State insurance regulators need to address cost control issues and standardize their methods of statutory financial examinations for monitoring insurer solvency, according to a new white paper issued by the major property/casualty and life insurance trade associations.
In “A Call for Change,” a statutory financial examination process white paper, the Alliance of American Insurers (Alliance), the American Council of Life Insurers (ACLI), American Insurance Association (AIA), the National Alliance of Life Companies (NALC); the National Association of Independent Insurers (NAII); the National Association of Mutual Insurance Companies (NAMIC), and the Reinsurance Association of America (RAA) criticized the high degree of variation among the states in conducting their financial exams.
Although regulators and the National Association of Insurance Commissioners (NAIC) have developed additional solvency tools over the past ten years, including the statutory financial audit, risk-based capital, the actuarial opinion and the NAIC Financial Analysis Handbook, there are differences in the way state regulators perform their detailed financial examinations, making the system unnecessarily costly to insurers and policyholders.
Based on member input, the associations recommend that regulators:
• More closely control the costs of financial examinations;
• More closely integrate financial examination work with the work done by an insurer’s auditors; and
• Provide additional training to state examination staffers to be more effective.
To control expenses, the groups recommend that regulators rein in the use of independent contractor-assisted exams, which may significantly increase the cost for services with little or no company input to the procurement process. Although vendors like Certified Public Accounting (CPA) firms and other consultants are frequently necessary when the insurance department lacks the resources to conduct the financial examinations, improved processes are needed to monitor costs when they are used.
The report recommends that insurance departments share both the work plan and time budget with the company being examined before the job begins. The report also stressed the importance of fully integrating the work already completed by the independent auditor into the department’s work plan. For example, if a CPA audit opinion is a valuable enough tool for it to be required for nearly all companies, examiners should use the auditor’s work as much as possible during a financial examination.
Finally, with more of the examination work going to outside consultants, it is essential that regulators provide better training for examination staffers in order to retain expertise within the department. For additional information contact: Alliance Charles Schmidt, 630-724-2158; ACLI Jack Dolan, 202-624-2418; AIA Gretchen Schaefer, 202-828-7100; NALC Scott Cipinko, 847-699-7008; NAII Sue McKenna, 847-297-7800; NAMIC Rick Nelson, 317-875-5250; RAA Joe Sieverling, 202-638-3690.
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