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Risk-focused exams – and their corresponding costs – are the “new normal” for all insurers

I’m sure I’ve said this before, but if there is a model for how the relationship between insurers and regulators should work, it exists in Pennsylvania. It’s not always a love-fest – nor should it be – but insurers know exactly where they stand and what to expect from regulators in the Keystone State. This is particularly true – and important – for fraternals, because Pennsylvania has more domiciled societies than any other state.

And the primary reason why the relationship works so well there is simple: Deputy Insurance  Commissioner Steve Johnson and the CEOs of the fraternals headquartered there work at it. If you’ve ever heard Steve speak –

Pennsylvania Deputy Insurance Commissioner Stephen Johnson

Pennsylvania Deputy Insurance Commissioner Stephen Johnson

whether delivering formal remarks at an industry event or sitting next to you at dinner – you know he’s bombastic, opinionated and, as a result, first encounters with him can be a little frightening. But it doesn’t take long to get past that sometimes gruff exterior and realize that he possesses the characteristics that define an effective regulator: he’s fair; he’s honest; and he’s transparent – there are no secrets or hidden agendas.The Pennsylvania Fraternal Alliance invites Steve and his equally effective regulatory colleague, Annette Szady, to address its meeting each fall. You’d think this annual regulatory review would get old after a while, but it never does. In fact, it’s one of the more enlightening components of the Pennsylvania Fraternal Alliance meeting and I would highly recommend that every other state fraternal alliance schedule similar presentations with their state regulators.

This year, Steve and Annette focused on the “new normal” of risk-focused exams – the much more thorough and much more expensive replacements for the every-five-year financial examinations conducted by state insurance departments. The Alliance has received more than a few comments and complaints about these exams from member societies in Pennsylvania and across the country – mostly focused on the fact that the exams are considerably more expensive (100% increases over previous exams are the average), take much longer to complete (months versus weeks), and seem to have few controls or incentives in place for regulators and/or out-sourced examiners to limit these time and cost factors.

Because of the relationship that exists between fraternals and regulators in Pennsylvania, fraternal CEOs could raise these issues with Steve and Annette in a public forum without fear of “regulatory retribution.” That’s not always the case in other states. And while the answers they provided were not always what Alliance member society leaders wanted to hear, we all walked away with a better understanding of why risk-focused exams are necessary, as well as a commitment from regulators to work with insurers – commercial and fraternal – to do everything possible to limit unwarranted price escalation in the future.

Here are a few of my most significant takeaways from Steve’s presentation:

  • Risk-focused exams are much more detailed and require much more work by the examiner. Comparing them to the old-style financial exam is “apples to oranges” in that risk-focused exams are “operational” and provide a look ahead at the future of the entire organization, while financial exams provide only a snapshot of the insurer’s fiscal health at a moment in the past. The resulting “look ahead” should be beneficial to both the society leadership AND regulators.
  • The Pennsylvania Insurance Department’s objective is not to play “cops and robbers” with insurers; it’s to foster an exchange of ideas that results in best practices that will lead to a sustainable business model so that fraternals can continue to provide benefits to their members and the communities they serve. Solid, solvent, and profitable insurance operations are essential to achieving that goal.
  • Fraternal leaders should take a close look at the NAIC’s risk-focused exam procedure before the examination process begins – you can access it on the NAIC’s web site. By familiarizing yourself with the process, you will have a better understanding of what’s expected from you and your board and will be able to reduce the time – and potentially the cost – of the exam.
  • Fraternal leaders should understand that “once you’re down, it’s hard to get back up.” The key to prolonged success is slow and steady growth, combined with reduced (or at least controlled) expenses. If you can’t realistically make those things happen – and a risk-focused exam will go a long way to providing answers to those questions – it’s time to consider other options, including mergers.

Feel free to add your comments below or contact me with any questions.

3 Responses

  1. I concur Joe on your take about Steve. When I first saw him at an NAIC meeting, he was a rather intimidating force. But over the years, I have come to see him just as you described him – tough, yet fair, the perfect blend for a regulator. My other reaction to your blog is about the Risk-focused examination description as explained by Steve at the Pennsylvania Fraternal Alliance Meeting. My understanding about RFE’s (and I have followed the development for many years) was that they were intended to focus on those areas of greatest risk for an organization, as well as dive deeper into a company’s governance processes. The guiding thought being that if a company had a good governance structure (i.e. what the NAIC was encouraging) and had a solid handle on their key risks, then the examination would in theory be less costly and shorter in length. I heard that numerous times from the NAIC as they developed the RFE. So, it comes with a little grief that regulators have abandoned that theoretical underpining and are going down the road of “more” regulation, albeit a better process, at the expense of their foils!


  2. Many times I have sat across the table from Steve at the PA Department and while initially he seems intimating, he quickly wins you over by his industry knowledge and sincerity about fraternals and their operations. Many times I heard, “I will not have a fraternal fail on my watch!”. He is transparent and open and he expects the same from those sitting across the table from him. I believe the focus on RFE’s is long overdue. Good corporate governess and best practices are a must and many fraternals have a lot of work to do in this area. Thanks to the AFA they are getting the help they need, provided they are astute enough to take it. The good ‘ol days in fraternals are hopefully becoming extinct.

  3. Thanks to both Gary and Paul for these thoughtful comments. While the costs for these new exams will take some getting used to, the cost of not doing them – to the society, it’s members, and the fraternal system – is a price none of us can afford.

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