on a fundamental principle: that the premiums and capital of any insurer are meant to pay the claims of that insurer’s policyholders and not to be drawn on to rescue a failing affiliate within the same group. This is a customer-centric approach, based on the individual insurance contract that is issued by a separately capitalized insurer for a specific period of time, in which the premiums charged are regulated based on that issuer’s solvency position and the risk assumed under that contract.

Since the financial crisis, however, international financial bodies, including the EU, have been pressing U.S. policy makers to adopt the EU’s very different approach toward insurance regulation for globally and systemically important insurers, and potentially for all insurers, borrowing from the banking industry the notion of “group capital” regulation. This latter approach ignores the legal separateness of the different entities belonging to the same group and makes all parts of a banking group financially responsible for each other, through the so-called “source of strength” doctrine for holding companies and “cross-guarantee” requirements for bank subsidiaries. In effect, group capital regulation is creditor-centric, and potentially ignores the specifics of individual insurance contracts.
Litan suggests that, while group capital regulation many be appropriate for banks, it is not generally appropriate for insurance, and U.S. policy makers should remain cognizant of this distinction when considering European-style insurance solvency regulation in the United States.

Read the full article:

CMS Reforms to "Obsolete" and "Burdensome" Medicare Regulations in Effect

The Centers for Medicare and Medicaid (CMS) has enacted amendments to certain Medicare regulations that it deemed "unnecessary, obsolete, or excessively burdensome" on health care providers. These new amendments went into effect on July 11, 2014.

According to a Mondaq article, the "amended regulations affect a broad range of providers and suppliers, including hospitals, long-term care facilities, rural health and primary care facilities, clinical laboratories, transplant centers and organ procurement organizations, ambulatory surgical centers (ASC), and intermediate care facilities for individuals who are intellectually disabled."

The Mondaq article notes that, while the CMS introduction focuses on the revisions intended to reform the obsolete and burdensome regulations, a "significant number of the amendments merely standardize language or confirm internal citations or references."
Of course, any effective measures CMS takes to reduce the regulatory and cost burden on health care providers are welcome. Even with these most recent changes, however, the burden of local, state, and federal regulatory compliance continues to divert resources away from patient care.[1]
CMS indicated that the final rule "increases the ability of health care professionals to devote resources to improving patient care, by eliminating or reducing requirements that impede quality patient care or that divert resources away from providing high quality patient care." [2]

Read the full article:

FIO Unlikely to Remain a Spectator in Insurance Regulation

When Michael McRaith was originally appointed as the first Director of the Federal Insurance Office ("FIO"), then Deputy Treasury Secretary Neal Wolin stressed that the regulation of the insurance industry was not one of FIO's responsibilities, and that "nothing in the Dodd-Frank Act alters the fact that insurance is fundamentally regulated by the states."[1]

McRaith in 2006: "State regulation of the 'business of insurance' ... has protected consumers for over 60 years..."
In 2006, before the United States Senate Committee on the Judiciary, McRaith himself testified to the fact that insurance was a unique financial product that requires state regulation. At that time, McRaith was the Director of Insurance for the State of Illinois, and his testimony extolled the virutes of the long-standing practice of the state supervision of insurance, as coordinated by the National Association of Insurance Commissioners. He warned the U.S. Congress to carefully consider the "unintended consequences and potential pitfalls" of amending the McCarran-Fergusen Act to allow broader federal regulation of insurance, acknowledging that state regulation of the business of insurance "has protected consumers for over 60 years."[2]

In 2009, McRaith characterized the creation of a federal chartering system for insurance companies as "a solution in search of a problem."[3] Testifying before Congress on modernization of insurance regulation, McRaith emphasized the primary role and importance of state-based insurance regulation:
To be clear, any reforms to functional insurance regulation should start and end with the States. Federal assistance may be necessary if targeted to streamline insurance regulator interaction and coordination with other functional regulators, but that initiative should not supplant or displace the state regulatory system. The insurance industry, even in these difficult times, has withstood the collapses that echo through other financial sectors.[4]
As the Director of FIO, McRaith has changed his tune. Moving away from his previous comments on the long-standing practice and primary importance of state-based insurance, McRaith testified before Congress earlier this year that the U.S. should build on the "hybrid model of insurance regulation, incorporating both federal and state oversight."[5] Emphasizing this point further, McRaith said:
The question is not whether federal involvement in insurance regulation is necessary, but where and how that involvement should be calibrated. A federal role in insurance regulation would improve uniformity of regulation, address the realities of globally active, diversified insurance firms, and better serve national interests.[6]
McRaith declared the state-versus-federal regulation discussion as a "binary debate" that is a "relic" of a bygone era, according to the Insurance Journal. When pressed on the potential regulatory future of FIO, McRaith comments suggested that the role of mere spectator for FIO is not in the national interest:
McRaith’s characterizations of the global insurance market, however, make clear that FIO is unlikely to sit back and be a spectator, and that it will do what it believes is in the “national interest” for such a critical component of the economy and consumers’ lives.[7]
To be fair, even McRaith's earlier comments suggested some role of the federal government with respect to the regulation of insurance, but his concerns that federal regulation should not supplant or displace the state regulatory system seem to have withered away since his appointment as FIO Director.