Attachment One
Examination Oversight (E) Task Force
3/29/15
Draft Pending Adoption
Draft: 11/24/14
Examination Oversight (E) Task Force
Washington, District of Columbia
November 17, 2014
The Examination Oversight (E) Task Force met in Washington, DC, Nov. 17, 2014. The following Task Force members
participated: Mary Taylor, Chair, represented by Bill Harrington (OH); Thomas B. Leonardi, Vice Chair, represented by Bill
Arfanis (CT); Jim L. Ridling represented by Richard Ford (AL); Jay Bradford represented by Mel Anderson (AR); Dave
Jones represented by Al Bottalico (CA); Chester A. McPherson represented by N. Kevin Brown (DC); Karen Weldin Stewart
represented by Dave Lonchar (DE); William W. Deal represented by Georgia Siehl (ID); Andrew Boron represented by Eric
Moser (IL); Stephen W. Robertson represented by Cindy Donovan (IN); Nick Gerhart represented by Jim Armstrong (IA);
Sandy Praeger represented by Ken Abitz (KS); Sharon P. Clark represented by David Hurt (KY); James J. Donelon
represented by Caroline Brock (LA); Therese M. Goldsmith represented by Christopher Buchanan (MD); Annette E. Flood
represented by Judy Weaver (MI); Mike Rothman represented by Kathleen Orth (MN); Bruce R. Ramge represented by
Justin Schrader (NE); Scott J. Kipper represented by Omar Akel (NV); Roger A. Sevigny represented by Colin Wilkins
(NH); Wayne Goodwin represented by Tony Riddick (NC); John D. Doak represented by Joel Sander (OK); Laura N. Cali
represented by Russell Latham (OR); Michael F. Consedine represented by Annette Szady (PA); Joseph Torti III represented
by Jack Broccoli (RI); Todd E. Kiser represented by Jake Garn (UT); Jacqueline K. Cunningham represented by David Smith
(VA); Mike Kreidler represented by Patrick McNaughton (WA); Ted Nickel represented by Tom Houston (WI); and Tom C.
Hirsig represented by Linda Johnson (WY).
1.
Adopted its Working Group Reports
Mr. Harrington asked members to review the reports from the Task Force’s working groups and to consider them for
adoption. Upon a motion from Ms. Szady, seconded by Ms. Johnson, the Task Force adopted the reports of the Analyst Team
System Oversight (E) Working Group, which met Oct. 16 in regulator-to-regulator session pursuant to paragraph 3 (specific
companies, entities or individuals) of the NAIC Policy Statement on Open Meetings; the Electronic Workpaper (E) Working
Group, which met Oct. 20 in regulator-to-regulator session pursuant to paragraph 4 (internal or administrative matters of the
NAIC or any NAIC member) of the NAIC Policy Statement on Open Meetings; the Financial Analysis Handbook (E)
Working Group, which met Nov. 5, Oct. 16 and Oct. 14 (Attachment One); the Financial Examiners Coordination (E)
Working Group, which met Oct. 9 (Attachment Two); the Financial Examiners Handbook (E) Technical Group, which met
Nov. 6, Oct. 7 conducted an e-vote, Oct. 3 and Aug. 21 (Attachment Three) and Oct. 16 (Attachment Two); the Financial
Examination Report (E) Subgroup, which met Oct. 29, Oct. 21 and Sept. 3 (Attachment Four); and the IT Examination (E)
Working Group, which met Oct. 28 (Attachment Five).
2.
Discussed a Referral from the Financial Condition (E) Committee Regarding CDAs
Mr. Harrington stated that at the Summer National Meeting, the Task Force received a referral from the Financial Condition
(E) Committee to work with the Life Actuarial (E) Task Force to help address a charge to consider the development of a
template or checklist of questions that state insurance departments could use to facilitate the review of an insurer’s riskmanagement program at the time of a policy form filing related to a contingent deferred annuity (CDA), consistent with the
recommendation from the Contingent Deferred Annuity (A) Working Group.
Mr. Harrington reminded members that the referral recommends that the Life Actuarial (E) Task Force take the lead on this
project in setting up joint discussions with the Examination Oversight (E) Task Force related to CDAs and addressing
whether an insurer’s risk-management processes are sufficient to address the risks associated with writing this product.
However, also included in the considerations for addressing this referral is a broader issue relating to the effective
communication of risks associated with individual products throughout the solvency-monitoring process. Mr. Arfanis
provided an overview of the process in place at the Connecticut Insurance Department to review and communicate issues
surrounding new sophisticated products such as CDAs. He said that when a new life product comes to the department’s
attention, the life actuaries review the product and then sit down with the analysis team to go over potential risks. Specific
risks are monitored and followed up on through the analysis and examination as deemed appropriate. Mr. Arfanis made note
of several risks commonly associated with CDAs, which include longevity risk, market risk, policyholder behavior risk and
third-party risk. He emphasized the importance of communication between different areas of the department—including
actuarial, analysis and examinations—to ensure that the risks are identified and monitored.
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Attachment One
Examination Oversight (E) Task Force
3/29/15
Draft Pending Adoption
3.
Adjourned to Regulator-to-Regulator Session
Ms. Donovan made a motion, seconded by Mr. Abitz, to adjourn into regulator-to-regulator session pursuant to paragraph 3
(specific companies, entities, or individuals) of the NAIC Policy Statement on Open Meetings. The motion carried.
Having no further business, the Examination Oversight (E) Task Force adjourned.
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Attachment One
Examination Oversight (E) Task Force
3/29/15
Draft Pending Adoption
Draft: 3/4/15
Examination Oversight (E) Task Force
E-Vote
February 12, 2015
The Examination Oversight (E) Task Force conducted an e-vote that concluded Feb. 12, 2015. The following Task Force
members participated: Mary Taylor, Chair, represented by Bill Harrington (OH); Annette E. Flood, Vice Chair, represented
by Judy Weaver (MI); Allen W. Kerr represented by Mel Anderson (AK); Jim L. Ridling represented by Richard Ford (AL);
Dave Jones represented by Al Bottalico (CA); Anne Melissa Dowling represented by William Arfanis (CT); Gordon I. Ito
represented by Dwight Hamamura (HI); Stephen W. Robertson represented by Cindy Donovan (IN); Ken Selzer represented
by Ken Abitz (KS); Sharon P. Clark represented by David Hurt (KY); Gary Anderson represented by John Turchi (MA);
John M. Huff represented by Leslie Nehring (MO); Wayne Goodwin represented by Tony Riddick (NC); Roger A. Sevigny
(NH); Scott J. Kipper represented by Renee Hanshaw (NV); John D. Doak represented by Joel Sander (OK); Teresa D. Miller
represented by Steve Johnson (PA); Joseph Torti III represented by Jack Broccoli (RI); Mike Kreidler represented by Patrick
McNaughton (WA); Ted Nickel represented by Rebecca Easland (WI); and Tom Glause represented by Linda Johnson (WY).
1.
Adopted a Proposal to Disband or Reconstitute its Working Groups
The Task Force conducted an e-vote to consider a proposal to disband or reconstitute each of its working groups. The Task
Force considered a motion to disband the Financial Examination Report (E) Subgroup. The Task Force considered a motion
to reconstitute the following groups: Analyst Team System Oversight (E) Working Group; Electronic Workpaper (E)
Working Group; Financial Analysis Handbook (E) Working Group; Financial Analysis Research and Development (E)
Working Group; Financial Examiners Coordination (E) Working Group; Financial Examiners Handbook (E) Technical
Group; and IT Examination (E) Working Group. Without objection, the Task Force voted to adopt the proposal to disband or
reconstitute each group as described.
2.
Adopted Revisions to its 2015 Charges
The Task Force conducted an e-vote to consider revisions to its 2015 Charges (Attachment A). Without objection, the Task
Force voted to adopt the revisions to its 2015 Charges.
Having no further business, the Examination Oversight (E) Task Force adjourned.
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Attachment One
Examination Oversight (E) Task Force
3/29/15
Attachment A
EXAMINATION OVERSIGHT (E) TASK FORCE
The mission of the Examination Oversight (E) Task Force is to monitor all aspects of the financial examination
process and to identify, investigate and develop solutions to problems related to financial examinations; to
monitor and refine the IRIS ratios and the Financial Analysis Solvency Tools, including Company Profiles, FAST
ratio scoring system and the Financial Analysis Handbook; to oversee the Analyst Team Project; to review details
of examination surveillance process; to monitor the development of tests for determining when a financial
examination of an insurer is necessary; to establish procedures for flow of information between states about
troubled companies; to enhance the quality and timeliness of financial examinations and monitor additions to the
Financial Condition Examiners Handbook covering this area; and to monitor the examination schedules in
various states and assist the states in developing methods to maintain current schedules.
Ongoing Support of NAIC Programs, Products or Services:
1. The Examination Oversight (E) Task Force will:
x Provide input and comments to the International Association of Insurance Supervisors (IAIS) or other
related groups on issues regarding international risk-management concepts; coordinate such comments
with the International Solvency and Accounting (E) Working Group. — Important
x Provide ongoing maintenance and enhancements to the Form A Database and monitor its usage.
— Important
x Provide ongoing maintenance and enhancements to the NAIC Lead State Summary Report tool and
encourage coordination with solvency matters. — Essential
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Attachment Two
Examination Oversight (E) Task Force
3/29/15
Draft Pending Adoption
Draft: 3/24/15
Financial Examiners Handbook (E) Technical Group
Conference Call
March 12, 2015
The Financial Examiners Handbook (E) Technical Group of the Examination Oversight (E) Task Force met via conference
call, March 12, 2015. The following Technical Group members participated: Al Bottalico, Chair (CA); Richard Ford (AL);
William Arfanis (CT); N. Kevin Brown (DC); Cindy Andersen (IL); Peter Foley (MN); Leslie Nehring (MO); Tony Riddick
(NC); Justin Schrader (NE); Steve Kerner (NJ); Bill Harrington (OH); Joel Sander (OK); Annette B. Szady (PA); Patrick
McNaughton (WA); and Amy Malm (WI). Also participating was: Donald Karnes (TX).
1.
Voted to Expose Handbook Guidance
Mr. Bottalico said that the first two revisions considered for exposure relate to recommendations resulting from the NAIC’s
exam peer review project. The first revision proposes renaming Exhibit V as “Overarching Prospective Risk.” Mr. Bottalico
said that the peer reviewers recognized some confusion regarding which risks should be addressed on Exhibit V vs. a key
activity matrix. This recommended name change is intended to clarify the distinction and encourage an appropriate level of
testing for each prospective risk. Ms. Szady asked if part two of Exhibit V should include enterprise risk management (ERM)
as a possible area of concern that examiners should consider when assessing prospective risks. Becky Meyer (NAIC) said
that ERM is typically assessed during the review of corporate governance that is conducted during planning.
The next proposed revision relates to Exhibit DD – Critical Risk Categories. Participants in the peer review project noted that
numerous critical risk categories were being explained as not applicable for most of the exams submitted for review, which
did not correspond with the intention of the guidance. This proposed revision intends to clarify that in order for a critical risk
category to be considered not applicable, it would generally be a risk area to which the company is not exposed. Ms. Szady
proposed adding that a critical risk category may also be determined not applicable if the exposure the company has to that
risk is limited or insignificant. Mr. Bottalico requested that Ms. Szady’s proposal be submitted during the exposure period.
Mr. Bottalico said the next proposed revision considered for exposure is a minor revision to the required elements included in
the body of the examination report. Current guidance appears to indicate that the insurer would prepare and file a
reconciliation of surplus covering the five-year period since the previous exam that could be included in the examination
report. While the insurer likely prepares a reconciliation of surplus annually, it would not generally prepare a reconciliation
that encompasses the previous three- to five-year period. Therefore, the proposed revision suggests eliminating the language
“for the period since the last examination” to allow utilization of the insurers annual surplus reconciliation in the examination
report.
Mr. Bottalico said the final item to be considered for exposure is the incorporation of two risks related to XXX/AXXX
reinsurance agreements into examination repositories. He said one risk is proposed to be added to the Claims
Handling/Reserving – Life examination repository and is intended to addresses potential issues with loss development related
to XXX/AXXX reinsurance agreements. The other risk is proposed to be added to the Reinsurance Ceding examination
repository and is intended to address the funds held as security to support the reserve.
Ms. Szady made a motion, seconded by Mr. Kerner, to expose the proposed revisions to the Financial Condition Examiners
Handbook (Handbook) guidance for a 45-day public comment period ending April 27. The motion passed.
2.
Discussed 2015 Projects
Mr. Bottalico said that the Technical Group received a referral from the Risk-Focused Surveillance (E) Working Group in
2014 requesting that the Technical Group consider how to allow greater flexibility in the timing of exam procedures that are
conducted in support of a full-scope exam. Mr. Bottalico said the Technical Group now has capacity to devote resources to
this project and asked NAIC staff to draft an outline of preliminary considerations for the Technical Group to consider. He
also asked that any Technical Group members interested in assisting with the development of this outline to notify Ms.
Meyer. Mr. Schrader, Mr. Arfanis and Ms. Nehring volunteered to assist.
Mr. Bottalico said that requirements surrounding the review of affiliated transactions and related parties during an
examination are unclear. He said the current guidance in Section 1, Part IV.D could benefit from revision to clarify what
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Attachment Two
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Draft Pending Adoption
procedures are expected to be performed during planning and what procedures should be performed in later phases as a result
of the assessed risk. Ms. Meyer said the issue is two-fold: 1) there are examiners that interpret the guidance to encourage
extensive work in Phase 1 for related parties that may infringe on the risk-focused approach; and 2) there are examiners that
do not seem to do even the minimum requirements outlined in this section. Therefore, it may be beneficial to revise the
guidance to clarify what is expected. Mr. Schrader said that the critical risk category for related parties should capture
significant issues and suggested that the guidance be revised to be more flexible regarding what is required during Phase 1
with respect to related party transactions. Mr. Riddick and Ms. Andersen agreed that additional guidance is needed, but that
additional guidance should allow for flexibility. Ms. Szady said there is some overlap between required compliance
procedures and testing performed as a result of the risk-assessment process. Mr. Bottalico asked NAIC staff to draft revisions
to this section of guidance for the Technical Group to consider on a future call.
Mr. Bottalico said that another project for the Technical Group to consider relates to the concept of multi-entity reporting that
was proposed by the Financial Examination Report (E) Subgroup in 2014. Ms. Henning said that this is an optional concept
that would allow a state to issue one examination report covering multiple entities domiciled within the same state. All of the
required elements, as defined by the Handbook, would have to be documented within the report for each domestic entity
examined. Mr. Bottalico said that NAIC staff polled the states to gauge the interest in pursuing this project further. The
results were mixed, with 14 states favoring this reporting concept, eight states indifferent and nine opposed. Ms. Henning
said that the primary reasons reported for opposition to this concept were uncertainty regarding the legality of such a report
within each state and concerns that insufficient information could be reported. Bruce Jenson (NAIC) added that some states
were concerned that without additional guidance, some states might prepare consolidated group reports that lack information
on a legal entity basis. Mr. Arfanis, Ms. Szady, Mr. Riddick, Mr. McNaughton and Mr. Foley spoke out in favor of this
concept, requesting that the Technical Group pursue researching this issue further in order to determine what Handbook
guidance would be necessary to ensure that such a report would comply with state law that allows the acceptance of another
state’s examination report. Among those in favor, several stated that this concept would be beneficial to their state and could
lead to efficiencies in the presentation and disclosure of information resulting from an examination. Mr. Ford, Ms. Malm and
Mr. Karnes raised concerns regarding the depth of information reported using this format, the admissibility of a report
presented in this format and whether a state might feel the need to conduct an additional examination to get comfort over any
information that may be omitted in this format. Mr. Bottalico said there appeared to be enough support among the Technical
Group to pursue this issue further and asked NAIC staff to draft a framework covering the concepts related to multi-entity
reports for the Technical Group to consider on a future call.
Mr. Bottalico listed the other projects for the Technical Group to consider this year, including: 1) identifying and addressing
redundancies in the Handbook; 2) revisions to incorporate the corporate governance annual disclosure; 3) additional guidance
related to principles-based reserving; 4) sampling guidance; and, 5) potential revisions to the management representation
letter.
3.
Discussed Other Matters
Mr. Bottalico said that a large number of revisions were made to Handbook guidance in 2014 to clarify what elements of the
examination process were required and which were considered optional. Based on the work that was done, NAIC staff
created a tool that lists the items that the Technical Group considered required elements to be performed as part of every
examination. Mr. Bottalico said this chart is available for reference on the NAIC website. He also said that changes may be
proposed as necessary to ensure this document remains current.
Having no further business, the Financial Examiners Handbook (E) Technical Group adjourned.
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Attachment Two
Examination Oversight (E) Task Force
03/29/2015
Draft Pending Adoption
Draft: 3/24/2015
IT Examination (E) Working Group
Conference Call
March 16, 2015
The IT Examination (E) Working Group of the Examination Oversight (E) Task Force met via conference call Mar. 16, 2015.
The following Working Group members participated: Patrick McNaughton, Chair (WA); Charles Turner (AL); Ber Vang and
Jack Ho (CA); Ken Roulier (CT); Ginny Godek (IL); Ken Abitz (KS); George Hutschenreuter (MD); Mark Nance and Andy
Balas (MO); Justin Schrader (NE); Darlene Pettit (NY); and Phil Judge (PA). Also participating was: Raymond G. Farmer
(SC).
1.
Discussed the Cybersecurity (EX) Task Force’s Work
Mr. McNaughton and Director Farmer led a discussion informing the Working Group of the Cybersecurity (EX) Task
Force’s work. The Task Force met March 12 and subsequently released the “Principles for Effective Cybersecurity Insurance
Regulatory Guidance,” which will guide the Task Force’s work. These principles are available for public comment ending
March 23. Director Farmer provided an overview of the regulatory landscape and discussed how the principles were
compiled, as well as the role that the Working Group will play in incorporating these principles into the work already
performed on financial examinations. Director Farmer noted that one of the principles that will specifically affect the IT
Examination (E) Working Group will be Principle 5, which directs the Task Force to ensure that regulatory guidance be
consistent with the National Institute of Standards and Technology’s (NIST) framework.
Mr. McNaughton commented that although there may be opportunities to enhance existing guidance contained within the
Financial Condition Examiners Handbook (Handbook), examiners should consider that the principles also include language
asking that guidance be “flexible, scalable and practical.” Mr. McNaughton also noted that existing guidance already has a
strong foundation by being based on the COBIT 5 framework.
Miguel Romero (NAIC) provided a summary of the NIST framework that the Working Group is being asked to consider.
This framework is focused on addressing cybersecurity concerns and has additional language that is not presently included in
existing Handbook language. There are opportunities to enhance Handbook language around incident response, information
sharing, etc., but existing language is based on the Control Objectives for Information and Related Technology (COBIT)
framework, which has procedures in place to respond to several of the risks identified by the NIST framework.
Mr. McNaughton asked for volunteers to perform a further detailed comparison of existing guidance against the NIST
framework and to propose changes based on gaps identified.
Mr. Turner, Mr. Judge, Mr. Balas, Michael Morrissey (Examination Resources), Phil McMurray (RRC), Paul Berkebile (INS
Services) and Jerry Link (INS Services) participated in a discussion of existing Handbook guidance. Mr. Turner and Mr.
Berkebile asked that the group consider the creation of a separate domain within existing Handbook guidance. Mr. Link
commented that the Working Group should consider regulatory efforts by other state and federal regulators to ensure that
work already performed is leveraged. Mr. Romero noted that most regulators are expected to move towards compliance with
the NIST framework so convergence with this guidance will ensure consistency across regulatory agencies. Additionally, the
Handbook’s existing guidance compares favorably against guidance presently available for review from other regulatory
bodies that NAIC staff considered. This is due to the Handbook’s use of the COBIT framework as a reference.
2.
Discussed Comment Letters and Handbook Cybersecurity Considerations
In the previous Working Group meeting, the Working Group asked for comment letters to be submitted regarding examiner
experiences with existing Handbook guidance as it relates to cybersecurity. Mr. McNaughton led a discussion regarding
responses received. Mr. Turner submitted the NIST framework as a document the Working Group should consider, noting its
focus on cybersecurity. Mr. Ho submitted suggested procedures that could supplement existing Handbook guidance. Mr.
McNaughton asked that the comment be resubmitted as part of the NIST framework comparison. Debbie Lew (Ernst &
Young) provided the 2014 Director’s Handbook Series published by the National Association of Corporate Directors
(NACD). Mr. McNaughton noted that this guidance may be considered to supplement existing questions within Exhibit Y of
the Handbook, which provides a listing of topics to be discussed during interviews with company executives. Mr. McMurray
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provided a summary of the comment letter from RRC, which discussed its examination experiences that support the need for
additional guidance on cybersecurity.
3.
Voted to Expose Proposed Handbook Revisions
Mr. McNaughton led a discussion to consider a revision to Handbook guidance that addresses a redundancy identified
between Control’s DSS 01.04/.05 and DSS 05.05 Exhibit C Part II. The revision shifted the focus of Control’s DSS 01.04/05
to environmental concerns and while Control DSS 05.05 is focused on physical concerns. Mr. Vang made a motion, seconded
by Mr. Roulier, to expose the proposed revisions for a 45-day public comment period ending April 30. The motion passed
4.
Discussed Peer Review Observations
Mr. Romero led a discussion on NAIC staff observations as a result of the NAIC’s Peer Review Program. Mr. Romero noted
that examinations have done a good job of implementing Handbook guidance, but there are a few areas of feedback that have
been identified. These will be considered as future peer review sessions are held to determine if any training needs exist or if
there are necessary revisions to Handbook guidance.
Having no further business, the IT Examination (E) Working Group adjourned.
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