1. NAIC National Association of Insurance Commissioners AD HOC TASK FORCE ON SOLVENCY AND ANTI-FRAUD Casualty Actuarial Society 2001 Spring Meeting The Fontainebleau May 8, 2001

2. 2 Ad Hoc Task Force on Solvency and Anti-Fraud Overview yPurpose and Process yCompleted Improvements yTask Force Recommendations NAIC

3. 3 Purpose and Process vNAIC filings vInformal discussions with states vMedia reports NAIC What happened?

4. 4 Purpose and Process NAIC Question was: How could it have been prevented or detected sooner? Goal was to: Propose improvements in NAIC programs, processes and procedures

5. 5 Completed Improvements vProcedure which questions turnover activity of company’s portfolio vReference guidance for considering the results of the procedure vAdditional detailed procedures if concerns are raised including securities brokers’ standing with the SEC NAIC NAIC Financial Analysis Handbook

6. 6 Completed Improvements vAdded turnover ratios for stocks, long-term bonds and total portfolio NAIC NAIC 5-Year Company Profile Examinations vInvestment section of NAIC Financial Condition Examiners Handbook has been rewritten and includes new guidance on evaluating investment management and controls

7. 7 Task Force Recommendations uAccreditation Standards and Guidelines uFinancial Analysis and Examinations uCommunication and Coordination uAnti-Fraud Programs and Resources uDisclosure and Notification uImprovements to Model Laws and Regulations NAIC vReport and Recommendations of Ad Hoc TF (dated 4/13/01) was adopted by Executive (EX) Committee on 4/25/00 (see Handout #1). vThree Levels of Recommendations vGeneral Areas

8. 8 Level One NAIC “These items are generally the highest priority items that can be accomplished relatively quickly and that should not involve significant NAIC or state resources.”

9. 9 Level One NAIC Accreditation Standards vModel law regarding custodial arrangements vUse of investment specialists vExpanded requirements for “communications with states” uproactive udefine applicable criteria ureview teams to evaluate sufficiency and timeliness vUse of new Form A database vTask force recommended expedited adoption of these new standards

10. 10 Level One NAIC Financial Analysis and Examinations vAdd an evaluation of investment management practices to the Level One checklist of the NAIC Financial Analysis Handbook vDevelop examination procedures to evaluate investment management practices of insurers Annual Statement Blanks and Instructions vAdd disclosure affirming that investments are held pursuant to a qualified custody agreement vAdd disclosure regarding changes in custodian or custody agreement

11. 11 Level One NAIC Form A Database vCreate a Form A database containing the following elements: uState submitting data uDate of Form A application uContact person and contact information for state submitting data uApplication status (i.e., pending, approved, denied or withdrawn) uNames and addresses of applicants, directors, officers, and significant (10%) shareholders uNames and addresses of affiliated persons or companies or key parties to the transaction

12. 12 Level One NAIC Anti-Fraud vContinue negotiations with NASD for shared database access vCompile detailed information on anti-fraud databases maintained by anti-fraud organizations, financial regulators, and law enforcement agencies, and identify criteria for access vWhere members can meet criteria for access to such databases, negotiate access agreements for NAIC and member states

13. 13 Level One NAIC Anti-Fraud (continued) vEstablish guidelines for investigative and prosecutorial resources based on objective measures vConsider modifications to the Insurance Fraud Prevention Model Act such as: uauthority to investigate insider fraud ulaw enforcement status uprosecution authority ualternative structures for dedicated prosecution resources

14. 14 Level One NAIC Model Laws and Regulations vModify the model law regarding custodial arrangements to require custodian to notify regulators upon significant withdrawal of assets or termination of the agreement vAmend the model audit rule to require modification upon change in auditors

15. 15 Level Two NAIC “These are initiatives that overlap current projects of other NAIC groups, primarily the GLBA National Regulatory Priorities Working Groups. Although many of these items are considered priorities of the task force, they also appear high on the membership’s overall agenda so no further action is considered necessary at this time. However, the task force would like to endorse these initiatives for additional urgency.”

16. 16 Level Two NAIC Coordinated Financial Examinations vDevelop a process for coordinating financial exams of insurer groups vDevelop requirements for consolidated accounting and reporting by insurer groups

17. 17 Level Two NAIC Consolidated Financial Analysis vNAIC Financial Analysis & Reporting Division to coordinate analysis of GAAP information, SEC filings, and Federal Reserve information on Financial Holding Companies vStates to coordinate consolidated statutory analysis of insurance only groups Develop a process for consolidated financial analysis of insurer groups

18. 18 Level Two NAIC Holding Company Filings vDevelop standard review processes and procedures for holding company filings vDevelop standard procedures for Form A data input Model Laws and Regulations vConsider modifying the model audit rule to require consolidated GAAP and statutory audit reports

19. 19 Level Three NAIC “These are initiatives that may require lengthy discussions and development or that involve significant additional NAIC or state resources. They are no less important to the task force but are likely to require careful planning, organization and funding to complete. The task force has identified potential committees and charges to oversee these projects.”

20. 20 Level Three NAIC Accreditation Standards and Guidelines vConsider adopting a review team guideline requiring that significant elements of Part A standards are reviewed during the financial analysis and financial examination processes vConsider revisions to accreditation scoring including both the weighting of scores and the review team guidelines for scoring

21. 21 Level Three NAIC Accreditation Standards and Guidelines (continued) vConsider adding review team guidelines that would require examination of troubled or first priority insurers more often that once every five years vConsider adding review team guidelines requiring better communications with other state insurance regulators and state and federal banking and securities regulators

22. 22 Level Three NAIC Financial Analysis and Examinations vConsider adding guidance to the NAIC Financial Analysis Handbook and Financial Condition Examiners Handbook requiring compliance with Part A Accreditation Standards be reviewed and tested vConsider revising the NAIC Financial Condition Examiners Handbook to require scheduling of exams and targeted exams based on risks of insurers vConsider amending the NAIC Financial Condition Examiners Handbook to require a risk management assessment approach

23. 23 Level Three NAIC Anti-Fraud vDevelop alternatives for providing resources and expertise to state insurance departments for fraud investigation vObtain insurance regulators’ access to NCIC for licensing and investigation purposes vDevelop a structure for sharing information between insurance fraud investigations and prosecution authorities

24. 24 Level Three NAIC Model Laws and Regulations vConsider amendments to the Assumptions Model Act and the Disclosure of Material Transactions Model Act to increase prior approval of significant reinsurance transactions NAIC Troubled Companies Handbook vConsider improvements to the NAIC Troubled Companies Handbook regarding potential causes of solvency problems For status of the Task Force’s recommendations, see Handout #2.