How To Write A Law That Will Make It Easier To Manage Risk In New Jersey

Transcription

1 for N.J. health insurance companies and HMOs February 23, 2015 I. Introduction New Jersey health insurance companies and HMOs were greeted with significant new reporting and managerial requirements effective January 1, This voluminous 81 page Act (P.L. 2014, Ch. 81) concerning the modernization of the financial solvency regulation of insurers and amending and supplementing various parts of statutory law is consequential to all New Jersey health insurance companies and HMOs, and all entities included within their respective holding company systems. Spearheaded by the National Association of Insurance Commissioners (NAIC), the law requires a broad, holistic approach to risk assessment, risk management and risk reporting. Accordingly, the Act ushers in enterprise risk reporting requirements to these types of entities and requires them to develop and submit reports based upon NAIC s own risk and solvency assessments guidelines. The Act also imposes enhanced risk based capital requirements for so-called health organizations (discussed below) and expands powers of the Commissioner of the New Jersey Department of Banking and Insurance (DOBI). (Parts of the Act pertaining to life insurance policies are not discussed in this article.) II. Scope and Purpose of Legislation The purpose of the legislation is to strengthen and improve the process by which health insurers and HMOs are monitored and regulated in New Jersey. Based upon NAIC s model law, the Act intends to modernize DOBI s oversight of the State s insurance industry and accordingly, protect the public against insolvencies. To the extent adopted by all 50 states, the Act levels the playing field among states compliance requirements. Presumably, a level playing field avoids interstate market disruption and thus, reduces the risk of insolvencies. The law is also required for DOBI to maintain its accreditation by NAIC. New Jersey Assembly Financial Institutions and Insurance Committee Statement to AB III. Enterprise Risk Management In the aftermath of Sarbanes-Oxley and the Great Recession, a consensus among insurance regulators has developed which calls for an enterprise-wide risk management approach. Conventional (and soon to be archaic?) risk management approaches have been criticized for failing to integrate risks among separate entities within holding company systems. Requiring insurance groups to adopt enterprise risk management principles is therefore one of the core components of the new law. Reprinted with permission from the February 23, 2015 issue of The New Jersey Law Journal ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.for inform ation, contact or reprints@alm.com or visit reprints.com.

2 Enterprise risk management expands upon traditional metric and quantitative methods to include a formal and ongoing assessment of qualitative and strategic variables. For example, risks are expressed within domain categories such as: strategic; compliance; technology; operational; and human capital. Under the Act, the term enterprise risk is defined as follows: Enterprise risk means any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole, including, but not limited to, anything that would cause the insurer s Risk-Based Capital to fall into company action level as set forth in administrative rules adopted by the commissioner....which reflect the standards set forth in the Risk-Based Capital For Insurers Model Act adopted by the National Association of Insurance Commissioners or would cause the insurer to be in hazardous financial condition as defined in administrative rules adopted by the commissioner which reflect the standards set forth in the Model Regulation adopted by the National Association of Insurance Commissioners to define standards and the commissioner s authority over companies deemed to be in a hazardous financial condition. P.L. 2015, Ch. 81, 1. Accordingly, the Act requires the ultimate controlling person of every insurer to file an enterprise risk report in the manner determined by NAIC. The report must identify material risks that could pose enterprise risk to the insurer. Id., 3. The Act thus ensures that the regulation of insurance in New Jersey is consistent with NAIC s current industry-wide guidance. IV. Own Risk and Solvency Assessment The Act requires all insurers to complete and conduct an Own Risk Solvency Assessment (ORSA) and to submit an ORSA Summary Report to DOBI no more than once per year. Id., 49. The ORSA Summary Report is a fundamental component of the enterprise risk report. To some commentators, the ORSA requirement is a sea change in the way in which insurance regulators will obtain information, monitor, and respond to insurers. Conducting the ORSA will likely be a significant challenge requiring additional human resources and actuarial expertise. Although some exemptions apply (i.e., if an individual insurer has less than $500M direct written premium or if the insurance group has direct - 2 -

3 written premium less than $1B), the exemptions can be overridden by the Commissioner. Id., 51. The Act requires the ORSA to be conducted in a manner that is consistent with a process comparable to the ORSA Guidance Manual, i.e., the manual published by NAIC. Id., 52. Accordingly, health insurers and HMOs should now study the ORSA Guidance Manual. The ORSA Guidance Manual (the July 2014 version is the most recent currently available version) is comprised of three sections. The first requires the insurer to describe its enterprise risk framework, i.e., its risk management infrastructure. This requires the insurer to describe its governance structure, including roles and responsibilities. It also requires the insurer to describe how it identifies risks and the risk assessment tools that are incorporated into its management and governing infrastructure. The second section of the ORSA Guidance Manual pertains to quantitative and qualitative assessments of the insurer s risk exposure in normal and stressed scenarios. Accordingly, insurers will be required to consider the impact of stresses on capital. Those stresses can arise from, for example, adverse changes in the regulatory environment, reputational damage and loss of market share, unexpected investment loss, unexpected losses due to poor underwriting, etc. The third section of the Manual requires the insurer to describe how it assesses risk capital among entities included within the insurance group, i.e., integrating risks of all affiliates within the holding company system. This is intended to shed light on the interconnectedness of the affiliates within the holding company system. Additionally, the ORSA Guidance Manual requires insurers to assess prospective solvency under normal and stressed conditions. The prospective solvency assessment must include a discussion of prospective risks and whether these risks are expected to increase or decrease prospectively. In light of the detailed and strategic disclosures required by the Act, confidentiality provisions are added to shield the information from disclosure to third parties, e.g., in connection with civil litigation. Id., 9, 53. Last, it should be noted that NAIC s pilot testing of ORSA reporting suggests challenges may lie ahead. For example, test reports failed to adequately describe risk limits; failed to explain methodologies underlying internal capital models; and failed to identify key risks. Test results therefore suggest that state regulatory authorities will indeed take a close look at submitted ORSA Summary Reports. It should be noted that failure to timely file the ORSA Summary Report as required by the Act is punishable by a penalty of $5,000 per each late day. Id., 54. The first ORSA Summary Report must be filed in Id.,

4 V. Capital and Surplus Requirements for Other Types of Carriers In addition to imposing enterprise risk reporting and ORSA reporting requirements, the Act expands DOBI s regulatory powers to entities that had previously not been subject to the same capital and surplus requirements that have been in place for health insurance companies and HMOs. More specifically, the new law authorizes the Commissioner to increase capital and surplus requirements for hospital service corporations, medical service corporations, dental service corporations, dental plan organizations, health service corporations, prepaid prescription service organizations and licensed organized delivery systems ( health organizations ) based on the health organization's business risks. Id., Accordingly, NAIC s risk based capital ( RBC ) requirements are now required by these types of entities. VI. Enhanced Powers of Commissioner The Act enhances the Commissioner s powers by expressly granting him or her the authority to examine any insurer or its affiliates to ascertain financial condition, including enterprise risk to the ultimate controlling party or with respect to any affiliate within the holding company system, or by the holding company system on a consolidated basis. Id., 6. Additionally, the Act expressly grants the Commissioner the right to order production of information not in the possession of the insurer if that information can be obtained via contract or some other method. If such information cannot be provided for reasons the Commissioner determines are without merit, the insurer may be fined up to $5,000 per day or, the insurer s certificate of authority may be suspended or revoked. Id. If an insurer fails to comply with the Commissioner s order to produce records, documentation, books, etc., as permitted under the Holding Company Act, the Commissioner has the power to examine the insurer s affiliates to obtain the information. Id. Further: The commissioner shall also have the power to issue subpoenas, to administer oaths, and to examine under oath any person for purposes of determining compliance with this section. Upon the failure or refusal of any person to obey a subpoena, the commissioner may petition a court of competent jurisdiction, and upon proper showing, the court may enter an order compelling the witness to appear and testify or produce documentary evidence. Failure to obey the court order shall be punishable as contempt of court. Id. VII. Conclusion New Jersey Health insurance companies and HMOs must now comply with new reporting and disclosure requirements. Enterprise risk management and Own Risk - 4 -

5 Solvency Assessments are the cornerstones of these requirements. Developed by the NAIC, the Act requires relatively elaborate disclosures of insurers internal processes for assessing, managing, and planning for an array of risks. These risks will now be analyzed at the insurance group level, i.e., systematically integrating the array among all affiliates within the insurance group s holding company system. Based upon the results of NAIC s pilot testing, compliance will be challenging. Barry Liss is a Director in the Corporate Department and Healthcare Team Leader at Gibbons P.C. where his practice is exclusively dedicated to healthcare law