NY INSURANCE REGULATOR PROPOSES NEW ENTERPRISE RISK

Size: px

Start display at page:

Download "NY INSURANCE REGULATOR PROPOSES NEW ENTERPRISE RISK"

William Harrington
8 years ago
Views:

1 January 13, 2014 NY INSURANCE REGULATOR PROPOSES NEW ENTERPRISE RISK AND GROUP SOLVENCY REQUIREMENTS On January 7, 2014, the New York Department of Financial Services (the Department) issued a proposed rulemaking 1 on insurance company enterprise risk management (ERM) and own risk solvency (ORSA) requirements (each as explained below). The rule would implement amendments made to New York Insurance Law (NYIL) during 2013 that enhanced the New York insurance regulator's oversight authority over insurers, their affiliates and risks affecting such affiliate groups as a whole. In this regard, the proposed rule is consistent with similar "group solvency" measures that have been adopted by the National Association of Insurance Commissioners (NAIC) and a number of other states as a response to the financial crisis of Such measures significantly increase insurers' reporting and risk-management requirements, particularly with respect to relationships with affiliates and group-wide exposure to financial risks. The Department will accept comments on the rule for a period expiring 45 days following publication of the proposal in the state register. ERM The proposed rule would require each of the following types of entities to adopt a formal ERM function that identifies, assesses, monitors and manages "enterprise risk": a holding company that controls a New York-authorized insurer; a New York-domiciled insurer that controls one or more subsidiaries; and an New York-licensed insurer that is not a member of an affiliate group. The proposed rule's definition of "enterprise risk" tracks the definition set forth in the 2013 NYIL amendments and applies the definition also to insurers that are not affiliated with any group: 1 Proposed 11 NYCRR 82; Insurance Regulation 203 (available at and scheduled for publication in the state register on January 22, 2014). Attorney Advertising 2014 Kramer Levin Naftalis & Frankel LLP

The rule would implement amendments made to New York Insurance Law (NYIL) during 2013 that enhanced the New York insurance regulator's oversight authority over insurers, their affiliates and risks

2 "any activity, circumstance, event, or series of events involving the insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer, including anything that would cause the insurer's risk-based capital to fall into company action level..., or that would cause further transaction of business to be hazardous to the insurer's policyholders or creditors or the public." The ERM function must, inter alia, be headed by an appropriately experienced individual "with the requisite authority and who has access to the board of directors and senior management;" include a written risk policy adopted by the board that delineates "risk/reward framework, risk tolerance levels, and risk limits;" provide for the measurement of risk under a "wide range of outcomes," using techniques that are "appropriate" and "adequate" for management of the entity's solvency; include documentation that sets forth assumptions made, measurement techniques applied and outcomes of "plausible" scenarios; include stress testing; incorporate risk tolerance levels and limits; consider a process to monitor capital and capital adequacy; incorporate investment and asset-liability management policy; controls on internal models; longer-term continuity analysis; and "feedback loops"; address all "reasonably foreseeable and relevant material risks" including insurance underwriting, asset-liability matching, credit, market, operational, reputational and liquidity risks, assess the "relationship between risk management and the level and quality of [necessary] financial resources"; and identify, quantify and manage any risks arising from affiliate transactions. The proposed rule would require each of the following types of entities to file an ERM report with the Superintendent of Financial Services (the Superintendent) by each April 30: a holding company that controls a New York-authorized insurer;

.., or that would cause further transaction of business to be hazardous to the insurer's policyholders or creditors or the public.

3 a New York-domiciled insurer that controls one or more subsidiaries; and an New York-licensed insurer that is not a member of an affiliate group and that has annual premiums of at least $500 million. An ERM report must discuss the following (to the extent not already covered in other filings submitted to the Department under certain other statutes or regulations): any material developments regarding strategy, internal audit findings, compliance or risk management affecting the insurer or group; any acquisition or disposal of insurance entities and reallocation of existing financial or insurance entities; any changes in the shareholders exceeding 10 percent or more of voting securities; developments in any investigations, regulatory activities or litigation that could have a significant bearing or impact; the entity's business plan; a summary of strategies for the next 12 months; the identification of any material concern by a supervisory college, if any, held during the last year; the identification of capital resources and material distribution patterns; certain adverse developments in the entity's financial strength or credit ratings; information on any corporate or parental guarantees, and the expected source of liquidity should the guarantees be called upon; and the identification of any material activity or development that, in the opinion of senior management, could adversely affect the insurer or group. A covered firm may attach an SEC filing (or, in the case of a non-u.s. firm, its most recent public audited financial statement) as long as specific references are included to those areas listed above for which the SEC filing or audit provides responsive information. ORSA The proposed rule would require New York-domiciled insurers to conduct an ORSA at least annually and when there are "significant changes" to the firm's risk profile. The insurer's obligation to conduct an ORSA would be satisfied if its affiliate group conducts such an ORSA. An ORSA is defined (in a manner similar to the definition set forth in the NAIC's model ORSA act) as an "internal assessment, appropriate to the nature, scale, and complexity" of an insurer or its affiliate group, which is conducted by that insurer or group, of "the material and relevant risks" associated with the insurer's or group's current business plan, and of "the sufficiency of capital resources to support those risks." Each covered insurer would be required to submit a "high-level" summary of its ORSA (or, where such insurer's affiliate group files an ORSA summary in another jurisdiction, a copy of such report) to the

regarding strategy, internal audit findings, compliance or risk management affecting the insurer or group; any acquisition or disposal of insurance entities and reallocation of existing financial or

4 Superintendent by December 1 of each year, starting in 2015, and to "maintain and make available documentation and supporting information upon examination or upon the Superintendent's request." Each ORSA must be conducted in accordance with, and each summary report must contain all of the information required by, the NAIC's ORSA Guidance Manual. An insurer would be exempt (except as described in the next paragraph) from the ORSA requirements where (a) it has annual premiums of less than $500 million and (b) its affiliated group, if any, has annual premium of less than $1 billion. (Where an insurer falls below the $500 million threshold, but its group has premiums of $1 billion or more, the ORSA summary report must include every insurer within the group. Conversely, where the insurer has premium of $500 million or more, but its group is below $1 billion, the ORSA summary report need include only the domestic insurer. In addition, any insurer that would otherwise be covered by the proposed ORSA requirements may apply for a waiver from the Superintendent.) Despite falling within the thresholds for an exemption, a domestic insurer may be required by the Superintendent to conduct an ORSA and file an ORSA summary report: based upon unique circumstances, including the type and volume of business written, ownership and organizational structure, federal agency requests, and international supervisor requests; if such insurer's risk-based capital triggers a company action level event; if the further transaction of business would be hazardous to policyholders, creditors or the public; or if requiring such measures would be in the best interests of the people of New York State. The proposed rule provides for a one-year transition period for any insurer that is currently exempt from the ORSA requirement but becomes subject to it in the future due to changes in its premium volume.

An insurer would be exempt (except as described in the next paragraph) from the ORSA requirements where (a) it has annual premiums of less than $500 million and (b) its affiliated group, if any, has

5 * * * Kramer Levin's Insurance Practice Group routinely advises clients on all aspects of insurance regulation affecting transactions, reinsurance, solvency, investments and other areas of insurance company activity. We monitor regulatory developments at the state, federal and international levels and offer clients in the insurance and reinsurance businesses the fullest range of transactional and regulatory legal services.for more information, please contact: Daniel A. Rabinowitz Co-Chair, Insurance Practice Group drabinowitz@kramerlevin.com * * * This memorandum provides general information on legal issues and developments of interest to our clients and friends. It is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters we discuss here. Should you have any questions or wish to discuss any of the issues raised in this memorandum, please call your Kramer Levin contact. Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, NY Phone: Marsh Road Menlo Park, CA Phone: avenue Hoche Paris Phone: (33-1)

We monitor regulatory developments at the state, federal and international levels and offer clients in the insurance and reinsurance businesses the fullest range of transactional and regulatory legal

NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES 11 NYCRR 82 (INSURANCE REGULATION 203) ENTERPRISE RISK MANAGEMENT AND OWN RISK AND SOLVENCY ASSESSMENT

NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES 11 NYCRR 82 (INSURANCE REGULATION 203) ENTERPRISE RISK MANAGEMENT AND OWN RISK AND SOLVENCY ASSESSMENT I, Benjamin M. Lawsky, Superintendent of Financial