|March 10, 2014|
Previously published on March 2014
The New York State Department of Financial Services (the “Department”) recently proposed Regulation 2031 (the “Proposed Regulation”) which attempts to assess the “enterprise risk” impacting New York authorized insurers and business risks disclosed by New York domestic insurers’ own risk and insolvency assessments (“ORSA”) to determine the impact of such risks in light of available capital.
Specifically, the Proposed Regulation will require:
- All holding companies as defined in New York Insurance Law (“NYIL”) Article 15, insurers registered or required to register under NYIL Article 16 or 17 (New York-domiciled insurers controlling one or more subsidiaries) and all other New York authorized insurers2 to adopt a formal enterprise risk management function that identifies, assesses, monitors, and manages all enterprise risk;
- All holding companies pursuant to NYIL Article 15, insurers registered or required to register under NYIL Article 16 or 17 (New York-domiciled insurers controlling one or more subsidiaries) and certain New York domestic insurers that are not members of holding companies to file an annual enterprise risk report (the “Report”); and
- Domestic insurers (subject to certain exemptions) to conduct regular ORSAs and to submit an ORSA summary report, consistent with the NAIC ORSA Guidance Manual, by December 1, 2015 and annually thereafter.
All holding companies as defined in NYIL Article 15, insurers registered or required to register under NYIL Article 16 or 17 (New York-domiciled insurers controlling one or more subsidiaries) and all New York domestic insurers that are not members of holding companies, writing equal to or greater than $500 million in annual direct written premium and unaffiliated assumed premium, will be required to file a Report by April 30 of each year. It should be noted that the statutes underlying the Proposed Regulation require that the first Report must be filed by April 30, 2014 despite the fact that the comment period for the Proposed Regulation does not expire until March 8, 2014.3
The Report must identify the material risks that have the potential to pose “enterprise risk” to the insurer. In New York, “enterprise risk” is defined as any activity, circumstance, event or series of events involving the insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer, or its holding company system (as applicable), including anything that would cause the insurer’s risk-based capital to fall into the company action level as set forth in NYIL Section 1322 or 1324, or that would cause further transaction of business to be hazardous to the insurer’s policyholders or creditors or the public.4
More specifically, pursuant to the Proposed Regulation, the Report must provide the following information unless such information has been disclosed in the insurer’s registration statement or documents submitted to comply with 10 NYCRR Section 98-1.16(e) (applicable to managed care organizations) during the prior 12 months:
- Any material developments regarding strategy, internal audit findings, compliance or risk management affecting the holding company system, the Article 16 system, or Article 17 system (collectively, the “Insurance Group”) or the insurer;
- Any acquisition or disposal of insurance entities and reallocation of existing financial or insurance entities with regard to the insurer or Insurance Group;
- Any changes in the shareholders of the insurer or Insurance Group exceeding ten percent or more of voting securities;
- Developments in any investigations, regulatory activities, or litigation that could have a significant bearing or impact on the insurer or Insurance Group;
- The business plan of the insurer or Insurance Group, and a summary of the insurer’s or Insurance Group’s strategies for the next 12 months;
- Identification of any material concerns regarding the insurer or Insurance Group by a supervisory college, if any, held during the last year;
- Identification of capital resources and material distribution patterns with regard to the insurer or Insurance Group;
- Identification of any negative movement, or any discussions with nationally recognized statistical rating organizations, that may have caused, or may cause, potential negative movement in the credit ratings and individual insurer financial strength ratings assessment of the insurer or the Insurance Group (including both the rating and outlook);
- Information on any corporate or parental guarantees throughout the Insurance Group, and the expected source of liquidity should the guarantees be called upon; and
- Identification of any material activity or development of the insurer or Insurance Group that, in the opinion of senior management, could adversely affect the insurer or Insurance Group.5
Similarly to the NAIC Insurance Holding Company System Model Regulation Enterprise Risk Report on “Form F”, to comply with the filing requirement, the insurer or Insurance Group may attach filings made with the United States Securities and Exchange Commission to the Report, or if a non-U.S. entity, its most recent public audited financial statement filed in its country of domicile, as long as the Insurance Group or insurer includes specific references to responsive information. If the Insurance Group or insurer has not disclosed any information, then such Insurance Group or insurer must include a statement affirming that it has not identified enterprise risk subject to disclosure.
The items required to be disclosed in the Report correspond to the items disclosed in the Form F. However, the filing of the Report, pursuant to the Proposed Regulation, applies not only to holding company systems as required under the NAIC Insurance Holding Company System Model Act (the “Model Act”), but to individual New York domestic insurers meeting the $500 million annual premium threshold. Furthermore, unlike the requirements of the Model Act, the Report must be filed with the Department regardless of whether New York is the lead state in the holding company system. Finally, the Proposed Regulation does not protect the confidentiality of the Report and instead the insurer must rely on protections afforded under the New York Freedom of Information Law. This differs from the Model Act’s explicit protection of the Form F from public disclosure.
1. Proposed 11 NYCCRR 82.
2. Pursuant to the Proposed Regulation, insurers include a domestic corporation organized pursuant to NYIL Article 43, a health maintenance organization as defined in 10 NYCRR Section 98-1.2(r) and a domestic retirement system subject to NYIL Article 46.
3. NYIL Sections 1503(b), 1604(b) and 1717(b), which were effective October 2013, state that the Report must be filed by April 30th of each year. We note the statutes apply to holding companies and insurers registered or required to register under NYIL Article 16 or 17, but we assume the Department will apply the same April 30, 2014 deadline to all reporting entities.
4. NYIL Sections 1501(a)(7), 1604(b)(2), 1702(f) and Proposed 11 NYCCRR 82, Section 82.1(c).
5. Proposed 11 NYCCRR 82, Section 82.1(b).