State Regulation, how would it change your world? Dennis Tweedale, CEO, League of Wisconsin Municipalities Mutual Insurance Company Cheryll Bossingham, Financial Administration, Strohm Ballweg, LLP AGRIP-Orlando, FL March 2017

Wisconsin Climate for Pools/Municipal Mutuals -Wisconsin Statute 611.23 (1977) -Pools not allowed -7 municipal mutuals -Statutes allow workers compensation, liability, and property -Relaxed start-up regulations -No rate filings required

Regulation Of Insurance Companies National Association of Insurance Commissioners (NAIC) State Insurance Departments Rating Agencies including AM Best

Regulation Of Insurance Companies NAIC Coordinates insurance regulation among the states but has no direct authority Develops Model Laws and Regulations Develops uniform financial filings and models -Annual Statement -Risk Based Capital or RBC -Own Risk and Solvency Assessment (ORSA) -Corporate Governance Annual Disclosure (CGAD)

Regulation Of Insurance Companies State Insurance Departments Enforces insurance laws to protect consumers, monitors solvency, and regulates competition via: -State-specific filings and reports -Approval of rates and forms -Financial and Market Conduct Exams -Licensing -Minimum surplus requirements

Filings Checklist for WI Insurers

Approval of Policy Forms Policy Forms (Including endorsements and applications) All original forms and any changes must be filed with the state under Strict Filing Requirements -Prescribed filing forms (signatures needed) -Must be certified as readable -File & Use (i.e. use 30 days after filing) or Use & File -Approved/Filed/Not Disapproved -If significant coverage decrease-must notify insureds in writing

Rates and Rules Filing Original Rates/Rules and any changes must be filed with the State Strict Filing Requirements -Required forms (signatures needed) -Minimum Documentation (Justification): Three years of premium and loss information and; Explanation of rate-making procedures; including at least one: A description of any statistical and actuarial methods used A statement of facts which explain judgements used A statement as to how the rates of the filing company compare with those of the competition -File & Use or Use & File (i.e. WI P&C filing required within 30 days after new rates/rules) -Not Disapproved -Different rules if insurer uses rate service organization (i.e. ISO) which files loss costs. -Varying filing requirements by certain perils -ALL PUBLIC INFORAMTION

Financial Examinations -Looks at the Company’s financial condition as of a particular date -Reviews the insurance company’s compliance with some of the many insurance laws -Company must complete and submit multiple questionnaires (lengthy IT questionnaires) -Basically look at everything in great detail (financial records, minutes, marketing material, and contracts) -Extensive interviews conducted -Examination report is a public document

Financial Examination Interviews Interview all levels (Directors, Management, and Staff) regarding: -Experience and background -Duties and responsibilities -Reporting structure -Ethics -Risk Area -Risk mitigation strategies -Corporate strategy -Other topics

Example Questions for Directors/Audit Committee: 1. As a member of the board, do you believe you receive adequate training on corporate governance? How? What is your responsibility as a board member? 2. Explain your relationship with the internal/external auditors. Shareholders. CEO. 3. Explain the reporting structure, including who reports to the board/committee. 4. Explain the commitment to ethics by the board/committee and explain how the board/committee conveys that commitment to employees? 5. What key risks do you monitor as a member of the board? How do you monitor the risks? Are the risks monitored the key risks of the company based on your opinion.

Regulatory Requirement on Board of Directors Required Forms -Biographical Form A-Filed -Conflict of Interest Form- Maintained -Code of Ethics Board Structure -Audit Committee Required (Model Audit Rule) -Audit Committee Structure -Must retain a certain proportion of independent member based on previous year’s direct & assumed premium. -Corporate Governance Annual Disclosure-Even more requirement for Boards (discussed later on)

Rating Agencies AM Best Most widely recognized rating agency for insurers Financial Strength Rating is based on the balance sheet strength, profitability, and business profile Insurer must pay to be rated Have pushed industry towards a more conservative position in recent years

Potential Future Regulation Corporate Governance Annual Disclosure (CGAD-Pertains to all insurers) 1-Corporate Governance Framework 2-Board and Committee Policies and Practices 3-Management Policies and Practices 4-Management and Oversight of Critical Risk Areas Potential Changes in the future Federal Insurance Office (FIO) Created via Dodd-Frank Role has yet to be determined International Financial Reporting Standards (IFRS) Not yet adopted by the SEC Drastic changes for insurance accounting NAIC is watching closely, several years off

The $64 dollar question…State Regulation Upside downside Transparency NAIC database measures Deflect competitor criticism Build regulator relationships Insolvency protection Part of State Insurance Alliance (lobbying) Transparency Filings- Pools results are public Ratios open pool to criticism Regulators may find practices that are questionable (on bad list) Do not qualify for insolvency protection Subject to sanctions Limited # of statutory experts Cost of state regulation and assessments