1. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 1 - The New World Order in Insurance Regulation: What Boards and Management Need to Know and Why What the Regulator is Expecting

2. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 2 - This presentation is all about change How many years did it take radio to reach 50M users? 38 years How many years did it take Google to reach 50M users? 6 years How many years did it take Facebook to reach 50M users? 3.5 years How many years did it take iPad to reach 50M users? 1.5 years How many years did it take Google + to reach 50M users? 88 days

3. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 3 - What is Happening in the Regulatory World There have been seismic shifts in regulatory approach by the NAIC and Insurance Departments RetrospectiveProspective CompanyEnterprise Financial StatementGovernance RulesPrinciples Regulators are expecting more Board involvement in this new regulatory approach Is your management ready?

4. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 4 - What are we trying to do differently: Group vs. Legal Entity Supervision Corporate Governance Risk Management  Enterprise Level  Legal Entity Level  Inter-Connectivity Risks  Control Environment Capital Management Strategic Management (Prospective Risk) Verification of all of this-the Risk Focus Exam Process

5. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 5 - Have you ever read the NAIC’s White Paper on High Level Corporate Governance Principles NAIC’s Comparative Analysis of Existing U.S. Corporate Governance Requirements NAIC’s Model Corporate Governance Manual Disclosure Model Act and Model Regulation Exhibits L & M on the NAIC’s Financial Examiners Handbook  Exhibit L – Branded Risk Classification  Exhibit M- Understanding the Corporate Governance Structure

6. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 6 - Form F – Enterprise Risk Report NAIC’s Own Risk and Solvency Assessment Guidance Manual NAIC’s Own Risk and Solvency Assessment Feedback Pilot Projects Observations

7. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 7 - What are Regulators Looking at Now Corporate Governance – Group level as well as Legal entity level  NAIC’s Model Corporate Governance Annual Disclosure Model Act and Regulation (my hope is to be live 1/1/2016)  Interviews with Chairman of the Board and Head of Audit Committee as part of Financial Examinations  Importance of Audit Committee Enterprise Risk Management (ERM)  How does the process work?  Is it effective?  Is it used by Management and Boards?  ERM is Scalable  Prospective Risks  “Risk Management became Risk Justification”

8. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 8 - What are Regulators Looking at Now Own Risk and Solvency Assessment (ORSA)  NAIC Guidance Manual  NAIC Pilot Program  NAIC Model Law is live as of 1/1/2015 in PA Control Environment  Board’s need to take on more responsibility  Effective or not  Boards need to make certain representations to Insurance Departments within Amended Holding Company Law  Internal Audit Function Requirement (Revisions to NAIC’s Model CPA Audit Regulation)

9. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 9 - What are Regulators Looking at Now Capital Management  How is this done by Management and Boards  Effective or not  Group Capital (ORSA) Strategic Management  Does the Board have a plan?  Prospective Risks

10. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 10 - Why are Regulators Doing This? It is a better regulatory process-looking out of the front of the car window (prospective risk) then looking out of the back window. AIG-Reputational Risk/Group Risk My International Friends (EU, IAIS, G-20)

11. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 11 - What Boards Should Be Doing About All This Change Get educated Set up a Risk Committee of the Board Should we hire or designate a Chief Risk Officer (CRO Council of North America) Is the Board receiving proper Risk Summary Reports from Management

12. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 12 - What Boards Should Be Doing About All This Change (Cont’d.) How does the Board know that the Company’s ERM System is working  AIG-Derivatives operation  JPMorgan Chase $2B trading loss (Now $5.8B)  UBS-Rogue Trader How do we learn from the ERM failure?

13. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 13 - What Boards Should Be Doing About All This Change (Cont’d.) Boards need more individuals with an Insurance Regulatory Background-Where do we find them? Should the CEO and Chairman of the Board be split roles? Is your Board receiving updates on Regulatory Issues (Regulatory Risk)? Has your Board ever thought about inviting your Domestic Regulatory to one of your Board Meetings?

14. PAMIC 2015 Executive Roundtable June 3, 2015 Stephen J. Johnson, CPA, Deputy Insurance Commissioner Office of Corporate and Financial Regulation - 14 - Other Resources for Corporate Governance The Society of Corporate Secretaries and Governance Professionals (http://www.governanceprofessionals.org)http://www.governanceprofessionals.org The National Association of Corporate Directors (http://www.nacdonline.org)http://www.nacdonline.org The Business Roundtable has a Corporate Governance Committee (http://www.businessroundtable.org/issues/corporate- governance/committee)http://www.businessroundtable.org/issues/corporate- governance/committee The Conference Board Commission (http://www.conference- board.org/pdf_free/sr-0304.pdf)http://www.conference- board.org/pdf_free/sr-0304.pdf The Organisation for Economic Co-operation and Development (OECD) (http://www.oecd.org/corporate/)http://www.oecd.org/corporate/