bureau of captive and financial insurance products fall forum/bureau of captive an… · 3 delaware...

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Bureau of Captive and

Financial Insurance Products

Delaware Captive Insurance Association

Fall Forum – October 28, 2014

Steve Kinion, Director

John Tinsley, Special Deputy

Ann Pruett, Administrative Supervisor

Natalie Davis, Examiner

Jackie Lewis, Actuary

Claude Granese, Information Technology Specialist

DELAWARE DEPARTMENT OF INSURANCE

INSURANCE COMMISSIONER KAREN WELDIN STEWART

Bureau of Captive and Financial Insurance Products

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Discussion Topics

1. Introductions & Delaware Captive Team

2. Understanding the Regulatory Role

3. Delaware’s Approach to Captive Regulation – Financial Examinations•Budgeting Process •Examiner Role •Actuarial Role •Risk Retention Groups•Information Technology Role

4. Examination Issues

5. Questions DELAWARE DEPARTMENT OF INSURANCE



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Delaware Department of

Insurance


• Delaware Named 2013 US Onshore Domicile of the Year

• The Nation’s 3rd Largest Captive Domicile

• The World’s 6th Largest Captive Domicile

THANK YOU for your continual support!




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Insurance

Insurance Commissioner Karen Weldin Stewart

Steve Kinion, Director

Mark Murowany, Director Assistant

John Tinsley, Special Deputy - Examinations

Rasa Zubielaite, Senior Captive Analyst




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Insurance

Delaware Captive Team

Jamie Bafundo Gregg Bealuk Doug Bey Sean Brown Cindy Davis Natalie Davis Frank Edwards Bob Gardner Jackie Lewis Dave Macesic William Marshall Sam MarzarRyan Maxwell Trey Mills Michael Morro Raciel Moratin Michael Pate John PedrickAlbert Piccoli Ann Pruett Bethaney Ryals Nancy Thomas Gene Thompson John White Steve Guest




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Insurance

Delaware Captive Team Credentials

• 5 Associate in Captive Insurance • 13 Certified Financial Examiners• 1 Affiliated Financial Examiners • 4 Certified Public Accountants • 1 Credentialed Life/Health Actuary (Society of Actuaries)• 6 Credentialed Property/Casualty Actuaries (Casualty Actuarial Society)




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Understanding the

Regulatory Role

What are the working components of Statutory Regulation?

•Application for Certificate of Authority (COA)•Examiner review & Actuarial Review •COA approved based on business plan

•Captives granted a COA•Assigned Analyst will perform continual monitoring

*Financial Examinations •Examiner review and Actuarial review

*Emphasis of this presentation is understanding the Financial examination process as several Delaware Captives have, are or will be undergoing first time Examinations.




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Understanding the

Regulatory Role

6908 Examinations and investigations.

(a) At least once in 3 years, and whenever the Commissioner

determines it to be prudent, the Commissioner or the Commissioner's

examiner shall personally visit each captive insurance company and

thoroughly inspect and examine its affairs to ascertain its financial

condition, its ability to fulfill its obligations and its compliance with the

provisions of this chapter. The Commissioner may enlarge the aforesaid

3-year period to 5 years, provided said captive insurance company is

subject to a comprehensive annual audit during such period of a scope

satisfactory to the Commissioner by independent auditors approved by

the Commissioner. The expenses and charges of the examination shall

be paid to this State by the company or companies examined.




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Understanding the

Regulatory Role

(b) The provisions of §§ 318-320, 321 (other than subsection (g)), 322

and 330 of this title shall apply to examinations conducted under this

section.




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Understanding the

Regulatory Role

§ 318 Examination of insurers.

§ 319 Examination of agents, promoters and others.

§ 320 Conduct of examination; access to records; correction.

§ 321 Examination report. (other than subsection (g))

§ 322 Examination expense.

§ 330 Immunity from liability.




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Financial Examination

Scheduling

• Captive Manager

•1st Captive Exam 3rd Year

•Every 3-5 years thereafter

•Or at the Commissioner’s discretion

•RRG




Financial Examinations

Budgeting Process

Role of Budgets:

• To forecast outcomes

• To allocate resources

• To improve efficiency

• To promote forward thinking

• To set targets in numerical terms

• To provide direction and co-ordination

Important to understand the budgeting process, components and cost variables in working together to achieve desired results.

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Budgeting Process

How have Captive Examinations budgets evolved?

Historically have implemented changes to reduce overall exam costs for the purpose of saving captives money while maintaining appropriate regulatory oversight.

•Efficiencies gained thru numbers – Ranked 3rd in the Nation, 6th World Wide

•Examinations grouped by Captive Manager for multiple entities with same licensing year




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Budgeting Process

What is the budget and reporting process for Special Purpose Captive Insurance Companies?

•Each entity has its own examination costs.

•Examination of Series are reported on a stand-alone basis.

•Examination budgeted costs is reflective of one SBU examination.




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Budgeting Process

How much to budget for captive examination?

•$10,000 for typical pure/831(b) type captive

How are Examination costs invoiced for each key component?

•Examiner/Supervisor/Admin •Consulting

•Actuary •IT Specialist (RRG’s)

•Software fee•Department surcharge




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Overview

Communication & Coordination

Key Working Components




DE Supervising Examiner

Auditor

Actuary

Captive Manager

Delaware Domestic Delaware Dept. of Ins.

DE EIC

DE Actuary

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Examiner Role

Primary Goal of the Examiner; report on the Company’s financial condition thru limited tests of various income and disbursements. Determine whether the Captive was operating pursuant to the Department approved Business Plan and in compliance applicable sections of the Delaware Insurance Code.

• Management responsible for Financial Reporting and Regulatory Compliance.

• Auditor responsible for issuing an opinion – Audit Report. • Examiner responsible for issuing a Report on Examination.




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Examiner Role

What are common cost contributing factors impacting the forecasted budget?

1. Captive Manager communication & cooperation

2. Financial Reporting and Regulatory Compliance

3. Availability and reliance upon Audit work papers

4. Availability and reliance upon Actuarial work papers




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Examiner Role

(1) Communication and Cooperation – How may we improve this?

Provide timely and complete responses to Examination requests

• First Day Letter responses uploaded (i.e. via ShareFile) prior to start of the Examination

• Ask clarifying questions during the Pre-Examination call

• Ask clarifying questions throughout the Examination process; Examiners are available call or email




(2) Financial Reporting & Regulatory Compliance - What is reviewed by Examiner?

• Financial Reporting & Financial Condition • Reliance may be placed upon Auditor work papers• Review material account balances, underlying data, subsequent events• Ultimately issue an Examination Report with financials as of exam date

• Regulatory Compliance * most common factor impacting exam costs variability • Generally independently tested by Examiner • Compliance with 18 Del.C. ch. 69 Captive Insurance Companies• Compliance with 18 Del. Adm. Code 302 Captive Insurance Financial

Regulation Compliance reviewed for Examination Period


Examiner Role

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(3) Audit Work papers - Can the Auditor’s work papers create Examination efficiencies?

YES, if the workpapers are complete and have been properly prepared

• Availability and reliance upon Audit work papers can reduce financial reporting testing.

• Auditor and Examiner communication prior to start of Examination. Contact information requested during Pre-Examination call.

• Timely receipt of all audit work papers. Uploaded to ShareFile prior to start of the Examination.

• Audit Procedures • Investment confirmations • Series are not operating segments


Examiner Role

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(4) Actuarial work papers - Can the Actuarial work papers create Examination efficiencies?

YES, if the workpapers are complete and have been properly prepared

• 18 Del. Adm. Code 302 requires an annual Actuarial Opinion

• Reliance may be placed on Actuarial documents • Statements of Actuarial Opinion • Actuarial Opinion Summaries • Actuarial Report

• Actuarial document review is a necessary part of the Examination• Inefficiencies can result if paperwork is incomplete or otherwise

inaccurate


Actuarial Role

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The primary goal of the actuarial review is to assess the reasonability of carried loss and loss adjustment expense reserves, as well as the unearned premium reserves.

Items examined by the actuary:• Actuarial documents (SAO, AOS, Actuarial Report)• Annual Statement and/or audited financials• Reinsurance transactions (incl. amounts ceded to/assumed from pools)• Reinsurance Contracts including Pooling Contracts• Business Plan and subsequent amendments• Past pro forma projections

The quality and completeness of the documents noted has a direct impact on the time required to complete the actuarial examination.


Actuarial Role

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Issues encountered by examining actuary that impact cost:• Missing actuarial documents: SAO, AOS, Actuarial Report• Actuarial Report is not compliant with NAIC Instructions or Actuarial

Standards of Practice• Inconsistency between reserves presented in audited financials vs.

amounts cited in SAO• Internally inconsistent accounting documents• Reinsurance transaction detail not provided• Business Plan changes and related amendments not reflected in financials,

OR are reflected but supporting details are not known to the examining actuary (i.e., not filed with revised pro formas)

• Mix of Life/Health and P& C coverages in single captive (requires additional resources)

• Enterprise Risks vs. traditional insurance coverages


Actuarial Issues

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RISK RETENTION GROUPS

•Utilize a Risk Focused Process - document controls and potentially test

•Examiner review, Actuarial review and Information Technology review

•Higher required minimum capital and surplus

•Holding Company’s are subject to 18 Del.C. ch. 50




Risk Retention Groups

Required for Accreditation: • General IT Review

• Obtain and document a basic understanding of the IT Environment Done via the Information Technology Planning Questionnaire (ITPQ)


Information Technology

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Risk Retention Groups

Small Company’s – Focused IT Controls include: • Up-to-date virus and spyware protection • Updated firewalls and secure wireless protection • Regular and tested backup procedures • Access privileges• IT and business (strategic) planning • Business continuity and disaster recovery • Identification/authentication • Periodic identification of IT risks • Employee awareness and accountability (IT security training) • Data input controls • Controls over IT related service providers



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How long should an IT review take?• Depending on the degree of IT complexity and cooperation, 24-40 hrs.

How can we as examiners fulfill our requirements, but at the same time be practical and cost-efficient?

• RRG’s total and effective completion of the ITPQ • Timely access to the CPA’s work papers, management letter and report of

control weaknesses• Timely access to SSAE 16 (SOC 1 or SOC 2) reports for processing by others• Timely provide any follow-up evidence requested



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Regulatory Non-Compliance 18 Del. Adm. Code 302 Captive Insurance Financial Regulation Examination Exceptions:

• No reconciliation of differences between Audited Financial Statements and Annual Report filed

• No approval obtained for consolidated annual audit

• No established and signed Conflict of Interest Policy

• No Department notification for change in Director, Officer and/or Member, Executive Manager


Exceptions

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Regulatory Non-Compliance 18 Del.C. ch. 69 Captive Insurance Companies Examination Exceptions:

• Business prior to the Certificate of Authority Date

• No annual Board of Directors Meetings or only Written Consents

• Capital and Surplus is below minimum required levels

• Minimum capital and surplus is NOT in the form of Cash, Letter of Credit or such other assets as approved by the Commissioner

• Non-compliance with Chapter 13 Investment limitations for Special Purpose Captive Insurance companies – not applicable to Pure Captives

• Issuing loans for minimum capital and surplus


Exceptions

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Continued - Regulatory Non-Compliance 18 Del.C. ch. 69 Captive Insurance Companies Examination Exceptions:

• No Department notification of a material change in financial condition OR management

• No Department approval of material transactions , Examples: • Business Plan Changes (i.e. organizational document) - lines and limits• Pro formula Changes – example operating beyond worst case scenario• Investment Plan Changes –example real estate purchases • Reinsurance Agreements – example change to pool participation • Third Party Administrator Agreements – example change in captive

manager (i.e. change in service agreement) • Material payment from capital and surplus - example dividends


Exceptions

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Questions and Answers




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